Rep: OEB Doc: 128r3 Rev: 0 ONTARIO ENERGY BOARD Volume: 7 February 28, 2002 BEFORE: M. JACKSON PRESIDING MEMBER G. A. DOMINY VICE CHAIR AND MEMBER P. SOMMERVILLE MEMBER 1 IN THE MATTER OF the Ontario Energy Board Act, 1998; 2 AND IN THE MATTER OF an Application by Union Gas Limited for an order or orders approving the unbundling of certain rates charged by Union Gas Limited for the sale, distribution, transmission and storage of gas. 3 APPEARANCES 4 PAT MORAN Board Counsel CATHY LITT Board Staff OLGA SHPORA Board Staff PATRICIA JACKSON Union Gas Limited MARCEL REGHELINI Union Gas Limited GEORGE VEGH CEED & TCG BARBARA BODNAR Enbridge Consumers Gas ROBERT ROWE Enbridge Consumers Gas ALICK RYDER City of Kitchener MICHAEL JANIGAN VECC JOYCE POON VECC ANDREW TAYLOR WGSPG TIBOR HAYNAL TransCanada Pipelines IAN MONDROW HVAC Coalition ROBERT WARREN Consumers' Association of Canada PETER THOMPSON IGUA MICHELLE FLAHERTY IGUA BRIAN HOWELL IGUA DAVID BROWN Direct Energy Marketing Limited TOM WOODWARD OESC PETER SCULLY Cities of Greater Sudbury and Timmins RANDY AIKEN London Property Management Association GLEN MACDONALD Hydro One Networks 5 TABLE OF CONTENTS 6 PRELIMINARY MATTERS [12] VECC - PANEL 1; Sworn [36] EXAMINATION BY MR. JANIGAN: [37] CROSS-EXAMINATION BY MR. WARREN: [202] CROSS-EXAMINATION BY MR. VEGH: [293] CROSS-EXAMINATION BY MS. FLAHERTY: [422] CROSS-EXAMINATION BY MS. JACKSON: [469] CROSS-EXAMINATION BY MR. MORAN: [697] QUESTIONS FROM THE BOARD: [745] DIRECT ENERGY MARKETING LIMITED - PANEL 1; Sworn [800] EXAMINATION BY MR. BROWN: [801] CROSS-EXAMINATION BY MR. JANIGAN: [893] CROSS-EXAMINATION BY MR. VEGH: [923] CROSS-EXAMINATION BY MS. JACKSON: [936] CROSS-EXAMINATION BY MR. MORAN: [1305] QUESTIONS FROM THE BOARD: [1362] 7 EXHIBITS 8 EXHIBIT NO. F7.1 WRITTEN ANSWER CLARIFICATION OF DR. SCHWINDT'S [28] EXHIBIT NO. D7.1: REPORT OF PROFESSOR TREBILCOCK [805] EXHIBIT NO. D7.2 CURRICULUM VITAE OF PROFESSOR TREBILCOCK [806] EXHIBIT NO. F7.2 EXPERIENCE OF THE COMPETITIVE MARKET (EXCERPTS) [883] EXHIBIT NO. F7.3 PACKAGE OF MATERIALS FOR USE BY MS. JACKSON IN EXAMINATION OF PROFESSOR TREBILCOCK [986] EXHIBIT NO. F7.4 EXCERPT FROM THE MORI STUDY FILED BY UNION GAS LIMITED [1161] 9 UNDERTAKINGS 10 UNDERTAKING NO. G7.1 TO PROVIDE COMPLETE LIST OF OTHER PROVINCIAL DECISIONS [741] 11 --- Upon commencing at 9:40 a.m. 12 PRELIMINARY MATTERS 13 MR. JACKSON: Good morning. Please be seated. 14 Now, the Board has taken a few minutes this morning to look into some timetable issues and availability of hearing rooms and so on, and so let me try to deal with that first, if I may. And then if there are any thoughts that parties have on this, they can address them. 15 We're looking now at having argument in chief on March 13th and having it orally. The estimate is that it would be sufficient to provide the morning for that. And we are looking into hearing rooms. We think we have one available. In fact, I'm told we do, so we'll probably be right here. 16 Reply argument could be just before or just after Easter, and we've been asked by one or two parties to make it just after, so that will be April 2nd. Yes, that's intervenor argument, reply by intervenors to argument in chief, and that's written. And we will have Union's reply April 16th, then. 17 And with respect to arguments that are submitted in writing, we are asking for ten hard copies and one electronic copy in WordPerfect 8 on a best efforts basis, please. Alternatively, in Word. 18 And the last matter of timetabling that I have here is that Mr. Trebilcock will be available at 1:30. So if we finish the evidence of John Todd, we will recommence at 1:30 this afternoon. 19 And the other point I should have made is that we hope that with this timetable for argument, no one will be faxing in argument, because that actually does create some difficulties for the staff. So if you could possibly avoid sort of that last minute need to fax your argument in, and submit your hard copies a day late, we would like you to avoid that. 20 Thank you, very much. So, Mr. Moran, have I covered all the preliminary matters that you can think of? 21 MR. MORAN: I believe so, Mr. Chair, that I know of. Ms. Jackson may have -- 22 MS. JACKSON: I have one matter, Mr. Chair. 23 MR. JACKSON: Thank you. 24 MS. JACKSON: You, I think, have in front of you something that's been described as a clarification of Dr. Schwindt. Dr. Schwindt realized, Mr. Dominy, after yesterday's afternoon session, that there was an aspect of his answer to you that he wished to clarify. This has to do with the structure of the electricity market. We weren't precisely sure how we should go about doing that clarification, so I asked Dr. Schwindt to write down what he would have said. And he has done that and that's before you. 25 I would suggest we give it an exhibit number, but Dr. Schwindt is here and can -- would be happy to ask -- answer any further questions as a result of this clarification if the Board would like. 26 MR. JACKSON: Shall we give that a number, Mr. Moran? 27 MR. MORAN: That will be Exhibit F7.1, clarification by Dr. Richard Schwindt. 28 EXHIBIT NO. F7.1 WRITTEN ANSWER CLARIFICATION OF DR. SCHWINDT'S 29 MR. JACKSON: Do any of the other parties have any comments with respect to this additional information? Mr. Vegh? 30 MR. VEGH: Well, you know what, I have no comments on this. 31 MR. JACKSON: I think we'll just leave it at that. We have no further questions. 32 MS. JACKSON: Thank you. 33 MR. JACKSON: Thank you. 34 Mr. Janigan? 35 MR. JANIGAN: Thank you, Mr. Chair. I wonder if Mr. Todd could be sworn. 36 VECC - PANEL 1; Sworn 37 EXAMINATION BY MR. JANIGAN: 38 MR. JANIGAN: Mr. Todd, you were the author of a report entitled, "Evidence of John D. Todd, Econalysis Consulting Services," that has been filed in these proceedings? 39 MR. TODD: That's correct. 40 MR. JANIGAN: And your curriculum vitae has also been filed with this evidence? 41 MR. TODD: Yes. 42 MR. JANIGAN: And you've also given responses to interrogatories asked by the company and intervenors that have been filed in this proceeding? 43 MR. TODD: Yes. I think only by the company and staff, sorry, not by intervenors. Not by intervenors 44 MR. JANIGAN: And the contents of this evidence and the interrogatory responses fairly set out your opinion and are true, to the best of your knowledge? 45 MR. TODD: That's correct. 46 MR. JANIGAN: And the conclusions that you have drawn in relation to the issues arising in this proceeding are set out on page 16 of your evidence? 47 MR. TODD: That's correct. 48 MR. JANIGAN: I want to take you through some issues that have come up in the course of the proceedings that I would ask you to address. 49 It has been suggested in discussions earlier in the proceeding that these conclusions you've set out may differ or are contrary to the positions advanced by the Vulnerable Energy Consumers' Coalition and/or yourself in previous proceedings of the Ontario Energy Board. 50 How do you respond to this? 51 MR. TODD: I'm glad you asked that question. It gives me a chance to review the history of issues which are still controversial, it seems. 52 In terms of my views, my views as of today were initially laid out in the paper I prepared for the January 31st, 1996, Ontario Energy Board ten-year market review workshop, "Where Should We Be Going?" 53 In that, I described three categories of LDC activities which had to be looked at in different ways; one being distribution, one being gas purchasing and supply, and the third being retail services. 54 Retail services, as I defined it then, included billing and collections, along with other energy services, account inquiries, so the full definition of customer care. DSM, equipment rentals, some of these aspects of retail services have been separated from utility services; some, such as billing and collections and other aspects of customer care, have not. 55 As I noted at that time, six years ago, I stated that the key to achieving a more competitive retail sector is ending the LDC's absolute dominance in the primary aspect of the relationship with the customer billing and collections. He who does the billing has a big advantage in terms of customer contact and hence the opportunity to sell the full range of ancillary retail services. 56 That was my position then and that was my -- and that is my view now. 57 I then discussed five impediments to full and effective competition. Cross-subsidization of competitive activities by monopoly activities; that has been addressed, to a large extent, by the OEB since then. The credibility of customer recognition accorded to LDCs, and that was leading into the issue of direct billing. Abuse of market dominance; that has been addressed by the OEB since then through codes of conduct. Economies of scope, which appears they may be offset in the utilities by some diseconomies of scale in retrospect. 58 I also identified issue of bad debt costs in the absence of the right to cut-off, which I think has not been addressed and is still an important issue, particularly when it comes to the discussions that have been taking place about billing and have been neglected so far in this proceeding. 59 My point then, and it's still my point now, is that without appropriate rules with respect to cut-off, the utility has much lower collection costs, much lower bad debt costs, because they have the ability to cut off customers in order to collect their bills. 60 That puts other potential billers, retailers, whether they're billing only for their own commodity or whether there is consolidated retail billing, at a significant competitive disadvantage in offering billing services. 61 As a consequence, to a large extent, that pushes the marketplace into relying on distributor-consolidated billing and therefore reinforces the sole relationship, sole customer contact as being between the utility and the customer. And therefore we have a playing field that is not level. 62 One of the reasons why I think in this marketplace we have not seen more third party billing is because of that imbalance in bad debt costs. 63 Again, that was an issue raised six years ago and it is still an issue today. And that has -- that issue has woven through at least the processes that I participated in throughout the years. 64 I also discussed at that time three options for addressing those concerns; one being the vestiture; second being structural separation; the third being unbundling, something we have got to today. 65 And I think it may be worth noting the conclusion of my comments on that day, January 31st of '96: "It is time to embark on the next stage of developing a pervasive, efficient and effective market for retail as well as gas purchasing activities in the Ontario natural gas market. To accomplish the transition, it will be necessary to rethink the role of the LDCs. While my comments have identified a number of concerns and suggested a number of possible solutions, they are not definitive proposals. Much more work and analysis is needed in order for us to get it right." 66 And we've been doing a lot of that since then. 67 "I believe that the potential benefits of introducing increased customer choice and the discipline of the competitive market in the retail sector are significant enough to make it worth the efforts to work through the problems." 68 Those have been guiding my participation in processes since that time. 69 Just to emphasize, there are three messages out of that; one is that I was supportive of the move to full and effective competition; second, I treated billing and collections as appropriately being a component of competitive retail services and identified that as the key to achieving a more competitive retail sector; and third, through that paper, I was suggesting that it won't work unless the ability to use shut-off to collect bills is available equally to everyone, and equally could be available or unavailable, but available equally so there is a level playing field. 70 That workshop was followed by the Ontario Energy Board's report on the ten-year market review of natural gas deregulation which came out on September 27th, 1996. 71 That report was the basis of the next process that I, in this case rather than speaking for myself, was participating in the Working Group as a representative of the predecessor organization of that, OCAP. And the Working Group report came out May 31st, 1997, entitled "Toward a Fully Competitive Natural Gas Commodity Market in Ontario." It started off by quoting the OEB report which had spawned the Working Group. 72 And I think it's important to note a key paragraph that was quoted from the OEB, which states at page 2 of the Working Group report: "The Board agrees with the workshop participants who concluded that the LDCs currently control the entire delivery function, including billing and informational services, and that some of these services may not need to continue to be regulated as monopoly functions. 73 "To ensure the market review process is manageable and timely, however, the Board believes the current review should focus on the merchant functions and other related issues. 74 "Deregulation or separation issues related to other functions or ancillary programmes of the utilities will need to be considered in another form in the near future." 75 One observation I would have is that those issues were put off and they have been addressed somewhat in subsequent forms, but we've never really come to grips with them. They seem to keep getting put off and put off and we're finally getting down to that issue now. 76 There are a couple of important statements which provide context to today's hearing, which come out of the Working Group report. One important one, and certainly reflective of my input on behalf of VECC into that process, appears in section 3.3.3, entitled "Economic Efficiency and Customer Benefits." The report states: "The discussion of economic efficiency by the Working Group for the purposes of the WGR centred on production of demonstrable incremental benefits to the market and customers, reduction in regulatory burden, recognition of contract integrity, minimization of transitional instability, enhancement of customer protection through greater mobility, and greater access to information. 77 "While the Working Group agreed that the DME, which was the market model that was envisaged to exist at the end state, should improve economic efficiency, there was no consensus on whether or not the DME would improve economic efficiency compared to economic efficiency in the existing regulated market." 78 The divergence views is described elsewhere. That reflects the fact that from the very beginning, some parties, including VECC, were concerned as to whether the net benefits of the transition through complete unbundling would, in fact, justify the costs. In other words, that was a flag up front that, in the view of VECC, certainly in my personal view, there was a need for good cost benefit analysis before committing funds to the unbundling process. 79 In addition, in section 3.4 of that Working Group report, again we're talking 1997 now, the report contained a number of expressed different views; for example, in this section there were four different views expressed explicitly in the Working Group report. The parties who held views were not disclosed on the basis the parties were free to say what their views were after the fact. 80 I would point out for the Board's edification that OCAP, at that time VECC, supported view C, the third view. 81 The essence of that view was that unless the unbundling was done correctly, there may be no net benefits. In other words, the model of unbundling being envisaged was a package. The support was that if we do it right, fine. But if we change the essence of the package, it may be -- there may be problems. 82 The report states: "They," that's the supporters of view C, "supported their conclusion that residential customers may face higher prices in an unregulated commodity market with the following arguments:" Bullet one: "Gas supply has been subjected to competition for 11 years and is already priced competitively." The second bullet: "There are only small operating efficiencies to be gained by separating out the merchant function on its own from the regulated utility." Bullet three: "These minor operating efficiencies will probably be too small to offset the increased mark-up expected to result from de-regulating the cost of gas." And the fourth bullet: "Partial separation could well increase regulatory requirements and complexity as it would allow significant potential for cross subsidies. It would leave the LDCs with all the associated functions, meter reading, billing," is identified, "collecting, selling and marketing various end-use products and services but not selling the underlined product." 83 So again, the concerns that are being flagged in this proceeding were very definitely there at that time. 84 That report was followed again by -- going back to the Board -- the Ontario Energy Board report on legislative change, which came out in December '97, and in there, it dealt primarily with issues that are not related to the current proceeding. But it was pointed out by the Board, I think it's relevant, at section 2.3.4, that: "In general, the Board agrees with the sentiments expressed by the Working Group that the development of an effective retail market will be an evolving process and the removal of the impediments to title transfer is an important step in the direction of full retail competition. Revisions to legislation must allow the industry, the stakeholders, and the regulator the flexibility to manage the market transition and to seek the path that offers the greatest benefit to consumers." 85 In other words, number 1, underlying this is there must be net benefits to customers, is the way I read that statement. You don't do it if there aren't net benefits. And it's got to be designed in a way so that the customers end up better off. 86 And implicitly that would suggest to me that if there is -- the design does not result in that benefit, it should not proceed. 87 Subsequent to that came another task force, the Market Design Task Force. There are a number of statements through there which I think are extremely relevant to the issues being addressed in this proceeding. The first one appears in the section "Discussing Customer Mobility." 88 "The Task Force agreed on a number of objectives including," and it goes through a list. The third one is: "The LDCs will remove themselves from the middle of the end-user and supplier relationship as soon as practicable." 89 That was Task Force-agreed. That was a consensus position at that time. 90 There was, in fact, also an unbundling timetable set out. The timetable started with building customer awareness and education, moved on to a bare-bones algorithm for profiling of customers; initial allocation of upstream transportation and storage capacity; development of wholesale rates for unbundled transportation and storage services for marketers. The fifth and sixth points there were: "Expanding the menu of unbundled components in the wholesale service for marketers to include billing and collection as of January 1, 2000." 91 And the last one, "Further expanding the menu of unbundled components in the current retail services for general service customers on an optional basis to include storage, billing and collection, not later than April 1st, 2000." 92 So in that time frame, it actually had billing and collections coming before the separation or unbundling of storage. 93 It was seen as a high priority, and that was, again, agreed to by all parties and was a consensus at that time. 94 It referred to the first report of the Task Force on page 14 in which the Task Force described a fully unbundled market model that it believes is a desirable end state for the Ontario marketplace. And in describing that model, it includes the statement that: "The LDCs would offer stand-alone distribution services on their own systems, including wholesale services under which marketers would render bills directly to customers. The LDCs have indicated that they will be advancing proposals to facilitate such unbundled services in their next rate cases or other proceedings." 95 And in the discussion of general objectives, I would also note on page 15 that one of the objectives -- the second objective was "to provide all customers with an opportunity to share in the benefits of increased competition." The Task Force agreed that we should not have competition that helps certain classes of customers and harms other classes of customers. 96 Again, that is an extremely important agreement that underpins some of the cost allocation issues in the current proceeding. 97 It should also be explicitly noted on an area where there was some disagreement, at page 20, the incumbent marketers had one view. Then it points out the LDCs and customers' representatives -- CAC or OCAP are explicitly mentioned view -- this and customer education as essential -- essential to enabling an orderly unbundling process. 98 And this refers to developing mechanisms in this case for switching within terms, discussing customer mobility. But the point that I think that makes is that there was disagreement, there is certain -- a view from customer groups, at least, on the LDCs at that time, that proper mechanisms had to be in place to make sure there was full and effective competition. 99 Page 27, at the end state model - I won't bother reading it again because it's much the same statement again - reinforces that imbedded in the report and embedded in the end state model was retailer consolidated billing. 100 In the discussion of unbundling issues - again, the objectives were building on the OEB report and ongoing support for unbundling - it states: "There is general agreement within the subcommittee that the priorities for unbundling should include title transfers, transactions between marketers, end-users, and LDCs, both enfranchise and ex-franchise and in combination, upstream transportation, storage, load balancing and billing." 101 The final point which is a different one made in there, page 53, at least on my copy, the group stated that: "It was generally acknowledged that displacement of unbundled services priced by fully allocated cost may strand assets of the LDC. The Task Force agreed that, provided the costs of those assets are vigorously mitigated during restructuring, the LDC should be entitled to recover them over reasonable transition period from all users on the theory that all will benefit from the enhanced choice and flexibility afforded to them in market restructuring." 102 That agreement was very clearly premised on the total package of agreement, which said, we are going to implement a model which produces net benefits, and the costs would be paid for out of those benefits. 103 Further, it suggests that, "Unless utilities made a vigorous effort to mitigate any cost that would be hanging over them as a result of unbundling, that they had no entitlement to recover those costs," and that was generally agreed. General agreements, I think, can be read to include the utilities. 104 The final step in this -- sorry for taking so long, but I think the historical context has been ignored too much in this proceeding and it's important that it be on the record. 105 The final report of the Distribution Access Rule Task Force to the Ontario Energy Board staff, which was an industry group preparing it, was on June 8th, 2000. I would note that in that process there were no representatives of small volume customer groups, neither VECC nor CAC were participating. I did facilitate -- I believe I scrupulously resisted injecting any of my views so I can't say this reflects my views. I was simply facilitating. And certainly my participation was accepted by all parties in that process. 106 So I'll only point out that in that report, in the discussion of 6.1, customer billing, it sets out two alternatives; 6.1.2 is a discussion in support of alternative A, alternative A being a mechanism that is consistent with the Retail Settlement Code, i.e., it includes retailer-consolidated billing, distributor-consolidated billing rate-ready, distributor-consolidated billing bill-ready, and split billing. 107 Alternative B was a position that, in part, related to Board jurisdiction, and was that there should be no -- the rule should not specify billing options. 108 I would note that -- my reference is off here. 109 MR. JACKSON: Where billing options there encompass what -- 110 MR. TODD: Sorry, the billing options -- well, under proposal B, which was supported in the report - listed supporters of B were Enbridge, Kitchener, Six Nations, and Union - it said there should be no billing options, so it would be left to the discretion, presumably, of the distributor what options they would make available. 111 MS. JACKSON: Well, can I -- I can't help but interject. I think these documents speak for themselves. There is a much more elaborate position put there than has been described. And a number of people subscribed to it. But the Board has the benefit of that report, so I just make that observation. 112 MR. JACKSON: Thank you for that. We know we do. 113 MS. JACKSON: Sorry, I'm happy to have it referred to in argument. I just don't want to sit quietly and listen to a description of the position that I, frankly, don't think is fully descriptive of a position. 114 MR. JACKSON: I think your point is well taken, and perhaps you can draw attention to that again in your examination of this witness. I suppose it may depend a little bit on the length of time this witness thinks it will take to finish what he is doing whether I would like to rule that he cease now and leave all of this for argument. But I'm actually finding some of this somewhat helpful in reminding me, at least, of the reports and giving me references that I may wish to look up. 115 Now, you will have an opportunity, of course, to do the same thing one place or the other, and I'll take counsel on this, if I should -- if I should cut him off, but I must say I'm appreciating this little historical sojourn. 116 MS. JACKSON: I don't -- I'm not going to interfere with something that you're appreciating, Mr. Chair. I just want to say that from my perspective -- well, while the dates are correct and some of the statements are correct, there are some other statements that I would take issue with. But I think from my perspective the question isn't whether Mr. Todd and I agree or disagree on what those words say. To the extent that the history is relevant, I expect that on behalf of Union I'll be referring to it in argument. I don't think it will be helpful to the Board for me to dispute with Mr. Todd what the words say and I don't propose to cross-examine him on that. Thank you. 117 MR. JACKSON: Thank you. I think if -- he hasn't got the words right, though, I -- the Board will certainly appreciate any efforts you make to try to correct that, and if you think that his characterization of the agreement is off, I'm sure the Board will appreciate you stating that. That's, at some point, for us. 118 MS. JACKSON: Which is why I interjected. I apologize. 119 MR. JACKSON: No, I appreciate your interjection and I think you should do so. 120 In the meantime, then, Mr. Todd, will you carry on. And can you give me an estimate of how long you think you might be in this direct? 121 MR. TODD: Two seconds, which is now zero, because that brings us up to date in terms of the processes prior to the current proceeding. 122 MR. JACKSON: Okay. Well, thank you very much. 123 MR. TODD: Of course the balance of the DAR process, Distributor Access Rule process, is yet to be completed. 124 MR. JACKSON: Thank you. 125 MR. JANIGAN: Thank you, Mr. Todd. 126 I would like to turn now to another issue that has been dealt with principally by the company witnesses in this proceeding. 127 As you're aware, the evidence and the testimony of a number of company witnesses has suggested that the costs associated with the unbundling exercise should be allocated to general services customers on the basis of weighted customer averages, because these costs enable the functionality required to effect delivery of unbundled services to small volume customers. 128 Now, by so doing, the company claims that this unbundling will help bring about a more competitive commodity market benefiting those customers. How do you respond to this position? 129 MR. TODD: My response primarily is contained in section 3.5 of my evidence, which points out that I start with the Board's decision, RP-1999-0017, which stated in the context of options for dealing with upstream transportation that the Board believes that there is merit in the principle that those who stand to benefit most from an initiative should bear the bulk of the costs. 130 In other words, an allocation of costs, as I read that, I understand that the intent is that benefits is a valid basis on which to allocate costs. 131 I see two approaches to defining those who stand to benefit. One approach is that the people that benefit are those who use the service. That approach suggests there are not general benefits, there are just benefits of actually creating a service and making it available to people. 132 The second approach is that if you believe there are generalized benefits to all customers, then there would, for example, in particular, as certain witnesses have suggested in this proceeding, that there would be a lower, all-in commodity cost. That's gas plus transportation plus storage. Then there would be an argument for allocating those costs to all customers. 133 So let's follow each of those alternatives through to the logical conclusion. 134 If the benefit accrues to those who use the unbundled services, and there is not a general benefit, then it would be appropriate to recover those costs from those who use the unbundled services. And that's discussed in my evidence, suggesting that the logical outcome would be something equivalent to the direct purchase administration charge that says those who actually opt for the service would pay for it. 135 There have been some significant concerns raised, suggesting that nobody is taking the service; therefore, that approach may not be feasible in terms of cost recovery for the company. 136 And perhaps for that reason, or simply by arguing that the real benefit is not what accrues to the individual customer but is an overall market benefit, it pushes us to the second alternative which is that it should be allocated to all customers. 137 Now, the underlying premise of allocating it to all customers is that the price goes down. If the price goes down, the quantum of benefits by rate class is the price times the volume. The price is essentially the same as we're talking about the commodity, except for the storage element which is about 6 per cent. A small factor. And therefore the benefits -- the distribution of the benefits is essentially a volumetric basis if you accept the premise that there is a reduction in the overall commodity costs. 138 MR. JACKSON: Just remind me. The price you're talking about here is the landed price, or is it a portion of the landed price? 139 MR. TODD: It would -- well, the way that the discussion has gone, which I think is if there is a generalized benefit, I would agree, is the only way that there is a benefit in the price is if it's the way the gas management is handled. So it includes the commodity and storage and transportation as an all-in price, i.e., with load balance, so it's a landed price. 140 MR. JACKSON: Thank you. 141 MR. TODD: And I see very little opportunity to actually lower the prices of the components. But what the argument is, that if you have continental best suppliers, people that -- I used to say, like Enron, but not anymore, that they would be able to manage the gas supply in a way that would lower the cost even if the cost of the components of load balancing didn't change. 142 With that lower all-in price, that would accrue to all customers based on the volumetric factor and therefore it would be consistent with that view that costs should be recovered on the volumetric basis, which is what is contained in my evidence. 143 Now, there is a third possibility, which is not really a cost allocation issue, which is that there are no benefits of the costs, perhaps for some of the reasons I suggested in 1996 and the way the unbundling has proceeded. In this event, it would seem to me that, given the way the unbundling has been done, there is room to suggest the expenditures were imprudent and should not be allowed. If there are no benefits and costs were incurred, why were those costs incurred? And why should they recover it from customers who have no benefit? 144 Certainly, if there is no benefit, it raised the question of why was there no cost benefit done initially, particularly when the approach was changed relative to what some of the parties were viewing as essential in order to achieve full and effective competition in order to deliver benefits. 145 Those are my comments. 146 MR. JANIGAN: Okay. Thank you. 147 Now, there has also been some discussion of current experience in Canadian jurisdictions with unbundling of services. Do you have any knowledge or have you been involved with any of these unbundling exercises, and can you briefly describe the results? 148 MR. TODD: I notice after my response to the first question you included the word "briefly." I take the hint. 149 Yes, I have been involved in the proceedings across the country. B.C. Gas had a market unbundling group which reported in August of 1999. The approach taken there was to recommend a pilot project for the interior region. 150 The concept was that the group's view was appropriate to implement a system that could be done on a manual basis without huge IT cost in order to assess the benefits of further unbundling in B.C. Of course, that was not the same concept of unbundling as we're talking about now, but the underlying premise was let's go in small steps. They wanted to demonstrate -- have demonstrated interest from both retailers and customers and demonstrated benefits before proceeding with the investment in IT costs. 151 As it turned out, there was no retailer participation in the pilot project and so that was suspended. It is currently being revisited and we have yet to see whether they will proceed. But the same principles apply in the parties I'm aware of out there in that there must be demonstrated value first and then spend the money. 152 Moving east from B.C., the next one is Alberta. There was a proceeding last year. I appeared in that and gave evidence. The decision in that proceeding came out late last year, and they were looking at perhaps the most aggressive form of unbundling in terms of other jurisdictions in Canada. The executive summary of the gas rate unbundling proceeding decision states that: "The Board directs AGS and AltaGas to file with the Board an unbundling allocation study within 90 days of the date on which the Board issues its forthcoming approved phase 1 revenue requirements." These have been filed as what are called mock filings. "These studies are to provide --" and I won't go through the full list, but it notes "allocation of all applicable direct costs, indirect costs, and overheads for each of the following functions: Transmission; storage services; meters; billing, distinct function; customer information systems, a distinct function; call centres; credit and collections; customer enrolment; load settlement; load balancing; marketing customer information." 153 And then it notes for those, "An examination of the operations and requirements of each function, describing how these may change during a transition to a fully competitive market," filed, "and an assessment of the potential for stranded costs for each function, an assessment of the effect of unbundling on indirect costs and overheads by function, and proposed rates reflecting the views of the Board in this decision." 154 So they're looking for this information in order to determine how they should proceed in terms of implementing unbundling. 155 Centre of Manitoba, an unbundling of primary gas. Primary gas deals only with the 100 per cent load factor portion of gas supply, which in Manitoba is roughly 92 per cent of the gas supply. It has not looked at the further unbundling as we're looking at now. 156 Gaz metropolitaine, in the Regie jurisdiction, has also looked at the issues. That was conducted in French. I did not participate, but one of the staff of my company did participate. The Task Force agreed to unbundling for all classes, originally. The cost estimate, then, in terms of IT cost to implement the unbundling was in the order of half a million dollars. I think it was a little under that originally and then went up slightly. 157 As they proceeded with planning, the costs for unbundling of small volume customers escalated. Planning, this is not implementation. This is the planning stage. And therefore with the approval of the Regie they amended the approach to include large volume only. So they said it's too expensive to do small volume customers so we will not proceed with spending the money. 158 Those are the unbundling processes I'm aware of across the country. 159 MR. JACKSON: What was the date for the most recent decision in the Gaz metro situation? 160 MR. TODD: In an IR response -- I can dig it out. 161 MR. JACKSON: That's fine, thank you. 162 MR. TODD: It was last year; it was recent. 163 MR. JACKSON: Thank you. 164 MR. JANIGAN: Thank you. And finally, Mr. Todd, there has also been evidence introduced through the testimony of Union witnesses in this proceeding that there are few avoided costs associated with the provision of marketer-consolidated billing, particularly in light of the current and contemplated future arrangements with Enlogix. Do you have any comments concerning the observations of these to the possible introduction of marketer-consolidated billing? 165 MR. TODD: The premise underlying that approach is different from the premise that underlies, certainly, my comments over the last six years related to a wholesale price. And -- or separate price for customer care, or elements of customer care. 166 Relevant costs can be divided into three categories: variable costs, fixed costs, and overhead costs. The comments about there being very small savings refer to the fact that the variable costs are very small. The costs will change from a customer that's shed. 167 The implication of that approach is that customers that opt out of Union's customer care would still be required to pay fixed and overhead costs, that they would only avoid the variable costs. That approach is totally inconsistent with the concept of a competitive market approach. If the goal of unbundling is to go down the route in the way competitive markets work, that's inconsistent. 168 The concept that is consistent with competitive market approaches would be to create wholesale rates that exclude all three cost categories, wholesale rates which would show the bottom-up costs of providing just distribution without customer care. And that would exclude variable, fixed, and overhead costs. 169 Furthermore, taking that approach, i.e., of creating a wholesale price for people who choose not to get billing and customer care from Union, would subject the Union customer care costs to a market test, which would be a test of the prudence or reasonableness of those costs. And that is one of the reasons why I have supported that approach over the years, is saying that it is extremely difficult, in a regulatory process, to determine the reasonableness of the customer care costs of the company. And since those function and rental programs and so on are potentially subject to competition, just like other functions that are potentially subject to competition, such as the functions that have been separated, like furnace care and rental programmes and so on, these -- these package of costs could also be subjected to the test of the market. And costs which cannot be recovered in a market environment would be, by definition, excessive relative to competitive costs and therefore would not -- would be a demonstration that they were unreasonably high. 170 MR. JACKSON: Would you please remind us what all you would include in your definition of customer care? 171 MR. TODD: Yes. And the details are contained through -- throughout the history of the reports there. This is an issue that has been examined in great extent. 172 Essentially, customer care includes billing, it includes answering customer questions with respect to their bill, and general questions in the customer call centres. Throughout the reports there's a practicality issue as to whether meter readings are included or not; in concept it would be. There are some impediments to actually bundling with it. And it would not include functions such as answering calls about safety, doing safety checks, doing things that are part of the responsibility of the pipes -- distribution pipes part of the company. 173 There is an answer to interrogatory from Union Gas, Exhibit E22.5, the question is: "What are the elements of customer care as that phrase is used in the evidence?" The term "customer care" is used in the evidence, includes billing cycle, customer information, including customer call centre and customer support functions. It does not include emergency response or other functions related to operating distribution pipe. 174 MR. JACKSON: And not metering, then? 175 MR. TODD: Sorry? 176 MR. JACKSON: And not metering, then? 177 MR. TODD: Given the practical concerns, metering has been left out. I've been convinced by discussion over the years that it's -- it will have to be. If it's unbundled and subjected to competition, that will be done later. One of the reports says - and I think it was general agreement if not full agreement -- that meter readings should be deferred until there is automatic meter reading, which would facilitate competition in meter reading. 178 MR. JACKSON: And you say billing is excluded? 179 MR. TODD: No, billing is included. 180 MR. JACKSON: Included. I'm sorry, yes, that was my slip. I was thinking, then, excluded from the wholesale -- 181 MR. TODD: Yes, it's excluded from the wholesale definition. 182 MR. JACKSON: I jumped ahead in my thinking there. How can it be excluded from the wholesale? We've heard from Mr. Birmingham that the cost -- the distribution company must still bill for all of its distribution services. 183 MR. TODD: It would be excluded from distribution as a distinct function. There would be a separate function which could be customer care, or customer care could be broken down the way Alberta did, into components. And those who use the customer care functions would pay for them. It means excluded -- put into separate packages. It doesn't mean left out of the company. 184 MR. JACKSON: All right. Okay. 185 MR. JANIGAN: Thank you, Mr. Chair. Those are all my questions for this witness. I just want to give the interrogatory a number for the information associated with the Regie unbundling decision. It's found in Exhibit 22.1.3, and it refers to a proceeding, a 2001 proceeding, in the Regie of R-3463-2001. 186 MR. SOMMERVILLE: Could you just give that exhibit reference again, please. 187 MR. JANIGAN: Sure. It's Exhibit 22.1.3. 188 MR. SOMMERVILLE: Thank you. 189 MR. JACKSON: Probably C22, is it? 190 MR. JANIGAN: It's found in the intervenor evidence section of the proceedings. 191 MR. JACKSON: So you gave it an E notation, then? Thank you. 192 MR. JANIGAN: That's what I understand. 193 MR. DOMINY: An interrogatory from Board staff. 21 -- 20.13, an interrogatory -- answer to interrogatory from Board staff. And there are a whole lot of references in there. That's the one, isn't it? 194 MR. JANIGAN: Yes, that's true. 195 MR. DOMINY: Page 2 of 2, the reference is in it. Thank you. 196 MR. JANIGAN: Thank you, Mr. Chair. The witness is available for cross-examination. 197 MR. JACKSON: Okay. Intervenors, perhaps, generally in support of this evidence, or any agreement amongst intervenors as to who will go first? 198 MS. JACKSON: That might be an easier question to answer. 199 MR. JACKSON: Yes. Mr. Warren, would you be ready to proceed? 200 MR. WARREN: Certainly, sir. I have only a very few questions in any event. 201 MR. JACKSON: Thank you. Thank you very much. 202 CROSS-EXAMINATION BY MR. WARREN: 203 MR. WARREN: Mr. Todd, there are a couple of starting points for my first question, and probably the easiest place to start is in your discussion of your examination-in-chief of the options for the allocation of the costs. And you talked about -- initially talked about two approaches to the calculation of benefits. 204 You talked first about a narrower calculation, specifically those who benefit from it. And the second approach was to assume that, generally, there would be benefits. 205 You then said, my note of your testimony is that there is, in fact, a third alternative way of looking at it, and that is that if there are no benefits to unbundling, then it may be arguable that the costs incurred have been imprudently incurred. 206 Now, if I've got that roughly accurately, let me ask this question: In your view, Mr. Todd, is there -- is it an open question whether or not there are -- is it an open question whether or not it has been established that there are, in fact, benefits to the unbundling process? 207 MR. TODD: I'm not aware of any cost benefit analysis that has been done to quantify those benefits and demonstrate the benefits exceed the costs. 208 Through most of the working groups, task forces, and so on, these were approached at a conceptual level. These cost were not known. Costs, we've seen in the past year, have escalated when the company went ahead. 209 And at all times, certainly, my view has been not to spend money until we determine whether the benefits exceed the costs, and that hasn't been done as far as I'm aware. So it's an open question, unless you presume that, in the absence of demonstrating benefits, they don't exist, which was Dr. Schwindt's approach on a slightly different matter or from the other side. 210 MR. WARREN: That leads me to -- I guess you've addressed, in part, the second part of my question which is: Do I take it that your view is that there ought to be -- I think this distinction is important. Either there ought to be or there ought to have been a cost benefit analysis undertaken before expenses were incurred for unbundling? 211 MR. TODD: There are two possible approaches: One is, let's do our homework and do the cost benefit analysis first; the other is, let's take a leap of faith. And certainly as an analyst, my view is, do the analysis first. 212 I recognize through this process that there have been a lot of statements, there has been -- by parties. There have been a lot of statements by the Board, there has been provincial legislation, all of which have steered us in the direction of taking a leap of faith. 213 So if the leap of faith approach was actually legitimate, then it still does not mean that you go ahead and spend money to implement a system that does not have general agreement. And surely the leap of faith should be based on the agreement of parties that what we're leaping to is correct. 214 MR. WARREN: What is your view, Mr. Todd, on the leap of faith -- sorry, leap of faith versus do a cost benefit analysis approach? 215 MR. TODD: In principle -- well, in principle, I would like a thorough cost benefit analysis. In reality, many of the benefits of competition are not quantifiable. So in practice you need a judgmental analysis in terms of some of the benefits. But that does not mean that the costs are not quantifiable. 216 So as has been done in B.C. and as was done in -- and is being done in Alberta, and as was done in Quebec, the analysis that should be done is at least figure out what the costs are and then have a look at what you're creating in terms of the marketplace and make a best estimate at the benefits and say yes, I think I have confidence that we're jumping across a river, we're not jumping off a cliff. 217 MR. WARREN: Still trying to hone in, Mr. Todd, on what your view is as a practical matter, where we are today. Part of my question is: There are expenditures today of $12 million, roughly, is what the evidence is, incurred thus far in unbundling. That's one data point, if you want. The second data point is there has been no cost benefit analysis, there is universal agreement on that. 218 Now, given that there has been no cost benefit analysis, and given that there have been $12 million in expenditures to date -- and I think to be fair across the board, to Union and to everybody else, there is the fact of the 0017 ADR agreement and the Board's decision which agreed at a high level of principle, if you want, on further unbundling. 219 Now, given those data points, if you want, what is your recommendation on this point of leap of faith versus cost benefit analysis? 220 MR. TODD: I am guided by what other jurisdictions have done. Other jurisdictions have looked at the costs first. The Market Design Task Force in Ontario did set up subcommittees. IT subcommittees did recommend that those subcommittees would be available to work with the utilities in developing details of design, so they could be done in a cost-effective way. 221 As far as I'm aware, that opportunity is not utilized. And certainly in the other jurisdictions where they were authorized to go ahead with cost estimates that have been provided, when they discovered the costs were going to be much higher, they at least went back to parties in the regulator to indicate that they -- the economics had changed and, in fact, backed off making the investments. 222 We'll get to see what will happen in Alberta. 223 But I think that it would be inappropriate to suggest that any of the past decisions of the Board or any of the past reports were an approval with a blank cheque. And at most, the disclosed costs at the time of the company receiving a go-ahead are all that we can say were authorized. And any additional costs would have to be demonstrated after the fact to have been reasonable, based on demonstrable, quantifiable benefits which goes right back to my earlier statements. 224 MR. WARREN: In light of that answer, Mr. Todd, we go at this two ways. In your view, does the Board have enough information in this case on what the costs are to be able to make a decision, comparing probable benefits and costs, or is more information required? Will the Board be able to do that responsibly? 225 MR. TODD: Well, I could not draw a conclusion from the evidence on the record today that I'm aware of. The Board may have greater insight than I do. 226 MR. WARREN: Would you then, in light of that recommendation, recommend that the Board mandate some further process by which those costs are determined? And if so, what would that process look like? 227 MR. TODD: Well, if I recall some occasions in the past where costs were not allowed, the company has always felt at liberty to come back with further analysis to suggest that the disallowed costs were in fact justifiable, and I refer to companies generally now. And therefore the Board should reconsider its position. 228 It puts essentially -- saying that the costs are not being accepted does put the burden on the company to come up with more concrete evidence that, in fact, those costs can be justified. So certainly an easy position for the Board to take is that the costs are not justified based on the evidence to date, we can't accept them at this time. 229 MR. WARREN: Do you believe that the costs are not justified based on the evidence today? 230 MR. TODD: I have not culled through the evidence to try to answer that question, but I'm not aware of any justification that has been provided. I have not attempted to answer that question, but I'm not aware of any. 231 MR. WARREN: Let me just ask -- sorry to narrow the focus to one element of what might be regarded as potential costs. Mr. Feldmann, testifying for Union, at the beginning of last Friday and continuing in the early part of this week, itemized, if memory serves me correctly, some seven broad categories of potentially significant costs associated with marketer-consolidated billing and, for example, the question of customer shut-off, the question of collection costs, and so on and so forth. 232 Now, part of the discussion that followed and -- part in cross-examination questions from me and, in part, in cross-examination questions from my friend Mr. Vegh, the question was: Can the allocation of those costs be made a function of -- sorry, can the practical details of how to work those things out and therefore the costs be negotiated as part of Service Level Agreements? 233 Now, I would conclude from that that the negotiation of the Service Level Agreements and dealing with those issues may result in a bundle of costs that have got to be allocated somewhere. I don't know whether you're familiar with this general discussion over the past few days. If I'm right in my summary of that exchange, is that a category of costs that the Board should be involved in deciding how they're allocated, or should that just be left to -- I guess it can't be left to Union and to the marketers because Union has to get approval to allocate -- to charge them to ratepayers. How do we deal with those -- map those contingent costs, if you want, in your view, Mr. Todd? 234 MR. TODD: You're referring to the costs which are left over and not recovered in the Service level Agreements with retailers? 235 MR. WARREN: Well, I'm referring to -- 236 MR. TODD: That have been allocated to other customers? 237 MR. WARREN: They're costs that -- let's assume that the Board says -- I may have the premise of this question wrong. But let's assume the Board says, we're going to proceed with marketer-consolidated billing, and Union says, quite legitimately, now we have a problem with these category of costs that Mr. Feldmann outlined, and who is going to bear those costs? And who is going to take responsibility for customer shut-off, and so on and so forth. They're going to be negotiated as part of Service Level Agreements. 238 So that whole cluster of costs which are related to unbundling, related in part to billing functions, how would you recommend that the Board deal with that category of costs? 239 MR. TODD: Sorry, we're now talking about future costs for retailer-consolidated billing, which is not part of the process to date. 240 The approach that has been adopted in other jurisdictions, which I agree with entirely, is that you first determine the costs, look at how you're going to recover those costs, and determine whether those costs are feasible. You approach it the same way that a private sector company would approach it. And I think this point has been made yesterday during Mr. -- Professor Schwindt's cross, that a private sector company would only spend the dollars if it's economic. 241 And that's the way unbundling should have proceeded to date and that's certainly the way it should proceed in the future; that first you determine what the costs are, look at whether it's feasible to recover them, i.e., if the benefits are large enough, that people are willing to pay those costs because their benefits will exceed those costs. And if the numbers work and the market accepts the costs, then you proceed. 242 It is helpful that there is an industry out there with some -- some technological sophistication that, through a Working Group process, could find the most cost-effective way to implement these processes. And you certainly should be using the most cost-effective way to do it, not some arbitrary chosen way which may not be cost-effective and therefore would preclude it being done. 243 MR. WARREN: Does what you've just described, Mr. Todd, in your view, necessarily involve another Board process much like the one we're involved in here, whereby the Board assesses what those costs are and makes a determination of how they should be allocated? 244 MR. TODD: In what I described the -- through an industry process, such as the ones we've had, the Market Design Task Force and so on, with its technical subcommittees, if a methodology for implementing retailer-consolidated billing is agreed to by parties and the Service Level Agreements are agreed to that recover those costs, no further process would be recovered because the Service Level Agreements for the functions being provided by the company would recover the costs. By definition, the market would sustain the service. 245 Only if there are costs left over and the company is saying, we need a subsidy from distribution rates to make this happen, would that require a further Board process. And presumably that proposal would be based on the premise that there are going to be generalized benefits above and beyond those which could be accrued to the people using the service, going back to my other points. That would require a further process if that was the position taken. 246 But I would encourage all parties to look at going through that process first before the money is spent so that the Board can make a determination as to whether, in its judgment, the benefits exceed the costs. 247 MR. WARREN: Let me ask you, finally, just on this category of costs, I would like your views on one issue which has been articulated by Mr. Birmingham, certainly quite forcefully, and was equally forcefully re-articulated by Dr. Schwindt yesterday, and that is that taking away -- I apologize to both of those gentlemen for my crude gloss on it. But the taking away of Union's ability to have a direct billing relationship with its customers amounts to a kind of expropriation for which they should be compensated. Do you agree with that analysis? And if so, how would you -- how should Union be compensated? 248 MR. TODD: I categorically do not accept that view. There are two aspects of the value question. 249 With respect to a regulated monopoly service, the regulatory process allows the company to earn a fair or competitive rate of return, no more, subject to PBR variances. By definition, with respect to any monopoly or regulated monopoly service, there can be no taking away because the company will earn its fair rate of return. 250 Therefore, if there is a taking away, it must relate to some unregulated service of the company where it could end up with a lower rate of return because of the loss of that customer relationship. 251 And I would suggest that with respect to any unregulated services, it is not unreasonable -- in fact, it is reasonable to expect the company to have to win the customer relationship in the marketplace like everybody else. 252 In effect, if Union Energy has been unsuccessful in gaining significant market share and therefore Union Energy is not keeping the name of Union before the public, that, to me, is not a justification and is not a -- does not lead to a concept of taking, if Union Gas, the distribution utility, is not allowed to keep its name before a hundred per cent of customers in its service territory. 253 MR. WARREN: Now, I turn to the question of costs, Mr. Todd, briefly to the question of benefits. And in this -- I want to see if I can get some common ground between us. 254 As I understand the evidence, which is both the pre-filed evidence and the oral testimony in this case, unbundling would, among other things, bring some benefits to marketers in terms of reduction of their costs. And there is, I think - and I don't remember who the exchange was with - but there was an exchange in which I think Mr. Moran put this to the first Union Panel, that the savings or the benefits which the marketers may achieve may or may not be passed on to their retail customers. 255 Now, in light of the fact that the marketers will attain benefits which they may or may not pass on to customers, why should the marketers not bear some of the costs of unbundling? 256 MR. TODD: Well, there's no reason they shouldn't. I mean clearly they would not bear them if all participants in the marketplace, retail marketers, affiliates, and so on, bear comparable costs. The economic principles are clear: That would be reflected in the market price and therefore they will recover them. 257 In effect, imposing those costs on marketers is a way of passing those through to the customer's marketers and saying that the customers and marketers should be paying them. In effect, before any benefits are passed through to customers, which they would be if there is full and effective competition, they would not be if there is market power. 258 Before any benefits are passed through, those benefits would be offset by any cost that is are being borne by the marketers, and only the net benefits -- or net costs, if the costs exceed the benefits, would flow through to the customers. 259 MR. WARREN: I appreciate that analysis, that they may try to pass that on. But in your view, in the first instance, should the Board consider the option of imposing some of the costs? And you've said costs should follow benefits. Should some of the costs be imposed on the marketers? Leave aside the question of how you do that for the moment. But in theory, based on the proposition that costs should be related to benefits, should the marketers bear some of the costs? 260 MR. TODD: Going back to earlier comments, we must clarify first how we're defining the benefits. If the benefits are benefits that accrue to the customers of marketers, it is appropriate that they should pay those. If they're getting the benefits, it's appropriate they should bear the costs. 261 MR. WARREN: Who is "they," the customers or the marketers? 262 MR. TODD: Either one. It's -- they're, from an economic analysis perspective, the same. The only difference is the amount of market power as to who is going to end up bearing them. 263 If is there market power, the marketers earn a higher profit and you pass the cost on to them. In full and effective competition, the customers pay a competitive rate, and if their competitive rate is lower because of the benefits of the unbundling and other people do not benefit, then it is appropriate to pass the costs through to them. 264 I'm being agostic on what form the benefits take because I don't see much in the way of benefits, as I've always said in an unbundling that does not include unbundling of customer care, which the current unbundling does not. 265 Therefore, I'm saying whatever the Board decides in terms of who benefits, allocate the costs to them. If it's only those customers who use unbundled services, do it through the marketer to those customers. If it's the market generally through a lower price, then do it based on the distribution of benefits which is ultimately volumetric because it's price times volume. 266 MR. WARREN: You're an economist and I'm not, and so I apologize for the crudeness of my analysis. But if the Board says these costs should, in some part, in whole or in part, be borne by the market, then the marketers would presumably try and pass those on to its customers. And at least the customers making the choice would understand, would they not, or have a better chance of understanding the full cost of what they were buying from the marketers? Better price signals, to use one of the theological terms repeated in this hearing. 267 MR. TODD: Yes. But I think it's important to recognize the caveat that this entire move to competition has taken place in a bunch of small steps, and we have not been consistent at all times in allocating the costs. 268 What is really required, in my view, is a full review of the allocation of costs which would include existing direct purchase costs, and so on, in order to rationalize and make sure that the costs are being allocated to parties correctly. 269 If you're going to do it strictly correctly, as you're suggesting, and a lot of those costs would go to marketers, some of them would go through fees with marketers per se for the services they use; some of them would retain -- continue to be charged as a direct purchase administration fee. 270 But what you want to do in this nice theory of price signals is to make sure that all of your prices are right, and that would require not a -- a review of one piece of the cost but, in fact, it's time -- it's overdue in time to actually step back and look at an appropriate allocation of costs given the move to unbundled structure. That would be down the road. 271 In the meantime, we would take a step, as we have in the past, of allocating this bundle of costs that earned $15 million out in the way that's most appropriate, to marketers if it's the customers who choose that option. The benefit for all customers based on volume, it's all customers that benefit through a lower price. 272 MR. JACKSON: Mr. Warren. 273 MR. WARREN: I have only one question left, sir, literally. 274 MR. JACKSON: That's fine. I don't want to rush you at all. I was hoping that maybe I could convenience you by just running until you had finished, but I was just looking for a forecast. 275 MR. WARREN: I have one narrow question, sir, and then I'm spent. You raised, sir, and I want to follow it up because I'm not sure of the significance of it, in your historical review this morning, you talked about the resolution or the failure to resolve the shut-off issue. I'm just -- I want to understand whether -- I guess it's a two-part question, I apologize. 276 What's the relevance of it -- sorry. Is it still alive, and if it's still alive, what's the relevance to the Board's decision-making process in this case? 277 MR. TODD: The relevance is that Professor Schwindt, who unfortunately was not part of these processes, has not addressed that issue at all, and appears to be of the opinion that retail marketers can perfectly well offer their own billing services at the present time; if they're not doing it, it's because they don't want to, And everything is just fine the way it is. 278 I apologize for the simplistic characterization of his evidence, Ms. Jackson, but -- 279 MS. JACKSON: No need to apologize. Professor Schwindt is sitting beside me. 280 MR. TODD: But it seems to me that everything -- that the status quo is okay. What I'm suggesting is that the issue has been live for six years, that there is not a level playing field in terms of providing billing services, that throughout the period so far a marketer has the choice of going to the utility to render the bill, in which case the bad debt costs are low; or rendering the bill themselves, in which case the bad debt costs will be higher because they cannot use shut-off to collect those bills. That creates a bias in favour of consolidated distributor billing. 281 And the point was that until we address that impediment, the billing issue will not be resolved and will not have true retailer and customer choice as to what billing mechanism is used. There will be a strong bias in the whole process. 282 MR. WARREN: So the Board should resolve that issue before it makes the decision on whether to approve marketer-consolidated billing; is that your position? 283 MR. TODD: That issue should be resolved as a part of implementation of retailer-consolidated billing. The issue has been addressed and there are a number of proposals out there. I don't know that requires a hearing to resolve. The parties should be able to resolve that themselves if they know they're proceeding with retailer-consolidated billing. It's a level playing field issue which the industry understands well and I believe is perfectly capable of resolving as it has a number of issues of technical detail in the past. 284 MR. WARREN: Those are my questions. Thank you, Mr. Chair. 285 MR. JACKSON: Thank you, Mr. Warren. 286 Parties may feel free to comment on this, but I think we should have a break. And I would propose that we try to come back by about 11:25 and that -- no, I guess -- yes, that would do it. And then see what we can accomplish before the lunch break, which maybe we could reasonably have around 12:30 if that -- if we haven't finished before then. 287 Are there any thoughts from the parties on that, as to how that would work? Well, then, let's give that a try. So we will adjourn now until about 11:25. Thank you. 288 --- Recess taken at 11:10 a.m. 289 --- On resuming at 11:30 a.m. 290 MR. JACKSON: Please be seated. 291 Mr. Vegh, would you be next? 292 MR. VEGH: Thank you. Thank you, sir. 293 CROSS-EXAMINATION BY MR. VEGH: 294 MR. VEGH: Good morning, Mr. Todd. 295 First, I just wanted to thank you for ensuring that we did not have too much down time while waiting for Dr. Trebilcock this afternoon. 296 Mr. Todd, I take it from your resume and from your evidence in chief this morning that you've been involved in a number of Board processes? 297 MR. TODD: Yes, I have. 298 MR. VEGH: And you've done that in a number of different capacities: as a witness, as a consultant, and even as an advocate; is that right? 299 MR. TODD: I would not have characterized myself as an advocate. I was retained by VECC, in my view, to sit as an expert expressing my views. 300 MR. VEGH: I'm talking about on other occasions. On other occasions, you've represented the same client, VECC, in negotiations around ADRs and analyzing proposals from utilities and in making arguments on behalf of VECC as an advocate? 301 MR. TODD: Part of the role of an expert is to assist the client in forming their opinions, yes. 302 MR. VEGH: Are you drawing a distinction between -- are you saying every time you've appeared on behalf of VECC in these Board proceedings you've done so as an independent expert or as a -- or on occasions have you also been an advocate for VECC? 303 MR. TODD: I've always drawn a distinction between my views and VECC's views when they differ, and I usually speak in terms of my views. 304 MR. VEGH: Even on occasions where you would have represented VECC, say, in negotiations? You're really representing your own views, not the views of VECC? 305 MR. TODD: Unless I explicitly say, VECC's position is such and such, which I'm transmitting to the group, yes. 306 MR. VEGH: So there have been occasions where your job was to represent VECC's view and not your own view? 307 MR. TODD: Well, I view representing a view as, shall we say, advocating and defending it. And I have never agreed, in any setting, to advocate a view that wasn't my view. So I've said, here is what the view is, but I've not, shall we say, sold the view unless it was my view. 308 MR. VEGH: So when we look back at a view that has been put forward by VECC through you, we can treat that as John Todd's view? 309 MR. TODD: Yes, it's John Todd's view and VECC endorses it. And I've been pulled -- I've been pulled on occasions when my view wasn't what their view was. Or, I should say, not explicitly VECC but clients generally. There are times when they don't use me because our views don't coincide. 310 MR. VEGH: Okay. In today's proceeding, you're here before the Board as an expert or as a representative of VECC or what? 311 MR. TODD: I'm here as John Todd of the Econalysis Consulting Services, hopefully an expert on these matters. 312 MR. VEGH: Okay. And what is your area of expertise. Are you an economist? 313 MR. TODD: I've been working as an economist since I was retained by the Ontario Economic Council in 1976, to be responsible for research in the area of regulation. 314 MR. VEGH: The answer is, yes, you're an economist? 315 MR. TODD: Yes, I am an economist. I'm also an electrical engineer and have an MBA. 316 MR. VEGH: Well, you're not giving evidence today in your capacity as an electrical engineer, you're giving evidence today in your capacity as an economist. 317 MR. TODD: If you -- let's say as an applied economist, a regulatory economist. My -- the expertise that I believe I bring is not a matter of economic theory per se, it's using economic theory as the foundation. But it's been formed significantly by experience working in the industry. So as a regulatory economist, yes. 318 MR. VEGH: So when you say you use economic theory as the foundation, I've done that in the report that you filed in this case? 319 MR. TODD: Yes. 320 MR. VEGH: Okay, I would like to look at that report with you. 321 It's a fairly multi-layered analysis so I would like to, if I could, get to kind of the first principles articulated in your report, and I believe that that starts at page 3. Do you have that? 322 MR. TODD: Are you referring to the section, "Regulatory Framework for Unbundling"? 323 MR. VEGH: Yes, I am. It says that -- the section identifies considerations that, in your view, form appropriate underpinnings, so I take that as setting out kind of the base principle, the appropriate underpinnings. 324 MR. TODD: Yes. 325 MR. VEGH: And so in that paragraph, you say: "The decisions being made in this proceeding are quite limited in scope. However, the issues related to the recovery of the costs of unbundling must be considered within the larger context of the approach being taken to introducing competition into the natural gas marketplace." 326 And this is the sentence I would like to emphasize: "If the larger context isn't given due consideration, there is a very real danger that the decisions made by the Board in this proceeding will be counter-productive in terms of the goal of achieving an efficient and competitive retail market for consumers." 327 So is that the goal that's driving your report and, you say, should be driving this decision, "the goal of achieving efficient and competitive retail markets for consumers"? 328 MR. TODD: That's my understanding of the purpose of -- the primary purpose of unbundling, is to achieve efficient compensation. 329 MR. VEGH: And is that the normative principle behind your report and the normative principle which you say should guide the Board in making its decision in this case? 330 MR. TODD: Yes. 331 MR. VEGH: And that principle should guide decisions on both of the areas that we've been examining over the last week or so, both the cost allocation issue and the marketer-consolidated billing issue? 332 MR. TODD: Yes. 333 MR. VEGH: Okay. Can you turn over to the next page, page 4. At the -- in the second paragraph, you're talking -- this is Board mandate -- under the heading Board mandate. Second paragraph, you talk about what ideally the Board should do and you say: "Ideally, the Board will allow the ultimate structure of the market to be determined by the choices made by customers without the influence of explicit or implicit constraints," et cetera. 334 So when you say the Board will allow the ultimate structure of the market to be determined by choices made by customers, I take it that that's also a normative statement. You're saying the Board should do that. 335 MR. TODD: Well, that's the basic principle of competition, is that customers make the choices. So I would say that that is a statement that is -- is an implication of reliance on competitive markets. 336 MR. VEGH: Right. Fair enough. 337 And so when you talk about choices here, you mean choices between competing or alternative services. Are those the choices you're referring to? 338 MR. TODD: Yes. And competing alternative designs of services and services that are available. Just what they are able to choose to buy which is different packages of services, yes. 339 MR. VEGH: So these are choices among alternatives? 340 MR. TODD: Yes. 341 MR. VEGH: And you say -- you go on to say in the final sentence in that paragraph -- let me -- what you say is: "Unnecessary market distortion should be avoided." So I take that to mean that in structuring the choices available to the customers, the Board should avoid making unnecessary market distortions; is that right? 342 MR. TODD: Yes. What I'm saying is the Board should not be dictating what choices are made available. To the greatest extent possible, it should allow the market to bring forward whatever options they believe will work. And the ones that, in fact, customers want will be the ones that survive. 343 And the entire basis of economic theory is that markets are spontaneous, you know. We -- Adam Smith had "invisible hand." We talked about "invisible hand," not a "visible hand," the regulators coming in and designing a competitive marketplace. So if a regulator is trying to encourage competition, the goal is to have as much hands -- allow as much flexibility to market as possible so the market can determine -- market forces will determine what is available and what isn't. 344 MR. VEGH: And given that we're in a regulated market, the Board should, in making its decisions, try to make the market choice -- or the choices reflect the choices that would be available in a market? 345 MR. TODD: If you're trying to design a competitive market, you want to have one that has choices similar to what would occur in a competitive market. Of course, all decisions by the Board as opposed to an expert witness do have to take into account, you know, other considerations guiding it, such as legislation, that may put a little more pressure on them than they put on me as an economist. 346 MR. VEGH: Well, let me see if I have this. A market distortion arises in this context, leaving aside Adam Smith, but in this context: Where the Board is structuring choices available in the regulatory environment, you would say that a market distortion arises where one of the services offered in that market is made artificially attractive or artificially unattractive because of a regulatory decision. 347 MR. TODD: Yes. Or arbitrarily available or not available. 348 MR. VEGH: Yes, but assuming -- assuming these are services that are available, the Board should ensure that the services -- or the options that are made available are not made artificially attractive or artificially unattractive when compared to an alternative option. 349 MR. TODD: Yes. That would be skewing the market. That would be what's referred to as a playing field that is not level. 350 MR. VEGH: So when unbundling is implemented, just to bring this back down to earth a little bit, when unbundling is implemented, Union will effectively be offering three types of services to customers, right, a system gas service, direct purchase service, and then an unbundled service; right? 351 MR. TODD: At the present time, yes. 352 MR. VEGH: Right. And it is those three services that the customers will be comparing and it's those three services that provide the choices and the alternatives that would be made available to the customers. 353 MR. TODD: Yes. And strictly speaking, those are being offered by the marketplace because they're being offered by Union in conjunction with marketers, in effect, the way you defined them. 354 MR. VEGH: Right. So these are the alternatives presented to the marketplace. 355 MR. TODD: Yes. 356 MR. VEGH: Mr. Todd, just when you were going through your -- your evidence on the history of this issue this morning, I was reminded of the fact that you have participated in a number of previous proceedings which did look at the allocation of costs between two of these alternatives, between system gas and direct purchase. Do you recall those proceedings? 357 MR. TODD: Yes. 358 MR. VEGH: And I believe that this issue came up in the Consumers' case, 497. I may be wrong. But there was an issue about whether the costs of administering system gas and direct purchase should be allocated on a fully allocated basis or an incrementally costed basis; do you recall that? 359 MR. TODD: Vaguely, yes. It was a while ago. 360 MR. VEGH: And that's somewhat similar to the issue here. Should these services recover their full costs or is there a threat of socialization or subsidization of some of those costs; fair? 361 MR. TODD: All things being equal, yes. Market pricing reflects the full recovery of costs, although recognizing that fully allocated costing uses human-devised rules for the way you recover fixed and common costs, not market rules which are different. 362 MR. VEGH: Right. And as I recall your position in that case, which up until now I thought was VECC's position but I now understand to be John Todd's position, as I recall your position in that case, it was that you said that there should be a fully allocated costing between -- for both direct -- administering direct purchase and administering system gas. Do you believe that was your position? Do you recall? 363 MR. TODD: You're referring to my evidence in that case? 364 MR. VEGH: I'm referring to your position, and I read your position in the Board's decisions so I'm not sure if it was in your evidence or your argument or -- 365 MR. TODD: Well, the argument was not my argument because I -- it's not my argument. That's VECC's position. 366 MR. VEGH: Well, was that your position? 367 MR. TODD: My view is that -- has been through a number of issues and it's hard to distinguish, but I presume it would have been fully allocated costing because that's been my general position, is recover not marginal costs but competitive services would be allocated -- fully allocated costs. 368 MR. VEGH: And that's -- in your view, that's consistent with the position you're taking here today, that all the unbundling -- all the costs of unbundling should be collected from customers who use unbundled services? 369 MR. TODD: My recommendations in the evidence do not suggest that approach, because I haven't seen the evidence to suggest that the customers who use the service will be achieving benefits that justify those costs. 370 So the first question is, should the costs be recovered from anybody? And what I do recommend is if the -- the justification to recover those costs from customers would appear to be that there are generalized benefits in terms of lower per-unit costs of natural gas delivered, and therefore it should be allocated on a volumetric basis. That's what appears in my conclusions. There is some discussion of the other point, but that discussion is a discussion of principles. But it doesn't lead to the recommendation, because there is not evidence that the benefits outweigh the costs. And it's not a leap of faith that I was prepared to take. 371 MR. VEGH: Okay. Let's separate those two issues first. The first is whether the costs are justified, and let's leave that aside for the moment. You've made your evidence clear on that. 372 And the second question is, if those costs were prudently incurred, how should those costs be allocated? And as I read your evidence, and perhaps we don't have a dispute at all, but as I read your evidence, you say at page 11, second last paragraph 373 MR. TODD: Sometimes printouts are different. Is that paragraph starting "This approach"? 374 MR. VEGH: Yes. Second sentence, you say, "If and when these customers exercise choice to take unbundled services from a REM, they should pay their share of cost of developing the system as well as transaction-specific costs reflecting the benefit they received from competitive gas commodity and service markets." 375 So I took you to be saying that the cost of unbundling should be recovered, assuming they're prudently incurred, but the costs of unbundling should be recovered from unbundled customers. 376 MR. TODD: That part of the discussion is premised on the assumption that the benefit accrues not to customers generally but to customers who use the unbundled services. And if you have that as your starting point, then it leads to this allocation of the costs. 377 MR. VEGH: Well, that is your assumption, isn't it? 378 MR. TODD: When you get down to my conclusions or recommendations, specifically number 4, that flows from the other part of the discussion which deals with there being benefits generally through a lower delivered cost of gas. 379 Now, I think as I said earlier this morning, I'm somewhat agnostic on those -- where the benefits lie, and my advice to the Board is you decide, number 1, whether you think they're benefits, because I don't have enough evidence to make that conclusion analytically. And number 2, if there are benefits, which form do they take, benefits that accrue to customers using the services or benefits that accrue to the market generally? And that should guide the approach you take. 380 In my conclusions I've leaned in the other direction, that it's more likely that there are some benefits that accrue to the market generally than there are to -- simply to unbundled customers. Frankly, part of that leaning is because, given the size of the costs, it may be infeasible to recover the costs simply from customers who are choosing the unbundled services. That may impede the development of the marketplace and may work against the long-run objectives of facilitating competition, which is clearly a pragmatic concern, not an economic theory concern. 381 MR. VEGH: I thought I understood your evidence, sir. In paragraph 3 of your conclusions or recommendations, you say: "The bulk of the up-front unbundling development cost should be the responsibility of direct purchase customers that, through their REMs, expect to benefit from unbundling of storage and transportation costs." 382 So what is this supposed to mean? Does this mean that you expect -- that you believe that the bulk of the 15.7 million should be recovered from customers who take up unbundled services? 383 MR. TODD: At the time I did not have before me statements about no take-up of these services. So what this sets out in terms of the recommendations is that you recover what you can in terms of those charges. And my understanding of the evidence at this time is that the bulk of the costs is defeated by feasibility, and the bulk of the costs is saying, in principle, if those customers are gaining benefits, you seek recovery in that way. 384 My understanding, as the evidence has come in, is that that may be less feasible than I thought at the time when I was writing the evidence. 385 But yes, the first cut, as you suggest, would be -- again, assuming, and I've stated a couple of times I'm -- my advice to the Board depends on their view of where the benefits lie, and what I've said on a number of occasions is given the structure of the unbundling, I don't see a lot of benefits. 386 In my view, over the years, my primary potential incremental benefit of further unbundling, particularly for the residential class, would come from subjecting the high costs of customer care, in particular the technology systems, to a competitive competitor. So, frankly, I'm struggling a bit with how you recover those costs if you recover them. And to an extent you can, ideally bulk but probably not practical, you recover them from those customers who are using those services; and if you can't, then you go to the market generally on the premise that there are some general market benefits. 387 MR. VEGH: Well, ideally, going back to your first principles and leaving aside the negotiations you have undergone with yourself, but going back to your first principles, ideally shouldn't you be dealing with the costs in a way that does not create market distortions when compared to the alternatives that are available to customers? 388 MR. TODD: To the extent that the costs are specifically there to provide an option to the customers of unbundled services, and choosing unbundled services leads to a saving to either REMs or their customers or both, then those costs should be recovered from them, ideally, assuming that's feasible. 389 MR. VEGH: But don't you have to consider how the costs are recovered for the alternative services? Isn't that what you said in your evidence, that you really have to prevent distortions among alternatives? 390 MR. TODD: Regulators make decisions on a step-by-step basis based on what is being heard in a particular proceeding. What I have suggested is that the end result of a series of incremental steps is not necessarily consistent overall, and it may be about time to review the way the costs have been allocated generally and make sure that they are being recovered in a valid, i.e., causal-cost basis. 391 MR. VEGH: Well, what you said in your evidence is that if the Board does not apply the principles properly, then it could be -- this decision could be counter-productive. 392 MR. TODD: Yes. In that it could -- if costs are not allocated properly, you can impede competition, going back to, I think it was, Mr. Warren's reference to price signals, you could end up with price signals which skew the marketplace. 393 MR. VEGH: Right. So when the Board addresses cost allocations for the different services made available by Union, the system gas service, bundle direct purchase and unbundled, the Board should then be applying the same allocation methodology across all three of them? 394 MR. TODD: It should be applying the appropriate, right methodology across all three of them, yes. 395 MR. VEGH: Well, they should be consistent so that one is not made artificially attractive or unattractive? 396 MR. TODD: Consistently applying an incorrect methodology does not remove market distortions; consistently applying a correct methodology would. So I put -- I put implementing the correct methodology ahead of consistency. 397 MR. VEGH: So you have three services; two are socialized or subsidized but the other should recover its own cost. And you're saying that does not create a market distortion? 398 MR. TODD: If that creates a concern, then the correction for that would be to go back to the other two and remove the subsidy, not introduce a third service which is being subsidized. 399 MR. VEGH: Usually you try to correct problems before you cause them, but let me go on, Mr. Todd. 400 I just want to get -- deal now with some clarifications around some of the issues that came up in your discussions this morning. 401 First was around the idea -- I think you were responding to Panel Member Jackson, to the Chair, and I just want to make sure I understand how that exchange worked. 402 There was a discussion around the idea of excluding or including billing. And you said that you referred -- that what you're proposing is to put billing in a separate package. And it wasn't clear to me whether the two of you were talking about billing to the same types of customers. 403 Do you see a difference between the contents of the billing package whether Union bills a marketer on behalf -- bills a marketer which has aggregated a number of customers versus a retail billing package to customers, to end-use customers? 404 MR. TODD: Yes, those would be different services. The one is really a provision of information. I suppose you can call it a billing to a retailer on a wholesale basis, and that would be one concept of a bill. 405 There are different concepts of a bill, of sending out a million bills or 500,000 bills, whatever the case may be, to individual end-use customers. There are differences in call centre costs. There are differences in -- in systems. Mailing, obviously, with a retailer, you're probably providing on an electronic basis, through the web, without a stamp information to them, whereas you're sending out a mailing to the customers, whatever the mechanism of collection may be. 406 MR. VEGH: Okay. So different service, different prices, different packages; right? 407 MR. TODD: Yes. Retailer billing and end-use customer billing would be different billing services. 408 MR. VEGH: And finally, just on your reference to -- yes, in discussion around implementation, you also refer to task forces going back, I think, to 1996 that have looked at this issue. And I would like you to comment on the concern that some parties would have if this whole process were to lead to the establishment of yet another task force. 409 As you may know, my clients have participated in many of those task forces and don't have infinite resources or patience to be dealing with this issue over and over again. What would your -- what is your view on the need for some sort of direction coming from this case on what the next steps are for billing? 410 MR. TODD: Well, I suppose as a consultant, and loyal to the consulting group, I should say a task force is absolutely necessary. However, like you, as I've heard some of the same issues being debated and read, Professor Schwindt's evidence with all the problems that have been discussed over and over again over the years, I would have the same frustration with, let's go back and revisit those same issues again. 411 At the same time, resolution is required, and either the Board steps in in a more proactive way or an industry group has to, in one way or another, resolve the issues. 412 I do not think it is appropriate to ask one party to go away and design the system, especially not if you say, go away and we'll give you a blank cheque, design the system, and come back with what you think is appropriate. That's just not the way to get an effectively competitive marketplace. 413 MR. VEGH: What about the prospect of the Board making a decision in the GDAR and instituting a process, which it would have to do, to finalize Service Level Agreements? 414 MR. TODD: I would recommend to the Board that they provide as comprehensive policy guidance as possible so that the parties know the policies and principles that should guide them to resolution of the issues. And in -- and then the parties should be able to work out the technical details themselves and, frankly, as one of the founding members of OEMA, the DPIC at the time, the Direct Purchase Industry Committee, I have for many, many years been a strong believer that the details should be worked out by the industry groups. And frankly, I think that over the years there has been a fairer bit of success with that despite the frustrations. 415 Where policies cannot be resolved, I think smoother access back to the Board could be desirable. Without a hearing process, get the Board to, excuse the words, kick a little bit of butt or straighten out the issues to keep the parties moving along. 416 MR. VEGH: OEMA stands for Ontario Energy Marketers Association? 417 MR. TODD: That's correct. Now, the Ontario Energy Association is in a position to take up -- one of their sub-committees taking up the role that OEMA has served now for a number of years. 418 MR. VEGH: And just to conclude, what is your view of the likelihood of being able to resolve these, what you call, technical issues without some clear direction from the Board on what the policy is? 419 MR. TODD: Without clear direction from the Board, there are certain issues which are irresolvable, and one can see that through the consistent failure to resolve certain issues through the many task forces. With clear guidance from the Board on those issues, the balance of the issues are, in my view, highly resolvable. 420 MR. VEGH: Thank you, sir. Those are my questions. 421 MS. FLAHERTY: 422 CROSS-EXAMINATION BY MS. FLAHERTY: 423 MS. FLAHERTY: Mr. Todd, my name is Michelle Flaherty and I represent the Industrial Gas Users' Association. 424 I'm sorry, I just proceeded, Mr. Chair. I'm assuming you weren't discussing a break, or were you? 425 MR. JACKSON: No, that's fine, Ms. Flaherty. I think we'll try to go until about 12:30, so please proceed. 426 MS. FLAHERTY: I expect my questions will be very brief in any event. 427 MR. JACKSON: Good. We will use that time. 428 MS. FLAHERTY: Mr. Todd, if I correctly understood your evidence in chief this morning, you propose a number of alternative allocation methods to deal with these costs, and these are, first, to allocate the cost to those who benefit from it, and, in this connection you made reference to a DPAC-like charge. 429 MR. TODD: The Direct Purchase Administrative Charge? I mean, to clarify, both proposals were allocating costs to those who benefit. Your question is, is it only customers that use it that benefit, or is it all customers generally that benefit, which leaves me a different analysis of the benefits. 430 MS. FLAHERTY: That actually takes me to my second question which was, both of those alternatives that you proposed are based in the principle of cost causality, then? 431 MR. TODD: Yes. And what I have said in my evidence and repeated today is that that view of cost causality flows from the statement at paragraph 6.106 in the Board's decision in 1999-0017, which I've already quoted. 432 MS. FLAHERTY: Thank you. Now, if I could take you to Exhibit 22.1, which is an answer you gave to an interrogatory. 433 MR. TODD: Yes. 434 MS. FLAHERTY: I'll be referring to page 2 of that exhibit. 435 MR. TODD: Yes. 436 MS. FLAHERTY: So the first approach that you discuss is the benefits of unbundling are the cause of the related costs, and in that scenario you propose that the costs be allocated-based volumetrically. And then in the third -- I guess, fourth full paragraph of that page, you write: "An alternative approach would be to view the mechanics of the process as the indicator of cost causality." 437 Mr. Todd, I'm struggling a little bit to understand what you mean by the mechanics of the process as the indicator of cost causality. Could you provide me with an explanation of what you mean by that? 438 MR. TODD: That's transaction-related costs. So if you're -- if your view is that you've got costs related to processing paper, that's the mechanics. 439 MS. FLAHERTY: So just to make things as simple as possible, in the paragraph above you refer to benefits being the cause of the related costs. Under the second scenario, what would you term the cause of the costs? 440 MR. TODD: If customers came forward and said, "I want you to implement a certain mechanism," and a certain cost to providing those administrative activities for them, then it would be appropriate for them to pay for those administrative costs; for example, with respect to the issue of retailer-consolidated billing, I believe there has been some discussion that the there will be costs related to that. The retailers and distributors, in this case Union, could get together, work out a mechanism for passing information back and forth, work out the costs and develop Service Level Agreements that relate to the recovery of those costs. And that would be, you'd like the service, okay, here's the service, here's what it's going to cost, and the customer says, yeah, that's worth it to me, I'll take it. 441 MS. FLAHERTY: So if this process is driven by transactions, then would you agree that cost recovery should also been transactional? 442 MR. TODD: No. The question is if unbundling is driven by -- if the entire process of implementing unbundling was driven by the need to service transactions, that would be appropriate. What I'm suggesting in my evidence is that the leap of faith to unbundling has been driven by the belief that there are benefits, and therefore, in my view, as expressed here in my evidence, what I'm saying is that we are incurring these costs in order to achieve a set of benefits. These benefits -- there seems to be more support, certainly, from Union's witnesses, and I would concur with them that there is probably more room for benefits that would flow from generalized benefits in the marketplace, i.e., a lower delivered commodity rate, than there are benefits that occur uniquely to customers who choose unbundled services. And therefore the driver is the benefits, not the transactions. 443 MS. FLAHERTY: I'm not clear how that fits in with this alternate approach that you suggest in paragraph 4, because you're talking about the mechanics of the process as being the indicator of cost causality. It doesn't refer to the benefit. 444 MR. TODD: What I was laying out were the alternatives that have been put forward by different parties and that reflects one of the views that's being put forward. It's not one that I accept, but I'm mapping out the different views. That's the analytical approach; you consider all the different perspectives. 445 MS. FLAHERTY: If I can now take you to page 16 of your report, and specifically paragraph 4. 446 MR. TODD: Yes. 447 MS. FLAHERTY: So the first part of that paragraph reads: "To the extent that Union demonstrates that any of the up-front costs are related to facilitating customer choice generally, these costs should be disposed of to all customer classes." And I'm just going to stop there. 448 Would you agree, then, that at least that part of the paragraph or the sentence is consistent with the principle of cost causality? 449 MR. TODD: Yes. Generally means there is a benefit applying to all, therefore all pay, yes. 450 MS. FLAHERTY: Okay. And I'm just going to complete the sentence. It says that "These costs should be disposed of to all customer classes on the basis of annual volumetric use rather than the weighted number of customers." 451 What I fail to see, Mr. Todd, is the causality basis for that. How do the annual -- how does annual volumetric use affect customer care? I'm sorry, not customer care. But up-front costs that relate to facilitating customer choice, how is that based on volume? 452 MR. TODD: That's back to the benefits. If what you're doing is you are facilitating benefits to customers, and the way those benefits have been characterized throughout this proceeding is a lower commodity cost, then the distribution of benefits is on a volumetric basis. 453 MS. FLAHERTY: But then -- 454 MR. TODD: It's not a -- a large volume customer with a very large volume does not receive, say, the benefit -- does not receive a $14 benefit and the small volume customer receives a $14 benefit. That's not the way a lower price flows through to customers. A lower price is a lower price per unit and therefore the more you use, the more you benefit from the unbundling process which is being done for a generic price decline in the marketplace. 455 MS. FLAHERTY: As I read that sentence, what we're talking about are up-front costs that are going to be allocated to customers generally, regardless of whether or not they choose it use the unbundling services, regardless of whether or not they're going to benefit from a presumably lower per-unit cost. 456 MR. TODD: But my point is what is the reason for incurring those costs? Let me use an illustration. 457 If you incur, and I won't use realistic numbers, I'll keep it simple, if you incur half a million dollars in costs to achieve a million dollars in benefits, and $999,000 of those benefits accrue to one rate class and you accrue -- and you charge them 1 per cent of the cost, then those customers that receive the bulk of the benefits and the very small share of the costs will clearly be better off. The other block of customers who are bearing most of the costs and very little, relatively speaking, of the benefits will be worse off. And what I'm suggesting is that that is not -- that is not the principle underlying unbundling. The principle unbundling was not done in order to get an end result that benefits some customers and makes other customers -- not meant to benefit some classes of customers and make other classes of customers worse off. 458 therefore, that is why I define the cause of the unbundling expenses to be the pursuit of benefits, and therefore the way we allocate costs is on the basis of those benefits so that everybody in -- you know, the target is, it's going to be somewhat of a simplification, but the target would be that people bear the costs in proportion to the benefits that flow through to them. And the way you measure that is based on volume, if your benefit is a lower unit cost. 459 MS. FLAHERTY: But then how would a large volume customer who doesn't take up unbundling services have any benefit from the up-front cost related to facilitating customer choice? 460 MR. TODD: Because the whole principle on which we're building this -- this case is that with unbundling comes a lower delivered cost in the marketplace, lower market cost, which everybody enjoys. 461 It's the same principle as was applied with the initial introduction of competition in 1985 in the wellhead price, which says that price goes down for everybody whether they opt into competition or not, and therefore, everybody should bear some of those costs. Even system gas users in that case, system gas customers, end up -- ended up eventually with a lower price from the Alberta suppliers. 462 MS. FLAHERTY: But why, then, should the cost not be allocated to all gas users generally and not just those who take up the unbundled service? 463 MR. TODD: I'm saying if the benefit is a decline in the volumetric price, it is allocated to all customers generally, based on the volume of use which is based on their -- a portion of the benefits. 464 MS. FLAHERTY: Okay. I just, finally, would like to take you to page 12 of your report. Here you mention sunk or stranded costs. I would just like to ask you for your view as to how, assuming there are -- if there sunk or stranded costs, what you think would be the proper way to recover those. 465 MR. TODD: First of all, a determination is needed as to whether they are sunk or stranded, having been prudently incurred. Assuming they have been prudently incurred in the first place, then if they are a consequence of the unbundling process, then they would be rolled in with other costs, to be recovered on the basis of -- in the same proportion to different customers and classes as their -- as the benefits that accrue. So those would be also recovered on the volumetric basis, i.e., proportion, in a way that is consistent with the distribution of benefits. 466 MS. FLAHERTY: Those are my questions. Thank you. 467 MR. JACKSON: Thank you, Ms. Flaherty. Are there other intervenors or are we at Union? I think we're at you, Ms. Jackson. 468 MS. JACKSON: Thank you, Mr. Chair. 469 CROSS-EXAMINATION BY MS. JACKSON: 470 MS. JACKSON: Mr. Todd, you made an observation this morning about the approach to the steps of unbundling. You said that we should not proceed with unbundling steps unless there is a net benefit to consumers, and we shouldn't do it if there aren't. Do you recall saying that? 471 MR. TODD: Yes. And we're talking about steps of unbundling? 472 MS. JACKSON: Yes. 473 MR. TODD: In other jurisdictions there is unbundling, but exactly how you unbundle? 474 MS. JACKSON: I'm talking about taking a step back, which is what I understood you were talking about. And I understood you were saying we shouldn't take a step until we've determined that there is a net benefit to consumers. That's your view? 475 MR. TODD: That's correct. 476 MS. JACKSON: And do I take it that's the approach of the organization that you're with, Econalysis? 477 MR. TODD: I'm president of Econalysis, but I have my opinion and others in the firm may have their own opinions. 478 MS. JACKSON: Do you think anybody in your -- I'm sorry. 479 MR. TODD: I have not canvassed others in the firm to see whether they have different views or not. 480 MS. JACKSON: You have no reason to think they do, I assume? 481 MR. TODD: No. 482 MS. JACKSON: All right. And you have no reason to think that VECC has a different view of that issue. 483 MR. TODD: I'm sure they'll tell you in final argument. I've had clients who rejected my positions in final argument before. 484 MS. JACKSON: I understand that, but you've had a lot, as we've heard, a lot to do with this organization over the years, and I am assuming you have no reason to think, given their mandate, they take a different view on that issue. 485 MR. TODD: Probably not. 486 MS. JACKSON: Sorry? 487 MR. TODD: Probably not. 488 MS. JACKSON: Thank you. And if I could just -- and that's been consistent -- I take it, as far as you know, your organization and VECC, you have taken a consistent view on this issue throughout the steps in the unbundling process. 489 MR. TODD: Yes, that things should not be done without there being demonstrable benefits. 490 MS. JACKSON: All right. Now, you've talked about the kind of end state or billing proposal that you see in a number of places, and I think it's become fairly clear -- I'm looking at page 14 but I think it's elsewhere, too -- that what you're advocating is a billing model that flows from a -- from a wholesale service. Is that fair? 491 MR. TODD: That's correct. 492 MS. JACKSON: In other words, the distributor becomes the wholesaler of the distribution service. 493 MR. TODD: Yes. 494 MS. JACKSON: And the marketer should be able to resell distribution services acquired from the distributor as the wholesaler? 495 MR. TODD: Yes. 496 MS. JACKSON: And when you talk about marketer- or retailer-consolidated billing, that's the model you're talking about? 497 MR. TODD: Yes. 498 MS. JACKSON: And in that model, the consumer ceases to be the distributor's customer; fair? 499 MR. TODD: In most markets, you end up with a mix of different models so that for at least some customers, assuming that choice is made, it may end up that some customers are not. 500 MS. JACKSON: Fair point. To the extent that somebody takes up the marketer-consolidated billing service that you're describing, in that scenario, the consumers served by that marketer ceased to be customers of the distributor. 501 MR. TODD: That's correct. 502 MS. JACKSON: They become the customers of the marketer. 503 MR. TODD: Yes, who are also referred to as retailers. So there is -- particularly in that model, you can have a wholesaler and a retailer and that -- under that model they would be dealing with retailers as distinct from wholesalers, so they would be the customer with the retailer not the wholesaler. 504 MS. JACKSON: That's right. The customer of the retail marketer. And the marketers would package and re-sell gas commodity transportation and downstream services, including distribution. 505 MR. TODD: Yes, and potentially it would be distributing or selling energy services -- 506 MS. JACKSON: Sure. 507 MR. TODD: -- as well, yes. 508 MS. JACKSON: And the marketer would determine the retail price of the distribution and other services. 509 MR. TODD: They would set a price on a package basis, yes. 510 MS. JACKSON: And how they accumulated that price for the components, including for distribution, would be for them to decide. 511 MR. TODD: That's correct. 512 MS. JACKSON: Now, you've been candid to say that in your interrogatories, that you're not qualified to say whether this does or doesn't comply with the Ontario Energy Board Act. But I take you to be saying as well that if the result of this model is a fully competitive marketplace, there ought not -- there ought not to be any need for a regulation of the resulting marketer price; is that right? 513 MR. TODD: Yes. If we go back through the discussions from the beginning, the guidance has been given to various task forces that essential says: Either we are going, or if we are going to a competitive model, how do we do it? So the premise is, the premise I've always operated under is, number 1, let's have a discussion on the assumption we're going, and number 2, how do we design it so as to make it at least workably competitive. 514 MS. JACKSON: And if it's workably competitive, you don't see a need for regulation of the resulting price; correct? 515 MR. TODD: I'm an economist. I believe in competitive markets. So yes, what the competitive market says is that you put all the pieces together, the price of various players in the marketplace will be dictated by competitive forces which will drive prices to a level which allows competitors a normal competitive return. 516 MS. JACKSON: And if the resulting marketplace is not workably competitive as you say, I think, in interrogatory 22.6, there would be a need for regulatory protection of the resulting price? 517 MR. TODD: No. If the end result is -- if the end result is not workably competitive, everything needs to be regulated and you should never have gone there in the first place because you've incurred unreasonable costs and so on. 518 MS. JACKSON: Okay. 519 MR. TODD: What I'm saying is that once you make the leap of faith and decide to do that, you're jumping across a river. Don't jump into the middle of the river, jump across it. That's all I'm saying. Don't -- if you really believe it's going to provide benefits and you really believe you're going to have workable and effective competition, you better go all the way for it, or what you're doing is defeating yourself by saying, we'll stop halfway, undermine competition, and they're guaranteed not get to go that end result. 520 MS. JACKSON: So the leap of faith ends up in a place where you don't require the regulation for the reasons you've indicated; fair? 521 MR. TODD: Once you make the leap of faith, yes. You're saying, I believe we are going to get there. We listened to Mr. Wilson speaking yesterday morning. Look what's happening in electricity with the electricity market. It's quite clear where we're going, and all I can say is if we're going there -- and this has always been my advice to the clients, if you're going there, don't even ask whether competition is good or not. Make sure that you get a model that is fully competitive. 522 MS. JACKSON: So you have to be sure that competition -- as sure as you can be that a fully competitive market will be the result? 523 MR. TODD: Design it to maximize that probability, because that's your only hope of making it pay off. 524 MS. JACKSON: It's your only hope, okay. And if the distributor's service is, though -- let me posit at a different model. 525 I understand this is not your model, but if the distributor's service under a marketer-consolidated billing regime is not a wholesale service -- so for example, if the retailer becomes the customer's agent for the purposes of receiving a bill, then you would agree, in that model, the consumer remains the distributor's customer; correct? I understand that's not your model. 526 MR. TODD: If we -- yes. For those retailers who choose to be agents, they would be a middleman between the distributor and the customer, and the customer would still be the customer of the distributor, yes. 527 MS. JACKSON: And in that case, in effect, the distributor continues to provide a retail service to the ultimate consumer, through the agency of the marketer. 528 MR. TODD: Yes. Because then, in theory, the agency is -- the agent is representing the customer as part of the customer, buying a package of services, yes. 529 MS. JACKSON: And you've indicated that customer care, as you use that term, includes the billing cycle, customer information and customer support functions? 530 MR. TODD: Yes. So in that model, for example, with the marketer, I won't call him a retailer, the marketer as agent calls about the bill would go -- certainly about the distribution part of the bill, would go through to the LDC. They would not be calls to the marketer. 531 MS. JACKSON: Yes. And you've said clearly, customer care, including billing, is essential to all retail and retail service companies. Do you recall giving that evidence? I think it's at 22.14. 532 MR. TODD: Some customer care. I mean customer care is part of providing service to customers. Certainly in a competitive market, what's entailed in customer care is a wide range of levels of service. 533 MS. JACKSON: Wide range of services. But as you use that term, it always includes billing, customer information, and customer support. 534 MR. TODD: Yes. The existence of those in some form are required. 535 MS. JACKSON: And customer care, including the existence of those in some form, is essential to all retail commodity and service companies? 536 MR. TODD: Yes. 537 MS. JACKSON: And the relationship with the customer is key to corporate accountability? Do you recall saying that? 538 MR. TODD: Yes. And whomever the customer may be, be it an end-user or a retailer, yes. 539 MS. JACKSON: Yes. Now, you said earlier this morning in a summary of Dr. Schwindt's evidence, for which you apologized, that he was suggesting in some way that the status quo was okay. 540 Do you understand that under the existing regime, marketers are billing their customers? 541 MR. TODD: Currently, marketers can bill their customers for the commodity if they wish to. 542 MS. JACKSON: And nobody -- they can, but do you understand that anybody is? 543 MR. TODD: There are some commercial and, I would presume, industrial customers -- 544 MS. JACKSON: Not to the residential small market. 545 MR. TODD: I'm not aware of any who are billing the residential market. I believe there was a plan put in place, which I think was just temporary, by Union Energy which was sort of an annual bill to customers for the use of gas supply. And I'm certainly not aware of the status of that now and not sure how far they got off the ground. 546 MS. JACKSON: And you know that Union Energy is no longer an affiliate of Union Gas and no longer called Union Energy? 547 MR. TODD: Well, I was referring to Union Energy which was doing it at the time. 548 MS. JACKSON: Okay. 549 MR. TODD: Which was about four or five years ago, and I have no idea what happened with that. I think it -- I think it was terminated or maybe never even got started. But that was certainly a plan. That's the only one I'm aware of. 550 MS. JACKSON: Now, if a marketer took up the opportunity you say already exists to bill directly, or took up a direct billing opportunity of the sort either offered by Union or contemplated in the draft GDAR, I take it from what you say, the issue of shut-off that you've referred to would still exist? In other words, you would still want that issue resolved? 551 MR. TODD: Absolutely. Otherwise, you would greatly disadvantage any option other than consolidated utility billing. 552 MS. JACKSON: And I take it that you'd suggest that whatever the resolution is, it should be the same for direct billing, if it exists, as it should be for marketer-consolidated billing, if it exists? 553 MR. TODD: Yes. There should be a level playing field in terms of ability to collect bills, 554 MS. JACKSON: And do I have it that you say the resolution of that issue should be that marketers should be able to direct shut-offs for non-payment of their services? 555 MR. TODD: No, that's not -- I have put my position forward previously and have said the approach should be the approach that is consistent with other competitive markets, which is that suppliers must enforce contracts on their own through the courts and so on or a collection agency, whatever the mechanism may be. 556 If I don't pay my rent, I can be kicked out of my apartment but I cannot be stopped from renting another one. So shut-off is, in effect, saying you cannot get supply. Shut-off would be a necessary part for all retailers to be able to do while the customer is their customer. But in shutting them off, the customer then would be able to contract elsewhere and -- in which case, when somebody else is supplying gas, the gas would be turned back on again. So shut-off would become different than it is now. 557 MS. JACKSON: Are you saying that nobody should be able to shut off gas for non-payment, then? 558 MR. TODD: No, I'm saying that all parties would be able to shut off their supply of gas, but any customer who then arranges an alternate supply could not be impeded from getting gas from another supply. That would be consistent with the practice in any competitive marketplace because that's the reality of the marketplace. If one person doesn't supply me, I can go to somebody else. 559 MS. JACKSON: And to the extent that Union Gas, for example, continues to supply commodity to a particular household, does it retain the right of shut-off under your model for non-payment? 560 MR. TODD: It would retain the right to shut off future supplies of its gas, but it would not retain the right to shut off a customer from getting gas from another supplier. 561 MS. JACKSON: So it would not retain the right of shut-off for non-payment of the distribution portion of the bill? 562 MR. TODD: Not if -- in my model of wholesale service, not if they find another supplier, retailer, who is providing them a package of distribution and gas services. 563 MS. JACKSON: And if the -- if, for some customers at least, Union retains the right -- retains the distributorship relationship and the consumer is a retail customer, in that circumstance, are you suggesting that Union would retain the right of shut-off for the distribution and commodity? 564 MR. TODD: They would retain the right to shut off a supply of distribution services from them to the customer just as anybody in the marketplace can. But they could not impede the delivery of those services by somebody else to that customer, which, again, is consistent with the competitive marketplace. If we're going to a competitive marketplace, let's go there. 565 MS. JACKSON: And this issue of shut-off that you describe has been an issue, in your mind, for quite some time? 566 MR. TODD: Yes. 567 MS. JACKSON: And in the minds of others? Or, well, I shouldn't say -- you can't speak to the minds of others. It has been the subject of discussion in the consultations you've referred to? 568 MR. TODD: The issue does arise repeatedly and there is anywhere from small to extensive discussion in different forums that have -- 569 MS. JACKSON: With very different views as to the appropriate resolution of that issue from different participants. 570 MR. TODD: Yes, there are different views as there is on every topic. Without the resolution of other issues -- let's say it hasn't become necessary to work through to a final resolution on the shut-off. But, frankly, I didn't think there was -- well, I guess I can't comment on how extreme the differences were for parties. I've never felt it was a -- 571 MS. JACKSON: All right. 572 MR. TODD: -- deal-breaker in itself. 573 MS. JACKSON: But as you say, you can't comment on the views of others. 574 Can I just ask you, then, sir, you indicated that you think that the Board, if I understood you correctly, in this proceeding should provide as much direction on policy with respect to the billing model that you're seeking as possible, and I take it, is shut-off one of those issues on which you're asking this Board to provide direction? 575 MR. TODD: I don't think that in this proceeding the Board has the evidence necessary to make a decision on that matter. 576 My advice, based on my read that the shut-off issue is not a deal-breaker in itself, would be to give the parties a chance in working through the details. That would be one of the details. 577 MS. JACKSON: All right. 578 MR. TODD: If they were unable to resolve the issue, then it would be necessary to come back to the Board for guidance on that as a policy issue. 579 MS. JACKSON: What are the issues on which you're saying this Board should -- I took you to be saying that the Board, who is hearing this proceeding, should be providing specific guidance as to what marketer-consolidated billing should look like. Did I misunderstand you? 580 MR. TODD: No. What the Board -- as I understand the Board process, the Board can only rule on matters that are before it in this proceeding. There may be other policy issues that the parties feel need resolution and certainly, if you go back to the disputed positions in the various task forces and identify what are -- what remain as disputed positions -- 581 MS. JACKSON: I'm not asking you what remained as disputed positions in other task forces. Are you asking this Board, in this hearing, to provide specific direction on the shape of marketer -- on the nature of marketer-consolidated billing. 582 MR. TODD: Well, frankly, my view at the beginning of this hearing was that that is part of the decision on the Distribution Access Rule, and that issue has been brought into this hearing, so it doesn't matter where the Board rules on it. I would expect that we're going to see a decision on that matter in either the Distribution Access Rule decision or this decision. 583 MS. JACKSON: And in this decision, what specific issues of marketer-consolidated billing do you think the Board should give direction on, if any? 584 MR. TODD: The issue of how it should be done if it's not dealt with in the Distribution Access Rule. It's only being dealt with here because it's being asked to be included in the proceeding, and I assume the Board felt it needed more information on the issue, despite the DAR process. 585 MS. JACKSON: So you're talking about directions as to process not directions as to what marketer-consolidated billing should be like. 586 MR. TODD: No. I'm saying that the Board -- I can't tell the Board where to make the decision. I'm saying the Board has heard evidence in two different proceedings. It should make a decision in one of those proceedings as to what should be available in the way of billing options; in particular, whether or not retailer consolidated billing should be available. 587 MS. JACKSON: All right. With respect to marketer-consolidated billing and wherever that direction comes, what direction are you suggesting the Board should provide as to what marketer-consolidated billing is like? 588 MR. TODD: I am suggesting that one of the options, and it should be an option, would be retailer-consolidated billing, consistent with the electricity sector Retail Settlement Code. 589 MS. JACKSON: Is that the extent of the direction you're looking for? 590 MR. TODD: Well, consistent with drilling down to the next level is that the direction should be that they explore options, determine the costs and benefits of that, and that as a default position they should proceed unless the parties come back to the Board and say it doesn't make -- the numbers don't work out. The costs exceed the benefits and we jointly have explored the most cost-effective way to actually implement it and we can't come up with a cost effective way, in which case it would be abandoned. 591 All policy decisions of the Board, in my view, would have to be subject to cost realities. And if new information comes forward, then you reconsider the policy. 592 MS. JACKSON: Okay. Mr. Chairman, I do have a few more questions but I recognize that I wasn't paying attention and I've gone a little bit past your hour. 593 MR. JACKSON: That's quite all right. 594 MS. JACKSON: I apologize. 595 MR. JACKSON: I was perhaps being ambitious in thinking that it might be useful to carry on and see where we could get a logical break. But I have no trouble with the way this is evolving, and given that you will be here anyway when we resume after lunch, let's break for lunch and take approximately an hour today if we could so that we would be back here, say, by quarter to two, if that's satisfactory. 596 MS. JACKSON: Thank you. 597 MR. WARREN: Mr. Chairman, I would like to advise the Board I have only a very few questions for Professor Trebilcock but something has arisen at my office, a fire I have to go and put out, or -- or get consumed by it one way or the other. And I'm going to impose on my friend Mr. Janigan to ask the four or five questions that I have. So I apologize but I can't be here this afternoon. 598 MR. JACKSON: Thank you, Mr. Warren. 599 We'll rise, then, until a quarter to two. 600 --- Luncheon recess taken at 12:40 p.m. 601 --- On resuming at 1:50 p.m. 602 MR. JACKSON: Please be seated. 603 MR. JACKSON: Ms. Jackson, when you're ready. 604 MS. JACKSON: I am as soon as Mr. Todd is. 605 Mr. Todd, do you agree that in the supply of the gas commodity marketers compete with Union Gas currently? 606 MR. TODD: I think traditionally Union has said they don't compete. It's because of the cost pass-through. But it is a competitive offering. That's the term from the marketplace perspective, one of the choices the customers have to -- 607 MS. JACKSON: Part of the competitive marketplace, and that would mean that Union Gas is a competitor of the marketers in the commodity. 608 MR. TODD: The answer is yes. 609 MS. JACKSON: And you've said that if the playing field is to be level in a market, all competitors must be entitled to offer consumers comparable bundles of services. 610 MR. TODD: As much as is practical, yes. 611 MS. JACKSON: Okay. Could you take a look with me, sir, at the -- just on the question of Exhibit C1.28 and we have it here. I'm not sure if you have it there. 612 Page 2. This is an interrogatory that compares the billing options that would be available under the current draft GDAR for various groups of people. I'm looking at the table 1 at the bottom of page 2. Do you see that? Do you see that? 613 MR. TODD: Yes. 614 MS. JACKSON: And you'll see that under the proposed GDAR, combination marketers or marketers can offer gas distribution, gas commodity, electricity distribution, electricity commodity and other goods and services; true? 615 MR. TODD: Yes. 616 MS. JACKSON: And the gas LDC can offer a billing of gas distribution and gas commodity but not electricity distribution, electricity commodity or other goods and services; true? 617 MR. TODD: Yes. 618 MS. JACKSON: An electricity LDC cannot offer gas distribution, gas commodity but can offer electricity distribution, electricity commodity and can offer other goods and services; true? 619 MR. TODD: Yes. 620 MS. JACKSON: And would you agree with me, sir, that's a level playing field with respect to billing? 621 MR. TODD: That's not a level playing field. That's for specific policy reasons, the monopoly versus competitive market but -- 622 MS. JACKSON: It's not a level playing field, is it? 623 MR. TODD: That is not -- they do not each have the same opportunities as regulated utilities, because gas is not permitted to go into electricity services or other goods and services. The separation has been required; there is legislative background to that, so -- but the consequence of that is, for policy reasons, is the difference in the playing field, the consequences of difference in the playing field. 624 MS. JACKSON: Now, you've said, sir, on another topic, at page 7 of your evidence, you have expressed concern about customer confusion as a result of the unbundling proposals? Do you recall that evidence? 625 MR. TODD: Yes. 626 MS. JACKSON: And in particular, you say the inclusion of all of the listed information on the bill, this is with respect to unbundling, will provide transparency or confusion for small volume -- whether the inclusion of all the listed information on the bill will provide transparency or confusion for small volume customers is questionable. And you've suggested additional focus groups should be conducted before the bill is implemented. Do you recall that evidence? 627 MR. TODD: Yes. 628 MS. JACKSON: Do you agree, sir, that -- and what you're expressing a concern about is that this level of information may confuse customers. 629 MR. TODD: The reality is that some customers will find it confusing and abstract, but then other customers will find it attractive. That's been the historical experience with bill changes, to include market information. 630 MS. JACKSON: And if you talk about consolidated bills where other services are, in your terms, cross-sold or up-sold, do you agree that with the introduction on bills of further products and information there may also be customer confusion? 631 MR. TODD: Yes. I mean the more -- if there is an inability to simplify, more information almost inevitably will result in more confusion for some customers. And it requires greater effort in order to understand what you're looking at. 632 MS. JACKSON: And the other element, it strikes me, which may be problematic for customers is if a lot of services are billed together, the billing may be bundled together; fair? 633 MR. TODD: Yes. And what -- 634 MS. JACKSON: Sorry, I should say that the pricing may be bundled together. 635 MR. TODD: The pricing, if a customer -- if a particular marketer chooses to provide a bundled bill, the pricing will be bundled, yes. 636 MS. JACKSON: And the result may be prices are bundled in a way that makes prices of individual products and services not transparent. 637 MR. TODD: For customers who go with people who provide a bundled bill, yes. That's a choice between those who break it out or those who don't. 638 MS. JACKSON: And to the extent that prices are transparent, customers are less well-informed in the choices they make. 639 MR. TODD: Sorry, to the extent that prices are not transparent, they are not as well-informed, if they choose to be, that's correct, unless they can get a breakdown of the bill somewhere. I mean, where this comes from is -- is you recognize from my CV I have done a lot of other work over the years in the telecom side as well, and with the initial period of long-distance competition, customers were very confused by the proliferation of information in the marketplace. And ultimately what has prevailed in the marketplace is very simple price offerings. Ten cents a minute, fixed prices for the month, and $10 a month, that type of thing. 640 In essence, customers get to choose whether they want simplicity or want more information. That's part of one of the aspects of a competitive marketplace. 641 MS. JACKSON: And in opting for simplicity, customers often give up the ability to compare aspects -- competitive aspects of the bundled service. Do you agree with that? 642 MR. TODD: Yes. And if it's done as a matter of their choice then the competitive market model says that's their choice, that's fine. 643 MS. JACKSON: And they can live with it. 644 All right. Now, you -- coming back, sir, to the question of costs and benefits of marketer-consolidated billing, you have -- you've been candid to say, then, no empirical study of the costs and benefits of marketer-consolidated billing; correct? 645 MR. TODD: That's true. I have no ... 646 MS. JACKSON: And you're not aware of any such study? 647 MR. TODD: Not of the kind of models we're talking about. 648 MS. JACKSON: And I take it as well, sir, that you've done no systematic study of the relative costs and benefits of direct billing in relation to marketer-consolidated billing? 649 MR. TODD: No, that information is not available as far as I'm aware. 650 MS. JACKSON: Now, you said that your conclusions are based on the discussion and work in the GDAR process; is that correct? 651 MR. TODD: Have I said that somewhere? 652 MS. JACKSON: Does that sound familiar? 653 MR. TODD: I think that my observations are based on the full history of the discussion of the issues. 654 MS. JACKSON: I'm looking at your answer to interrogatory E22.12. 655 MR. TODD: My bundle goes to 10. Do we have -- 656 MS. JACKSON: You say there, having observed that you are not aware of any study, as you've just confirmed, that the evidence, that is, your evidence, relies on the extensive discussion and work that was involved in the development and review of the draft GDAR. 657 MR. TODD: Yes, and the GDAR goes into more detail than anything else that I'm aware of, of the issues around the billing options. 658 MS. JACKSON: So you're there speaking of the material that's included in the report that you referred to earlier. 659 MR. TODD: That's what I'm referring to, yes. 660 MS. JACKSON: All right, thank you. 661 And I take it, sir, from what you suggested this morning that your recommendation to the Board is that marketer-consolidated billing be worked out in a consultative way and through direct discussions between the utilities and the marketers, in part; is that correct? 662 MR. TODD: That's the way it was left by the Market Design Task Force, which created some sub-committees which started work on those issues, and I would suggest that they could continue to assist in working out the protocols. 663 MS. JACKSON: Now, to the extent that a marketer-consolidated billing model might emerge from that process, just assuming for a moment that there could be consensus on the many issues that have arisen, but assume as well, that there are significant incremental costs associated with implementing marketer-consolidated billing, do I take it from what you've said so far that before you would recommend that the Board endorse such a model, you would want to know, first of all, how large those costs were and who was going to bear them? 664 MR. TODD: Yes. 665 MS. JACKSON: And secondly, if the model is to be the one you're proffering, which is the wholesale model, you would also want to know, I assume, that that model was going -- was likely to result in the competitive market that you think would justify the absence of regulation; is that fair? 666 MR. TODD: That would depend on the costs. If the costs were modest, the -- say the prospect of opening up, the opportunity for greater efficiency, there's no guarantees, it may be enough. An economist or statistician would refer to it as expected benefits. 667 If the costs are large, you would set a higher threshold or standard of expected benefits in order to proceed. For some of these modest costs, you might say choice -- having choice and having the opportunity is sufficient. You would like to smooth the path to getting a more extensive competitive model, and through my various bits of work over the last six years, I've outlined my view or vision of what a competitive market would be. 668 When you have equal parties with equal opportunity to provide billing packages that customers would choose from, the number one implication of that for competition is the importance of reputation in the marketplace, when your name is on the bill and you've got the customer contact and provide some discipline in terms of customer's attitudes and, therefore, retailer behaviour. 669 MS. JACKSON: If the cost were, in your terms, modest but the result was not a fully competitive market, the consequences of having unregulated prices to consumers would be something you would want this Board to take account of, I assume. 670 MR. TODD: There are two -- there are two approaches to that. One approach is as long as customers have a regulated option, that's sufficient. The regulator cannot regulate the price being charged by marketer and therefore they cannot regulate that option. 671 What has been done in other industries, and again the CRTC is an example, is that the regulation is maintained for the utilities until there is a finding of fact that the market is sufficiently competitive to forebear from regulation. And so there would be a transitional period of regulation of the utility but clearly that could not be applied to unregulated marketers. 672 MS. JACKSON: So it's a necessary condition of the comfort you feel with that that the regulated distributors stay in place for any period of transition, however long? 673 MR. TODD: Part -- yes. As with the commodity supply. 674 MS. JACKSON: I assumed you meant both distribution and supply. 675 MR. TODD: It's my view that those services would continue in places they are for a transition period until full and effective competition is achieved. 676 MS. JACKSON: And one last question. You say all of that is fine if the costs are modest. What are modest costs? 677 MR. TODD: Depends on the benefits. It's not a -- it's not a -- 678 MS. JACKSON: Okay. 679 MR. TODD: You don't look at costs in isolation. You're looking at, do the benefits justify the costs, and you quantify the benefits as well as you can. And I have pointed out in the past that many of the benefits are not quantifiable, so what you're really doing is looking at the costs and making a judgement as to whether you think that the benefits are there to justify it. 680 MS. JACKSON: Well, if the benefits aren't quantifiable, then, what, in this context, are modest costs? 681 MR. TODD: I can try to quantify that. I believe that in the case of Gaz metropolitaine, costs in the area of four or five dollars a customer were considered to be excessive 682 MS. JACKSON: I'm not asking -- I'm asking -- you've indicated if the costs are modest the proposal should go ahead. I want to know what you consider to be modest costs. 683 MR. JANIGAN: Well, I think, Mr. Chairman, he was trying to give an example on which would he base his answer. 684 MR. JACKSON: So you think he was moving towards his answer. 685 MS. JACKSON: I think that's the charitable view, Mr. Chair. 686 MR. JACKSON: Let's just see. 687 MR. TODD: I was thinking about it and I think that the honest answer is that, analytically, I don't have the data to give you an answer, and what you're talking about is a judgement call. And I'm here as an analyst, not to apply my guesses or judgements. 688 I would like to see -- as an analyst, I would like to see more information on benefits and costs and what I'm saying is that if there is a reasonable prospect, given the government's clear position in the past decisions that the preference is for the competitive model, clearly, you accept some tolerance for there to be net costs. Barring that, as an analytical approach, you'd say the benefits must exceed the costs. 689 MS. JACKSON: And that would have to be established at the time you had the particular proposal in front of you? 690 MR. TODD: Well, unless -- yeah, and the proposal may be a matter of a consensus agreement of parties -- 691 MS. JACKSON: Whatever it is. 692 MR. TODD: -- such as the Market Design Task Force or whatever form it takes. 693 MS. JACKSON: Thank you. 694 Thank you, Mr. Chair, those are my questions. 695 MR. JACKSON: Thank you, Ms. Jackson. 696 Mr. Moran. 697 CROSS-EXAMINATION BY MR. MORAN: 698 MR. MORAN: Thank you, Mr. Chair. 699 In your evidence, Mr. Todd, you've been speaking about the desirability of a cost benefit analysis and I think you've made reference to the difficulty of quantifying the benefits and you've made reference to a judgmental analysis being required to be applied. 700 I would like to start first by seeing if there are some benefits that are capable of being quantified. 701 And if we take the example of unbundled service, the ability to manage your storage requirements on a daily basis in a situation where you've got fixed price, fixed term contracts, how would you describe the benefit in a situation like that? 702 MR. TODD: Are you talking about the benefit to the end-use customer, and in particular, are you talking now about the benefit to customers who are currently on fixed-price contracts? 703 MR. MORAN: Well, we can start there if you want. Let's start with current contracts. 704 MR. TODD: With existing customers on fixed-price contracts, for the term of the contract, assuming they stay on those fixed-price contracts, there by definition can be no benefit that would flow through to them. 705 MR. MORAN: I'm sorry? 706 MR. TODD: There would be no benefit that flows through to them. There could, nevertheless, be a benefit in terms of -- with more flexibility in terms of managing load balancing gas supply that retailers, marketers would have. They could reduce their costs and that would be a benefit to them, of course. 707 MR. MORAN: Okay. And with respect to people who aren't currently contract customers, where would the benefit lie, if they were to become contract customers. 708 MR. TODD: Assuming effective competition, and economists always assume away the problems, assuming effective competition, the marketers -- you know, the business would anticipate cost savings, and in order to be priced competitively, would reflect those savings in their offerings. 709 The further you go away from effective competition into a market where there is either market power because of the small number of players or an absence of price competition due to an absence of price transparency or other impediments in the marketplace, the benefits would be more likely captured by the marketer rather than passed through to the consumer. The market discipline would not be there to force the savings through. Over time, one would hope that those benefits would flow through and be reflected in the market prices which is the consistent with the competitive market model. 710 MR. MORAN: All right. So for those two categories of benefits, one for existing contract customers where the benefit would be kept by the marketer, and the other category where the benefits, over time, would be passed through to the end-use customer, are those benefits that are capable of being assessed in order to input that into a cost benefit analysis? 711 MR. TODD: You would have to assess the dollar value of the savings that would be enjoyed by having more flexibility. Those estimates of savings would depend on the current commodity prices, the secondary market for storage and transportation, a lot of factors. In theory -- in theory they can be quantified, and I guess in practice, empirically you could come up with a number. How good that number would be is very questionable. 712 But in my view as an analyst, certainly, some number as an indicator is better than no number if you're doing cost benefit analysis. 713 MR. MORAN: All right. Now, before Union embarked on a course of spending $15.7 million, they were to retain you to do a cost benefit analysis as you're suggesting should be done -- 714 MR. TODD: I assume that's an assumption? 715 MR. MORAN: Yes. 716 MR. TODD: That's very speculative. 717 MR. MORAN: Hopefully not a hypothetical I have to prove later on. 718 What would you do in order to carry out a cost benefit analysis? You've already talked a little bit about how some of the benefits might be assessed and how good a number it might be for specific benefits we just looked at. What else would you do? 719 MR. TODD: Well, there exists at the present time for managing gas supply models to determine how best most cost effectively to manage those costs. 720 Certainly, Union has methodologies in order to determine the least cost mix of storage, transportation, in order to minimize costs of the commodity, all in, and looks at things such as buying delivered gas versus contract, long-term and short-term, hedging, all those factors affect the cost. 721 And for a marketer, the same principles apply: How to minimize. If you were to, essentially, simulate the opportunities and the optimal scenario under the constraints that exist presently and compare it to what the optimal mix of those inputs would be with less constraint, you would come up with a result which is a good assumption to make about what, in the future, storage, transportation, and commodity will cost. 722 MR. MORAN: Now, you made reference to a judgemental analysis. I wonder if you can describe what you mean by that. 723 MR. TODD: Well, the biggest -- the biggest part of the judgement is how effective will competition be. I think there are -- there is debate at the present time as to how -- how much price competition there is in the retail gas market, whether there is retailer-on-retailer price competition, that is, forcing them to price in accordance with the competitive market model, i.e., accept only a normal return on equity. And one would have to make a judgement of, in practice, how close to the competitive ideal are you likely to get. 724 And therefore, by unbundling, are you creating a situation where effective competition will pass the benefits through or are you creating a situation that will result in market power for certain suppliers and perhaps create the worst of all scenarios of an unregulated near-monopoly or duopoly, so whatever uncompetitive market segment without price regulation. 725 That is a judgement that has to be made in terms of how tightly do you try to control the marketplace and not throw yourself to the whimsy of the competitive market. 726 MR. MORAN: Now, Union has proposed to allocate the costs associated with the enabling unbundling proposal, in a particular way. Their system is a transaction-based system, and the allocation ends up being heavily towards the small volume users. You're suggesting, as I understand your evidence, a volumetric basis for allocating the costs. And I -- I'm wondering if there is any hybrid approach between those two proposals that might work also, from your perspective? 727 MR. TODD: In cost allocation, there are definitely hybrid proposals which are done for pragmatic reasons; average and excess techniques, others that take two allocation methods and put them together. 728 I suppose if you were to say each view of cost causality has some legitimacy, you could argue that you should have some mix of half the costs being allocated by one method and half the costs being allocated by the other method. Clearly, the transaction orientation is an after-the-fact, saying, we've got this system, how are we using it? And saying, cost causality is viewed in that perspective and one can -- I'm not saying that's wrong. That's a perspective. 729 If you say, why did we go about incurring the cost in the first place? It wasn't really driven by the desire to do transactions, it was driven by this concept of the general market benefit. You have a different perspective. But certainly it'd be -- be entirely valid for the Board to say, we think both people are right. So we'll go half and half or 60/40. 730 MR. MORAN: Are you aware of any examples where benefits have been realized at different times by different rate classes, but the costs associated with those benefits have been applied up front and across the board? 731 MR. TODD: Boy, I wish I had a computer for memory to sort of scan the databases there. 732 I'm sure that there are cases where that sort of thing has happened. I think of things like DSM, where very often the segments that are targeted initially would be segments that are easier to generate benefits from, and in some cases -- perhaps large volume customers, for example, and the cost of the programmes may be distributed across all customer classes. And all the details and jurisdictions are exactly how costs are allocated. I think some of those are allocated generally across all customers, the concept being, in the long run, everybody is going to get there. 733 Similarly, with some of the commodity unbundling, since '85, and direct purchase cost and so on, we certainly know the benefits permeated through the market, class by class by class, as they went from largest volume down to smallest volume. I'm sure there must have been costs that were sort of embedded in distribution rates and, therefore, everybody bore the costs up front, although there was different timing in the benefits. That's generalizing, though. 734 MR. MORAN: Finally, you've made reference in your evidence to some specific situations in other jurisdictions: British Columbia, Alberta, and Quebec. I'm assuming that you don't carry all these documents around with you wherever you go. I'm just wondering if you might be able to undertake to give us a list of those documents and appropriate web addresses that we might find them at, or where there aren't, where we can get copies of them? 735 MR. TODD: Yes. As a matter of fact, many of them are here. 736 MR. MORAN: You have your OEB briefcase with you today? 737 MR. TODD: And I do have -- from some of them, I do have excerpts, like the Alberta decisions, which are quite recent. But as an undertaking I can certainly provide you with a complete list. 738 MR. MORAN: Thank you. 739 Mr. Chair, perhaps we can give that undertaking G7.1. 740 MR. JACKSON: Thank you. 741 UNDERTAKING NO. G7.1 TO PROVIDE COMPLETE LIST OF OTHER PROVINCIAL DECISIONS 742 MR. MORAN: Thank you. Those are all my questions, Mr. Todd. 743 Mr. Chair. 744 MR. JACKSON: Mr. Dominy, would you -- 745 QUESTIONS FROM THE BOARD: 746 MR. DOMINY: Mr. Todd, I think you made some reference earlier on about there are a number of "irresolvable issues" outstanding related to the progress it was creating in market unbundling, et cetera. I was just wondering whether -- it sparked an interest in me as to what your -- what you consider are those "irresolvable issues" that are outstanding. 747 MR. TODD: Given that the GDAR decision is not out and given that I facilitated the GDAR process, I would say, at least from my perspective as a facilitator, all of the issues in the report to staff, where there are multiple positions, unresolved positions, I would categorize those as irresolvable. And perhaps it was the inadequacy of me and the group in that process, and they may be resolved on a different process, but they certainly seemed to be irresolvable in that process when my role was simply to try to find a solution to the differences. 748 MR. DOMINY: Perhaps just for -- so to spark my memory, perhaps you could give a couple of examples of what issues are falling in that class? 749 MR. TODD: Key issues with multiple positions in that proceeding were transfers within the term of the contract, that is, customers transferring from one marketer to another, Elements of what's called the STR procedure, transfers from retailers back to standard service supply, the billing issue, of course, which I've already cited. I had flipped and -- actually given me is the summary -- yes, appendix G contains the summary -- or appendix G in the report to staff contains the summary of issues and recommendations and in it -- 750 MR. VEGH: Sorry, excuse me. If I can -- if I can just be of assistance. That document is filed in the record so you -- the list of recommendations. I forget the exhibit number, Mr. Todd. 751 MR. TODD: Exhibit F4.2 is what's marked down here. 752 MR. TODD: Supplemental book of materials. The file made it, Mr. Vegh, so I'm sure she's quite familiar with what's in there. 753 MR. DOMINY: June 8, 2000 version. 754 MR. TODD: Right. 755 MR. DOMINY: Thank you. 756 MR. TODD: In addition, if you go back one step, it's probably worth identifying the Market Design Task Force Report, which also -- it deals with more issues than was in the Gas DAR. And it explicitly goes through, in the introductory part, a list of items which -- where there is settlement and not settlement and within the group, and therefore flagged some of the more difficult issues. 757 MR. DOMINY: Thank you. 758 MR. TODD: If you take those as a list of issues, I would caution that those are all -- not all issues that the Board would have to decide. Many of them are implementation issues which -- what would be done, that the dispute really went back to a policy issue. So I think there are policy questions that have to be decided which are quite different from the list of unresolved issues in these reports such as will there be -- will customers be able to return to system? Will customers be able to transfer within the term of a contract and by some mechanism? And with that guidance, the parties would be more likely to reach a resolution. 759 MR. JACKSON: Well, that leads me right into another question which I have. 760 MR. SOMMERVILLE: Go ahead. 761 MR. JACKSON: So I'll ask this one and then I'll check with Mr. Sommerville and let him come in. But that's the question of whether or not these discussion forums have considered the idea of sort of an industry insurance program, if I may call it that, whereby a customer that is cut off from one supplier, who is not considered a good risk by any other supplier, might be served until he could re-fit his home with a wood stove or whatever he needs to do. 762 MR. TODD: That issue was raised by myself on behalf of the clients in the original Working Group report process, and it is addressed. There was no consensus, as I recall, on those issues, but certainly options are laid out and the issue has been considered. And I think there are practical solutions there. Again, if it's being done, it probably -- and if guidance is being provided, then there must be something. There probably would not be too much dispute over -- or people could sort out how to do it in a practical way. Nothing is perfect, but once you say I've got to do something, people can resolve on what is a reasonably acceptable way. 763 MR. JACKSON: Good. Thank you. I'll be back. But Mr. Sommerville? 764 MR. SOMMERVILLE: No, go ahead. 765 MR. JACKSON: I wonder if you could just remind me of some of the history, but -- in terms of marketer-consolidated billing concepts that have been explored, I would have to assume at this point that the marketer-consolidated billing concept of the sort of pure agency arrangement which we've talked about a little bit in this hearing, whereby the marketer does not become a principal in the transaction, whereby the marketer does not buy the distribution services and then resell them, must likely have been considered and rejected. 766 Can you help me a little bit with the history? 767 MR. TODD: I don't know that the group had discussed it in quite that sense. 768 I'll give you my take on it, which is that it is really an artifact of the way the industry has evolved. To me, the agency agreement which predominates is unusual if you look across other -- other markets. You take, for example, telecommunications, which has done the transition from monopoly to competition, earlier, longer time. The -- contrary to some of the discussion, which is looking at some of the services being long distance, local, I think it's more appropriate to look at the re-sellers of long distance and the re-sellers of local services in that industry, where it could have evolved in a similar way as agency between the incumbents of Bell Canada and the customers. But in fact, the re-sellers purchased services, Centrex services, for providing local services and long distance in bulk, from -- from the incumbents, and they then buy those and they're -- take possession of them, and are principals, and then resell a somewhat different service but using the incumbent's facilities to their customers. There is no agency agreement. And that is, again, you look through all competitive markets and that's the usual arrangement. 769 To customers, I would suggest that they don't see this as an agency agreement. They think they're buying from the retailer. It's -- it's a legal structure which comes out of the restrictions originally on the -- what's called the exports from Alberta to Ontario, that -- that led to the restrictions on selling at the burner tip in Ontario by anybody but the LDC. It forced parties to go down the route of the buy/sell arrangement, which put them in the boat of having to do these agency arrangements in order to make it work legally. I would be surprised if we would see agency arrangements if it weren't for those legal restrictions which forced work around. 770 I would -- frankly, I would expect that if we got to the proper underlying structure, that there would be movement away from that agency arrangement to something which better reflects what customers think they're getting. A principal arrangement, and that that would go away. 771 MR. JACKSON: In terms of the comments you made about the telecommunications business and the reselling arrangements in that business, can you help me by telling me whether the price that the re-seller pays the owner of the physical plant would be the aggregate of what the seller -- the original utility would have charged individually for those services? Or does the re-seller expect a discount for the volume purchase that he is making? 772 MR. TODD: The CRTC requires -- otherwise re-sellers would never have emerged -- requires the incumbents to sell their services to the retailer as a customer. So that, a retailer will buy ten thousand lines of Centrex service at the same price that the Ontario government would buy 10,000 lines of Centrex services. Similarly, with long distance, they would be buying long distance services on the same basis. 773 As there has been a move to competitive markets, so there is negotiated prices for those large volume services in the telecommunications market, there has been a move to creating regulated competitor services. Which is, the CRTC sets the rates that the ILECs may charge to competitors for those bulk services, but also for what are called any bottling facilities. So if they want what's referred to as the local loop, which is a piece of wire which is essential for providing their own service to their customer. They're not actually buying local services, they are able -- or they must charge a regulated rate for that, which reflects the costs in order to avoid an excessive mark-up. Those costs clearly do not include any customer care costs. They are the costs that relate to the sale of the wholesale services to the retailer, and don't relate to any of the costs that would be involved in selling the same facilities as part of a package to an end-use customer. 774 MR. JACKSON: So, in your opinion, having looked at these costs and these pricing arrangements, are you then essentially saying to me that rather than sort of a volume discount, notwithstanding that in effect, the re-seller probably does pay less than the aggregate individual charges? You think the reason for that relates to the fact that the customer care and other such costs have been stripped out? 775 MR. TODD: Yes. The volume discount approach was, in essence, a transitional approach. It enabled the CRTC, the Canadian Radio-television and Telecommunications Commission, to facilitate competition using existing facility and rate structures. 776 With time, as problems arose with those, as happens in a competitive environment between a regulated company and unregulated companies, they moved to more what I would say is a sophisticated methodologies, which is saying we will have rates for competitor services. And what is defined as competitor services is continually evolving as the marketplace evolves. 777 MR. JACKSON: Thank you for that. 778 Now, this may be in the realm of speculation, but I would like to give you an opportunity to comment on it. We heard from two of the potential re-sellers yesterday, Toronto Hydro Services and Sunoco, and I believe that both witnesses, certainly at least one of them, said that they saw that there would be value in being able to play the agency role and simply pass on the distribution charges on their bill, even if they were not a principal in the transaction. And have you heard similar expressions from others? Because you've been very involved in these proceedings down through time. Do you think that there is a value in that as a first step or as any step at all? 779 MR. TODD: That would be very reasonable as a step. It would -- if it were -- if it involved a restriction on the ability to purchase and resell, clearly that would be inconsistent with the ultimate competitive market model. 780 But, we don't get the full and effective competition overnight. And everywhere the transition has happened, there -- there is transition. It can be short and you can go forward and let the market sort out of the problems, or the regulator can do it step by step and try to smooth the transition. I would point out that when the regulator tries to smooth the transition, it probably means the transition is longer. But, you probably have certainly less political flak in the short run if you're managing that transition. And it may end up getting you to a more effective result. There's less risk of it going off the rails in an uncontrollable way. 781 MR. JACKSON: Okay. And just because I may otherwise have to go back through a lot of material, can you remind me what you see as the shortcomings of the split billing proposal which Union is putting forward right now? Because I see it as a step away, again, from the agency arrangement. I see a progression, if you like, through split billing to agency arrangement to full re-seller, where the marketer is a principal. 782 MR. TODD: The -- frankly, my biggest concern is that on the surface, the customer care billing information technology costs of the -- of the LDCs are extremely difficult to test thoroughly through the regulatory processes and seem awfully high for reading a meter, getting some information and putting out a bill. 783 I find it very credible that certain competitors argue that they could provide the same service as far as the customer is concerned, and may not have as sophisticated information systems to assist the company in knowing their customers and doing marketing of the services and so on. But from the perspective of billing the customer, it seems very credible to -- that there may be far cheaper alternatives. 784 So, quite frankly, my primary reason for saying we should move ahead with that - and that does appear in my evidence and my statements over the last six years - is that the biggest potential pay-off for the residential customer of unbundling would be to subject the customer care costs to a competitive market competitor; to determine whether those costs, in fact, are reasonable or not. We know that the commodity costs are already competitive and there is very little chance for those to move further down, just through Ontario unbundling. 785 How is that going to affect the continentally determined commodity price? Transportation and storage is regulated rates on the secondary markets as well. It's difficult to see how those would be significantly impacted. The amount of saving that's likely to accrue from being -- having more flexibility in load balancing, putting together the different aspects, it's difficult to see that that is a significant saving. Frankly, it's difficult to see the offset of $14 a customer. 786 But on the billing side, there could be some ongoing significant savings if those costs are out of line, and I think that parties around the table in past and recent hearings over the last few years, and I believe the Board has struggled with finding a way to test those costs. And we have a perfect opportunity here to put them to a market test and say what's not recoverable through a market test was obviously excessive cost and you will have to recover it in other ways, i.e., through the competitive services that these may help -- help you use as a source of revenue. 787 MR. JACKSON: Well, thank you for that answer. And I just want to point out to you that I think I heard you put metering back in, those customer care costs in this answer, and yet I thought earlier in our discussion you said it was impractical to do so. 788 MR. TODD: Yes. The place that I put it back in was talking about the chain of information. I didn't -- you know, you do read the meter before it flows in the way we more narrowly defined, for practical reasons, the customer care information. So yes, you're right, it's still a separate and, presumably in the short-term, part of the distribution cost. I was just referring to it as a -- as part of the chain of flow information. 789 MR. JACKSON: Okay. Thank you for that. 790 Mr. Janigan. 791 MR. JANIGAN: I have nothing in redirect, Mr. Chairman. 792 MR. JACKSON: Thank you. Then the Panel would like to thank you for your assistance. 793 MR. TODD: It's been a pleasure, as always. And I apologize to Mr. Trebilcock for delaying his appearance. So hopefully he can get on today and you can wrap up today. 794 MR. JACKSON: Thank you. 795 I think that the Board will rise now for its afternoon break. I know it's a little bit early, but I think it might be useful in terms of setting up the next witness. So let's rise for 20 minutes and then we'll carry on and complete. Thank you. 796 --- Recess taken at 2:45 p.m. 797 --- On resuming at 3:05 p.m. 798 MR. JACKSON: Please be seated. 799 MR. BROWN: Mr. Chair, the next witness is Professor Trebilcock. If I could ask that Professor Trebilcock be sworn. 800 DIRECT ENERGY MARKETING LIMITED - PANEL 1; Sworn 801 EXAMINATION BY MR. BROWN: 802 MR. BROWN: Mr. Chair, I have spoken with Board staff and in terms of assigning exhibit numbers to Professor Trebilcock's report and his CV, we proposed that his report be assigned Exhibit D7.1. 803 MR. JACKSON: Thank you. 804 MR. BROWN: And that his CV be assigned Exhibit D7.2. 805 EXHIBIT NO. D7.1: REPORT OF PROFESSOR TREBILCOCK 806 EXHIBIT NO. D7.2 CURRICULUM VITAE OF PROFESSOR TREBILCOCK 807 MS. JACKSON: The other material will come later. 808 MR. JACKSON: Thank you, Ms. Jackson. 809 MR. BROWN: I have a brief examination-in-chief, Mr. Chair. 810 MR. JACKSON: Yes. 811 MR. BROWN: Professor Trebilcock, you are a professor of law and economics at the University of Toronto. 812 DR. TREBILCOCK: That's correct. 813 MR. BROWN: And you've appeared before this Board before? 814 DR. TREBILCOCK: I have. 815 MR. BROWN: You have a lengthy CV and it speaks for itself, in large part, although I do want to come back in a minute to look at some of the things that you've done in the recent past. 816 The report entitled an economic analysis of allowing gas marketers consolidated billing in Ontario, which we have marked as Exhibit D7.1 was prepared by you, sir? 817 DR. TREBILCOCK: It was. 818 MR. BROWN: And do you adopt that evidence as your own for the purposes of this proceeding? 819 DR. TREBILCOCK: I do. 820 MR. BROWN: A number of information requests were asked on that report, and answers were given. Were those answers prepared under your supervision? 821 DR. TREBILCOCK: Yes, they were. Mr. Brown: Do you adopt the evidence in those IR responses as your own? 822 MR. TREBILCOCK: I do. 823 MR. BROWN: Are there any changes that you wish to make to your pre-filed evidence or to any of the interrogatory responses that you made to questions asked on it? 824 MR. TREBILCOCK: I don't think so. 825 MR. BROWN: Your CV indicates that in 1998, you were the research director for the Ontario Electricity Market Design committee. Is that correct? 826 MR. TREBILCOCK: That's correct. 827 MR. BROWN: And in this proceeding, in your report, in paragraph 3, in the first sentence you have stated quite succinctly that in summary: "I support the billing options provided in the DAR, the Distribution Access Rule." 828 Was that opinion which you formed, influenced by -- to any extent by the issues that you considered in your capacity as the research director for the Market Design Committee for electricity? 829 MR. TREBILCOCK: Yes, that view is influenced by that experience. A parallel set of issues obviously arise on the electricity side and they would be considered extensively and not just by me, but by the 14-person stakeholder task force that constituted the Market Design Committee. 830 And -- 831 MR. MORAN: Mr. Chair? Sorry, I'm having some difficulty hearing Mr. Trebilcock. 832 MR. TREBILCOCK: Okay, I'll speak louder. 833 A parallel settle of issues arise on the electricity side with respect to billing options and the Market Design Committee, which comprised, as I recall, 14 stakeholder representatives. Plus a three person non-voting executive. Plus a prime -- a lead consulting firm. We looked at these options and in my opinion, I report recommendations, which I should add on this issue were unanimous. 834 MR. BROWN: The recommendations made by that committee were that electricity distributors should offer three billing options to retailers, what we have called distributor-consolidated billing, split billing, and retailer-consolidated billing? 835 MR. TREBILCOCK: That's correct. 836 MR. BROWN: What was the rationale for the Market Design Committee supporting a recommendation for retailer-consolidated billing? 837 MR. TREBILCOCK: We didn't have a preference for one billing option over another. We took the view that, by providing the maximum number of billing choices out there in what we perceived to be, potentially at any rate, a competitive retail market, the consumers and retailers offering consumers various supply options would settle on whichever option -- billing options they preferred. And I guess if one was proved to be significantly more efficient or attractive than another, then that would come to dominate. But we had no preference for one over another. 838 MR. BROWN: Now, in your report in this proceeding, Professor Trebilcock, you have indicated in paragraph 3 that you support the billing options provided in the DAR, which are the three billing options which are paralleled on the electricity side. 839 Could you, in a nutshell for the Board, summarize the reasons why you support these multiple billing options? 840 MR. TREBILCOCK: Well, on the assumption that the point of de-regulating either the gas market or the electricity market, at the retail end of things, is that competition will -- will appropriately discipline offerings in that market. Then billing options simply become another aspect of the potential competitive offerings in that market. And by maximizing the range of potential competitive offerings, we assumed that, over time, consumer welfare would be maximized. 841 MR. BROWN: A number of billing options have been discussed during the course of this proceeding. I guess the issue that ultimately remains is: Who and by what means do you decide how many billing options should be made available to consumers? What is your view on those two questions? Who should decide, and by what means? 842 MR. TREBILCOCK: Well, in a competitive market, the participants in the market will decide. It's -- in my view, those are the parties who should decide. As I say, I have no preference for one billing option over another, at least from a public policy point of view. I might have a personal preference as an individual consumer. But from a public policy point of view, I don't have any -- any preference for one billing option over another. But the question of who should decide, just like in any other competitive market, the market participants will decide and should decide. 843 MR. BROWN: Union has filed evidence on its own and also Professor Schwindt has filed evidence and testified yesterday, and one aspect of that evidence is the suggestion that if one adopts direct billing or split billing, one really gets the best of both worlds. What are your comments on that assertion? 844 MR. TREBILCOCK: Well, I obviously favour including the split billing as one of the three options. As I say, I have no public policy preference for one option over the other two. My guess is though, looking at the various survey evidence and evidence from other jurisdictions that have introduced the three options is the one option that consumers by and large do not favour is the split billing option. 845 Simply, they find it annoying and confusing to get two bills a month rather than one. Rather if somebody wants two bills a month, distribution charges on the one hand and energy charges on the other, I haven't seen a reason to prevent them from exercising that option. But I'm guessing -- I'm guessing if the three options were allowed that over time this would prove the least popular option. 846 MR. BROWN: Four matters have arisen during the course of this evidence from witnesses who have testified before this Board, and I would -- I'm going to ask you to comment briefly on each. The first assertion that has emerged from the evidence is the suggestion that the customer should not choose the billing option that they want, that is, the service provider who should choose how they are going to bill their customers for services. Could you comment, please, on that proposition? 847 MR. TREBILCOCK: Well, to the extent that I understand it, I would argue that ultimately, consumers should choose the billing option, but that choice is likely to be made by reference to the entire package of service characteristics that any particular supplier chooses to associate with his or her offerings. 848 So the way consumer choice gets exercised is: I like this particular service offering, and one feature of it happens to be a particular billing option. So I think that's what I have in mind by consumer choice here. And if a particular supplier offers a service package that includes a billing option that a consumer finds unattractive, I'm assuming that what will happen in a competitive retail market is the consumer will go elsewhere and choose an alternative service offering that contains some other billing option. 849 MR. BROWN: A second suggestion which has been made, which is sort of a corollary of the first one I put to you, is that there is no industry around in which the service provider does not issue the bill. Can you offer any comment on that suggestion? 850 MR. TREBILCOCK: The service provider does not render the bill to -- 851 MR. BROWN: To the end-use consumer of the service. 852 MR. TREBILCOCK: I'd -- I'm trying to make sure that I understand the -- understand the question here. 853 If -- well, if the scenario that is contemplated here is where -- is one where the upstream service provider, so to speak, is providing an input into a downstream supplier's bundled offering. 854 MR. BROWN: No, I think that the context of the suggestion was that in this particular case, the utility, Union Gas, provides a distribution service to customers. 855 MR. TREBILCOCK: Right. 856 MR. BROWN: And the suggestion is made that in the circumstance where a company provides a service to an end-use consumer there is no other industry one can point to where the service provider does not render the bill, and therefore, it would be inappropriate to include retailer-consolidated billing as one of the options. 857 MR. TREBILCOCK: Well, that's the argument, I don't agree with it. And moreover, I don't agree that there are no examples where upstream suppliers of inputs -- in fact, bill the -- bill not the final customer, but the intermediate supplier. In this case the supplier of the commodity, the energy. 858 MR. BROWN: Could you offer -- sorry. 859 MR. TREBILCOCK: Well, let me -- let me just clarify that. That is what the -- what the local distribution company is doing, is providing an input, i.e., transportation if you like, or distribution, into the provision of gas, supply of gas to the final consumer. So the question is: Who does this input supplier, i.e., the supplier of the transportation, who does he bill? Well, I think it's easy to imagine cases where -- not only imagine cases, pointed cases where the supplier of the input will bill the intermediate party, that will be likely the supplier of the final product. 860 Then we give one sort of homely example. Suppose I hire a builder to add a -- do some renovations to my house, add a bedroom. The builder says, the way I do business is to declare a fixed price for the work, materials, labour. Here is my price. And I will go and purchase the inputs from building supply firms, they will bill me for the inputs, I will pay them and I will bill -- provide a consolidated bill to you, the customer. It happens all the time. 861 If you like, that's retailer-consolidated billing. The input suppliers bill the final supply. 862 So I find it hard to imagine examples where input suppliers do not bill the final customer. 863 The other example closer to the present context is the long-distance telephone market. Here a long-distance carrier, of course, bill the final customer directly for long-distance charges. Those charges are an amalgam of two things. First, the provision of the long-distance charges themselves and secondly the provision of interconnection with the owner of the local switching. The local loop. 864 And we know that in the long-distance market, Bell does not send a separate bill to end-users for interconnection charges. It bills the long-distance carrier and the long-distance carrier incorporates those interconnection charges in its bill to the final customer for long-distance service. 865 MR. BROWN: If I could move to the third suggestion that was made in the evidence, and I think it was made yesterday by Professor Schwindt in his evidence, and I hope I'm summarizing it accurately. The suggestion was made that customers must first express the desire for a choice before one decides to offer that choice and then, unless the desire is strong, the costs of the service might outweigh the benefits, and therefore, society should consider not offering that service. 866 Could you comment on that suggestion, please, Professor? 867 MR. TREBILCOCK: Assuming that's what Professor Schwindt said, which I have not independently verified, I would strongly disagree with it. That is, in a market economy, people -- firms out there, suppliers, new entrants and all kinds of sectors are constantly probing the market for potential demand for their goods and services. Some succeed; some fail. We don't run some kind of government study every time to see whether a retailer offering -- chooses to offer triple-top pizza should or shouldn't do it. The opposite; right? And the man there presumably succeeds or nobody wants pizza with triple cheese he'll fail. We don't have a hearing to decide whether there is a demand out there, or really, for triple cheese pizza. It's the market that will sort that out. 868 MR. BROWN: Thank you. Turn then, Professor, to the last point that I wanted to raise with you. 869 In one of the interrogatory responses that you gave, in particular, a response to Board staff interrogatory number 4, you listed the materials that you reviewed to authenticate the advantages of customer choice. And on the second page of that IR response, right at the top, one of the documents that you refer to was a report issued by OFGEN, called "Experience of the Competitive Market: The Domestic Electricity Gas Markets," January, 2001. 870 And I believe yesterday, Professor Schwindt referred to that, or alluded to that in his evidence, and there was an undertaking G6.1, to provide that document. I don't have a complete copy but I have provided extracts from that. I've got some over with Board counsel and perhaps he could hand three of them up to the Panel. 871 MS. JACKSON: They are actually the entire report. I have -- there was material I had -- I'm sorry, I understood it had been filed. Supporting documents referenced in your -- Professor Trebilcock response to Board staff, interrogatory Exhibit E2. 872 MR. BROWN: Well, it may well be, but perhaps -- 873 MS. JACKSON: And its at tab 9. It's in its entirety. 874 MR. BROWN: Thank you, Ms. Jackson. For the purpose -- so it's there, Panel, for it. 875 Perhaps I could just, for sake of convenience, hand you up the extract which I think is directly on the point. If I could ask you, Professor Trebilcock, to turn to page 19 of that extract. There is a section at the bottom: Who has switched gas supplier, and then some statistical information is given. And if you flip over to the next page, page 20, at the bottom, there is paragraph 7.10 under the heading "Reasons for Switching Electricity and Gas Supplier." And then 7.10 and 7.11 elaborate on the findings. 876 Is there a discussion -- well, there is a discussion in there about dual-fuel billing. 877 MR. TREBILCOCK: Right. 878 MR. BROWN: Perhaps you can just clarify for the Board, the findings which OFGEN made in this report on the U.K. experience? 879 MR. TREBILCOCK: Well, they point -- 880 MR. JACKSON: Sorry, I think the chair has a -- I was just wondering if it would be useful to give this a number, too, for the proceeding. Just to keep track of paper. 881 MR. MORAN: That would be F7.2, Mr. Chair. 882 MR. JACKSON: Thank you. 883 EXHIBIT NO. F7.2 EXPERIENCE OF THE COMPETITIVE MARKET (EXCERPTS) 884 MR. MORAN: Excerpts from a document entitled, "Experience of the Competitive Market: The Domestic Electricity and Gas Markets" research study conducted for OFGEN by MORI, January, 2001. 885 MR. JACKSON: Thank you. 886 MR. BROWN: Thank you, Mr. Moran and Professor Trebilcock. I was asking you to just confirm what the findings were with respect to dual-fuel finding in this survey. 887 MR. TREBILCOCK: What this survey finds in examining reasons for customers switching suppliers is that price, not surprisingly, is the principal factor, but that over time, other factors have become significant. And these include a desire to have a single combined bill, and a desire by customers to exercise the dual-fuel option. And the commentary indicates that these factors -- while not nearly as significant as price, have become more significant with consumers through time. 888 MR. BROWN: Thank you, Professor. Those are my questions in chief, Mr. Chair. Professor, I think some of the others have questions for you. 889 MR. JACKSON: Thank you. 890 Mr. Janigan, would you be going next? 891 MR. JANIGAN: I'm asking Mr. Warren's questions on his behalf next. 892 MR. JACKSON: Thank you. 893 CROSS-EXAMINATION BY MR. JANIGAN: 894 MR. JANIGAN: Thank you, Professor Trebilcock. These are questions that are being given on behalf of the Consumers' Association of Canada and Mr. Warren, counsel for Consumers' Association of Canada, could not be here, and so I apologize for whatever inept delivery I make of his questions. But I hope you will bear with me as we go along. 895 Professor Trebilcock, do you believe -- and do you agree with Professor Schwindt and with Mr. Todd that a cost benefit analysis of market -- marketer-consolidated billing should be required before implementing them? 896 MR. TREBILCOCK: The answer to that is no, I don't believe that's necessary. 897 MR. JANIGAN: Okay. Could you tell me why? 898 MR. TREBILCOCK: Yes. If we believe that the retail market here is structurally competitive, the market will decide which option, if any of the three, should, or will, rather, dominate. That is, to go back it my triple cheese pizza example, we don't insist that some regulator do a cost benefit study of whether consumers think this is good or bad before somebody offers it. You offer it and see what happens. 899 MR. JANIGAN: Given that position, where do you think the costs associated with implementing marketer-consolidated billing should be allocated? 900 MR. TREBILCOCK: What costs in particular do you have in mind? 901 MR. JANIGAN: Well, the costs that are required to provide the functionality that will enable the marketers to prepare and deliver a bill. 902 MR. TREBILCOCK: Well, as a matter of principle, I think the incremental costs associated with effectuating that option should be borne by the marketers and ultimately by their customers. Exactly what costs of use is incremental and what is fixed, I imagine, leaves some room for debate. I'm not sure I have a terribly helpful view on that. 903 MR. JANIGAN: Okay. Now, we've heard earlier evidence from both Dr. Schwindt and, I believe, the Union witness, Mr. Birmingham, that to the effect that denying Union the opportunity to bill its customers amounts to an expropriation of a right that Union enjoyed with respect to their distribution customers. And accordingly, should be compensated for it if it's taken away. 904 MR. TREBILCOCK: I don't agree with that. That is, I'm assuming the consumer makes the choice as between the billing options, one of which is, of course, to have the billing function remain with the distributor. In this competitive retail market, consumers choose to exercise other service offerings, including other billing options; that's life. You know, Bell Canada lost market share on the long distance phone line, but I haven't heard arguments made that they should be compensated for the loss of market share that they had. Moving from a monopoly to competition means that sometimes people lose. 905 MR. JANIGAN: Now, Union maintains that the right to bill customers is an essential element of the customer relationship, in that giving customers a choice, in effect, takes away their -- that right that they formerly enjoyed exclusively to bill customers. Essentially, as I gather from your answer, that that -- the provision of choice in effect, trumps the right of Union to bill their customer. 906 MR. TREBILCOCK: Yes, I'm not persuaded by that argument. 907 MR. JANIGAN: And in your view, it does not amount to a confiscation of assets within the regulatory meaning? 908 MR. TREBILCOCK: No. 909 MR. JANIGAN: And in your view, do you believe that the actual and potential costs of unbundling or billing have been sufficiently accounted for to allow the Board to fairly allocate those costs? 910 MR. TREBILCOCK: Well, I've acknowledged in earlier answers, that I have not done a cost benefit study. I think Union says in its evidence it hasn't either. 911 MS. JACKSON: I wonder if, Professor Trebilcock, there are two issues and my friend has -- is asking about unbundling. I'm not sure if you've realized that he is -- whether intentionally or not I'm not sure, moved from the question of billing to -- 912 MR. TREBILCOCK: We're not on billing any more? 913 MR. JANIGAN: Actually, we were on both. But why don't we take them in -- in seriatim. First of all, the question on unbundling. 914 MR. TREBILCOCK: I expressed no view on that. In my opinion. I -- this is unbundling separate from the billing issue? 915 MR. JANIGAN: That's correct. 916 MR. TREBILCOCK: I have no -- I don't express a view in my opinion and I don't have an informed view now. 917 MR. JANIGAN: And I take it we've already canvassed your views on how you would expect the cost to be -- incremental cost to be allocated with respect to billing? 918 MR. TREBILCOCK: Yes. 919 MR. JANIGAN: Okay. Thank you, Professor Trebilcock, those are all my questions. 920 MR. JACKSON: Thank you, Mr. Janigan. 921 Mr. Vegh, are you going to ask some questions? 922 MR. VEGH: Yes, sir, thank you. 923 CROSS-EXAMINATION BY MR. VEGH: 924 MR. VEGH: Just one question. 925 Good afternoon, Mr. Trebilcock, or Professor Trebilcock. My name is George Vegh and I'm here on behalf the Toronto Hydro Services and Sunoco Inc., both of whom are both licensed gas retailers and licensed electricity retailers. And it's within that context that I have a question for you. It's actually a two-part question. 926 My question is whether you have a view on whether there is a benefit in having similar rules for both gas and electricity in the retail billing options? 927 MR. TREBILCOCK: I have a strong view on that. 928 That is, what appears to be emerging in jurisdictions that have evolved somewhat further in de-regulating these two sectors is the dual-fuel option. That, I think, is one of the significant findings in this OFGEN study that I was referring to a few moments ago. Thirty-five of U.K. small volume users now have exercised this dual-fuel option. This is clearly seen by consumers as an option of significant value. 929 MR. VEGH: Thank you. My second question is whether in your view or whether you can explain how, in your view, the availability or the lack of availability of marketer-consolidated billing in the gas sector may have an impact on the effectiveness of the marketer-consolidated billing option in the electricity sector? 930 MR. TREBILCOCK: That seems obvious to me, that for a retailer to go out and offer the dual-fuel option, he needs to be able to send a single bill for these two forms of energy on a regular basis. And the Retail Settlement Code for electricity, of course, provides the three billing options. So if that bill -- the retailer-consolidated billing option is not available in the case of gas, I would think this will prove to be a significant constraint on retailers offering the dual-fuel option. 931 MR. VEGH: Thank you, Professor, those are my questions. 932 MR. JACKSON: Thank you, Mr. Vegh. 933 I guess the Industrial Gas Users' Association has no questions? 934 MR. HOWELL: We have no questions. 935 MR. JACKSON: Ms. Jackson, I think we're at you. 936 CROSS-EXAMINATION BY MS. JACKSON: 937 MS. JACKSON: Professor Trebilcock, as you know, I'm here for Union Gas and I'm Patricia Jackson. A couple of questions arising from the exchange you had with Mr. Brown. When you hire a builder, and the builder goes out and gets the supplies to build -- to build your extension or whatever he's building, the building supplier's customer is the builder. 938 MR. TREBILCOCK: Right. 939 MS. JACKSON: And in sort of, if we think of it in a wholesale-retail terms, the building supplier is the wholesaler in relation to you as you as the retail customer, in effect. 940 MR. TREBILCOCK: That's correct. 941 MS. JACKSON: And when the long-distance telephone company acquires service from the local company, the local company's customer is the long-distance company; correct? 942 MR. TREBILCOCK: Sorry, I'm not sure I follow. This is the long-distance charge? 943 MS. JACKSON: You had the long-distance charge, including the local company's charge. 944 MR. TREBILCOCK: The interconnection charges. 945 MS. JACKSON: That's right. And insofar as that interconnection charge is concerned, the charge from the local company to the long-distance company -- the long-distance company is the local distance -- the local company's customer; correct? 946 MR. TREBILCOCK: That's correct. 947 MS. JACKSON: Thank you. 948 Now, I wanted to explore with you some of the things that you identified as the economic benefits of marketer-consolidated billing. You talk about this, Professor Trebilcock, in paragraphs 18 of -- starting paragraph 18 of your report. And you say there, sir, "There is a broad consensus on the economic benefits of allowing customer choice in natural gas billing." And you go on to describe, that under consolidated billing, marketers have incentives to offer different kinds of billing packages; fair? 949 MR. TREBILCOCK: That's correct. 950 MS. JACKSON: And I think, in fairness to you, you expand on that in paragraph 20, that in addition to different billing packages marketer-consolidated billers can provide different ranges of product. 951 MR. TREBILCOCK: That's correct. 952 MS. JACKSON: For example, dual-fuel but not limited to dual-fuel. 953 MR. TREBILCOCK: That's correct. 954 MS. JACKSON: Would you agree with me, sir, that those kinds of benefits that -- that, first of all, that somebody who direct bills for a gas commodity has an opportunity as well to couple other service offerings with their gas commodity bill; correct? 955 MR. TREBILCOCK: When you use the term "direct bill" this is what I call split billing? 956 MS. JACKSON: Yes. 957 MR. TREBILCOCK: Yes, that's true, that these are the other services can be bundled with the commodity. But as I've said, what seems clear from a variety of surveys, and other evidence, consumers don't like getting two bills. 958 MS. JACKSON: And we'll come to that question of ask consumer preference in a moment but I want to be sure, and I think you've indicated, there is nothing that stops the split biller from offering a multitude of services? 959 MR. TREBILCOCK: I agree. 960 MS. JACKSON: And indeed at question 5 of Exhibit 2 -- and I guess this is Exhibit E2. Questions 5 from Union Gas. Do you have that? 961 MR. BROWN: Question 5? 962 MS. JACKSON: It's -- 963 MR. TREBILCOCK: I see, yes. 964 MS. JACKSON: There is a problem with the numbering. What is called Union Gas Ltd., interrogatory number 5, up in the right-hand column it's called question 4, but I'm looking at the one that's actually question 5. 965 MR. TREBILCOCK: Right, I have that. 966 MS. JACKSON: Wrongly labelled 4 in the upper right-hand corner. Have you got that one? It the one that says: What is the evidence that marketer-consolidated billing of gas commodity and distribution is necessary to allow marketers to offer multi-product -- and that should be multi-service billing. And you refer to experience in other jurisdictions to which I will return but you're candid to say that you haven't considered how much flexibility is necessary, in order to -- for marketer-consolidated billing -- billers to undertake this -- these innovations. Is that fair? 967 MR. BROWN: Sorry, Ms. Jackson, but if we can just find the right page first. 968 MS. JACKSON: I'm sorry. 969 MR. TREBILCOCK: I think Ms. Jackson is referring to Union Gas Ltd. interrogatory number 4? Or is it number 5? 970 MS. JACKSON: Well, it's 4 in the upper right-hand corner and 5 -- 971 MR. BROWN: That one. The reference is to paragraph 20 of the evidence. 972 MS. JACKSON: That's right. 973 MR. TREBILCOCK: Okay, I have it now. Sorry. 974 MS. JACKSON: In answer to that interrogatory, you say "I have not considered the question of how much flexibility is necessary to provide an incentive for marketers to undertake these innovations"; correct? 975 MR. TREBILCOCK: Right. 976 MS. JACKSON: And indeed, whether these innovations would be generated by the introduction of marketer-consolidated billing in Ontario is not a question that you're answering. You would say that's a question that will be determined by market forces. 977 MR. TREBILCOCK: That's correct. 978 MS. JACKSON: Now, you do say in that same interrogatory, sir, that you know of no marketers in Ontario that are making such multi-product offerings; right? 979 MR. TREBILCOCK: Well, that's because retailer-consolidated billing is not currently available, and the split billing is not currently available. 980 MS. JACKSON: True. But just by way of example, I have -- I've given to your counsel last night, and I think people have it in a bundle of material this morning, it's actually -- sorry, if -- there is a bundle of material together, Mr. Chair. It starts with a newspaper article from the Atlanta Journal, and three pages in is a Sears bill. Do you have that, Professor Trebilcock? 981 MR. BROWN: Professor, three pages in the bundle. 982 MR. JACKSON: Ms. Jackson, would this be useful to mark the entire -- 983 MS. JACKSON: I think that it would be a good idea, Mr. Chairman. 984 MR. JACKSON: There is a package of materials for use by Ms. Jackson in examination of Professor Trebilcock. 985 MR. MORAN: That will be Exhibit F7.3. 986 EXHIBIT NO. F7.3 PACKAGE OF MATERIALS FOR USE BY MS. JACKSON IN EXAMINATION OF PROFESSOR TREBILCOCK 987 MS. JACKSON: So we're looking at page 3, Professor Trebilcock. Do you have that? 988 MR. TREBILCOCK: I do. 989 MS. JACKSON: Now, Sears, as you may know, is a licensed marketer in Ontario; you knew that? 990 MR. TREBILCOCK: I didn't know that. 991 MS. JACKSON: Well, let me tell you that they appear on the Ontario Energy Board's list of licensed gas marketers in Ontario. Would you take that subject to check? 992 MR. TREBILCOCK: Yes, I would accept that. 993 MS. JACKSON: And you see that Sears, even in the absence of a direct retail-consolidated bill is already bundling services such as clothing, long distance and then, on the web site attachment for Sears that goes on, other comparable services. Do you see that? 994 MR. TREBILCOCK: I do. 995 MS. JACKSON: So it would seem that people who might offer gas marketing are not inhibited from bundling services by not having marketer-consolidated billing. Do you agree with that? 996 MR. TREBILCOCK: This is simply to reaffirm the point that technically, split billing provides them with that option. 997 MS. JACKSON: Right. Now, I want to just understand the implications of these competitive offerings in a particular hypothetical. And I'm going to ask you to assume that we're talking about a hypothetical in which a marketer has the capacity and has a direct billing alternative for gas, okay? So they have the capacity to directly bill the gas commodity. 998 MR. TREBILCOCK: Right. 999 MS. JACKSON: And they also offer electricity. 1000 MR. TREBILCOCK: Mm-hmm. 1001 MS. JACKSON: Now, if an electricity supplier can add natural gas commodity to that bill, and if that offering is competitive on any basis other than the number of bills, for example, price -- 1002 MR. TREBILCOCK: Mm-hmm. 1003 MS. JACKSON: Okay. Do you agree with me that if that offer is competitive and that -- and the marketer makes that offer to the customer, the customer's number of bills stays the same? He continues to get one bill in respect of electricity and the gas commodity, and one bill for the gas distribution charge. You've got two bills. 1004 MR. TREBILCOCK: Okay. And what happens to electricity distribution? 1005 MS. JACKSON: Apparently, under the new regime, electricity distribution is there. 1006 MR. TREBILCOCK: I'm asking, are the bills split on both sides, natural gas and electricity? 1007 MS. JACKSON: Let's assume that the -- let's start again. I'll try and make it simpler. Let's talk about a marketer who is already offering electricity supply and distribution. 1008 MR. TREBILCOCK: Mm-hmm. 1009 MS. JACKSON: Okay. And by virtue of the availability of direct billing, proposes to offer the gas commodity in addition to electricity supply and distribution -- 1010 MR. TREBILCOCK: Right. 1011 MS. JACKSON: -- using the direct bill, and amalgamating that with the electricity bill. 1012 MR. TREBILCOCK: Right, I understand. 1013 MS. JACKSON: Okay. And if that offering of electricity supply, distribution and gas commodity is competitive on some basis other than the number of bills, let's say it's price -- 1014 MR. TREBILCOCK: Right. 1015 MS. JACKSON: -- the customer's number of bills will not go up or down as a result; the customer still gets two bills. 1016 MR. TREBILCOCK: One bill for gas distribution and one bill for everything else. 1017 MS. JACKSON: That's right. 1018 MR. TREBILCOCK: That's correct. 1019 MS. JACKSON: And if the marketer's offering is competitive, for example on price, there would be no reason that you could postulate, would you, why the customer wouldn't choose the more competitive offering? 1020 MR. TREBILCOCK: I don't plan to speak for customers. If they want one bill for the whole works here rather than two, I say to myself, why are we in the business of preventing them? 1021 MS. JACKSON: I'm not saying we are in the business of preventing them, Professor Trebilcock. I'm saying in those circumstances, if the offering is more competitive than what is already available to the customer, it's more competitive. 1022 MR. TREBILCOCK: It's more competitive. But if a customer says it would be even more attractive to get one bill rather than be bothered by two, I favour making that option available to them. 1023 MS. JACKSON: If the offer is more competitive and the number of bills can't change, the customer would be better off choosing the more competitive offering. 1024 MR. TREBILCOCK: They would be even better off, is what I'm saying. He may be even better off getting one bill. 1025 MS. JACKSON: He may or may not be. 1026 MR. TREBILCOCK: I don't know that. 1027 MS. JACKSON: Okay. 1028 MR. TREBILCOCK: All I'm saying is I don't want to deny that possibility. 1029 MS. JACKSON: I understand you don't want to deny that possibility, I'm just trying to explore what's left off if you do. 1030 Now, can we talk as well, then, about another element of marketer-consolidated billing that you endorse. You say at paragraph 19 of your evidence that the scope to cover marketer-consolidated billing -- 1031 MR. TREBILCOCK: If I can just -- 1032 MS. JACKSON: Sorry, have you not got it? 1033 MR. TREBILCOCK: That would be paragraph 19? 1034 MS. JACKSON: Paragraph 19 of your report. 1035 MR. TREBILCOCK: Yes. 1036 MS. JACKSON: Do you have that? 1037 MR. TREBILCOCK: I do. 1038 MS. JACKSON: You say there: "The scope to offer marketer-consolidated billing would also improve the efficiency with which demand and cost information is transmitted to consumers." Do you see that? 1039 MR. TREBILCOCK: I do. 1040 MS. JACKSON: And at interrogatory number 4 in pack -- in E2, and again, this is four on the heading -- 1041 MR. TREBILCOCK: Right. 1042 MS. JACKSON: 3, in the upper right-hand corner. 1043 MR. TREBILCOCK: Yes. 1044 MS. JACKSON: The question there is: "What is the evidence that marketer-consolidated billing has approved the efficiency with which market demand and cost information is transmitted to consumers?" Do you recall that interrogatory? 1045 MR. TREBILCOCK: I do. 1046 MS. JACKSON: Now, you mentioned three points there. But it's -- only the second appears to go to the efficiency with which market demand and cost information is transmitted. Do you see that? 1047 MR. TREBILCOCK: I do. 1048 MS. JACKSON: "Second, the current billing arrangements are an efficient means of transmitting market demand and cost information to customers in some cases." 1049 MR. TREBILCOCK: Right. 1050 MS. JACKSON: "Specifically, in some cases. Specifically, for customers remaining on the buy/sell mechanism, information on the effective cost of commodity gas is only provided ex-post, i.e., any savings that a final consumer realizes by choosing a merchant rather than the LDC for the merchant function are paid through a separate rebate since this information is provided after a consumer's decision is made, the ability to respond to changes in the underlying ex-ante cost is impeded." 1051 So I take it, sir, that what you're saying is with buy/sell customers, marketer-consolidated billing would be a more efficient means of transmitting market demand and cost information. 1052 MR. TREBILCOCK: That's correct, although I acknowledge somewhere in there -- 1053 MS. JACKSON: There is no buy/sell -- 1054 MR. TREBILCOCK: The buy/sell is phased out. 1055 MS. JACKSON: And again, it's gone on the Union system. 1056 MR. TREBILCOCK: Right. 1057 MS. JACKSON: So this advantage has disappeared. 1058 MR. TREBILCOCK: I agree. 1059 MS. JACKSON: Thank you. 1060 Now, if I've understood how you're saying these choices are to be available in the marketplace, Professor Trebilcock, and putting to one side for a moment Union's billing options, the existence of customer choice in billing options in the model you posit depends upon the extent to which marketers offer such options; is that fair? 1061 MR. TREBILCOCK: As opposed to -- 1062 MS. JACKSON: Well, the choices available to consumers will be the choices made available by marketers. 1063 MR. TREBILCOCK: I think, by and large, that is likely to be the way this will work; that is, you could imagine an alternative scenario where marketers offer each customer the three billing options. I think, in fact, that is not likely to prove practical. 1064 MS. JACKSON: Well, a marketer may offer more than one option or a marketer may not. 1065 MR. TREBILCOCK: It may or may not. 1066 MS. JACKSON: It would be for the marketer to choose. 1067 MR. TREBILCOCK: Right. 1068 MS. JACKSON: And -- 1069 MR. TREBILCOCK: And for the consumer to choose among marketers. 1070 MS. JACKSON: The consumer chooses the marketer. 1071 Now, the -- so the choice will depend on whether marketers offer those options and some of them may and some of them may not. 1072 MR. TREBILCOCK: That's correct. 1073 MS. JACKSON: Now, you talk about this at paragraph 8 of your evidence, and say that one of the ways in which this choice is promoted is because it enables the marketers to reduce billing costs by offering other services and spreading the costs over other services. Is that fair? 1074 MR. TREBILCOCK: That's one of the potential efficiencies. I call this -- these economies of scope. 1075 MS. JACKSON: And the benefit of that is for an entrant to the market, it reduces the up-front cost of the billing system, in effect. 1076 MR. TREBILCOCK: Because he's amortizing these costs, perhaps over a larger customer base. 1077 MS. JACKSON: And the result, as I understand your evidence is, in effect, to reduce the barrier to entry of investment in the billing system? 1078 MR. TREBILCOCK: Right. And I put aside particularly the possibility of entry from one energy sector to the other. 1079 MS. JACKSON: And spreading the cost. 1080 MR. TREBILCOCK: Spreading the costs. 1081 MS. JACKSON: Now, I acknowledge you don't think this is the perfect answer, but would you agree with me that when we talk about barriers to entry, to some -- and the costs of investing in a billing system precisely, the existence of distributor-consolidated billing has reduced the need to invest in a billing system? And to that extent, has reduced the barriers to entry for new marketers? 1082 MR. TREBILCOCK: Well, I assume these billing costs have to be paid somehow. They're not -- 1083 MS. JACKSON: But a new marketer coming online today has an alternative to investing in a new billing system which is to take a service from Union on a per-bill basis. In other words, they don't have to invest in the up-front investment in the billing system; correct? 1084 MR. TREBILCOCK: No, but the marketers' customers must be paying for the billing costs somewhere in the process. 1085 MS. JACKSON: But if you're a new marketer contemplating coming into this market, one potential barrier to entry is the requirement to find the capital to invest in a billing system; correct? 1086 MR. TREBILCOCK: It could be. And of course, I am not arguing for the elimination -- 1087 MS. JACKSON: I understand that. 1088 MR. TREBILCOCK: I am not arguing for the elimination of distributor-consolidated billing, and if there is a new entrant of the kind you described, Ms. Jackson, who would prefer to avoid these up-front costs in establishing its own billing system or contracting without a third party biller, I imagine that they -- such a party may find it attractive to enter into an arrangement with the distributor, to do the billing. 1089 MS. JACKSON: Now, if I am a new entrant and I'm going to invest in a marketer-consolidated billing system, although I may be able to spread the costs over a number of products, I still have to contemplate the up-front investment in a marketer-consolidated billing system; correct? 1090 MR. TREBILCOCK: That's correct. But I'm not sure we're really on the same wave length here. 1091 MS. JACKSON: If you take this one step at a time we'll find out. That's correct, isn't it? 1092 MR. TREBILCOCK: Yes, I guess so. The marketer won't do it. 1093 MS. JACKSON: That's right. Now, if it turns out that marketer-consolidated billing is sufficient -- that in order to effectively operate in this market you have to invest in a marketer-consolidated billing, do you agree that that could create a greater barrier to entry than the existing ABC service if the existing ABC service didn't continue to exist? 1094 MR. TREBILCOCK: I'm -- I'm skeptical of that claim. In jurisdictions that permit retailer-consolidated billing, those that have -- let me call them a mature deregulated market, the most prominent example is Great Britain for gas and electricity side, we say -- have seen lots of new entry in retailing involving cross others from one energy sector to the other. 1095 MS. JACKSON: Well, because, of course, each market is different and in different states of transition, let me ask you to assume this hypothetical. That is, if the existence of marketer-consolidated billing makes entry more difficult, would you agree with me that would favour entrenched and dominant marketers? In other words, if you create a barrier to entry, the result is to favour entrenched and dominant marketers, do you agree? 1096 MR. TREBILCOCK: Yeah. If that was so. 1097 MS. JACKSON: Okay. Now, Direct Energy that has been identified in these proceedings as the largest marketer in Union's franchise. Do you know what Direct Energy's share is? 1098 MR. TREBILCOCK: I know it's substantial. 1099 MS. JACKSON: Do you know what it is? 1100 MR. TREBILCOCK: No. 1101 MS. JACKSON: Now, coming back to the question of the nature of the consumer's choice in billing, I understand that you're not saying that the consumer can choose the billing option regardless of who provides the commodity. In other words, if Direct Energy provides the commodity, can the customer choose whether or not to be billed by Direct Energy and how? 1102 MR. TREBILCOCK: I think in answering that I would have to say, initially, my intuition was that the consumer should choose, but I think a moment's reflection shows this isn't feasible and your new entrant example, I think, dramatically underscores this. This is the new entrant that does not want to establish his own billing system and enters into a distributor-consolidated billing arrangement with the local LDC, goes out and markets gas, and consumers starts checking off marketer-consolidated billing on these retailer comments. The retailer says, I don't have this option available. 1103 MS. JACKSON: So if a customer likes Direct Energy's price, for example, but not its billing system, you're not positing that it would be able to force Direct Energy to use Union's billing system? 1104 MR. TREBILCOCK: No. 1105 MS. JACKSON: And if a customer wants a system supplied but billing from Direct Energy, you're not suggesting that Direct Energy should be forced to bill for that customer? 1106 MR. TREBILCOCK: I am not. 1107 MS. JACKSON: Okay. So that if marketers cannot be forced to the extent to which customer choice and billing options exists, depends on what billing options are offered with marketers on those services? 1108 MR. TREBILCOCK: That's correct. 1109 MS. JACKSON: Now, in paragraph 18 of your evidence, and we looked at this earlier, you talk about the broad consensus on the economic benefits of allowing consumer choice in natural gas billing. Do you see that? 1110 MR. TREBILCOCK: I do. 1111 MS. JACKSON: And in Union Gas's interrogatories to you, this is Union Gas interrogatory number 3 in Exhibit E2 and this one is correctly labelled 3 in both places. 1112 MR. TREBILCOCK: Right. 1113 MS. JACKSON: Union asks you what the basis of that broad consensus was. 1114 MR. TREBILCOCK: Right. 1115 MS. JACKSON: And you referred to an answer to Board staff interrogatory number 4, and if I could take you back to Board staff interrogatory number 4, you list there a series of materials? 1116 MR. TREBILCOCK: Correct. 1117 MS. JACKSON: Do you see that? This is the material, Professor Trebilcock, that I wrongly thought had been filed in this proceeding that has not been, but has been compiled in this big blue book in front of me. 1118 I take it that -- and looking at the Board staff interrogatory, you say that this is the material authenticating the advantages of customer choice; correct? 1119 MR. TREBILCOCK: Right. 1120 MS. JACKSON: Now, in this material, there is a substantial review of the extent to which customer choice with respect to energy options is available in different jurisdictions. Do you agree with that? 1121 MR. TREBILCOCK: Yes, that's correct. 1122 MS. JACKSON: In effect, with respect -- I'm going to suggest, Professor Trebilcock, that this material does not speak to a broad consensus or the economic advantages of allowing customer choice in billing. Indeed, the word "billing" rarely appears in this material? 1123 MR. TREBILCOCK: Well, I would refer you to my answer to Union Gas's interrogatory number 1, where I refer specifically to the data available to me on the range of billing options in the U.S., and I think the data I refer to there, which is not totally current but reasonably recent, shows -- let me see. This is -- this is the case of survey 25 utility programmes, 19 responded the utility offered billings. Nineteen said the utility offered billing services, twelve cases -- 1124 I'm simply quoting -- quoting from my answer to the range of billing options. 1125 MS. JACKSON: I'm not asking at the moment, Professor Trebilcock, about jurisdictions that have offered some of these options. I'm asking about the question of the -- the broad consensus on the economic benefits of offering customer choice in billing as opposed to energy supply, and I'm suggesting to you, Professor Trebilcock, that the material you refer to in answer to Board staff interrogatory does not reflect any such broad consensus. It addresses the question of choosing energy supply? 1126 MR. TREBILCOCK: Well, I was trying to refer you to my answer to an interrogatory that expressly reviews the range of billing options in a variety of jurisdictions. 1127 MS. JACKSON: And are you suggesting the fact that this option is available in some jurisdictions reflects a broad consensus on the economic advantages of allowing customer choice in billing? 1128 MR. TREBILCOCK: The fact that in 12 out of 30-some utilities, this option is open. Maybe it isn't a consensus, but it is a commonly provided option 1129 MS. JACKSON: It's an option that's provided in some jurisdictions, but do you have any information on the extent to which it's taken up? 1130 MR. TREBILCOCK: I don't. 1131 MS. JACKSON: And you'll agree with me, sir, that there is nothing in the material that you referred to in the answer to the interrogatories we've referred to, that refers to a broad consensus on the economic advantages of customer choice in billing? 1132 MR. TREBILCOCK: No, I think that's too strong. 1133 MS. JACKSON: Well, could you tell me where I find it, then? 1134 MR. TREBILCOCK: Yes. In the -- in the OFGEM material that I list where we know that the most -- the most mature deregulated gas and electricity markets in the world, those that have been deregulated the longest, that 35 per cent of low volume users exercise the dual-fuel option under a retailer-consolidated billing model. Thirty-five per cent is not a small number. 1135 MS. JACKSON: I am not asking about whether consumers do or don't want dual-fuel capacity. I'm asking about the suggestion that there is a broad consensus that they require marketer-consolidated billing or a choice in billing, that that provides an economic advantage? 1136 MR. TREBILCOCK: Well, the dual-fuel option has been intimately combined -- I shouldn't say intimately. Has, in fact, been combined with the retailer-consolidated billing option. That's -- 1137 MS. JACKSON: But need not be? 1138 MR. TREBILCOCK: It need not be, but the one jurisdiction where we observe a high incidence of dual-fuel contracts is where retailer-consolidated billing is open. 1139 MS. JACKSON: All right. And that's the basis upon which you make that statement? 1140 MR. TREBILCOCK: Well, I am not wired to the term "broad consensus" if that's what -- if that bothers you. 1141 MS. JACKSON: You're inferring, sir, that because where there is dual-fuel capacity in certain jurisdictions and those jurisdictions have marketer-consolidated billing, that that, in some fashion, supports the evidence of a broad consensus of economic advantage? 1142 MR. TREBILCOCK: I'm happy to change that to provide evidence of economic benefits to consumers of a choice in billing options. 1143 MS. JACKSON: Well, it provides evidence that the option is available? 1144 MR. TREBILCOCK: Not only available but exercised. 1145 MS. JACKSON: All right. Well, let's go, if we could, again, to the MORI study to which you've referred. This is January 2001. And I'm sorry, as I say, I hadn't realized this was not in evidence. 1146 What I have here are the -- is the questions that under -- the relevant questions that underlie the summary that you've just referred to. This is in the January 2001 research study. Do you have the whole study there? 1147 MR. TREBILCOCK: Do I need that? Or can I -- 1148 MS. JACKSON: I don't think you do but I wouldn't want you to -- you can see which pages it's from. 1149 I wanted to ask you to look, first of all, at -- and you can confirm, Professor Trebilcock, that, first of all, MORI is Market and Opinion Research International? 1150 MR. TREBILCOCK: Right. 1151 MS. JACKSON: And what they're reporting on in this January 2001 study is a very substantial and detailed survey of the actions and views of energy consumers? 1152 MR. TREBILCOCK: Yes. 1153 MS. JACKSON: And what I have here for you, sir -- and perhaps, Mr. Chair, we should mark this as another exhibit. 1154 MR. JACKSON: Yes. I think that's the only way to keep track of the paper. Thank you. 1155 MR. SOMMERVILLE: I believe I asked as part of an undertaking yesterday, that this report be filed in its entirety. 1156 MS. JACKSON: Well -- and it's -- I had -- what I had thought we were going to do was identify something in this blue book, because until about half an hour ago I was maybe the only person in the room that thought this blue book was in evidence. And clearly what we'll have to do, since it isn't, is do exactly that. 1157 MR. SOMMERVILLE: That would be great. I just didn't want this to serve as a substitute for the report. 1158 MS. JACKSON: Absolutely not. 1159 MR. SOMMERVILLE: Thank you kindly. 1160 MR. MORAN: Mr. Chair, that becomes Exhibit F7.4, excerpt from the MORI study filed by Union. 1161 EXHIBIT NO. F7.4 EXCERPT FROM THE MORI STUDY FILED BY UNION GAS LIMITED 1162 MS. JACKSON: Professor Trebilcock, first of all, can you look at question 36, and you'll see there, "What are the" -- question -- 1163 MR. TREBILCOCK: What page? 1164 MS. JACKSON: Page 69. 1165 MR. TREBILCOCK: Oh, yes. 1166 MS. JACKSON: "What are your main reasons for staying with your current gas supplier?" And the results that answered that question are responded -- are summarized below. Do you see that? 1167 MR. TREBILCOCK: I do. 1168 MS. JACKSON: Now, in the first column to the left, we have the answers that were given on an unprompted basis. In the column on the right are the answers that are given after consumers are prompted. 1169 MR. TREBILCOCK: Mm-hmm. 1170 MS. JACKSON: And you'll agree with me, sir, that there is no reference in that list to the method of billing as a reason why a customer stays with the current gas supplier. 1171 MR. TREBILCOCK: As opposed to switching? 1172 MS. JACKSON: That's right. 1173 MR. TREBILCOCK: That's correct. 1174 MS. JACKSON: And then if you turn over to page 72, and there you have the question 42: "If you were to change gas suppliers, what factors would be most important to you when choosing a new gas supplier?". And you'll agree with me, sir, that billing is not one of the reasons entered on that list, either spontaneously or prompted? 1175 MR. TREBILCOCK: I'm not sure that I read it that way. That its their choice of convenient payment methods. 1176 MS. JACKSON: Well, the payment methods are -- can be dealt with -- are dealt with -- you can pay in different ways regardless of how you're billed; correct? You can pay electronically, you can pay by debit card, you can pay by credit card. Payment methods refer to how you pay, not how you are billed; right? 1177 MR. TREBILCOCK: If you say so. 1178 MS. JACKSON: You're not sure? 1179 MR. TREBILCOCK: Well, I can help you there, sir, because if you turn over to the next question, which is 46, what are -- "what are the main reasons why you decided to change your gas supplier?" So these are the people that did switch, okay? 1180 MR. TREBILCOCK: Okay. 1181 MS. JACKSON: First of all, it's clear that the overwhelming factor is cheaper prices; correct? 1182 MR. TREBILCOCK: Right. 1183 MS. JACKSON: Prompted and unprompted. 1184 Secondly, on a prompted and unprompted basis, the ability -- number F, the ability to buy gas and electricity from the same company, prompted and unprompted is the second most significant factor. 1185 MR. TREBILCOCK: Right. 1186 MS. JACKSON: The third most significant factor is D, "persuasive doorstep salesmen," prompted and unprompted. 1187 MR. TREBILCOCK: Right. 1188 MS. JACKSON: And as we move down, these factors are becoming substantially less significant, apparently, on the basis of their reference -- of the times to which they're referred to. You would agree with that? 1189 MR. TREBILCOCK: I do. 1190 MS. JACKSON: Yes. 1191 Yes. Sorry, when I say there is a difference between payment and billing, you'll -- if you move down to K, you'll see there: "Only one bill for gas electricity" and, four lines down, "payment methods." So clearly this survey is distinguishing between paying and billing; do you agree with that? Do you agree with that, Professor Trebilcock? 1192 MR. TREBILCOCK: I'm just looking at K. It seems to have a series of sub -- 1193 MS. JACKSON: Billing is distinct from payment in K. 1194 MR. TREBILCOCK: Okay. Yes. 1195 MS. JACKSON: And those customers who refer to the one bill for gas and electricity, are substantially -- are significantly smaller than the number who refer to the ability to buy gas and electricity from the same company. You would agree with that? 1196 MR. TREBILCOCK: I do. 1197 MS. JACKSON: And with all of that, sir, on a spontaneous basis, in 94 per cent of cases, one bill played no role at all in the decision to switch. 1198 MR. TREBILCOCK: I'm not sure that I read the numbers this way, ability to buy gas and electricity from the same person. To what extent is that facilitated? This is the dual-fuel option; to what extent is that facilitated by the availability of retailer-consolidated billing? 1199 MS. JACKSON: I'm talking about what persuades the customer to do it. 1200 MR. TREBILCOCK: Well, with the dual-fuel option, is necessarily -- or necessarily -- 1201 MS. JACKSON: It's not necessarily -- 1202 MR. BROWN: Please let Professor Trebilcock finish. 1203 MR. TREBILCOCK: The dual-fuel option is, necessarily, more strongly facilitated with a consolidated-billing option. 1204 MS. JACKSON: It's more strongly facilitated to the extent that it's an important element of the customer's decision to take the dual-fuel capacity. 1205 MR. TREBILCOCK: Right. I don't know of any dual-fuel customers that have, of any significant percentage of them in this survey, that are not receiving consolidated bills. 1206 MS. JACKSON: Well, the -- what we're looking at here doesn't suggest that one way or another. But what it does suggest is that the one bill is substantially less significant than the bill -- the ability to buy both fuels. We've been over that. 1207 MR. TREBILCOCK: Right. 1208 MS. JACKSON: And these -- these items are not -- the deciding factor; these are things that influence the decision in any way; correct? 1209 MR. TREBILCOCK: That's correct. 1210 MS. JACKSON: And therefore, in 94 per cent of cases, spontaneously, one bill had nothing to do with it. 1211 MR. TREBILCOCK: You keep repeating the question, and I keep -- keep repeating the qualification. That the dual-fuel option is an important additional factor. 1212 MS. JACKSON: Well, if we believe the respondents when they answered the interrogatory -- when they answered the survey on a spontaneous basis for 94 per cent of them it had nothing to do with it. You would agree with that. 1213 MR. TREBILCOCK: All I can -- all I can repeat is the interpretation by the people who ran the survey that the dual-fuel option and the single bill have emerged as increasingly more significant factors. That's what they say and I have no reason to doubt their interpretation of their own numbers. 1214 MS. JACKSON: And there is no question, sir, that the dual-fuel capacity is a factor? But you agree that the survey results indicate that those who chose, said that the one bill had nothing to do with it in 94 per cent of cases. 1215 MR. TREBILCOCK: I've already answered that question. 1216 MS. JACKSON: You don't agree that's what they said? 1217 MR. TREBILCOCK: No, because I cannot separate the dual-fuel issue from the one-bill issue. 1218 MS. JACKSON: All right. So you can't, regardless of whatever the respondents say about it? 1219 MR. TREBILCOCK: Right. 1220 MS. JACKSON: Then let me ask you about -- something about the question of costs to the system of accommodating marketer-consolidated billing. 1221 MR. TREBILCOCK: Right. 1222 MS. JACKSON: One of the costs, potential costs identified is associated with the need -- potentially to accommodate a significant number of customers returning to service. Do you recall that? 1223 MR. TREBILCOCK: Yes. 1224 MS. JACKSON: And you say, Professor Trebilcock, that in your mind it's an open question whether it's realistic to expect a significant volume of customers to return to system? 1225 MR. TREBILCOCK: I do say that. 1226 MS. JACKSON: Yes. And I think you've indicated in answer to one of the interrogatories, that the best way to judge that is to look at historical returns to the system? 1227 MR. TREBILCOCK: Yes. 1228 MS. JACKSON: Do you agree, though, that there may be effects of marketer-consolidated billing itself that affect the rate of return to system? 1229 MR. TREBILCOCK: That's possible. 1230 MS. JACKSON: And indeed, there is one jurisdiction in North America that is has had, effectively, marketer-consolidated billing in a substantial way for a number of years, and that's Georgia, isn't it? 1231 MR. TREBILCOCK: Yes. But it doesn't have distributor-consolidated billing. 1232 MS. JACKSON: No, it doesn't. 1233 And it -- but it is a jurisdiction in which there is -- there is a -- because of that absence, the level of marketer-consolidated billing is very high. In fact it covers the market. 1234 MR. TREBILCOCK: Right. By definition it's a hundred per cent. 1235 MS. JACKSON: And can I just ask you to turn up Exhibit C1.23. 1236 MR. BROWN: C123? 1237 MS. JACKSON: I think that's the one. See if I have the right one. Yes, it is. Do you have that, Professor Trebilcock? 1238 MR. TREBILCOCK: I do, I have it in front of me now. 1239 MS. JACKSON: And I'm going to ask you to turn over to the attachments to that interrogatory, which is a series of articles about billing problems in different jurisdictions. 1240 And the last one is an article in -- near the end of the year 2000 from the Atlanta Constitution. Do you see that? 1241 MR. TREBILCOCK: I haven't got it yet. Yes, now I do. 1242 MS. JACKSON: And according to that article, and you'll probably realize there are many other comparable newspaper articles, it begins by noting that a small Texas company has become the third unregulated Georgia natural-gas marketer to declare billing -- to declare bankruptcy and it blames billing problems for its petition. You're familiar with that kind of experience in Georgia? 1243 MR. TREBILCOCK: I wasn't until reading this. 1244 MS. JACKSON: All right. And if you flip over the page, you'll see -- and I'm looking at the fourth paragraph down on that page: "Billing has been by far the biggest and most persistent headache of Georgia's landmark natural gas deregulation and was blamed for the bankruptcy of one other marketer." Were you familiar with that? 1245 MR. TREBILCOCK: I'm not familiar with this claim, but I never supported the Georgian solution of forcing the utility to get out of the retailing. 1246 MS. JACKSON: I understand that; and I'm not exploring all aspects of the models, just what can happen with respect to marketers. 1247 In the case of Georgia, the other marketer who declared bankruptcy was Peachtree with 171,000 customers. You're familiar with that? 1248 MR. TREBILCOCK: I see it here. 1249 MS. JACKSON: "And the Public Service Commission called marketers on the carpet this month to detail steps that they are taking to correct problems that have included late bills, inaccurate bills, and no bills at all." 1250 You were familiar with that development in the Georgia market? 1251 MR. TREBILCOCK: I see it here. 1252 MS. JACKSON: Were you familiar with it before? 1253 MR. TREBILCOCK: No. 1254 MS. JACKSON: "The PSC's energy committee on Thursday will consider a proposal that would excuse consumers from paying bills from certified marketers that are more than 90 days late and less than 90 per cent accurate." 1255 Are you familiar with that? 1256 MR. TREBILCOCK: No. 1257 MS. JACKSON: And then, if I could ask you to turn back to Exhibit F7.3, and that's a more recent article about the ongoing problems in Georgia. "Nearly a quarter of a million Georgia households are on Atlanta Gas and Light Company's turn-off list. Almost two months of -- after expiration of -- a Public Service Commission ordered a moratorium on disconnections of natural gas service." 1258 And what happened, Professor Trebilcock, as a result of these billing problems and a number of other marketer problems, marketers started submitting turn-off requests to Atlanta Gas and Light to a level Atlanta Gas and Light couldn't process. Were you familiar with that? 1259 MR. TREBILCOCK: No. 1260 MS. JACKSON: And at least at this level, do you agree with me that these developments suggest that marketers may take on billing functions that they cannot execute? That's at least a possibility, isn't it? 1261 MR. TREBILCOCK: That's a possibility under split billing, which -- which I gather your client favours. 1262 MS. JACKSON: Right. And if billing problems, non-payment or customers switching brokers leads to a massive increase in turn-off requests of the sort experienced in Georgia, if the utility extends its capacity to accommodate such a massive number of turn-offs and turn-ons, in your view, who should pay? 1263 MR. TREBILCOCK: Well, I didn't find the Georgia experience terribly helpful or interesting. This is a -- the -- this is totally unlike what the process of deregulation is in this province. To order the local utility to get out of the commodity function is something nobody is seriously arguing for here. 1264 MS. JACKSON: If it turns out that because marketers take on billing functions they cannot execute or have other problems with respect to billing and collection, that leads to a massive number of -- a massive increase in the number of turn-off requests, if the utility prepares for that, who should pay? Are you saying the utility should not prepare for that? 1265 MR. TREBILCOCK: Well, let's take this one step at a time. 1266 If we -- if the first move is to minimize this risk, then we should not have either retailer-consolidated billing or split billing; we should have only distributor-consolidated billing. We want to minimize the risk of retailer -- retailer bankruptcies, which is one problem you referred to. Then let's go back and re-regulate the natural gas market and get back to the old monopoly model that -- where that risk disappears completely. 1267 MS. JACKSON: Does that mean that in your view, the utility should not take steps to be able to deal with this kind of massive level of turn-offs and turn-ons? As -- associated with moving to marketer-consolidated billing? 1268 MR. TREBILCOCK: I'm not sure to what extent this turn-off factor is an inherent function of marketer-consolidated billing. As opposed to -- and would not occur under direct billing. Or as you have said prefer to call it, split billing. 1269 MS. JACKSON: Well, if -- so you don't know whether the utility should or shouldn't prepare for such a massive number of turn-offs? 1270 MR. TREBILCOCK: Well, I report the historical data and consumers returning to system gas in this province, and this is under the distributor-consolidated billing, and the number is trivial. 1271 MS. JACKSON: And you don't expect it to change? 1272 MR. TREBILCOCK: And I expect -- no. I accept your point that it may change. 1273 MS. JACKSON: So should the utility prepare for it? 1274 MR. TREBILCOCK: It probably should contemplate contingent billing capacity, but most of this capacity is variable. 1275 MS. JACKSON: I'm not talking about billing capacity; I'm talking about turning-on and turning-off capacity. Should the utility prepare for it? 1276 MR. TREBILCOCK: Should it prepare for the possibility that Direct Energy goes bankrupt? 1277 MS. JACKSON: Should it? 1278 MR. TREBILCOCK: Well, if we're going to paralyze ourselves with these contingencies, I suggest we go back to a single, vertically-integrated monopoly. 1279 MS. JACKSON: If the utility doesn't prepare for it, Professor Trebilcock, and the experience is like Georgia, and as a result the utility can't process the turn-off and turn-on requests as they come in, who becomes responsible in your view for the gas that flows while those turn-offs can't occur? 1280 MR. BROWN: With all due respect, Mr. Chair, we're getting pretty speculative, I think, at this point of Ms. Jackson's questions, and as interesting as they may be, there is no jury here. We do have to deal with evidence and facts at the end of the day, and in my submission, this question is extraordinarily speculative and of no probative value whatsoever. 1281 MS. JACKSON: Well, Mr. Chairman, my friend may feel that. He is in the fortunate position of not having to plan for the future under marketer-consolidated billing. The utility doesn't have that luxury, and with respect, neither does the Board. And at least in theory -- because Professor Trebilcock is being fairly candid here. He is speaking about theory -- I would like to understand, in theory, what he says should happen. 1282 MR. JACKSON: I think that to the extent he can also deal with practice, we would be very pleased to hear any suggestions that he might have as well. 1283 MS. JACKSON: Absolutely. 1284 MR. JACKSON: This is a discussion, indeed, which I had with Mr. Todd -- or it gets very close to the same discussion I had with Mr. Todd, in any event. And I think that -- and the Board would benefit from any practical advice you might have with respect to the question of turn-off and the recourse that anyone might have, then, to cover the cost of gas which flows, if -- if no provisions have been made to deal with it. 1285 MR. TREBILCOCK: Well, I'm not sure how helpful I can be on this, even under distributor-consolidated billing, if one wants to address the hypothetical case of Direct Energy going bankrupt tomorrow. 1286 MR. JACKSON: I don't think that was the question, Professor Trebilcock. I think it was if -- if they haven't gone bankrupt but there is a problem of gas flowing after a request has been made to shut off the gas -- 1287 MR. TREBILCOCK: Right. 1288 MR. JACKSON: -- by the distributor, notwithstanding that the distributor may be still a going concern. I don't think we have to make the assumption that the -- of the -- sorry, the marketer still being a going concern. I don't think we have to make the assumption of the marketer going bankrupt and I don't think that assumption was put to you either, sir. 1289 MR. TREBILCOCK: I thought Ms. Jackson referred me to a paper or article in the Atlanta Journal that referred to a retailer bankruptcy, so I was taking the most extreme case first. 1290 MR. JACKSON: Okay. As long as you're moving on to deal with the less extreme case. 1291 MS. JACKSON: I don't believe the are bankrupt companies act -- asking for the shut-offs in Georgia, but the premise of my question is not bankrupt companies. 1292 MR. JACKSON: Okay. Thank you. So maybe, Professor Trebilcock, could deal with that. 1293 MR. TREBILCOCK: You want me to focus on the turn-off problem where customers haven't paid their retailers? 1294 MS. JACKSON: Yes. As a result, the marketers request an extraordinary number of turn-offs of the utility and the utility can't process them as quickly as they come in. Who should pay? 1295 MR. TREBILCOCK: And why are the marketers experiencing this extraordinary default rate? 1296 MS. JACKSON: I have no idea. 1297 MR. TREBILCOCK: Well, the whole situation strikes me as bizarre. Why are the marketers encountering a vastly higher default rate than the distributor would? 1298 MS. JACKSON: You have no suggested answer to that? 1299 MR. TREBILCOCK: I don't. 1300 MS. JACKSON: All right. One last question. 1301 If the ability to accommodate marketer-consolidated billing turns out to be very expensive to the utility, and nobody takes it up, or no significant take-up results, who should pay for that? 1302 MR. TREBILCOCK: To the extent there are fixed costs of putting this option in place, I assume that all the utilities' customers should pay that. The principle I identified earlier and the incremental cost of providing a particular case should be borne by those exercising the choice. 1303 MS. JACKSON: Thank you, Professor Trebilcock. Those are my questions. 1304 MR. JACKSON: Thank you Ms. Jackson. Mr. Moran? 1305 CROSS-EXAMINATION BY MR. MORAN: 1306 MR. MORAN: Thank you, Mr. Chair. Just a few questions. 1307 MR. JACKSON: Thank you. Don't let us cut you short, though, Mr. Moran. 1308 MR. MORAN: I can't afford it anyway. 1309 Mr. Trebilcock, I take it you agree that those who benefit are the ones who should probably bear the costs of providing that benefit, as a general principle. 1310 MR. TREBILCOCK: Yes. 1311 MR. MORAN: And I was taken by your three cheese pizza example where you suggested that the market should decide whether it wants to have such a product in the market place; right? 1312 MR. TREBILCOCK: That's correct. 1313 MR. MORAN: I take it you would also agree that, to the extent that there are costs associated with developing that product and putting it out into the market, that you wouldn't look to all pizza eaters bear those costs as part of making that product available? 1314 MR. TREBILCOCK: That's correct. 1315 MR. MORAN: Okay. So in the context of the $15.7 million that we're talking about in this hearing, in order to deliver the unbundled service, and so on, how do we deal with the costs -- those costs when it comes to dealing with the benefits that might flow from those costs? 1316 MS. JACKSON: Well, Mr. Chair, Professor Trebilcock has already been quite candid. He hasn't looked at the unbundling issue at all. 1317 MR. TREBILCOCK: I don't really have a view on that. 1318 MR. MORAN: All right. Fair enough. 1319 You were talking about the advantages of marketer-consolidated billing in your report and in your evidence and one of the advantages, as I understand it, is the ability to leverage the billing activity to provide other services that might not necessarily have anything to do with the energy -- energy market; right? 1320 MR. TREBILCOCK: Well, that is one potential advantage. But I want to clarify something here. I am not arguing -- let me make this absolutely clear. I am not arguing that retailer-consolidated billing is superior to the other two billing options for all customers. I have no view on this. 1321 MR. MORAN: Fair enough. 1322 MR. TREBILCOCK: As to whether one is superior to the other and, moreover, there may not be one single answer. One option would be better or some customers and other option for others. I do not want to leave this hearing as an apparent advocate of the retailer-consolidated billing. I don't care. Right? The only issue is who decides. And my answer to that is the market will decide, just as it decides whether there is a demand for three cheese pizza. 1323 MR. MORAN: Fair enough, Mr. Trebilcock. I'll take note of your indifference to what kind of billing is available to customers. 1324 However, you're talking about one of the benefits associated with marketer-consolidated billing being the ability to leverage that activity into, into other markets. 1325 MR. TREBILCOCK: And that's one advantage it possesses relative to the other two options. But frankly, it probably has some disadvantages relative to the other two options. 1326 MR. MORAN: Let's focus on that. Would you consider that to be a benefit to the marketer? 1327 MR. TREBILCOCK: I would. 1328 MR. MORAN: All right. And to the extent that that's a benefit to the marketer and to the extent that that benefit is not related to energy matters, would you agree that it might not be appropriate for the ratepayers to pay for the whole cost of delivering such a system? 1329 MR. TREBILCOCK: No. This again -- getting into how we're going to split these unbundling costs? 1330 MR. MORAN: No. I'm asking a general question. 1331 MR. TREBILCOCK: I'm assuming that, in principle, the retailer and its customers should bear the costs associated -- that are uniquely associated with rendering the bill in this form. And any incremental costs associated with getting billing information from the distributor to incorporate this bill. 1332 MR. MORAN: Thank you for that. 1333 Now, with respect to the experience in other jurisdictions, let's look at the British experience, which I think you've referred to quite a lot. 1334 MR. TREBILCOCK: Right. 1335 MR. MORAN: The -- that market started approximately when? The gas market? 1336 MR. TREBILCOCK: I can't give you an exact date. Electricity dates back to the late '80s. 1337 MR. MORAN: And is the gas market even earlier than that? 1338 MR. TREBILCOCK: There is no point in me guessing. Somebody must know. 1339 MR. MORAN: Fair enough. Let's take the electricity market at least in the '80s. And the dual-fuel option and the consolidated-marketer billing option, when did that start to show up in the British market? 1340 MR. TREBILCOCK: Well, the excerpt from the MORI report that I referred to earlier in my testimony today suggests -- suggests that it's become a relatively recent phenomenon. 1341 MR. MORAN: I think you referred to the British market as being a more mature market? 1342 MR. TREBILCOCK: More mature deregulated market, in the sense that it's been deregulated longer in both cases. 1343 MR. MORAN: Right. And in Ontario, of course, we have the gas market that's been open for a few years, but the electricity market isn't even open yet; right? 1344 MR. TREBILCOCK: Right. 1345 MR. MORAN: In terms of timing, do you think it's appropriate to wait until the market is a bit more mature before you expand the options available to marketers? 1346 MR. TREBILCOCK: I don't see a good reasons for that. The decision has already been made to make these three options available in the case of electricity. 1347 MR. MORAN: All right. If there was a concern about the -- about the behaviour of marketers out in the marketplace, do you think it would be appropriate to wait until those behavioural concerns are addressed before expanding the options to those marketers? 1348 MR. TREBILCOCK: That sounds like a loaded question, but -- 1349 MR. BROWN: It is. 1350 MR. TREBILCOCK: I'm not sure what concerns you have in mind or what remedies you have in mind. 1351 MR. MORAN: If there were concerns about the market as it currently exists and, those haven't been resolved yet, would it be appropriate to wait until those are resolved before expanding the options? 1352 MR. TREBILCOCK: Well, I would be repeating myself, largely. I acknowledge at the end of my opinion that I am concerned that the choice process out there in the retail market would be a genuine choice process, not specifically in relation to billing, but a choice among service offerings alone. I specifically emphasize that at the end of my opinion. 1353 But it does also bear noting that we've already got, as I understand it, collectively committed ourselves to making these three choice billing -- these three billing options open in the -- open to consumers in the electricity market. From day one, from the day it opens on May 1st. 1354 MR. MORAN: One last question, Mr. Trebilcock, and it has to do with the comparison of marketer-consolidated billing to split billing. What would you point to as being a unique benefit associated with marketer-consolidated billing that's not provided by split billing, other than the one bill versus two bills? 1355 MR. TREBILCOCK: Well, that's a big part of it. That is -- clearly, the split bills involve duplication, and additional costs providing two bills rather than one. If you look at the various functions in the billing cycle, a number of these functions are going to have to be repeated twice, to send out the two bills, this is -- involves additional costs and -- and inefficiency. 1356 So there is a cost issue, secondly -- there is apparently the case that consumers find it annoying or confusing to get two bills for what they regard as the same service. 1357 So I don't see the split bill as a close substitute for a consolidated bill, on either side. With the marketer or with the distributor. 1358 MR. MORAN: All right. So the difference turns primarily on the one-bill versus two-bill issue, then? 1359 MR. TREBILCOCK: Yes. 1360 MR. MORAN: Yes. Thank you, those are all my questions. 1361 MR. JACKSON: Thank you, Mr. Moran. 1362 QUESTIONS FROM THE BOARD: 1363 MR. DOMINY: Professor, you have a great background with regard to the electricity system and, in fact, you as I understand it, you were very much involved in developing the design of the new electricity market through the Market Design Task Force in other areas. 1364 If I'm on marketer-consolidated billing in electricity, and Direct Energy is my supplier because I believe Direct Energy is one of the people that markets for electricity. Who do I call -- I'm a customer, if something goes wrong with the feed of electricity into my house, and I want to get attention? 1365 MR. TREBILCOCK: In the retailer-consolidated billing model, the retailer is the front line provider of customer care, so to speak. 1366 MR. DOMINY: So I call Direct Energy, and then Direct Energy has to call -- if I'm in the Toronto Hydro supply area, Toronto Hydro, to get someone to come and deal with my problem, which may be a squirrel in the transformer outside my house or something. Is that what -- is that the process you're thinking of? 1367 MR. TREBILCOCK: I'm not sure that I've thought through exactly how the call centre process would work here or whether -- in relation to a range of technical problems. The retailer under a consolidated-billing option says if you've got a squirrel in your, wherever the squirrel was, call the distributor. And I'm not sure if the problem is different under the retailer-consolidated billing than under split billing. That is: What does the customer do under a split bill, where he is getting billed for energy from the retailer and distribution from the LDC, who does he call in relation to what type of problem? 1368 MR. DOMINY: But my concern about the quality of my service is a concern that Direct Energy will look after for me, because I'm a Direct Energy customer. Because Is that the structure that you're thinking of? 1369 MR. TREBILCOCK: The structure I'm thinking of would have the retailer as the front-line respondent, so to speak, to customer service concerns. 1370 MR. DOMINY: And that's -- and that's the system in the U.K.? 1371 MR. TREBILCOCK: Yes. 1372 MR. DOMINY: And then -- I think you answered the question, I think one Mr. Moran put to you. I think it was the answer to the last question you gave to Ms. Jackson. And that is the question that in order to implement these services, or new services and new structures, the -- there may be a cost to the incumbent utility to create the systems to make them available, and until the system is available, there is no measure of what the likely -- of what the take-up will be. Obviously there must be an assumption that there would be take-up. 1373 And if there isn't immediate take-up, or there is delayed take-up, I believe your answer was that those costs should probably be going to the overall system, because it's part of the developing the overall system. Because the system is being put in place to facilitate, say, one class of market participants or suppliers by another entity, either the utility that is actually not going to be taking advantage of it. So where would the cost responsibility lie? I think you answered this with Ms. Jackson by saying: Well, you think that's a system cost that should, provided they were prudent, should be absorbed by the whole system. 1374 MR. TREBILCOCK: That is my position in principle. That there are certain fixed costs to unbundling, a variety of services: Storage, transportation and billing, fixed cost of unbundling, and then there are some incremental costs to servicing consumers who choose to exercise any of these unbundled choices. Or unbundled options. 1375 In principle, I think the fixed cost entailed in making these unbundled choices available to all users of the system probably should be system costs. And the exercise of the unbundled choice should be viewed as incremental costs payable by the subset of customers who choose to take advantage of the particular unbundled option. That probably isn't very helpful in terms of actually splitting up the costs, but that's how I would approach it. 1376 MR. DOMINY: Thank you, Professor Trebilcock. Those are my questions, thank you. 1377 MR. SOMMERVILLE: No, thank you. 1378 MR. JACKSON: I believe I've asked my questions, Professor Trebilcock, so if -- is there any direct? 1379 MR. BROWN: No, there is no redirect. 1380 MR. JACKSON: I meant redirect. Thank you. 1381 Professor Trebilcock, thank you very much for your assistance to the Board. 1382 And now, Ms. Jackson, have you any thoughts on whether or not you wish to recall Mr. Schwindt -- Dr. Schwindt? 1383 MS. JACKSON: I do not have any reply evidence, Mr. Chair. 1384 MR. JACKSON: Good. So then I would like to thank all participants so far, and we will be reconvening on March 13th, at 9:30, to hear oral argument in chief. 1385 And just as I think is an appropriate tradition, I would like to thank Mr. Moran, our Board counsel, and Ms. Litt, and her associates for your able assistance to the Board in these proceedings. 1386 MR. MORAN: Thank you, Mr. Chair. 1387 MR. JACKSON: And the court reporter, of course. 1388 Thank you very much, and we will see you on the 13th. 1389 --- Whereupon the hearing concluded at 4:45 p.m.