Rep: OEB Doc: 128Rk Rev: 0 ONTARIO ENERGY BOARD Volume: 6 April 10, 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 ECAO 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: [18] CLOSING ARGUMENT BY MR. ROGERS: [23] QUESTIONS OF CLARIFICATION FROM MS. LEA: [121] QUESTIONS OF CLARIFICATION FROM THE BOARD: [134] 8 EXHIBITS 9 10 UNDERTAKINGS 11 12 --- Upon commencing at 9:03 a.m. 13 MR. VLAHOS: Please be seated. 14 Good morning, everyone. 15 We're sitting today to hear argument-in-chief from the applicant. 16 Before we get to that, Mr. Rogers, Ms. Lea, are there any preliminary matters? 17 MR. ROGERS: Yes, sir, we do have some filings to make. 18 PRELIMINARY MATTERS: 19 MR. ROGERS: There are two outstanding undertakings, I believe. H.5.1, dealing with customer information that I believe it was Dr. Zerker asked about, confidential type information, and we have a response to that question for her in answer to H.5.1. 20 Secondly, we are filing H.5.3, which is a schedule of miscellaneous distribution charges which were approved, I believe, last October. But for continuance, we agreed to file those with you in one place, and that is Exhibit H, page 5, tab 3, so that is clear. Those are all of the outstanding undertakings 21 MR. VLAHOS: Thank you. 22 Mr. Rogers, you may proceed. 23 CLOSING ARGUMENT BY MR. ROGERS: 24 MR. ROGERS: This morning, the Board has permitted the applicant to make oral argument. 25 In a little unusual format, I have prepared, in addition, a written outline which I would like to provide to the Board. This outline came about because we had already started to work on the argument which I thought might be in writing when the Board indicated that it preferred oral argument. I decided that it would be useful to at least give the Board the benefit of the work that we had done to compile a written argument, because this written document, which I will not read or follow today precisely, it does contain a good deal of references to evidence which I hope will be of assistance to the Board in finding things. That's why I decided to do it this way. 26 I will leave the written argument with you. I plan to highlight what's in the written outline orally today and enlarge upon a few of the more controversial issues in my oral comments today. I will see that all intervenors get a copy of these written comments as well. But I will leave that with you and I hope that you will find the references there useful in your deliberations. 27 We have organised the written outline by dealing with those issues which are not contested first; then I will deal with a couple of issues that were partially contested orally. The time-of-use mitigation proposal did not find its way into the settlement proposal. And then lastly I will deal with the controversial issues in this case which, as you know, involve line losses and, most especially, the low-voltage system. 28 MR. VLAHOS: And you will keep this within two hours, Mr. Rogers? 29 MR. ROGERS: Oh, yes, I will. 30 MR. VLAHOS: I guess a further update, 11:30 at the latest would be appreciated. There's another commitment by the Board. 31 MR. ROGERS: I promise you. 32 Mr. Chairman and Members of the Board, because so many of the issues in this case have been settled in the settlement proposal, I do not propose to say very much about those settled issues today. The document that I've left with you does provide a brief summary of the company's position on each of those issues and it lists the references supporting the company's proposal for you. 33 Before I begin with the merits of the case, and in particular the contested issues, I would like to take a minute, however, to go back to the beginning of this case and repeat a few observations I made at that time. 34 First, Networks considered that it was involved in a rate-unbundling exercise in which the company's 1999 revenues were unbundled in accordance with the Distribution Rate Handbook, just as was done by all other utilities. In making its application, it thought that this exercise was a first-generation PBR task. Accordingly, Networks' proposals are intended to be transitionary and subject to further review and refinement in the next case. 35 I remind the Board that Networks plans to be back before the Board in 2003 to apply for rates which will go into effect in 2004 as the second generation of the evolution of rates in the open marketplace. At that time the Board will have an opportunity to consider Networks' proposals based on much better cost-allocation information, just as it will be considering similar applications by other LDCs. At that time the Board will be in a position to apply consistent principles of cost allocation and rate-making to all of the utilities under its jurisdiction. 36 Now, before I deal with the issues, may I make a couple of other observations which are important to my client. 37 First, it is very important to the applicant that the aggregate revenue requirement of $694 million, effective March 1, 2002, and $742.3 million, effective March 1, 2003, be formally approved on a permanent basis as soon as possible. This revenue requirement, which has been approved as part of the settlement agreement, has been substantially reduced from what the rates handbook would allow, as I'm sure the Board recalls. As the witnesses have indicated, it would be a very serious matter for Networks if this revenue requirement were to be eroded further by any means. 38 Second, uncertainty about the collection of future revenues can seriously hamper a company's ability to collect capital at appropriate rates and, as the Board knows, this company is before the capital markets now. It is important, therefore, that there be some assurance that the company will be able to recover the approved revenue requirement and that other issues such as the low-voltage issue do not erode that ability. 39 I remind the Board that the company presently has no means in place to recover the $38.6 million of the aggregate revenue requirement attributed to the low-voltage system. It will not be in a position to recover those revenues until the Board decides the low-voltage issue. 40 As I indicated in a response to a question from the Chairman, the company's plan is to track these unrecovered revenues in a deferral account until the Board's decision is released. I think I indicated in the transcript when asked, sir, that the thinking was that the company would apply to clear that account at the next rate case, if it's approved. 41 Having given the matter further thought, I think I should say this: that the company would propose that it will either apply to have the account cleared when the Board's decision is issued in some way or wait until the next case, depending on how much time has gone by and how much has been collected in that account. In other words, the amount involved will determine the company's approach to asking the Board to clear the account. 42 The longer those unrecovered revenues are allowed to accumulate in the account, the greater the uncertainty about ultimate recovery; accordingly, the sooner the Board can issue its decision on this matter, the better. From the company's perspective, it would be very serious if the recovery of these necessary revenues was delayed indefinitely. There's no doubt that these costs are real, that they relate to used and useful assets, and that they should be recovered from electricity consumers. The sooner the Board can decide which consumers should bear these costs, the sooner appropriate rates can be put into effect in order to recover the necessary revenue. 43 Those are my preliminary comments, and now I'd like to deal, rather quickly, with the settled issues. I'll try to follow the index that's in the written outline which I've left with you 44 First is issue number 1, the proposed distribution revenue requirement. As I have said, the Board has accepted the settlement proposal of the parties on April 3rd, 2002, and in so doing approved an aggregate revenue requirement of $646 million, effective October 1, 2001; $694 million, effective March 1, 2002, each of which was previously approved on an interim basis; and $742.3 million, effective March 1, 2003. 45 In each of 2002 and 2003, the approved revenue requirement includes revenues of $38.6 million attributable to the low-voltage system, and miscellaneous charges are set to recover $13.7 million. These charges must be recovered from electricity consumers and the only issue concerning the $38.6 million is from whom it should be collected. I will deal with that later when I talk about the low-voltage system. 46 Another item under issue number 1 was the appropriateness of exceptions to the rate handbook in settling unbundled rates. Networks' application of the rate handbook in settling unbundled rates was approved by the Board on April 3rd, 2002, when it approved the settlement agreement. 47 Let me just briefly deal with issue number 2 on the issues list, cost allocation and rate unbundling and design, including LV. This was dealt with in two components. 48 First, the cost allocation and rate unbundling was agreed to by all parties except for FOCA and with the exception of line losses and low-voltage rates. Networks does not know the position of FOCA and therefore must await its argument before we can respond. We're not clear exactly what it is that troubles that organisation, but we'll respond when we get their argument. 49 The issues of line-loss allocation and low voltage will be dealt with in a few moments. All other issues of cost allocation and rate unbundling were settled by the parties and approved by the Board on April 3rd, 2002. 50 The parties agreed that the retail rates proposed by Networks are appropriate, subject to the low-voltage and line-loss issue, and this settlement was approved by the Board on April 3rd, 2002. 51 I'd like to deal now with the remaining settled issues, and on the written outline that you have, the next item is issue 4, dealing with what we've been calling miscellaneous charges, including street light and sentinel light rates. 52 Networks' proposals with respect to each of those issues were agreed to in the settlement agreement and approved by the Board on April 3rd, 2002, and I will say no more about them. References are given in the written document for your guidance, I hope. 53 The next item is the accounting order to establish a deferral account for recording environmental costs, and that's issue number 5. This issue was settled as well. The account was approved on an interim basis by the Board and confirmed by acceptance of the settlement proposal on April 3rd, 2002. As the Board recalls, it provides for the collection of expenses incurred, but to be recovered when the account is cleared at the next rate case. 54 Now may I move to what we've designated as "Other Issues" which are not quite settled, or not settled at all, but not on the issues list. 55 The first of those was the service-quality issue. The Board will recall that this issue was limited to a review of customer letters that were received by the Board up to the commencement of the hearing. In the settlement agreement, the parties agreed that they would not cross-examine on this issue and would address it only by way of final argument. A few questions were asked, as you may recall, about certain concerns expressed by customers, notwithstanding the settlement agreement. 56 The company presented witnesses to speak to the issue raised in the customers' letters. As Mr. Horton indicated through his evidence, the company takes customer complaints very seriously, and it has put in place steps to address both the concerns that have been raised and the trends that are indicated in his analysis. 57 I remind you that there were, I think, 40 letters of complaint or concern filed with the Board which, given the size of the company's customer base of I think 1.1 million customers at the moment, something like that, is quite small, as Mr. Horton testified, based on his experience in another industry. And so the company submits that on the basis of the evidence, customer complaints are being appropriately addressed by the company. References are given in the written document to the relevant documents in support of that proposition. 58 The next item that I'd like to deal with, sir, is the time-of-use mitigation rate that is proposed. This was not part of the settlement discussions and was dealt with during the hearing. 59 You will recall that Networks amended its application to seek approval of transitional rates to mitigate the impact of eliminating the time-of-use rates for ten existing customers who faced bill impacts of between 35 and 110 per cent upon market opening. These rates would be discontinued upon implementation of Networks' 2004 approved tariffs; in other words, they have a very short projected life span. 60 Networks also seeks approval of a deferral account to reflect the decrease in revenues related to the establishment of these rates, if approved, until it can be cleared at the next rate proceeding. 61 Mr. Horton explained the rationale for this proposal. The rate is designed to keep bill impacts in year 1 to 10 per cent or less and at a maximum level of 30 per cent or less in year 2 before being phased out completely in 2004. 62 Networks understands the Board's concern about special rates, which it shares, but felt that this would be appropriate given the short time frame involved and the considerable impacts these customers would otherwise face. The company asks your approval of those rates. 63 I should say, sir, that the written document which we've given to you does contain, at the back, an appendix A which has a complete -- it's a compilation of all the rates being applied for. They're there for your convenience. 64 Now we come into the contested issues, the first of which is the allocation of line losses, including low-voltage. This was issue number 3 on your issues list. 65 A substantial part of this issue was settled. It has been agreed by the parties and approved by the Board that a facility loss factor of 0.6 per cent as opposed to 3.4 per cent will be applied by Networks to certain facilities serving Niagara-on-the-Lake and several other comparable utilities. This was approved by the Board on April 3rd, 2002, and amended schedules have been filed reflecting the change. They can be found, I believe, at page 19 of appendix A to the argument. 66 Let me say a few words now about the allocation of line losses which was made an issue by ECMI. 67 Dr. Poray and Mr. Hubert described Networks' proposal concerning line losses in their evidence. For the reasons given, Networks is proposing distribution loss factors of 2.8 per cent for the low-voltage system, 5.5 per cent for the primary distribution system, and 8.5 per cent for the secondary distribution system. This goes beyond the requirements of the Retail System Code, as shown at volume 3, paragraph 771. 68 No party disputed Networks' proposals for line losses except ECMI. As ECMI did not call evidence, I do not fully appreciate the reasons for its disapproval and must await its argument before responding in full. However, Networks does understand that ECMI argues that the low-voltage line losses for low-voltage facilities should be assigned to low-voltage customers on a specific basis rather than on an average basis. Networks does not believe that this would be appropriate, particularly in such a complex system, even if it could be done; (volume 4, paragraph 104 and paragraph 331). 69 However, the fact is that Networks simply does not have the necessary information and cannot obtain it without incurring a great deal of additional expense; (volume 3, paragraph 811). Nor does it have the information required to create zones which would more closely approximate user-pay as suggested, I believe, by Mr. Birchenough; (volume 3, paragraph 798; volume 4, paragraph 245; and volume 4, paragraphs 336 and 337.) I will direct you to where that discussion took place. 70 Networks understands that this panel has a concern, as expressed during this hearing, that the distribution loss factors are also being considered in a different Board process presently underway. However, the allocation of line losses has been set as an issue in this case and hence my client dealt with it here. 71 As a result, the loss factors for Niagara-on-the-Lake, Vineland, and Fallowfield DSS have been adjusted, but those adjustments will not apply until the Board's order is made in this case. This is one of the orders that there is not interim approval for now, or one of the matters that requires -- if the loss factor that's been agreed to is to go into effect on market opening, the Board will have to approve it before that time. 72 Now, the issue of line losses is developed a little more fully in the written outline which I've left with you and it has references. 73 I would like now to turn to the low-voltage issue. By the way, these low-voltage rates, if you look at the written document which I've left with you this morning, at the back, you'll see appendix A, and if you turn to page 13 of appendix A, you'll see the proposed rate for the low-voltage system and you will see there, in the top paragraph, the facility charge for shared LV lines of 17 cents. That line is what this fuss has been about, that 17 cents. That's what's taken almost all of the time in this hearing to discuss. 74 The parties have agreed, and the Board has accepted, that the aggregate of amounts to be collected by Networks composed of miscellaneous charges, retail rates, and low-voltage rates. The so-called revenue requirement is approved or allowed at $646 million, starting October 1, 2001; $694 million, beginning March 1, 2002; and $742.3 million, commencing March 1, 2003. 75 The company filed a cost allocation as to how those revenues should be recovered. The cost allocation was examined by R.J. Rudden & Associates and found to be reasonable. No party contested its reasonableness and the issue of the aggregate revenue requirement was settled. Therefore, the rates must be set to recover $38.6 million of shared low-voltage facilities. As I said at the outset, the only issue is from which consumers should that sum be collected. 76 I would like to review briefly with the Board the background to these facilities. 77 What has been called the low-voltage system in this hearing is unique to Hydro One Networks Inc.. No other utility under the Board's jurisdiction has a comparable system. The handbook does not directly deal with the unbundling and allocation of these costs. The problem faced by Networks, when it came to deal with this problem, and now facing the Board, is how best and most fairly to recover that revenue and rates during the first-generation PBR transitional period. Networks believed that it is important to assess the historical context in which these facilities were constructed when assessing which consumers should share in their cost. 78 As Dr. Poray described, and Mr. Snelson confirmed, the low-voltage system assets at issue were constructed by the old Ontario Hydro, or the former Ontario Hydro, at least in part as the best and least cost means of providing what are, in essence, transmission facilities to serve customers. 79 These facilities were constructed as the least-cost solution to meet demand on behalf of the pool of customers at large. Their construction, and Mr. Snelson agreed with this, was in lieu of more expensive transmission facilities, at least in part. Accordingly, all LDCs and direct industrial customers benefited from lower costs as members of the pool, and they contributed to those costs and continue to do so today. 80 As these costs were incurred for the benefit of all, I submit that it is fair and just and in accordance with sound rate-making principles that all should contribute to the cost. The pooling of costs of expense of capital facilities is the essence of the rationale for a regulated utility system. In such a regime, it is at least as important to look at the reason the facilities were built, what caused those costs and who benefited from them, as it is to consider what customers are physically connected to them, which is the so-called user-pay approach as defined by its proponents in this case. 81 I ask the Board to pause and consider before too quickly accepting the user-pay approach as defined by its proponents for some assets in this case. I also ask the Board to consider the proposition that cost-based is not synonymous with user-pay. 82 The applicant does not quarrel with the proposition that rates should be cost-based; however, it does not accept that the sole determinant on which rates should be based is the narrow brand of user-pay advocated by those who will benefit in this context and as argued in this case. It is a more subtle and complex issue than that. 83 There are problems with the user-pay approach. I tried to raise a few of these in cross-examination to illustrate the point. There may well be others, but let's just think about this case and, short though it was, some of the examples that emerged. 84 Now, is it right that companies such as Placer Dome accept responsibility for all costs of providing its connection and maintaining that connection without contribution from other users of the system? 85 Should Mr. White's clients, PenWest, whom you'll recall had some concerns about quality of service and on behalf of whose customers my client augmented the system, should that PenWest group of utilities be saddled with all of those costs of upgrading its system which Mr. Horton described? Mr. Aiken would have you believe that they should; (volume 5, paragraphs 458 to 60; 1036 to 39). 86 Is it prudent to deal with one segment of Networks' system, the low-voltage system, when no other LDC, to my knowledge, has presented cost-allocation information to the Board to enable it to assess the reasonableness of rates on a cost-based assessment let alone a user-pay variation of it? 87 Would the Board, by accepting user-pay as the guiding principle here, tie its hands in dealing with all other utilities in the second-generation PBR period? 88 And what about the gaming potential introduced by Mr. Snelson's proposal on behalf of AMPCO and acknowledged by Mr. Aiken. Mr. Aiken concluded that the proposal to charge only on demand through the LV system, that is to say, basing the charge determinant only on your demand from the LV system. If you have a dual connection to the transmission and a low-voltage system, this would result in gaming, or could result in gaming, and the stranding of assets which were constructed to serve the very utilities which would now be able to avoid the cost, leaving it to the balance of the customers to finance. 89 So you see, Members of the Board, I submit that there are problems with applying the user-pay approach to the low-voltage system. It doesn't say that user-pay does not have a place in rate-making; obviously, it does. It's an important concept and it should be a guide. But it should not be the sole criterion by which these decisions are made, I submit. 90 I further submit that the allocation of costs and the setting of rates should consider an element of fairness, because that's, in essence, what we're trying to do here, to share these costs of common facilities appropriately and fairly. Let us examine this question of fairness as it relates to the low-voltage system. 91 As you heard during the hearing, all customers are contributing now. That is because all customers benefit now from the existence of the low-voltage system whether or not they are physically connected to it, whether or not the former Ontario Hydro chose to serve them by installing low-voltage facilities rather than high-voltage transmission facilities. 92 The decision taken by the former Ontario Hydro for the common good of all within the pool, all of those using transmission, as to which customers would be connected through low-voltage facilities and which would be connected through transmission facilities, as now defined, should not be the sole determinant as to how those costs are allocated. That decision in the past was based on geographic location and the system-wide benefits for the pool as a whole. 93 That common benefit has been enjoyed by all customers and it will continue to be enjoyed by all customers after market opening in lower transmission costs for those customers. However, under the brand of user-pay advocated by some intervenors in this case, while the benefits will continue to be shared, the costs will not. None of the physical properties of the system that we have today is going to change on May the 1st. All that is changing is the definition of transmission customer as defined by the legislation as being those customers connected at 50 kV and above. The electrons are going to flow in the same way. Why, then, should the responsibility for the costs necessarily change? 94 Networks, rightly or wrongly, was concerned about this mismatch of cost and benefit and sought to address it in its proposals. In my view of the issue, and I submit to you this is one way of looking at this, there is no cross-subsidy in Networks' proposal. There is no cross-subsidy at the moment. The cross-subsidy arises only if the so-called user-pay principle is accepted because then you're going to have a situation where those who are enjoying some of the benefits are not helping to pay the cost and are, in effect, receiving a cross-subsidy from those left behind to bear the full costs of these facilities. 95 I submit to you that this raises a question of basic fairness here. Why should those LDCs which the former Ontario Hydro chose to serve through low-voltage facilities be saddled with their share of the cost of transmission facilities and, in addition, the low-voltage system, while those LDCs which the former Ontario Hydro chose to serve through transmission pay only transmission costs? Is this not exactly the kind of geographical accident that Mr. Snelson complained about with respect to AMPCO members located within and without municipal boundaries, who face different rates as a result? I submit to you that it's very similar in character to what Mr. Snelson complains about with respect to certain AMPCO members. 96 Now, Members of the Board, Networks understands, and, if I may say so, better than most intervenors, that the low-voltage system presents a unique regulatory problem because Networks had to deal with it, as you now have to, and try to figure out the best way to treat this unique system. 97 It inherited a hybrid system from the former Ontario Hydro about which it does not have full access to information which resides with OPGI, but nevertheless it had to make a proposal. It attempted to propose a fair compromise to be employed in the interim period until better information is available and second-generation PBR adjustments can be made. A simple reflex solution based on the so-called user-pay principle of physical connection is, at first blush, appealing, I concede. It is simple. But is it fair and is it prudent at this time? 98 Networks' proposal was intended to respect the more subtle complexities of the issue. My client, as it has stated, is not sure that the user-pay approach, as defined by its proponents, for the purpose of this case, as synonymous with physically connected, is the best approach. It may well be, but then again it may not. And even if physical connection should be the sole criterion in defining approval, Networks felt that it would be better to complete the necessary studies in order to determine which customers are now physically connected and in what configuration so that costs will be spread appropriately over those physically connected to the system. That cannot be done until the next case. 99 My client and even I understand the counter-argument of those not connected to the system that they should no longer share the costs of a pool which they will no longer belong to upon open access because of the definition of transmission. But I again repeat and ask the Board to recall that the only change that's going to occur on May the 1st is to a definition of transmission; not the physical characteristics of the system, not the reason the facilities were constructed in the first place, and not the benefit of lower costs enjoyed by all, whether attached or not. 100 Now, when it began this exercise, as I stated at the beginning, Networks considered that it was attempting to unbundle 1999 low-voltage costs in the first generation of PBR. In that context, it thought it advisable to preserve the status quo for the next two years so far as possible so that the proper studies can be completed, all options fully explored, including user-pay, all stakeholders consulted, and permanent well thought-out solutions proposed 101 There are a number of reasons why Networks considered its interim solution to be advisable. It understood that full cost allocation and the reflection of better rates to better reflect those costs was considered to be a second-generation PBR task. So far as I'm aware, none of the other LDCs prepared a complete cost-allocation study and will not do so until the second-generation period. 102 Networks understood, when it began this task, and certainly understands now, that this is a difficult and unique regulatory problem. However, the utility itself is revenue-neutral on the issue; it has no direct self-pecuniary interest. Now, it does have its own retail system which would be affected by this, its customers, it's true, but the owners of my client should be revenue-neutral about this issue in making these proposals to you. 103 There's no dispute that the cost of $38.6 million is being incurred in providing used and useful assets for the electricity system, and I repeat that the only issue is which participants in the electricity system should share those costs over the next two years, when it will be considered again. 104 This is, at its heart, a question of fairness between electricity consumers. My client, faced with its task, as it understood it, to unbundle rates in accordance with the Distribution Rate Handbook, attempted to fashion an interim solution which was fair to the interest groups. It intended that its proposals would apply to the first-generation PBR period only, until further study could be undertaken and further decisions made by the Board. It has, therefore, proposed an interim solution to a complex problem which is intended to transition us to the next phase of PBR development. 105 Now, I'd like to make this very clear to the Board: My client does not pretend that it has examined thoroughly and adequately all possible options. This is because it understood that this was to be an unbundling exercise. And as I've said before, in any event, it's saddled with the problem of not having access to much of the important, relevant information. As a result, there is only one proposal before the Board different from what my client proposes and that is the so-called user-pay principle advocated by others. 106 There are undoubtedly other options for dealing with this unique problem, including variations of user-pay, and, perhaps more appropriately, one of the many variations of cost-based rates which have not been considered in this case: Nevertheless, it is entirely appropriate that this Board, with your public policy responsibilities, should be the arbitrator, or the arbiter, and the decider of this issue which is, in essence, a question of fairness between users of this system. 107 If the Board is comfortable in making a decision for the long term now based on the evidence you have, well, then, you should do so. My client advocates that caution be exercised and that a final decision in this aspect await the next case. But you are the appropriate body to make that decision. 108 I would like to make one thing quite clear, and I wish to be quite direct about this. Dealing with this low-voltage issue, the important thing to my client, and to others, too, but particularly to my client, is that a decision be taken as quickly as possible so that the company can begin to collect these revenues from the electricity consumers. It obviously does not wish to maintain a deferral account for any longer than is absolutely necessary, for the reasons I alluded to earlier. 109 It's a difficult decision. We hope the Board can make it as soon as possible. This thorny issue must not be allowed to impose a grid-lock on the development of the system. 110 Those are my submissions on low-voltage. I wish to say something about the jurisdiction of the Board. But we look forward to as early a decision as possible. I know it is a difficult issue and there are lots of things you have to decide. 111 May I say something about the jurisdiction of the Board in this issue, and I'm anticipating arguments that may be made by others. 112 I submit the Board has jurisdiction to deal with this issue, notwithstanding the dichotomy between distribution and transmission. Low-voltage facilities present a unique regulatory problem to this Board in this context. This is a unique system; these are unique times. We're dismembering a large combined organisation and the low-voltage system has fallen out to be dealt with. It's an orphan someone has to take care of. 113 It may be suggested that the Board does not have jurisdiction to approve a rate which recovers costs from LDCs which are technically not customers of Networks' distribution system. However, these customers are customers of my client, Networks. The Act clearly permits a company to engage in both distribution and transmission of electricity, and it grants the Board jurisdiction over both functions. The Act also provides that the Board can designate non-transmission assets to be transmission assets to achieve the purposes of the Act, in section 84. The Act, therefore, allows the Board the flexibility necessary to ensure that the complexities of the interplay between transmission and distribution assets are not allowed to defeat the Board's ability to set rates which would cover the costs associated with the system as a whole, in a fair and equitable manner and in the public interest. 114 Networks has been left with the low-voltage system in its distribution system as part of the segregation of the former Ontario Hydro. This presents a unique regulatory problem for us all, and in particular for you, which requires a unique regulatory solution. 115 I submit that the Board does have a broad supervisory jurisdiction over this reorganisation of the electricity sector which enables you to deal with this issue as the applicant proposes. I may have more to say about this issue when I've received the other parties' arguments, depending on what they have to say. 116 Mr. Chairman and Members of the Board, in keeping to my promise, I have finished my submissions. I would like to thank you very much for your courtesy and patience today and throughout the entire hearing in dealing with my witnesses in an unfamiliar setting for them, and I wish you well in your deliberations. Thank you very much. 117 MR. VLAHOS: Thank you, Mr. Rogers. 118 I would ask Ms. Lea if she has any questions of clarification. 119 MS. LEA: One moment, please, sir. 120 MR. VLAHOS: Yes. 121 QUESTIONS OF CLARIFICATION FROM MS. LEA: 122 MS. LEA: Mr. Rogers, pardon us if this was already clear, but it would be useful for us for you to reiterate which approvals you would be asking the Board to make before May 1st -- 123 MR. ROGERS: Yes, I can do that. 124 MS. LEA: -- before market opening. 125 MR. ROGERS: I can tell the Board that at the moment there are three areas where there are no approvals. 126 The first is on the low-voltage issue. Now, I appreciate that that may be unrealistic, to expect a decision on that one before market opening, and I had told you how I anticipate the company would deal with it. 127 The second is the time-of-use mitigation rates of which there is no approval at the moment. 128 The third is the line-loss factor for the three unique stations; Niagara-on-the-Lake and the others. If the Board's decision does not -- if there is no Board decision before May 1st, they will be charged under the higher rate applying to all customers for that service. I believe all other requests for relief have been granted on an interim basis. 129 MS. LEA: Thank you. 130 MR. VLAHOS: Ms. Lea? 131 MS. LEA: That is it. Thank you very much. 132 MR. VLAHOS: Thank you. 133 Dr. Zerker. 134 QUESTIONS OF CLARIFICATION FROM THE BOARD: 135 MS. ZERKER: Thank you. 136 Mr. Rogers, I'd appreciate if you would present your reasoning why you hold that the company's proposal on low-voltage has no cross-subsidisation characteristic while the user-pay approach would involve cross-subsidisation. I'd like to hear that. 137 MR. ROGERS: Yes, Dr. Zerker, I'll try. 138 As I see it, and as I submit to you, cross-subsidisation is a concept whereby one group of customers pays more than the costs which are fairly allocated to them for a service. Cost-based rates imply that customers who enjoy the benefit of the facility should help to pay for it. In the user-pay pay proposition, only those who are physically connected will pay for these facilities. They undoubtedly enjoy the use of those facilities and benefit from it, but so, too, do the non-physically-connected. Hence, in my view of things, it is, in effect, a cross-subsidy when certain customers are paying the full cost of facilities, the benefits of which are enjoyed by others. I submit to you that's a form of cross-subsidy. It's as simple as that. 139 MS. ZERKER: And could you elaborate on the implications of user-pay with regard to cross-subsidisation, your view of it. 140 MR. ROGERS: Well, yes. 141 My submission is that the strict user-pay approach, and I want the Board to understand that my client understands user-pay and does feel it has a very important role to pay in rate-making, and so do I, for that matter, but if you take a too-narrow view of user-pay in this context, defining it simply as those who are physically connected to a facility, you create an unfairness and a mismatching of costs and benefits, because those who are not physically connected will benefit but will not pay. 142 I go back to that TTC analogy, you may recall, that I explored with Mr. Aiken. In the transit system, and it's quite analogous, I submit, to the low-voltage system, if the TTC decided that it would build underground subway lines instead of all the bus feeders, the costs would be enormous for everyone. It has decided instead to have a corridor, a high-volume corridor, underground, comparable to the transmission system in electricity, and feeder lines that bring customers to the system at lower cost, by bus. As a result of that low-cost bus-feeder system, the cost of the subway system for the users of only the subway system is reduced, because if we had underground lines everywhere, it would cost a thousand dollars to take a subway ride down town and it now costs about $2. Well, the users of the subway system who don't use the bus system benefit mightily from the fact that the TTC chose a least-cost solution for the pools of transit riders as a whole, and I submit to you that it's fair that the subway riders should pay part of the cost of the bus-feeder system because otherwise the cost of riding the subway would be prohibitive. 143 It's exactly the same situation, or almost the same, it's analogous, I submit, to the low-voltage system. I submit to you that there's a fairness issue here when you permit electricity users who happen to live on the subway line to avoid all the costs of the lower -- of a low-voltage system, or the bus-feeder system. 144 MS. ZERKER: Thank you very much for that elaboration. 145 MR. ROGERS: Thank you. 146 MR. VLAHOS: Mr. Rogers, just one or two clarifications. 147 You brought up the issue of the gaming. Correct me if I'm wrong, but I thought that gaming arises only under a certain proposal with respect to what charge determinants you would use; is that fair? 148 MR. ROGERS: That's right. If I can just elaborate on that. 149 As I understand it now, the company's proposal is that the charge determinant is based upon 1999 demand - Mr. Aiken accepted that that would be appropriate - in which case you would have a fixed charge and I don't believe gaming would be a problem for the interim. I believe I'm correct in this, that Mr. Snelson advocates a current demand as the charge determinant. Under that scenario, I submit the system is open to gaming. 150 MR. VLAHOS: Okay, thank you, Mr. Rogers. 151 Lastly, you made reference a couple of times, and witnesses throughout the hearing, to the fact that the company will be back in 2003 for 2004 rates. 152 MR. ROGERS: Yes. 153 MR. VLAHOS: Now, am I right to assume that that view is based on what the rate handbook says about next-generation PBR? 154 MR. ROGERS: Sorry, sir, I didn't hear the first part of that. 155 MR. VLAHOS: Is that based on what the Board schedule is -- 156 MR. ROGERS: I understand your question. Just a moment, please. I'm not sure whether it is or not but I'll find out. I only know what their plans are; I don't know the reasons for them. 157 The intention is to follow the second-generation PBR approach. The intention is to file both a transmission and distribution case, and the intention at the moment is to file that case in the spring of 2003. 158 MR. VLAHOS: Right. And that presumes that the Board's schedule will proceed as pronounced or announced in the PBR handbook. 159 MR. ROGERS: Yes, I see. 160 MR. VLAHOS: I guess my question is suppose -- don't read anything into this. Suppose that we're not ready for second-generation PBR in 2004. I'm just wondering, in this hypothetical, whether the company would still come forward in 2003. 161 MR. ROGERS: May I just take some advice. 162 MR. VLAHOS: Sure. 163 MR. ROGERS: Well, I suppose if circumstances change, the thinking may have to be reviewed. At the moment the company has no rates in effect for 2004. I've been careful to say that the company's intention is to come back in 2003, and that is the intention. Should circumstances change dramatically, the plans might as well. 164 MR. VLAHOS: Okay. Thank you, sir. 165 I guess we'll adjourn, then. Thank you very much. We are looking forward to receiving written argument by intervenors and reply argument by the applicant. Have a good day. 166 --- Whereupon the hearing adjourned at 10:05 a.m.