Rep: OEB
Doc: 12KPB
Rev: 1













ONTARIO ENERGY BOARD

Volume: 3

10 FEBRUARY 2003


BEFORE:



R. BETTS

PRESIDING MEMBER

P. SOMMERVILLE

MEMBER

B. SMITH

MEMBER



1
RP-2002-0142 EB-2002-0420 TRANSCRIPT VOLUME #3

2
IN THE MATTER OF sections 70 and 74 of the Ontario Energy Board Act, 1998, S.O. 1998, c.15, Schedule B; AND IN THE MATTER OF Transitional Generation Licence EG-0333, issued to Ontario Power Generation Inc. AND IN THE MATTER OF an application by Ontario Power Generation Inc. to amend its licence obligations to provide a rebate to consumers under specified circumstances.

3
RP-2002-0142 EB-2002-0420 TRANSCRIPT VOLUME #3


4
10 FEBRUARY 2003

5
HEARING HELD AT TORONTO, ONTARIO


6
APPEARANCES

7

PAT MORAN

Board Counsel

LAURIE KLEIN

Board Staff

DAVID BROWN

Board Staff

PATRICIA JACKSON

OPGI

TOM ADAMS

Energy Probe

JUDY KWIK

VECC

DAVID POCH

GEC CIELAP OSEA



8
TABLE OF CONTENTS

9

PROCEDURAL MATTERS:







ONTARIO POWER GENERATION INC. - PANEL 3






EXAMINATION BY MS. JACKSON:







CROSS-EXAMINATION BY MR. POCH ON BEHALF OF MR. JANIGAN:







CROSS-EXAMINATION BY MR. POCH:







CROSS-EXAMINATION BY MR. MORAN:







QUESTIONS FROM THE BOARD:








10
EXHIBITS

11

EXHIBIT NO. G.3.1: DOCUMENT ENTITLED "ELECTRICITY MARKETS: SHOULD THE REST OF THE WORLD ADOPT THE UK REFORMS?" BY CATHERINE D. WOLFRAM, SEPTEMBER 1999











12
UNDERTAKINGS

13

14
--- Upon commencing at 2:02 p.m.
15
MR. BETTS: Thank you, everybody. Please be seated.

16
Welcome back, everybody. I hope everyone had an enjoyable weekend. We are resuming this hearing at this point. I'll ask, before we get into the next witness panel, if there are any procedural matters that need to be brought to the attention of the panel.

17
Ms. Jackson.

18
PROCEDURAL MATTERS:

19
MS. JACKSON: Mr. Chairman, you and others in the room will have before you answers to the two undertakings that were taken on Friday, F.2.1 and F.2.2. And if I could note for the record that they have been filed.

20
MR. BETTS: Thank you.

21
MS. JACKSON: And the next witness for the applicant, Mr. Chairman, is Lawson Hunter.

22
MR. BETTS: Thank you very much. Are there any other preliminary matters?

23
MR. MORAN: Mr. Chair, Mr. Janigan is not going to be hear today, as I understand it. Mr. Poch is assisting in that front. You have a document that's entitled "power". That's going to be used for the purposes of cross-examination and it will need an exhibit number. That will be G.3.1, a document entitled "Electricity Markets: Should the Rest of the World Adopt the UK Reforms?" By Catherine D. Wolfram, dated September 1999.

24
EXHIBIT NO. G.3.1: DOCUMENT ENTITLED "ELECTRICITY MARKETS: SHOULD THE REST OF THE WORLD ADOPT THE UK REFORMS?" BY CATHERINE D. WOLFRAM, SEPTEMBER 1999

25
MR. BETTS: Thank you. Any other procedural matters?

26
Mr. Poch, thank you for filling in for one of the intervenors.

27
Then with that we will invite the applicant to -- we will ask the witness to be sworn in, please. Mr. Sommerville will do that.

28
ONTARIO POWER GENERATION INC. - PANEL 3

29
MR. SOMMERVILLE: Do you choose to swear or affirm?

30
MR. HUNTER: I'll swear.

31
L.HUNTER; Sworn.

32
MR. SOMMERVILLE: Spell your name for the record.

33
MR. HUNTER: H-u-n-t-e-r.

34
MR. BETTS: Ms. Jackson.

35
EXAMINATION BY MS. JACKSON:

36
MS. JACKSON: Thank you, Mr. Chair.

37
Mr. Hunter, I'd like to take you through certain of your qualifications as those are set out in your CV at tab 6 of the evidence. I understand that, from an education point of view, you have your BSc, LLB, and LLM, the latter from Harvard Law School; is that correct?

38
MR. HUNTER: That's correct.

39
MS. JACKSON: And that you are currently the head of the competition department of Stikeman, Elliott in Toronto -- or in Ottawa, both.

40
MR. HUNTER: Both.

41
MS. JACKSON: You are in Ottawa and you are the head of the Stikeman, Elliott competition department.

42
MR. HUNTER: That's correct.

43
MS. JACKSON: From 1981 to 1985 you were the Director of the Competition Bureau, and that, as I understand it, is the Chief Executive Officer of the Bureau?

44
MR. HUNTER: That is correct.

45
MS. JACKSON: And in that capacity you were responsible for providing advice to the minister and to the government on competition issues; you were responsible for enforcement of the Combines Act and for representing Canada abroad in respect of competition issues.

46
MR. HUNTER: That is correct.

47
MS. JACKSON: Before that, as I understand it, you were the departmental general counsel and director of legal services for the Department of Consumer and Corporate Affairs, from '78 to '81?

48
MR. HUNTER: Yes.

49
MS. JACKSON: And at an earlier stage in your career, were responsible for the policy development coordinator for the Bureau of Competition Policy.

50
MR. HUNTER: That's correct.

51
MS. JACKSON: You have provided expert advice on competition issues and law and have appeared as a witness before a number of federal and provincial regulatory bodies and the U.S. District Court of New York.

52
MR. HUNTER: That's correct.

53
MS. JACKSON: And have taught advanced competition law for three years at the University Of Toronto.

54
MR. HUNTER: That's correct.

55
MS. JACKSON: You have been the chair of the international bar anti-trust and trade law.

56
MR. HUNTER: I was chair of the trade law committee.

57
MS. JACKSON: Chairman of the competition law section of the Canadian Bar Association from '94 to '95.

58
MR. HUNTER: Yes.

59
MS. JACKSON: Chairman of the OECD committee of experts on restrictive business practices in 1985.

60
MR. HUNTER: Yes.

61
MS. JACKSON: Head of the Canadian Deligation to the OECD on restricted business practices committee.

62
MR. HUNTER: Yes.

63
MS. JACKSON: And are currently listed in the Chambers legal directory as one of the top 25 competition lawyers in the world.

64
MR. HUNTER: Yes.

65
MS. JACKSON: Mr. Chair, Mr. Hunter is here to give evidence as an expert in respect of competition matters.

66
MR. BETTS: Thank you. I think that's quite acceptable.

67
I will ask, Mr. Hunter, though, I think we're going to have to get you to stand a little bit closer to that microphone. We should, as I said to an earlier panel about this, give instructions about this system, but if you could be a little bit closer, I think we'll all here you a little better.

68
MR. HUNTER: No problem.

69
MR. BETTS: Please proceed.

70
MS. JACKSON: Thank you. Mr. Chair. I have just a very few introductory questions.

71
Mr. Hunter, you have, as I understand it, had an opportunity to review the prefiled evidence filed by the Competition Bureau at Exhibit D.8, and you were present for their oral testimony on Thursday of last week; is that correct?

72
MR. HUNTER: That is correct.

73
MS. JACKSON: Is there anything in that evidence that conflicts with the competition constructs and opinions that you are presenting in your view?

74
MR. HUNTER: No, I don't think there is.

75
MS. JACKSON: And we have before us this afternoon, as a result of an interrogatory last week, an undertaking last week, a review of the extent to which Cameco, who we now know is a part owner of the Bruce facility, provides supply to OPG. Have you had a chance to review that undertaking answer?

76
MR. HUNTER: Yes, I have.

77
MS. JACKSON: Is there anything in that supply relationship that raises concerns of interdependence, in your view.

78
MR. HUNTER: In this context I don't think there is, no. I think the percentage of cost input that reflects and the fact that this type of arrangement would be quite common in many, many industries and does not raise a concern -- should not be a concern here either.

79
MS. JACKSON: And lastly, Mr. Hunter, there have been a number of references in these proceedings to date to the work and the reports of the Market Surveillance Panel, and I wanted to ask you, sir, with respect to the people who have athyroid those reports, whether they are known to you by way of their reputation and experience.

80
Fred Gorbet is the chair of that committee. Is he known to you by reputation?

81
MR. HUNTER: Yes, he is.

82
MS. JACKSON: Can you tell the Board about him, please

83
MR. HUNTER: He is a former federal public servant, former Deputy Minister of Finance, a very well recognised economist. And since he left the government, has performed a number of public policy roles in financial institutions and now obviously in energy.

84
MS. JACKSON: And Don McFetridge?

85
MR. HUNTER: Don McFetridge teaches industrial organization economics or competition economics at the Carleton University. He is used extensively by the private sector and the Competition Bureau, and in fact at one point was a visiting fellow at the Competition Bureau. And I would say he's one of the leading competition economists in the country.

86

MS. JACKSON: And lastly, Harry Chandler, who I understand is the Director of Market Assessment and Compliance of the Market Surveillance Panel.

87
MR. HUNTER: Harry Chandler is a an economist by training, worked may years in the Competition Bureau during the period -- including during the period when I was the Director of the Bureau, and most of the time when he was at the Bureau had an enforcement responsibility both for criminal and civil matters, and is very well known in the competition bar and obviously well known in competition economics.

88
MS. JACKSON: Thank you.

89
Thank you, Mr. Hunter. Mr. Chair, those are my questions. Mr. Hunter is available for cross-examination.

90
MR. BETTS: Thank you. Questions from intervenors. Mr. Poch.

91
MR. POCH: Yes, Mr. Chair. First I would like to ask some questions on behalf of Mr. Janigan, on behalf of the Vulnerable Energy Consumers Coalition. You'll have to pretend I'm not as charming and as good looking as I am.

92
CROSS-EXAMINATION BY MR. POCH ON BEHALF OF MR. JANIGAN:

93
MR. POCH: First of all, the change of ownership of Bruce Power interest here occurred after you wrote your prefiled -- your evidence?

94
MR. HUNTER: The most recent, you mean?

95
MR. POCH: Yes.

96
MR. HUNTER: Yes, it is.

97
MR. POCH: Now, part of that change is that TCPL is a partner in the arrangement; you are aware of that?

98
MR. HUNTER: Yes.

99
MR. POCH: And are you aware that TCPL is also a partner in the Portlands Energy Center limited partnership with OPG?

100

MR. HUNTER: I'm aware that there was some generation facility that was -- in the city of Toronto, I think, that they were partners in. I don't know whether it's operating yet or not.

101
MR. POCH: Would you agree that the co-ownership of a generating plant that is bidding into the same market by an owner of the -- in the Bruce partnership and OPG is a further element that's a relevant consideration in looking at the question of interdependent behaviour, or the possibility of interdependent behaviour?

102
MR. HUNTER: Well, it could be. I'm not sure in the circumstances that it changes much in terms of the likelihood of this. But certainly it could be an issue.

103
MR. POCH: We'll certainly come to your test, and I assume what you're referring to is that you believe the safeguards in place are sufficient.

104
MR. HUNTER: I wouldn't mind if Mr. Rattray moved a little to the side. Could you repeat the question.

105
MR. POCH: I was just saying I assume your comments there were simply the more general point you make that you believe that the safeguards that are in place are adequate to foreclose concern there.

106
MR. HUNTER: Well, I think it goes beyond that. I think that -- and partly in response to Ms. Jackson's question, that the situation where you would have someone who was both a part owner or an owner and a supplier is very, very common in many industries, and typically would not give rise to a concern of interdependence.

107
MR. POCH: The situation here is that you have a major owner of the Bruce Power facility also being a partner with OPG in the same business, that is, generation in the same market, as distinct from a supplier situation; do you appreciate that?

108
MR. HUNTER: In their case, yes, that's true.

109
MR. POCH: All right. You would agree that, to the extent that interdependence, if it did arise, interdependent behaviour, and benefited Bruce would then likely benefit TCPL wearing its other hat, that is, as owner -- as part owner of the Portlands energy center.

110
MR. HUNTER: Well, if it -- it could, yes, as an owner, just as any shareholder might benefit.

111

MR. POCH: Sure. All right. Now, in your evidence at page 9, I don't think you have to turn it up, I'll just read in the reference. You say: "In developing the basis for the market power mitigation framework, the MDC," being the Market Design Committee, "correctly sought to impose specific conditions for decontrol, that is, the interdependence test, that I expect were designed to prevent situations in which a transaction results in, or is likely to result in, implicit or explicit arrangements or behaviour between parties that would materially harm competition."

112
And I want ask, in the situation here, unlike the situation that the Competition Bureau is usually dealing with where we already have a competitive market, here where we're trying to create a competitive market, would it be fair to say -- would it be fair to -- could we make a friendly amendment to your test and add to the end that it was a proper concern not just for "behaviour between parties that would materially harmed competition," but we would add the words "or materially impede the development of effective competition"?

113
MR. HUNTER: You'll see that my proposed definition certainly has the effect as part of it, and I think maybe if you go to the next page, paragraph 20 of my testimony, where I set out the definition, it really has three components to it; one is joint or coordinated action by two or more parties; the second is that that action is anti-competitive in nature; and the third is that it would have a materially negative effect on the market. So my test says there has to be some effect, and so I think in answer to your question, I would think there would need to be some effect.

114
MR. POCH: All right. And I'm asking if the effect you're thinking of in this context is not just the destruction of competition, if you will, but the -- but impeding the development of competition. That would be an effect, if it's demonstrated, that would be of concern?

115
MR. HUNTER: Well, I think you have to make a distinction, just as I think the Bureau does, between the activity itself and what harm that causes to consumers who you're primarily worried about, which really goes more to the question of is it going to raise prices, or is it going to restrict output, or whatever. So the mere activity itself is not the bad thing, it's the consequence of the activity.

116
MR. POCH: I'm not addressing that at the moment. What I'm really addressing is just the simple starting point. If we have a situation where we don't have effective competition now, would you agree that the test is appropriate -- the appropriate test would worry about impeding moving towards competition. It's not just worrying about reducing competition and increasing prices from the status quo.

117
MR. HUNTER: Well, I think again if you refer to my evidence, and I think it's paragraph 19, that we are starting from a different point, you're right, we're starting from a point of market power and we're trying to mitigate that market power; and so the purpose, in my view, of the market power mitigation framework and the MDC report was to put in place a regime that would kick-start competition, if you will. I guess maybe where I'm quibbling a little bit with you is that I don't think that it's anything that might have any impeding effect. I think -- that's why I think the effect is so important, that it has to be something that, as I say, is materially negative. That's where I just want to be clear with you.

118

MR. POCH: Fair enough. I was leaving your adjective "material" in there, and that's fine. I think we agree, then, that in this particular context the effect may not be a reduction in competition so much as an effect that impedes the growth of competition, which is what we're after in Ontario.

119
MR. HUNTER: That's certainly true in the sense -- and, again, if I hearken back to what the Bureau people said and what I said in that paragraph, it's a different way of coming at it because you're starting from a different point.

120
MR. POCH: Now, I think the interrogatory where you make these comments is in I.1.11. Again, I don't think you have to turn it up but you say that: "We have to take into account the ongoing monitoring of OPG not only by the Ontario Energy Board but also the Market Surveillance Panel and the Competition Bureau."

121
First of all, am I correct in interpreting that as the monitoring of -- after-the-fact monitoring, searching for market abuse, abuse in the market?

122
MS. JACKSON: I'm sorry, Mr. Poch, you're looking at interrogatory I.1.11?

123
MR. HUNTER: I'll pull it up, I.1.11. I think I've found it, I'm just looking at the last paragraph of that interrogatory.

124
It's certainly monitoring of that type of effect, but I think it's also -- I was talking about monitoring about whether the ring fence has been complied with, which could be part of that too, I guess.

125
MR. POCH: All right. We'll come back to that later, then. I have some questions on behalf of GEC that I'll ask.

126
Did you say in response to interrogatory 17 posed by Energy Probe, that would be I.9.17, that the -- there has been ex post -- experience with ex post ring-fence arrangements required by the Competition Bureau has been entirely satisfactory. I'm wondering if you could help us. Are you aware of the criteria used to determine satisfaction with ring fencing compliance used by the Competition Bureau?

127
MR. HUNTER: Well, what I meant by that was, and you have to really read the whole answer, because there aren't really any studies and I actually searched to see if I could find some either in Canada or in the United States or Europe where these things are pretty common, and I didn't find any. What I meant by they've been entirely satisfactory is that to my knowledge -- and I think I'm pretty knowledgable for what the Bureau does for many, many years -- there has never been a situation where the Bureau thought that when they -- when there was a ring fence arrangement in place, either in a merger or a strategic alliance or whatever, that they weren't being complied with and they had to take steps to enforce compliance. That's what I was trying to say.

128

MR. POCH: So, in effect, what you're saying, may I, is that in a situation where a ring fence has been a consent agreement or otherwise imposed, you're not aware of any such situations where there has subsequently been a prosecution.

129
MR. HUNTER: Yes, or beyond that that the Bureau took the view -- let's take, for example, in a merger situation where very often there are consent orders issued by the Competition Tribunal, and those very often have ring-fence typ provisions in them; that the Bureau has ever had to go back to the Competition Tribunal and say someone is violating the ring-fence arrangement or the information-sharing arrangement and we want you to order them to stop, that sort of thing.

130
MR. POCH: Can we agree that the Competition Bureau is generally dealing -- I think we've spoken of this already -- but they're generally dealing with a situation where you already have a competitive market and their job is to protect the vibrancy of that competition.

131
MR. HUNTER: Well, in a merger situation that is usually the case. There are exceptions to that, too. I, unfortunately, happen to represent Air Canada, and when they bought Canadian one might have said Canadian might have gone bankrupt otherwise; you should be glad. But the government and the Bureau took the view that they needed to do things to ensure that there was competition when I think otherwise they couldn't have done it for the reason that the Bureau folks said the other day. So it's not always that way.

132
And I guess as well in the strategic alliance area it tends to be a little bit different as well, because there you -- it's like a partial merger, in essence, and so the way the Bureau looks at those is a bit different, and they tend to be often of more long-standing duration and so concerns about information sharing can be significant.

133
MR. POCH: All right. If there is -- if, as you say, there has been no examples that you've come across of dissatisfaction with the ring-fence situations after the fact, might it be possible that there has been, nevertheless, been some anti-competitive behaviour but that is occurring below a threshold level of detection?

134
MR. HUNTER: That's -- that could be possible. I'm not aware of that.

135
MR. POCH: Now, your general conclusion is that the arrangements don't facilitate interdependent behaviour between OPG and Bruce Power. You believe further that appropriate controls have been developed to restrict access to the sensitive information that is getting exchanged, and you reach your conclusion that there is no difficulty with the licence test, particularly with interdependence.

136
MR. HUNTER: Yes.

137
MR. POCH: Without controls in place, such as the ring fence, the code of conduct and the market surveillance which you've spoken of, would you reach the same conclusion?

138
MR. HUNTER: Well, when I looked at this, given the degree of information that was going to be shared, and in particular that was going to come into OPG's hands, I thought that it was essential that there be protections with respect to the use and sharing of that information. And the question is what is the right way of doing that. And so certainly in principle, in my view, there needed to be provisions in place to control the use of that competitively sensitive information. Whether that means this ring fence was -- goes too far, it may very well. All I'm saying is something has to be there, in my opinion.

139
MR. POCH: All right. To paraphrase, then, absent the protection of the ring fence -- the various protections we've listed, or some other set of protections, you would have been concerned about the -- that the arrangements were facilitating interdependent behaviour, but with these protections you believe there is no concern.

140
MR. HUNTER: That is correct.

141
MR. POCH: Fine. And that being the case, would you agree that reporting and third-party auditing of the ring fence arrangement would increase your confidence?

142
MR. HUNTER: Well, I thought about that, too. Again, in one of the interrogatory answers I talked a bit about that. As I've said, ring fence arrangements are really commonplace in the anti-trust world and it would be true that, in some situations, there might be some third party that was monitoring compliance with it. That would tend to be more in a merger situation. But I would not say that that is the norm, and in fact I would think that in more cases than not there is no such person like that. They tend -- in the situations where they are used, they tend to report either to the company or sometimes to the Competition Commissioner. So the question really is what is going to be effective, in my view, and in my view this arrangement has proven itself -- the type of arrangement we have and the enforcement mechanisms here have proven to be effective in other situations, and I don't see why they wouldn't be here.

143
MR. POCH: In a Competition Bureau situation, if there was suspicion that they weren't effective, does the Bureau have jurisdiction to go in subsequently and revisit the matter?

144
MR. HUNTER: Again, that would depend on the particular circumstances. Let's say, for example, there was a consent order that was outstanding and something changed, then clearly they would have the right to do something about that. On the other hand, if they allowed a transaction to proceed and had no consent order or other arrangement with the merging parties in place, and more than three years passed because I think you heard last Thursday that under the merger law there's a three-year limitation period, then they would lose their right under the merger section.

145
That's not to say that they couldn't do something under one of the other sections of the Act that may be relevant here, which I think I also mentioned in my evidence, both the conspiracy section or the abuse of dominance section. So if they saw something was happening that was resulting in interdependent behaviour by a number of parties, they might be able to attack it under the abuse of dominance section, under the theory called joint dominance.

146
MR. POCH: You're aware the situation here is that once this Board grants a declaration that decontrol is effective, the Board is functus, they can't visit that, with respect to those facilities, as a stated component of the directive from the government.

147
MR. HUNTER: I really not an expert in the Board's jurisdiction.

148
MR. POCH: Fair enough then. Just to make sure we understand each other. The kinds of information you are concerned about -- I think you've spoken that the concern would be OPG might be in a position to take advantage, absent these protections, of knowledge about -- and the kinds of knowledge, let's me make sure we agree, including scheduled outages and capacity at Bruce, unscheduled outages and reduced capacity at Bruce, knowledge of Bruce's supply bids, and by that I meant volume being bid, and of course knowledge of their bid prices. Is that the -- this is the kind of information, you would agree, there would be the most sensitive?

149
MR. HUNTER: I don't know whether you're reading from anything.

150
MR. POCH: I think this is a paraphrase of various answers you've given. Is that fair?

151
MR. HUNTER: I think I was most concerned about outage information, because it struck me that that could be very relevant in one how one would bid, if you had knowledge of that. There could be other things that might have some competitive significance. If you had detailed cost information about your competitor, that could be a factor.

152
But I guess I'd like to make one point about this, that compared to a lot of situations -- in a lot of situations where you would see ring fences in the competition world, the quality of the information here, from a competitive importance point of view, I thought, was at the very low end of the spectrum. I did not think that we were dealing with the types of information that would be of most concern in most competition situations, which would be detailed information about pricing to customers, who your customers were, what your strategic plans were. It's not that sort of information.

153
MR. POCH: I'll come back to this. But would you agree that if Bruce Power gained similar information about OPG, I know you haven't come to that conclusion in these arrangements, but if they could glean such information, then similar concerns would arise about the potential for them to gain advantage unfairly in the marketplace?

154
MR. HUNTER: I looked, obviously, at the question of the information Bruce had and I thought that that information, even if they had it, which in my view they don't get, as I understand it, from the arrangements that are in place about OPG, given the fact that they're a nuclear operator and the imperatives of, as I would have thought a rational operator of that facility, which I think are confirmed by the Market Surveillance Panel report in October, I'm not sure it would have been of much help to them. I think the way they would have bid into the market, in my view, would have been the same anyway.

155
MR. POCH: I will return to that. I have some questions in follow-up in my own cross.

156
Finally, an article was filed as Exhibit G.3.1 earlier. This is the article from Power entitled "Electricity Markets: Should the rest of the world adopt the UK reforms?" by Catherine Wolfram. I just want to put a couple of her observations in front of you and ask you if you agree and how the import for the situation here.

157
She describes in this document, at page 6, the uniform option which is -- my understanding, is used in Ontario, that is where all generators that are accepted obtain the value of the highest bid at any given --

158
MS. JACKSON: I think it's a uniform price auction.

159
MR. POCH: Yes, uniform price auction. Correct. Thank you.

160
And Ms. Wolfram, at page 6 of her paper, four or five lines up from the bottom of the page, she's describing that and says: "The auctioneer asks the firms to submit their bids in sealed envelopes without talking to one another about what they will bid." Implicit in that was the statement that this type of auction works, confidentiality of bids is an important component. Is that your understanding?

161
MR. HUNTER: In the uniform price auction?

162
MR. POCH: Yes.

163
MR. HUNTER: I don't have any reason to dispute that, no.

164
MR. POCH: Okay. And therefore in the particular situation in Ontario where we're dealing with that kind of auction, that's -- that concern about sharing information about bid prices as they go in is amplified compared to a situation where you have a conventional auction.

165
MR. HUNTER: I don't follow the logic. Can you explain why --

166
MR. POCH: Well, in a conventional auction the prices bid are transparent as they're bid.

167
MR. HUNTER: Well, I suppose in that sense they're different --

168
MR. POCH: Could you lean forward a little just to get the microphone. Sorry.

169

MR. HUNTER: I'm sorry. I've also been at art auctions where there are lots of people bidding and a lot of them weren't bidding for -- you didn't know who they were bidding for. I'm not so sure that the prices are that transparent.

170
MR. POCH: Fair enough. It's not always transparent in that situation. But the point I was simply making is in the uniform price auction, the secrecy isn't an important component of making that auction work effectively for competition and therefore -- first of all, do you agree with that?

171
MR. HUNTER: Well, certainly if you have a close -- in public tender auctions, clearly you want to have sealed bids, and she's postulating that model. I'm not sure that's the only model. But if that's what you want, then obviously you want to make sure that they're not sharing information. I'm sorry to --

172
MR. POCH: Are you in a position to -- let me ask you this: Are you in a position to agree or disagree with the proposition that a uniform price auction, the effectiveness at it in terms of enhancing competition is increased where bids are confidential?

173
MR. HUNTER: Yes, I would have thought you want people bidding independently. Yes.

174
MR. POCH: All right. And therefore, given that's the situation in Ontario, as compared to a situation with a conventional auction, there is an increased concern about any possibility of sharing bid information in advance, from the perspective of enhancing competition?

175
MR. HUNTER: As opposed to what, as opposed to a public auction? You're not contrasting this with a discriminating auction model.

176
MR. POCH: Yes, I am.

177
MR. HUNTER: Oh, you are. I see. Well, I guess I'm not sure about that. When I read this paper, and you were good enough or your colleague was good enough to provide a copy so I could look at it quickly over the weekend, I am, in fact, more concerned about interdependence in a discriminatory price auction then I would be here because there is more of an incentive for people with similar types of costs or generation facilities to make sure that the price they're bidding, because it is so crucial to whether they will be dispatched or not, to find some way of coordinating their behaviour; whereas in a uniform market clearing price auction where there are many more players and where it is confidential, it strikes me it would be harder to coordinate that than it would be in a discriminatory price auction.

178
MR. POCH: Would you agree that in a uniform price auction, because all the successful bidders will benefit from the same price --

179
MR. HUNTER: Yes.

180
MR. POCH: -- that the incentive, the gaming incentives are different, first of all, than in a discriminatory auction.

181
MR. HUNTER: Yes. Clearly there are different incentives depending on the auction model.

182
MR. POCH: Excuse me.

183
All right. I think you've already agreed that secrecy is a value in the context of a uniform price auction.

184
MR. HUNTER: I believe that's true, yes.

185
MR. POCH: And so with that I'm going to move on.

186
In fact, I'm going to move to my cross-examination questions now, Mr. Lawson. These are on behalf of the Green Energy Coalition, which is a coalition of environmental groups such Sierra Club and Greenpeace, as well as the Canadian Institute for Environmental Law and Policy and the Ontario Sustainable Energy Association, which is a coalition of community-based groups interested in renewable energy developed dispersed generation.

187
CROSS-EXAMINATION BY MR. POCH:

188
MR. POCH: Would you agree that the situations covered by the various Competition Act remedies are different either in kind or degree, maybe not the situations but the tests are different in kind or degree, than the situation addressed in this case here?

189
MR. HUNTER: I think the concern is -- should be the same, and I think I stated that in my evidence --

190
MR. POCH: Yes.

191
MR. HUNTER: --That what you're -- presumably what the Board is trying to do is to ensure that there's no behaviour in a decontrol situation which would result in -- and if you were looking at it from a competition point of view, the likelihood that prices would be higher than they would be if people were truly acting independently. So that is fundamentally what the Bureau is always looking at.

192
MR. POCH: Yes.

193

MR. HUNTER: You're just looking at it in a way, as I say, from a different side. You're starting from here, a situation where someone clearly has market power, and in the other you're starting at more likely, not always but more likely, from a situation where they may not, and you're trying to ensure that they don't get that.

194
MR. POCH: Let me put the question another way. Mere compliance with the Competition Act today, the fact that OPG isn't being prosecuted by the Competition Bureau in and of itself is not equivalent to satisfying the intent of the market power mitigation framework and the specific test in the licence; you would agree with that?

195
MR. HUNTER: I think I do. Under the Competition Act, the fact of having market power is not illegal and it is not actionable. It's what you do with your market power that is relevant, is actionable.

196
MR. POCH: And also I think the test you've suggested here, while we may have our differences about whether that's appropriate, but even your test has a different burden than the ones under the Competition Act; for example, you say under the Competition Act the impact on competition has to be substantial, whereas here I think you've offered as an appropriate test merely that it not be diminimus.

197
MR. HUNTER: Or that it be material.

198
MR. POCH: Or that it be material. Fair enough?

199
MR. HUNTER: Yes, I think that's fair.

200
MR. POCH: So we have different hurdles.

201
MR. HUNTER: Yes. But in my view, all driving towards the same basic concern.

202
MR. POCH: Certainly sharing the common goal of wanting vibrant competition.

203
MR. HUNTER: Yes, certainly.

204
MR. POCH: Now, in interrogatory 15.18 -- excuse me, I'll just turn it up -- and I note there's a revised version of this -- you're commenting there on -- I'm sorry, do you have that in front of you there?

205
MS. JACKSON: Mr. Poch, you said there's a revise the version. Are you referring to the undertaking response today?

206

MR. POCH: No, I'm just referring to the revised interrogatory which was -- I gather corrections were made to it. The answer was to an entirely different interrogatory when first printed and it was subsequently refiled. I want to make sure someone has the one with the word "revised" in the upper right-hand corner.

207
MR. HUNTER: Yes, I have that.

208
MR. POCH: This is a question about your test, your proposed test of interdependent behaviour, and you make a distinction in the -- you make a point in the second paragraph that your test requires a "conscious behavioural decision by the parties". I just want to clarify: Is that a conscious behavioural decision to share information or to gain a competitive advantage, or abuse the market?

209
MR. HUNTER: What I was trying to say there, and I think Mr. Ronayne commented on it last week, is that it's not simply consciously parallel behaviour that is something that you would worry about. And I think he used that example and said, you know, conscious parallelism is not illegal; it happens every day of the week, there's not much you can do that. It's not just that, there has to be something more than that.

210
MR. POCH: Now, the distinction there I take to be between, I take it, joint as opposed to independent but parallel behaviour, and -- correct me if I'm wrong, I read something else in this question of conscious behavioural decision, and I wanted to know what the player had to be consciously doing, consciously thinking about for that to be conscious behaviour -- a conscious behavioural decision. Is it a conscious decision to share information with the competitor, or is it a conscious decision to -- does the intent have to go farther than that, that the intent has to be to share information with the intent of gaining the market, for example?

211
MR. HUNTER: I'm not sure I'm really following you, and I hope I'm going to answer your question. But -- and I think again the Bureau folks said the same thing, that it's not simply even consciously parallel behaviour, there have to be plus factors; I think they used that sort of term, too. So you have to look at the characteristics of the industry and see whether that industry and the firms of that industry, just by the structure of that industry, would likely facilitate interdependent behaviour, and then you go beyond that and say, and what's actually going on here. Are there contractual arrangements which -- like they use meet or release clauses, are there contractual arrangements that give people transparency that they otherwise wouldn't have about prices of their competitors? Are there -- how differentiated are the products? I mean you look at the specific behavioural things as sort of plus factors beyond the mere structure of a particular industry, and that's what I was trying to get at. Now, I don't know whether I've answered your question or not.

212
MR. POCH: All right. I was just trying to understand the terms "conscious behavioural decision" and I wonder what that decision is in respect to.

213
MR. HUNTER: Again, all I was trying to say here again -- remember, the question was what is the difference between interdependence and interdependent behaviour. I was just, again, trying to make sure that mere conscious parallelism is not seen as anything that -- it may be the normal competitive result in that and you can't do anything about it. It has to be more than that.

214
MR. POCH: Understood. All right.

215
MR. HUNTER: As you know, the free market is based on the assumption that people act in their own self-interest.

216
MR. POCH: Yes, I wasn't disputing that that was permitted. I thought the intent -- the ultimate demon that we're trying to keep at bay here is for two competitors to -- "collude" is a strong word and I know it's a term of art, but let's use it in the more common meaning of the word -- but to get together with some intent to get an advantage here as opposed to the gas station guy who looks across the street and says he just put down his price, obviously I'm going to match it.

217
MR. HUNTER: Exactly. You're absolutely right.

218
MR. POCH: You're nodding yes.

219
MR. HUNTER: I'm nodding yes. Collusion, as you say and as was said last week, has a special meaning in competition law. But generally speaking you want to make sure that there isn't a way in which these people can coordinate their behaviour, and they're not coordinating their behaviour in a way that helps them both. I think that's very clear from the Competition Bureau's test as well.

220
MR. POCH: All right. Now, could you have an arrangement that facilitates such behaviour even though there is no evidence that there is an intent to take that step of, you know, getting together to defeat the market? At least there's no intent and there's no behaviour existing at this point in time, but nevertheless the arrangements could be seen to facilitate such interdependence in the future.

221
MR. HUNTER: Yes, I think there would be all kinds of things that go on in every industry that are like that. Most industry members belong to trade associations. Well, trade associations meet. You meet. There's an opportunity. Does that make it that you can never meet? It wouldn't be the law under the Competition Act.

222
MR. POCH: So there can be arrangements that facilitate interdependent behaviour where, at the moment, there's no interdependent behaviour occurring.

223
MR. HUNTER: That's correct, yes.

224
MR. POCH: All right. And do you say that the test in the licence is met, that is, there's no problem, so long as this joint intentional behaviour has not occurred yet, if it's facilitated by the arrangements but has not yet occurred, either because it's in the future or due to other safeguards?

225

MR. HUNTER: Repeat that again.

226
MR. POCH: Well, I think -- I'm just trying to make sure if you're -- you know, you're the teacher saying they pass or fail the test here.

227
MR. HUNTER: Right.

228
MR. POCH: We have arrangements which have been found to facilitate interdependence. Let's posit that we do have such arrangements, and I think you've said the totality of the arrangements, in your view, don't because you have these safeguards in place. But let's pretend we don't have the safeguards in place and we just have arrangements that facilitated interdependent behaviour, this information sharing arrangements and so on, would you agree that that is a situation which fails the licence test? You don't have to wait for the actual behaviour to occur.

229
MR. HUNTER: Well, I'm not trying to be obtuse or difficult here, I hope, but there are two parts to this, in my view. You have to have the circumstances that would facilitate the interdependent behaviour, and, in my view, they would actually have to be happening. I think you could look at this arrangement and say they have entered into all these arrangements and they're sharing this information so that has happened, that is happening.

230
But the Board, in my view, should not just look at that and say, therefore it's bad. You have to look at why are you worried about this in the first place. And that's where, to me, it's very important to do two additional things that I put in my test, which are different obviously than the Competition Act, because they look at sort of do we meet the definition and then they say, and what's the impact. And I'm saying, in my view, that's what the Board should do, it should make sure that when it looks at these things, even when they occur, is it going to have a materially negative effect on the market; and secondly, and I made this distinction as well, it should be anti-competitive.

231
There are lots of things that business people do that might be sharing of information that are pro-competitive, that are beneficial, that are efficiently-enhancing, and you don't want to drag all those into this as well. So you need to, in my view, zero in on the things that are anti-competitive in nature.

232
MR. POCH: So I think what you really have done is added another aspect to this which is that it has to be material, and you've said that earlier.

233
MR. HUNTER: Yes.

234

MR. POCH: Let's assume that the facilitating arrangements are seen to raise the spectre that they could have an impact that would be material; the fact that the impact has occurred yet is not an issue for you. Obviously if it had occurred, as I think the Competition Bureau folks said, you would have stronger evidence. But for the purposes of the test before the Board, it's a forward-looking test and we don't have to actually show that the material effect is, in fact, occurring at this time; is that fair?

235
MS. JACKSON: Can I just interject here, just with the view of being of assistance. I heard about four question in that question. I don't think Mr. Poch intended it that way, but there will always be some ambiguity on the transcript as to which of the four questions he's being asked to answer.

236
MR. POCH: I take that as a friendly interjection and let me break that up.

237
I think the crux of my question is this: If we have a situation where the Board, having looked at the safeguards, finds them inadequate for whatever reason or not applicable to the licence test, and finds that whatever test of materiality it adopts there could be an impact greater than that: The fact that the behaviour, other than the sharing of information, has not occurred in the marketplace, yet that gaming has not occurred; that in and of itself would not allow OPG to pass the test, would it?

238
MR. HUNTER: No, I don't think it would. I think -- again, maybe this is adding another wrinkle to my test. I think the Board should use a similar test to the Bureau. You have to look at the likelihood of that occurring. You'd have to look at the behaviour and then you would have to look at the likelihood of the impact. It wouldn't merely be that well, the practice is there and the effect hasn't happened yet and we think it will never happen but nevertheless they don't pass the test. I think that you'd have to look again at the likelihood of that occurring too.

239
MR. POCH: I think you have already agreed that absent this set of protections -- the ring fence, the code of conduct and the and the market surveillance, you wouldn't be happy, you wouldn't be here saying there's no problem. So you place some reliance on the existence of those safeguards; is that fair?

240
MR. HUNTER: Absolutely, yes.

241
MR. POCH: And, in addition, you say there's this materiality aspect, there has to be a situation where the likelihood effect would be material.

242
I want to ask you about what is material and what is immaterial. Do you have any measures you can suggest?

243
MR. HUNTER: I was afraid you were going to ask me that.

244
MR. POCH: That's why I asked you.

245

MR. HUNTER: That's a difficult -- I mean -- and I'm going to answer it in a sort of vague way maybe by saying you really have to look at each circumstance and decide in those circumstance whether you think that would be material. It's measurable; it should be demonstrable; it certainly has to be more than diminimus. But just exactly there a formula, and would it be the same in every case, I'm not sure it would.

246
MR. POCH: Would you agree, then, and I think I hear what you're saying is you're not professing to be an expert on the electricity generation market per se and what it would take here, but that the Board, having to sit in those shoes, would you agree it's appropriate to look at the circumstances such as where we are in the development of that market?

247
MR. HUNTER: That could be relevant, yes.

248
MR. POCH: All right. And even questions such as how arrangements -- these arrangements and these effects might be perceived by potential market entrants?

249
MR. HUNTER: If they had an effective deterring entry and you thought that was a serious problem, then that could be a relevant factor for sure.

250
MR. POCH: All right. Now, I said I'd return to this question about the nature of the concern where you're likely to see an effect. You had -- in discussing this in your evidence at page 12, your opinion is based, in part, on the economic parameters including the non-price setting situation of nuclears, I think if I may paraphrase you, as you've been informed of its situation in the market value by your client. Why is that important?

251
MR. HUNTER: Because it affects whether these two parties would likely have an interest in acting jointly. And I guess in my view Bruce is in a very different situation because they -- they are the operator of a nuclear facility that has very low marginal costs compared to other types of generation assets, and it is in their -- and they have limited variability in output, so it is in their interest, in my view, that they will bid always very low to make sure they're dispatched. In fact, I think the whole system is designed to ensure that that happens. And I think if you look at the Market Surveillance Panel's report in October, that's exactly what it says, that's exactly what it shows, and in fact for most of the time the nuclear facilities were bid at negative prices.

252
MR. POCH: You understand that both OPG and Bruce have to schedule outages from time to time, and are also forced into outage situations from time to time?

253
MR. HUNTER: Yes.

254
MR. POCH: So would you agree that the possibility of coordinating outages is a means by which these entities could work together to optimise each other's incomes without having to sacrifice any hours in the market?

255

MR. HUNTER: Well, again, from Bruce's point of view, I would have thought their incentive is all the time to bid low to be dispatched, and so it wouldn't matter.

256
MR. POCH: When they're running.

257
MR. HUNTER: When they're running, yes, of course. But even when they're not running, what are you suggesting they might do?

258
MR. POCH: I'm suggesting that when you have two entities that recognise that some of the time they're going to be out of the market, that arranging the timing of their outages with each other optimally could -- it could be a strategy for making sure that -- it could be a strategy used to manipulate market prices, either for their opposite or for their other generation capacity where that is manoeuvrable.

259
MR. HUNTER: Well, that is clearly true on OPG's side. I guess maybe what I need to clarify here. Bruce, in my view, is quite in a different situation.

260
MR. POCH: There may be a fact that you are unaware of, and I referred to obliquely before, but at this point at least one of the owners of Bruce has an interest in -- not a major owner of Bruce, has an interest in a station which is expected to be marginal, as opposed to inframarginal. Does that affect your analysis?

261
MR. HUNTER: Not really, because as I said, many people own many parts of many different things. That doesn't mean that they, A, have any information or that, B, that whatever benefit they might get from a partial ownership would affect their bidding behaviour. So again, I think you'd have to look at the information sharing. I think on Bruce's case, getting back to what I said before, that even if they, on the outage side, in my view, it wouldn't change their bidding behaviour. They would still bid low, even for what they had left. Let's assume --

262
MR. POCH: I understand, when they're in the market, and the question was more with respect to this outage question which is when they choose to be out of the market.

263
MR. HUNTER: And what I'm saying is that even if they had one unit that was down, they still for the remaining units would bid low. It wouldn't affect their behaviour on the remaining output.

264
MR. POCH: And then harkening back to my prior question about related interests that are -- where they are marginal stations, gas/fire, for example, I take it, then, for that to be a concern, you would need to examine the nature of the relationship between the Bruce Power partnership and that other ownership group and --

265
MR. HUNTER: Well, if it reached a threshold where you thought there was concern, for sure you would have to get more detailed information. I guess I'm not -- to me it looks remote enough that I wouldn't worry about that.

266
MR. POCH: Well, we can only speculate because Bruce Power is notably absent today.

267
I think you made the same -- relied on the same facts for your conclusion with respect to the supplemental rent arrangement. You didn't see how there was a means by which rents could be optimised through exchange of information; is that fair?

268
MR. HUNTER: No. And as I said, I think, in my view, their interest would be exactly the opposite. It only would matter as you got close to $30, and that's on annual basis and you're sort of at the end of the year so you might speculate of a situation where, gee, maybe you might be just a little bit under, a little bit over. And obviously if it were under it be to Bruce's advantage, if it were over it would be to OPG's advantage. So even if you could contemplate that situation, their interests are different. So it's not interdependent behaviour, it's in fact quite the opposite.

269
MR. POCH: So when I -- we asked you in two interrogatories at I.6.21 and I.6.22. I'll just let you turn those up. I think we've really covered the ground of that first answer, I.6.21, when I asked you about absentee protection, if you would be concerned and you indicated that you would be.

270
We asked a parallel question in I.6.22 about the potential for Bruce Power abusing knowledge and your answer is a little ambiguous to me. You said: "I would not expect that BPI, the owner of the nuclear facility, would have an advantage in the market from the special knowledged referenced in the question." I just wanted to make sure I understood. Is that because you think they aren't getting special knowledge, or because they're not in a position to use it effectively in the marketplace?

271
MR. HUNTER: It's both. It's that -- my understanding is that the sharing of information is very asymmetrical, that OPG gets far more information than Bruce gets and that partly is driven by the number of arrangements and contracts. Bruce is providing some services to OPG where obviously they're getting a bit of information about OPG, but far more the other way. And so the information is very asymmetrical and the quality of the information that Bruce is getting, in my view, is -- and I made earlier reference to sort of how competitively significant the type of information that's being shared under all of the agreements is, and my view is that it's not -- not the most competitively significant. And in their case I think it's even lower down the totem pole, as it were. So it's the quality and quantity of information that they have.

272
But the second part of it, really, is just the nature of the facility. Would it affect their bidding behaviour and given that they are a nuclear facility and their interest isn't always to be operating as much at capacity as possible.

273
MR. POCH: If we know that one of their owners, TCPL, with its gas plant coming online at some point, had access to whatever information Bruce -- the partnership got, and that information was leaking through, would that be of concern?

274

MR. HUNTER: Well, to be honest, I mean it's hard for me to answer that because I haven't really looked at it, but I doubt it because -- for the reason in the first part of my answer. I that the quality and quantity of information that Bruce gets about OPG is of very limited competitive value.

275
MR. POCH: Your aside there was you haven't really looked at it. I take it it wasn't part of your brief to examine the situation of Bruce Power and so on.

276
MR. HUNTER: No, it wasn't.

277
MR. POCH: And you're agreeing with that, I think.

278
You were asked about -- and the reference, again I don't think you have to turn it up, but it is I.1.10, you were asked about alternatives to the ring fence, I guess, which were -- included a repository for -- or public disclosure of any information shared on the same -- so that all competitors would be in a similar situation. You dismissed that as not particularly workable or preferable.

279
I wanted to ask you about another one which is, would you agree that it would be preferable if we had an arrangement where there was simply no information shared? That's always going to be -- I think in the words of the Competition Bureau's folks, that's the kind of structural remedy that if you can have it, is preferable to a behavioural remedy such as a ring fence.

280
MR. HUNTER: I wouldn't agree that's how they're using structural behaviour. Obviously, I suppose, that in the ideal world, having no information that could possibly be competitively sensitive might be better, but that's not the real world.

281
MR. POCH: We're not there today.

282
MR. HUNTER: It strikes me as extremely unlikely. Even in this circumstance, let's assume that OPG had sold Bruce to somebody as opposed to a lease to sell, I think it's probably pretty likely that some of these agreements would have been in place anyway given the nature of the technology and the safety concerns and whatever. So there would have been some information sharing, even in that circumstance which, in some sense, might be seen to be a more structural type transaction.

283
MR. POCH: All right. So if I can paraphrase you, in an ideal world, there'd by no information sharing. We don't live that in ideal world.

284
MR. HUNTER: Far from it.

285

MR. POCH: All right. I just want to turn you finally to this question of monitoring with respect to the ring fence. In I.1.10 you also said that, "although there is no third-party audit of the OPG ring-fencing programme, one must bear in mind that OPG, unlike most competition law situations is regulated or supervised by other agencies such as the OEB."

286
May I take it from that that the existence of that regulation was a factor you considered in coming to your conclusion that the ring fence will, in fact, be effective?

287
MR. HUNTER: That's a good question, whether that's a necessary condition or not. I think when I was answering that interrogatory it was more whether you need third-party monitoring as opposed to whether the ongoing supervision of the OEB was important. I mean obviously, in my view, it is important and I think the Market Surveillance Panel is important as well, and there are people there who are very experienced in competition-law matters and in detecting behaviour that might be interdependent behaviour. So those were important things.

288
MR. POCH: All right. May I put words in your mouth and suggest that these are mutually reinforcing aspects; is that fair?

289
MR. HUNTER: That's fair.

290
MR. POCH: What aspects of regulation or supervision by the OEB will reinforce the adequacy of the ring fence? What were you referring to specifically?

291
MR. HUNTER: Well, I was more referring to the fact that -- and as I said earlier, I don't know the jurisdiction of the Board and so I can't sort of tell you how far they can go and what they could do, but there is a licence here, there are conditions of the licence. I believe I know in looking at the arrangement that the Board entered into with the IMO and the Competition Bureau, it talks about ongoing supervision by the Board through its licensing powers, and one has to recognise as well that OPG presumably is going to be dealing with this Board for many years to come and is going to pay attention to their interests and concerns.

292
MR. POCH: All right. You indicated you're not an expert in the OEB's jurisdiction so I take it you weren't thinking of any particular mechanism for that monitoring, assuming there is some mechanism for that monitoring?

293
MR. HUNTER: That is really right, yes.

294
MR. POCH: All right. And you refer to the Market Surveillance Panel and you've done that several times today, and I think you've indicated in the evidence, correct me if I'm wrong, that you don't anticipate that entity auditing the ring fence per se. Is my understanding that your understanding of the Market Surveillance Panel is that they would be looking for evidence in the marketplace, bidding patterns and so on, evidence of abuse in marketplace bidding patterns, price levels, that sort of thing?


295
MR. HUNTER: I think that's more of what their responsibility is. But I also think that they have pretty broad powers to get information. So if they saw suspicious behaviour, I would have thought that they could find a way of getting behind that, and that might be just the ring fence and whether --

296
MR. POCH: All right. Now, in a situation where you have an existing vibrant competitive market, I assume there are certain patterns that develop that are the normal patterns of how prices fluctuate and competitors follow -- follow, as you said, with perhaps lagged parallelism, and what have you. Is that a fair? Those are the kinds of patterns that a surveillance entity would look at, and look for anything out of the ordinary?

297
MR. HUNTER: I would have thought they would but every industry is different and so you have to look here clearly at the sort of apparatus, the regulatory apparatus affects normal market behaviour.

298
MR. POCH: Would you agree that surveillance might face an additional challenge though in a situation where we're starting from a place where there is no competitive market and we're trying to grow one, that we don't really have a baseline to compare to. That might be a challenge facing a surveillance entity.

299
MR. HUNTER: It might be. But it strikes me as well that, for better or for worse, we have a fair amount of experience with deregulation of electricity, and so one wouldn't expect that what would happen in Ontario would necessarily -- given a product like electricity, which is basically an undifferentiated commodity would be any different. In fact, the paper you gave me before is sort of talking about how to do it and what works and what doesn't work and we know there have been some things that work better than others. So I think -- all I'm saying is that they will be able to look at what's gone on in the rest of the world and figure out what they need to be worried about.

300
MR. POCH: Have you examined the situation with Enron and allegations of market abuse there in the electricity markets in the U.S.?

301
MR. HUNTER: No.

302
MR. POCH: All right. Now, you also mentioned the Competition Bureau as a third player that could play, in some fashion, a monitoring role; is that fair?

303
MR. HUNTER: Yes.

304
MR. POCH: All right. I think you already agreed that the test is more stringent under the -- rather, the test is -- the burden facing a prosecutor, let's put it that way, would be a tougher one under the Competition Act than we see under this licence condition or at least under the test you propose for this licence condition.


305
MR. HUNTER: I think it's --

306
MR. POCH: I'm sorry?

307
MR. HUNTER: It's a bit higher.

308
MR. POCH: All right. So I take it we could have a situation where we have a failure to meet the test, even the test you've proposed here, but it wouldn't trip the wire for the Competition Bureau to prosecute. There's some spread there that's possible.

309
MR. HUNTER: There's some spread there that's possible, yes.

310
MR. POCH: All right.

311
Now, you say in I.1.14, you use the word "extensive" to your understanding of -- there would be extensive monitoring of compliance. Is your opinion on the totality of the arrangements being satisfactory under the licence contingent upon the existence of that extensive monitoring?

312
MR. HUNTER: Well, we sort of talked about this a little bit before. I said that they were mutually reinforcing but I'm not sure that when I was thinking about this I was thinking they were all necessary conditions.

313
MR. POCH: Is that a necessary condition, though?

314
MR. HUNTER: That there be some monitoring?

315
MR. POCH: Yes.

316
MR. HUNTER: Well, I guess I'd put it another way. I think the Board needs to be satisfied that the ring fence is being complied with, and the question is how do you do that. My view is that what OPG has done here and the seriousness with which they are taking this programme, even though it's arguably voluntary, in my view, is sufficient. In fact, I've done a lot of these things over the years, and I think that the quality of the information, the user-friendliness of the information that OPG has given its employees is among the best I've ever seen. I think they are clearly taking this very seriously. It's really a question of the effectiveness and making sure that it's being implemented.

317

MR. POCH: Well, at the time you wrote your evidence, the evidence from OPG had us -- had us understanding that they -- they would not report ring-fence transgressions to external entities. So I'm wondering how the monitoring could occur absent such reporting.

318
MR. HUNTER: Well, it could occur, just as we talked before, through the Market Surveillance Panel. Let's assume that the Market Surveillance Panel sees some behaviour and they think there is something funny going on here and they start whatever process they would to get behind it. So that -- they might find that --

319
MR. POCH: And you feel that's adequate.

320
MR. HUNTER: Well, are you asking me one by one, would that be enough if there were no code of conduct and no disciplinary procedure; is that what you're saying? Well, I probably wouldn't say that's enough. But that's not the facts here.

321
MR. POCH: Thank you. Those are my questions. Thank you for your patience if I've been redundant with my two cross-examinations.

322
MR. BETTS: Thank you.

323
Are there questions from Energy Probe?

324
MR. ADAMS: No questions.

325
MR. BETTS: Thank you. Board counsel, please.

326
MR. MORAN: Thank you, Mr. Chair.

327
CROSS-EXAMINATION BY MR. MORAN:

328
MR. MORAN: Mr. Hunter, perhaps let me start with paragraph 17 of your prefiled evidence, Exhibit A, tab 6, at page 9.

329
MR. HUNTER: I have it.

330
MR. MORAN: In paragraph 17 you have an excerpt from a document. It starts off: "It would be a sad denouement of attempts to achieve ..." Do you see the excerpt?

331
MR. HUNTER: Yes, I do.

332
MR. MORAN: So reading that: "It would a sad denouement of attempts to achieve the transition from monopoly to competition if we were, in the worst case scenario, to move from monopoly to cartelisation, recognising that this may raise serious concerns under the Canadian Competition Act, but also recognising that more subtle or tacit forms of interdependent behaviour are difficult to detect and sanction."

333
How does the reference to more subtle or tacit forms of interdependent behaviour fit in with your proposed definition? Do I assume correctly that you don't intend to exclude those more subtle forms?

334
MR. HUNTER: No, absolutely not.

335
MR. MORAN: Okay. And in that context you've referred to various regulators that might have the ability to look at what's going on in the marketplace. Would you agree that the spot market price is a bit different from the -- sorry, the spot market is a bit different from the bilateral market and the ability to monitor what's going on?

336
MR. HUNTER: It probably is, yes.

337
MR. MORAN: And that it's more likely in the bilateral market that that would be more complaint driven than something that would be more monitored, given the nature of that market?

338
MR. HUNTER: I'm not sure I can answer that. I know that -- and again, I don't want to go over my head here with my knowledge or lack thereof. But I have had some involvement with people concerned about gaming in the electricity bidding market, not in Ontario but elsewhere, and so even in the auction business there are things there that people do, as you know, to try to work to their advantage.

339
MR. MORAN: Okay, thanks.

340
Let me turn you now to paragraph 12, this same tab reference. In that paragraph you've set out a number of cites to the MEGs and the BMEGs. The first one that comes from the MEGs part 2, Section 2.2, it says: "Interdependent behaviour includes an explicit agreement or arrangement ..." I take it that interdependent behaviour, therefore, is broader, based on that language, than just explicit agreements or arrangements.

341
MR. HUNTER: Yes, absolutely.

342
MR. MORAN: And you wouldn't be excluding those other things that are not explicit from your definition of interdependent behaviour.

343

MR. HUNTER: No, I'm not.

344
MR. MORAN: Okay. And in the next paragraph where it says. -- a reference from your BMEGs, or the Competition Bureau's BMEGs -- I'm sorry.

345
MR. HUNTER: Thanks.

346
MR. MORAN: "Interdependent behaviour refers to" -- they may well have been yours. "Interdependent behaviour refers to explicit or implicit understandings among firms in the market to jointly exercise market power or limit competition on price, quality, service, variety or any other dimension." It wouldn't have been your intention to exclude any of those matters from your definition of interdependent behaviour.

347
MR. HUNTER: No.

348
MR. MORAN: I apologise for jumping around but many of the areas have been canvassed with you earlier and with other witnesses last week.

349
Let me turn you next to interrogatory 15.5.

350
MR. HUNTER: Is that one of mine or somebody else's?

351
MR. MORAN: I.15.5 is one of the Board staff series.

352
MR. HUNTER: But did I answer -- was I responsible, do you know ...

353
MR. MORAN: I can tell you in a moment. I don't believe so, no.

354
MR. HUNTER: 15.5?

355
MR. MORAN: 15.5.

356
MR. HUNTER: I have it, okay.

357
MR. MORAN: In the response to that interrogatory there's an excerpt from the generator licence that OPG holds, and it says: "Transfer of effective control of output shall be considered not to have occurred if the Board determines that," and then (ii), "there exist any ongoing arrangements which facilitate interdependent behaviour between OPGI or a subsidiary of OPGI and the transferee."

358
Regardless of the definition of interdependent behaviour, would you agree that really the test here is whether such interdependent behaviour, defined as it might be, is facilitated? That's really the focus for the Board's inquiry here, based on that wording.

359
MR. HUNTER: It is, although, as I've said to Mr. Poch, that the test that I've proposed adds the effect notion for sure onto that, because I -- I think, as I say, the Board, in my view, would be looking at the purpose of why you're concerned about this and you would want to incorporate into the test something that dealt with the effect.

360
MR. MORAN: Right. And as I understand where you end up, the arrangements that give rise to exchange of information that could be sensitive in a competition context is the problem, the ring fence is the solution, and you say you take the problem together with the solution and conclude that you don't have a problem with the facilitation of interdependent behaviour.

361
MR. HUNTER: That's fair, yes.

362
MR. MORAN: Okay. Finally, if I could get you to turn up paragraph 35 of your evidence. It starts on page 17 and then continues on page 18. Your answer is confirmed in the first sentence: "In my opinion, OPG's ring fencing programme will be effective in preventing market sensitive information that is obtained." What I'd like to then ask you is, when you turn over the page, you indicate that: "I am satisfied that OPG's ring fence programme, if implemented as planned, will be effective in achieving its intended objectives."

363
Just a question on that. Were you involved in the development of the actual ring fencing plan and in bringing it to the shape that we've seen as presented in this hearing?

364
MR. HUNTER: A little bit. As you know, OPG had a ring fence as part of the retail licence, and after the deal with Bruce and before market opening they had put in place policies about information sharing. When I came on the scene, they were talking about a ring fence which was sort of an amplification of that and I saw what they were proposing to do and I think in one of my interrogatory answers I indicated that I did review it, that I made some suggestions about what I think they thought they should have done. One that I remembered particularly that I made which is in the ring fence now is that I thought that they should ensure that even people inside the ring fence were not at liberty to disclose information to anybody else inside the ring fence unless there was a need to share that information, and so that was added, I think. I don't think that's in the retail licence ring fence.

365
MR. MORAN: Thanks. And then looking at the next sentence at page 18: "The programme is comprehensive and includes all of the key elements that would typically be required to be effective," and then you list a number of things. As I'm sure you're aware, OPG has indicated that it would accept a mandatory condition in its licence for the ring fence, and so I take it you'd agree that -- in your list, the one thing that is missing is any compulsory component. But with this concession from OPG, the compulsory component is now there as well.

366
MR. HUNTER: Yes. I understand they've agreed that it could be a condition of the licence, or the decision however.

367
MR. MORAN: And earlier I think you actually indicated that ring fence proposals in the Competition Bureau setting were often in the form of a consent order which would bring a compulsory component to it in any event.

368
MR. HUNTER: In those circumstances it would, yes.

369
MR. MORAN: Now, in the context of the ring fence, does it make sense to seek out ways to reduce the number of times it can be tested, the number of times that rocks can be actually thrown at it? And what I'm suggesting is that something in Bruce Power's licence that would direct them with respect to the authorised channels that they should be using to send information to OPG where that information is going to be ring-fenced information on OPG's side. Is that something that makes sense to you?

370
MR. HUNTER: Well, as I said before, I'm not sure that it's necessary given the quantity and quality of the information that Bruce has in the nature of the way they would bid that it's necessary. I guess the key question is whether you're going to be satisfied that this information is effectively ring-fenced and is not going to leak out and be used inappropriately. An analogy I guess I've thought about is it's like insurance. How much insurance do you need? There's often not sort of a black and white answer to that. If you're particularly risk adverse, you have more insurance. If you're not so risk adverse, you have less. So it's where you draw that line. I'm satisfied, based on the evidence that's here and that I've seen, that the arrangement is satisfactory. If Bruce had one, would it do any harm? Of course not.

371
MR. MORAN: Fair enough. Thanks.

372
My last question is with respect to an audit. Would you agree that it would make sense to do an early audit to ensure that the plan has been properly implemented and is functioning properly?

373
MR. HUNTER: Yes, I would have thought you would want to move early on, because what you're trying to do is instil sort of a culture in the organisation that this is very important and needs to be taken seriously. And one way of doing that is internal audit people typically scare people, and I think for them to look at it might not be a bad thing.

374
MR. MORAN: Thank you, Mr. Chair. Those are all my questions. Thank you, Mr. Hunter.

375
MR. BETTS: Thank you.

376
Re-examination, Ms. Jackson?


377
MS. JACKSON: Mr. Chair, I wonder if I might have a few minutes to consult before making that decision.

378
MR. BETTS: How long do you think you'd need?

379
MS. JACKSON: About 10 minutes. I confess I'm coupling the need to consult with the fact that I think there are people in the room who would like a short break for another purpose.

380
MR. BETTS: That's a very -- we'll combine both of those objectives, then. Thank you. We will reconvene at, let's say, 20 minutes to the hour, then.

381
MS. JACKSON: Thank you, Mr. Chair.

382
--- Recess taken at 3:30 p.m.
383
--- On resuming at 3:43 p.m.
384
MR. BETTS: Thank you, everybody. Please be seated.

385
Ms. Jackson.

386
MS. JACKSON: Thank you, Mr. Chairman, members of the Board, for the opportunity to consult. I had the propitious result that I have no questions.

387
MR. BETTS: Thank you. Questions from panel members.

388
MR. SOMMERVILLE: No, thank you.

389
MR. BETTS: I do have one for Mr. Hunter.

390
QUESTIONS FROM THE BOARD:

391
MR. BETTS: It related to your point you made about the ring fence that was used in the retail licence. I'm not going to get into the specifics of that. But you did indicate that -- I'm sorry, I just walked up the stairs. I'm going to lose my breath before I'm done here. You did indicate that that there was something that you felt could have be added to that was added to this one which you saw to be of benefit.

392

I'm just curious how one would possibly catch those kinds of weaknesses in the ring fence structure if there was no opportunity to monitor the ring fence performance.

393
MR. HUNTER: Well, again, ring fences, in my experience, have to be tailored to the situation as well. And I don't want to get OPG into trouble about the retail one.

394
MR. BETTS: No. No one will ever know.

395
MR. HUNTER: One of the -- and the thing that I suggested be added was this business that even if you're inside the ring fence that doesn't mean you can just run around and talk to everybody else who is inside the ring fence. And to be honest, part of the reason that I thought was important in this ring was because there's so many people inside the ring fence. If you had a ring fence where there were very, very few people, then you might not be so worried about that, because it doesn't matter very much. Here, and it was done for what I thought was a good and sufficient reason, there are quite a few people, at least in the beginning - it's declining and it's declining quite rapidly - but that was the reason I thought it would be valuable to add that little wrinkle to it.

396
MR. BETTS: Well, avoiding the specifics to that particular item, I'm just wondering if there was - I'm not saying there is - but if there was a flaw inside the design of the ring fence, what mechanism would allow that flaw to be identified and force its change, if there were not monitoring?

397
MR. HUNTER: Well, there would have to be some -- I suppose OPG might, even if they weren't doing internal auditing, just as I think happened on one occasion already where someone inappropriately from Bruce started communicating and they told them not to, so it really ultimately is the commitment of the company to enforce this thing and monitoring might pick up certain things that you wouldn't otherwise be aware of.

398
But on the other hand, you know, I -- when I've been reading the transcripts about this, and the interrogatories, obviously, about monitoring, in one sense you're sort of saying what are they going monitor? What are they supposed to be doing? They aren't going to be wiretapping people, presumably. So it's pretty hard to see, in one sense, what this is going to produce if you're not having people -- educated and reporting and finding out what's going on.

399
So I think, again, you have to be practical about these things and say what is going to be the best way of making sure that the company takes this seriously, the employees take it seriously, and it's going to be effective. And monitoring might produce something, but on the other hand it might be a nil report so you might not learn anything.

400
MR. BETTS: Okay, thank you very much.

401

I would say, then, that that concludes this -- effectively concludes this day's hearing. We will be, according to the schedule agreed to by everybody, convening on Wednesday morning, the 12th, at 9:30 a.m., and we will be receiving arguments in chief from the applicant. We will allow all of the other parties an opportunity for a break after that and then we will be receiving final arguments from those parties. We will then break for that day and come back on the Thursday morning, again at 9:30 a.m., to receive the final arguments from the applicant. And I don't see anyone shaking their head negatively so I assume I've summed that up properly.

402
Mr. Poch.

403
MR. POCH: Yes, sir, you have. I just think -- I'm aware, as I am, that Mr. Janigan is ill, I have spoken to his colleague. They intend to make every effort to meet that schedule, and if for some reason Mr. Janigan can't intend, their intention would be to try to file written argument. And just to clarify, I'm assuming it would be on the same schedule, so OPG should have that argument by mid-day on Wednesday so they have an opportunity to look at it and respond the following day.

404
MR. BETTS: Very good. That point is worthy to pass on to any others that are following this hearing through the transcripts, that there's an expectation that all parties will have their final arguments to the applicant at least in -- I would say by the end of the day on the Wednesday. Is that sufficient?

405
MS. JACKSON: Mr. Chair, we had earlier talked about noon, and the difficulty is we have to get it, read it, reflect on it, absorb it and reply to it, so noon I think would be preferable from the applicant's point of view.

406
MR. BETTS: I recall that as well. So it will be a requirement for all parties to have their written submission, if they're not presenting them orally, here by noon on Wednesday afternoon.

407
MR. POCH: Mr. Chairman, I should caution the Board there's been some delay in the transcripts getting posted on the web site. I know myself, being an out-of-town counsel, I rely on my way to obtain the transcripts. Now, Board staff has facilitated my getting Friday's transcript today, but I imagine there will be people who won't hear this schedule, will not even know of it at this stage because Friday's transcript is probably just getting uploaded today on the web site.

408
I might suggest that it would be appropriate for Board staff to send a fax out to its batch list or an e-mail to its batch list in this proceeding just alerting people of that schedule. That would probably ease the concern.

409
MR. BETTS: That sounds like a practical solution and Board staff appear to agree with that, so we will do that in the interests of making sure everyone is able to participate to the extent that they should.

410

MR. ADAMS: Mr. Chairman, there is one matter on the record that I would like to bring to your attention, and maybe Ms. Jackson may have some reply to it. Friday's transcript, starting at 937, there's an exchange between Mr. Moran and Ms. Velshi with regard to infrastructure, communication infrastructure at OPG, where Mr. Moran asks if you phone OPG at 700 University office, will you be put right through to the Bruce people. She responds, "I'm sorry, I've never tried that so I wouldn't be able to answer that." Then he follows up by saying, "How plugged into the infrastructure are they?" and she replies, "Oh, they're not. They're totally separate."

411
In fact, if you phone 700 University by their general number, the 5111 directory number for 700 University, you can be put directly through to Bruce Power. Perhaps the record can be cleared up on this point.

412
MR. BETTS: Ms. Jackson, would you --

413
MS. JACKSON: Mr. Chair, I can tell you this, because Mr. Adams told me this Friday, which was of some surprise and we looked into it. First of all, you should know that 700 University is a building with a number of tenants in it besides OPG. I'm advised that the telephone system to which my friend refers is operated by a third-party service provider who -- and that there are arrangements to forward calls coming into that central switchboard to a number of tenants that have made those arrangements, among whom are Bruce Power but also among whom are a number of other tenants in the building. It's equally the case though -- and you'll recall Ms. Velshi said she didn't know about that part, but it is the case that the IT systems and the infrastructure are totally separate and indeed security protected.

414
MR. BETTS: Thank you.

415
MS. JACKSON: I think her answer was correct. It just -- she was not able to answer the first part and we now can, and with that explanation.

416
MR. BETTS: Thank you very much for that clarification.

417
Are there any other items of interest to the panel at this point? Then we will stand adjourned until Wednesday morning at 9:30. Thank you.

418
--- Whereupon the hearing adjourned at 3:53 p.m.