122 1 RP-2000-0068 2 THE ONTARIO ENERGY BOARD 3 4 IN THE MATTER OF the Ontario Energy Board Act, S.O. 5 1998, c. 15, Schedule B; 6 7 AND IN THE MATTER OF an Application by Hydro One 8 Networks Inc. for an order or orders granting leave to 9 construct an electricity transmission line from the 10 Hawthorne Transmission Station to Gamble Junction and to 11 the Ontario-Qu‚bec provincial border at the Ottawa 12 River, all in the regional Municipality of 13 Ottawa-Carleton. 14 15 16 B E F O R E : 17 S.K. HALLADAY Presiding Member 18 K. McCANN Member 19 A. BIRCHENOUGH Member 20 21 Hearing held at: 22 2300 Yonge Street, 25th Floor, Hearing Room No. 1 23 Toronto, Ontario on Thursday, November 23, 2000, 24 commencing at 0931 25 26 HEARING 27 28 VOLUME 2 123 1 APPEARANCES 2 PATRICK MORAN Counsel to Board Staff 3 KATHI LITT/ 4 NABIH MIKHAIL/ 5 ZORA CRNOJACKI 6 7 MARY ANNE ALDRED Hydro One Networks Inc. 8 PETER THOMPSON City of Cumberland 9 MURRAY KLIPPENSTEIN/ Pollution Probe 10 JACK GIBBONS 11 ERNEST McARTHUR Regional Municipality of 12 Ottawa-Carleton 13 PETER BUDD/ TransEnergie, a Division of 14 KRISTIE SEBALJ/ Hydro-Qu‚bec 15 DENIS GAGNON 16 LLOYD GREENSPOON Northwatch 17 DAVID BROWN Independent Electricity Market 18 Operator (IMO) 19 20 21 22 23 24 25 26 27 28 124 1 Toronto, Ontario 2 --- Upon resuming on Thursday, November 23, 2000 3 at 0931 4 THE PRESIDING MEMBER: Please be seated. 5 Before we begin, are there any preliminary 6 matters? 7 MS ALDRED: No, there are not. 8 PRELIMINARY MATTERS 9 MR. GREENSPOON: Madam Chair, you may recall 10 yesterday in my cross-examination there appeared to be 11 some issue as to whether the two OPG plants in 12 northwestern Ontario, Atikokan and Thunder Bay, were 13 scrubbed or not. 14 I obviously can't give evidence, but it is my 15 understanding that these are unscrubbed fossil plants. 16 If that turns out to be an issue, I would like to know 17 that. I am assuming, for the purposes of argument, that 18 that is an admission, subject to my friend checking that 19 it is not the case. 20 THE PRESIDING MEMBER: Ms Aldred, do you have 21 a problem with whether these plants are scrubbed or 22 unscrubbed? 23 MS ALDRED: I personally don't know whether 24 they are scrubbed or unscrubbed and I don't think we 25 made an admission. But if it is going to be an issue 26 that we are going to take some position on it in 27 argument, I will advise Mr. Greenspoon and the Board. 28 THE PRESIDING MEMBER: Is that satisfactory, 125 Preliminary Matters 1 Mr. Greenspoon? 2 MR. GREENSPOON: That is satisfactory. 3 Thank you, Madam Chair. 4 THE PRESIDING MEMBER: Thank you. 5 Any other matters? 6 Mr. Brown? 7 MR. BROWN: Well, I'm not sure whether it is 8 preliminary. 9 We sort of left it yesterday that there is 10 interest, I understand, on the part of the Board panel 11 having an update on where the System Impact Assessment 12 study stands with the IMO so, with your leave, I would 13 like to just make a few comments to bring you up to date 14 on that. 15 THE PRESIDING MEMBER: Fine. Thank you. 16 MR. BROWN: Perhaps I could start by saying 17 that when the IMO established the connection assessment 18 and approval procedures earlier this year, there were a 19 number of projects that were proposed by several 20 applicants, and Hydro One was only one of them. 21 For those projects, Hydro One was already 22 performing a preliminary analysis of the impact of the 23 interconnection of those projects with the grid. 24 Following discussions with the proponents of 25 those projects, the IMO indicated to the proponents that 26 it would accept the preliminary analysis conducted by 27 Hydro One in place of a preliminary assessment conducted 28 by the IMO under its CAA procedures. 126 Preliminary Matters 1 As I mentioned, the Hydro Quebec 2 interconnection project was one of the projects for 3 which Hydro One was already doing technical work, and so 4 earlier this year the IMO advised Hydro One that it 5 would accept the technical study conducted by the 6 TransEnergie OHSC technical studies and planning working 7 group in lieu of a preliminary assessment. 8 That particular document, Madam Chair, is the 9 one that is attached to the response to Board Staff 10 Interrogatory No. 8. The IMO accepted this study in 11 lieu of a preliminary assessment from a procedural 12 efficiency point of view, without conducting a detailed 13 review of its content. 14 As this panel heard last week from the IMO 15 witnesses who appeared before it in the TransAlta leave 16 to construct application, the IMO subcontracts much of 17 the technical study work required for a preliminary 18 assessment to Hydro One, because the focus of a 19 preliminary assessment is on the impact of a proposed 20 project on the local system. 21 Consequently, in the case of the Hydro Quebec 22 interconnection project, the IMO was prepared to proceed 23 to the next stage of the connection and approval 24 process, that is the System Impact Assessment, using the 25 working assumption that the tactical study performed by 26 Hydro One would form the basis of the System Impact 27 Assessment and that the SIA performed by the IMO would 28 cover any additional issues that may not have appeared 127 Preliminary Matters 1 in Hydro One's technical study. 2 Now, the IMO System Impact Assessment of the 3 Hydro Quebec interconnection project is now under way. 4 It has started. The study is in its preliminary stages 5 and there are several assessments and analysis which the 6 IMO will be conducting over the next few weeks as part 7 of its assessment procedures. 8 I can advise the Board that based on the 9 information which the IMO has received to date, the IMO 10 has not identified any major adverse impacts on system 11 reliability that would require extensive system 12 modifications. 13 Now, in terms of the timing for the completion 14 of the SIA report, the IMO has informed Hydro One that 15 it will use its best efforts to produce a draft SIA 16 report by the end of January 2001. This draft report, 17 at a minimum, will identify any adverse reliability 18 impact. 19 Now, if the analysis conducted by the IMO over 20 the next few weeks does not turn up any problems, it may 21 well be possible to provide a draft report at an earlier 22 date. 23 The target date for the release of the final 24 formal report is February 20, 2001. 25 The IMO has advised Hydro One that it requires 26 some additional technical data for the SIA, and we 27 understand that Hydro One is committed to provide the 28 IMO with that information in a timely fashion so that 128 Preliminary Matters 1 these dates can be met. 2 Now, although the IMO is not in the position 3 to provide the Board today with any preliminary 4 conclusions or recommendations regarding the SIA, as we 5 did in the TransAlta case. I can say that in the event 6 the SIA report identifies any adverse system impacts, 7 the final report will contain recommendations by the IMO 8 to mitigate those impacts. 9 Generically, those recommendations would take 10 one of two forms: recommendations to upgrade equipment 11 in order to mitigate a reliability impact or 12 recommendations regarding operational constraints. 13 There is one further matter which I would like 14 to address. 15 Yesterday in its evidence Hydro One referred 16 to a study undertaken for the NPCC. The scope of work 17 for this NPCC study was set earlier this year and the 18 study focuses on whether the interconnection project 19 would have any adverse impacts on power systems outside 20 of Ontario. 21 As is apparent from that statement, the scope 22 of work for the NPCC study is narrower than the scope of 23 work for the IMO's System Impact Assessment study, which 24 deals with impacts on the reliability of both the 25 Ontario system and external systems. 26 That having been said, the IMO is prepared to 27 accept the results of the NPCC study regarding the 28 impact of the interconnection project on external power 129 Preliminary Matters 1 systems. 2 I should also mention that the IMO intends to 3 make the fullest possible use of the NPCC study in the 4 course of performing its SIA, and the IMO does not plan 5 to redo any of the NPCC study work unless absolutely 6 necessary. 7 So that is where we stand, Madam Chair, in 8 terms of the SIA process. 9 I hope that this information provides some 10 assistance to the Board regarding the status of the 11 System Impact Assessment study for this particular 12 project. 13 THE PRESIDING MEMBER: Thank you, Mr. Brown. 14 Ms Aldred. 15 MS ALDRED: I would like to call my second 16 panel of witnesses now. 17 --- Pause 18 SWORN: ANDREW PORAY 19 SWORN: ANDREW SKALSKI 20 SWORN: ABRAM W. KLEIN 21 SWORN: MITCHELL P. ROTHMAN 22 EXAMINATION 23 MS ALDRED: Mr. Klein, could you please state 24 your name for the record and tell us about your 25 professional affiliation? 26 MR. KLEIN: Yes. My name is Abram Klein and I 27 am a principal consultant with PA Consulting Group. PA 28 is a global management consulting firm and recently, in 130 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 October, purchased my former company, PHB Hagler Bailly. 2 So PA now incorporates all of PHB Hagler Bailly, 3 including the Ontario office here, and we are very 4 actively engaged, and continue to be actively engaged in 5 the Ontario market in both a business and regulatory 6 context. 7 MS ALDRED: Could you please describe your 8 educational background? 9 MR. KLEIN: I have a Masters in Public Policy 10 from the John F. Kennedy School of Government at Harvard 11 University, where I focused on applied microeconomics, 12 the business-government relationship and regulatory 13 economics. I also have a Bachelor of Arts from Brown 14 University. 15 MS ALDRED: Could you please describe your 16 experience? 17 MR. KLEIN: I joined PA's predecessor, Putnam, 18 Hayes & Bartlett in 1994 and since that time I have 19 primarily consulted on energy and environmental issues, 20 primarily with respect to the electricity market. 21 This work has included electricity market 22 restructuring and analysis of competitive markets 23 throughout the U.S. and Canada. It has also included 24 significant effort in the area of asset valuation and 25 modelling of electricity markets. In that capacity I 26 have led a number of efforts that use the GE-MAPS 27 Production Cost Model to model different aspects of 28 electricity markets. 131 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 A third area that I do significant work in is 2 market power. That refers to the ability and the 3 incentive of market participants to affect market prices 4 through their behaviour in the market. 5 MS ALDRED: Can you please just describe your 6 firm's experience which is relevant to Ontario? 7 MR. KLEIN: Yes. PA was the lead consulting 8 firm hired by the Market Design Committee to design the 9 competitive market in Ontario. 10 I worked with PA on several aspects of that 11 market design effort. My work included looking at 12 Alberta policies regarding market structure to assure 13 adequate capacity and reliability, looking at 14 alternative bidding rules for generator bids in the 15 market, looking at locational prices and congestion 16 within Ontario and I also worked on the modelling effort 17 to develop the contractually required quantities that 18 are part of the Market Power Mitigation Agreement. 19 MS ALDRED: What portions of the evidence will 20 your testimony cover? 21 MR. KLEIN: It covers Exhibit B, Tab 4, the 22 analysis of the economic benefits to consumers. 23 MS ALDRED: Were you responsible for the 24 preparation of that portion of the evidence? 25 MR. KLEIN: Yes, I was responsible for that 26 and for the modelling effort. I worked with other PA 27 staff including Mitch Rothman, who is on the panel with 28 me, and also Hydro One staff to review input assumptions 132 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 and the reasonableness of the model outputs. 2 MS ALDRED: And are there any changes you wish 3 to make to that evidence? 4 MR. KLEIN: There was one minor change. In 5 the electronic evidence there was a table that was 6 provided which was not printed out in the paper version. 7 It was provided in the electronic evidence, but wasn't 8 printed out. 9 MS ALDRED: Subject to that change, is the 10 evidence true, to the best of your knowledge, and do you 11 accept it as your evidence in this matter? 12 MR. KLEIN: Yes. 13 MS ALDRED: Mr. Poray, if we could deal with 14 you now. 15 Can you state your name and your professional 16 affiliation? 17 DR. PORAY: My name is Andrew Poray and I am 18 the Director of Pricing and Strategic Support in the 19 Strategic Planning Division of Hydro One Networks 20 Company. 21 MS ALDRED: Can you tell us about your 22 qualifications and your experience? 23 DR. PORAY: I have been employed in the 24 electricity utility industry for 30 years. During that 25 time I worked as a professional electrical engineer in 26 the field of power system analysis and transmission 27 system planning. 28 Lately, I have moved on to accept increasing 133 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 accountabilities and responsibilities dealing with 2 transmission business strategy development. During the 3 past three years I have been heading a unit responsible 4 for the cost allocation and rate design for the 5 development of transmission and distribution service 6 tariffs. 7 MS ALDRED: What portions of the evidence are 8 you responsible for? 9 DR. PORAY: I am responsible for the 10 preparation of those parts pertaining to rate and bill 11 impacts that are contained in Exhibit B, Tab 4, 12 Schedules 1 and 2. 13 MS ALDRED: And were those portions of the 14 evidence prepared under your supervision and control? 15 DR. PORAY: Yes, they were. 16 MS ALDRED: Do you have any corrections to 17 make to those portions of the evidence? 18 DR. PORAY: Yes, I do. There are changes in 19 the rates and impacts resulting from changes to the 20 project costs which were discussed during Panel 1 21 yesterday, changes due to the Board's decision on the 22 LV switch gear and some corrections concerning the 23 calculation of the average end use transmission charge. 24 Specifically I draw attention to Table 3 in 25 Exhibit B, Tab 4, Schedule 1, page 8 of 15, and Table 4 26 in Exhibit B, Tab 4, Schedule 2, page 4 of 4. 27 The impact of the project cost is to lower, at 28 some point, the transmission network monthly charge and 134 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 reduce the rate impact from 1.79 per cent to 1.72 per 2 cent and to lower the impact on the overall average 3 transmission charge from 1.04 per cent to .99 per cent. 4 As a result of these changes, the 5 corresponding values quoted in lines 16 and 17 on page 7 6 of 15 in Exhibit B, Tab 4, Schedule 1, should be 7 corrected accordingly. 8 Furthermore, the estimate to the customer bill 9 impact shown as $1.87 per annum on line 27 on page 7 of 10 15 in Exhibit B, Tab 4, Schedule 1, should be changed to 11 $1.78 per annum. 12 The impact of the LV switch gear decision is 13 to increase the transformation connection charge from 14 $1.41 per kilowatt per month to $1.48 per kilowatt per 15 month. 16 The existing values of the average charge 17 expressed in cents per kilowatt hour were derived on the 18 basis of the total energy delivered at the transmission 19 and distribution boundary, this being approximately 20 139 terrawatt hours. In effect, to calculate the charge 21 rate for end-use customers the proper value of the 22 delivered energy should be 130 terrawatt hours, because 23 that takes into account the distribution loses. 24 Those are all the changes. 25 MS ALDRED: Can you confirm that, subject to 26 the corrections that you have just now made, the 27 evidence is true to the best of your knowledge and 28 belief and you therefore accept it as your evidence in 135 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 this case? 2 DR. PORAY: Yes, I do. 3 MS ALDRED: Turning now to Mr. Skalski. 4 Mr. Skalski, can you tell us your position 5 with Hydro One? 6 MR. SKALSKI: Yes. I am Manager of Decision 7 Support at Hydro One Networks. 8 MS ALDRED: Have you testified previously 9 before the Ontario Energy Board? 10 MR. SKALSKI: Yes, I have. I was previously 11 employed at Enbridge Consumers Gas and in that position 12 I had occasion to testify on many occasions in front of 13 the OEB with respect to economic evaluation in both 14 leave to construct proceedings and rate cases. 15 MS ALDRED: What evidence are you responsible 16 for in this proceeding? 17 MR. SKALSKI: I am responsible for the 18 evidence on economic evaluation of the interconnection, 19 specifically the revenue requirement analysis in 20 Exhibit B, Tab 4, Schedule 1 and related interrogatory 21 responses. 22 MS ALDRED: Do you have any updates or 23 corrections to your evidence? 24 MR. SKALSKI: Yes, I do. I have a number of 25 updates or corrections. 26 The first one I will deal with relates to OEB 27 Staff Interrogatory No. 52. This interrogatory deals 28 with the lines that will be taken out of service when 136 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 the interconnection is built. 2 Subsequent to the response being filed, 3 additional information came to light. 4 Starting in Part A, on the second line, a 5 reference to the assets originating in the 1950s should 6 be changed to 1930s. 7 Secondly, in the table below, on the first 8 line the reference to the "500 kV line" should read 9 "230 kV line". 10 Then, as well to the table, I have a revision 11 to the book value for the two lines: gross book value, 12 accumulated depreciation and net book value. I will 13 just give the net effect. Overall the net book value in 14 the "Total" line, the third line of the table, should be 15 "1,648,000" and not "412,000", for a difference of 16 approximately 1.2 million. 17 I apologize for the errors in this 18 interrogatory, but I would note that these changes to 19 the asset values for the line being taken out of service 20 do not affect, in a material way, the economic 21 evaluation results. 22 MS ALDRED: Do you have any other corrections 23 or updates? 24 MR. SKALSKI: Yes, related to the change in 25 the total project cost down to $96 million. The revenue 26 requirement analysis in Exhibit B, Tab 4, Schedule 2 has 27 been updated to reflect that change. 28 In so doing, just one technical point to note: 137 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 the capital cost allowance calculations on the revenue 2 requirement analysis have been updated so that it now 3 includes the overhead costs. These costs were 4 previously omitted through an oversight. 5 MS ALDRED: Are those all of the corrections? 6 MR. SKALSKI: Yes, those are the corrections. 7 MS ALDRED: Was this evidence prepared under 8 your supervision and control? 9 MR. SKALSKI: Yes, it was. 10 MS ALDRED: Do you believe it to be true to 11 the best of your current knowledge and belief? 12 MR. SKALSKI: Yes, I do. 13 MS ALDRED: You adopt it as your evidence in 14 these proceedings? 15 MR. SKALSKI: Yes, I do. 16 MS ALDRED: Finally, Mr. Rothman, could you 17 please identify yourself and state your position? 18 MR. ROTHMAN: Yes. My name is Mitchell 19 Rothman. I am a principal consultant with PA Consulting 20 Group in the energy practice area. 21 MS ALDRED: Can you please outline your 22 background? 23 MR. ROTHMAN: I have a Bachelor's Degree in 24 Economics from Harvard College, I have a Master's Degree 25 in Economics from the Graduate School of Industrial 26 Administration of Carnegie-Mellon University. 27 I have worked in the energy industry for over 28 20 years. I have been Chief Economist of Ontario Hydro. 138 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 I have been a consultant since then with several 2 companies. I have worked overseas. In Ontario, I was a 3 member of the Market Design Committee. 4 MS ALDRED: What area of the prefiled evidence 5 and interrogatory responses are you responsible for? 6 MR. ROTHMAN: I am responsible for the 7 analysis of economic impacts of the Hydro Quebec 8 interconnection. 9 As Mr. Klein said, I also participated in the 10 process of discussing assumptions and the iterative 11 process of analysing the results during the MAPS 12 modelling. 13 MS ALDRED: Do you have any changes to make to 14 that evidence? 15 MR. ROTHMAN: No, I don't. 16 MS ALDRED: Were you responsible for the 17 preparation of that evidence? 18 MR. ROTHMAN: Yes, I was. 19 MS ALDRED: Do you adopt it as your evidence 20 in this proceeding? 21 MR. ROTHMAN: Yes, I do. 22 MS ALDRED: I am turning now to Mr. Klein. 23 THE PRESIDING MEMBER: Excuse me, Ms Aldred, 24 before you go on. 25 Mr. Klein, you mentioned an additional table 26 that was not in the written evidence, it was in the 27 electronic format. 28 MS ALDRED: Madam Chair, I think if it would 139 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 be suitable we could file that after the next break. 2 Would that help? 3 THE PRESIDING MEMBER: I just want to make 4 sure that the Board has a complete set. If you could 5 double check to make sure of that. 6 MS ALDRED: If it hasn't already been filed, 7 we will check to see whether it has been and, if not -- 8 THE PRESIDING MEMBER: I do appreciate that. 9 Thank you. 10 Mr. Skalski, you mentioned some change to, I 11 think it was Exhibit B, Tab 4, Schedule 2 that I 12 didn't get. 13 MR. SKALSKI: Okay. 14 --- Pause 15 MR. SKALSKI: Madam Chair, if you turn to 16 Exhibit B, Tab 4, Schedule 2, page 2. 17 THE PRESIDING MEMBER: Right. 18 MR. SKALSKI: It is the blue sheet. 19 THE PRESIDING MEMBER: Okay. Thank you. 20 MS ALDRED: I'm sorry. Apparently it was 21 filed yesterday. My apologies. 22 THE PRESIDING MEMBER: So the information has 23 been corrected in the brief? 24 MR. SKALSKI: The information has been 25 corrected, that's right. 26 THE PRESIDING MEMBER: Thank you very much. 27 MS ALDRED: Mr. Klein, what was your firm 28 retained to do? 140 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 MR. KLEIN: Hydro One asked PA to prepare an 2 independent economic assessment of the proposed 3 expansion of the Hydro Quebec to interconnection and to 4 evaluate the potential benefit to Ontario consumers and 5 the Ontario economy as a whole. 6 MS ALDRED: How did you carry out that 7 analysis? 8 MR. KLEIN: We used the GE-MAPS production 9 cost model. GE-MAPS simulates system operations on an 10 hour-by-hour basis, taking into account all loads, 11 generating resources and transmission limitations in the 12 system. The model acts something like a power exchange 13 or an independent system operator, much like the IMO 14 will operate once the competitive market begins in 15 Ontario. 16 But the model will choose the least cost set 17 of generators to meet system load, taking into account 18 the bids of those generators. 19 In addition, the model has scheduled 20 maintenance on generating units and implements random 21 forced outages. 22 In addition to Ontario, the model incorporates 23 the entire eastern interconnection of the U.S. and each 24 NERC region is modelled as a separate market. This 25 allows for a more robust modelling of imports and 26 exports into Ontario from U.S., from New York and 27 Michigan. 28 Among the outputs of the model are locational 141 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 spot prices at every generator's location which reflect 2 the system short-run marginal cost. Price divergences, 3 differences between locations are driven by transmission 4 tariffs or line losses or transmission constraints or 5 limitations that restrict the arbitrage between 6 locations. 7 One of the benefits, in my view, of using 8 GE-MAPS is that it permits a detailed simulation of the 9 operation of a transmission system. Rather than 10 simplifying the transmission system into a set of pipes 11 with independent fixed capacity, as other models do, 12 MAPS is able to account for realistic interactions 13 within the transmission system, including contingency 14 constraints, interface limits and thermal limits on 15 individual lines within the system. 16 MS ALDRED: In what context do you use 17 that model? 18 MR. KLEIN: We use the model in a number of 19 different contexts. We are often asked to value 20 specific assets that are for sale in a divestiture. So 21 companies that are interested in purchasing assets will 22 hire us to assess the value of them using GE-MAPS. 23 We also look at the fundamental economic 24 drivers in various markets as competitive markets are 25 evolving throughout the U.S. 26 Another area where we will use GE-MAPS is, 27 because the model is able to implement locational 28 pricing, much as it is done in, say, New York or PJM, we 142 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 use the model to value relative prices between locations 2 or the value of financial transmission rights between 3 locations or in these markets. 4 MS ALDRED: How did you use GE-MAPS in this 5 analysis? 6 MR. KLEIN: What we used the model to do was 7 to try to isolate the impact of the Hydro Quebec 8 interconnection. To do this, we modelled a base case 9 year with no interconnection in the model. Then we 10 modelled the change case that had the interconnection 11 in. Based on the output from these two lines, we 12 measured the change in the estimated electricity market 13 prices in Ontario and the cost of purchases for Ontario 14 load. 15 MS ALDRED: In what manner did you model Hydro 16 Quebec interconnection? 17 MR. KLEIN: Modelling the imports and exports 18 of an interconnection is one of the key modelling issues 19 in the study. 20 Hydro Quebec is a low-cost supplier with 21 significant storage capacity behind its dams. 22 Traditionally, Hydro Quebec exports significant energy 23 to the New England Power Pool and the New York control 24 area. During on-peak hours of the summer, the 25 transmission lines between Hydro Quebec and those 26 regions tend to be filled to their full capacity 27 throughout the summer, during the on-peak hours. 28 However, as Hydro Quebec's load grows, Hydro 143 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 Quebec will not have enough water within its system to 2 meet its internal load plus the export demand without 3 drawing down its reservoirs over time. As a result, 4 Hydro Quebec would be expected to increasingly rely on 5 energy banking to meet the export demand. 6 What banking is, banking occurs when Hydro 7 Quebec foregoes using its own resources to meet its 8 internal demand and instead purchases that power from 9 external markets during low-load off-peak periods. The 10 energy that was foregone is then available to export to 11 external markets during on-peak periods when prices are 12 likely to be high. 13 Through this process, Hydro Quebec is able to 14 sell into external markets without increasing their net 15 exports and, therefore, preserve the security of their 16 reserves. 17 Note that this banking process is not a new 18 phenomenon and, in fact, Hydro Quebec and the former 19 Ontario Hydro had been doing this for some time at their 20 present interconnection between the provinces. 21 MS ALDRED: What is the key issue in modelling 22 the change in the market prices? 23 MR. KLEIN: One of the key issues in modelling 24 the change is just to make sure that the supply/demand 25 balances are -- that you have a realistic model of the 26 fundamental drivers within the market to assess the 27 supply/demand balances and to assess the impact of the 28 tie on those balances. 144 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 So as long as we are comfortable that the 2 change in the price from our model is a realistic 3 modelling of the impact of the tie, it is not as 4 important that we have the absolute level of prices 5 precisely modelled in the market. 6 In fact, there is a tremendous amount of 7 uncertainty about what market prices will be in the 8 future and it is not critical for this analysis that we 9 be precisely right about the absolute level of market 10 prices within Ontario, rather the important aspect is to 11 be able to measure the change. 12 MS ALDRED: How does this interconnection 13 create savings for consumers? 14 MR. KLEIN: The tie has two benefits, 15 increasing competition and lowering prices. 16 The tie increases competition by providing 17 Ontario with access to capacity from a low cost supplier 18 that would otherwise not have access to this market. 19 Hydro Quebec is the lowest cost producer in 20 the region, from the standpoint of its production costs, 21 and the vast majority of its resources are hydro 22 resources, approximately 94 per cent of its resources 23 are hydro resources, and much of this is stored storable 24 capacity behind dams. 25 MS ALDRED: How does the increase in supply 26 from Hydro Quebec translate into lower prices for 27 Ontario consumers? 28 MR. KLEIN: The interconnection, or the 1,250 145 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 megawatts from the interconnection will allow the IMO to 2 meet demand by dispatching cheaper generating resources 3 than it would be able to without the tie. During peak 4 periods when the interconnection is utilized, the IMO 5 will be able to replace 1,250 megawatts of the highest 6 bid generation with lower cost hydro power. 7 MS ALDRED: Are there other benefits of the 8 tie that you would like to point out for us? 9 MR. KLEIN: Yes. As I mentioned before, 10 Ontario customers will be able to benefit from Hydro 11 Quebec's ability to bank energy. This makes the project 12 somewhat unique in that it has a moderating effect on 13 electricity market volatility. 14 Volatility is the extent to which prices 15 change from period to period. One of the defining 16 characteristics of competitive electricity markets as 17 they have been evolving is that there is a greater 18 amount of volatility in competitive electricity markets 19 than with virtually any other commodity. 20 Among other reasons, one of the reasons that 21 electricity markets are volatile is because electricity 22 has to be delivered in real time and there is virtually 23 no inventory and very little cost effective storage. 24 With the interconnection, however, we have a 25 means of providing effective storage of energy. So 26 effectively you can sell to Hydro Quebec during the 27 off-peak periods and then that energy is now available 28 to export into Ontario during on-peak periods. 146 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 MS ALDRED: What is your estimate of the 2 savings to consumers? 3 MR. KLEIN: Using the GE-MAPS model, we have 4 modelled the 2005 electricity market prices with and 5 without the interconnection. Our base case estimate was 6 $240 million per year, which corresponds to a drop in 7 average Ontario electricity prices of about $1.58 per 8 megawatt hour, or approximately 5 per cent. 9 However, these base case estimates assume less 10 volatility in the top 100 hours than in the actual 11 GE-MAPS results, which predict benefits to consumers of 12 $295 million. This was the unadjusted volatility 13 scenario in our prefiled evidence. 14 In my judgment, the model estimate of the 15 price volatility is a conservative approach and the 16 benefits could easily be greater than the $295 million 17 per year that we estimated. 18 Nevertheless, we also looked at a reduced 19 volatility scenario and the benefits of the tie were 20 still very significant, approximately $185 million per 21 year. 22 MS ALDRED: Did you model any other year? 23 MR. KLEIN: No, we did not. In our judgment 24 the project was clearly decisive based on modelling the 25 single year, thus there really wasn't a need to model 26 other years. But while we didn't model those years, we 27 would expect the benefits beyond the 2005 year to 28 continue and still be significant as the interconnection 147 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 represents a permanent introduction of new capacity that 2 is available to the market on peak. 3 MS ALDRED: Why do you say that the model is 4 conservative with respect to volatility? 5 MR. KLEIN: Well, there are a number of 6 conservative assumptions that are built into the model. 7 The first is that the model assumes that all 8 generator bids are based on short-run cost of production 9 rather than considering any opportunity costs or 10 strategic bidding by market participants. 11 The model also has perfect information about 12 loads and outages in the future and it doesn't get 13 surprised when circumstances are unexpected. 14 In addition, the model, we use an expected 15 load for 2005 when we simulate the year, so we are not 16 accounting for the potential for a significant heat wave 17 that would result in much higher peak loads than what 18 the model predicts. We also don't account for 19 transmission line outages. 20 The bottom line is, the real world is much 21 less flexible and doesn't have the same degree of 22 information that is in this model. 23 There were some other conservative assumptions 24 that were built into the model inputs. 25 The first is that the fuel prices that were 26 used at the time are lower than fuel prices that we see 27 today in the market and, as a result, the on-peak prices 28 tended to be lower. 148 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 Another conservative assumption is that we 2 only assumed the Hydro Quebec -- the Hydro Quebec 3 interconnection would have approximately a 12 per cent 4 capacity factor. We probably left some potential 5 banking opportunities that we could have modelled on the 6 table, but we wanted to make sure we were conservative 7 in terms of how we modelled the imports from Hydro 8 Quebec. 9 Finally, when we estimated out base case 10 $240 million per year estimate, we actually reduced the 11 model's volatility during the top 100 hours to come up 12 with our base case estimate. 13 MS ALDRED: Will the benefits of the Hydro 14 Quebec interconnection accrue to the Ontario market? 15 MR. KLEIN: Yes, they will. 16 The savings to consumers are completely 17 independent of the types of transactions that Hydro 18 Quebec might engage in in the market. 19 Hydro Quebec would not be able to, for 20 instance, bypass the Ontario market by selling to the 21 United States, because the Ontario market rules dictate 22 that Hydro Quebec will be paid for the price of its 23 energy at the delivery point at Hawthorne. To the 24 extent that Hydro Quebec did a bilateral transaction 25 with a U.S. market participant, it would have to pay 26 congestion costs associated with that transaction and 27 would have to compete with other Ontario producers for 28 the export capacity. 149 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 Hydro Quebec also could not bypass the Ontario 2 spot market with a bilateral sale to an industrial 3 customer in Ontario. To the extent that you reduced the 4 demand from that industrial customer that is engaged in 5 the bilateral, that demand is no longer in the spot 6 market and so you basically shifted the demand curve 7 within the Ontario market by the same amount as the 8 Hydro Quebec sales into the market. 9 So whether they sell into the market as a 10 bilateral or bid directly to the IMO, there is really no 11 difference in terms of the impact on the spot market 12 prices within Ontario. 13 MS ALDRED: Can you think of any plausible 14 scenario where Ontario customers would be harmed by the 15 interconnection? 16 MR. KLEIN: No, I really can't think of any 17 plausible scenarios. 18 This is a unique resource from the standpoint 19 of its ability to moderate price volatility in the 20 likelihood of price spikes. It adds supply during peak 21 periods, and adding supply into the market can only be 22 good. In fact, if you had a circumstance where you 23 didn't have the interconnection and you had price spikes 24 in the Ontario market, you could easily have not had 25 those price spikes if you had had the interconnection. 26 MS ALDRED: Finally, Mr. Klein, Networks has 27 stressed the importance of a construction schedule which 28 would allow it to meet the target in-service state in 150 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 2003. On the basis that any delay in the in-service 2 state would reduce the energy cost savings for 3 consumers, can you explain why that is the case? 4 MR. KLEIN: I think that having the 5 interconnection available for the summer peak period is 6 when the benefits are the greatest. By 2003, the 7 interconnection will have an impact on market prices by 8 providing a supply that would not otherwise be there. 9 In fact, I doubt that other merchant plants that are 10 proposed for the Ontario market will necessarily be on 11 line by that time. 12 So having the interconnection in by the summer 13 of 2003 would be very valuable in terms of providing the 14 benefits of the interconnection as soon as possible. 15 MS ALDRED: Thank you very much, Mr. Klein. 16 Turning now to Dr. Poray. 17 What is the purpose of your direct evidence? 18 DR. PORAY: The purpose of my direct evidence 19 is to describe the key elements of the rate and customer 20 bill impact assessment carried out by Hydro One in 21 consideration of the proposed facilities of the new 22 Hydro Quebec interconnection. 23 MS ALDRED: Would you please describe for the 24 Board the basis of Networks' analysis of rate impacts? 25 DR. PORAY: The analysis was based on the 26 recently OEB-approved transmission cost allocation and 27 rate design structure. The starting baseline is the 28 2000 transmission revenue requirement. This total 151 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 revenue requirement is allocated to the transmission 2 network, line connection and transformation connection 3 pools as per the rate order. 4 For the purpose of this analysis, Networks 5 assumed that the cost of the new facilities would be 6 included in the transmission network pool of costs, as 7 these facilities provide benefits to all transmission 8 customers. 9 In effect, these interconnection facilities 10 are considered to be network facilities, just as all 11 existing interconnection facilities, because their usage 12 cannot be identified with any specific customer or group 13 of customers. 14 Using this approach, Networks included the 15 incremental cost of the new facilities in the network 16 pool. The additional cost is $13.38 million per annum. 17 However, given that there will be revenues 18 accruing to Networks from the IMO for the export 19 transmission service that will offset the transmission 20 revenue requirements, Networks backed out an estimated 21 $1.58 million per annum in accordance with the 22 OEB-approved transmission rate order. 23 This amount is estimated to be the total 24 revenue from expected exports as calculated by PA 25 Consultants in their study over the new interconnection. 26 Therefore, the actual additional amount included in the 27 network pool due to the new interconnection is reduced 28 to $11.8 million per annum. 152 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 The resulting network pool revenue requirement 2 becomes $698 million. This represents an increase of 3 1.72 per cent in the transmission network revenue 4 requirement, or .99 per cent in the total transmission 5 revenue requirement. 6 MS ALDRED: Could you please describe how you 7 calculated the rate impact. 8 DR. PORAY: Having established the 9 transmission network revenue requirement, Networks used 10 the rate design approved by the OEB to establish the new 11 transmission network pool rate, which is $2.86 per 12 kilowatt per month. 13 Therefore, compared to the OEB-approved 14 network rate of $2.81 per kilowatt per month, the 15 addition of the new interconnection will result in an 16 increase to the network pool rate of 1.72 per cent. 17 MS ALDRED: Could you please explain why that 18 is expected to be the maximum rate impact. 19 DR. PORAY: Certainly. 20 Assuming that there are no changes in the cost 21 of capital and in export revenues in future years, the 22 rate impacts will likely decline. 23 MS ALDRED: Could you please explain why 24 Networks did not consider collecting costs of the new 25 interconnection from users of the export transmission 26 service. 27 DR. PORAY: In its decision on the matter of 28 setting the level of the export transmission service, 153 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 the OEB was not inclined to agree with setting the 2 export service charge at a higher level than $1.00 per 3 megawatt hour because of the potential impact that might 4 have on working towards a larger open market. 5 In other words, the OEB felt that by setting 6 the export charge at higher levels this might frustrate 7 market participants and result in less competitive 8 entry. 9 Furthermore, the export transmission charge is 10 not meant to reflect the embedded cost of the 11 transmission infrastructure, nor does it reflect any 12 specific volume of exports. It was set at the $1.00 per 13 megawatt hour value to reflect the balance between 14 charging exporters a reasonable amount for the use of 15 the transmission system and fairness to customers who 16 have to pay the full cost of transmission in Ontario. 17 MS ALDRED: How did Networks obtain the 18 customer bill impact? 19 DR. PORAY: The customer bill impact analysis 20 was done on the basis of assuming a typical residential 21 customer who consumes 1,000 kilowatt hours per month. 22 Today, transmission represents about 15 per 23 cent of the total bundled electricity bill paid by 24 consumers. Assuming an average residential consumer 25 bundled electricity charge of 10 cents per kilowatt 26 hour, it means that on average the transmission 27 component of the bill represents about $15 per month. 28 Since the cost of the Hydro Quebec 154 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 interconnection will increase the overall transmission 2 costs by .99 per cent, this increase translates into a 3 customer bill impact of 14.9 cents per month, or $1.78 4 per annum. 5 By comparison, the estimated savings generated 6 by this Hydro Quebec interconnection for the same 7 customer are expected to be in the range of $22 per 8 annum. 9 MS ALDRED: Thank you, Dr. Poray. 10 Mr. Skalski, could you please summarize the 11 approach which you took for the economic evaluation of 12 the interconnection. 13 MR. SKALSKI: Yes, I could. 14 The economic evaluation of the project has 15 been carried out from a utility and a consumer 16 perspective. 17 The utility impact was modelled using a 18 revenue requirement analysis to show the impact on the 19 annual cost of service as a result of building the 20 interconnection, and that cost-of-service impact is then 21 expressed, as Mr. Poray has indicated, in terms of the 22 impact on transmission rates and end use bill. 23 As far as the consumer impact is concerned, 24 the impact on Ontario electricity consumers has been 25 modelled using the study from PA, which Mr. Klein has 26 described. The PA study indicates that there are 27 considerable savings available to consumers as a result 28 of the interconnection. 155 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 MS ALDRED: Is the company's approach 2 consistent with OEB practice? 3 MR. SKALSKI: Yes, it is. The company's 4 approach in applying a utility perspective and a 5 consumer perspective is consistent with standard OEB 6 methodology used in previous natural gas leave to 7 construct proceedings. It is also consistent with the 8 principles and criteria for economic assessment of 9 projects that is contained in the recently approved 10 transmission system code. 11 Under the code, network investments, like the 12 interconnection, where there are large benefits that 13 extend to large groups of end users and which are made 14 to increase general supply capabilities, as Mr. Poray 15 has indicated, are to be funded and included in the 16 network pool. That is included in Appendix 4 of the 17 transmission system code. 18 MS ALDRED: Are there any departures from the 19 transmission code methodology? 20 MR. SKALSKI: Yes, there are a couple of areas 21 where we departed from the project assessment guidelines 22 contained in the code. 23 First, in our prefiled evidence we have 24 provided a revenue requirement and rate impact analysis 25 to show the impact on the utility, rather than an 26 discounted cash flow analysis. 27 This was done because of the minor amount of 28 incremental transmission revenue that is being generated 156 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 by the project, which by definition results in a 2 negative net present value when looking at transmission 3 business revenues and costs only. 4 The project is, however, clearly feasible from 5 a broader Ontario consumer perspective, given the large 6 energy costs savings which are not captured in the DCF 7 analysis. 8 So in this case, given this situation, we 9 considered that the presentation of the project impact 10 on transmission rate, on the one hand, coupled with the 11 energy saving from the PA analysis, was more informative 12 in terms of evaluating the project's impact than the DCF 13 analysis. 14 However, I would point out that a DCF result 15 was provided in an Interrogatory Response to Board 16 Staff. 17 The second area where we departed from the 18 transmission service code guidelines is with respect to 19 overhead costs. 20 The code calls for project specific overheads 21 to be included, but we have included overheads using our 22 general overhead rate which results in overheads being 23 assigned to the projects and that are probably somewhat 24 higher than the project specific overheads are. 25 We used general overheads because we didn't 26 have enough project specific overheads available. The 27 result of doing that is that the incremental rate impact 28 we are showing is at the high range of the estimate and 157 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 will most likely be somewhat less. 2 But without knowing project-to-project 3 specific overhead costs, it is hard to say with any 4 precision. 5 At any rate, we believe that the 1 per cent 6 rate impact figure that Mr. Poray has mentioned is a 7 reasonable and conservative one to use for evaluation 8 purposes. 9 MS ALDRED: Could you summarize the results of 10 your economic evaluation? 11 MR. SKALSKI: Yes. As Mr. Poray has indicated 12 with respect to the rate impact, and what Mr. Klein has 13 indicated with respect to the consumer savings 14 available, when you combine the results the ongoing 15 energy cost savings of $240 million per year are well in 16 excess of the costs to build the interconnection, 17 whether you look at that cost just in terms of its 18 upfront capital cost of $96 million or whether you look 19 at it in terms of its annual revenue requirement or cost 20 to carry the project of approximately $12 million 21 initially and then declining over time. 22 The company therefore believes that the 23 interconnection will clearly result in economic benefits 24 for Ontario consumers. 25 MS ALDRED: What were the results in terms of 26 consumer impacts? 27 MR. SKALSKI: I think, as Mr. Klein has 28 indicated, those were $240 million. 158 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 MS ALDRED: Thank you, Mr. Skalski. 2 THE COURT REPORTER: I'm sorry, sir. You keep 3 popping in and off the microphone. 4 MR. SKALSKI: Yes, I'm sorry. 5 THE COURT REPORTER: Thank you. 6 MR. SKALSKI: Yes, $240 million per annum. 7 MS ALDRED: Mr. Rothman, did you provide the 8 economic impact analysis for this project? 9 MR. ROTHMAN: Yes, I did. 10 MS ALDRED: And what methodologies are 11 commonly used for economic impact analyses? 12 MR. ROTHMAN: I should mention that as Chief 13 Economist of Ontario Hydro I was responsible for 14 economic impact analyses for the annual rate submissions 15 to the Ontario Energy Board, and presented those impact 16 studies to the Ontario Energy Board, along with other 17 testimony for Ontario Hydro. 18 There are two common methodologies that you 19 can use for these kinds of impact analyses. 20 One is to use a large scale macroeconomic 21 model to understand the complexities of the end results 22 within the economy of the change that you are looking 23 at. So you would take a large scale macroeconomic 24 model, run a base case and then run an alternative case 25 indicating the change, and the difference between those 26 two results would be the economic impact. 27 Another way to do it is a lot simpler. You 28 take a number, a factor, a multiplier, that represents 159 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 that kind of impact and apply it to the changed variable 2 and get a result. 3 For example, if you were changing the level of 4 government expenditure and the government expenditure 5 multiplier were 1.3, then you might say that 6 $100 million more government expenditure would produce 7 $130 million more in economic activity as the result of 8 that government expenditure worked its way through the 9 economy. 10 MS ALDRED: In this case which methodology did 11 you use and can you tell us why you chose that 12 methodology? 13 MR. ROTHMAN: For this analysis I used the 14 simple multiplier procedure. We are talking about 15 changes here that for a macroeconomic model are 16 relatively small. Two hundred and forty million dollars 17 isn't small, but macroeconomic models deal with numbers 18 in the billions or hundreds of millions of dollars -- 19 hundreds of billions of dollars, and so $240 million 20 would be kind of in the fourth decimal point place and 21 probably not significant enough to be seen as a result 22 from the macroeconomic model. 23 So I used the multipliers, which generally 24 come from experience with those kinds of macroeconomic 25 models and from looking at what kinds of results have 26 been seen in the past as a result of changes like this 27 in the economy. 28 MS ALDRED: And where did you get the 160 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 multiplier values that you used? 2 MR. ROTHMAN: I talked to some analysts who 3 have done these kinds of impact analyses, people who use 4 models extensively and people who have done this kind of 5 analysis without models, who have done the same kind of 6 simple multiplier analysis that I used. 7 The multiplier that I am using for the change 8 in electricity prices or the change in consumer 9 expenditure is similar to one for a tax change. 10 In effect, the consumers get an increase in their 11 disposable income, very much the same way that they 12 would if there were a tax reduction. 13 The multiplier I am using for investments is a 14 multiplier that is commonly used for investments where 15 there is a high Ontario content. 16 MS ALDRED: And what results did you get? 17 MR. ROTHMAN: I looked at two kinds of 18 impacts. The first is the one-time impact from the 19 construction of the Hydro Quebec interconnection. That 20 impact occurs during and immediately after the 21 construction period. 22 The multiplier that I used is 1.3, so we 23 apply 1.3 to $80 million of expenditures. Those are the 24 incremental non-financial expenditures. That is, we 25 take out the overhead expenditures and we take out the 26 amounts for funds used during construction. Those 27 aren't direct incremental expenditures into the economy. 28 We get an economic impact of about $104 million. 161 HYDRO ONE NETWORKS PANEL 2, ex (Aldred) 1 The second kind of impact is the ongoing 2 impact of the rollover electricity rate to consumers. 3 So we have $240 million in savings to consumers, we 4 apply a multiplier of about 1.25 to that and get an 5 estimate of an increase in Ontario economic activity of 6 about $300 million. 7 Now that estimate is an upper bound of the 8 actual economic impact on Ontario, because the increase 9 in consumer expenditures is offset by an increase in 10 producer incomes. That is, the increase in consumer 11 disposable income is offset by a decrease in producer 12 income and that decrease in producer incomes will have 13 some effect, or could have some effect on their 14 expenditures. We believe that over the short run that 15 expenditure -- short to medium-term, that decrease will 16 be relatively small given the degree to which those 17 expenditures are fixed. 18 So the economic impact, the impact on economic 19 activity in Ontario is, at least I say, close to 20 $300 million. 21 MS ALDRED: Thank you, Mr. Rothman. 22 That concludes the direct evidence for this 23 panel. 24 THE PRESIDING MEMBER: Thank you, Ms Aldred. 25 Mr. Moran? 26 MR. MORAN: Madam Chair, I note that 27 it's 10:30. I was wondering when you wanted to take the 28 morning break. 162 HYDRO ONE NETWORKS PANEL 2 1 THE PRESIDING MEMBER: That's fine. That way 2 we won't interrupt your cross-examination. 3 We will take a break for 15 minutes. 4 Thank you. 5 MR. MORAN: Thank you, Madam Chair. 6 --- Upon recessing at 1030 7 --- Upon resuming at 1053 8 THE PRESIDING MEMBER: Please be seated. 9 Mr. Moran? 10 MR. MORAN: Thank you, Madam Chair. 11 Before I start, I have three exhibits that I 12 would like to file. 13 The first one would be marked as 14.5. It is 14 entitled "Figure 1, Ontario Peak Load and Capacity 15 2005". 16 EXHIBIT NO. 14.5: Document entitled 17 "Figure 1: Ontario Peak Load and 18 Capacity 2005" 19 MR. MORAN: The second one is a set of four 20 schematics regarding dispatch scenarios, and I would 21 like to mark that as 14.6. 22 EXHIBIT NO. 14.6: Set of four schematics 23 regarding dispatch scenarios 24 MR. MORAN: The third one is a table entitled 25 "Single Cycle Gas Turbine Profit Profile". It will be 26 14.7. 27 EXHIBIT NO. 14.7: Table entitled "Single 28 Cycle Gas Turbine Profit Profile" 163 HYDRO ONE NETWORKS PANEL 2 1 MR. MORAN: Perhaps I can just confirm that 2 the witnesses have the exhibits. 3 DR. PORAY: Yes, we do. 4 EXAMINATION 5 MR. MORAN: Mr. Klein, I expect that most of 6 my questions are going to be ones that you will field. 7 Let me take you first to Exhibit 14.6, the 8 four schematics. Have you had a chance to take a look 9 at those? 10 MR. KLEIN: I just got them now. If you will 11 give me a minute I will go through them. 12 --- Pause 13 MR. KLEIN: Okay. 14 MR. MORAN: Can you agree with me that these 15 four schematics set out essentially the four scenarios 16 that would be available in the context of this intertie, 17 in theory? 18 --- Pause 19 MR. KLEIN: Yes, I will accept it, subject to 20 a further check. 21 MR. MORAN: All right. Thank you. 22 Now, you carried out an analysis. You have 23 referred to it as GE-MAPS in your direct evidence. As I 24 understand it, in your analysis you assume a certain 25 level of volatility, or at least the model does. Right? 26 MR. KLEIN: We didn't assume a certain level 27 of volatility -- 28 MR. MORAN: It is one of the inputs. 164 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. KLEIN: No. It was one of the outputs of 2 the model. We did not impose -- I think, as we 3 indicated in one of the responses to the 4 interrogatories, we did not impose a specific assumption 5 about volatility in the market. We did assume certain 6 dispatch price quantity pairs for price responsive 7 demand in the market and then the model would then 8 choose the least cost way of meeting the load, given the 9 transmission constraints and the bids from generators. 10 MR. MORAN: Right. And in that context, one 11 of the things that factored into the volatility of the 12 model predicted had to do with the modelling of U.S. 13 markets. Right? 14 MR. KLEIN: Yes, it did. 15 MR. MORAN: All right. So, of course, the 16 volatility that you see in the California market, in the 17 New York market is part of that. 18 MR. KLEIN: No. Well, the volatility in the 19 New York market is a part of that. The volatility of 20 the California market is not a part of that because it 21 is -- 22 MR. MORAN: Too far away. 23 MR. KLEIN: It is not interconnected with the 24 eastern interconnection. 25 We did not -- we used historical data to 26 support the reasonableness of the assumptions, but the 27 volatility that is in the model is based on the model's 28 modelling of supply and demand in the simulation. It is 165 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 not based on the current volatility in New York or 2 California. 3 MR. MORAN: All right. I take it that the 4 volatility in New York is something that would be 5 predictable using the model. I mean it's a way of 6 testing the model, isn't it? 7 MR. KLEIN: This is one of the interesting 8 factors about production cost models, because many of 9 the factors that drive volatility in the real world are 10 not necessarily captured in the actual production cost 11 models. 12 So that there are many, many factors that are 13 going on in the New York market that are affecting the 14 high prices in New York, if that's what you mean or are 15 referring to as volatility. 16 And there are a number of factors that are not 17 necessarily captured in GE-MAPS. 18 MR. MORAN: Based on the volatility predicted 19 by the model, that is what led to the prediction of 20 $240 million of benefit if the intertie is built. 21 Right? 22 MR. KLEIN: It is the change in market prices 23 from the case with the tie compared to the case without 24 the tie. 25 MR. MORAN: Right. 26 MR. KLEIN: And to some extent, the way the 27 tie creates the benefits is by reducing -- most of the 28 benefits come from reducing prices when they are high in 166 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 Ontario. 2 So I would agree with that. 3 MR. MORAN: So part of it is a reduction in 4 volatility leads to an improvement in price. 5 MR. KLEIN: Yes. 6 MR. MORAN: All right. 7 Now, when we would look at the real world, as 8 you referred to it, in California and New York, there 9 was a government response to the volatility. Price caps 10 were introduced. Right? 11 MR. KLEIN: Yes. 12 MR. MORAN: Which is a way of controlling 13 volatility. Right? 14 MR. KLEIN: Yes. 15 MR. MORAN: And as you are aware, there is a 16 price cap in place in Ontario right now on generation. 17 Right? 18 MR. KLEIN: There is a price cap currently in 19 place on generation in the Ontario market or in the 20 proposed competitive market once the IMO begins. 21 MR. MORAN: It's existing. Right now there is 22 a price cap in place. Are you aware of that? 23 MR. KLEIN: No, I was not aware specifically 24 of a price cap. At what level is it? 25 MR. MORAN: Mr. Mitchell, maybe you can assist 26 on that -- on OPG. 27 MR. ROTHMAN: On OPG. 28 MR. KLEIN: Are you referring to the Market 167 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 Power Mitigation Plan? 2 MR. MORAN: I'm talking about the existing 3 price cap on generation in Ontario at the moment. 4 MR. ROTHMAN: There has been a price freeze 5 essentially on generation in Ontario for quite some time 6 as a result of, first a commitment by Ontario Hydro and 7 later interaction between it and the government. 8 MR. KLEIN: But, as far as I know, there is no 9 spot market in Ontario at this point at which -- 10 MR. MORAN: I wasn't suggesting that there is. 11 I just asked you if you were aware of the current price 12 freeze, as Mr. Mitchell prefers to -- 13 MR. KLEIN: Okay, that's different. 14 MR. ROTHMAN: That's Mr. Rothman. 15 MR. MORAN: I'm sorry, Rothman. I'm sorry. I 16 should know that by now. 17 MR. KLEIN: I am aware that there are 18 regulatory structures in place and that there is a price 19 freeze. 20 MR. MORAN: I'm sorry, Mr. Rothman. I think I 21 talked to you too many times in the hallways of the DSP. 22 --- Laughter 23 MR. MORAN: All right. 24 In Interrogatory No. 20, Mr. Klein, I think 25 you were asked to assume a continuation of that price 26 cap if it were to be imposed in the year 2005. I take 27 the analysis in that scenario showed a benefit reduction 28 down to $70 million. 168 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. KLEIN: Let me just clarify or 2 distinguish -- I will ask the question: My 3 understanding of the price cap that you are referring to 4 in Interrogatory No. 20 is the cap that is part of the 5 Market Power Mitigation Agreement which is not to start 6 until the competitive market begins in Ontario. This is 7 why your question confused me. It is my understanding 8 that cap doesn't truly come into effect until the actual 9 competitive market begins in Ontario. Is that right? 10 MR. MORAN: That's right, yes. 11 MR. KLEIN: I'm sorry, what was the question? 12 MR. MORAN: Interrogatory No. 20, I think 13 asked you to assume a price cap in place, and the 14 current price freeze was used, I think in the question. 15 Based on the analysis I just want to confirm that it is 16 taking into account the kind of price freeze that exists 17 now, if that were to exist in the future -- in response 18 to volatility, for example, if the government were to 19 intervene, as it did in other jurisdictions -- the 20 benefit to Ontario consumers is reduced? 21 MR. KLEIN: When you say "if the government 22 were to intervene". Are you asking me to posit 23 additional price caps in the market other than what is 24 contemplated in the Market Power Mitigation Plan or the 25 rules that are in place for when the market starts? 26 MR. MORAN: Either way. If there is a price 27 cap put into place that will reduce volatility. Right? 28 MR. KLEIN: Well, it depends on the price cap, 169 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 okay. If there is a -- the current Market Power 2 Mitigation Agreement contemplates -- doesn't actually 3 have a price cap in the Ontario market, rather it is a 4 revenue cap which applies to the OPG generation. That 5 is very different from a price cap in that prices 6 could -- under the current structure I don't believe 7 that there is any contemplated limit on how high the 8 prices could go in the hourly market in the Ontario 9 market. 10 There may well be that I don't know about that 11 the IMO has been engaged in, but there is a difference 12 between an annual revenue cap and an actual price cap 13 such as has been imposed in the California market or the 14 New York market which you were referring to before. 15 MR. MORAN: I am just suggesting, Mr. Klein, 16 that if there was government intervention as was seen in 17 California and in New York in response to high prices, 18 if that kind of intervention occurred in Ontario in 19 response to a similar situation -- I'm not suggesting 20 that it is going to happen, but if it does -- then that 21 would reduce the benefits to the consumer of this 22 intertie project. 23 MR. KLEIN: That depends on the level of the 24 price cap. If it is a New York price cap, it would have 25 no impact on our study because we never had model 26 results that went above $1,000 U.S. 27 And again, the New York price cap is temporary 28 and how long it will be in place is not clear. 170 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 Nevertheless, in our modelling of the volatility we 2 never had prices in Ontario exceed the level of the 3 New York price cap. 4 Now, in California there has been -- I think 5 the price cap moved to $750 and then to $250. I believe 6 it is at $250 now. So there would be some reduction 7 where prices that we estimated that were above $250, if 8 there were a $250 price cap in Ontario hypothetically, 9 would be reduced. 10 MR. SKALSKI: Could I just add as well, just 11 to put some numbers around it, the estimated 12 conservative savings from the PA study are about 13 $240 million per year and the impact on the revenue 14 requirement of the transmission business is $12 million 15 initially and then it starts falling. 16 So just directionally the savings more than 17 cover the increase in cost to transmission customers 18 and, in fact, we only need 5 per cent of those 19 savings -- 5 per cent of 240 million is about 20 $12 million -- to cover the increased cost of the 21 interconnection. 22 So in order to get a break-even result, you 23 really don't need to have those large savings that the 24 PA study is indicating are there to be realized. 25 MR. MORAN: All right. If I understand what 26 you say, the savings to Ontario consumers could be less 27 than $240 million per year and still be savings. In 28 effect that is what you said. Right? There still could 171 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 be savings even at much lower numbers. 2 MR. SKALSKI: And still make the project 3 feasible from a broad perspective, yes. 4 MR. MORAN: It would make the project 5 feasible. Right. Yes, all right. 6 Mr. Klein, I think we can just wrap up on this 7 point then. 8 I mean, directionally speaking, volatility 9 that is addressed through government intervention could 10 lead to something less than $240 million of savings to 11 Ontario consumers, right, per year? 12 MR. KLEIN: There could be factors that lead 13 to less than $240 million. There could be other factors 14 that lead to higher than $240 million. But I would 15 agree that to the extent that there is less volatility 16 in the market than we have modelled here that the 17 benefits may be less. 18 MR. MORAN: Okay. Let me move on then. 19 You indicated that in GE-MAPS some U.S. 20 markets were modelled and you modelled the Ontario 21 market. How did you model the Quebec market? 22 MR. KLEIN: The GE-MAPS model that we have 23 includes the entire eastern interconnection in order to 24 be able to model the transmission interactions within 25 that market. I think, as we indicated in the 26 interrogatories, we didn't explicitly model the Hydro 27 Quebec market as supply and demand, rather we assumed a 28 certain amount of supply would be available from Hydro 172 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 Quebec to export to U.S. markets and scheduled that 2 energy available to New York and NEPOOL so that it was 3 available in the highest load periods, and then we 4 modelled the banking process with Ontario as we 5 discussed earlier. 6 MR. MORAN: All right. So you looked at the 7 existing export/import relationship between Hydro Quebec 8 and American jurisdictions? 9 MR. KLEIN: Yes. 10 MR. MORAN: All right. But you didn't look at 11 the export/import potential relationship between other 12 American jurisdictions and Hydro Quebec like -- 13 MR. KLEIN: No, we did not model -- this I 14 need to -- this is subject to further check, but my 15 recollection is we did not model banking with U.S. 16 markets because we didn't view that that was necessarily 17 a critical component to estimating the benefit to 18 Ontario. 19 MR. MORAN: And you didn't model for northern 20 ECAR either, right, with the Michigan-Ohio market going 21 through Ontario? 22 MR. KLEIN: Well, Hydro Quebec is not 23 connected with the Michigan market, so to the extent 24 that we model the interconnection -- 25 MR. MORAN: With the interconnection they 26 would be connected, wouldn't they -- 27 MR. KLEIN: Well, they would be -- 28 MR. MORAN: -- through Ontario. 173 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. KLEIN: So we modelled the 2 interconnection. 3 MR. MORAN: Right. But not -- only into 4 Ontario and not going through Ontario to ECAR. 5 MR. KLEIN: Well, the way -- let me give some 6 further background about GE-MAPS. 7 What the GE-MAPS model does is it really 8 models the electrical location of generation and load. 9 So if Hydro Quebec wants to sell into the ECAR market, 10 the only way to do that is to sell to Ontario and then 11 to wheel that power through Ontario to the ECAR market 12 and therefore they have to pay congestion costs 13 associated with those transactions to the extent that 14 there are some. 15 MR. MORAN: Right. 16 MR. KLEIN: So it is as if you have a 17 generator at the Hawthorne bus, you know, and just like 18 any other generator in Ontario that could decide to 19 engage in a bilateral transaction with the U.S. market, 20 the imports from Hydro Quebec are in exactly the same 21 situation with any other generation resource within the 22 Ontario market. But there is no interconnection between 23 Hydro Quebec and the ECAR markets in the same way that 24 there is an interconnection between Hydro Quebec and 25 NEPOOL or New York. 26 MR. MORAN: Right. But you are not suggesting 27 that Hydro Quebec, on that basis, wouldn't be in a 28 position to sell under all conditions through Ontario to 174 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 the United States, are you? 2 MR. KLEIN: They certainly are in a position 3 to sell directly into New York and NEPOOL into the 4 United States, and they are in a position to sell into 5 U.S. markets in northern ECAR in Michigan in the same 6 way that any other market participant in Ontario would 7 be able to sell into those markets. But they are not 8 connected to those markets by virtue of this 9 interconnection in any way that is different from any 10 other load or generation that is located in the Ottawa 11 region. 12 MR. MORAN: Right. And on that basis, if that 13 were to occur, isn't it fair to say that the benefits to 14 the Ontario consumer are reduced, to the extent that 15 those kinds of sales take place? 16 MR. KLEIN: No. 17 MR. MORAN: Why not? 18 MR. KLEIN: As I tried to indicate in my 19 direct testimony, the benefit of the interconnection 20 with Hydro Quebec is to reduce prices in Ontario. And 21 to the extent that there are greater imports to other 22 regions, those imports are a result of the change in 23 supply-demand balances and reduction in the relative 24 prices in Ontario compared to the U.S. markets. So you 25 may see higher exports. 26 But if Hydro Quebec were to export to the U.S. 27 market rather than Ontario, presumably they would be 28 replacing some -- presumably they would be doing that 175 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 because the prices are higher in the U.S. than they are 2 in Ontario. To the extent that the prices are higher in 3 the U.S. than in Ontario, Hydro Quebec would be 4 competing with every other generator in Ontario for 5 those exports. The amount of that competition would be 6 greater because of the interconnection. As a result, 7 the price would be lower in Ontario. 8 So either the exports are constrained, in 9 which case there is a price difference, and the prices 10 in Ontario are lower than in the U.S. because of the 11 constraint, and the benefits of the sale from Hydro 12 Quebec through Ontario to the U.S. market would accrue 13 to the owners of the financial transmission rights to 14 the congestion cost for that sale. There is no way that 15 the Hydro Quebec import can somehow bypass the Ontario 16 market simply by arranging a bilateral. 17 MR. MORAN: Right. But Hydro Quebec has a 18 competitive advantage over Ontario generators in that it 19 is the lowest-cost producer when you compare to Ontario 20 generators. Right? 21 MR. KLEIN: Yes. But the decision that they 22 would make as far as whether to sell into the U.S. is 23 based on the opportunity cost of selling to the U.S. 24 So if the price is $50 in the U.S. and, you 25 know, hypothetically, $20 in Ontario, or if I have got a 26 $2 unit in Hydro Quebec or a $15 unit in Ontario, both 27 would rather get the $50 price. 28 MR. MORAN: Right. And if that happens, then 176 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 you get the harmonization effect in both the American 2 market and the Ontario market, with some upward pressure 3 on prices in Ontario as a result. Right? 4 MR. KLEIN: That is not a result of the 5 interconnect. Rather, what you are positing is to the 6 extent that there is not a transmission constraint 7 between Ontario and the U.S. market the price is -- and 8 to the extent that Ontario is exporting to the U.S. 9 market, then prices might be higher in Ontario but for 10 the exports to the U.S. market. 11 Now, let's impose a change to that situation, 12 which is an import from Hydro Quebec. It is not 13 possible that that new supply that is available would 14 somehow increase the prices in Ontario. In fact, it 15 would decrease the prices in Ontario, put greater 16 pressure on imports, and either lower the prices in both 17 the U.S. market plus Ontario combined or cause a 18 transmission constraint between Ontario and the U.S. 19 market, which would reduce prices in Ontario and cause 20 the value on the interconnection or the value of the 21 transmission to be greater, and again the benefits would 22 flow to the holders of the financial transmission 23 rights. 24 MR. MORAN: I will be talking about financial 25 transmission rights a bit more in a few minutes. 26 But with those variables, there is still 27 potentially a scenario where there could be upward 28 pressure on prices in Ontario, subject to the 177 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 qualifications or the changes in scenarios that you just 2 mentioned. 3 MR. KLEIN: I think I indicated that there 4 would be no upward pressure on price as a result of the 5 isolated impact of the interconnection. In fact, there 6 is a downward pressure on price, regardless of where 7 they sell their power. Whether they sell it to the 8 U.S., or sell it to Ontario, sell it bilaterally within 9 Ontario, it is a downward pressure on price. 10 MR. MORAN: If we bring the intertie out of 11 isolation and look at it in the context of everything 12 else that his happening, I think we did agree that there 13 could be some upward pressure under certain scenarios. 14 MR. KLEIN: Not because of the 15 interconnection. 16 MR. MORAN: Not solely because of the 17 intertie. 18 MR. KLEIN: Not at all because of the 19 interconnection. It's not even contributing because of 20 the interconnection. The interconnection is putting a 21 downward pressure on the price, everything else being 22 equal. 23 MR. MORAN: Other than to the extent that the 24 intertie provides access to the IMO grid and to the 25 American market, though? 26 MR. KLEIN: Well, whether you build this or 27 not, you are going to have an interconnection with the 28 U.S. markets. To the extent that that interconnection 178 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 to the U.S. markets is not constrained and Ontario is 2 exporting to the U.S. markets rather than importing from 3 the U.S. markets, prices may be higher in Ontario. 4 Again, with the interconnection, prices are 5 lower in Ontario, given that situation. 6 MR. MORAN: So, relatively speaking, they 7 might be lower, but to the extent that we are speaking 8 relatively the benefit to Ontario consumers is reduced 9 somewhat by that scenario, if I understand you 10 correctly. 11 MR. KLEIN: No. I think the benefits might be 12 much higher. 13 I mean to the extent that Ontario is connected 14 to U.S. markets -- and you are positing that because of 15 the exports to U.S. markets prices are higher in 16 Ontario -- then you may be at a steeper part of the 17 supply curve because prices in Ontario are being set by 18 net back from exports to U.S. markets, and the effect of 19 the interconnection could be to increase supply in 20 Ontario, cause a constraint with the U.S. markets, and 21 in fact reduce the prices in Ontario more. 22 So I don't agree with your hypothetical. 23 MR. MORAN: Let me move on, then. 24 If we take a look at Interrogatory Response 25 No. 25, there are some tables attached. On the fourth 26 page in, there is a table, and on the fifth page in, 27 there is a table. Do you have those? I'm sorry, third 28 and fourth pages? 179 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. KLEIN: Third and fourth, okay. I haven't 2 looked at these in a while, but -- 3 MR. MORAN: All right. 4 These are outputs from your model. Right? 5 MR. KLEIN: Yes. 6 MR. MORAN: Comparing the interconnect to the 7 scenario without the interconnect? 8 MR. KLEIN: Bear with me for one second while 9 I read through Interrogatory 25. 10 --- Pause 11 MR. KLEIN: Okay. 12 MR. MORAN: I would like to just go through a 13 number of comparisons between the two tables if I could. 14 If we look at hour 1-2 in both tables -- 15 MR. KLEIN: Yes. 16 MR. MORAN: First of all, just to set it up, 17 what we have is a comparison between Ontario and NYPP, 18 which is represented by Chateauguay. Right? 19 MR. KLEIN: M'hm. 20 MR. MORAN: And NEPOOL, which is represented 21 by Sandy Pond-Highgate. Right? 22 MR. KLEIN: M'hm. 23 MR. MORAN: So that is the New York market. 24 MR. KLEIN: Yes. 25 MR. MORAN: And the New England Pool. Right? 26 MR. KLEIN: M'hm. 27 MR. MORAN: Okay. The first table shows the 28 situation without the interconnection and the second 180 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 table shows the situation with the interconnection. 2 Right? 3 MR. KLEIN: Okay. 4 MR. MORAN: So if we look at hour 1, without 5 the interconnection, hour 1-2, the price at Chateauguay 6 and Sandy Pond is higher than at Ontario. Right? 7 MR. KLEIN: Yes. 8 MR. MORAN: And if we add the interconnection 9 into the mix, the price in Ontario goes down. 10 MR. KLEIN: M'hm. 11 MR. MORAN: And we see the price at 12 Chateauguay and Sandy Pond also going down. 13 MR. KLEIN: M'hm. 14 MR. MORAN: All right. If we move down the 15 list, to hour 29-30 -- 16 MR. KLEIN: Okay. 17 MR. MORAN: -- again, when we add the 18 interconnection, we see that the price in Ontario goes 19 down. Right? 20 MR. KLEIN: Yes. 21 MR. MORAN: But we see the price at 22 Chateauguay and Sandy Pond going up? 23 MR. KLEIN: Yes, I see that. 24 MR. MORAN: All right. And if we look at 25 hour 49-50, essentially there is no difference for 26 Ontario. 27 MR. KLEIN: M'hm. 28 MR. MORAN: And no difference for the other 181 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 two either. 2 MR. KLEIN: Yes. 3 MR. MORAN: Then we go to 51-52, the price is 4 going up in Ontario, when you add the interconnection, 5 and it is also going up at Chateauguay. 6 MR. KLEIN: M'hm. 7 MR. ROTHMAN: Excuse me. The way I read this, 8 the price in 51-52 the price goes down in Ontario. It 9 is three twenty nine seventy five -- 10 MR. MORAN: I'm sorry, you are right. Just a 11 minor reduction. You are right. I'm sorry. 12 And there is a reduction at Chateauguay. 13 Right? 14 I'm sorry, an increase at Chateauguay. 15 MR. KLEIN: An increase at Chateauguay. 16 MR. MORAN: And an increase at Sandy Pond. 17 If we go right down to the bottom, 99-100, the 18 price goes down for Ontario -- in fact for all three. 19 Right? 20 MR. KLEIN: Yes. 21 MR. MORAN: All right. So there is quite a 22 fit of fluctuation in terms of what is predicted when 23 you add in the interconnect. 24 First of all, is there kind of a global 25 explanation for that kind of fluctuation that you can 26 provide? 27 MR. KLEIN: Let me just look at the numbers 28 for one second. 182 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 --- Pause 2 MR. KLEIN: Well, let me respond to the 3 question subject to, it would require a further detailed 4 check into the specifics of exactly what is going on in 5 the model, in any one of these specific hours. 6 However, there are plausible reasons why this 7 might happen in the simulation. For instance, in the 8 hour 49-50 where there is essentially no change in the 9 prices may well have been an hour in which the 10 Hydro Quebec imports were not scheduled. 11 So as indicated in the interrogatories, we 12 didn't assume any scheduling from Hydro Quebec in winter 13 months, and the way the model schedules the Hydro Quebec 14 energy that we specify is by scheduling it against 15 system load. There could easily be circumstances that 16 happen in a subsequent step in the modelling process 17 that result in the maximum load hours not necessarily 18 being the maximum price hours. 19 So subject to qualification, I would suspect 20 that the hour in which there is no price decrease is an 21 hour when there is very limited Hydro Quebec exports. I 22 again may point out some conservatism in the analysis in 23 that I am quite certain that there are opportunities for 24 banking in the modelling if we looked ex-post at the 25 prices between the hours when it would be profitable to 26 settle from Hydro Quebec where the model hadn't 27 scheduled energy from Hydro Quebec. 28 In the other hours where we have a decrease in 183 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 Ontario generation, or in the Ontario price, and an 2 increase in the prices in New York and NEPOOL, that may 3 simply be the result of the Hydro Quebec that there is a 4 transmission constraint between Ontario and New York 5 during those hours. 6 And so decreasing the price in Ontario will 7 result in higher prices in New York because you will 8 need to dispatch -- this is a locational spot pricing 9 technical issue in some sense, but the locational spot 10 prices are the marginal cost of generation -- the 11 reduction in system costs of an incremental megawatt of 12 generation on the system. And to the extent that the 13 Hydro Quebec imports come in and further congest the 14 interface between Ontario and New York, you could 15 easily -- and that is the key constraint causing the 16 difference in prices between Ontario and New York. The 17 incremental generation in New York would then be worth 18 more because it is relieving a constraint that is 19 further congested. 20 It's the same thing you would have in say the 21 New York ISO in today's markets where relieving a 22 constraint east of Central East would cause prices to go 23 up west of Central East rather than down. So if you put 24 additional generation into the eastern market and the 25 constraint is from east to west the price would go up in 26 the west and down in the east with a greater 27 equilibration between the prices. 28 So I don't find these results surprising 184 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 necessarily and I would have to look at the details of 2 exactly what was going on in that specific hour in the 3 simulation to understand it precisely. But, you know, 4 it doesn't surprise me that there are these results. 5 I don't consider them anomalous. 6 --- Pause 7 MR. KLEIN: If I could just also amend 8 that -- MR. MORAN: Mr. Rothman is being helpful, 9 I see. 10 MR. THOMPSON: We call that woodshedding the 11 witnesses. 12 --- Laughter 13 MR. KLEIN: The other potential difference 14 between these tables is that the top hours are not 15 necessarily the same hours. The two tables provide the 16 top hours in one simulation and the top hours in the 17 other simulation, but they are not necessarily precisely 18 the same hours. And depending on the impact of the 19 interconnection on the market prices, you could easily 20 have some changing of which hours are the top hours. 21 So perhaps hour 49-50 could be July 25th hour in one 22 simulation and August 3rd hour in another simulation. 23 So you wouldn't necessarily see the relationship. 24 However, what I said before about the fact 25 that prices may go down in Ontario and up in other 26 regions, I suspect that is true in some hours in the 27 market to the extent that the transmission constraint is 28 between Ontario and New York. 185 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. MORAN: Let me just finish this topic up 2 with this question then. 3 To the extent that congestion might be an 4 explanation for that, if it isn't the explanation, if we 5 look at, for example, hour 51-52, the price is higher in 6 Chateauguay and in Sandy Pond than in Ontario. Subject 7 to congestion, Hydro Quebec would probably prefer to 8 sell over there than into Ontario. Right? 9 MR. KLEIN: Well, I don't know that their 10 preference for selling to New England or New York is 11 relevant because if I were Hydro Quebec I would rather 12 sell to all three. 13 MR. MORAN: To get the best price you can 14 wherever you can get it. 15 MR. KLEIN: Well, you can sell to all three. 16 MR. MORAN: All right. Subject to being 17 energy constrained. Right? 18 MR. KLEIN: Well, Hydro Quebec is not capacity 19 constrained. So Hydro Quebec, as we indicated in the 20 interrogatories, Hydro Quebec has enough excess capacity 21 to export to the U.S., to NEPOOL and New York and 22 Ontario Hydro -- or, I'm sorry, Ontario, simultaneously. 23 MR. MORAN: Okay. 24 MR. KLEIN: So there is no trade-off for 25 Hydro Quebec in terms of selling into U.S. markets 26 instead of selling into Ontario. If I were Hydro Quebec 27 and prices were high in all three, I would sell to all 28 three. There may be times when prices are high in 186 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 Ontario and not high in the other markets in which case 2 you may choose to sell more to Ontario. 3 There could be times when prices are low in 4 Ontario and high in the other markets in which case you 5 might choose to sell to the other markets. But they are 6 not -- there is no either/or for Hydro Quebec because 7 the limitation on Hydro Quebec's exports to the U.S. are 8 transmission limitations. They are not capacity 9 limitations of Hydro Quebec's resources. 10 I mean I think it's a really critical point 11 because I know that some of -- the issue was raised 12 yesterday about the possibility that Hydro Quebec would 13 only bank from Ontario and sell to the U.S. markets and 14 they are going to sell to the U.S. markets regardless of 15 whether this interconnection is built. They are not 16 going to use this interconnection to facilitate their 17 sales to the U.S. 18 Those sales, they have incentive to make those 19 sales regardless and the problem, from an economic 20 standpoint that Hydro Quebec has, is that they don't 21 have enough transmission capability to export to 22 U.S. markets or to eastern interconnection markets when 23 prices are high in those markets as they would like to 24 given the cost of their resources. 25 So this interconnection is providing them with 26 an opportunity to participate in another eastern 27 interconnection market, basically the Ontario and 28 midwestern U.S. markets separate from the northeast 187 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 markets and there is no either/or between selling to 2 Ontario versus selling to New York or NEPOOL. 3 MR. MORAN: Thank you, Mr. Klein. 4 Let me move on then to the next area that I 5 want to cover with you. 6 When you were modelling, I think the 7 dispatchable load you modelled was 2.5 per cent of peak, 8 which translates roughly into about 600 megawatts. Is 9 that correct? 10 --- Pause 11 MR. KLEIN: Do you have a reference for that? 12 I think it was 13. 13 MR. MORAN: I believe it was number 13, yes. 14 MR. KLEIN: I believe it's approximately 15 600 megawatts. I would need to go back and check the 16 exact supply amount, but it would be -- the way the 17 model treats the dispatchable demand is as a percentage 18 of Ontario load. 19 So 2.5 per cent of the Ontario load in any 20 hour is available for price responsive demand. 21 MR. MORAN: All right. When we look at the 22 Ontario load, OPG currently has about 600 megawatts of 23 interruptible power contracts. Did you take that into 24 account when you were modelling? 25 MR. KLEIN: I suspect that that is where the 26 2.5 per cent came from, because I mean frankly, one of 27 the issues -- this is another conservative assumption in 28 the modelling is that we did not assume that with the 188 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 IMO market structure there would be an increase in price 2 responsive demand. We simply took -- the 2.5 per cent, 3 I believe, comes from the interruptible and -- the 4 interruptible load resources from the OE-411. 5 So to the extent that OPG's 600 megawatts of 6 interruptible customers are reflected in the NPCC-411 7 documents, that is exactly where this 2.5 per cent comes 8 from. 9 We just add, though, that with competitive 10 markets, I think one of the benefits of them is that it 11 creates an incentive for loads to respond to prices and 12 that you will get an increase in the amount of price 13 responsive demand over time. 14 MR. MORAN: In other words, an increase in the 15 number as people prepare to enter into interruptible 16 power contracts. Right? 17 MR. KLEIN: Yes. 18 MR. MORAN: Okay. 19 You indicated that you weren't quite sure, but 20 you were assuming. Is there way for you to check that 21 and let us know? 22 MR. KLEIN: I do know that the 2.5 per cent 23 comes -- well, subject to checking, I believe the 24 2.5 per cent comes from the NPCC-411. We simply used 25 that assumption rather than assuming an increase in 26 price responsive demand over time in response to market 27 forces. 28 MR. MORAN: I take it you will agree that with 189 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 interruptible power contracts, that that is something 2 that will lead to a reduction in volatility in the 3 Ontario market? 4 MR. KLEIN: Yes. To the extent that market 5 participants are able to respond in real time to prices 6 and lower demand, then prices may be lower than they 7 otherwise would be, you know, assuming no price caps so 8 they are kind of non-market mechanisms. 9 MR. MORAN: All right. And I guess what 10 follows from that is that the price of $600 to $900 per 11 megawatt hour for that peak dispatch might be overstated 12 under those circumstances? 13 MR. KLEIN: I don't think it follows from that 14 that the price is overstated. The question of the 15 amount of and the willingness to respond to price is a 16 very different question from at what prices market 17 participants will respond to price. 18 MR. MORAN: Right. And to the extent that 19 that happens, then that might then lead to a reduction 20 in the estimate of customer benefits resulting from the 21 intertie? 22 MR. KLEIN: To the extent that there is 23 sufficient price responsive demand in order to clear the 24 market at significantly lower prices, you essentially -- 25 you do decrease the elasticity during peak periods and 26 the reduction may be a little bit lower. 27 But, yes, I would agree. 28 MR. MORAN: So in fact you are agreeing with 190 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 me, yes. 2 MR. KLEIN: Yes. 3 MR. MORAN: All right. 4 Let me turn now to the figure that is 5 Exhibit 14.5, the Ontario Peak Load and Capacity. 6 Would you agree that one of the factors that 7 affects volatility is how much reserve there is in 8 capacity? 9 MR. KLEIN: When you say "volatility", are you 10 referring to -- do you mean price spikes and high 11 prices? 12 MR. MORAN: Yes. 13 MR. KLEIN: Okay. 14 --- Pause 15 MR. KLEIN: To the extent that reserve margins 16 are tighter, then there may be higher price spikes or 17 there may be a greater likelihood for price spikes. 18 MR. MORAN: Right. In fact, could you just go 19 to Interrogatory No. 36, Exhibit C, Tab 1, Schedule 36. 20 What we see in the table in that response is a 21 description of the reserve margin in Ontario versus the 22 New England Pool and New York. Right? 23 MR. KLEIN: Yes. 24 MR. MORAN: And when we look at that, it is 25 clear that there is a much larger reserve margin in 26 Ontario than in the other two jurisdictions. Right? 27 MR. KLEIN: Yes. 28 MR. MORAN: And we saw in the other 191 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 jurisdictions quite a large degree of price volatility. 2 Right? 3 MR. KLEIN: Yes. 4 MR. MORAN: Okay. To the extent that Ontario 5 Hydro -- I'm sorry, Ontario has a 25 per cent reserve 6 margin, as we see demonstrated in 14.5, the figure, that 7 is a factor that reduces the potential for volatility 8 like that, isn't it? 9 MR. KLEIN: To the extent that the Ontario 10 reserve margin would be lower, there could potentially 11 be less what you are referring to as volatility or lower 12 prices within the Ontario market. 13 MR. MORAN: Right. And in that scenario the 14 estimate of benefits to the Ontario consumer from the 15 intertie is accordingly reduced as well, isn't it? 16 MR. KLEIN: The table you are referring to -- 17 or Interrogatory 36 requests that we provide the reserve 18 margins in these markets from the simulation, which we 19 have done here. So I'm not clear what is reducing what. 20 I don't think that -- this is what the reserve 21 margin is in the market that corresponds to the level of 22 volatility or high prices, or whatever you want to call 23 it, that is in the simulation. There is no reduction 24 involved in terms of this table. 25 MR. MORAN: I guess what we are trying to 26 understand is, with as large a reserve margin as you see 27 for Ontario versus the reserve margins in the other two 28 jurisdictions, why you would predict as high a level of 192 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 volatility as you have in Ontario. 2 --- Pause 3 MR. KLEIN: Bear with me while I take a look 4 at Figure 1. 5 --- Pause 6 MR. KLEIN: I think, as I indicated in -- or 7 as the response to some of the interrogatories indicated 8 with respect to what drives the price volatility, a 9 significant amount of volatility in Ontario is driven by 10 exports to other markets such as New York or the 11 Michigan market. 12 So to the extent that there are high prices in 13 ECAR, some of the volatility in ECAR may be translated 14 into the Ontario market. 15 MR. MORAN: I think you already indicated that 16 you didn't model for ECAR. Right? 17 MR. KLEIN: No. ECAR is included in the 18 model. 19 MR. MORAN: And how did you do that? I'm 20 sorry, maybe I misunderstood your answer. 21 MR. KLEIN: I think what I said earlier was 22 that Hydro Quebec is not connected to ECAR. However, 23 the supply and demand balances in the midwestern markets 24 and throughout the eastern interconnection are each 25 modelled separately in the GE-MAPS model. 26 So Ontario is connected to Michigan. We 27 modelled the phase shifters and the interconnection with 28 Michigan. We modelled supply and demand in ECAR 193 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 markets. And the same with New York markets. 2 MR. MORAN: Perhaps we can leave it like this 3 then, Mr. Klein: to the extent that the size of the 4 reserve margin is a factor that affects volatility, if 5 you have a bigger reserve margin, you have less 6 volatility and under that situation the benefits to 7 Ontario consumers, as a result of the intertie, might be 8 lower than predicted? 9 MR. KLEIN: Right. I would agree with that. 10 In fact, increase in the reserve margin is one of the 11 ways that the interconnection is providing a benefit to 12 the Ontario market in terms of reduced prices. 13 MR. MORAN: So one way, for example, that 14 reserve can change is by bringing online a new 15 generation, right, in Ontario? 16 MR. KLEIN: Yes. 17 MR. MORAN: Right. And new generation can 18 come on stream pretty quickly if it is, for example, 19 single-cycle gas turbines and combined cycle and cogen. 20 Right? 21 MR. KLEIN: What do you mean by "quickly"? 22 MR. MORAN: One to two years. 23 MR. KLEIN: I think typically for a combined 24 cycle, you know, a combined cycle plan, that if you have 25 a turbine lined up, and there is right now a shortage, 26 then it takes between the whole permitting process, a 27 little longer than two years to get -- sometimes three 28 years to get the whole generator in place and go through 194 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 the permitting, get the plant built and put it in place. 2 So that is typically what we are seeing in many of the 3 markets in, you know, elsewhere in the eastern area 4 connection. 5 MR. MORAN: What knowledge do you have of 6 projects that are proposed in the near term in Ontario? 7 MR. KLEIN: Wasn't there an interrogatory on 8 that? 9 MR. MORAN: Maybe just to help you out a bit, 10 are you familiar with the TransAlta project that was the 11 subject of a hearing last week? 12 MR. KLEIN: I know that we assumed March entry 13 within Ontario and it was the subject of an 14 interrogatory. It will just take me a moment to 15 find it. 16 --- Pause 17 MR. MORAN: I think that might be No. 25 if 18 that helps. 19 --- Pause 20 MR. ROTHMAN: Yes, there was an Interrogatory 21 No. 37 which asked about simple-cycle gas turbines and 22 other cogeneration projects. 23 Let me cut this a little short. 24 MR. MORAN: Sure. 25 MR. ROTHMAN: Certainly, PA Consulting is 26 aware of the TransAlta Project in Sarnia and we just 27 completed, for example, a study on the potential for 28 cogeneration in Ontario for the Ministry of Energy, 195 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 Science and Technology. So yes, we are aware of 2 those -- certainly of that proposed project. 3 MR. MORAN: I take it you are also aware of 4 the other three projects in that area then that form the 5 cluster down in that part of Ontario, Enron, Atco and I 6 can't recall the name of the third. 7 MR. ROTHMAN: We are aware of -- there have 8 been -- we are aware of the fact that there have been 9 many projects proposed or announced in Ontario. 10 MR. KLEIN: As we indicated in the appendix to 11 the prefiled evidence, we assumed merchant capacity 12 additions in the model, including two 500 megawatt gas 13 turbines in Toronto by 2003, a 250 megawatt gas turbine 14 and a 250 megawatt cogen plant in Sarnia by 2003. So 15 that is a total of 1,500 megawatts that we assume would 16 be built and it is in the base case file. 17 MR. ROTHMAN: And we did discuss that among 18 ourselves and with Hydro One. We didn't want to put in 19 specific projects. We didn't want to make a specific 20 call on which specific project will go in but we did 21 want to make some provision for what looked like a 22 reasonable amount of new projects in Ontario. 23 MR. MORAN: Mr. Rothman, maybe I can ask you 24 this question. 25 I take it you are not taking the position that 26 there isn't a significant amount of new generation 27 capacity to be pursued in Ontario, are you? 28 Are you taking the position that the 196 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 assumption built into the model on new generation 2 capacity reflects what is economically possible in 3 Ontario over the next couple of years? 4 MR. ROTHMAN: We are taking the position that 5 that is a reasonable assumption about what would come 6 into the market in Ontario over the next few years. 7 What is economically possible will clearly 8 depend on your assumptions about other supply conditions 9 and other things in Ontario. We wanted to do something 10 that would make or represent a reasonable scenario as a 11 reasonable basis on which to base this analysis. 12 MR. MORAN: Mr. Klein, to the extent that the 13 economic potential over and above the assumption built 14 into the model exists in Ontario, I take it you will 15 agree that that also is something that adds to the 16 reserve capacity within Ontario, reduces volatility and 17 therefore the benefits of the intertie to the Ontario 18 consumer. Right? 19 MR. KLEIN: Well, let me just clarify 20 something that is different about this interconnection 21 relative to hypothetical merchant power plants because 22 if this interconnection is approved it isn't going to be 23 dealt and there will be a 1,000 megawatts or 24 1,250 megawatts of new capacity available for certain in 25 the Ontario market. 26 There are participants who are pursuing 27 projects in the Ontario market, and as Mitch indicated, 28 we have attempted to make reasonable assumptions about 197 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 the likely entry of those market participants in our 2 simulation. Whether they actually go forward with their 3 projects or not, will depend on their own business 4 decisions. To the extent that there are other projects 5 that are possible and would increase the reserve margins 6 in Ontario, yes, those do have a lowering effect on 7 market prices in Ontario in addition to the lowering 8 impact that occurs with the Hydro Quebec 9 interconnection. 10 MR. MORAN: Thank you, Mr. Klein. 11 Let me take you now to -- 12 DR. PORAY: Could you just hang on for a 13 second. I just want to -- 14 --- Pause 15 MR. MORAN: Mr. Klein, is there anything you 16 wanted to add at this point? 17 MR. KLEIN: No, that is okay, no. 18 MR. MORAN: Let me take you now to 19 Interrogatory 13, Exhibit C, Tab 1, Schedule 13. The 20 paragraph that specifically starts at line 18. 21 MR. KLEIN: Which page? 22 MR. MORAN: Oh, I'm sorry, page 3 of 3. 23 --- Pause 24 MR. MORAN: I wonder while you are reviewing 25 that paragraph if you could also look at Exhibit 14.7 26 which is a table relating to single-cycle gas turbine 27 profit profile. 28 --- Pause 198 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. MORAN: In the response to the 2 interrogatory, as I understand it, based on the figures 3 that are presented there, the response says that it is 4 not economic. Am I correct? 5 MR. KLEIN: Our response says it is not 6 economic? 7 MR. MORAN: Is that what the message is in 8 that paragraph? 9 MR. KLEIN: Let me just look at the full 10 context of it. 11 --- Pause 12 MR. KLEIN: The point of the paragraph 13 starting at line 18 was not to indicate that any 14 specific project was not economic but was to emphasize 15 that volatility is very much inherent in competitive 16 electricity markets and to believe that merchant 17 entrants will enter into competitive electricity 18 markets, particularly in this case, the example of a 19 simple-cycle combustion turbine, those units need to 20 expect to earn returns on their investment and depending 21 on how many hours they run, the prices in those hours 22 will need to be above their cost by a sufficient amount 23 to support their capital investment. 24 So the point here is that over the long term, 25 one can expect volatility to be an important aspect of 26 long-run electricity markets in a competitive 27 environment. 28 MR. MORAN: The paragraph, though, assumes 199 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 that the unit would only operate for 200 hours, right, 2 to come to that conclusion? 3 MR. KLEIN: Well, you could change the 4 assumption about the number of hours, and it would 5 change the prices. This paragraph was only designed to 6 be indicative of the fact that prices during the -- the 7 expected prices during the top hours of the year need to 8 be sufficiently high to justify the capital investment 9 on a new unit. 10 MR. MORAN: If you are only going to operate 11 it during those few hours, though. Right? 12 MR. KLEIN: If it is a simple cycle combustion 13 turbine, a peaking unit, essentially, it is not likely 14 to operate for a significant amount of time during the 15 year, given the cost of the units with which it 16 competes. 17 MR. MORAN: Right. When we look at Exhibit 18 14.7, there are two scenarios there, at two different 19 prices -- the $300 that you have just talked about, but 20 there is a second one at $100 -- and both of them look 21 at operating up to 1,000 hours. Right? 22 MR. KLEIN: Can you walk me through the table? 23 MR. MORAN: Sure. Scenario 1 looks at 24 operations involving a price at $300 per megawatt hour. 25 MR. KLEIN: Or the number of hours spanned. 26 MR. MORAN: And then if you operate it -- you 27 will see there is a number of columns, the number of 28 operating hours are at the top of that. So, you have 10 200 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 hours, 20 , 50, 100, all the way through to 1,000. Do 2 you see that? 3 MR. KLEIN: Okay. 4 MR. MORAN: And then under those scenarios, 5 there are calculations to determine payback periods. 6 Obviously at 10 hours, with a 117-year payback period, 7 it is not going to work, is it, but at 1,000 hours, you 8 have got a payback period of one year. 9 MR. KLEIN: So this assumes 1,000 hours, with 10 average prices of $300. Is that how this table works? 11 MR. MORAN: Yes. 12 MR. KLEIN: Okay. I mean -- 13 MR. MORAN: At 1,000, that $300 price is 14 probably unrealistic, right, unless you have very 15 volatile prices? 16 MR. KLEIN: Unless you have very high prices. 17 The $300 is actually not volatile, if you are 18 assuming $300 in every hour. 19 MR. MORAN: And then in scenario 2, there is 20 the same exercise, except using a price of $100 per 21 megawatt hour. 22 MR. KLEIN: Right. And I guess I would 23 typically think about this is, the price in top hour is 24 going to have a higher average price and as you increase 25 the number of hours over time that you would expect the 26 average price during that period to decrease. 27 MR. MORAN: Right. Let me put it this way, 28 Mr. Klein. I mean the point of Exhibit 14.7 is to 201 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 suggest that the ability to justify entry into the 2 market is not limited to the scenario that is described 3 in the third paragraph. 4 MR. KLEIN: Oh, yes, I would agree. 5 MR. MORAN: Okay. 6 MR. KLEIN: That wasn't the intent. 7 MR. MORAN: Yes. And if we consider 8 single-cycle gas turbines to be peaking units and 9 replace them with combined-cycle, or even cogen, with 10 higher efficiencies, it is even easier to come into the 11 market with those kinds of units. Right? 12 MR. KLEIN: Well, the economics are different. 13 I mean you would have to provide another 14 table, for the economics of a combined cycle or cogen 15 unit where there you would have the benefit of whatever 16 the high prices are, which even the combined-cycle 17 plants rely on, and then you also may want to obtain a 18 benefit from basically running your unit at a lower cost 19 than what the market prices are on a continuous basis 20 over the year and earn some margin that way. It will 21 really depend on what the market prices are, what the 22 market fundamentals are. Are the prices driven, you 23 know, what fuel is driving the market prices. 24 So, you know, those types of decisions -- my 25 view is that it was not necessary to model those types 26 of decisions. Clearly, market participants will make 27 decisions about whether they should enter or not, 28 regardless of whether this intertie is built. 202 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. MORAN: Right. And to the extent that 2 they do, then that leads to less volatility and lower -- 3 MR. KLEIN: To the extent that they do, that 4 would lead to -- an increase in supply based on economic 5 fundamentals tend to lower market prices. I would agree 6 with that. That is why that interconnection has a 7 benefit. 8 MR. MORAN: Right. And then the corollary is, 9 therefore, perhaps a reduction in the benefits directly 10 attributable to the intertie. 11 MR. KLEIN: Well -- 12 MR. SKALSKI: Can I just -- go ahead, 13 Mr. Klein. 14 MR. KLEIN: I was going to say that it may or 15 may not result in a reduction of benefits of the 16 intertie. The key question there is: What is the 17 change in price because of the interconnection? 18 One of the important aspects of this specific 19 interconnection, as I mentioned during the direct, is 20 the effect it has on reducing market volatility by being 21 able to store energy from one period to the next. 22 So this is a very different resource from 23 other types of merchant entry. It adds to the sort of 24 diversity of the types of supply within the Ontario 25 market. It really is quite unique in terms of its 26 ability to essentially and effectively store power from 27 off-peak periods to be available during on-peak periods. 28 It has very different economics associated with it than 203 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 the merchant power plants, whether combined cycle or 2 simple cycle. It is simply a different resource. 3 MR. SKALSKI: Could I just add one more 4 comment with respect to Table 14.7 that Board staff has 5 provided. 6 I would just like to note that the payback 7 periods there are done without inclusion of taxes. So 8 if the figures were restated, on an after-tax basis I 9 think you would find the payback periods going up. In 10 other words, these paybacks are understated. 11 MR. MORAN: Fair enough. 12 Mr. Klein, what assumptions did you factor 13 into the modelling process with respect to outage rates 14 in Ontario generating capacity? 15 MR. KLEIN: In general, we used a study of 16 NERC/GADS data to estimate maintenance and forced outage 17 rates as a basis for the assumption of the model, 18 regarding outage rates by class of type. 19 So we looked at the NERC outage rates and 20 estimated, based on different types of units, looking at 21 historical data, during the mid-1990s, probably 1994 to 22 1998, what were the maintenance rates on different 23 sizes, by size and type of unit, and applied those, both 24 maintenance and forced outage rates, in the model to 25 different types of units. 26 MR. MORAN: I have a question on price caps 27 which I should have asked earlier on, so let me just ask 28 it now. 204 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 I think you have indicated, or the material 2 indicates, the belief that price caps in the 3 interconnected U.S. markets aren't going to radically 4 reduce peak prices by 2005 in your case without the 5 intertie. 6 Have you considered how this scenario has 7 unfolded in California, in terms of how that might 8 affect your analysis? 9 MR. KLEIN: It's a fair question. I think one 10 of the things we assumed in modelling the U.S. markets 11 here is, first of all, the level of price responsive 12 demand reflects a price cap of basically $1,000, which 13 is what is in place in New England, in PJM, in New York, 14 at this time. I think the direction of price caps 15 within those markets is certainly I think not to lower 16 them, at least in terms of what the FERC perspective is. 17 So, to the extent that price caps were in 18 place that would lower the prices in those markets, then 19 we would expect to see less entry in those markets, and 20 prices during the other hours would have to be 21 correspondingly higher in order to support the entry of 22 new units into the market. 23 So there is a trade-off between high peak 24 prices and average prices over a longer period of time 25 being high enough to support merchant entry that is 26 going into the market. 27 So, even if you have price caps at $250, there 28 is a pretty significant difference between the price 205 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 during off-peak periods and on-peak periods at 2 $250 where the interconnection has a benefit. 3 MR. MORAN: Mr. Klein, do you understand what 4 is meant by the term "gaming"? 5 MR. KLEIN: I think so. 6 MR. MORAN: In the power market? 7 MR. KLEIN: I think so. 8 MR. MORAN: Okay. 9 Theoretically, Hydro Quebec could withhold 10 some of its capacity in order to keep the price up, 11 couldn't it, in Ontario? 12 --- Pause 13 MR. KLEIN: To the extent that they in fact 14 operate as a monopolist, they could -- and I am not that 15 familiar with the Hydro Quebec market situation, whether 16 they are -- I understand that they are moving towards 17 more of an open access system for potentially willing 18 power through or from Hydro Quebec. So that might be a 19 question that you would address to a panel tomorrow or 20 the next panel. 21 MR. MORAN: From your perspective, in the 22 context of the modelling you did, is there anything that 23 would prevent Quebec generators from adjusting their 24 supply in order to capture some of the predicted gains 25 for Ontario consumers? 26 MR. KLEIN: I'm sorry. Can you repeat the 27 question? 28 MR. MORAN: Is there anything that will 206 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 prevent Quebec from adjusting how much they supply in 2 order to capture some of the predicted gains for Ontario 3 consumers? 4 MR. KLEIN: Again, it depends on the extent to 5 which the Quebec market is competitive. I mean, 6 obviously if they sell -- if they withhold all of their 7 capacity, there would be no difference from the 8 situation without the tie. 9 MR. MORAN: All right. So then I take it you 10 will agree that to the extent that they participate in 11 the Ontario market that could also have an impact on how 12 much benefit there is to the Ontario consumer. It could 13 reduce the $240 million estimate, right, depending on 14 what they do? 15 MR. KLEIN: You have to realize the 16 $240 million is already reduced from the GE-MAPS result, 17 so in some sense that could take into account a reduced 18 volatility scenario, it could take into account some 19 Hydro Quebec's strategic gaming, as you are referring 20 to it. 21 So I wouldn't say it would necessarily reduce 22 the $240 million, but to the extent that they are able 23 to bid their units in such a -- or bid their capacity in 24 such a way that not all of it is taken by the market, 25 prices would be higher than they would have been if they 26 bid it all at zero cost, for instance. I would agree 27 with that. 28 MR. MORAN: Madam Chair, just so you know 207 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 where I am, I think I am closing in on the end here, 2 so -- 3 MR. KLEIN: Could I add one more point on 4 that one? 5 MR. MORAN: Yes. 6 MR. KLEIN: The other assumption we made was 7 we assumed that Hydro Quebec would only sell 8 1.4 kilowatt hours over the tie. So in some sense we 9 didn't assume the full utilization of the tie during all 10 hours when they might have been able to utilize the tie. 11 So in some sense we have already accounted for 12 the potential that you wouldn't fully utilize the 13 interconnection to its full capability. In part because 14 we weren't explicitly modelling Hydro Quebec's system, 15 we tried to be as conservative as possible in terms of 16 what we assumed about how much energy would be imported 17 from Hydro Quebec. We simply assumed what was 18 effectively a 12 per cent capacity factor on the 19 imports. 20 THE PRESIDING MEMBER: I would just like to 21 point out, Mr. Rothman, that you are free to join in at 22 any time you want on your own and you don't have to 23 speak only through Mr. Klein. 24 If you can help illuminate as in the answer to 25 the questions, please feel free to do so at anytime 26 directly. 27 MR. ROTHMAN: Thank you, Madam Chair. 28 I understand that, but most of my comments are 208 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 checking with Mr. Klein on some of the assumptions in 2 modelling techniques that we use. 3 THE PRESIDING MEMBER: I appreciate that, sir. 4 MR. KLEIN: And Madam Chair, I would welcome 5 Mr. Rothman's input. 6 THE PRESIDING MEMBER: Mr. Moran, how much 7 longer do you think you are going to be as you are 8 closing in? 9 MR. MORAN: I have three areas I still wish 10 to, so less than half an hour, I would think. 11 THE PRESIDING MEMBER: Then why don't you 12 continue. 13 Thank you. 14 MR. MORAN: Mr. Klein, I indicated earlier 15 that I wanted to ask some questions about financial 16 transmission rights. I wonder if you could just 17 indicate very briefly your understanding of how those 18 operate from your perspective? 19 MR. KLEIN: Sure. Financial transmission 20 rights are essentially the right to the congestion to 21 the difference in spot prices between two locations on 22 the grid. So that if you had a price in the Michigan 23 market -- of exports to Michigan that was $5.00 higher 24 than the price inside Ontario, then the IMO wouldn't 25 necessarily collect congestion rents associated with 26 those transactions, and then those congestion rents 27 would be paid out to the holders of financial 28 transmission rights. 209 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. MORAN: All right. 2 If we turn to Schematic 4 in Exhibit 14.6. 3 This is a scenario where the Quebec generator offers 4 into Ontario and then the power is bid out to the United 5 States. Right? 6 MR. KLEIN: Okay. 7 MR. MORAN: Okay. 8 So when you talk about two points on the 9 transmission system, the two points in this scenario 10 would be where we see the two interties. Right? The 11 Quebec-Ontario intertie and the Ontario-U.S. intertie. 12 --- Pause 13 DR. PORAY: If I could explain that? 14 MR. MORAN: Go ahead, Dr. Poray. 15 DR. PORAY: The way the market pools are 16 written today when a generator bids into Ontario, it 17 would bid in on the intertie and the congestion rental 18 and the financial transmission right that it would be 19 getting would be on that intertie, not across the 20 Ontario system. 21 In other words, Quebec would bid in at 22 Hawthorne and it would take out a financial transmission 23 right on the interconnection with Quebec. It would 24 enter the market and then it would bid out at the 25 Michigan tie again buying a financial transmission right 26 on the Michigan interconnection. 27 MR. MORAN: Right. And the total cost would 28 be adding those two together. Right? 210 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 DR. PORAY: Essentially the total cost to the 2 generator would be those two things, yes. 3 MR. MORAN: So, Mr. Klein, on that basis then 4 if we look at Quebec wishing to sell to a U.S. load, the 5 cost of the financial transmission right will 6 essentially be as Dr. Poray has indicated. Right? 7 MR. KLEIN: Well, the cost of the financial 8 transmission right depends on how the -- I believe that 9 they have planned to auction them. Certainly, I am more 10 familiar with the transmission congestion contracts in 11 New York and PJM, or the financial transmission rights 12 in PJM. I believe it's basically the same principle, 13 but if Quebec were to sell to the U.S. in a bilateral in 14 this case, is this a bilateral? 15 MR. MORAN: Not necessarily, but we can start 16 with that one. 17 MR. KLEIN: Well, I mean, if they are to sell 18 to the U.S., if it's not a bilateral I don't see how 19 they would be selling to the U.S. Because if it's not a 20 bilateral, they are selling to a spot market. Right? 21 MR. MORAN: That is right. 22 MR. KLEIN: So then -- 23 MR. MORAN: So let's look at the bilateral 24 arrangements. 25 MR. KLEIN: Okay, so that is a different 26 schematic? 27 MR. MORAN: No, it's the same one. 28 MR. KLEIN: Okay. 211 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 So we assume that they are selling to the U.S. 2 by a bilateral, and then to the extent that there is 3 congestion on the intertie between Ontario and the U.S., 4 Quebec would need to pay the congestion costs associated 5 with the congestion on that intertie. So they would be 6 paid the market price at the Hawthorne bus and then they 7 would have to pay the congestion costs associated with 8 that intertie. 9 MR. MORAN: The maximum financial transmission 10 rights cost would be the difference in the price at the 11 Quebec intertie and the price at the U.S. intertie. 12 Right? No? 13 DR. PORAY: No. The way the financial 14 transmission rights will be structured would be the 15 auction would take place independently for the Quebec 16 intertie and for the Michigan price. 17 So that the IMO would have options based on 18 the relative -- 19 MR. KLEIN: I think there are two things that 20 are being confused here, that is congestion costs which 21 are paid by the transmission customers and are collected 22 by the IMO, and the congestion rents that are collected 23 by the IMO and the payments to the holders of financial 24 transmission rights, which could be a different group of 25 market participants, not necessarily the transmission 26 customer, and those payments come from the revenues from 27 the congestion costs, but they are two distinct 28 payments. 212 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. MORAN: I understand that, but I want to 2 talk about the financial transmission rights. 3 I understand also that those will be done 4 through an auction. But presumably the participants in 5 that auction are not going to overbid the realistic 6 value of that right when you look at the comparison of 7 prices between the two interties. Right? 8 MR. KLEIN: I'm just trying to relate your 9 focus on financial transmission rights to the schematic 10 here, where the schematic of a sale from Quebec to the 11 U.S. has nothing to do with financial transmission 12 rights, it has to do with the congestion costs that they 13 would pay. 14 MR. MORAN: Right. The transmission rights 15 are a hedge, though, against congestion costs, are they 16 not? 17 MR. KLEIN: If they purchased them, yes. 18 MR. MORAN: Yes, they either purchase them or 19 they take the risk, they assess the risk. 20 DR. PORAY: That is correct. 21 MR. MORAN: So the realistic value of the 22 transmission right in the auction is going to be 23 constrained by people's understanding of the difference 24 between the price -- 25 MR. KLEIN: Yes, I would agree with that. 26 DR. PORAY: But basically the way it will 27 happen is that the IMO will auction the transmission 28 right on the intertie with Quebec based on the price 213 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 difference between the Quebec node and the Ontario node. 2 And it will do the same for the interties with 3 Michigan. It will be the price difference between the 4 Ontario node, which could be quite different from the 5 Ontario node in the Hawthorne area. 6 So there are two distinct -- there are two -- 7 they are not auctioned on the basis of the price 8 difference between the Quebec node and the Michigan 9 node. 10 MR. MORAN: Right. 11 MR. KLEIN: And I'm sorry, in the Schematic 4 12 are you assuming -- there is no assumption in the 13 schematic that Quebec owns any financial transmission 14 rights. That's where my confusion is. 15 MR. MORAN: The assumption is that they will 16 buy them if they want to buy them as a hedge against 17 congestion costs. 18 MR. KLEIN: Okay. So they -- 19 MR. MORAN: You can see that in the box at the 20 bottom in the middle of the table. 21 MR. KLEIN: Okay. Okay. 22 MR. MORAN: All right. 23 So on that basis, then, if you have a 24 generator that is a low cost producer like Hydro Quebec 25 competing against generation within Ontario, the 26 difference in their cost of production and the cost of 27 production within Ontario is a factor that could create 28 the likelihood or the possibility that Hydro Quebec 214 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 would sell through Ontario into ECAR. 2 --- Pause 3 MR. KLEIN: Why do you think that that is 4 the case? 5 MR. MORAN: That is a possibility, isn't it? 6 MR. KLEIN: I don't think so. 7 MR. MORAN: Why not? 8 MR. KLEIN: Well, you know, as I indicated 9 before, the value to the market participant is simply 10 the value of the difference in price between the two 11 regions. And to the extent that the prices are lower in 12 Ontario than they are in the U.S., that those financial 13 transmission rights will have a value and any market 14 participant in Ontario that wishes to export to the U.S. 15 will obtain that value. 16 It doesn't matter what your cost is, it is 17 really your opportunity costs relative to the 18 differences in the marketplaces between these markets. 19 And the fact that Hydro Quebec happens to be a lower 20 cost producer than some of the Ontario market 21 participants doesn't mean that Hydro Quebec has a 22 greater incentive to sell to a higher cost market. They 23 are not going to, you know, than somebody else. 24 If I have a choice between selling to a market 25 that is 50 versus selling to a market that is 30, I 26 don't care if my cost is 20, 15, 10 or five, I would 27 rather sell to the higher cost market. 28 MR. MORAN: Right. And the higher cost market 215 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 may well be in the U.S. 2 MR. KLEIN: Right. 3 MR. MORAN: So the opportunity that Quebec 4 will look at will take into account: Do I want to sell 5 into Ontario or do I want to sell through to the U.S.? 6 MR. KLEIN: Yes. But they need to -- I mean, 7 it depends on what their view -- Hydro Quebec will have 8 an independent view of those financial transmission -- 9 the value of those financial transmission rights and 10 their own risk management position in the market and the 11 risk that they are willing to take in that market. 12 But there is no reason to presuppose that 13 those financial transmission rights are of more value to 14 Hydro Quebec than any other market participant that 15 wishes to export to the U.S. 16 MR. MORAN: But, as you indicated, that 17 depends on how Hydro Quebec views the situation. Right? 18 MR. KLEIN: They may value them higher than 19 other market participants or they may value them lower 20 than other market participants. I have no way of 21 knowing. 22 MR. MORAN: Right. 23 MR. KLEIN: But there is no inherent aspect to 24 the Hydro Quebec -- the fact that Hydro Quebec's supply 25 is lower cost that would make them want to value them 26 more than another market participant. 27 MR. ROTHMAN: Let me just add to that, just 28 briefly. 216 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 If Hydro Quebec chooses to buy financial 2 transmission rights from Ontario into ECAR, say, they 3 can do that whether or not the intertie exists. That 4 is, if they believe that there is going to be some value 5 to those financial transmission rights, they are free to 6 bid on them and buy them and it is immaterial to them 7 whether or not they have the interconnection. 8 When they have the interconnection, they may 9 be more interested in that market, but the existence of 10 those financial transmission rights is independent of 11 the existence of the interconnection. 12 And the circumstances under which Hydro Quebec 13 would -- the circumstances under which the Hydro Quebec 14 power would be sold through to Michigan would be timed, 15 presumably, when the price in Michigan is higher than 16 the price in Ontario, in which case those financial 17 transmission rights will have value. 18 And Hydro Quebec can hedge itself, if it 19 chooses -- it is a question of whether or not -- what 20 you are suggesting is they might do a physical 21 bilateral, in which case they might choose to hedge 22 their profit on that physical bilateral by buying 23 financial transmission rights. But it doesn't change 24 the fact that at the time that that financial 25 transmission right has value and that electricity is 26 being sold through into Michigan, the tie is 27 constrained, Ontario is exporting to Michigan and 28 probably would be -- I mean depending on the size of 217 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 the -- depending on the exact supply demand balance in 2 Ontario, but probably would be with or without Quebec. 3 If that is the case, then the Ontario price is 4 lower than the price in Michigan and it will be lower as 5 a result of the existence of the Hydro Quebec 6 interconnection, because that tie would be constrained 7 whether or not the interconnection existed. 8 MR. KLEIN: If I could just offer or add one 9 more point to Mr. Rothman's. 10 First of all, I concur with what Mr. Rothman 11 just said. 12 And if you were to posit that Hydro Quebec 13 owned financial transmission rights because it bought 14 them, my judgment is and my belief is that that would 15 create a greater incentive for them to sell into the 16 Ontario market, all else being equal, to the extent that 17 their sales in the Ontario market would then lower 18 market prices in Ontario relative to the congested 19 interface in the U.S. and increase the value of those 20 transmission rights. 21 MR. MORAN: That wouldn't be gaming, would it? 22 MR. KLEIN: The good kind. 23 MR. MORAN: To the benefit of the Ontario 24 consumer, presumably. 25 MR. ROTHMAN: It is not gaming as one worth 26 defining gaming. 27 MR. MORAN: No, I understand. 28 Now, Mr. Klein, have you undertaken any 218 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 studies of congestion costs due to the intertie during 2 the economic lifetime of the assets rather than the 3 single year 2005? 4 MR. KLEIN: No. 5 MR. MORAN: No. 6 I am on my last question. I am well within my 7 time estimate, Madam Chair. I do give warranties. 8 THE PRESIDING MEMBER: Mr. Moran, you are an 9 example to us all. 10 MR. MORAN: That's right. 11 My warranties are good. 12 This is a question about the use of the line 13 for telecommunications. I'm not sure who the right 14 person is to ask this question of, so feel free to 15 volunteer. 16 MS ALDRED: Excuse me. It might be better for 17 Panel 3, Mr. Moran. They are dealing more with the 18 physical aspects. 19 MR. MORAN: This is a question about rates, so 20 this might be the panel for it. 21 Could you just clarify for the Board's 22 purposes whether Hydro One Networks is going to be 23 charging Hydro One Telecom a market-based rate for the 24 use of the transmission facility for telecommunications? 25 MR. SKALSKI: To the extent that Hydro One 26 Telecom does use Hydro One Networks telecom facilities, 27 yes, the transaction will be done on the basis of the 28 market price. 219 HYDRO ONE NETWORKS PANEL 2, ex (Moran) 1 MR. MORAN: Thank you. 2 Those are all my questions, Madam Chair. 3 THE PRESIDING MEMBER: Thank you, Mr. Moran. 4 Now might be an appropriate time to break for 5 lunch. 6 MR. KLIPPENSTEIN: Madam Chair, I wonder, 7 presuming I'm next, I have one question that -- I 8 apologize, I jumped right over my friend, Mr. Thompson. 9 --- Laughter 10 THE PRESIDING MEMBER: It's been done before. 11 --- Laughter 12 MR. KLIPPENSTEIN: That's fine. I thought I 13 would have one question on follow-up on a specific point 14 here that might be helpful, but I will just wait for my 15 turn I guess. 16 THE PRESIDING MEMBER: Thank you. 17 MS ALDRED: Maybe, Madam Chair, we could just 18 canvas on time remaining for cross-examination, just so 19 I have some idea of a schedule for the rest of the day. 20 THE PRESIDING MEMBER: As to whether you have 21 to schedule Panel 3 today or -- 22 MS ALDRED: That's right. 23 THE PRESIDING MEMBER: -- whether they will be 24 tomorrow. 25 All right. 26 Mr. Thompson, you are first. 27 MR. THOMPSON: Yes. I would guess about 28 20 minutes. 220 HYDRO ONE NETWORKS PANEL 2 1 THE PRESIDING MEMBER: Mr. Klippenstein. 2 MR. KLIPPENSTEIN: I may be quite lengthy and 3 it could be two hours or more, unfortunately, but it 4 could collapse, I don't know. 5 THE PRESIDING MEMBER: I understand 6 Mr. McArthur isn't here. 7 Mr. Budd, any cross-examination from you? 8 MR. BUDD: I don't anticipate any, but I might 9 have one or two. 10 Thank you. 11 THE PRESIDING MEMBER: Thank you. 12 Mr. Greenspoon. 13 MR. GREENSPOON: Yes, I would be 20 minutes to 14 half an hour. 15 THE PRESIDING MEMBER: Excuse me. 16 --- Pause 17 THE PRESIDING MEMBER: Excuse me. 18 Also, obviously we are anticipating not 19 scheduling Panel 3 until tomorrow, but then we have to 20 worry about congestion tomorrow. 21 It seems to me, Mr. Thompson, you will have 22 your witnesses as well. Is that what is scheduled for 23 tomorrow? 24 As I understand it, there will be Panel 3, 25 assuming that we wait until tomorrow for them, and 26 Mr. Thompson's witness panel. 27 Will there be any other panels for tomorrow? 28 MS ALDRED: No. Assuming we finish 2, then I 221 HYDRO ONE NETWORKS PANEL 2 1 just have 3 left. 2 THE PRESIDING MEMBER: I understand. 3 Is it anticipated that we will then -- if we 4 don't schedule Panel 3 until tomorrow, that we will be 5 able to get through Panel 3 tomorrow as well as 6 Mr. Thompson's panel? 7 MR. THOMPSON: I personally don't think that 8 is likely, Madam Chair. I was discussing with Ms Aldred 9 earlier that contingency. 10 My people, if they come tomorrow, have to get 11 on and off tomorrow. They are scheduled to leave Ottawa 12 at 4:00 and if I am going to have to hold them back, 13 then I am going to have to know now so I can make some 14 calls. 15 THE PRESIDING MEMBER: Mr. Moran, any help? 16 MR. MORAN: I was just wondering if Mr. 17 Thompson could indicate how long he thinks his panel 18 would be, because I think that would help us understand 19 the timing. 20 THE PRESIDING MEMBER: I'm sorry, 21 Mr. Thompson. 22 MR. THOMPSON: Well, I think -- I'm sorry. 23 THE PRESIDING MEMBER: I was just going to 24 suggest, perhaps at lunch might be a good time for 25 boards staff to speak with the applicant and intervenors 26 and try to arrange the scheduling in the most efficient 27 way so that hopefully we can get through both panels 28 between this afternoon and all day tomorrow. 222 HYDRO ONE NETWORKS PANEL 2 1 MR. MORAN: Okay. We can do that, Madam 2 Chair. 3 THE PRESIDING MEMBER: I would appreciate 4 that. 5 Thank you. 6 That being said, we will adjourn for lunch and 7 reconvene at a quarter to 2:00. 8 Thank you. 9 --- Upon recessing at 1345 10 --- Upon resuming at 1405 11 THE PRESIDING MEMBER: Please be seated. 12 MS ALDRED: I have a couple of filings that I 13 would like to make, if that's okay, at this point. 14 THE PRESIDING MEMBER: Certainly. 15 MS ALDRED: There was a chart missing from 16 OEB C-133. There was one chart attached but one chart 17 missing, so I would like to file that at this point. 18 The next matter is -- 19 THE PRESIDING MEMBER: Excuse me, before you 20 proceed, would that need an exhibit number, or is that 21 just merely an addition to an already filed -- 22 MS ALDRED: It is an addition to an already 23 filed interrogatory response. 24 THE PRESIDING MEMBER: Then I don't think we 25 need an exhibit number for that. 26 MS ALDRED: The next is a missing chart from 27 Interrogatory 51, OEB Staff. Again, that is a previous 28 interrogatory. 223 HYDRO ONE NETWORKS PANEL 2 1 Mr. Thompson is going to assist. 2 MR. MORAN: Madam Chair, while we are filing 3 things, there are a couple of additional filings that I 4 would like to make as well. I don't know if -- 5 THE PRESIDING MEMBER: Okay, that is fine. 6 Have you finished yours? 7 MS ALDRED: I have, thank you. 8 THE PRESIDING MEMBER: Thank you. 9 Mr. Moran. 10 MR. MORAN: The first item is a Supplemental 11 Interrogatory, No. 4. I don't think this has been filed 12 at all. I think we want to give an exhibit number to 13 that. 14 The next number would be 14.8. It would be 15 Pollution Probe Interrogatory No. 4, Supplemental, 16 Exhibit C, Tab 3, Schedule 4-1. 17 EXHIBIT NO. 14.8: Pollution Probe 18 Interrogatory No. 4, Supplemental, 19 Exhibit C, Tab 3, Schedule 4-1 20 THE PRESIDING MEMBER: Thank you. 21 MR. MORAN: The next item would be a Board 22 Staff exhibit, "Comparison of costs per kilometre -- 23 1992 project versus the proposed project." That would 24 be 14.9. 25 EXHIBIT NO. 14.9: Document entitled 26 "Comparison of costs per kilometre -- 27 1992 project versus the proposed project" 28 MR. MORAN: And finally, this is a filing by 224 HYDRO ONE NETWORKS PANEL 2 1 TransEnergie. It is entitled, "Hydro Quebec 2 interconnection critical dates." That would be 14.10. 3 EXHIBIT NO. 14.10: Document entitled 4 "Hydro Quebec interconnection critical 5 dates" 6 MR. MORAN: That is all I have. 7 THE PRESIDING MEMBER: Thank you, Mr. Moran. 8 Mr. Moran, what was the exhibit number for the 9 Hydro Quebec -- 10 MR. MORAN: It was 14.10. 11 THE PRESIDING MEMBER: Thank you. 12 Are there any other preliminary matters? No 13 other filings? 14 Mr. Thompson, I think you drew the short straw 15 for this afternoon. 16 MR. THOMPSON: Thank you, Madam Chair. 17 EXAMINATION 18 MR. THOMPSON: Panel, I have two topics I want 19 to cover in cross-examination. The first is the other 20 public interest considerations topic. The second is 21 rate impact. 22 If you look at Exhibit B, Tab 4, Schedule 1, 23 page 14, you will see the topic there, "Other Public 24 Interest Considerations". 25 I note that Hydro One itself thought it 26 appropriate to do some evidence about public interest 27 considerations outside of consumer-focused public 28 interest considerations. 225 HYDRO ONE NETWORKS PANEL 2 1 Is the panel aware that the public interest 2 consideration that my client wishes the Board to 3 consider is the urban/community planning topic? I'm 4 working at a high level here. 5 Mr. Skalski, can you speak to that? 6 MR. SKALSKI: I can try, Mr. Thompson. 7 The other public interest consideration in 8 this piece of the evidence refer to primarily the 9 economic considerations, Mr. Thompson. 10 MR. THOMPSON: Yes, I understand that, and I 11 understand there is a dispute as to the scope of what 12 public interest factors can be considered. But you do 13 know that one of the public interest factors that my 14 client wishes the Board to consider is this 15 urban/community planning public interest factor? 16 MR. SKALSKI: Yes, I understand that. 17 MR. THOMPSON: Right. Can the other public 18 interest considerations panel -- and I will put this 19 you, Mr. Skalski -- accept that electricity 20 infrastructure design is a major issue for community 21 planners and the residents of urban communities? 22 Can you accept that as a proposition? 23 MR. SKALSKI: I wonder if this question should 24 be better dealt with by another panel, Mr. Thompson. 25 MR. THOMPSON: Well, I thought this was the 26 other public interest consideration panel. 27 MR. SKALSKI: I can concede that it is a 28 public interest consideration, yes. 226 HYDRO ONE NETWORKS PANEL 2 1 MR. THOMPSON: Thank you. 2 Can you concede that the urban community 3 planning topic is different from the topic of the 4 environment? Evidence that supports that is that in 5 Ontario we have a Planning Act and in Ontario we have 6 got an Environmental Assessment Act, another legislation 7 dealing with different topics. 8 They are different topics: Can you accept 9 that? 10 MR. SKALSKI: Madam Chair, I am reluctant to 11 go down this line. This is not my area of expertise at 12 all, and there is no one on this panel, I think, who can 13 address Mr. Thompson's question. 14 MR. THOMPSON: Very high level. I would have 15 thought someone could accept that as a general 16 proposition. 17 THE PRESIDING MEMBER: If it is within your 18 general knowledge at a high level, answer the question. 19 If it is specific and you don't feel comfortable 20 answering it, then we will delay it. 21 MR. SKALSKI: Okay. 22 Mr. Thompson, could you repeat the question, 23 please. 24 MR. THOMPSON: Can you accept that urban 25 planning and the environment are different topics? 26 MR. SKALSKI: Yes, they are different topics. 27 MR. THOMPSON: Thank you. 28 Can you accept that urban planning has come a 227 HYDRO ONE NETWORKS PANEL 2 1 long way since these original towers were installed? I 2 think one line was installed in 1932, and the second in 3 1949. 4 Is that putting you to the test? 5 MR. SKALSKI: I am afraid it is, yes. I am 6 not familiar with urban planning. 7 MR. THOMPSON: All right. Well, just to give 8 you an example, 50 to 70 years ago electricity 9 distribution lines, I would venture to guess, were all 10 above ground. 11 Can you accept that, subject to check? 12 MR. SKALSKI: Subject to check, yes. 13 MR. THOMPSON: And today, can you accept 14 subject to check, as a result of urban planning 15 considerations in all new communities these lines are 16 underground? 17 Can you accept that, subject to check? 18 MR. SKALSKI: No, I'm sorry, I can't. 19 THE PRESIDING MEMBER: Excuse me, 20 Mr. Thompson, where are you going? 21 Perhaps you can help me with this line of 22 questioning. Is this because the heading says "Other 23 Public Interest Considerations"? 24 MR. THOMPSON: Yes. I thought this was the 25 "other public considerations" panel that I should put 26 these questions to, but I don't have very many more of 27 them, so I will carry on. 28 THE PRESIDING MEMBER: Okay. Thank you. 228 HYDRO ONE NETWORKS PANEL 2 1 MR. THOMPSON: Can you accept, panel, that the 2 removal of these lattice towers on this right-of-way and 3 the installation of new towers and new lines, additional 4 lines, is an opportunity for Hydro One and others to 5 raise the urban planning/community planning public 6 interest issue? 7 Again, it's a high level question. I wouldn't 8 think there would be much problem with that. 9 MR. SKALSKI: Yes. It's an opportunity for 10 the issue to be raised. 11 MR. THOMPSON: And would you accept that once 12 Hydro One gets an order from this Board with respect to 13 the infrastructure design of this project, they can go 14 in and install it as approved by the Board? 15 MS ALDRED: I think that is a legal question 16 because there are niceties around -- 17 MR. THOMPSON: Let's come at this way: Once 18 replacement or new poles are up, they are there for a 19 long time. 20 Can you accept that, Mr. Skalski? 21 MR. SKALSKI: Yes. 22 MR. THOMPSON: And what is the depreciation 23 rate as applied to these poles? 24 MR. SKALSKI: It's between 50 and 80 years. 25 MR. THOMPSON: I will then turn to my second 26 topic: rate impact. 27 If you would just be good enough to put this 28 into context of the Cumberland position. If you could 229 HYDRO ONE NETWORKS PANEL 2 1 just turn up Tab 7 of the Cumberland evidence. It is 2 Exhibit 10.1. 3 --- Pause 4 DR. PORAY: I'm sorry, we don't have tabs. 5 MR. THOMPSON: Tab 7. 6 MS ALDRED: The tabs are printed on the top of 7 the page, but it is not tabbed. 8 MR. THOMPSON: It is a letter from Mr. Pierce 9 to Mr. Rohaly dated January 28, 2000. 10 And if you would look at the third paragraph 11 of that letter, it is just one illustration of it, but 12 it illustrates that one of Hydro One's reasons for 13 rejecting the amount of poles options that Cumberland 14 favours was its rate impact. If you look at the second 15 paragraph it reads: 16 "However, there are objectively 17 demonstrable financial and environmental 18 factors that argue against using poles. 19 It is our position that OHNC has chosen 20 the alternative that best meets the needs 21 of this project with the least overall 22 impact on the environment, as presented 23 in our Draft Environmental Study Report 24 (ESR) and correspondence to the Minister 25 of the Environment dated December 2, 26 1999. OHNC has also considered the 27 impact of higher costs on the wider 28 community of transmission ratepayers." 230 HYDRO ONE NETWORKS PANEL 2 1 Do you see that, Mr. Skalski? 2 MR. SKALSKI: Yes, I do. 3 MR. THOMPSON: Okay. And that is the 4 suggestion -- and my clients I believe will indicate 5 that it is repeatedly made to them -- that the 6 infrastructure option which they preferred was being 7 rejected by Hydro One because of its unfavourable rate 8 impacts compared to the proposal that Hydro One 9 preferred. I would like to explore that with you 10 because your evidence does address rate impacts, or it 11 is Mr. Rohaly's evidence. Is that right? 12 MR. SKALSKI: Mr. Thompson, just to clarify, 13 the paragraph that you have referenced talks strictly 14 about cost. So you are drawing a connection to rate 15 impacts, which is there definitely, but I think the 16 decision here, as it is indicated, was made purely on 17 the basis of cost. 18 MR. THOMPSON: Well, the letter says: 19 "...has also considered the impact of 20 higher costs on the wider community of 21 transmission ratepayers." 22 Which to me is costs and rates. 23 In any event, I just want to explore the 24 difference based on the evidence that you had provided 25 with respect to rate impact. 26 And if we go to B, Tab 4, Schedule 1, at 27 page 6, as I understand it, at line 20, based on a 28 capital cost in the order of $96 to $97 million, you 231 HYDRO ONE NETWORKS PANEL 2 1 calculate that the incremental revenue requirement is 2 $12.3 million, net of export revenues? 3 MR. SKALSKI: That's correct. 4 MR. THOMPSON: All right. That takes into 5 account, I assume, return on depreciation on the new 6 facilities as well as operating costs? 7 MR. SKALSKI: Yes, it does. 8 MR. THOMPSON: Then over on the next page you 9 tell us that that increase compared to your -- I guess 10 it would be adjusted revenue requirement approved by the 11 Board in your recent case, works out to an increase 12 percentage-wise of 1.72, I now have it, in the network 13 pool and an increase of 0.99 in average transmission 14 service. Those are the numbers at lines 16 and 17. 15 MR. SKALSKI: That is correct. 16 MR. THOMPSON: All right. That translates 17 into an impact on a typical Ontario residential consumer 18 at line 27 of a $1.78 per year. 19 MR. SKALSKI: That is correct. 20 MR. THOMPSON: That is the updated evidence. 21 Okay. 22 The evidence with respect to the incremental 23 cost of the steel pole option, which my client favours, 24 is that it would range between, in the low case, 25 $3 million and, in the high case, $10 million. Would 26 you take that subject to check? 27 MR. SKALSKI: Yes, we would. 28 MR. THOMPSON: All right. My reckoning is 232 HYDRO ONE NETWORKS PANEL 2 1 that if we added $3 million to the roughly 2 $97 million -- well, adding $3 million to the capital 3 expenditures, big picture, I guessed would add about 4 $300,000 to the cost of service for a return on 5 depreciation. Is that in the ballpark, 10 per cent? 6 MR. SKALSKI: It's a little bit low. It would 7 be more like 12 or 13, but 300 is fine as a working 8 number. 9 MR. THOMPSON: All right. Well, how do you 10 get the 12 or 13, please? 11 MR. SKALSKI: Oh, that's just a ballpark. 12 MR. THOMPSON: Well, maybe 350,000 would be 13 closer, based on your high-level analysis of your -- 14 MR. SKALSKI: At a very high level, yes. 15 MR. THOMPSON: And 350,000 on 12.3 million is 16 something -- I make it between 2 and 3 per cent. Would 17 you accept that, subject to check? 18 MR. SKALSKI: I'm sorry. Could you repeat 19 that, Mr. Thompson? 20 MR. THOMPSON: The 350,000 on the 21 12.3 increment caused by the project as you have 22 designed it would be an increment of between 2 and 23 3 per cent? Is that -- 24 MR. SKALSKI: Yes, that's correct. 25 MR. THOMPSON: All right. If I apply that to 26 the $1.78 per annum, I get a number in the order of four 27 to four-and-a-half cents per annum. Would you take that 28 subject to check? 233 HYDRO ONE NETWORKS PANEL 2 1 MR. SKALSKI: Yes, I would. 2 MR. THOMPSON: And the 10 million number, I 3 had estimated that would add a million dollars to the 4 revenue requirement. I am perhaps a little low there? 5 MR. SKALSKI: I think a little low, yes. 6 MR. THOMPSON: But at a million that would 7 add, I make it about 14 cents per year to the baseline 8 number. Would you take that as being in the order of 9 magnitude? 10 MR. SKALSKI: Yes, I would. 11 MR. THOMPSON: So from a rate impact 12 perspective, big picture, the differences between the 13 infrastructure option preferred by Cumberland and the 14 infrastructure option favoured by Hydro is, on an 15 average consumer, between four cents and 14 cents 16 per year? 17 MR. SKALSKI: Yes, that sounds about right. 18 MR. THOMPSON: So would you agree with me that 19 from a rate impact assessment there is really no 20 material difference between these two infrastructure 21 options? This is chicken feed in the highest order. 22 MR. SKALSKI: Yes, it's a small amount. 23 MR. THOMPSON: From a savings perspective, I 24 understood you to say that based on the $240 million of 25 forecasted benefits, this project is expected to save 26 the average residential customer $22 a year? 27 MS ALDRED: That's correct. 28 MR. THOMPSON: So that the benefits to -- the 234 HYDRO ONE NETWORKS PANEL 2 1 savings, I guess, to rate impact ratio is something in 2 the order of 12 to 1. Is that what we are talking about 3 here on an annual basis? 4 MR. SKALSKI: It sounds reasonable. 5 MR. THOMPSON: This 240 million, it goes on 6 year after year after year. That's your -- 7 MR. SKALSKI: Yes. 8 MR. THOMPSON: -- best guess at the time. 9 MR. SKALSKI: Yes. 10 MR. THOMPSON: Okay. So that whether it is 11 lattice towers or a combination of lattice towers and 12 steel poles, it really doesn't matter from an economic 13 perspective. They are one and the same. Wouldn't you 14 agree? 15 MR. SKALSKI: Well, you are talking about, Mr. 16 Thompson, spreading costs amongst all Ontario consumers 17 of a requirement being imposed on the project for a 18 specific area. Sure, you can say that overall over all 19 consumers there is a very small impact, but nonetheless 20 I think Networks has a duty to try to minimize the cost 21 of its facility. 22 MR. THOMPSON: Well, this, I guess, is what 23 the Minister of Environment was being told. But he 24 didn't have the benefit of any rate impact analysis and 25 the benefit of any cross-examination on rate impact 26 analysis. Would you agree? 27 MR. SKALSKI: Yes, that's true. 28 MR. THOMPSON: All right. He was told it is 235 HYDRO ONE NETWORKS PANEL 2 1 between $3 million and $10 million and that was that. 2 That being that was the difference between the cost of 3 these two infrastructure options. Is that fair? 4 MR. SKALSKI: Mr. Thompson, you can always 5 play this game of spreading costs among the biggest 6 denominator possible. 7 MR. THOMPSON: I'm not -- I'm just taking your 8 rate impacts with respect to this project and comparing 9 them to the rate impacts of the infrastructure option 10 that we proposed. I'm not doing anything different than 11 you are doing, am I? If I'm gaming, you're gaming, I 12 guess. I don't know if that's a question, but answer it 13 if you think it is. 14 Well, let me conclude with this then: Do you 15 think Hydro One -- well, let me -- 16 Were these rate impact concerns that were 17 being raised by Hydro One, comparing the infrastructure 18 option that my client favoured compared to the 19 infrastructure option that your client favoured and the 20 suggestions that the one that we favoured had adverse 21 rate impacts compared to yours, are they, in the context 22 of what you just told me, really genuine? Because these 23 numbers are, I suggest, not different from an economic 24 analysis perspective. 25 MR. SKALSKI: Mr. Thompson, I can't speak -- I 26 don't think I can respond to that because I didn't write 27 the letter. I don't know what informed the writer of 28 the letter. 236 HYDRO ONE NETWORKS PANEL 2 1 MR. THOMPSON: Thank you very much. 2 Those are my questions. 3 THE PRESIDING MEMBER: Thank you, 4 Mr. Thompson. 5 Mr. Klippenstein, are you next? 6 MR. KLIPPENSTEIN: Thank you, Madam Chair. 7 EXAMINATION 8 MR. KLIPPENSTEIN: Good afternoon members of 9 the panel. 10 I represent Pollution Probe and have a series 11 of questions related to both the economic or bill impact 12 and also the public health or pollution impact arising 13 from coal generation, coal-fired generation. 14 If I can start out just by making sure I 15 understand some of the basics of the economics of the 16 proposed line, as I understand it the proposed new 17 transmission line, according to your view, benefits 18 Ontario customers basically because it operates like a 19 big electricity storage facility, and because of that or 20 through that it can shift Ontario power from off-peak 21 periods when it is cheaper to peak periods when it is 22 more expensive and save Ontario customers money on the 23 peak power costs. 24 Is that a fair summary of the essential 25 justification of the proposed line? 26 MR. KLEIN: That is essentially how we 27 modelled it, but it is certainly possible that the 28 interconnection would be used for exports from Hydro 237 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 Quebec's own resources rather than just banked energy 2 from Ontario. 3 MR. KLIPPENSTEIN: But the -- 4 MR. KLEIN: But the analysis we did assumed 5 that all the energy would be banked. 6 MR. KLIPPENSTEIN: All right, thank you. 7 So in your analysis, when all is said and 8 done, there isn't any net new power coming in to Ontario 9 from Hydro Quebec, as I understand it. 10 MR. KLEIN: Right. 11 MR. KLIPPENSTEIN: It is basically the banking 12 function? 13 MR. KLEIN: Yes. 14 MR. KLIPPENSTEIN: And as I understand it, 15 when all is said and done, the reason for that is you 16 have accepted the assumption that Hydro Quebec is energy 17 constrained. In other words, Hydro Quebec doesn't 18 really have available power that it can export to 19 Ontario. 20 MR. KLEIN: They do have power available that 21 they could export to Ontario, but in order to be 22 conservative in our assumptions we decided to assume 23 that it would all be back. 24 MR. KLIPPENSTEIN: Okay. In other words, you 25 just decided to assume that Hydro Quebec would not in 26 fact add new -- 27 MR. KLEIN: Right. 28 MR. KLIPPENSTEIN: -- power to Ontario. 238 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 As I understand it, another basic feature of 2 the logic of your assessment of the proposed line is 3 that there is a cost to doing this and there is a 4 benefit. The cost is that during the off-peak hours 5 when the power is taken out of Ontario and stored in 6 Quebec, then the total energy cost, electricity cost in 7 Ontario is made higher as a result. Is that a correct 8 sort of layman's summary of half the picture? 9 MR. KLEIN: At the margin it is made somewhat 10 higher during off-peak periods to the extent that you 11 come up the supply curve a little bit, but it should be 12 noted that generally off-peak periods are a time when 13 there is excess capacity available in the market at 14 basically marginal costs of the generation and there is 15 often resources that actually would sell power below 16 their marginal cost of production in order to avoid 17 quasi-fixed costs like cycling costs or wear and tear 18 from having to restart a unit if they were to turn it 19 off at night and on during the day. 20 MR. KLIPPENSTEIN: But, bottom line, the 21 project will increase energy costs for off-peak Ontario 22 users? 23 MR. KLEIN: I believe it did. I haven't 24 looked at that, but I believe it did. 25 MR. KLIPPENSTEIN: I'm going to get back to 26 it, but that is half the picture. The other half is 27 that you feel that there is large benefits in the form 28 of savings on peak hours which more than offset the 239 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 other half of the picture. Is that fair? 2 MR. KLEIN: Right. 3 MR. KLIPPENSTEIN: Okay. Let me go back to 4 the other half of the picture just so I can make sure I 5 understand that. 6 If you could turn to Exhibit B, Tab 4, 7 Schedule 3, Page 5 -- that is a chart or a graph -- your 8 Figure 3-2. That again was Tab 4, Schedule 3, Page 5. 9 --- Pause 10 MR. KLIPPENSTEIN: Keep a finger there and 11 turn to the previous page, which is page 4. I will just 12 read two sentences from the last paragraph. 13 It says, on page 4: 14 "The right-hand side of Figure 3-2 shows 15 hours when banking occurs. These 16 represent hours when Ontario generators 17 export energy to Quebec, yielding higher 18 revenues during those hours for Ontario's 19 generators than would be the case without 20 the interconnection expansion." 21 (As read) 22 End of quote. 23 So that is what I was alluding to in the sense 24 that when that export from Ontario to Quebec occurs, 25 there is a net increase in prices to Ontario. 26 MR. KLEIN: Yes. 27 MR. KLIPPENSTEIN: And on the graph on page 5, 28 that net increase is represented on the right-hand side 240 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 of the graph under the label "banking" -- 2 MR. KLEIN: Right. 3 MR. KLIPPENSTEIN: -- where the line deviates 4 from what it otherwise would be for some 15 per cent of 5 the time, and that deviation is the total amount of 6 money that Ontario consumers pay because of the exports 7 to Quebec. Right? 8 MR. KLEIN: Yes. 9 MR. KLIPPENSTEIN: Do you have a dollar figure 10 for that total amount? Can you tell me on that half of 11 the picture how much Ontario consumers pay more in total 12 for the exports that are going to Quebec for banking? 13 MR. KLEIN: I don't have it with me but it is 14 certainly something that we could obtain from the model 15 and from the numbers that underlie this chart. I just 16 don't have it at my fingertips right now. 17 MR. KLIPPENSTEIN: Could you undertake to 18 provide that to us, that is the total dollar figure of 19 additional cost to Ontario consumers in, I believe this 20 is the year 2005, during the banking or export of power 21 from Ontario to Quebec? 22 --- Pause 23 MR. KLIPPENSTEIN: I will take your silence to 24 mean yes? 25 MR. KLEIN: Yes. 26 MS ALDRED: Is that something that can be 27 obtained quickly or do you have to -- 28 MR. KLEIN: I don't know if, given the 241 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 holiday, we could do it right away, but certainly by 2 Monday. 3 MR. KLIPPENSTEIN: The sooner the better, 4 since it might raise some questions and, in fact, if it 5 is possible to obtain it somehow right now, that would 6 help in case I wish to raise some questions about it. 7 MR. KLEIN: It is a holiday in the U.S. 8 MR. KLIPPENSTEIN: I see. I forgot about 9 that. 10 Is it something you can estimate? You have 11 said the net benefit is, I believe, $240 million per 12 year. Is that the net benefit after the figure I have 13 just asked for your undertaking? 14 MR. KLEIN: Yes. 15 MR. KLIPPENSTEIN: Can you recall or estimate 16 how much that increased off-peak bill is in total? 17 MR. KLEIN: No, but it is something we may be 18 able to check, today or tomorrow. 19 MR. KLIPPENSTEIN: Okay. 20 I believe I need an undertaking number for 21 that undertaking. 22 MR. MORAN: That would be 15.2, Madam Chair. 23 Undertaking to provide total dollar figure for the 24 additional cost to Ontario consumers during the banking 25 of energy by Hydro Quebec. 26 UNDERTAKING NO. 15.2: Mr. Klein 27 undertakes to provide the total dollar 28 figures for the additional costs to 242 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 Ontario consumers during the banking of 2 energy by Hydro Quebec 3 MR. KLIPPENSTEIN: Thank you. 4 I would like to then again focus on what I 5 understand to be a key part of the whole mechanism of 6 this proposed line and that is that a certain amount of 7 power is exported from Ontario to Quebec and then 8 time-shifted and returned to Ontario. 9 MR. KLEIN: Yes. 10 MR. KLIPPENSTEIN: And as I understand it, the 11 amounts are exactly the same, according to your 12 analysis. 13 MR. KLEIN: Yes. 14 MR. KLIPPENSTEIN: In other words, the amount 15 exported from Ontario to Quebec is exactly the same as 16 the amount re-imported into Ontario from Hydro Quebec. 17 MR. KLEIN: Yes. 18 MR. KLIPPENSTEIN: If I can just get the 19 numbers on that, and for that I need to ask you to look 20 at an updated answer to Pollution Probe Interrogatory 21 No. C-3-4-1, updated as of November 21. I believe that 22 has been distributed and -- 23 MR. MORAN: Exhibit 14.8. 24 MR. KLIPPENSTEIN: -- Exhibit 14.8 is the 25 number I think. 26 --- Pause 27 MR. KLIPPENSTEIN: I have an extra copy or 28 two, if that would be of convenience to the panel. 243 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 --- Pause 2 MR. KLIPPENSTEIN: This is an updated answer 3 to a Pollution Probe Interrogatory, received a couple of 4 days ago. 5 First of all, I would like to just see what it 6 tells us about the amount exported to Quebec and the 7 amount imported back into Ontario. 8 If you could look with me at the table that 9 refers to the year 2005 numbers. In the bottom section 10 that is entitled "Flows" I see numbers for exports to 11 Quebec and the scenario without the interconnection, 12 340 gigawatt hours, I believe, and with the 13 interconnection, 1,709 gigawatt hours. And I do the 14 math on that and get a difference of 1,369 gigawatt 15 hours, representing the increased exports to Quebec as a 16 result of the proposed line. 17 You can take that subject to check? Does that 18 sound right? 19 MR. KLEIN: Yes. 20 MR. KLIPPENSTEIN: Then to get the flow in the 21 other direction, I go down a few lines to the line 22 "Imports from Quebec". I see the number as being 315 23 gigawatt hours, and then after the proposed line, 1,684 24 gigawatt hours. I do the math and I get a difference of 25 1,369 gigawatt hours, which is the import from Quebec 26 through the proposed line. Is that fair? 27 MR. KLEIN: That's good to hear. That's what 28 I said earlier, yes. 244 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLIPPENSTEIN: Okay. So those two numbers 2 are the same. So that is what you said before about the 3 outflow equalling the inflow. 4 MR. KLEIN: Right. 5 MR. KLIPPENSTEIN: Now, could you explain to 6 me how it is that the outflow exactly equals the inflow? 7 I think I understand, but perhaps you could explain that 8 again. 9 MR. KLEIN: Well, we were left with a model 10 where we are trying to estimate the impact of the change 11 as a result of the interconnection. And one of the 12 questions was: All right. Well, how should we model 13 the banking process? 14 There were some alternatives. We could have 15 assumed that some of the Hydro Quebec exports, net 16 exports that are available, would actually come to 17 Ontario. But we didn't want to get into a debate about 18 whether they would choose to sell to Ontario net exports 19 or to other markets. 20 So rather than address that, we simply made 21 the assumption that we will just assume, you know, zero 22 net exports from Hydro Quebec and model it that way, 23 rather than assuming that some of the net exports from 24 Hydro Quebec would come to Ontario. 25 MR. KLIPPENSTEIN: So you stipulate, if you 26 will, that it would simply be a round trip and -- 27 MR. KLEIN: Right. 28 MR. KLIPPENSTEIN: Okay. 245 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLEIN: I think that one of the answers to 2 the OEB Staff Interrogatories addressed this. 3 Schedule 21 talks about the assumptions for Hydro 4 Quebec. 5 MR. KLIPPENSTEIN: If you could point me to 6 that, I would appreciate it. Which one is that? 7 MR. KLEIN: It is Exhibit C, Tab 1, 8 Schedule 21. 9 MR. KLIPPENSTEIN: Twenty-one did you say? 10 Where in that interrogatory response do I find 11 the stipulation that we just talked about? If you can 12 point it out to me. 13 MR. KLEIN: Well, in the Table C-1, 21, it 14 indicates that the total imports and the exports are the 15 same. It discusses the overall assumptions. 16 --- Pause 17 MR. KLIPPENSTEIN: All right. Thank you. 18 Hydro Quebec also exports power to New York 19 and to the New England States as well. Obviously, we 20 have talked about that. 21 MR. KLEIN: Right. 22 MR. KLIPPENSTEIN: And I'm going to ask some 23 questions about that direct export, just to be clear, 24 because there was a whole lot of discussion earlier 25 about Hydro Quebec exporting through Ontario to the U.S. 26 I'm not talking about that at all. I just want to focus 27 on Hydro Quebec exporting directly to the U.S. So if 28 you could keep that in mind. 246 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 You said that you assumed with respect to 2 Ontario that Hydro Quebec isn't adding any new net power 3 to Ontario. Now, however, Hydro Quebec is exporting 4 some power to the U.S. States. 5 And does that power come also from a banking 6 approach as is envisioned here? In other words, does 7 Hydro Quebec buy it off-peak from the U.S. States, store 8 it and send it back in peak? Is that partly what is 9 going on? 10 MR. KLEIN: Let me just -- I believe how we 11 modelled it was we did not model any banking with the 12 U.S. markets and we simply assumed that Hydro Quebec's 13 net exports would be sold into New York and New England. 14 I think I recall there was an interrogatory that 15 addressed, from OEB staff, that asked how much we 16 assumed was exported to the U.S. market. So we did not 17 assume any banking within the U.S. markets. We were 18 simply trying to isolate the impact on Ontario of the 19 banking process. 20 If I could also add that you asked exactly 21 where we discussed how some of the assumptions were 22 developed. On page 4 of 5 on Schedule 21, it discusses 23 some of the assumptions that we made that I feel, in my 24 judgment, are conservative in terms of Hydro Quebec's 25 sales into Ontario. 26 This includes that we did not assume that any 27 of the net exports from Hydro Quebec would come to 28 Ontario, that we didn't assume any banking during winter 247 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 months because of the possibility that Hydro Quebec 2 might be capacity constrained during winter months. 3 However, there are likely to be periods of the winter 4 when there are banking opportunities because Hydro 5 Quebec wouldn't be at exactly its winter peak, you know, 6 wouldn't necessarily be the coldest months of the 7 winter. 8 In addition, we only assumed that 9 1.4 terrawatt hours would be sold, which corresponds to 10 a capacity factor of about 12.5 per cent. 11 MR. KLIPPENSTEIN: So let me get this 12 straight. You used different assumptions with respect 13 to Ontario. You used different assumptions regarding 14 Hydro Quebec sales to Ontario than you did with respect 15 to Hydro Quebec sales to the U.S. States, as I 16 understand it. 17 With respect to Hydro Quebec sales to Ontario, 18 you assumed no net Quebec power going to Ontario. With 19 respect to the U.S. States, you -- 20 MR. KLEIN: We assumed no banking. 21 MR. KLIPPENSTEIN: -- you assumed no banking 22 and that all of the power to those States would be 23 native Quebec power, if you will. 24 MR. KLEIN: Right. And I believe the answer 25 to that was indicated in OEB Staff Interrogatory No. 32. 26 --- Pause 27 MR. KLIPPENSTEIN: Now, is there going to be 28 any time -- 248 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. ROTHMAN: Just one quick point, and it is 2 probably a quibble. 3 But some of that exported power, of course, 4 comes from Labrador, some of the power that Hydro Quebec 5 exports comes from Labrador, not necessarily from 6 generation within Quebec. But it is treated by Hydro 7 Quebec as if it were its own generation. 8 MR. KLIPPENSTEIN: That would be the Churchill 9 Falls. 10 MR. ROTHMAN: Yes. 11 MR. KLIPPENSTEIN: Which leads very nicely 12 into my next question. 13 Is there going to be any power purchased in 14 Ontario by Hydro Quebec on off-peak times that is banked 15 and for which Hydro Quebec says, "We can sell this 16 additionally to the U.S. States, or else we can use this 17 to sell to the U.S. States, and it is cheaper than what 18 we would otherwise sell them"? 19 In other words -- 20 MR. KLEIN: Can you ask it again? 21 MR. KLIPPENSTEIN: Yes. 22 Is there going to be some power off-peak in 23 Ontario that now becomes available to Hydro Quebec, 24 through the proposed line, which Hydro Quebec will want 25 to sell to the U.S. States? 26 MR. KLEIN: We talk about the banking process 27 as if there are these megawatts that are purchased 28 off-peak and then they are sold on-peak, but really, 249 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 Hydro Quebec will make sales into the U.S. markets and 2 into Ontario, and whether the actual megawatts come from 3 Hydro Quebec's own resources or from what is banked is 4 -- I don't know how to -- this may be a philosophical 5 question. 6 MR. KLIPPENSTEIN: No, I am not talking about 7 where the electrons go and what not, that kind of stuff. 8 But is Hydro going to now be able to avoid 9 buying or producing power somewhere else to sell to the 10 U.S. States and instead supplying the U.S. States with 11 power from Ontario that is cheaper? 12 MR. KLEIN: Well, Hydro Quebec may choose to 13 purchase from either Ontario or western New York or 14 NEPOOL and use that energy as well in the banking 15 process, but I would expect that -- okay, there are 16 basically two sources for Hydro Quebec. 17 They can either use their own excess energy or 18 water that is stored behind their dams to export either 19 to Ontario or to New York or to NEPOOL, or they can use 20 banked energy that they purchase from Ontario or they 21 could use banked energy that they purchase from New York 22 or they could use banked energy that they purchase from 23 NEPOOL. 24 MR. KLIPPENSTEIN: Right. Now, are there 25 going to be some times when banked energy from Ontario 26 is going to be cheaper than any of the other options you 27 mentioned and thus the most sensible choice for Hydro to 28 sell to the U.S. States? 250 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLEIN: Well, the "thus" didn't really 2 follow from the -- the second part of your statement 3 didn't follow from the first part of your statement. 4 MR. KLIPPENSTEIN: Surely you are not saying I 5 am illogical! 6 --- Laughter 7 MR. KLIPPENSTEIN: Well, let me try and make 8 my point -- 9 MR. KLEIN: There may be times when Hydro 10 Quebec will choose to purchase from Ontario on days when 11 it does not choose also to purchase from New York or 12 NEPOOL, if prices were lower in Ontario. That does not 13 necessarily mean therefore that there are incremental 14 additional resources that would be provided to U.S. 15 markets that would not have otherwise been provided 16 during those hours but for the interconnect. 17 MR. KLIPPENSTEIN: I think I understand that. 18 But my question was and is this: Will there 19 be any times when Hydro Quebec says, "We are able to 20 sell megawatt hours to a U.S. State, and let's sell a 21 megawatt hour that we bought in Ontario at off-peak 22 hours and banked rather than a megawatt --" 23 MR. KLEIN: It doesn't make sense to make that 24 distinction. 25 What is the difference between a megawatt that 26 they bank from Ontario and a megawatt that they simply 27 have in their own reserves? 28 MR. KLIPPENSTEIN: Well, presumably they can 251 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 bank power from the U.S. States. Is that right? 2 MR. KLEIN: They could, yes. 3 MR. KLIPPENSTEIN: And that they would 4 purchase from the U.S. States for a particular price, in 5 the same way that they would purchase power or would 6 purchase it through the new line from Ontario. Right? 7 MR. KLEIN: Yes. 8 MR. KLIPPENSTEIN: So they could have a banked 9 U.S. hour which they paid something for or a banked 10 Ontario hour which they paid something for. Is that 11 right? 12 MR. KLEIN: Right. 13 MR. KLIPPENSTEIN: Are there any times when 14 they will say, "We will not bank U.S. hours because they 15 are more expensive than Ontario hours. We will bank 16 Ontario hours and sell them to the U.S."? 17 MR. KLEIN: Why do you keep saying, "and sell 18 them to the U.S."? 19 I agree with you on every single point up 20 until you say that. Okay. There are certainly times 21 when they will choose to buy from Ontario and not buy 22 from U.S. markets -- 23 MR. KLIPPENSTEIN: Instead of buying from U.S. 24 MR. KLEIN: Instead of buying from U.S. 25 markets. 26 What they then do with that power, whether 27 they sell it back to Ontario later or sell it into U.S. 28 markets, is not connected to the first part of the 252 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 argument. 2 MR. KLIPPENSTEIN: All right. Let's try to 3 break it into two parts and see if I can avoid your 4 objection. 5 If Hydro Quebec thinks it can sell a megawatt 6 hour and it has a choice from where to buy it, Ontario 7 or the U.S. States, and it is cheaper to buy it from 8 Ontario, Hydro Quebec will buy it from Ontario. Is that 9 fair? 10 MR. KLEIN: Well, let me provide -- 11 MR. KLIPPENSTEIN: I think that question makes 12 sense, so I wonder if you could just answer it. 13 MR. KLEIN: If it is cheaper to buy it from 14 Ontario, then they will buy it from Ontario, but given 15 their overall portfolio -- let me provide some 16 perspective regarding the Hydro Quebec exports to the 17 U.S. markets. 18 One of the key aspects of those exports to the 19 U.S. markets is that they are transmission constrained, 20 meaning that there are transmission constraints that 21 limit their ability to export. 22 If you look at the Hydro Quebec Strategic 23 Plan, which indicates 7 terrawatt hours in net exports 24 to external markets in 2004, if you look at that 25 Strategic Plan and you say, "Okay, suppose that they 26 were to not have the interconnection at all, and sell 27 that into U.S. markets," well they could fill up their 28 interconnection with New York and NEPOOL during on-peak 253 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 hours, 5 by 16, for 27 of the 52 weeks of the years, 2 simply with their own resources without any banking from 3 any market. 4 So most likely, the opportunities to sell to 5 U.S. markets, certainly the most desirable opportunities 6 to sell to U.S. markets would be completely used by 7 their own internal resources first, before they even 8 considered any banking with the U.S. even if they didn't 9 built the tie. 10 MR. KLIPPENSTEIN: All right, let me just 11 focus on what you have said. 12 I understand you are saying that most of the 13 time when Hydro Quebec wants to sell to the U.S. they 14 can do it from their own internal power without even 15 thinking about Ontario power. 16 MR. KLEIN: Right. 17 MR. KLIPPENSTEIN: Now, I said most of the 18 time. As I understand it, are you saying there will 19 be -- that it will always be the case that Hydro could 20 in fact sell -- can meet those U.S. needs and fill up 21 those transmission lines with its own available internal 22 power. Is it always the case? 23 MR. KLEIN: Not during all hours of the 24 year, no. 25 MR. KLIPPENSTEIN: So there will be times when 26 Hydro Quebec needs outside power to sell to the 27 U.S. States. 28 MR. KLEIN: If they want to sell to the 254 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 U.S. States, they will still need to bank. 2 MR. KLIPPENSTEIN: Okay. On those days or 3 hours or weeks, whatever it is, as I understand from 4 what you said to my question before, on those days, if 5 Hydro Quebec has the choice of supplying that need with 6 outside power from the U.S. that it has banked, or 7 outside power from Ontario that it has banked, it will 8 choose the cheapest. Right? 9 MR. KLEIN: Well -- 10 MR. KLIPPENSTEIN: I think that is a simple, 11 fair answer. 12 MR. KLEIN: Well, it is not a simple, fair 13 question in that the Hydro Quebec storage resources are 14 annual storage resources. So Hydro Quebec could 15 purchase from Ontario in spring of 2000 and store that 16 until, you know, summer of 2001, obviously if we had the 17 interconnection. So there is not -- there is a daily 18 decision going on here. There is a seasonal decision 19 that is going on here. There is an annual decision that 20 is going on here. It is a very complex decision about 21 how they would analyze it. 22 Now, I have stated earlier and I would 23 completely agree that given the choice of buying less 24 expensive power from Ontario or from any one of the 25 three markets, if I know Hydro Quebec, clearly from an 26 economic standpoint, they will choose to bank their 27 energy from the cheapest possible resources. I mean I 28 have stated that already. 255 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLIPPENSTEIN: Okay. So as I understand 2 that you have agreed that since Hydro Quebec cannot 3 supply the U.S. markets all the time with its own 4 internal power and sometimes requires external power for 5 that supply, that there will be times and they will be 6 predictable to Hydro Quebec roughly speaking with some 7 predictability, that it will require cheaper outside 8 power and those times it will, if the new line is in 9 existence, face a choice between drawing power from the 10 U.S. States or from Ontario off-peak, and it will do the 11 economically rational thing and use Ontario off-peak 12 power to supply the U.S. market. I believe that is what 13 you have agreed to. 14 MR. KLEIN: Presuming that the Ontario 15 off-peak power is cheaper. 16 MR. KLIPPENSTEIN: Right. Okay. 17 Thank you. 18 --- Pause 19 MR. KLIPPENSTEIN: Now, the problem I have 20 with that is that in your model for the year 2005 you 21 have simply stipulated, as we discussed before, that the 22 outflow from Ontario of off-peak hours would match what 23 flows back into Ontario. But as you have just agreed 24 there may be times when it is rational for Hydro Quebec 25 to use cheap Ontario power to supply the U.S. States. 26 So I am having a problem with whether your 27 numbers for the year 2005 don't require some adjustment 28 to accommodate that. In other words, I think there is 256 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 an aspect of what would really happen that is not 2 captured in those numbers in your model. 3 MR. KLEIN: I guess I don't think so. Because 4 we have assumed 7 terrawatt hours flowing into the U.S. 5 there are opportunities for banking in Ontario during 6 all the peak hours in Ontario, which wouldn't be 7 accounted for. So it does not necessarily flow that the 8 power will -- that Hydro Quebec will purchase more from 9 Ontario than it will sell back to Ontario. And even if 10 it did purchase more from Ontario than it sold back to 11 Ontario, the change in the price during the times when 12 it sells it back is significantly greater than the 13 change in the price during the off-peak period. 14 MR. KLIPPENSTEIN: All right. Let's just make 15 sure I understand what you are saying. 16 I think you are agreeing that the results of 17 the discussion we had about Hydro Quebec choosing 18 cheapest outside power for U.S. market is that, you 19 know, there may well be or there will likely be some 20 extra power flowing out of Ontario and it doesn't -- and 21 the question I have for you, first of all, is can you 22 give us an estimate of how much that will be, and 23 secondly, if that happens, it will presumably increase 24 the price rise in off-peak Ontario. 25 And so what is the dollar amount of that 26 outflow from Ontario to the U.S.? Could you give me an 27 idea of those two? 28 MR. KLEIN: It is really a hypothetical. 257 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLIPPENSTEIN: Well, it is in a sense, but 2 in a sense it isn't since -- unless you can guarantee to 3 me that there won't in the year 2005 be any draw of 4 Ontario power to send to the U.S. It is going to be a 5 reality. So I am wondering if you can help us out on 6 that. 7 MR. KLEIN: As I indicated in, I think it was 8 Schedule 21 on the conservatism of the assumption that 9 there are a number of opportunities for banking into -- 10 from Ontario into the U.S. or back into Ontario that 11 aren't accounted for. That includes both imports and 12 exports. So what we were trying to do here is to 13 estimate what the impact was in terms of the benefits to 14 consumers within Ontario using what we felt were 15 conservative assumptions about that. 16 MR. KLIPPENSTEIN: As I understand it, there 17 is this possibility or likelihood that further Ontario 18 power will go to the U.S. and your model, as I 19 understand it, is intended to give a market-based 20 approximation of what is likely to happen. And I am 21 wondering if your model could, in fact, give us an 22 estimate of how much power is actually going to go, not 23 only through the banking operation but actually going to 24 go to the U.S. in the year 2005. Can you actually give 25 us an estimate of how much power off-peak Ontario is 26 going to go to the U.S. in -- through Quebec in the year 27 2005? 28 --- Pause 258 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLEIN: I think that the model that we 2 used is very robust in terms of determining the benefits 3 to Ontario consumers. But to be able to model the 4 strategic decisions of Hydro Quebec in terms of how 5 their energy would be sold, we could certainly come up 6 with a very rough approximation -- we were not asked to 7 do that and didn't attempt it -- in terms of where there 8 might be hours for additional banking opportunities into 9 both the U.S. and Ontario markets looking at on-peak and 10 off-peak prices. That wouldn't account for capacity 11 restrictions say during winter months in the Hydro 12 Quebec system, and you know, there are other simplified 13 assumptions that might bear on it. So that would be a 14 separate modelling exercise and I don't know that 15 GE-MAPS would be the right tool for that either. 16 MS ALDRED: I have to say that I would object 17 to giving such an undertaking because it seems to me 18 that it is a lot of work for little benefit. It 19 requires another model run. It is quite extensive work. 20 MR. KLEIN: Not only is it a model run, it is 21 another model. 22 MS ALDRED: It's another model -- 23 MR. KLEIN: It is another -- 24 MS ALDRED: As my witness tells me, it is 25 another model altogether and it requires assumptions 26 from Hydro Quebec which I am not even sure whether this 27 witness -- whether he has got the background information 28 to do it. 259 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLIPPENSTEIN: Well, I have some problem 2 then because I think it has been agreed that there will 3 likely be some additional Ontario power going to serve 4 the U.S. market. And I am understanding that not only 5 was that not modelled, but it can't be modelled with the 6 present model. And that looks to me like there is no 7 evidence before the Board then on what looks like a 8 significant issue. 9 Let me try and move ahead on this. 10 I read with interest some of the detailed 11 description of the model in your materials which talked 12 about the detailed description of, or the catalogue of 13 all the generation stations or points throughout eastern 14 North America. 15 As I understand it, your model has essentially 16 all the generation facilities plugged into it in eastern 17 North America. Is that roughly accurate? 18 MR. KLEIN: It is roughly accurate, yes. 19 MR. KLIPPENSTEIN: And it would have all the 20 major transmission lines in eastern North America? 21 MR. KLEIN: Yes. 22 MR. KLIPPENSTEIN: And the even more modest 23 transmission lines as well? 24 MR. KLEIN: Yes. 25 MR. KLIPPENSTEIN: And it would have the 26 constraints of the transmission lines and the capacity 27 of the generating stations? 28 MR. KLEIN: Right. 260 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLIPPENSTEIN: And yet you are telling me 2 that you didn't model Hydro Quebec in running your 3 model. Is that right? 4 MR. KLEIN: Right. 5 MR. KLIPPENSTEIN: So we don't know anything 6 about Hydro Quebec's decision about purchasing Ontario 7 power except for the one assumption that you stipulated. 8 Right? I mean -- 9 MR. KLEIN: Well, there were several 10 assumptions. I think we do know -- we know a number of 11 things about what Hydro Quebec will do. We know that 12 they will -- that they are capacity constrained during 13 much of the year in terms of their ability to export to 14 external markets or they are constrained by transmission 15 limitation in terms of their ability to export; that 16 they will choose to export to those markets when prices 17 are high in order to reduce prices; that they will 18 probably engage in some form of energy banking and that 19 they will choose to purchase power from either Ontario 20 or New York. 21 By the way, the premise which I don't -- I 22 never indicated that it would necessarily be the case 23 that Ontario would generate more for export to the U.S. 24 In fact, you know, the prices at Chateauguay in New York 25 are among the lower prices in New York and are roughly 26 consistent with prices in the Ontario market in our 27 modelling. 28 So it is not clear at all that they would 261 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 necessarily choose to bank. It would probably depend in 2 part on loss factors and market roles and things like 3 that. 4 So you know, I think that it is a -- in my 5 judgment, it is by no means clear that Ontario would 6 export more than it imports over this particular 7 interconnection. 8 MR. KLIPPENSTEIN: You have mentioned the one 9 example of prices in one location in New York. Would 10 you agree with me that the average price in New York is 11 larger than the average price in Ontario? 12 MR. KLEIN: I would agree that that is an 13 irrelevant question in that the price for Hydro Quebec 14 to purchase in the New York market, given the New York 15 market structure, is the price of the Chateauguay bus. 16 MR. KLIPPENSTEIN: Well, let me ask you this: 17 Would you agree there will be times when it would make 18 sense for Hydro Quebec to purchase from -- let me start 19 again. 20 There will be times when the price that Hydro 21 Quebec could purchase from Ontario, using the proposed 22 line, will be less than any price Hydro Quebec could get 23 in New York? 24 MR. KLEIN: And almost certainly, there will 25 be times when the price is lower in New York than the 26 price is in Ontario. 27 MR. KLIPPENSTEIN: But you will agree then 28 that there will be times when Hydro Quebec can get power 262 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 cheaper through the proposed line than it can get in New 2 York? 3 MR. KLEIN: During that specific hour, yes. 4 MR. KLIPPENSTEIN: And that may be for a whole 5 week, for instance. 6 MR. KLEIN: Maybe, but it could also be 7 cheaper in New York for a whole week. 8 MR. KLIPPENSTEIN: And would you agree that 9 the same applies to the other New England states? 10 MR. KLEIN: Yes, the price could be cheaper at 11 Sandy Pond for a whole week than it is in New York 12 potentially. 13 MR. KLIPPENSTEIN: And the problem I have is 14 we have no way now, I gather, of assessing in a rational 15 way, how much that is going to occur and I gather 16 neither your present model or any other model that you 17 are willing to bring to bear will tell us in any kind of 18 rational way how much that is going to occur. 19 Now, can you tell me that you can do a model 20 run of the MAPS, the GE-MAPS program or do you have 21 access to another model that can tell us that on those 22 occasions, over the course of a year, when Ontario power 23 is cheaper than anywhere in northeastern United States, 24 how much would flow through the proposed line to those 25 areas? 26 MR. KLEIN: Again, the question of on those 27 occasions is an irrelevant question because the energy 28 banking process is not an hour-by-hour process. So you 263 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 know, you are making a decision between purchasing from 2 Ontario during a low-cost week or purchasing from New 3 York during a low-cost week in New York. They are all, 4 you know, potentially banking processes. 5 MR. KLIPPENSTEIN: All right. I think the 6 intent to my question hopefully came through anyway, but 7 let me ask it. 8 Over the course of a year, since there will be 9 times when Ontario power is cheapest, how much power 10 over the course of a year will go through the proposed 11 line to the northeastern U.S. States as a result of that 12 price differential? 13 We need to have some kind of estimate of that 14 because, as we discussed before, that is going to have a 15 negative upward effect on Ontario prices. And I don't 16 see in the evidence or in our discussion today, or 17 anything that can enlighten the Board about how much 18 that is going to be. 19 MS ALDRED: I think he has already given his 20 answer that it would be a net -- it would net out. 21 MR. KLEIN: Yes. 22 MR. KLIPPENSTEIN: Well, with respect, that is 23 not at all the case. And it is clear that if the 24 answers and assumptions that we have gone through are, 25 in fact, accurate, then there will be this additional 26 flow. And the question of whether it is offset by an 27 increase, as we have discussed, is a separate second 28 question. 264 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLEIN: Yes. Well, I think that the real 2 question here is whether in the modelling of the Hydro 3 Quebec potential exports in the interconnection with 4 Ontario, we have used reasonable assumptions about how 5 those exports would go. I do not believe that it is 6 necessarily the case by any stretch that -- I mean the 7 fact of the matter is we do not know exactly what Hydro 8 Quebec will do in 2005 and what the market prices will 9 be in these different markets. 10 One thing we do know is that the Hydro Quebec 11 interconnection will allow for sales during on-peak 12 periods into Ontario and that will have a decreasing 13 effect on prices in Ontario. 14 MR. KLIPPENSTEIN: But your evidence says, or 15 Hydro's evidence says, Exhibit B, Tab 4, Schedule 1, 16 page 9 and I think this is actually a quote from page 4 17 of the Hagler Bailly Report, and I quote: 18 "As with any commercial entity, Hydro 19 Quebec and other potential users would be 20 expected to attempt to maximize their 21 return from the proposed interconnection 22 investment by exporting to Ontario during 23 peak periods when spot market prices are 24 high." (As read) 25 I guess all I am asking you to do is give us 26 information that will allow us to estimate what Hydro 27 Quebec, as a maximizing user of the proposed line, will 28 do with respect to further exports from Ontario to 265 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 the -- I'm sorry, importing power from Ontario to Quebec 2 for use in the northeastern States. 3 And you know, the model that you have run, 4 with its many information points, seems to be entirely 5 focused on figuring out what the various market players 6 will do to maximize their returns and to maximize 7 efficiency. That is what I want for Hydro Quebec's 8 position with respect to those additional power imports 9 from Ontario. 10 You can't do that? Can you do that? 11 MR. ROTHMAN: We have been going at this for a 12 while. Let me see if I can get -- and maybe we can try 13 to be helpful on it. 14 If I'm hearing you right -- and correct if I'm 15 not -- the issue that you are trying to get at is what 16 might be the deleterious effect on consumers in Ontario 17 of the increased prices in Ontario at times of low 18 demand in Ontario when the power -- when additional 19 power, that is power in addition to what we have 20 estimated -- is being sold to Hydro Quebec for its 21 purposes of banking and resale either to Ontario or to 22 the United States. Is that the question that you are 23 asking? 24 MR. KLIPPENSTEIN: No. My question firstly is 25 the net power -- well, I think my question has been 26 asked and answered. But my question is the net power 27 flows from Ontario to Quebec to serve the U.S. markets 28 through the new proposed line. That is the first 266 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 question. 2 MR. ROTHMAN: Yes. I think what we have said 3 is, with or without a model, answering that question 4 requires answering a really complex set of questions 5 because it has to deal with the issues of existing 6 transmission constraints between Quebec and the United 7 States, the issues of what prices are on an hourly basis 8 in the United States jurisdictions into which Quebec 9 might export and the hourly prices in Ontario. 10 It is getting a precise answer to that 11 question and that is why I'm hoping to intervene here a 12 little bit. 13 Getting a precise answer to that question, as 14 Mr. Klein has been telling you, is a very complex matter 15 and would require a kind of modelling that we haven't 16 yet undertaken because it would require modelling within 17 Quebec. 18 Getting a rough answer to that question might 19 be somewhat easier and that's why -- and getting a rough 20 answer to the question that I posed, I think, is also 21 somewhat easier. 22 So that's what I am trying to get at, how 23 precise a question you -- how precise you are looking -- 24 an answer you are looking for and exactly what answer it 25 is that you are looking for. 26 MR. KLIPPENSTEIN: Well, frankly, I thought 27 that I could get that answer, because I read the 28 Appendix B overview of the GE-MAPS software and it 267 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 described exactly what you have just said we needed. 2 If I can quote to you: 3 "The MAPS, Market Assessment and 4 Portfolio Strategy Software, is a highly 5 detailed model that calculates 6 hour-by-hour production costs while 7 recognizing the constraints on generation 8 dispatch imposed by the transmission 9 system. MAPS performs a transmission 10 constrained production simulation which 11 uses a detailed electrical model of the 12 entire transmission network. For 13 example, the eastern interconnection, 14 along with generation shift factors 15 determined from a solved AC load flow, to 16 calculate the real power flows for each 17 generation dispatch." (As read) 18 So all the things you have mentioned, the 19 transmission constraints, the detail, the production 20 simulation, that is all, I thought, incorporated into 21 your model. So what I have here, it appears, is the use 22 of this model for a very small relationship, namely the 23 Quebec-Ontario relationship that boxed off from all 24 other realities. What I am specifically being told is 25 that you didn't do it and you can't do it from a 26 perspective of Hydro Quebec that includes both Ontario 27 and the northeastern States. 28 So I don't know if you can add anything to 268 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 that but I'm left -- 2 MR. KLEIN: I guess what I would add is that, 3 as we indicated in answers to OEB Staff Interrogatories, 4 Hydro Quebec was not explicitly modelled in our market 5 other than as imports from U.S. -- to the U.S., New York 6 and NEPOOL and the banking with Ontario. So while the 7 rest of the eastern interconnection, where it is so 8 critical to take into account the interactions and the 9 transmission system because that interconnection is 10 synchronized with each other, and understanding those 11 interactions is key to understanding the market prices 12 in those regions, modelling Hydro Quebec with a less -- 13 in modelling the explicit detail within Hydro Quebec 14 with respect to generation and load and transmission 15 constraints internal to Hydro Quebec, was less critical, 16 in our judgment, to the current task at hand, which was 17 simply to estimate the impact of this interconnection. 18 Because the actual -- the supply and demand conditions 19 within Hydro Quebec don't affect the market prices 20 within Ontario. 21 MR. KLIPPENSTEIN: Madam Chair, that is the 22 end of one line of questioning and I don't know if you 23 are intending to have a break, but this is one possible 24 place. 25 THE PRESIDING MEMBER: How much longer do you 26 think you will be, Mr. Klippenstein? 27 MR. KLIPPENSTEIN: I will be a while. I 28 suspect at least an hour. 269 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 THE PRESIDING MEMBER: We will have a short 2 recess of 10 minutes and then we will reconvene. 3 Thank you. 4 --- Upon recessing at 1525 5 --- Upon resuming at 1543 6 THE PRESIDING MEMBER: Please be seated. 7 MR. GREENSPOON: Madam Chair. 8 THE PRESIDING MEMBER: Mr. Greenspoon. 9 MR. GREENSPOON: Madam Chair, I'm just a 10 little concerned about the timing here. 11 I don't want to be put in the twilight zone 12 hour of the day where we are all falling asleep, and if 13 Mr. Klippenstein indicates he has another hour, that 14 takes us to about a quarter to 5:00. I don't know what 15 you have in mind. I just wanted some direction 16 whether -- 17 THE PRESIDING MEMBER: Mr. Greenspoon, I can 18 assure you that we will be no more awake at a quarter to 19 5:00 than we are now at a quarter to 4:00. 20 --- Laughter 21 THE PRESIDING MEMBER: So, Mr. Klippenstein, 22 if you will continue on. 23 I assure you we will pay attention to your 24 questions, Mr. Greenspoon. 25 MR. KLIPPENSTEIN: I thought I was being 26 humorous and eloquent, and so forth, but if I'm putting 27 people to sleep I'm sorry. 28 --- Laughter 270 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLIPPENSTEIN: I have a number of 2 questions, members of the panel, about the savings 3 estimates, which is, I guess, the other half of the 4 picture for the proposed line. 5 First of all, what is the expected economic 6 life of the new proposed line? People have talked about 7 depreciation, but I'm not sure that that is the same 8 thing as the proposed expected economic life. 9 MR. KLEIN: We have used a 40-year period for 10 both economic and depreciable period. 11 MR. KLIPPENSTEIN: Thank you. 12 I think I heard the figures of 50 years and 13 80 years tossed around. So you leave them standing 14 40 years after they are useless? Is that -- 15 MR. SKALSKI: Well, that's a -- 40 years is a 16 composite average of our transmission asset. 17 MR. KLIPPENSTEIN: Oh, I see. 18 When I look through the evidence at various 19 places where the savings to Ontario customers are 20 estimated I frequently see the word "annually" or "per 21 year". For example, just to pick one of many examples 22 at Exhibit B, Tab 4, Schedule 1, Page 13, I will just 23 read a sentence. It's no big deal. That is Tab 4, 24 Schedule 1, Page 13, this first full paragraph says: 25 "Under the base case scenario, total 26 electricity expenditures by Ontario 27 consumers would be less by $240 million 28 annually with the introduction of the 271 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 Hydro Quebec interconnection." (As read) 2 I'm just focusing on the word "annually" 3 there. 4 As I understand your evidence, the analysis 5 and the model run that you did was for only one year, 6 namely 2005. Is that right? 7 MR. KLEIN: That's right. 8 MR. KLIPPENSTEIN: Is it your evidence that 9 you are forecasting savings of $240 million each year 10 thereafter for some period? 11 MR. KLEIN: We didn't model each year 12 thereafter, but certainly, as I indicated during my 13 direct, I would expect the benefits to continue for a 14 number of years after the tie was completed. 15 MR. KLIPPENSTEIN: Presumably there are 16 factors that can change in the year 2006 thereafter that 17 could affect those savings, as you see them, either way, 18 including changes in transmission constraints and new 19 transmission lines, and so forth. Is that fair? 20 MR. KLEIN: I think that in 2006 they would be 21 extremely close to the $240 million, but the question 22 isn't much longer when we are talking about 20 or 30 or 23 40 years out. It's just not -- you know, it's hard to 24 assign specific market prices in the pool to one 25 specific change in the market by that time, given that 26 in the long run supply and demand economics will dictate 27 market prices. 28 MR. KLIPPENSTEIN: But the present state of 272 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 the evidence before the Board is: We don't actually 2 have any analysis for the years 2006, 2007, 2008, all 3 the way up to 2010? 4 MR. KLEIN: Right. 5 MR. KLIPPENSTEIN: Nor do we have any analysis 6 for the years 2002, 2003, 2004? 7 MR. KLEIN: Right. Other than the response to 8 OEB Staff's inquiry regarding the price caps. 9 MR. KLIPPENSTEIN: Now, that figure of 10 $240 million, does that include the approximately 11 $96 million construction cost of the proposed line? 12 MR. KLEIN: No. 13 MR. KLIPPENSTEIN: That's not factored in. So 14 that would somehow have to be taken out of those 15 savings. 16 MR. KLEIN: Right. 17 MR. KLIPPENSTEIN: So with the appropriate 18 qualifications, then, in fact the evidence amounts to 19 that PHB's evidence is that it estimates electricity 20 commodity bill savings of $240 million for 2005 is 21 perhaps a slightly more accurate statement of the 22 evidence. Is that fair? 23 MR. KLEIN: Yes, the benefits to consumers in 24 terms of wholesale market prices. Yes, I would agree 25 with you. 26 MR. KLIPPENSTEIN: Thank you. 27 For what years other than 2005 could PHB do 28 the GE-MAPS model simulation? In other words, could you 273 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 do it for 2006, 2008, 2010 to give the Board some 2 evidence on those years? 3 MR. KLEIN: In principle we could, but I 4 don't -- as I stated in the evidence, I don't see the 5 value of doing it for additional years because we would 6 presumably find that -- we would find that there was a 7 benefit there. And because the benefits are so 8 definitive in the first year and completely pays for the 9 cost of the interconnection we didn't see the need to do 10 additional years. 11 Also, let me -- 12 MR. ROTHMAN: I don't want to leave the record 13 the way I thought I just heard it go by, which was that 14 PA Consulting has no evidence for years other than 2005, 15 as your statement. 16 I just wanted to make it clear that we are 17 making a fairly strong statement that, although we 18 wouldn't give precise numbers, that we would say that 19 four years, say, within four to five years of 2005 we 20 would expect the net benefit to be very close to that 21 that we have already estimated for 2005. Beyond those 22 years things do get -- the question does get less well 23 defined. 24 But that even if we were to do a model -- and 25 I think that is what Mr. Klein just said -- if we were 26 to model those years, like 2008, 2012, we would have a 27 very strong expectation that the benefits to Ontario 28 consumers in the form of lower electricity prices would 274 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 be very close to that we have already estimated for 2 2005. 3 MR. KLIPPENSTEIN: On the other hand, if a new 4 transmission line is built between Quebec and the 5 northeastern States that removes some transmission 6 constraints there might be a large increase in sale of 7 Ontario power that ends up through Hydro Quebec in 8 northeastern States. Is that a possibility? 9 MR. KLEIN: I know of no plans for any 10 additional expansion of those interconnections. 11 MR. KLIPPENSTEIN: But it would be a 12 possibility in a number of years past 2005. 13 MR KLEIN: If they were to decide to expand 14 those interconnections, yes. 15 MR. KLIPPENSTEIN: And that would have an 16 effect on Ontario consumers. 17 MR. ROTHMAN: It would not necessarily have an 18 effect on the benefit that we have calculated to Ontario 19 consumers, because however much additional transmission 20 capacity Hydro Quebec were able to build, the difference 21 between their total generation capacity and their 22 domestic peak demand is still high enough that they are 23 essentially still energy constrained and still would be 24 ready to export to both Ontario and the United States, 25 simultaneously, that they would export it through all 26 the jurisdictions simultaneously, and that that would 27 not significantly diminish the benefit to Ontario. As 28 would not the point we were talking about earlier, that, 275 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 even if there were some additional exports to Quebec 2 which it then re-exported to the United States, that 3 wouldn't significantly diminish the benefit to Ontario 4 consumers in terms of the savings in energy costs in 5 Ontario. 6 MR. KLIPPENSTEIN: But we don't have any model 7 of that scenario run for those years that you have put 8 before us. 9 MR KLEIN: We don't have any models of 10 hypothetical Hydro Quebec transmission lines that 11 haven't been planned. 12 MR. KLIPPENSTEIN: Thank you. 13 I would like to ask a number of questions now 14 about the other major area of Pollution Probe's concern, 15 which is the coal production and air pollution and 16 public heath effects of the proposed new line. 17 As I think you probably gathered from the 18 interrogatories, Pollution Probe is concerned that there 19 will be increased net emissions that result from 20 coal-fired generation that is increased as a result of 21 the proposed line, and it is particularly concerned 22 about emissions of carbon dioxide, nitrogen oxides, 23 sulphur dioxide and mercury, those four compounds or 24 elements. 25 Can you provide us an analysis of the net 26 change in Ontario's electricity-related nitrogen oxides 27 and sulphur dioxide and mercury and carbon dioxide 28 emissions which will occur as a result of the proposed 276 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 line, using the assumptions in your model? 2 Actually, before I get your answer on that, it 3 may be helpful to refer to Exhibit 14.8, which I 4 referred to earlier. 5 --- Pause 6 MR. KLIPPENSTEIN: The table on 14.8 has a box 7 or category called "Generation". 8 MR KLEIN: M'hm. 9 MR. KLIPPENSTEIN: And one of the categories 10 of generation is coal. In a scenario without the 11 interconnection, there are gigawatt hours of 39,932 for 12 coal production. And that increases in the scenario 13 with the proposed line by a figure of about 190 gigawatt 14 hours. So according to this evidence, the line would 15 result in increased coal-fired generation. 16 So I'm wondering if you can provide to us and 17 to the Board, as I mentioned before, the increase in 18 emissions for the four substances of carbon dioxide, 19 nitrogen oxides, sulphur dioxide and mercury, for the 20 year 2005, for starters? 21 MR KLEIN: We explicitly didn't model the 22 impact of the tie on pollution in Ontario. Frankly, we 23 thought about trying to do it, looking at that. When 24 you think about modelling 2005, it is not certain 25 exactly what is modelled. 26 So to give you a precise estimate, we would 27 need to know what the regulatory context is in Ontario. 28 And I think as your motion yesterday indicated the 277 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 current sale of the coal-fired units in Ontario is on 2 hold while the province investigates what pollution 3 control regime to impose on those sales. So in order to 4 model the exact emissions we would need to make some 5 assumptions about those regimes. 6 More importantly, the impact of those 7 regulations is going to far exceed the impact of this 8 Hydro Quebec interconnection. To the extent that the 9 emissions of pollution are constrained, due to the 10 regulations, that will be the case whether or not this 11 interconnection is built. 12 So it is the case here that there is a small 13 increase in coal-fired generation -- I think about half 14 a per cent, which is indicated by the model. We think 15 that that is a relatively small increase. 16 But it doesn't necessarily suggest an increase 17 in emissions within/without the tie because we just 18 don't know what the regulatory context is going to be 19 for pollution control, and that regulatory context is 20 going to be far more important in determining emissions 21 than the specific interconnection. 22 MR. KLIPPENSTEIN: Well, we don't know what 23 the future regulations are going to be. Could I ask you 24 to turn to Pollution Probe's Motion Record of a few days 25 ago. I don't know if you have that available to you. 26 At Tab D, which is page 19 of the Motion 27 Record, you may have noticed that we excerpted another 28 report by Hagler Bailly, called "The Cost of Early 278 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 Retirement of Coal Generation." Do you have that? 2 I notice on page 9 of that report, which is 3 page 29 of the Motion Record, there is a whole section 4 on coal replacement and a table which has coal 5 generation predictions going up 2005, 2008, 2010, 2012. 6 I notice it is predicted that generation will go up 7 pretty significantly. 8 And also, on the next page, which is included 9 in the Motion Record, which is page 13 of that report, 10 there is a table entitled "Emissions Impacts of Coal 11 Plant Retirement". Do you see that? 12 MR. ROTHMAN: Yes. 13 MR. KLIPPENSTEIN: And that has a table for 14 nitrogen oxides, for sulphur dioxide, for carbon 15 dioxide, going out to the year 2012, I believe. 16 Is it possible to do a similar projection for 17 the present proposed line, assuming the existing or 18 confirmed environmental regulations? Could you do that 19 so the Board would have some idea of what emissions of 20 mercury it could expect as a result of increased exports 21 from coal-fired generations? 22 MS ALDRED: I think we already made it clear 23 to Mr. Klippenstein during the last few weeks that we 24 did not model pollution emissions for the purposes of 25 the evidence as it was prepared. And the answer would 26 be the same as a request to model other information 27 previously in Mr. Klippenstein's examination, and it is 28 no small task and not a reasonable request. 279 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 MR. KLIPPENSTEIN: With all due respect it is, 2 in my submission, certainly a reasonable and certainly 3 an apparently important issue and request and it seems 4 pretty clear from previous reports that I have just 5 looked at it that it is doable. I would think it is in 6 the public interest to have that information and I would 7 indeed ask the Board to order that report be prepared. 8 THE PRESIDING MEMBER: To what extent is it? 9 I understand why the modelling of Quebec and the inputs 10 and the outputs and the decisions that the monopoly 11 would make may be difficult to do. Is it really that 12 difficult to do a model of half a per cent increase in 13 coal production with respect to these -- 14 MS ALDRED: I guess I can let my witness 15 answer as to difficulty. But I would like to address it 16 further, if I could. 17 THE PRESIDING MEMBER: Certainly. How 18 difficult -- you prepared this report that 19 Mr. Klippenstein has referred to or your group has. Is 20 there a problem? 21 MR. ROTHMAN: As no doubt Mr. Klippenstein 22 knows because I'm sure Mr. Givens knows, I prepared the 23 report that Mr. Klippenstein has been quoting from. And 24 it certainly would be not difficult at all to compute 25 the total incremental emissions from an additional half 26 per cent of coal-fired generation on the kinds of 27 assumptions that were made for this report. 28 In this report, as you can see, by 2012 we 280 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 show cogeneration above 40 terrawatt hours. Under 2 existing environmental regulations, coal-fired 3 generation is held to around 40 terrawatt hours and any 4 tightening of those regulations would reduce that 5 generation. 6 So we simply assumed for this study because of 7 the nature of the study we simply let that coal-fired 8 generation go and assumed that there would be a trading 9 system such that we could buy emissions credits and 10 reduce the net generation in that way, that emissions 11 credits could be bought. We put that into the cost of 12 the model because we were asked here, as the title of 13 the report says, to calculate the cost of the early 14 retirement of coal-fired generation. 15 And since the base case was to indicate the 16 total cost of the existing coal-fire generation we said, 17 well, if we get out to the point where we exceed the 18 emissions limits, that cost -- the cost of buying those 19 emissions credits would be included. So when we take 20 the differential, we can include those costs and then 21 take the differential on the other side. 22 So that is where we got the tables that 23 Mr. Klippenstein is talking about, the tables on page 9 24 and 13. And we could do, I'm sure, with relative ease a 25 not dissimilar calculation on the assumption that the 26 0.5 per cent increment just happened in one regulatory 27 regime or another. Mr. Klein's point is that may not -- 28 we should treat that result with caution because it may 281 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 not happen that way. 2 THE PRESIDING MEMBER: There is two issues. 3 The first is can you do with relative ease the 4 calculation that Mr. Klippenstein has asked for and I 5 think the answer is yes. 6 Mr. Klippenstein, the assumptions made in this 7 study can be equally applicable to the additional 8 information that you have requested. Is that 9 satisfactory to you? 10 MR. KLIPPENSTEIN: Yes. 11 THE PRESIDING MEMBER: So I think we should 12 have an undertaking for that, Mr. Moran. 13 MR. MORAN: That would be 15.3. Perhaps I 14 could ask Mr. Klippenstein how he would describe the 15 undertaking. 16 MR. KLIPPENSTEIN: I believe as I described it 17 last time is that we are requesting an undertaking for a 18 calculation of the emissions impact or the net change in 19 emissions due to the proposed interconnection for the 20 substances of nitrogen oxide, sulphur dioxide, mercury 21 and carbon dioxide for the year 2005 and beyond to the 22 year -- just leaving it at 2005. 23 THE PRESIDING MEMBER: Thank you. 24 UNDERTAKING NO. 15.3: Mr. Rothman 25 undertakes to provide a calculation of 26 the emissions impact or the net change in 27 emissions due to the proposed 28 interconnection for the substances of 282 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 nitrogen oxide, sulphur dioxide, mercury 2 and carbon dioxide for the year 2005 3 THE PRESIDING MEMBER: Now, of course, 4 Mr. Rothman, you are free to argue, as your counsel will 5 know, at any time the relevance of this additional 6 information. 7 Thank you. 8 MR. ROTHMAN: Thank you, Madam Chair. 9 --- Pause 10 MR. KLIPPENSTEIN: Now, I am happy that I 11 haven't imposed too great a burden on you as I 12 understand it and I look forward to getting it. 13 But we have had some discussion this afternoon 14 about the possibility that the increase in power leaving 15 Ontario on the proposed line will actually be more than 16 the amounts you have used in your calculation of, I 17 think, 1,369. Would you agree with me that if, in 18 accordance with that discussion, the amounts are 19 actually higher than the emissions that we are looking 20 at, would also be correspondingly higher because of 21 additional coal-fired generation. Is that fair? 22 MR. ROTHMAN: It is possible. Not necessarily 23 true. 24 MR. KLIPPENSTEIN: Would you agree that it is 25 likely because those additional units of power are quite 26 likely to come from coal-fired generation? 27 MS ALDRED: He just answered that question. 28 MR. KLIPPENSTEIN: I don't think it was 283 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 answered. I think you said it was possible and I think 2 I asked if it was likely, which is quite different I 3 believe. And the reality is it is going to be 4 coal-fired generation. Right? 5 MR. ROTHMAN: It likely gets into the issue 6 that Mr. Klein was raising of future environmental 7 regulations and the future of the Ontario power 8 generation coal-fired fleet. 9 MR. KLIPPENSTEIN: Okay. Well, given existing 10 laws and regulations, the additional generation above 11 the 1,369 that might result from the proposed line would 12 be likely coal-fired generation and thus would 13 additionally increase the emissions that we just talked 14 about. Is that fair? 15 MR. ROTHMAN: Not all of it but a good 16 fraction of it, yes. Given existing laws and 17 regulations and the existing fleet in its operation as 18 it is now -- 19 MR. KLEIN: And presuming also that the 20 increase that is stipulated is only an increase in 21 exports to Hydro Quebec rather than offsetting an 22 increase in imports from Hydro Quebec into Ontario. 23 MR. KLIPPENSTEIN: Thank you. 24 I have one final area of questioning and that 25 relates to the impact of the proposed line on new 26 gas-fired generation. And according to your evidence, 27 "the merchant entrance," that is the power plants 28 including gas, I guess: 284 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 "... count on volatile electricity prices 2 to justify their investment without a 3 certain degree of market volatility, 4 energy prices might never go high enough 5 to support entrepreneurs building a 6 merchant plant based on those prices in 7 the first place." (As read) 8 And that is in answer to Pollution Probe 9 Interrogatory No. 6. Is that accurate? I was just 10 reading it. You may want to turn up Interrogatory 11 No. 6. 12 You will see that in that interrogatory, 13 Pollution Probe asked you to provide your forecast for 14 the years -- for each of the years from 2002 to 2010, 15 the reduction in new merchant generation capacity for 16 Ontario that would result from the proposed line. Does 17 PHB or PA Consulting have the ability to estimate that? 18 To be honest, it seems to me it does based on 19 that other PHB report we looked at a few minutes ago in 20 the Pollution Probe Motion Record. 21 MR. KLEIN: Well, this really depends on the 22 decisions of market participants. I mean clearly the 23 interconnection is anticipated by the market and yet 24 there is significant merchant entry in Ontario currently 25 planned and being permanent. So it is really -- there 26 is not necessarily a connect. 27 As I stated earlier, the assumptions we are 28 using in this model really take into account a perfect 285 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 world in terms of prices being based on the production 2 costs of generators with no strategic bidding, no 3 uncertainty in load, no high forecast prices. This is 4 an estimate of spot market prices. It is not an 5 estimate of forward market prices. 6 So, you know, for all those reasons there is 7 not necessarily a connection between the market prices 8 that you find in the GE-MAPS model that was used here 9 and the decisions of the merchant entrants to build 10 power plants. That being said, what was stated earlier 11 in our direct evidence that we attempted to model the 12 impact of the change brought about by the 13 interconnection I think that those results were quite 14 robust. 15 But I am not comfortable using the model to 16 hypothetically estimate how much merchant entry would 17 reduce how quickly that response would necessarily occur 18 in the market. There are so many other variables in 19 terms of the decisions for merchant plants. I mean I 20 can state that there is a reduction that we estimate of 21 $1.58 per megawatt hour from the interconnection in all 22 hours average price in the Ontario wholesale market. 23 And to the extent that that then has an impact on the 24 decisions of potential merchants, that would be for them 25 to determine. 26 MR. KLIPPENSTEIN: The PHB report that I 27 referred to earlier that is at Tab D of the Pollution 28 Probe Motion Record report called "Cost of Early 286 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 Retirement of Coal Generation," seems to use the PHB 2 model, admittedly with the assumptions you mentioned, to 3 be able to do the kind of estimate we are asking. 4 But can you do that for this issue? Can you 5 do a calculation using that model as you apparently did 6 then of the impact of the proposed line on new gas-fired 7 power plants? That would seem to me to be feasible. 8 MR. ROTHMAN: What we did in that model was 9 assume that as supply tightened, average prices in 10 Ontario would rise until eventually they did reach the 11 price at which a new merchant generation would enter. 12 And that was in the year 2012, which is why that 13 analysis was carried out to the year 2012. 14 We didn't look -- well, we did -- 15 MR. KLIPPENSTEIN: It sounds like you used -- 16 you figured out what effect a rise in price would have 17 and we are asking you to do the reverse, which is to 18 figure out what a decline in price which you project 19 from this proposed line, what effect that would have on 20 exactly the same thing you did in that report. It is 21 the same thing, but we are dealing with, you know, a -- 22 MR. ROTHMAN: Well, in effect, this report 23 said that there would be no merchant entry until 2012. 24 So the downward impact on merchant entry in this report, 25 if you turned it around, would be zero, because there 26 isn't any. 27 MR. KLIPPENSTEIN: Well, I'm not sure how you 28 can say that, because with the price declining the point 287 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 of the enquiry is what effect will a declining price 2 have on new entry. You don't know. Presumably -- 3 MR. ROTHMAN: What I said was, if we look at 4 this report between the years 2005 and 2012, in the base 5 case there is no merchant entry. Since there is no 6 merchant entry, you can't have any negative effect on 7 the merchant entry that doesn't occur. 8 --- Pause 9 MR. KLIPPENSTEIN: The whole point of the 10 proposed line, I think, is that it allegedly is going to 11 save, you say, $240 million in the year 2005 and you 12 also say some more thereafter. 13 Now, if your evidence is that that's not going 14 to have any effect on new merchant entry -- I'm not sure 15 how you can do that without doing the analysis, but you 16 are saying there will be a large savings and -- 17 MR. ROTHMAN: There were different underlying 18 assumptions for these two studies. 19 --- Pause 20 MR. ROTHMAN: Excuse me a minute. 21 --- Pause 22 MR. KLEIN: I think, first off, that there is 23 a -- while both of these studies used GE-MAPS, they use 24 GE-MAPS for different purposes to try to isolate a 25 different effect. And you know, for us now to go back 26 with the model we used for the interconnection study and 27 to try to estimate the decrease in merchant entry would 28 be -- firstly, it would be speculative. 288 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 And you know, over time, there may -- we never 2 indicated that there would not be a decrease in the 3 incentive for merchant entry with a reduction of price. 4 I will certainly indicate to the extent that 5 market prices are lower, merchant entrants will have 6 less of an incentive to enter. But that's what happens 7 in competitive markets, is that, you know, if prices are 8 lower there is less of an incentive to enter, if prices 9 are higher there is more of an incentive to enter. 10 For us to go back now and to re-look at 11 balancing our model for an equilibrium merchant set of 12 entrants within or without the interconnection in this 13 model would be a different study and a pretty 14 significant undertaking. 15 And it's not clear to me what the benefit of 16 that would be, because we have already shown that the 17 interconnection has an impact on prices in Ontario in 18 2005. So it's decisive in terms of the reduction in 19 market prices because of the ability to sell on peak. 20 MR. KLIPPENSTEIN: Well, the concern, of 21 course, is that if there is less new gas-fired plants, 22 there will be more pollution and there will be more 23 mercury and the other emissions I mentioned before. 24 That's an additional important concern. That's what we 25 are partly trying to estimate. 26 You have mentioned there is a decrease in the 27 incentive as a result of a drop in price from the 28 proposed line, so it logically flows that there may be 289 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 an increase in these emissions as a result of the line. 2 MR. KLEIN: To the extent that the 3 environmental regulations don't determine the emissions 4 levels for plants, that's true, but, I mean, based on 5 the evidence that was provided in your motion, it seems 6 as if the regulatory environment for addressing 7 pollution explicitly will address restrictions on 8 emissions. 9 I mean, for instance, if you have a cap on 10 emissions of SO2 or NOCs and that cap is binding, and 11 say that cap is 200,000 tonnes of SO2, just to pick a 12 number, and you know, 40,000 tonnes of NOCs, and that 13 cap is binding on the market, meaning the market 14 participants are imposing either -- some sort of 15 pollution controls to meet the cap, then whether or not 16 this interconnection is built, we would anticipate -- 17 and as an economist I would anticipate that the 18 coal-fired generation would be at whatever the cap is, 19 regardless of whether the interconnection itself is 20 built. 21 MR. KLIPPENSTEIN: That's a great deal of 22 speculation and we are just trying to get an analysis 23 from you of the projected decrease in gas-fired new 24 construction. In other words, that's all we want. Can 25 you do that for us? 26 --- Pause 27 MR. KLEIN: It essentially means new model 28 runs in order to do it. I mean, it's not something we 290 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 can certainly get with ease from the model that we have 2 set up. It's simply not calibrated to do that type of 3 analysis. 4 MR. KLIPPENSTEIN: It sounds like it's doable, 5 but not extremely difficult and -- 6 MR. KLEIN: No, it is. It would take -- this 7 is not something that we could do in less than, you 8 know, three or four weeks. 9 MR. KLIPPENSTEIN: I would hope you could 10 manage it in less time than that. I think the effect of 11 this line on new gas-fired construction and on the 12 emissions is a significant issue in this -- as part of 13 this line. So I am suggesting it is fair and reasonable 14 that you do it and I am asking you to do it. Would you 15 be so kind? 16 MS ALDRED: May I address that for a minute? 17 A few minutes ago, Mr. Klippenstein asked for 18 an undertaking and he asked my expert if it was doable. 19 And he was quite quick to say that it was not too much 20 work and on that basis, or partially on that basis at 21 least, we are going to undertake that work. 22 Now, he has asked the expert: Can you do 23 this? And the expert says it is a major undertaking. I 24 can't do it for three or four weeks. 25 It sounds to me as though the underlying 26 assumptions are complex, that they are going to take a 27 lot of thought, and I would submit that it is not a 28 reasonable request as an undertaking in part of this 291 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 process. 2 THE PRESIDING MEMBER: Mr. Klippenstein, is 3 there something that the witnesses can give you that is 4 less than a full rerun of the model? Can you make some 5 sort of assumptions as far as the merchant generation 6 increase is concerned on the solutions? Or, 7 alternatively, can you argue the principle in general 8 rather than having the specific numbers? 9 MR. KLIPPENSTEIN: Well, it just seems, Madam 10 Chair, with respect to my friends that it's a little 11 ironic that they are prepared to submit the evidence 12 with respect to the economic benefits and not prepared 13 to have the evidence prepared for the other half of the 14 picture about the effects and the public health risks 15 and so forth. 16 It's just not reasonable or fair in my 17 respectful submission. It's something that should be 18 part of the picture from the beginning. It seems rather 19 obvious to me, and they have done it before and I can't 20 in good conscience say they shouldn't do it now. So I'm 21 in your hands on this one. 22 THE PRESIDING MEMBER: Gentlemen, can you 23 suggest a compromise to this logjam? 24 --- Pause 25 MR. KLEIN: I guess, Madam Chair, the problem 26 is that, as I indicated in my direct evidence, the focus 27 of our analysis was on making sure that we were able to 28 isolate the impact of the tie and estimate the decrease 292 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 in market prices as a result of the tie. 2 We did not enter into any endeavours to ensure 3 that the model was attempting to forecast market prices 4 that merchant entrants in the market would respond to. 5 In fact, I think I stated earlier that the market prices 6 that come out of this model because of all the 7 assumptions about perfect markets and expected load and 8 not modelling the possibility of heat waves or those 9 kinds of things, are not the same types of decisions 10 that a merchant entrant makes. 11 And in fact, we have 1,500 megawatts of 12 merchant entry in the model which we have put in to try 13 to -- because that seems like what market participants 14 are doing. But right now the model just is not 15 calibrated to estimate the amount of merchant entry in 16 response to market prices. So therefore it is hard to 17 measure the change. 18 In addition, we are taking about future years 19 that we didn't model at all because we were looking 20 simply at 2005 where the market was -- where the impact 21 of the tie was definitive. So in order to model the 22 decrease in future years of gas-fired generation, we 23 would have to first off calibrate the model to somehow 24 make assumptions about what market prices will be in an 25 absolute level rather than just the change and then 26 model future years and then see the impact of the tie on 27 that. 28 So I'm just having a hard time thinking 293 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 through exactly how I would respond in a way that 2 Mr. Klippenstein would be satisfied with. 3 MR. KLIPPENSTEIN: Madam Chair -- 4 MR. ROTHMAN: Can I just say though, as a 5 result of that, that we can give you an absolute 6 statement that the maximum is 1,500 megawatts because 7 that is how much that goes in. The maximum impact would 8 be 1,500 megawatts. We would expect that if we went 9 modelling it, it would be somewhat less than that. But 10 it can't be any more than that because we don't have any 11 more than that going in in the model. 12 MR. KLIPPENSTEIN: Maybe we can leave it at 13 that then, Madam Chair. 14 THE PRESIDING MEMBER: Is that satisfactory 15 for your purposes then, Mr. Klippenstein? 16 MR. KLIPPENSTEIN: It's not satisfactory, but 17 we will do what we can with that. 18 THE PRESIDING MEMBER: I understand. You will 19 accept it under these circumstances? 20 MR. KLIPPENSTEIN: Yes. 21 THE PRESIDING MEMBER: Thank you. 22 Continue. 23 MR. KLIPPENSTEIN: I must say it was nice to 24 have the witness describing the limitations of his 25 model. I thought that was my job. 26 THE PRESIDING MEMBER: Thank you. 27 Any more questions, Mr. Klippenstein. 28 MR. KLIPPENSTEIN: That is it for me, and 294 HYDRO ONE NETWORKS PANEL 2, ex (Klippenstein) 1 thank you, Madam Chair and members of the panel. 2 Thank you witnesses for your patience. 3 THE PRESIDING MEMBER: Thank you very much. 4 Mr. Greenspoon. 5 MR. GREENSPOON: Thank you. 6 THE PRESIDING MEMBER: We are wide awake, 7 bright-eyed, bushy-tailed? 8 MR. GREENSPOON: Oh, yes, wide awake. 9 THE PRESIDING MEMBER: Anxious to hear your 10 questions. 11 MR. GREENSPOON: Thank you, Madam Chair. 12 I didn't mean to imply that the panel wouldn't 13 be. I got squeezed at my last OEB hearing on the rates 14 at five o'clock and only had 20 minutes and a witness 15 from Colorado who was missing a plane. So I didn't want 16 to be in that situation. 17 THE PRESIDING MEMBER: We don't want you 18 squeezed, Mr. Greenspoon, and if we are any less awake 19 at the end, then it's your own fault. 20 MR. GREENSPOON: Well, I will try to be quick. 21 Yes, you are right, Madam Chair. 22 EXAMINATION 23 MR. GREENSPOON: Perhaps just following up on, 24 and not to belabour the issue of gas turbines, if we 25 were in the old regime -- and maybe Mr. Rothman could 26 answer this best -- where Hydro was what it once was, 27 that is a generator and a transmitter, if you were going 28 to spend -- if you were the Chairman of Hydro and you 295 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 were going to spend $100 million, keeping in mind the 2 purposes of the Ontario Energy Board Act, and the 3 Electricity Act, with respect to economic efficiency, 4 environment, the market, all of those -- you have read 5 those Acts, I take it, the preambles which are very 6 similar in both acts, would you build combined cycle or 7 would you build this line? And just let me pinpoint, 8 putting the combined cycle in places close to load where 9 gas was available. 10 MR. ROTHMAN: Let me answer first as a member 11 of the Market Design Committee. 12 It was the market -- maybe I can't answer for 13 all the Market Design Committee, though, there is one 14 other member here. It was the Market Design Committee's 15 intent that the increase in interconnection capacity 16 acts against the interest of Ontario Power Generation 17 Incorporated, that it mitigates their market powers, 18 that it reduces their ability to keep prices high and 19 that it increases competition in the Ontario market. 20 So if the question is: if I were the Chairman 21 of the old integrated Ontario Hydro, would I want this 22 line? I think my answer is -- the quick answer to that 23 on the basis of that reasoning is no. But I couldn't 24 give a carefully reasoned answer without thinking more 25 carefully about all of the kinds of system planning 26 issues that a Chairman or President of the old Ontario 27 Hydro would have to consider. 28 MR. GREENSPOON: Okay, I hear you there and 296 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 let's -- it's not -- let's just change the question for 2 a moment that you are not the Chair of OPG, but you are 3 some omnipotent person who can perhaps let other 4 companies build these one megawatt generators. Would 5 you rather build these one megawatt -- assuming that the 6 price is not the issue. 7 MR. KLEIN: If I could just respond? 8 MR. GREENSPOON: Sure. 9 MR. KLEIN: And forgive me for disagreeing 10 with the premise. 11 The reason that markets in New England and New 12 York and PJM and Ontario and California, and all the 13 problems that they have had, have moved to competitive 14 markets is to have these decisions in the marketplace 15 and in the hands of market participants to make and not 16 to have them on the burden of ratepayers and being made 17 an essentially planned mechanism. 18 Hydro Quebec, on behalf of its shareholders, 19 wants to pay to build this interconnection and they 20 believe that they will make money doing it and it will 21 provide benefit to Ontario consumers. That is the 22 promise of competition in all of these markets, is to 23 take that decision out of the hands of central planners 24 and put it in the marketplace and let the market decide, 25 given appropriate pollution regulations that are decided 26 in an appropriate regulatory forum, what the right 27 answer is. 28 And if market participants want to build this 297 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 tie, they build the tie and it reduces prices or if 2 instead they build merchant power plants, that's what 3 they will build. And if they do both, they will do 4 both, or if they do neither. But that decision is in 5 the hands of the market and that is the benefit of 6 competition, at least as I see it going forward. 7 MR. GREENSPOON: Thank you. 8 Perhaps that will be a matter I will leave for 9 argument, Madam Chair. 10 THE PRESIDING MEMBER: Thank you, 11 Mr. Greenspoon. 12 MR. GREENSPOON: Did your model look at all at 13 water levels in the Great Lakes in the future? Did it 14 take that into account with respect to hydraulic 15 generation in Ontario? 16 MR. KLEIN: No. 17 MR. GREENSPOON: Did your model take into 18 account any issues of climate change? 19 MR. KLEIN: No. 20 MR. GREENSPOON: Pardon me? 21 MR. KLEIN: No, it did not. 22 MR. GREENSPOON: Now, if you look at -- 23 MR. ROTHMAN: Excuse me, just one second. 24 --- Pause 25 MR. KLEIN: Mitch is just letting me know that 26 we did review the assumptions about the Hydro 27 Generation -- the OPG generation we obtained, working 28 with Hydro One staff, who are very familiar with that, 298 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 in looking at how to model the amount of energy that 2 will be available from those dams. And to the extent 3 that that energy takes into account issues with respect 4 to water levels, then it would have been incorporated. 5 MR. GREENSPOON: Yes, but your model didn't 6 take into account those issues specifically. 7 MR. KLEIN: Not in any dynamic sense other 8 than what information would have been provided to us 9 about the Hydro Generation by Hydro One staff. 10 MR. GREENSPOON: All right. 11 So if we look at -- and Hydro One staff, I 12 take it, not to belabour the point about the fossil in 13 northwestern Ontario, but they certainly didn't want to 14 give us any answers about that. So I would assume that 15 they are not to give reliable answers with respect to 16 OPG hydraulic matters as well. Anyway, that is maybe 17 not a fair comment. 18 If we could look at Exhibit C, Tab 3, 19 Schedule 4, page 2 of 2, that is Pollution Probe's chart 20 that Mr. Klippenstein used earlier. That is the chart 21 that shows the 2005 MAPS run with and without the 22 interconnect. Do you have that? 23 MR. KLEIN: Yes. 24 MR. GREENSPOON: There are 35,000 -- if you 25 look under the gigawatt hours of generation, hydro, 26 that's hydraulic, 35,900. 27 MR. KLEIN: Yes. 28 MR. GREENSPOON: All right. Would it be fair, 299 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 for the purposes of this question anyway, Mr. Rothman, 2 that about half of that is in northern Ontario, to the 3 best of your recollection? 4 MR. ROTHMAN: That is not one that is off the 5 top of my head. 6 MR. GREENSPOON: Okay. Well, if we look at 7 the map behind you, the big line, the 500 kilovolt line 8 that goes up to James Bay, that is hydraulic. That goes 9 up to James Bay because there is hydraulic power in 10 James Bay. 11 There is not a lot of load in James Bay? 12 MR. ROTHMAN: That's correct, yes. 13 MR. GREENSPOON: And you remember that we have 14 a lot of hydraulic on the Moose River. Do you remember 15 all of that, Mr. Rothman? 16 MR. ROTHMAN: Yes. 17 MR. GREENSPOON: All right. So just for 18 argument sake, there is a lot of megawatts -- a lot of 19 gigawatts coming from northern Ontario? 20 MR. ROTHMAN: Yes. 21 MR. GREENSPOON: Hydraulic gigawatts. 22 MR. ROTHMAN: There are hydraulic gigawatts 23 coming from northern Ontario, yes. 24 MR. GREENSPOON: All right. And we learned 25 yesterday that this interconnect could have impacts on 26 that north-south line. That was the evidence that Hydro 27 One gave, that there could be impacts from this 28 interconnect on the flow on the north-south line from 300 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 Timmins to Toronto. 2 MR. ROTHMAN: I wasn't aware of what those 3 impacts might be, but -- 4 MR. GREENSPOON: Well, did you take those -- 5 that's my question. Are you aware of those impacts, and 6 did you take -- did you look at the impacts that this 7 interconnect might have on the power that goes north and 8 south? 9 MR KLEIN: We certainly have the north-south 10 interface in the model. And the GE-MAPS model takes 11 into account the internal Ontario transmission 12 interfaces, the important ones, including the Queenstown 13 flow west, the imports with Michigan, the north-south 14 interface, the east-west interface. And to the extent 15 that the interconnection then changes the dynamic, in 16 terms of how power flows on the system, the model would 17 implicitly take that into account. 18 MR. GREENSPOON: All right. So if we have 19 lower water levels on the Great Lakes and then 20 presumably a lowering of the capacity of hydraulic in 21 Ontario, did your model look at how that might increase, 22 for example, the burning of coal at Atikokan and Thunder 23 Bay for northern Ontario? 24 MR KLEIN: I don't follow the question. 25 MR. ROTHMAN: No, we didn't. What you are 26 suggesting is that if there is less hydraulic available 27 than is modelled in southern Ontario did we look at the 28 impact that that would have on fossil generation in 301 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 northern Ontario. 2 MR. GREENSPOON: Yes. 3 MR. ROTHMAN: The answer to that is no. We 4 only looked at the level of hydraulic generation that we 5 had in our basic assumption. 6 MR. GREENSPOON: I take it that -- I 7 understand that TransEnergie does not have an open 8 access market. Is that correct? 9 In other words, it is not like Ontario will 10 be. Is that your understanding? 11 MR. ROTHMAN: Well, there is a TransEnergie 12 witness coming on the next panel. I think you might 13 best ask that question of him. 14 MR. GREENSPOON: Okay. So you are not aware 15 of that? 16 MR. ROTHMAN: I am not aware of what? 17 MR. GREENSPOON: Whether there is open access 18 in Quebec or not? 19 DR. PORAY: Perhaps I can mention there is 20 wholesale access on the Quebec system, and Hydro Quebec 21 has filed -- or TransEnergie has filed an open access 22 transmission tariff. 23 MR. GREENSPOON: But there isn't open access, 24 per se, as there will be here. 25 DR. PORAY: There is wholesale open access 26 today in Quebec. 27 MR. GREENSPOON: All right. 28 Now one of the -- the low-cost supply from 302 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 Quebec may, as you indicated in your last response to 2 Mr. Klippenstein, may discourage more efficient 3 generation in Ontario. In fact, you think it will 4 totally discourage it. 5 MR. ROTHMAN: I didn't say that at all. 6 MR. GREENSPOON: Oh, okay. What did say 7 about -- I thought that was your answer about merchant 8 generation. 9 MR. ROTHMAN: I said that if it does 10 discourage it, it can't discourage more than there is. 11 MR. GREENSPOON: Yes. But your model says 12 there won't be any. 13 MR. ROTHMAN: No. The model that we have used 14 here has 1,500 megawatts in it. 15 MR. GREENSPOON: Prior to 2005. 16 MR. ROTHMAN: Yes. 17 MR. GREENSPOON: Okay. So from 2005 to 2012, 18 you say there will be none? 19 MR. ROTHMAN: We didn't do that analysis. 20 MR. GREENSPOON: You didn't do that analysis. 21 All right. 22 Does your model ever take into account the 23 possibility of a major outage of a nuclear reactor, for 24 example Darlington? 25 MR. KLEIN: The model does take into account 26 forced outages and maintenance scheduling on the units. 27 And I think, as we indicated in one of the 28 interrogatories to OEB staff we made assumptions about 303 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 the Bruce A units, but we didn't model a number of 2 different scenarios, for instance, a major nuclear 3 outage. 4 MR. GREENSPOON: So you relied on OPG's data 5 through Hydro One? 6 MR KLEIN: I don't know -- I don't think we 7 did that. But I think we just used GADS assumptions 8 about outage rates on nuclear units. 9 MR. GREENSPOON: So no major outages. Routine 10 maintenance. 11 MR KLEIN: That's right. And, by the way, to 12 the extent that something like that may occur we would 13 expect prices to be higher in Ontario and therefore the 14 benefits of the tie to be that much greater. I mean, it 15 is exactly, as I stated earlier, the moderating impact 16 on price volatility that might come from such an event 17 which is one of the major benefits of this tie, this 18 interconnection. 19 MR. GREENSPOON: Now, in the latest numbers -- 20 I'm sorry. 21 --- Pause 22 MR. GREENSPOON: Did you have anything to add, 23 Mr. Rothman? 24 MR. ROTHMAN: No. 25 MR. GREENSPOON: The latest numbers from Hydro 26 One are down. Is that your understanding, that revenue 27 is down, I understand, because it was a cold summer? 28 Are you aware of that? Dr. Poray, is that 304 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 true? 2 DR. PORAY: Yes, I think we published 3 nine-month figures for 1999. I'm sorry, for 2000. 4 MR. GREENSPOON: And the revenue is down 5 because, as your chairperson, Madam Clitheroe, said, it 6 was cold -- I heard her on the radio, I think -- 7 DR. PORAY: There were weather effects for 8 reduced revenues, yes. 9 MR. GREENSPOON: All right. So does the model 10 take that into account, that again, with climate change, 11 we have colder summers, will that have any impact on 12 this interconnect? 13 MR KLEIN: I thought the theory was that 14 climate change might result in more extreme weather 15 volatility. 16 But in any case, we only ran the one 17 sensitivity, which was a base-case year to try to 18 isolate the impacts of the tie. 19 MR. GREENSPOON: Dr. Poray, one of the issues 20 that came up yesterday was that the HVAC is actually in 21 Quebec. 22 DR. PORAY: You mean the high voltage 23 back-to-back station? 24 MR. GREENSPOON: Yes. Is that correct? 25 DR. PORAY: That is my understanding. 26 MR. GREENSPOON: I understand that that would 27 mean that ownership and control of the HVAC is with the 28 Province of Quebec. 305 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 DR. PORAY: It will be operated by 2 TransEnergie, yes. 3 MR. GREENSPOON: Is that of any concern to 4 Hydro One, that they don't have control of that? 5 DR. PORAY: I think Dr. Macedo answered those 6 questions yesterday. 7 MR. GREENSPOON: What is your understanding? 8 DR. PORAY: My understanding is that 9 TransEnergie operates the high-voltage DC scheme much in 10 the same way it operates the other high-voltage DC 11 schemes that it has on its system. 12 MR. GREENSPOON: Okay. But if that fails, we 13 have no control over the interconnect. 14 DR. PORAY: We have no control over whatever 15 equipment fails in Hydro Quebec, New York or Michigan. 16 MR. GREENSPOON: Yes, but the whole 17 interconnect fails if that equipment fails. Hydro One 18 has no control over that HVAC. 19 DR. PORAY: Well, I think I will have to refer 20 to the answers that Dr. Macedo gave yesterday concerning 21 the reliability of that scheme. 22 MR. GREENSPOON: And the HVAC is the key. 23 Without the HVAC the interconnect doesn't work. 24 DR. PORAY: It has to be a back-to-back 25 scheme, yes. 26 MR. GREENSPOON: Right. 27 Now, this -- Mr. Rothman, perhaps you could 28 help me with this. 306 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 Is a model -- at some point a model becomes a 2 forecaster. Is that right? Is that fair? It is a 3 model at first but then you put stuff in, you put 4 numbers in that really are from forecasting. 5 MR. ROTHMAN: Any model, whether it's a model 6 like this production cost model or a macroeconomic 7 forecasting model is really nothing more than a way of 8 telling you what the implications of your assumptions 9 are under the conditions as represented by the model. 10 So in that sense, any model, whether it is 11 retrospective or prospective is a forecast. That is, it 12 tells you what -- it tells you what will happen in the 13 real world if the real world interactions are as they 14 are represented in the model, if the input assumptions, 15 the things that drive the model, are as they are in your 16 assumptions to the model. Then you will get a set of 17 results that will represent the real world. And in that 18 sense it is a forecast, because usually you are looking 19 forward so usually the assumptions that you put into the 20 model are assumptions about events in the future. 21 So, yes, it does turn into a forecast, but any 22 modelling exercise is a forecast in that sense. 23 MR. GREENSPOON: Yes. And forecasts have a 24 certain degree of unreliability. 25 MR. ROTHMAN: For exactly the reasons that I 26 just said -- 27 MR. GREENSPOON: Yes. 28 MR. ROTHMAN: -- because all of these -- they 307 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 are accurate only insofar as all of the assumptions that 2 I just said are accurate, accurate in an ex post sense. 3 MR. GREENSPOON: And we are in a very 4 volatile -- not volatile, because that is maybe not the 5 right word to use because it is a term of art, but 6 forgetting the term of art definition of "volatile" that 7 Mr. Klein used, it is a volatile thing in the pedestrian 8 way of using the word, is it not, a forecast, and the 9 climate that we are in, the economic climate? 10 MR. ROTHMAN: Sure. 11 MR. GREENSPOON: Okay. And not to point any 12 fingers, but Hydro, in the old days, did make some bad 13 forecasting. 14 --- Laughter 15 MR. GREENSPOON: And that was your department? 16 --- Laughter 17 MR. GREENSPOON: Just to remind you. 18 MR. ROTHMAN: Not to point any fingers, 19 Mr. Greenspoon. 20 --- Laughter 21 MR. GREENSPOON: Wait a minute now. Let me 22 just give you the two examples that I wanted you to 23 confirm. 24 In the 1970s, Hydro said we would need 60,000 25 megawatts by the 1990s. That was your department. 26 MR. ROTHMAN: Not then it wasn't. 27 --- Laughter 28 MR. GREENSPOON: All right. But they did say 308 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 that and you were in that department? 2 MR. ROTHMAN: No. 3 MR. GREENSPOON: Oh, you weren't. You don't 4 claim any responsibility for that projection? 5 MR. ROTHMAN: Not for that one. 6 MR. GREENSPOON: All right. What about the 7 LUEC of Darlington? 8 MR. ROTHMAN: Well, again, that wasn't my 9 prediction. 10 MR. GREENSPOON: All right, all right. Well, 11 let's leave it. 12 You will admit, though, that there have been 13 some bad forecasts, inaccurate forecasts. 14 MR. ROTHMAN: Again, in some senses it's an 15 unfair exercise to go back and say we made bad forecasts 16 because the world didn't turn out the way that your 17 forecast said. 18 And, as I guess everybody knows, that I was, 19 for quite some time responsible for load and economic 20 forecasts at the former Ontario Hydro and some of those 21 forecasts turned out not to be -- not to have been 22 accurate ex post. And you have to ask -- and several 23 people have made statements about, you know, "You are 24 responsible for Ontario Hydro making a whole bunch of 25 bad decisions." Well, I don't want to belabour it here 26 and I don't think it's relevant, the process of Ontario 27 Hydro decision-making in how forecasts were or were not 28 used. 309 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 The point, I think, is: Should we trust point 2 forecasts? The answer is no. 3 In making a forecast, if you are looking at a 4 price forecast or a load forecast or an economic 5 forecast, are you better served by recognizing that 6 there are going to be errors in the forecasts and that 7 there is uncertainty in the forecast, the answer is yes. 8 If you are doing planning, should you 9 recognize that uncertainty? The answer is yes. That 10 answer is what I have said for all the time that I was 11 at Ontario Hydro as well. 12 In this case, for those reasons, we are not 13 trying to make a price forecast. What we are trying to 14 do, and what we have tried to do with this modelling 15 process, is forecast a price differential. And that 16 requires, for accuracy, a much less restricted set of 17 assumptions -- I'm sorry, a much more restricted set of 18 assumptions to be correct than the forecast itself. 19 All we have to do is to be able to model not 20 the price itself but factors that will change, and all 21 we have to get right are the changes, not the level. 22 That is somewhat easier than getting the level, as 23 Mr. Greenspoon has so kindly pointed out. 24 MR. GREENSPOON: Now, with respect to the 25 model, it has taken into account open access, I take it. 26 It is premised on open access -- 27 MR. ROTHMAN: Yes. 28 MR. GREENSPOON: -- even though we don't have 310 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 that yet. 2 So you didn't model without open access. 3 MR. ROTHMAN: No. 4 MR. GREENSPOON: And we don't know all the 5 rules of open access at this time, do we? 6 MR. ROTHMAN: You mean in Ontario? 7 MR. GREENSPOON: Yes. 8 MR. ROTHMAN: No, they are still in -- 9 MR. GREENSPOON: Still being worked out. 10 We know most of them. 11 MR. ROTHMAN: I think we have a very good 12 sense of what the Ontario market is going to look like 13 even though some of the details of the market rules are 14 still being worked out. 15 MR. GREENSPOON: But it's fair to say, going 16 back to our last discussion about the forecast -- and I 17 am almost done, Madam Chair -- going back to our last 18 discussion about the forecasting, this is another 19 uncertainty, that is that we don't yet have open access 20 and the model is based on open access. 21 MR. ROTHMAN: Yes. Relative to others I think 22 it's small, but yes. 23 MR. GREENSPOON: Right. But it is another 24 forecasting uncertainty. 25 MR. ROTHMAN: Sure. 26 MR. GREENSPOON: And just a couple of more 27 questions. 28 If we brought this in, if we waited until open 311 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 access, what would be the down side? In other words, if 2 we waited to see how open access evolves, how it begins, 3 how the marketplace deals with open access and then we 4 decide on the interconnect, what would be wrong with 5 that? 6 MR. ROTHMAN: Well, the whole purpose of the 7 interconnect, as I said before, the whole purpose of the 8 Ontario Hydro Services Company, as it then was, and of 9 Hydro One's undertaking to increase the interconnection 10 was to mitigate the market power of the generators. The 11 market power occurs and can be wielded as soon as the 12 market opens. So that if the purpose is to mitigate 13 market power, then that mitigation device and that 14 mitigation mechanism has to be in place at the time that 15 the market opened or the generators can exercise market 16 power until it does. 17 And under the Market Power and Mitigation 18 Agreement they are obliged to be divesting themselves of 19 market power over the course of the market, so that one 20 would hope that some of these other mechanisms that were 21 available when the market opened in order not to let 22 them exercise untrammelled market power when it does 23 open. 24 MR. GREENSPOON: Presumably, though, this 25 $96 million construction can be done next year just as 26 easily as it can be done this year, and likewise the 27 year after, and will yield the same savings if those 28 savings are in fact true. 312 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 MR. KLEIN: Right. But one of the -- we used 2 a set of assumptions to try to estimate a conservative 3 expected benefit of the tie, of the interconnection. 4 One could easily posit a set of circumstances 5 like as occurred in California where no one expected 6 what would happen this summer, like as occurred in 7 eastern New York, where if you were to have asked the 8 regulators, you know, after the fact: Do you wish you 9 had an extra 1,250 megawatts in this market where there 10 is this tremendous price volatility and price spikes? 11 Do you wish you had made some decisions that would allow 12 you to do that? 13 And I'm sure all the regulators in those 14 markets, you know, would have said, "Given an 15 appropriate process, yes, we would like that power in 16 place as soon as possible in order to moderate, to 17 increase the competition in the market and to provide 18 benefits for consumers and to moderate this price 19 volatility." 20 So all of the uncertainties -- in my view, all 21 of the uncertainties about prices in this market argue 22 for allowing Hydro Quebec to construct this 23 interconnection. 24 MR. GREENSPOON: Just one last question then: 25 How do you answer -- and this may be somewhat 26 rhetorical, but how do you answer the question, the old 27 saw that says, "If it sounds too good to be true, it 28 probably isn't true." 313 HYDRO ONE NETWORKS PANEL 2, ex (Greenspoon) 1 What do you say about that? I mean, 2 $96 million to make $250 million in the first year? 3 MR. KLEIN: I guess I would respond that 4 $250 million is not a big number when you consider it's 5 spread among all the consumers in Ontario. It is a 6 5 per cent drop in wholesale market prices. 7 I think recently the New York Market Monitor 8 did a study where they estimated the impact of the loss 9 of 950 megawatt unit and attributed 20 per cent of the 10 increases in market prices from 1999 to 2000 to the loss 11 of this one 930 megawatt unit for the summer of 2000. 12 So, in my view, this is not -- this amount of 13 impact, the U.S. dollar per megawatt hour and wholesale 14 market prices is not a surprising impact in terms of the 15 decrease in market prices as a result of being able to 16 have the additional capacity. 17 MR. GREENSPOON: Thank you, panel. 18 Those are all my questions. 19 Thank you, Madam Chair. 20 THE PRESIDING MEMBER: Thank you, 21 Mr. Greenspoon. 22 Mr. Budd, I think you reserved the right to 23 ask a couple of questions. 24 Are you going to exercise that right? 25 MR. BUDD: But I'm sure you and the Board 26 members will be happy to know I don't think I will add 27 anything, so I will just refrain. 28 Thank you. 314 HYDRO ONE NETWORKS PANEL 2 1 THE PRESIDING MEMBER: You don't think you 2 will add anything? That's the right response, Mr. Budd. 3 --- Laughter 4 THE PRESIDING MEMBER: Mr. Birchenough? 5 EXAMINATION 6 MEMBER BIRCHENOUGH: Mr. Klein, you have 7 mentioned a number of times that in your modelling you 8 didn't model the Hydro Quebec system at all, but rather 9 regarded it as a single point input to Ontario. 10 I am just wondering looking ahead, and I am 11 not asking you do to a new analysis, but if Quebec were 12 to follow the route that Ontario is at some time in the 13 future, and in fact break up the monopoly of 14 Hydro Quebec and create generating companies, 15 transmission companies, what impact -- and I am not 16 asking for detailed answers, of course -- in general 17 could you forecast, understanding that forecasts aren't 18 always accurate, what the impact of such a scenario 19 would be on the Ontario consumer? Just in general 20 terms. 21 MR. KLEIN: It's a very good question. 22 Well, I think that to the extent that the 23 generation supply is unbundled within Hydro Quebec and 24 sold off to market -- various market participants -- 25 that that supply would want to seek out the highest 26 market prices in U.S. markets or in Ontario and as a 27 result of that, markets -- and you still have the 28 situation where during the summer you basically have 315 HYDRO ONE NETWORKS PANEL 2 1 36,000 megawatts of capacity in only a 20,000 megawatt 2 peak, with all of the capacity essentially Hydro storage 3 capacity and able to move itself around between time 4 periods. 5 So I would expect you would still have very 6 significant incentive for Hydro Quebec resources to seek 7 out exports to both the U.S. and Ontario, and that 8 whenever the prices are high in those markets, you would 9 see the ties fully utilized during peak periods, in both 10 Ontario and the U.S. 11 THE PRESIDING MEMBER: Thank you. 12 I just want to follow up. We have been going 13 around in a lot of circles today and I just want to 14 follow up on a couple of things. 15 I guess, Mr. Skalski, I just wanted to confirm 16 with respect to the transmission customers itself, you 17 mentioned that the analysis was similar to the one that 18 has been done for gas and for gas consumption, but in 19 fact it really isn't, is it? You didn't do a discounted 20 cash flow analysis, you didn't do a PI. These things 21 were not taken into account. There is no rolling PI for 22 your portfolio as there is in gas. 23 I'm not saying it's right or wrong, I'm just 24 saying that there are differences in the analysis here. 25 MR. SKALSKI: Actually, no, I think there is 26 greater consistency than you may think, Madam Chair. 27 My reference was not so much to the portfolio 28 approach that is used on the gas side now for a 316 HYDRO ONE NETWORKS PANEL 2 1 distribution system expansion, but more for a project 2 level analysis that has been done in the past for leave 3 to construct applications where a staged methodology was 4 used, similar to the one that we presented here, which 5 incorporates the utility perspective and a consumer 6 perspective and then as well other public interest 7 considerations mainly broader economic impacts. It's 8 exactly the same kind of approach that has been used. 9 Now, you are right, where we differed -- and 10 this is what I tried to bring out in my direct evidence 11 today -- was rather than a discounted cash flow being 12 presented for the utility impact, we presented the rate 13 impacts because we thought that was more informative 14 because by definition we have got a negative net present 15 value here and so we -- 16 THE PRESIDING MEMBER: I understand. This 17 project taken on its own, in total isolation, is going 18 to have a negative impact on transmission customers in 19 the province. 20 MR. SKALSKI: Yes. 21 THE PRESIDING MEMBER: Okay. That's fine. 22 So therefore we have to go outside the impact 23 on the transmission customers themselves to look at 24 other possible favourable impacts on consumers generally 25 in the province. 26 MR. SKALSKI: Yes, that's correct. 27 THE PRESIDING MEMBER: Okay. I understand 28 that. 317 HYDRO ONE NETWORKS PANEL 2 1 Now if I look at the table in the pre-filed 2 evidence, that is the Figure 3.2, page 5, the Economic 3 Assessment or Proposed Expansion, the Hagler and Bailly 4 table. I am looking at Exhibit B, Tab -- I'm sorry, I 5 don't have -- 6 --- Pause 7 THE PRESIDING MEMBER: Tab 4, Schedule 3. 8 --- Pause 9 THE PRESIDING MEMBER: I'm sorry, it's page 5, 10 thank you. It's the famous little table that says the 11 hourly price differentials and simulated electricity 12 prices in Ontario. 13 MR. KLEIN: Figure 3.2? 14 THE PRESIDING MEMBER: Yes, that's correct. 15 So we are going outside transmission customers 16 alone to look at the impact and this is where we get our 17 $240 million net. Okay. 18 To follow through, just so that I understand, 19 and I am going to use peak prices as the same as the 20 high prices because I know that the high prices aren't 21 necessarily at the peak, but there is a relation between 22 the two so -- 23 MR. KLEIN: That's fine. 24 THE PRESIDING MEMBER: So we know that at the 25 far right side there is going to be an increase to 26 consumers in Ontario because of the banking, the model 27 banking to the export of electricity to Quebec, probably 28 during a non-peak time. 318 HYDRO ONE NETWORKS PANEL 2 1 So there would be that, and that is the area 2 to the blue that is below the straight line. So that is 3 going to be the net cost -- the blue area because it's 4 the differential between -- it's the area in essence. 5 MR. KLEIN: Right. 6 THE PRESIDING MEMBER: Okay. And then we go 7 further, as we head further there is no differential 8 cost as we go straight along heading sort of towards the 9 left side of that graph. Then we get to what looks 10 about 11 per cent, and then there is this sharp spike 11 up. Right? So the net value is taking the amount that 12 is below the line of the blue area, under the line, and 13 subtracting it from this area of the sharp peak pike to 14 get your overall net value of the $240 million. Is that 15 correct? 16 MR. KLEIN: Yes. 17 THE PRESIDING MEMBER: So we see therefore 18 that almost all of the advantages in Ontario are in that 19 last 10 per cent. And in fact before we get to that 20 last 10 per cent, there are no advantages in Ontario, 21 there are merely disadvantages because -- in terms of 22 pricing because of his banking? 23 MR. KLEIN: That is correct, but that is in 24 part because we have assumed it that way because we 25 haven't necessarily modelled all the possible 26 opportunities for banking. There could easily be hours 27 in the simulation when prices were high relative to 28 off-peak periods. 319 HYDRO ONE NETWORKS PANEL 2 1 I mean for instance I mentioned we didn't 2 huddle any banking during winter months or there may be 3 other periods when there were somewhat high prices where 4 the model didn't necessarily schedule the inner 5 connection to come in in those hours. So I wouldn't say 6 that there are no other opportunities for there to be a 7 differential between on-peak and off-peak prices where 8 it would be profitable to utilize the interconnection. 9 THE PRESIDING MEMBER: I appreciate that, but 10 Mr. Klein, it's your model that you -- 11 MR. KLEIN: Right. That's right. I agree 12 that the way we have modelled it, the benefits are in 13 the top 10 per cent. 14 THE PRESIDING MEMBER: Okay. So and 15 therefore, and as I understand your model, there were a 16 number of assumptions that were made and one of the 17 assumptions that was made was that there was going to be 18 no price cap. 19 MR. KLEIN: Yes, we did not model -- 20 THE PRESIDING MEMBER: So in fact, we have got 21 up to $150 a megawatt hour on this graph -- 22 MR. KLEIN: Right. 23 THE PRESIDING MEMBER: -- that has been 24 modelled in. And what is the current price? 25 MR. KLEIN: Well, this is actually difference 26 in price of $150 -- 27 THE PRESIDING MEMBER: So we are assuming an 28 increase. 320 HYDRO ONE NETWORKS PANEL 2 1 MR. KLEIN: A decrease. 2 THE PRESIDING MEMBER: You are right, you are 3 absolutely right. So we are assuming that the price, 4 according to your model, the price per a megawatt hour 5 can increase up to $150 a megawatt hour. 6 MR. KLEIN: Or decrease because of the 7 interconnection -- or increase, but for the 8 interconnection, depending on how you think about it. 9 THE PRESIDING MEMBER: But, I'm sorry, this is 10 the, as I understand -- 11 MR. KLEIN: These are increase in the benefit, 12 sorry, yes. I'm sorry, go ahead. 13 THE PRESIDING MEMBER: Can you help me again? 14 MR. KLEIN: The $150 is the price differential 15 between the case without the tie, minus the case with 16 the tie. So the $150 -- prices are higher by $150 in 17 say the highest price -- the hour that has the highest 18 price differential between the two cases, by $150 in the 19 case without the interconnection compared to the case 20 with the interconnection. 21 THE PRESIDING MEMBER: Without 22 interconnection. 23 MR. KLEIN: Yes. 24 THE PRESIDING MEMBER: But the benefit to 25 Ontario consumers will only occur if there is this 26 spike? 27 MR. KLEIN: The benefits in the degree that we 28 have estimated will only occur to the extent that there 321 HYDRO ONE NETWORKS PANEL 2 1 is a spike. If prices were purely flat throughout the 2 year and there were no volatility in prices, then Hydro 3 Quebec would not presumably want to build the tie and 4 there wouldn't be benefits. 5 THE PRESIDING MEMBER: That's quite a spike of 6 $150 a megawatt. 7 DR. PORAY: Can I just help a little bit here? 8 I think what this is, this is a summary of the 9 results. This doesn't actually represent the spike in 10 the prices. This is just a summary of the results 11 produced by the model which indicate, in terms of the 12 percentage the number of hours at which the price 13 differential between the case -- 14 THE PRESIDING MEMBER: With and without. 15 DR. PORAY: -- without the interconnection and 16 with the interconnection would be $150, $125, $100, and 17 so on, until you get to the point that there is no price 18 differential. 19 So this is a summary of all the hours where 20 there is a price differential, with a maximum 21 differential being $150 per megawatt hour. 22 MR. ROTHMAN: Madam Chair, if you are looking 23 for the level of this price spike, then if you look at 24 Exhibit C, Tab 1, Schedule 25, page 3, that table that 25 we were talking about earlier shows that in the model 26 without the Hydro Quebec interconnection, we get a peak 27 price in Ontario of about $800 a megawatt hour. 28 THE PRESIDING MEMBER: Okay. That may be the 322 HYDRO ONE NETWORKS PANEL 2 1 one that I -- 2 MR. ROTHMAN: And with the interconnection we 3 get a price of about $650 a megawatt hour, which is 4 where that $150 differential comes from. 5 THE PRESIDING MEMBER: So that is where you 6 get the $150. Okay. So that is assuming -- your model 7 assumes a potential of $800 a megawatt hour without the 8 interconnect. 9 MR. ROTHMAN: The maximum price. 10 MR. KLEIN: The model produces the price of 11 $800 a megawatt hour without the interconnect. We don't 12 assume that -- 13 THE PRESIDING MEMBER: No, I understand that 14 you haven't put that assumption in, but there are 15 certain assumptions that go in the model that therefore 16 leads -- 17 MR. KLEIN: Right. 18 THE PRESIDING MEMBER: -- and that is one of 19 the outputs. Okay. 20 MR. KLEIN: That's right. 21 THE PRESIDING MEMBER: So one of the outputs 22 is the $800 a megawatt hour that has not been reached 23 anywhere in North America? 24 MR. KLEIN: Not true. 25 MR. ROTHMAN: Not true. 26 THE PRESIDING MEMBER: Oh, okay, it has. 27 MR. KLEIN: There have been price spikes, in 28 fact, just this summer. New England hit prices for four 323 HYDRO ONE NETWORKS PANEL 2 1 hours at $6,000 U.S. per megawatt hour in May. 2 THE PRESIDING MEMBER: This is all very 3 encouraging, Mr. Klein. 4 --- Laughter 5 MR. KLEIN: New York has hit a number of hours 6 and a number of days during the past summer in which 7 prices in eastern New York exceeded $1,000 a megawatt 8 hour prices. PJM in 1999, during the heat wave, had 9 prices of $1,000 -- 10 THE PRESIDING MEMBER: Fair enough, I stand 11 corrected, that there have been circumstances where it 12 actually has existed and it's not merely the output from 13 a model -- 14 MR. KLEIN: Right. In fact, if you look at 15 forward market prices in most of these markets, the 16 market is anticipating price volatility. I mean, if you 17 look at New York forward market prices, or PJM forward 18 market prices, or forward market prices in the ECAR 19 market for next summer, you can only understand the 20 forward market prices as some expectation that there may 21 be these price spikes and that is something that needs 22 to be guarded against. 23 The forward prices are almost uniformly well 24 above $100 per megawatt hour on a 5-by-16, you know, all 25 hours of the summer basis. I can check the precise 26 numbers of what the forward market prices are. 27 THE PRESIDING MEMBER: It doesn't matter, 28 thank you, for the purposes of our analysis right now. 324 HYDRO ONE NETWORKS PANEL 2 1 Now, as I understand it, the parties have 2 raised a number of assumptions that may or may not lead 3 to changes in your model, and I'm sure that they will be 4 raised in argument, such as assumptions regarding 5 additional merchant generation, the net exports to 6 Quebec, the assumptions with respect to price caps, the 7 assumptions with respect to reserves. That would, in 8 some circumstances, decrease the net benefit to Ontario 9 consumers. Is that fair to say? 10 MR. KLEIN: There certainly are circumstances 11 that might decrease the net benefits to Ontario 12 consumers that we have estimated. 13 THE PRESIDING MEMBER: But just according to 14 the model. So we wouldn't have the $240 million, it 15 would be something less. 16 MR. KLEIN: It could be something less or it 17 could be something significantly greater as well. I 18 mean, we didn't model a heat wave in 2005 or the 19 possibility that there is a heat wave. 20 So, I mean, my judgment is that the likelihood 21 of high side impacts on these with respect to these 22 prices is greater than the issues that have been raised 23 with respect to the possibility that the benefits would 24 be lower. 25 THE PRESIDING MEMBER: All right, fair enough. 26 But there are assumptions that you have made that the 27 parties have raised that would -- 28 MR. KLEIN: Yes. 325 HYDRO ONE NETWORKS PANEL 2 1 THE PRESIDING MEMBER: Well, that doesn't mean 2 that it's not still an economically viable project, that 3 just means that it would be less than the $240 million 4 that your model has generated, I guess, is the right 5 word. 6 MR. KLEIN: Right. 7 THE PRESIDING MEMBER: One of the concerns 8 that has been raised deals with, I guess, the issue of 9 wheeling energy through the province. In other words, I 10 think there has been concern that Ontario transmission 11 customers would, in fact, be paying for the cost of the 12 interconnect and would, in fact, not get the benefit 13 from it. 14 In other words, I think I understand what you 15 were saying before that they wouldn't be disadvantaged 16 by the interconnect, because any wheeling going through 17 the province would, in fact, displace exports that would 18 otherwise (off microphone). 19 But can you help me as to the fear that, in 20 fact, as I said, that the capacity -- generation from 21 Quebec would just wheel right through and we would, in 22 fact, be paying -- transmission customers in Ontario 23 would be paying for that -- 24 MR. KLEIN: Right. 25 THE PRESIDING MEMBER: -- without a benefit. 26 MR. KLEIN: Yes. And I think it is a very 27 good question. 28 I didn't mean to imply before that the 326 HYDRO ONE NETWORKS PANEL 2 1 wheeling through transactions would be neutral to 2 Ontario consumers. What I meant to imply is that the 3 benefits that we have estimated would be no different 4 regardless of what type of transaction that Hydro Quebec 5 engages in. 6 Whether they choose to sell into the U.S. 7 market, whether they choose to sell into Ontario is 8 merely a financial artifact. The fundamental market 9 driver is that now there is going to be this new supply 10 on peak in Ottawa, essentially in Ottawa, and it will 11 affect the market prices in Ontario and the dynamics of 12 that market. 13 THE PRESIDING MEMBER: Yes, I understand. I 14 understand that, in fact, the excess capacity -- I'm 15 sorry, the additional intertie capacity will create a 16 more competitive market and that is -- 17 MR. KLEIN: And will lower prices. 18 THE PRESIDING MEMBER: And will lower -- I 19 understand that was part of the -- you see, that is part 20 of what we are all going through is to, you know, limit 21 OPG's market power to create these interties, to create 22 a more open market that will then ultimately lead to 23 lower prices. 24 MR. KLEIN: Right. 25 THE PRESIDING MEMBER: I'm just trying to 26 isolate perhaps that one little bit of the concern about 27 the wheeling through. Not that there won't be advantage 28 to have additional generation on side. 327 HYDRO ONE NETWORKS PANEL 2 1 MR. ROTHMAN: Just quickly, in order for your 2 concern to happen, that is in order for that wheeling 3 through to take place with no benefit to Ontario, it 4 would have occur at a time when there was otherwise no 5 export to Michigan, because if there is already exports 6 to Michigan, that is if the prices in Ontario are 7 already lower than the prices in Michigan before the 8 electricity comes in from Hydro Quebec, then they can 9 only be so if the Michigan intertie is congested. 10 So that only in the circumstance where the 11 price in Michigan and the price in Ontario are the same, 12 but an additional supply from Ontario can go through to 13 Michigan without lowering the price in Ontario, could 14 that happen. 15 MR. KLEIN: I don't even think it would happen 16 in that circumstances. 17 MR. ROTHMAN: he is going to argue that that 18 won't happen. 19 MR. KLEIN: It really makes absolutely no 20 difference what type of transaction you are engaged in, 21 and that is because the IMO market rules and how they 22 are set up. 23 I mean, if you engage in a bilateral 24 transaction with the U.S. and the price in Ontario is 25 $25 and the price in the U.S. is, say, $30, you will 26 sell at $30 but pay $5.00 in congestion costs to the IMO 27 as part of your transaction. So you would get $30 minus 28 $5.00, which is $25, which is no different if you were 328 HYDRO ONE NETWORKS PANEL 2 1 to sell into Ontario. So you have the exact same 2 incentives regardless. 3 Now, the issue was raised by staff earlier: 4 What would happen if Hydro Quebec actually had the 5 beneficial interest from transmission rights between 6 Ontario and the U.S.? What I would argue is, to the 7 extent that there is any incentive in that circumstance, 8 the fact that they own the financial transmission rights 9 would give them a greater incentive to export into the 10 Ontario market so the prices in Ontario are then 11 relatively lower compared to the U.S. and the financial 12 transmission right is worth more. 13 I can think of really no circumstances where 14 somehow Ontario consumers, transmission customers, would 15 pay for this and then be left out of the benefits, 16 because the market rules really don't allow for it, 17 allow for that type of bypass of the spot market. 18 THE PRESIDING MEMBER: But in fact the 19 costs -- based on the transmission decision that the 20 cost of the transmission facility is borne by the 21 transmission customers. 22 MR KLEIN: Who are also wholesale power 23 consumers. And so the benefit -- the way I would 24 estimate it is that the lowering of the wholesale price 25 in Ontario is lowering of the average price to all 26 wholesale customers in Ontario, which is the exact same 27 set as the transmission customers. 28 THE PRESIDING MEMBER: That's fair enough. 329 HYDRO ONE NETWORKS PANEL 2 1 Any other questions? Any re-direct? 2 MS ALDRED: No. 3 THE PRESIDING MEMBER: Okay, thank you very 4 much. 5 The panel is excused with our thanks. 6 It is now 5:25. I guess we have now reached 7 the critical path option. There is Panel 3. We have 8 the option of staying on and listening to the direct 9 evidence of Panel 3, or we have the option of adjourning 10 for today and coming back tomorrow either earlier, or a 11 bit earlier, or at the same time. 12 Our goal is we want to finish the main case 13 tomorrow. So I guess I am in the hands of the parties 14 now as to what you would prefer. The panel is willing 15 to stay on later tonight. We are willing to come in a 16 bit earlier tomorrow, not a lot earlier, because 17 Mr. Greenspoon wants us awake. 18 MR. GREENSPOON: Pardon me! 19 --- Laughter 20 THE PRESIDING MEMBER: Wake up, 21 Mr. Greenspoon. 22 MR. GREENSPOON: Well, since you mentioned my 23 name, I will give you my vote first. I would prefer to 24 come in early tomorrow. 25 THE PRESIDING MEMBER: This may or may not be 26 fair to the parties, I'm sorry. 27 MR. BUDD: For our part, because I will have a 28 witness on as well, Madam Chair, we certainly are ready 330 1 to start earlier tomorrow morning. 2 THE PRESIDING MEMBER: Mr. Thompson, you have 3 got your witnesses coming in. What schedule do they 4 have? 5 MR. THOMPSON: Well, they have to get on and 6 off tomorrow, and I have an arrangement with Hydro One 7 that if we are not finished their panels at the luncheon 8 break that my panel will interrupt and get on and off, 9 and then we would finish up with Hydro One I guess. So 10 all of that I think augers for an early start time 11 tomorrow. We could probably get through the Hydro One 12 before lunch, and then we wouldn't have a problem. 13 THE PRESIDING MEMBER: Does that make sense to 14 you? Mr. Moran, is that satisfactory to you? 15 So, are we talking about starting at 9:00, 16 8:30? 17 MR. BUDD: Eight o'clock. 18 THE PRESIDING MEMBER: Mr. Birchenough is 19 going to be here at 6:00, I think, so he can start with 20 those who are here early! 21 --- Laughter 22 THE PRESIDING MEMBER: Mr. Klippenstein, you 23 have been very quiet. I'm trying to -- 24 MR. KLIPPENSTEIN: Whatever. 25 THE PRESIDING MEMBER: You're easy. Okay. 26 MS ALDRED: Eight-thirty. 27 THE PRESIDING MEMBER: All right. Then we 28 will adjourn for today and start bright-eyed and 331 1 bushy-tailed at 0830 tomorrow morning. And it is up to 2 you to make sure that we get through the third panel and 3 all of the intervenor witnesses tomorrow. 4 Thank you very much. 5 We are adjourned. 6 --- Whereupon the hearing adjourned at 1725, 7 to resume on Friday, November 24, 2000 at 0830 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 332 1 INDEX OF PROCEEDING 2 PAGE 3 Upon resuming at 0931 124 4 Preliminary Matters 124 5 HYDRO ONE NETWORKS PANEL 2 6 SWORN: ANDREW PORAY 129 7 SWORN: ANDREW SKALSKI 129 8 SWORN: ABRAM W. KLEIN 129 9 SWORN: MITCHELL P. ROTHMAN 129 10 Examination by Ms Aldred 129 11 Upon recessing at 1030 162 12 Upon resuming at 1053 162 13 Examination by Mr. Moran 163 14 Upon recessing at 1345 222 15 Upon resuming at 1405 222 16 Examination by Mr. Thompson 224 17 Examination by Mr. Klippenstein 236 18 Upon recessing at 1525 268 19 Upon resuming at 1543 268 20 Examination by Mr. Greenspoon 294 21 Examination by the Board 314 22 Upon adjourning at 725 331 23 24 25 26 27 28 333 1 EXHIBITS 2 NO. DESCRIPTION PAGE 3 4 14.5 Document entitled "Figure 1: 162 5 Ontario Peak Load and Capacity 6 2005" 7 8 14.6 Set of four schematics regarding 162 9 dispatch scenarios 10 11 12 14.7 Table entitled "Single Cycle Gas 162 13 Turbine Profit Profile" 14 15 14.8 Pollution Probe Interrogatory 223 16 No. 4, Supplemental, Exhibit C, 17 Tab 3, Schedule 4-1 18 19 14.9 Document entitled "Comparison 223 20 of costs per kilometre -- 1992 21 project versus the proposed 22 project" 23 24 14.10 Document entitled "Hydro Quebec 223 25 interconnection critical dates" 26 27 28 334 1 UNDERTAKINGS 2 3 NO. DESCRIPTION PAGE 4 5 15.2 Mr. Klein undertakes to provide 241 6 the total dollar figures for 7 the additional costs to Ontario 8 consumers during the banking 9 of energy by Hydro Quebec 10 11 15.3 Mr. Rothman undertakes to provide 281 12 a calculation of the emissions 13 impact or the net change in 14 emissions due to the proposed 15 interconnection for the substances 16 of nitrogen oxide, sulphur dioxide, 17 mercury and carbon dioxide for the 18 year 2005 19 20 21 22 23 24 25 26 27 28