Rep: OEB Doc: 12YP3 Rev: 0 ONTARIO ENERGY BOARD Volume: 7 15 DECEMBER 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER A. BIRCHENOUGH MEMBER A. C. SPOEL MEMBER 1 RP-2003-0044 2 IN THE MATTER OF a hearing held on Monday, 15 December 2003 in Toronto, Ontario; IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 (Sched. B); AND IN THE MATTER OF applications by Centre Wellington Hydro Ltd., Veridian Connections Inc., EnWin Powerlines Ltd., Erie Thames Powerlines Corp., Chatham-Kent Hydro Inc., Essex Powerlines Corp., Cooperative Hydro Embrun Inc. and Hydro One Networks Inc. pursuant to subsection 74(1) of the Ontario Energy Board Act, 1998 to amend Schedule 1 of their Transitional Distribution Licences. 3 RP-2003-0044 4 15 DECEMBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 JENNIFER LEA Board Counsel ROBERT GORDON Board Staff CAROL GODBY Southwest Applicants MICHAEL ENGELBERG Hydro One Networks Inc. MARY ANNE ALDRED Hydro One Networks Inc. MICHAEL ENGELBERG Hydro One Networks Inc. MARK RODGER LDC Coalition JAMES SIDLOFSKY LDC Coalition ANDREW LOKAN Power Workers Union DENNIS O'LEARY Wirebury Connections Inc. SUE LOTT VECC MIKE McLEOD Veridian Connections Inc. and Centre Wellington Hydro Ltd. SCOTT STOLL Westario Power GAYE-DONNA YOUNG Newmarket Hydro KELLY FRIEDMAN Electricity Distributors Association 8 TABLE OF CONTENTS 9 APPEARANCES: [19] PRELIMINARY MATTERS: [36] OPENING SUBMISSIONS BY MS. GODBY: [66] SOUTHWEST APPLICANTS - PANEL 1; SOUTHAM [79] EXAMINATION BY MS. GODBY: [82] CROSS-EXAMINATION BY MR. O'LEARY: [298] CROSS-EXAMINATION BY MS. YOUNG: [349] CROSS-EXAMINATION BY MR. McLEOD: [355] CROSS-EXAMINATION BY MS. LOTT: [367] CROSS-EXAMINATION BY MS. ALDRED: [577] CROSS-EXAMINATION BY MR. RODGER: [797] CROSS-EXAMINATION BY MS. LEA: [932] QUESTIONS FROM THE BOARD: [1062] RE-EXAMINATION BY MS. GODBY: [1074] HYDRO ONE NETWORKS INC. - PANEL 1; CHAMBERLIN, HUMPHREY [1098] EXAMINATION BY MS. ALDRED AND MR. ENGELBERG: [1102] CROSS-EXAMINATION BY MS. LOTT: [1219] PROCEDURAL MATTERS: [1296] 10 EXHIBITS 11 EXHIBIT NO. E.1.1: DOCUMENT CASE BRIEF INDEX [62] EXHIBIT NO. E.1.2: CURRICULUM VITAE OF DR. JOHN CHAMBERLIN [1096] EXHIBIT NO. E.1.3: CURRICULUM VITAE OF DR. BRUCE HUMPHREY [1097] 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:39 a.m. 15 MR. SOMMERVILLE: Thank you very much. Please be seated. 16 We are convened this morning in the matter of the combined applications for amendments to licensed service areas. The application bears Board case file number RP-2003-0044. My name is Paul Sommerville; I'm the presiding member. Sitting with me is Arthur Birchenough. 17 Are there any other matters before I take appearances? 18 Could I have appearances, please. 19 APPEARANCES: 20 MS. GODBY: Carol Godby representing the Southwest applicants. 21 MR. SOUTHAM: David Southam representing the Southwest applicants. 22 MR. ENGELBERG: Michael Engelberg representing Hydro One Networks. 23 MS. ALDRED: Mary Anne Aldred for Hydro One Networks. 24 MR. RODGER: Good morning, Mr. Chair. Mark Rodger, counsel to Toronto Hydro-Electric System Limited and Hamilton Hydro Inc., Hydro Ottawa Limited, Brantford Power Inc., Markham Hydro Distribution Inc., Hydro Vaughan Distribution Inc., and Enersource Hydro Mississauga Inc., known collectively as the LDC Coalition, and with me is my co-counsel Mr. James Sidlofsky and also Dr. Adonis Yatchew for the coalition. 25 MS. LEA: Jennifer Lea, Board Counsel. With me is Mr. Robert Gordon. 26 MR. LOKAN: Andrew Lokan for the Power Workers' Union. 27 MR. O'LEARY: Dennis O'Leary for Wirebury Connections Inc., Mr. Chair, and to my right is Mr. Rakus and to our left is our expert witness Mr. John Todd of Elenchus Research. 28 MS. LOTT: Good morning. It's Sue Lott and I'm counsel to the Vulnerable Energy Consumers' Coalition, known as VECC. 29 MR. SOMMERVILLE: Ms. Lott. 30 MR. McLEOD: Mike McLeod representing Centre Wellington Hydro and Veridian Connections Inc. 31 MR. SOMMERVILLE: Mr. McLeod. 32 MR. STOLL: Scott Stoll, Westario Power. 33 MS. YOUNG: Gaye-Donna Young, Newmarket Hydro. 34 MS. FRIEDMAN: Kelly Friedman for the Electricity Distributors Association. 35 MR. SOMMERVILLE: Are there any other further appearances? 36 PRELIMINARY MATTERS: 37 MR. SOMMERVILLE: The purposes of today's proceeding is to commence the evidentiary portion, oral evidentiary portion of this hearing. As I understand it, Ms. Godby, you will be leading your witness first. The Board anticipates, expects that parties will try to order their cross-examination in the following manner, so that parties generally supportive of the point of view being expressed by the witness will proceed first in the examination of the witness. Those generally adverse to the point of view being expressed by the witness would follow. Ms. Lea will be the last examiner, there will be Board questions, and there will be an opportunity for redirect following that. 38 Does anyone want to make any submissions with respect to that method of progress? 39 It is our hope to proceed through the evidence of Mr. Southam. I think the order that's being proposed is Mr. Southam and then the Hydro One witness from KEMA-Quantec would be presented followed by Dr. Yachew and then followed by Dr. Todd. 40 Is that an understanding among all the parties? 41 Following the conclusion of that portion of the proceeding, we will embark immediately into the oral presentations that have been noted in the Procedural Order. An outside time frame of 45 minutes has been expressed in the Procedural Order. We would expect parties to avoid duplication. It is obviously important from all points of view, I think, that the proceeding be concluded, this portion of the proceeding be concluded no later than the 23rd of this month. 42 With respect to some timing issues, regrettably the Board has to adjourn tomorrow afternoon so that our afternoon session tomorrow will be lost to us, unfortunately. That's unavoidable. 43 On the 19th, thank you, Ms. Lea, the Board has a hard adjournment time of 12:30. We will reconvene at 2:30 in the afternoon, but we must rise no later than 12:30 on the 19th to reconvene at 2:30. 44 Our normal process would be to start at 9:30, to proceed through to say about 11:00, where we will have a break. I look for counsel to be mindful of that and try to pick a time that is convenient from their point of view. 45 We would continue to sit until about 12:30, reconvene at 2:00, and adjourn in the afternoon with or without a short afternoon break at sometime between 4:00 and 4:30. 46 Now, those times are adjustable according to the requirement, the overriding priority of trying to make sure that we conclude this portion of the proceeding in the time frames that I've indicated. 47 Are there any matters arising from my opening remarks? 48 There being none, Ms. Godby. 49 MS. GODBY: Thank you, Mr. Chair. I wonder, just before we call Mr. Southam, if I could address a couple of matters, the first being that the Southwest applicants had two interrogatory responses outstanding. I have distributed them today; however, if other parties have not received a copy, I can advise that they're just over there on top of that black binder at the side. 50 The second -- 51 MR. SOMMERVILLE: I don't think I have those. 52 MS. GODBY: Actually, you don't. 53 MS. LEA: I do not either so I'll come over. 54 MS. GODBY: Thank you, Ms. Lea. 55 Thank you, Mr. Chair. 56 The second issue, and I do believe Ms. Lea has a copy of this, we put together a compilation of materials that we feel the Board will find helpful in the presentation of Mr. Southam's evidence and we would like those passed out. 57 Now, some of my friends have copies, but we were not able to make copies for all, and I apologize for that. However, we certainly are able to copy the index. 58 The third matter is, I wonder if the Board would indulge in granting a brief opening of about three minutes so that we might set the stage for Mr. Southam's evidence. 59 MR. SOMMERVILLE: I think with respect to the last point, Ms. Godby, I think that would be acceptable. 60 I'm wondering if we ought to enter the document case brief index as an exhibit, Ms. Lea, just for identification purposes, not as an evidentiary document but simply for ease of reference for the parties. 61 MS. LEA: Certainly, sir. The exhibits filed in the hearing will be in series E, E for Edward, so this will be E.1.1, please, for identification only. 62 EXHIBIT NO. E.1.1: DOCUMENT CASE BRIEF INDEX 63 MR. SOMMERVILLE: Thank you. I would think that it's not appropriate to give an exhibit number to the interrogatory responses, they're falling into the other portion of the proceeding. 64 MS. LEA: They do have exhibit numbers assigned to them as they are received, thank you. 65 MR. SOMMERVILLE: Ms. Godby. 66 OPENING SUBMISSIONS BY MS. GODBY: 67 MS. GODBY: Thank you, very much, Mr. Chair. 68 Mr. Chair, Honourable Board Members, what principles should govern service area amendment applications. The plan put forward by the Southwest applicants is straightforward, it's uncomplicated, it's lawful, and it's responsible. It is a plan which takes into account the on-the-ground considerations of the industry, the plain language of the legislation and the practical application and logical extension of existing and well-thought-out rules which the Board already has in place in the Distribution System Code, the rate handbook and your other regulations. 69 The plan is consistent with the spirit and intent of the legislation. It recognizes the objectives of bringing competition to all sectors of the electricity market, including distribution. It is consistent with section 70(6), which expressly provides that licences are non-exclusive, and it is consistent with section 70(13), which recognizes that overlapping licences will guard against the forced disposition of assets. The plan is non-discriminatory in that both existing and new customers obtain the benefits of competition, and no distributor is treated more favorably than another. 70 Now, what are the elements of this plan? The elements are as follows: One, there should be overlapping licences. For immensely practical reasons, these licences should extend up to the municipal boundaries so that the town or city that provides customers with their roads, their sewage, their water, also provides them with their electricity as well. The end state will be shoulder-to-shoulder utilities running up to municipal boundaries. But consistent with the legislation, no distribution company would have the right to claim exclusivity over the territory. The plan attributes reasonable rather than irrational behaviour to customers and to businesses. 71 The actual process underlying the Southwest applicant plan is equally simple and therefore, we would submit, compelling. Licence amendments should not be made on a customer-by-customer basis. This is not the case for customers connecting currently within a licenced territory, and it should not be the case for amendments. Otherwise, the administrative burden on the Board, we would submit, would be immense. 72 There would be no absolute requirement to conduct detailed economic evaluations relating to the customer-specific connection and the system expansion prior to the granting of the licence amendment. 73 These evaluations are done as a matter of course under the current regime and already are required should any customer today request a connection. The applicant must simply demonstrate, on the face of the evidence filed, that it meets the minimum threshold or some variation thereof as established by the schema that's been forwarded by the Southwest applicants in their supplemental evidence. 74 The evidence would need to demonstrate that the customers would benefit through competitive rates, service, and reliability, that the objectives of the OEB Act would be advanced, and that there would be no adverse impacts on the incumbent utility or its remaining customers as a result of a mandatory undertaking to hold whole the incumbent utility in situations of customers switching. 75 If this plan were followed, the Southwest applicants submit there would be no stranding of assets, there would be no duplication of assets, there would be no cherry-picking, and there would be no adverse impacts on system planning. There would be one system of licensing and it would be consistent with the system we have in place today. 76 The Southwest applicants believe that customers not only should be afforded a choice but that the legislation specifically mandates that choice. 77 The Southwest applicants are not advocating customer choice at the expense of all else, but they are saying this: It is possible to bring competition into this sector and to do it with little work, as the tools are already in place. It is possible to give customers a choice without contorting the plain language of the Act, and it's possible to give customers a choice while balancing the legitimate interests of the incumbent utilities and their customers. And we are of the view that the evidence of Mr. Southam will demonstrate how this proposal will meet the objectives both of the legislation and will also address the concerns of those opposed to competition. 78 With that I'd like to call Mr. Southam. 79 SOUTHWEST APPLICANTS - PANEL 1; SOUTHAM 80 D.SOUTHAM; Sworn. 81 MS. GODBY: Thank you, Mr. Chair. 82 EXAMINATION BY MS. GODBY: 83 MS. GODBY: Mr. Southam, you've been asked to give expert evidence before the Board today, and I thought it would be helpful today if you could outline for them some of your experience. 84 I understand currently that you are the vice-president of RDII Utility Consulting & Technologies Inc.; is that correct? 85 MR. SOUTHAM: That's correct. 86 MS. GODBY: And what is that company? 87 MR. SOUTHAM: My company is a consulting company that specializes in providing services to Ontario's electricity distributors. 88 MS. GODBY: And how many clients, in fact, would you have? 89 MR. SOUTHAM: We have current clients -- current and past clients numbering approximately 60 of Ontario's local distribution companies and 50 of the former hydroelectric commission's that -- prior to the incorporation -- prior to their incorporation in the year 2000. 90 MS. GODBY: Mr. Southam, could you give the Board some examples of assignments that you might do for your clients in your capacity. 91 MR. SOUTHAM: I have personally been involved in such things as the preparation of distribution rate applications, the preparation of business plans for utilities, preparation of revenue forecasts, assistance -- I have assisted utilities with financial -- corporate financial management matters, and my company and I have also been involved in things like regulatory compliance and market compliance audits. 92 MS. GODBY: And I understand as well that you also act as the president to a local distribution company; is that right? 93 MR. SOUTHAM: That's correct. I'm the president of West Perth Power Inc., which is the licenced distributor in West Perth. 94 MS. GODBY: And how did you come into that role, Mr. Southam? 95 MR. SOUTHAM: My company had been providing regulatory services to West Perth Power, both in terms of their distribution rate application and other regulatory compliance matters. The general manager of that particular utility retired. My company was asked by the board to take over the management of that utility. 96 MS. GODBY: And apart from the regulatory compliance issues, have you ever dealt with licence applications or licence amendment applications? 97 MR. SOUTHAM: West Perth Power had a situation where they had requested a licence amendment application from the Board. That licence amendment application was approved in the summer of 2001. 98 In addition to that, I have been -- had been responsible in my capacity as president of West Perth Power Inc. to fulfill the requirements of the Board with respect to the renewal or the issuing of the final licence to West Perth Power Inc. earlier this year. 99 MS. GODBY: Now, you mentioned that the licensing amendment application for West Perth was, in fact, approved. Is that the Board's decision appearing at tab 4 of the document brief that we have before the Board today? 100 MR. SOUTHAM: That would be correct. 101 MS. GODBY: And prior to owning and operating your own business, sir, you were with London Hydro, I understand? 102 MR. SOUTHAM: That's correct. 103 MS. GODBY: And for how long? 104 MR. SOUTHAM: Slightly over five years. 105 MS. GODBY: And during that time, what responsibilities did you perform for London Hydro? 106 MR. SOUTHAM: I, at the time, was a contract employee with London Hydro. I was involved in the design and implementation of demand-side management programs on behalf of that utility. I was involved in rate studies and also involved in project evaluations from a financial point of view. 107 MS. GODBY: And do you hold a masters degree in business administration from the Ivey School of Business? 108 MR. SOUTHAM: That's correct. 109 MS. GODBY: And where did you receive your undergraduate degree from? 110 MR. SOUTHAM: Also from the University of Western Ontario. 111 MS. GODBY: In what? 112 MR. SOUTHAM: In political science. 113 MS. GODBY: And have you ever been involved in a public policy hearing before the Energy Board before, Mr. Southam? 114 MR. SOUTHAM: Yes. 115 MS. GODBY: And when was that? 116 MR. SOUTHAM: I've been involved in several proceedings in the former Ontario Hydro rate cases HR-22, HR-23, and HR-24. I was a witness at HR-24, and in addition to that I had been involved in the generic proceeding on the Minister's perspective with respect to the electricity distribution rate handbook. 117 MS. GODBY: I'm sorry, did you say you gave evidence? 118 MR. SOUTHAM: I gave evidence at that proceeding also. 119 MS. GODBY: As a result of your past experience, and your current experience in your capacity as the vice-president of RDII utilities, how would you characterize your expertise in the energy distribution sector? 120 MR. SOUTHAM: My expertise pertains to the implementation of corporate financial management principles, Ontario Energy Board regulations in a practical way on the ground within Ontario's electricity distributors. 121 MS. GODBY: Now, Mr. Southam, you are here to speak today to a proposal which you developed and put forward on behalf of the Southwest applicants regarding licence amendment applications. 122 MR. SOUTHAM: That's correct. 123 MS. GODBY: And can you outline, please, for the Board, what are the fundamental elements of this proposal. 124 MR. SOUTHAM: This proposal would allow for the creation of overlapping distribution licences within the municipal boundaries of the shareholders of the licensed local distributors. In the case of two applications, the LDCs are applying for final boundaries which correspond to the municipal boundaries in a third application; there is an application for an overlapping licence with respect to a subdivision. That subdivision lies within the municipal boundaries of one of the shareholders of that particular corporation. 125 MS. GODBY: Now, you were speaking specifically, I believe, to the applications which you put forward for the site-specific applications for the Southwest applicants, but does your proposal relate more generally to how you see this sector evolving in the province? 126 MR. SOUTHAM: Yes, that the -- yes. 127 MS. GODBY: And under the terms of your proposal, in fact, would there then be competition within the municipal boundaries? 128 MR. SOUTHAM: There would be the provision for competition for distribution customers between licensed distributors and the overlapping territory. 129 MS. GODBY: And why is that? 130 MR. SOUTHAM: There are certain legislative requirements that would indicate that what we are proposing is a lawful way forward, that it is what we consider to be the only practical way forward in light of the legislative environment. 131 MS. GODBY: And how does what the Southwest applicants have proposed compare to the current licensing regime? 132 MR. SOUTHAM: We see the proposal put forward as being consistent with the current licensing regime and is merely an extension of the current licensing regime to cover overlapping areas. 133 MS. GODBY: Mr. Southam, under your proposal, who would have the obligation to connect customers in the overlapping service territory? 134 MR. SOUTHAM: In a situation where there were more than one distributor that was licensed to serve the area in question, each distributor would have an equal obligation to serve customers and customers would have the option of choosing the utility that it would be served by. 135 MS. GODBY: And does your proposal differentiate between new and existing customers within that territory? 136 MR. SOUTHAM: We do not feel the Board can or ought to discriminate between new and existing customers. We feel that all customers ought to be treated the same. 137 MS. GODBY: Mr. Southam, can you tell me what is driving, in your view, these applications? 138 MR. SOUTHAM: Yes. There are several factors which are driving these applications. My clients are under pressure from two sources: One is from customers, in the areas in question within the municipal boundaries, who wish to be served by the locally owned distribution company, and in addition to that, my clients are under pressure from their municipalities to bring their electrical service territories in line with the other municipal servicing territories such that there is a unified municipal servicing response which includes electricity as well as water, sewer, roads and so forth. And the municipalities are of the view that this is an important consideration because of -- in the case of my clients, the reasonably aggressive economic development position or policy of those municipalities. 139 MS. GODBY: Now, how are you aware of this personally, Mr. Southam? 140 MR. SOUTHAM: Representations have been made to me by my clients with respect to these pressures, and in addition to that, I've had the opportunity to speak to two such customers of one of my clients who have expressed to me their desire to be served by the locally owned distribution company. 141 MS. GODBY: Now, in designing this proposal, could you take us through the steps that you took in terms of how you justified it in terms of the legislative context, first of all. 142 MR. SOUTHAM: We are of the view that the proposals that we are making are lawful proposals, that any person is entitled to make an application with respect to a distribution licence under section 74 of the Ontario Energy Board Act, and there are a number of objectives that are specified under that Act that we have attempted to make these applications comply with. 143 MS. GODBY: If I could then turn you actually to section 1. You referred to the objectives of the Energy Board Act and they would appear at, I believe, tab 6 of our filed document brief. 144 So if we start at the beginning then, Mr. Southam, how is it that you think this proposal facilitates competition in the generation and sale of electricity? 145 MR. SOUTHAM: It is our view that the sale of electricity includes the sale of distribution services. It would be rather impossible to sell electricity, in our view, if that component of that service did not include the distribution component. 146 MS. GODBY: And if we go next to the second objective: 147 "To provide generators, retailers and consumers with non-discriminatory access to transmission and distribution systems in Ontario." 148 Similarly, can you tell us your proposal responds to objective? 149 MR. SOUTHAM: We are of a view, as I stated a moment ago, that licensed distributors in an overlapping service area would have an equal obligation to serve customers and would be required to be in a position to connect customers on a non-discriminatory basis and according to the same rules and standards. 150 MS. GODBY: And if we go down to the third objective: 151 "To protect the interests of consumers with respect to prices, reliability, and quality of electrical service." 152 MR. SOUTHAM: We are of a view that the current licensing requirements of the Board require distributors to be able to provide minimum standards with respect to reliability and quality, and we are of the opinion that the Board ought to provide customers -- where there is a discernible price benefit, ought to make that price benefit available to consumers. 153 MS. GODBY: And if we take the objectives four and five then, to promote economic efficiency and also the maintenance of a financially viable electricity industry, can you tell us how your proposal speaks to those items as well? 154 MR. SOUTHAM: The proposal would do three things in this regard: That we do not believe in the uneconomic duplication of distribution assets, we do not believe in the stranding of assets, and we feel that there are measures that the Board can take in granting these licence amendments that will ensure that cherry-picking or cream-skimming does not occur as a result of the extension of these service territories and that the measures that we propose will ensure that objectives four and five are met. 155 MS. GODBY: Mr. Southam, are there further legislative provisions which you took into account in formulating your proposal? 156 MR. SOUTHAM: We took into account section 70(6) which provides for non-exclusive distribution licences and which also states that the -- that nothing in a -- a licence will not convey to a person the right of exclusivity and will not prevent the Board from granting a licence to another person in -- situated in the same geographical area. 157 In addition to that, we also took account of section 70(13) of the Act, which causes the Board not to undertake any action that will force a distributor to dispose of a distribution system. That has, in the case of -- in the specific cases of my clients, there is an incumbent distributor already with assets, distribution assets in the areas in question, so that the Board could not simply transfer the area in question to the locally owned distribution companies, because that would force the incumbent distributor into a position where it would have to dispose of its assets. 158 So therefore, the practical, legal way forward is for the Board to grant overlapping distribution licences in the area in question. 159 MS. GODBY: Mr. Southam, are you aware of any provisions which you may have taken into account? 160 MR. SOUTHAM: I would note -- draw the Board's attention to section 29(1) of the Act, which I believe is at tab -- 161 MS. GODBY: It's at tab 6, page 17 of 108. 162 MR. SOUTHAM: That section reads: 163 "On an application on a proceeding, the Board shall make a determination to refrain in whole or part from exercising any power performing any duty under this Act if it finds as a question of fact that a licensee, person, product, class of products, service, or class of services is or will be subject to competition sufficient to protect the public interest." 164 We believe that the practical effect of that section with respect to these applications is that the Board ought to allow for competition, that the role of the Board in regulation ought to be to ensure the protection of the incumbent utility, incumbent distributor, and ought to also act to protect the -- any residual customers of the incumbent utility but not to disallow competition from occurring in that situation. 165 Then I would also draw the Board's attention at tab 9, this is an excerpt from David Brown's "Energy Regulation in Ontario," and I just draw to the Board's attention that the -- this forbearance provision of the Act, Ontario Energy Board Act, is similar to the forbearance provision in the Telecommunications Act. 166 And the comment -- the second paragraph on page 2-24 notes that the Ontario Energy Board has not exercised its power to refrain from regulation. But we note in the last sentence of that paragraph that the -- throughout the paragraph, first, I guess, that the -- the comment is that the application of the forbearance provisions of the Telecommunications Act may provide some guidance to the Ontario Energy Board with respect to the use of its -- the application of section 29. And I note the last sentence: 167 "The Act prevents the CRTC from refraining to exercise a power if it finds as a question of fact that to refrain would be likely to impair unduly the establishment or continuation of a competitive market for that service or class of services." 168 So we are of the view that the -- that this section recommends to the Board that it ought not to -- that it ought to approve licence amendments if that -- if those licence amendments are likely to lead to competition for distribution services. 169 MS. GODBY: Thank you, Mr. Southam. 170 You've gone through quite a number of sections of the legislation, and I gather that your analysis also took into account some of the regulations as well, and I was hoping you might be able to take us through some of the aspects of the regulations which governed your putting together this proposal. 171 MR. SOUTHAM: There are several aspects of the regulations to which I would draw the Board's attention. 172 We had noted in an earlier phase in this proceeding that the -- chapter 3 of the Electricity Distribution Rate Handbook talks about the benefits of competition to consumers and that the Board -- the contents of the Distribution Rate Handbook were intended to emulate competition. 173 I also note at tab 2 under the Affiliate Relationships Code, section 1.1 on page 1, the second sentence in the first paragraph: 174 "The principal objectives of the Code are to enhance the development of competitive market while saving ratepayers harmless from the actions of electricity transmitters and distributions." 175 In addition to that, I would also note that the Energy Board has made the conduct of economic evaluations a requirement of distribution licences, that appendix B of the distribution licence -- or sorry, the Distribution System Code requires distributors to undertake economic evaluations of system -- of customer connections and system expansions. 176 We feel that this is a -- this amendment -- this provision of the Distribution System Code can be expanded to make provision, the appropriate provision for -- to take account of stranded assets in evaluating costs to be assigned to customers proposing to switch distributors. 177 And in addition to that, I would also point out -- draw the Board's attention to section 11.3.3 of the Electricity Distribution Rate Handbook, which specifies that suppliers, distributors who supply power to embedded distributors through distribution facilities ought to apply for the Board or must apply to the Board for a rate to recover the costs associated with providing this service. 178 So the Board has already provided for distribution wheeling rates that will allow for a continuation of the situation we have today and have always had in the province of Ontario of embedded distributors, and that that is a practical method which has always been used in Ontario to allow for -- to eliminate, actually, duplication of distribution assets from the transformer station. 179 And we feel that this is an effective way to allow for connections and system expansions within the service areas that we are proposing that my clients be allowed to expand out to. 180 MS. GODBY: You're saying, Mr. Southam, that embedding is a current feature today? 181 MR. SOUTHAM: Embedding of distribution systems is a widespread and widely accepted feature of the Ontario electricity distribution system today. 182 There would be, to my knowledge, very few utilities that do not have at least some embedded supply points and that the Board has already taken a position which is consistent with the historical development of the system in Ontario to allow for connections of embedded distribution systems. 183 One of my clients today has a situation where -- faces a situation where his local distribution service territory is comprised of ten non-contiguous, embedded distribution systems ranging in size from a couple of hundred customers up to a couple of thousand customers. That distribution system is located in an area, from one end to the other, which is approximately 80 kilometres, running from Tavistock in -- the north end of Oxford county to Port Stanley on the north shore of Lake Ontario. 184 That distributor is able to provide service reliably within the minimum service requirements of the Board, and to do so at a cost, which is lower than the distributor with -- within which it is embedded. 185 There are numerous other similar situations around Ontario. The -- in the case -- in my own case in West Perth, I have two embedded distribution systems within the municipal boundaries that are embedded within the Hydro One distribution system, one of which has 139 customers attached to it. 186 So the system of embedding is one that is widespread, in widespread use in Ontario, and is recognized in the Board's regulations as part and parcel of that system and that system has developed over the course of the development of the distribution system in Ontario as a cost-effective way of avoiding duplication of system assets from the transformer station to those distribution systems. 187 MS. GODBY: Mr. Southam, are you aware of any movement afoot to get rid of embedded distributors? 188 MR. SOUTHAM: I'm not aware of any such movement from a policy perspective. 189 MS. GODBY: Now, you had mentioned earlier on in your evidence, you made reference to the economic evaluation model in appendix B of the Distribution System Code. Currently, is there an economic evaluation methodology for covering off the stranded assets? 190 MR. SOUTHAM: There is not currently in appendix B of the Distribution System Code a provision where it would capture stranded asset costs. Our view is that can easily be incorporated. In the same way that upstream costs are currently incorporated in those economic evaluations, stranded asset costs can be incorporated into those economic evaluations such that the cost of stranded assets, plus any new assets that would be required for customer connection or system expansion would be recaptured through a capital contribution from the customer that is proposing to switch in the same manner that capital contributions are captured today. And that is a very easy extension of the economic evaluation system that the Board has already established and is consistent with generally accepted corporate financial analysis principles. 191 MS. GODBY: In terms of the boundaries proposed by the licence amendments in your proposal, are these final or interim boundaries? 192 MR. SOUTHAM: With specific respect to the applications of my clients, two of the applications are to the municipal boundaries of the shareholders. Those would be final boundaries for those utilities. And in the case of the third application, there is a small boundary expansion within the municipal service territory of one such shareholder, and it is unlikely in that case that those would be final boundaries, but certainly the feeling among my clients is that they wish to ultimately, or in very short order, have final boundaries within which they can service customers. 193 MS. GODBY: Can you speak more generally to that issue, Mr. Southam, apart from your clients' proposals? So for instance, would you foresee licence amendment applications being for final boundaries or interim boundaries? 194 MR. SOUTHAM: Well, with respect to that, in an ideal world, or in a different situation, if there was the opportunity for shoulder-to shoulder utilities as envisioned in some of the original policy position papers that were put forward that would be fine; however, in my view, the legislature and the Board has taken a position with respect to the direction of the industry and the boundaries that are being proposed by the two utilities that would expand to the municipal boundaries would be the end state of their utility growth. 195 MS. GODBY: Mr. Southam, if you could take a look, if you will, at the first tab in our brief, which is just a copy of an application for an electricity distribution licence, you've taken us through, first of all, the legislative regime, you've taken us through some of the regulations which you believe would apply. Did you take into account the current licensing form and application also in your proposal? You'd have to say yes or no? 196 MR. SOUTHAM: Yes. We would see that the application instructions that are provided could easily be extended to cover the additional information that would be needed for the Board to be able to evaluate, in fact, for I guess the director of licensing in our proposal to evaluate specific proposals for overlapping licences once the rules have been established. 197 MS. GODBY: Would you see a lot of changes that would be required to this licensing document? 198 MR. SOUTHAM: We would suggest that some of the information that we have called for in our schema at Exhibit 1 in our supplemental prefiled evidence would need to be included along with, at page 18 of the application, an additional undertaking that would simply be added, that the applicant utility would agree not to strand any assets of an incumbent distributor. 199 MS. GODBY: Well, Mr. Southam, you referred to your schema and I wonder if we might not turn to that at the present time. 200 For the Board's reference, the schema that I'm referring to was the one that was filed as an appendix to our supplemental evidence. 201 Mr. Southam, before we get into the details of your schema, just as a general principle, do you see customer-specific requests as a pre-condition for filing a licence amendment? 202 MR. SOUTHAM: The answer to that is no. In fact, utilities in the Province of Ontario today, in my experience, are facing two kinds of situations. They are facing actual identified customers who have come to them and said we wish to be served by you within the municipal boundaries but outside of your existing licence service territories. That would be one type of situation that utilities would be faced with. In fact, in the case of all of my clients in this matter, all of them have customers who have come to them and have said, We wish to be served by you within the municipal boundaries but outside of your existing service boundaries. 203 The second situation that would arise would be sort of a fill-in type situation where there is an expectation of future customer connections and future system expansions that, as of the day of application, have not been identified as yet. In fact, all of my clients are facing a situation where they have several customers who they can identify today as being ones that wish to be connected but as I mentioned earlier, are under pressure from their municipality from the standpoint of official plans and this sort of thing to say, Well, why don't we get you licensed for the whole area in the expectation that you will be able to fulfill the needs in the future; needs that have been identified by the official plan or are expected from an economic development point of view. 204 MS. GODBY: And would that be consistent or inconsistent with the current regime to not have a specific customer identified? 205 MR. SOUTHAM: In fact, in my opinion, granting the licence on the basis of one customer identified now would be inconsistent with the current licensing regime. Granting licence amendments on the basis of general grants with respect to a geographic territory would, on the other hand, be consistent with the current licensing regime. But licences today that have been granted to distributors in Ontario presume, very clearly, that there could well be future customers connected to that distribution system that have not been identified as of the date of the granting of the licence. 206 So either situation would certainly be fine, but providing a general grant for a licence for a geographic area in the absence of identified customers today is actually more consistent with what the Board's licensing provisions and practices have been to date. 207 MS. GODBY: Well having said that, I'm going to take you back to your scenario in the schema, which is the -- the very first one, which does contemplate a specific customer connection. 208 So if we take you to scenario A, can you take the Board through your schema, Mr. Southam, please. 209 MR. SOUTHAM: Yes. In the case of scenario A, that would be where the -- a specific customer has approached a utility with a specific request to connect that customer. 210 And one of the things I would point out about this schema is that we're not certainly caught up on any of the weightings here. What we've attempted to do is provide the Board with some kind of integrated methodology for evaluating these things as they arise in a practical way. But we're certainly open to suggestions from other parties as to the appropriate weighting. 211 But certainly if the -- if a utility has been approached by a customer and it is the customer's preference to be served by that utility, in our opinion, the Board ought not to get in the way of that decision by the customer. 212 In that particular situation, it is in our role, the appropriate role of the Board, to ensure and to protect the other interests in the system, which include the interests of the incumbent utility and the interests of the residual customers of the incumbent utility. 213 And what we ought to -- what we believe is that the -- the appropriate regulation in that situation is for the Board to make provision, adequate provision for the protection of -- of residual consumers of the incumbent utility as well as incumbent utility, but those regulations would stop short of interfering in the decision of a given customer to connect to another utility. 214 Now, those regulatory stipulations could well include, and in fact we're advocating, a requirement on the part of a customer seeking the connection to pay for any stranded assets as well as any additional assets that would be required to connect that customer to the system. 215 If that were the customer's choice, and they were willing to pay those costs, then in our view, the Board ought not to get -- impose itself in that situation. That would be a case of caveat emptor, that the consumer would understand that those -- they would be required to bear those costs. 216 MS. GODBY: Well, in addition to the evidence of the customer preference, obviously, that would be the precipitating factor here in these specific types of applications. What other evidence would be included? So, for instance, would you have an economic evaluation accompanying this particular application? 217 MR. SOUTHAM: Well, the practice with respect to distribution licences in Ontario to date has been one where the economic evaluations normally follow the granting of licences, that distributors are expected to perform economic evaluations after the licence has been granted. 218 That could work in this situation, or the Board could, in that situation, could -- if an economic evaluation is available, could request to see that before the granting of the licence. 219 MS. GODBY: Now, you mentioned that there should be some weighting to the impact on the incumbent and its customers, and what are you proposing would be the evidence to show that, to demonstrate that, Mr. Southam? 220 MR. SOUTHAM: Well, there would -- obviously in the application, as we mentioned, there would have to be an undertaking not to strand assets of the incumbent utility. That would be step number one. 221 Step number 2 could be some indication -- as we mentioned, it could be an economic evaluation, which would require input from the incumbent distributor as to which -- what the unrecovered capital cost of connection assets would be in the event that a customer were allowed to switch or were allowed to make a choice. 222 MS. GODBY: If we could go to your second scenario, then, where there is no specific customer, can you take the Board through your schema in that regard. 223 MR. SOUTHAM: Under scenario B that we've indicated here, a utility would be making an application to the Board for a general grant of a service area. And in that case, this would be similar to the application -- two of the applications that we have submitted and would -- in this case would be -- in the case of my clients would be areas out to the municipal boundaries. 224 In that situation, we feel that the Board has the same level of -- same duty as it has in scenario A; namely, that it needs to be able to make sure the protection of the incumbent distributor, holding the incumbent distributor whole, and also to ensure that any residual customers or any customers of the incumbent distributor are also held whole. 225 But in -- the difference in scenario B, in the absence of a specific customer who has made a specific determination that they wish to be served by one distributor or another, that in that case, we feel the Board has an additional duty of care to ensure that the distributor that is making the application for the overlapping service territory has the ability to meet the requirements that would be -- with respect to reliability and with respect to quality and also would be able to demonstrate and -- a cost advantage for future customers. 226 So in other words, the Board would be responsible for, sort of, looking out after -- looking out for future customers and would -- and would have a duty to ensure that the applicant utility could, in fact, provide service at a cost advantage and consistent with the minimum servicing requirements of the Board. 227 So that's why there would be the additional criteria that we have listed out with respect to the approval of the licence amendment. 228 MS. GODBY: Well, Mr. Southam, where there's no specific customer that's identified, what evidence do you propose to submit to the Board to enable them to determine whether or not there are those advantages? 229 MR. SOUTHAM: In those cases, there would be an amendment to the application, licence application, which is -- I think we indicated was at tab -- 230 MS. GODBY: One. 231 MR. SOUTHAM: -- at tab 1 to include qualitative and quantitative information around the criteria indicated. 232 And in addition that, there would be a requirement at page 18 of that application, as we've stated, for the distributor, the applicant distributor to make an undertaking to the Board not to strand assets of an incumbent distributor. 233 MS. GODBY: Mr. Southam, where all of the thresholds met in the application, then what happens? 234 MR. SOUTHAM: Well, in that case, if those -- if the applicant distributor could satisfy the director in our proposal that it wouldn't be able to meet the minimum service quality indicators of the Board and would be able to provide a cost advantage to customers, in that case -- and the distributor were willing to undertake to the Board that it would not strand the assets of an incumbent distributor, then in that case, the application ought to be approved. And then the onus for determination of stranded assets would shift to the incumbent distributor in that situation. 235 MS. GODBY: And why is that? Why would the onus shift at that time? 236 MR. SOUTHAM: Well, the onus to show stranded assets would need to shift to the incumbent distributor because the incumbent distributor has all the information with respect to its -- to its distribution facilities, that it would have all the work orders available to it with respect to the original capital cost of the distribution facilities in question, and it would know when those distribution facilities were built, and would be -- it would know the unrecovered capital cost of those facilities. 237 MS. GODBY: Mr. Southam, what's your view with respect to providing an incumbent distributor with notice of this pending, overlapping licence application? 238 MR. SOUTHAM: Well, we feel that the Board already has notice provisions with respect to the -- to applications for licences, and all distributors are required to publish notice of their application for licences. 239 But, however, if the Board also saw that there would -- that it would be advantageous for the incumbent distributor to be notified of the particulars of a licence amendment application then that could be incorporated as well. 240 MS. GODBY: What do you see the administrative burdens on the Board should your proposal be adopted? 241 MR. SOUTHAM: We are of the view that applications in the case of two of my clients, two municipal boundaries, will actually result in a very limited administrative burden on the Board, that they are in essence final boundaries that would be similar to the existing licences that are granted. Those licences presume that there will be future, as yet unidentified customer connections, and that in the current situation, the Board does not withhold distribution service territory until customers are identified. What they do is they have a general grant of service territory and utilities are allowed to make connections within that service territory. 242 It would be extremely burdensome, in our view, if distributors had to either under the -- well, certainly under the current arrangements or under future arrangements, had to apply to the Board each time a new customer was going to be connected for a distribution licence amendment. We would think that that would be extremely burdensome and that there is nothing wrong with applying for a general grant of service territory with the expectation of future, as yet unidentified customers being connected according to the requirements of all the codes of conduct including the performance of an economic evaluation in the manner I've described. 243 MS. GODBY: Mr. Southam, you've been talking about bringing competition into this sector. How do you feel about others competing with you, with your clients? 244 MR. SOUTHAM: My clients have made the assessment that if they are asking for a distribution licence amendment that would cause them to be in competition with another distributors that they recognize that to ensure fairness across the system, that at some point in the future they could also face competition within their existing service territories, that that was only fair and non-discriminatory treatment by the Board. But their assessment is that that risk is one that is worth taking and have accordingly decided to proceed with these applications. 245 MS. GODBY: Would you like to see it restricted, the competition? 246 MR. SOUTHAM: In a different world, my clients no doubt actually would prefer a position of shoulder-to-shoulder utilities; however, they are of a view that they are under sufficient pressure from customers and shareholders at the present time that they need to proceed with licence amendment applications that are consistent with the current legislative environment and in the absence of a new act or new set of regulations, they have decided to proceed with the applications in a manner which is consistent with the current regulations. 247 MS. GODBY: Mr. Chair, just to let you know that we've finished pretty much with outlining Mr. Southam's own proposal. We'd like now to address some of the concerns raised by the other parties in this proceeding and how the proposal meets those. I don't know if you felt that this was an appropriate time for a break or if you wished for us to continue. 248 MR. SOMMERVILLE: How long do you think this segment is going to take? 249 MS. GODBY: I would suggest probably about another hour. 250 MR. SOMMERVILLE: In which case, I guess we'll take our break now. We'll reconvene at five minutes after 11:00. Thank you. 251 --- Recess taken at 10:44 a.m. 252 --- On resuming at 11:11 a.m. 253 MR. SOMMERVILLE: Thank you. Please be seated. 254 Ms. Godby, I think it may be appropriate just to outline to some degree the Board's expectations with respect to the -- this evidentiary portion. 255 Typically where a report has been filed, the Board considers that the report speaks for itself and that it isn't necessary to get into necessarily -- the Board, this is not by way of criticism or to inhibit you in any fashion, but typically we find that the report speaks for itself, and the purpose of examination-in-chief is to explore divergences or updates to that report. 256 And with respect to the concept of the witness's response to other proposals, typically we rely upon cross-examination to give the witness the opportunity to respond to the suggestion of counsel with points of view that are adverse. That's typically our process. 257 As I said, I'm not trying to inhibit you, but our timetable will very quickly become obsolete if we don't try to adhere to that to some extent. Again, I'm not trying to limit the presentation of your case, keeping in mind, too, of course, that all the parties will have an opportunity following this portion to make oral argument respecting their client's points of view. 258 With that gentle observation, please. 259 MS. GODBY: You're very kind, Mr. Chair. We noted the Board's concern and we're very happy to abbreviate this portion. 260 And with that, I would just like Mr. Southam, because we do think it would be quite helpful for him to -- to highlight some of the more salient or important or -- points that have been raised. 261 And with that, I'm going to ask, Mr. Southam, how does your proposal purport to address the issue of cherry-picking? 262 MR. SOUTHAM: Cherry-picking or cream-skimming is an issue with which we have a great deal of concern; however, the presentation of that issue in this proceeding, in my view, has been on a theoretical basis and it has not addressed practical considerations on the ground. It's been untested with respect to practical examples. 263 So while we have a great deal of concern about that issue, we feel that the manner in which it's been presented is -- is limited with respect to the practical considerations involved. 264 MS. GODBY: Mr. Southam, isn't it possible, however, under your proposal, that a utility would be able to carve out boundaries just surrounding low-cost customers? 265 MR. SOUTHAM: Well, we feel that that would -- that what we have proposed -- there are aspects of our proposal which mitigate the potential for that, and in addition to that, that wouldn't happen on a practical basis. 266 First of all, we have noted that any licensed distributor in the areas for which we have applied would have an obligation to serve, so that would -- that would be all customers, not customers that they might think are better customers or worse customers for whatever reason. 267 In addition to that, we've said that our view is that a customer or that -- the unrecovered capital costs of distribution facilities that have been constructed for the benefit of a switching customer have to be paid by switching customers, that there is no escape from those costs in our proposal. So that the residual customers of the utility would not be trapped from the standpoint of having to pay the unrecovered capital costs of exiting customers. So those are two items that we've made in our proposal. 268 With respect to the carving out of a high -- a low-cost area, that is, in my view, a theoretical construct that has no practical application today. If we understood what were low-cost customers and what were high-cost customers, we would not have a need to conduct a cost-of-service process over the -- which is -- in fact, has not been approved yet by the Board, is still in design, and is going to take several years to complete. 269 So if it were easy for people to walk up and down the street and say, Oh, this is a high-cost customer and this is a low-cost customer, there would not be a need for that cost-of-service study or cost-of-service effort now. And in fact, it's, in my view, impossible to tell what constitutes a high-cost or low-cost customer. 270 MS. GODBY: In your view, Mr. Southam, isn't it possible, though, for a distributor, let's say, to pouch along the border there by receiving the benefit of the revenue stream but without having to bear the fixed costs? 271 MR. SOUTHAM: Well, the answer -- in our proposal, the answer to that is no, that the unrecovered capital cost of assets that are -- that were built for the benefit of exiting customers, those costs have to travel with the exiting customers so that there would -- there is -- in our proposal, there is no ability, would be no ability for those customers to escape those costs and thereby avoid the fixed costs associated with servicing that customer. 272 MS. GODBY: Are high- and low-cost customers the same from the perspective of the incumbent and the applicant? 273 MR. SOUTHAM: Well, the presentation that's been made with respect to low-cost customers, in my view, is from a standpoint of the incumbent distributor, that we do not know whether -- we've seen no evidence with respect to a potential applicant distributor who would want to cherry-pick a customer or to cream-skim a customer. We do not know what the cost structure of that utility would be, whether it could meet the servicing requirements of the Board, and whether it can do so profitably at a rate which is competitive with the existing incumbent utility which serves thousands of customers. So -- in many cases, thousands of customers. 274 So we would have to see evidence of the cost structure, of profitability, rate level, and service levels of any potential applicant distributor, which is actually what we are requiring or suggested ought to be required by the Board in its application process before we can make any judgment -- before anybody can make any judgment on whether or not that distributor is going to be successful or not in cream-skimming a customer. 275 MS. GODBY: You mentioned earlier that a cost-of-service study is going to help identify the low-cost customers. Does that play into this argument with respect to cherry-picking at all? 276 MR. SOUTHAM: Well, to the -- the notion of the cost-of-service study is to identify what are high-cost customers and what are low-cost customers and to design rates that track costs. So to the extent that a low-cost customer is providing a cross-subsidy to another -- to another customer or group of customers, it is not clear to me that that ought not be something that could be addressed through -- through a process of competition just as easily as it could be through a process of cost of service. 277 MS. GODBY: Mr. Southam, if we could just move to some system planning issues. Wouldn't embedding, as you've proposed, impact the load forecasting for the incumbent? 278 MR. SOUTHAM: In fact, because embedding of distribution points is a widespread feature of the system in the province of Ontario today, there is constant conversation that goes on between host utilities and embedded distributors with respect to load forecast. 279 The notion that we're going to open a can of worms by allowing further embedding is something which ignores realities on the ground today, that embedded utilities, in my view, are constantly -- in more or less constant contact with host utilities with respect to load forecasts and servicing requirements. 280 This idea that we're somehow going to fragment the distribution system by allowing further embedding, in my view, is -- it may well apply to some jurisdictions in North America or elsewhere, but it certainly is not a description of the situation on the ground in Ontario today. 281 MS. GODBY: What about planning for capital investments? 282 MR. SOUTHAM: Well, again, the current regulations with respect to the Distribution System Code do not allow for suboptimal investments by utilities and distribution infrastructure, that investments that are required are required to be topped up by customers whose cost of service is in excess of the net present value of the revenue stream. 283 So there isn't really any provision for suboptimal investment today, and in our proposal that customers would not be able to switch and not bear the cost of capital investments that have been made on their behalf or at least the unrecovered portion of those. 284 MS. GODBY: How do you see the basic tasks of the utility being affected? 285 MR. SOUTHAM: Well, again, the position has been advanced that some of the basic tasks with respect to storm recovery and communications between utilities would be severely disrupted if we allowed overlapping licences or licence amendments of the sort proposed. In fact, we're all aware of situations where the utilities today, embedded utilities and host utilities, work together on storm repair issues. The ice storm in 1998 is one that everyone likes to talk to, and that, in fact, the communication between utilities, embedded utilities and host utilities is a feature, widespread, of the system in Ontario today. So, again, this notion that we're going to open up a can of worms with respect to some of these issues in my view, is not one that is sustained by the evidence on the ground. 286 MS. GODBY: Wouldn't such a competitive regime, though, Mr. Southam, lead to less cooperation between utilities? 287 MR. SOUTHAM: It's my view that there is a well-established pattern with respect to that in the province now and the fact that under our proposal incumbent utilities would be held whole as a result of customer switching ought not, in our view, to cause any friction or lead to friction between incumbent utilities and applicant utilities. 288 MS. GODBY: And if you could just sum up, please, Mr. Southam, your overall assessment of the proposal. 289 MR. SOUTHAM: We feel that, in our submission, the legislation advocates for the introduction of competition where possible. We recognize that there are significant concerns of some of the parties to this proceeding, some of those concerns are well-founded in our view, and we have sought, in advance, actually, to identify some of those, to respond and account for some of those and to also point out where some of those concerns fall down with respect to practical considerations. 290 In closing, I would say that we've made a lawful, practical and responsible proposal with respect to the general principles that ought to be adopted by the Board, in our submission, with respect to the granting of licence service area amendments. 291 MS. GODBY: Thank you, Mr. Chair. 292 MR. SOMMERVILLE: Ms. Godby. 293 At the beginning, I outlined a proposed conceptual order for examination. Have the parties worked out an order among themselves? 294 Mr. O'Leary. 295 MR. O'LEARY: Mr. Chair, I don't want to be presumptuous and speak on behalf of any of the other parties here, but just looking at my colleagues in front of me, I believe that following your order as to how we're going to proceed, I'm probably first on the list. 296 MR. SOMMERVILLE: Thank you, Mr. O'Leary. 297 MR. O'LEARY: I'm generally in agreement with Mr. Southam's comments. 298 CROSS-EXAMINATION BY MR. O'LEARY: 299 MR. O'LEARY: Mr. Southam, as you may know my name is Dennis O'Leary and I act for Wirebury Connections Inc., and if I can just generally remind you, perhaps, of what Wirebury's business model is. It's that of an embedded distributor and its business model involves competing for new customers, greenfield developments and what we've referred to as under-served customers which might consist of -- an example that simply comes to mind is a high-rise that's presently on a bulk meter that needs to be retrofitted and each of the units or suites provided with individual metering. 300 I'm wondering, sir, if I could turn to your supplemental prefiled evidence and your schema which is attached there. I just wanted to ask a question or two about how it would apply from Wirebury's perspective. 301 In your table you have a scenario A and B. Would you agree with me, first of all, that scenario B refers to those situations where no customer preference has been expressed? 302 MR. SOUTHAM: I would. 303 MR. O'LEARY: All right. So in Wirebury Connections Inc.'s case, where our business model and what we advocate is that we would be putting forward evidence of a customer connection, in fact, scenario B wouldn't apply? 304 MR. SOUTHAM: That's correct. 305 MR. O'LEARY: All right. And if we look at scenario A, if I understand this correctly, what your principals are advocating is that customer preference as expressed by a customer, and Wirebury suggests it's through a connection agreement, that that should be weighted to a factor of 70 percent, and then at the bottom of the page, if I understand this correctly, you would also weight the impact on existing customers or the incumbent distributor to the extent of 30 percent? 306 MR. SOUTHAM: That's correct. 307 MR. O'LEARY: All right. And let me offer a scenario where Wirebury is entering into a connection agreement with a subdivision developer and that developer is in a greenfield situation, so there is no distribution plant already laid in that subdivision but there is a nearby distribution line with the host distributor, and that host distributor has adequate upstream capacity such that the forecast load of that subdivision will be met by the host distributor and ultimately by the plant that needs to be constructed in the subdivision. 308 In such situations, would you agree with me that it's not likely that there would be any stranding of assets on the part of the host distributor? 309 MR. SOUTHAM: Well, what I would be looking for is an indication from the host distributor about what their expectations were around the construction of the initial distribution line. If they had constructed that, say, before November 1st, 2000, with the expectation of significant customer revenues off of that line following customer connections that they would normally be making and to the extent that a distribution wheeling rate were less than the rates that would normally be charged for full distribution service, it would seem to me that that distributor would in that case -- could, in that case, I should say, be disadvantaged. And in that case there ought to be a charge, in my view, for stranded assets if those conditions held. 310 MR. O'LEARY: Right. And I understand those conditions, one of them was -- you talked about the inadequacy of a wheeling rate, but assuming that would be dealt with in the confines of a Board proceeding that will look into the adequacy of wheeling rates, looking strictly at the issue of the assets of the upstream host distributor, it has the capacity to supply the subdivision, it has obviously planned to supply it, and now it will be supplying that, although it will not be the distributor within that greenfield. Would you agree with me that there is no stranding of assets in that situation? 311 MR. SOUTHAM: In that situation, the stranding from the standpoint of the use of the assets, I would agree with you. 312 MR. O'LEARY: All right. In which case, then, we would be looking at the customer preference as, in fact, constituting a 100 percent of the factor that would determine whether or not the service-area amendment should proceed? 313 MR. SOUTHAM: Well, I would not agree with that assertion. 314 The use of the asset is one issue. The expectation of the incumbent distributor with respect to the revenue and value that they achieved as a result of building that facility in the first place and when it was achieved and -- or when it was built, I should say, because there is an issue there under the Distribution System Code, may well result in harm to the rest of the utility's ratepayers and in that case, the Board ought to ensure that no harm comes to those people. 315 MR. O'LEARY: Fair enough. And you've indicated that you believe that subject to the additional rules that might be required with respect to stranded assets that the Distribution System Code already contains many of the methodologies that are needed. 316 MR. SOUTHAM: I agree. 317 MR. O'LEARY: May I ask you to also consider another scenario where, in fact, the proposed embedded distributor, for example, a Wirebury, is making a service offering to a prospective new customer, a subdivision, which would involve the installation of interval meters which, as you probably know, sir, are more costly than the standard meters that are utilized by LDCs today. 318 Is it conceivable, sir, that in those circumstances, customers may very well evaluate the various competing services of a host distributor or competing distributors that are looking to provide distribution services to that new customer and it may very well look at rates and it may very well look at the service offerings of other competing distributors such as interval meters and decide to prefer or indicate a preference for and enter into a connection agreement with that distributor that provides what the customer perceives as a higher level of service? 319 MR. SOUTHAM: And then I'm presuming from your comments that the -- that that service offering could be more expensive to the customer than a -- than an offering from an incumbent? 320 MR. O'LEARY: Yes. That was my next question. 321 MR. SOUTHAM: Well, if the -- if that's the customer's preference to do that, in our view, the customer ought to have that option. But always mindful that, in our view, the Board ought not to get between that customer and his decision to be served by one distributor or another. 322 But again, the system -- we always have to be mindful of the costs that have been incurred by the incumbent distributor and not to burden residual customers of the incumbent distributor with costs. 323 MR. O'LEARY: Thank you. 324 If I could just take you further down this scenario. Is it fair to say that the reason why customer preference is so important and should be looked at as being the prominent factor in a service-area amendment application is because, for example, in the instance of interval meters, in fact, a customer that is equipped with interval meters may have the opportunity, both presently and to a greater extent in the future, to use that interval meter to conserve energy, to use his or her appliances at appropriate off-peak times of the day. 325 And in fact, even though the rates may be slightly higher to that new distributor than the host distributor, the customer will, in fact, realize an overall net benefit as a result of the interval meter? Is that a reasonable assumption? 326 MR. SOUTHAM: Yes. 327 MR. O'LEARY: And thus that you'd agree that that's one of the reasons why we shouldn't be second-guessing customer preference? 328 MR. SOUTHAM: I would agree with that. 329 MR. O'LEARY: Mr. Southam, one of the -- perhaps the only issue that has been raised by the parties that are opposed to the competition -- sorry, I'm going back and forth trying to look through one, let you see one another -- is the issue of by increasing competition of the distribution sector, there is a fear that it will result in an increase in the cost of capital to incumbent utilities. 330 And I'm wondering, first of all, do you agree with that as being a potential risk? 331 MR. SOUTHAM: I agree it's a potential risk. 332 MR. O'LEARY: All right. And if so, can I ask you, why would you still advocate increasing competition in the distribution sector if it imposes such a risk on existing and future utilities? 333 MR. SOUTHAM: Well, my view on that subject would be that we have to assess the level of risk, that if switching customers or customers making choice are required by the rules to pay their share of the system cost, that is going to add to the cost burden of customers proposing to make a choice and may, in fact, lead to a situation where customers choose not to make a switching decision and may, in fact, choose to stay on balance and, on further consideration of the costs involved, stay with an incumbent distributor. 334 So, in fact, the notion, in my view, that there's going to be a widespread dislocation of revenue of utilities as a result of what is being proposed here is a bit of an overstatement. 335 In addition to that, I would also point out that the most heavily capital-intensive and highest fixed-cost portion of the industry, which is generation, there's general agreement, I think, that generation needs to be subject to competition. 336 If the highest fixed-cost and highest most capital-intensive aspects of the industry ought to be subject to competition, and distribution is a much smaller portion of the total overall investment, I don't -- it doesn't follow for me that distribution should be in any different situation than generation. 337 MR. O'LEARY: Thank you. 338 Mr. Chair, those are Wirebury's questions. 339 Thank you, Mr. Southam. 340 MR. SOMMERVILLE: Thank you, Mr. O'Leary. 341 MS. LEA: I'm just checking with Mr. McLeod, whose client also has similar interests, that they have no questions at this time? 342 MR. SOMMERVILLE: I'm reluctant to make any characterizations. 343 MS. LEA: Yes, that's right. 344 MR. SOMMERVILLE: So I'm really dependent on counsel and representatives to sort this batting order out. Or I can simply go through a list. 345 But I think it really is much to be preferred if we can organize it according to the distance from the point of view being expressed by the witness. 346 Mr. McLeod, were you expressing an interest in proceeding? 347 MR. McLEOD: One moment, Mr. Chair. I'm just reviewing one matter here. 348 MS. YOUNG: Newmarket Hydro has one question. 349 CROSS-EXAMINATION BY MS. YOUNG: 350 MS. YOUNG: You mentioned that you were supporting shoulder-to-shoulder municipal boundaries. Do you have objections beyond municipal boundaries, say, for a Wirebury situation or an LDC? 351 MR. SOUTHAM: I personally don't have objection to that, but the situation that -- with respect to my clients that I'm representing, their desire is essentially to be able to expand to boundaries within their municipal boundaries. 352 MS. YOUNG: Okay. Thank you. 353 MR. McLEOD: Mr. Chair, I do have a question. 354 MR. SOMMERVILLE: Mr. McLeod. 355 CROSS-EXAMINATION BY MR. McLEOD: 356 MR. McLEOD: Mr. Southam, you mentioned earlier on in your evidence that you preferred the concept of the shoulder-to-shoulder type of arrangement for the LDCs. Could I just get you to explain what you feel are the advantages for the industry, the electricity distribution industry, by having shoulder-to-shoulder LDCs in comparison to the existing structure we have in the province today? 357 MR. SOUTHAM: I think I was actually communicating a preference on behalf of my clients. 358 My view is that the system that we have in Ontario at the moment is entirely workable and can continue to do so indefinitely. 359 MR. McLEOD: Okay. So it was just reflecting your clients' particular view? 360 MR. SOUTHAM: What their preference would be, but they -- but their preference would be to have a shoulder-to-shoulder arrangement and have an exclusive right of service. But they recognize that they don't have that in law, so they've proceeded on this basis. 361 MR. McLEOD: All right. Thank you, sir. 362 MR. SOMMERVILLE: Ms. Lott? 363 MS. LOTT: Well, I would perceive our position as somewhat distant from -- 364 MR. SOMMERVILLE: I think we're getting a little bit -- is there anyone else who really regards themselves as being in support of the position being expressed by the witness who would like to cross-examine now? 365 Ms. Lott? 366 MS. LOTT: Thank you, Mr. Chairman. 367 CROSS-EXAMINATION BY MS. LOTT: 368 MS. LOTT: My name is Sue Lott. I'm counsel to the Vulnerable Energy Consumers' Coalition. We represent the interests of low- and fixed-income residential ratepayers. 369 I wanted to just start with a couple of questions that just arose from your direct examination this morning, just a couple of clarifications. 370 You indicated that municipally owned utilities should be allowed to expand in their service areas to the municipal boundary, subject to addressing the issues in your schema; is that correct? 371 MR. SOUTHAM: The issue of which? I'm sorry. 372 MS. LOTT: That the municipally owned utilities should be allowed to expand in their service areas to the municipal boundary. 373 MR. SOUTHAM: Yes. 374 MS. LOTT: Okay. I just wanted to confirm that. And that's subject to all the issues you've raised in your schema as well? 375 MR. SOUTHAM: Yes. 376 MS. LOTT: Now, you indicated that the applicant utility would be required to make an undertaking not to strand assets in a service-area amendment application; is that correct? 377 MR. SOUTHAM: That's correct. 378 MS. LOTT: Do you accept that there are likely to be differences of opinion, particularly when there's no specific customer at issue here, as to when the issues are -- the assets are stranded and how to value them? 379 MR. SOUTHAM: I'm sorry. Could you repeat that. 380 MS. LOTT: Would you accept that there are likely to be differences of opinion, particularly where there's no specific customer at issue here, as to when assets, in fact, are stranded and how to value those assets? 381 MR. SOUTHAM: In theory, I suppose, but I can't think of a practical application of that. 382 MS. LOTT: Okay. 383 MR. SOUTHAM: To my knowledge. 384 MS. LOTT: If that were the case, would this be likely to require future adjudication by the Ontario Energy Board? 385 MR. SOUTHAM: It may. 386 MS. LOTT: Okay. I wanted to start with the Southwest applicants supplemental evidence, I would like you to turn to page 8, lines 20 to 23. 387 MR. SOUTHAM: Yes. 388 MS. LOTT: Okay. And there you indicate that the -- I'm just reading off from it: 389 "The Board ought to give serious consideration to granting a service-area amendment where it can be demonstrated that such a grant will result in lower consumer costs than if the amendment had not been granted." 390 I just wanted to make sure that I understand what it is that you are referring to here. When you talk about lower consumer costs, are you talking just about the contestable consumers in that targeted amendment area or are you also talking about consumers in the existing incumbent and the applicant utility's service areas? 391 MR. SOUTHAM: In the first instance we're talking about the consumers in the target amendment area, but we're also, under our proposal, conscious to ensure that the residual customers of the incumbent utility are not harmed by the licence amendment. 392 MS. LOTT: Okay. 393 MR. SOUTHAM: And we've provided a definition of what we consider constitutes harm in that case. 394 MS. LOTT: So then just to clarify again, is it your view that the service area amendments should not result in higher consumer costs for those consumers in the balance -- 395 MR. SOUTHAM: They should not result in unduly -- sorry, I beg your pardon. 396 MS. LOTT: Should not involve higher consumer costs for those consumers in those other areas in the incumbent and applicants service areas? 397 MR. SOUTHAM: Well, what we feel on that is that there should not be unduly higher costs, that there is very possibly a situation where, as a result of cost of service which is a sort of a regulatory process or as a result of process of competition, that you could be in a situation where you would move away from average rates, so to that extent, some customers could have higher costs. But those, I'm presuming, and my thinking on this would be that those consumers would have higher costs because of the fact that they're high-cost customers, the theoretical high-cost customers. 398 The issue of -- and that's sort of, in my view, a generally accepted rate-making principle that rates should track costs. 399 The issue that I'm concerned about is undue burdening of residual customers that if, as a result of the decision to switch, a customer leaves asset costs that were incurred by incumbent utility on behalf of that switching customer, then nobody else should have a higher cost because of that, those costs should go with the departing customer. 400 MS. LOTT: Right. 401 MR. SOUTHAM: And be borne by them. 402 MS. LOTT: Thank you. Staying on page 8 of your supplemental evidence, I wanted to move down to lines 25 to 28 -- 403 MR. SOUTHAM: Yes. 404 MS. LOTT: -- where you make reference to the rate analysis contained in the perspective applications of the Southwest applicants and that these analyses demonstrate that consumers would be better off with respect to prices if the service area amendments were granted as requested. 405 I noted that in each of the three applications, the EnWin, the Essex and Erie Thames, they contain a rate comparison analysis that contrasts utilities' bills with those of the incumbent Hydro One. 406 MR. SOUTHAM: Yes. 407 MS. LOTT: Am I correct about recalling that? 408 MR. SOUTHAM: Yes. 409 MS. LOTT: And your proposed evaluation schema on page 5 of your supplemental evidence which we've already been making reference to, I notice that this proposes to give that element a considerable amount of weight, which I think is about 20 percent in your schema; is that correct? 410 MR. SOUTHAM: Yes. 411 MS. LOTT: But I also noted that on page 9 of your own evidence, and I'm looking at lines 1 to 3, you acknowledge that there are circumstances where an economic evaluation is required and that customer may also be required to make the capital contribution. 412 MR. SOUTHAM: Yes, absolutely. 413 MS. LOTT: Is it fair to state that in circumstances where a capital contribution is required, a comparison of current rates isn't an appropriate way to demonstrate whether the consumer costs will be lower for customers who are contemplating switching and using existing rates would understate the cost to customers? 414 MR. SOUTHAM: As a general theoretical proposition, yes. 415 MS. LOTT: And in those circumstances where an economic evaluation is undertaken and no capital contribution is required from the customer, would you confirm that -- is this because the revenue from the new customer based on current rates exceeds the incremental costs of serving that customer; is that correct? 416 MR. SOUTHAM: Yes. 417 MS. LOTT: Now, in such circumstances, isn't it fair to conclude that if everything else is equal, that the rates for the distributor will go down over time if that new customer is connected because the costs to serve that new customer are lower than the average costs to serve the existing customers. Would that be a fair assumption? 418 MR. SOUTHAM: It would be a fair assumption that the net present value of the revenue stream would exceed the capital contribution. I've no basis of concluding on that questioning that the rates of the utility would necessarily go down. 419 MS. LOTT: Over time, not necessarily? 420 MR. SOUTHAM: No, I'd have to -- there would be several other factors that would play into that, I would think, that I can certainly envision, that could cause no overall reduction in rates. 421 MS. LOTT: Okay. But let's assume that they did go down over time, would it be fair to conclude that using existing rates will then overstate the cost to customers of being served by a particular distributor? 422 MR. SOUTHAM: In those examples where the net present value of the revenue stream exceeds the cost of connection, but as I would point out, no one can make any statement with respect to a generalized situation facing any utility in Ontario today with respect to whether or not average rates will recover a cost of connections, that there are a variety of circumstances with respect to connection types that, in some cases, can be higher and some cases can be lower, and some cases can be at the sort of marginal revenue level. 423 So I don't think that there's a general conclusion that one can make with respect to that. 424 MS. LOTT: Okay. Thank you. I just wanted to take you to your response to a VECC interrogatory, and that for purposes of looking it up is at I9.11.9. Have you got that in front of you? 425 MR. SOUTHAM: Yes. 426 MS. LOTT: If we look in the questions and the responses there, I believe that you agreed here that one of the considerations for service area amendments should be whether existing customers are protected and held harmless from a rate perspective? 427 MR. SOUTHAM: Yes. 428 MS. LOTT: Am I correct that you had answered yes to that? 429 MR. SOUTHAM: Yes. 430 MS. LOTT: And in 9B, you also agreed that understanding what "held harmless" meant, that existing customers rates would be no higher than they would be without the amendment; am I correct that you -- 431 MR. SOUTHAM: Yes. 432 MS. LOTT: -- responded "yes" to that? 433 I think you also agreed in response to 9C of that question that this is the objective of economic evaluation of system expansions as required under the Distribution Systems Code. 434 MR. SOUTHAM: Yes. 435 MS. LOTT: Is that correct? 436 I think you've also indicated this, but would you agree that the same principles used in the DSC for looking at the impact of adding a customer would apply when a utility is also losing a customer through a distribution service-area amendment application? 437 MR. SOUTHAM: Yes, I think in general. 438 Would I be allowed a comment? 439 MS. LOTT: Sure. 440 MR. SOUTHAM: What I think that -- I think it's important to understand is that there could well be rate impacts, utility rate impacts that do not result from loss or gain of a customer, that there could be a cost-of-service study done, for example, and there could be a better definition of customer classes such that rates -- redefinition of customer classes is an example that would cause certain customer classes to pay more than they're paying now and other classes to pay less. 441 But I think what we're -- what I had interpreted as the purpose of the interrogatory was with respect to undue harm caused to residual customers of the utility as a result of a switching decision, and that would -- what I think I mean by that is that the unrecovered capital cost of facilities that had been constructed for the purpose of serving an exiting customer ought not to be borne by the other customers. 442 I think that's -- there are other reasons why rates could change, and just because a customer is lost or gained, the issue for me is more one of undue harm. 443 MS. LOTT: As opposed to any harm, is what you're saying. 444 You are familiar, I guess, with the economic evaluation methodology that's set out in the distribution system -- 445 MR. SOUTHAM: Yes. 446 MS. LOTT: -- okay. 447 Now, it's my understanding that the basic principle is that the revenues expected to be received from a new customer should cover the incremental cost of serving that customer, and a capital contribution is required if they do not; is that correct? 448 MR. SOUTHAM: Yes. 449 MS. LOTT: Are you aware that the economic evaluation methodology that's laid out in the DSC allows for the inclusion of incremental operating and maintenance expenses in the calculation? 450 MR. SOUTHAM: Yes. 451 MS. LOTT: And I gather that you haven't included that in your definition of "stranded cost"? 452 MR. SOUTHAM: No. What we had suggested was that the appropriate measure ought to be unrecovered capital cost as capital -- the capital investments that utilities make are the -- are, I would say, generally speaking, the lion's share of their -- their fixed the costs, represent their fixed cost. 453 However, if there is a feeling that there is a need to -- I mean, some parties will argue for a broader definition of that, I understand that. 454 MS. LOTT: Mr. Southam, as I understand it, you assisted EnWin, Erie Thames, and Essex in their preparation of their application for these service area amendments; is that correct? 455 MR. SOUTHAM: My firm did, yes. 456 MS. LOTT: Did you assist them in preparing their interrogatory responses for this proceeding? 457 MR. SOUTHAM: Yes. 458 MS. LOTT: And do you provide consulting services to any of these utilities on other matters? 459 MR. SOUTHAM: Yes. 460 MS. LOTT: What specifically could you say that you do? 461 MR. SOUTHAM: We have -- for each of those utilities, we have completed distribution rate applications. We have provided -- not me specifically, but other members of our firm have provided such services as regulatory accounting support. We have prepared some revenue forecasts for those utilities. We assisted those utilities with their -- a couple of them with their original mergers that created those utilities and some other things that, well, just escape me at the moment. 462 MS. LOTT: Okay. 463 MR. SOUTHAM: We have a long-standing relationship with those utilities. 464 MS. LOTT: And would it be fair to conclude that you are quite familiar with the operations of these utilities and their cost structures as well? 465 MR. SOUTHAM: We would be familiar with the cost structure of those utilities from the standpoint of the aggregate numbers, but we have no involvement on it, sort of, a day-to-day basis with respect to really what the daily operations are. 466 So in preparation of a rate application, for example, we would -- we would have followed the methodologies laid down in the Distribution Rate Handbook without having done any forensic degree of evaluation of -- of their cost structure. 467 We don't -- those are not typically things that we get involved in. 468 MS. LOTT: Now, I notice that your curriculum vitae doesn't make any reference to assignments related to system planning or economic evaluation. 469 MR. SOUTHAM: I beg your pardon? 470 MS. LOTT: I notice that your CV doesn't make any reference to system planning or economic evaluation of system plans. 471 Have you assisted any of these utilities in their system planning? 472 MR. SOUTHAM: No. That is not the field of expertise of our firm. 473 MS. LOTT: In your view, have the client utilities that you worked for been aggressively trying to manage their costs over the last number of years? 474 MR. SOUTHAM: The -- those -- my clients are under pressure from the shareholders for continuously improving financial results. So I -- I'm not really in a position where I can comment on their cost reduction activities. I don't have that level of knowledge. 475 I can say generically that their -- that their -- the boards of directors and shareholders are -- have -- are seeking better -- improve and -- improving, continuously improving financial performance from them. 476 MS. LOTT: Okay. I just wanted to take you back to your own prefiled evidence on page 8, once again, lines 25 to 26. 477 It's there where you're making reference to the fact that each of the Southwest applicants provided a rate analysis as part of their service-area amendment filing. 478 MR. SOUTHAM: Yes. 479 MS. LOTT: And having looked at that rate analysis which was filed in October 2002 under the appendices to that, I've noted that there was a difference in the bills charged to EnWin and to Erie Thames customers for the same level of use and -- 480 MR. SOUTHAM: I beg your pardon? For the same level of? 481 MS. LOTT: Of usage. 482 MR. SOUTHAM: Okay. 483 MS. LOTT: And that the bills to the EnWin customers were 5 to 10 percent higher. 484 Would you accept this subject to just confirming that estimation that I put there? 485 MR. SOUTHAM: Yes. 486 MS. LOTT: In your view, does this indicate that EnWin operates a less efficient utility than Erie Thames? 487 MR. SOUTHAM: No. What it indicates to me is that the original rate-making methodology of the Distribution Rate Handbook took, as the starting position, the 1999 operating costs of the utilities. I mean, beyond that, I'm not in a position to make a judgment with respect to the level of efficiency of those utilities. I don't have that level of knowledge. 488 MS. LOTT: With that proviso, though, in your view, would you view it as being reasonable to assume that EnWin could introduce cost-savings and efficiency measures that would allow it to reduce its rates to the same level as Erie Thames? 489 MR. SOUTHAM: Perhaps. I don't have -- I don't have direct knowledge to confirm that. 490 MS. LOTT: Okay. Back to your evidence again, page 6, I wanted to take to you lines 20 to 22 of that. 491 MR. SOUTHAM: Yes. 492 MS. LOTT: Would you agree that there you're making a -- basically making a case for competition in the distribution of electricity and that a key corollary of this is customer choice? 493 MR. SOUTHAM: Yes. 494 MS. LOTT: And on page 9, if you just flip to the next page -- sorry, page 9, lines 6 to 8. I'll just take you there quickly. 495 MR. SOUTHAM: Yes. 496 MS. LOTT: You also note that where capital contributions are required, it should be customer choice based on competing cost analyses that decides the data. You would agree with that? 497 MR. SOUTHAM: Yes. 498 MS. LOTT: Would you also agree with me that for customers to make a choice, that they must know what those choices are? 499 MR. SOUTHAM: Yes. 500 MS. LOTT: And under your model of the overlapping service areas, how can we be assured that the customer will actually know what his or her choices are? 501 MR. SOUTHAM: In a case where a customer had asked for a -- an offer to connect, as an example, from each utility, the -- it would be the -- I believe it is the responsibility today, it is certainly my understanding of my responsibilities, that I'm required to provide them with an analysis which shows not only their cost in terms of rates, but also to show them what the results of the economic evaluation would be with respect to the capital costs and whether a capital contribution was required. 502 That, to me, as I understand it, is the responsibility of a utility which is seeking to -- or is making an offer of connection to a customer. It would seem to me that that responsibility would reside with both utilities and that the customer would have before him or her the rate analysis which would show them their costs at their estimated level of consumption along with any capital contribution that would be required. 503 It also seems to me that there could also be -- well, would also be an alternative in terms of whether a new facility needed to be built where the customer would -- and this gets really sort of into how the system in Ontario allows for the avoidance of duplication of assets today, that there could be a calculation which showed what the cost of a new facility would be along with the stranded costs of an existing facility versus an alternative where there was an embedding situation. Those alternatives ought all to be provided in my view. 504 MS. LOTT: I guess I'm asking really a more basic question than that, really a step before that, which would really simply be: Is it the responsibility of the customer to inform him/herself that there are distributors out there licensed to serve him, that there are other alternatives? Is that the responsibility of the customer or is it the distributor? 505 MR. SOUTHAM: In a situation -- you're talking about a situation where there were two licensed distributors serving a -- I would see nothing wrong with the distributor advising a customer of the service to be provided or the customer seeking out that information themselves. I can't conceive of that as a responsibility issue in the sense of informing a customer that we can also provide the service along with the incumbent. 506 MS. LOTT: Sorry, I'm just not hearing you correctly. You are saying you don't conceive of it as a responsibility of the distributor? 507 MR. SOUTHAM: What I consider the responsibility of the distributor to be is to lay out all the costs that a customer would reasonably be expected to bear in an offer to connect. Whether that customer went into the marketplace and determined the existence of the second distributor for themselves or whether the distributor made some indication through some kind of advertising that they were available to make a connection, I would see no harm. 508 MS. LOTT: But you're not suggesting that that would be any obligation of the distributor to inform the customer of the options out there? 509 MR. SOUTHAM: No, I wouldn't. Some distributors will choose to do that, others may not. 510 MS. LOTT: Do you think it should be the responsibility of the Board or the industry overall to inform customers about options? 511 MR. SOUTHAM: I could see that it could be a responsibility of any of those, either the distributor themselves, the association or the Board. I have no view on that, really. 512 MS. LOTT: If there were costs involved in this kind of an exercise, who would you view should bear those costs? 513 MR. SOUTHAM: Such as advertising costs? 514 MS. LOTT: Whatever it would take to inform customers. 515 MR. SOUTHAM: Advertising costs are not, in my view, things that ought to be included in the revenue requirement of the utility; ought to be borne by the shareholder. 516 MS. LOTT: If the OEB were to adopt your model for competition and distribution service and grant the overlapping service areas, would you agree that it's reasonable to assume that the LDCs will position themselves so that they can better compete for contestable customers? 517 MR. SOUTHAM: Yes. 518 MS. LOTT: And would you agree that one of the key factors in the ability to compete for these new customers is the proximity of an LDC's distribution network to those customers in question? 519 MR. SOUTHAM: In some situations I would, in other situations, the proximity of the distribution system generally that the applicant distributor could embed a distribution system within is also a factor. So I don't think it's a universal statement one way or the other. 520 MS. LOTT: Is it likely that these kinds of considerations could influence the way an LDC expands its distribution network in the future? 521 MR. SOUTHAM: Yes. 522 MS. LOTT: Would you agree that in a competitive market it's the shareholders of a company that enjoy the benefits of the success and the costs of a failure and that it's this kind of discipline that provides the benefits that we see to competition? 523 MR. SOUTHAM: Yes. 524 MS. LOTT: Would you also agree that it's fair to say that firms before deciding to enter into a competitive market usually take some form of business analysis to assess the potential market in terms of the costs or the customers or their own costs to serve? 525 MR. SOUTHAM: In general, sophisticated firms would, yes. 526 MS. LOTT: And the reason, of course, is that if they decide to enter the market and fail then it's their firm that's going to bear the cost of those failures? 527 MR. SOUTHAM: Yes. 528 MS. LOTT: Is it reasonable to assume that the same principle applies to electric distribution utilities if competition is introduced in that market? 529 MR. SOUTHAM: Yes. 530 MS. LOTT: However, would you agree that the rates for electric distribution service are regulated and set by the OEB based on reasonable incurred costs as opposed to the market? 531 MR. SOUTHAM: Yes. 532 MS. LOTT: Is it practical to expect the OEB to be able to ensure that the risks associated with distribution utilities deciding to compete are borne by the shareholders and not the ratepayers? 533 MR. SOUTHAM: My view on that would be that the Board has the authority to make those judgements and I know generically that they have made those decisions in the past with respect to these types of matters. 534 MS. LOTT: I can see how -- would you agree with me that this would be difficult to do for the Board and it would require considerable regulatory effort even if it was a practical thing for the Board to do? 535 MR. SOUTHAM: It may. 536 MS. LOTT: And in order to manage this risk, both on the side of the shareholder and on the part of the ratepayer, would it be reasonable for the Board to expect the LDC to undertake a business analysis similar to that that we find in competitive markets? 537 MR. SOUTHAM: In principle, I don't see anything wrong with that. 538 MS. LOTT: And you would agree, as we indicated before, that without such an analysis, there is a risk of failure and a likelihood that customers or ratepayers could be impacted? 539 MR. SOUTHAM: In general and in theory I would say yes. 540 MS. LOTT: And if I could just pull up Essex's responses to the interrogatory, it's I.7.11.4 is what I'm referring to and it was the interrogatory of the Vulnerable Energy Consumers' Coalition. 541 MR. SOUTHAM: I beg your pardon, what was the number again? 542 MS. LOTT: It was I.7.11, and I'm looking there at 1.4 and 5. So it's Essex's responses to interrogatories by VECC. 543 MR. SOUTHAM: Yes, what were the numbers again. 544 MS. LOTT: Let's start with point 4, question 4. 545 MR. SOUTHAM: Yes. 546 MS. LOTT: And I'm interested here in your -- the question was: 547 "Has Essex undertaken any assessments of the costs associated with providing electrical services to the land scheduled for development in the expansion area?" 548 And your response to that was that: 549 "The applicant has undertaken no study with respect to the costs associated with providing electrical service to the subject lands." 550 MR. SOUTHAM: Yes. 551 MS. LOTT: And if we go back to the response to interrogatory number 1, that's on the first page there, where a question was asked about Essex commenting on the nature of Hydro One facilities in the subject area, in the expanded service area. 552 And the answer was: 553 "The applicant is not in a position to comment on the proximity or capability of Hydro One Networks' distribution facilities to meet the needs in the expanded service area." 554 Am I correct that that was your response to question B? 555 MR. SOUTHAM: Yes. 556 MS. LOTT: Okay. And just the last one, back to question 5 from VECC where it was asked whether or not Essex had any evidence to suggest information about Hydro One's response times and whether it would be able to provide higher service quality and service reliability to the specific customers in the exposed expansion area that would be higher than Hydro One's. 557 And I believe your response to those questions was that: 558 "The applicant is not in a position to comment on Hydro One's response times." 559 MR. SOUTHAM: That's correct. 560 MS. LOTT: In the first case. And then on the second question: 561 "The applicant's position is it will be able to meet or exceed the regulator's applicable service quality performance measures in servicing the subject lands." 562 And that was the -- your response to that question? 563 MR. SOUTHAM: Yes. 564 MS. LOTT: My question following from looking at that -- those questions and your responses are wouldn't you agree that, in a normal competitive market, a firm would have done these kinds of analyses asked for in the -- in the three questions? 565 MR. SOUTHAM: Well, it's -- it would certainly be true that in this case, Essex Power would have undertaken an assessment through trials which were conducted as described in the application with respect to their ability to move assets, servicing assets around the service territory. 566 I think the issue with respect to commenting on the position of their assets with respect to Hydro One's is that it -- there's no general case there that would -- that would need to be made with respect -- that need -- that is available with respect to any one piece of Hydro One's distribution system. 567 And I think what we've submitted with respect to the response times was that Essex Power could move human resources and servicing equipment to different parts of the proposed service region in the time lines suggested in the -- in the application and that those time lines were based on an actual trial, field trials that they ran. 568 But with respect to the location of any -- I mean, the -- I don't believe they've made an assessment about the location of -- or how -- how any system that they would own would look -- would relate or reposition in relation to any Hydro One systems, for example, simply because there would -- it would be a contingent type of consideration, depending on what -- who the customer was, what they wanted, and what was required and this sort of thing. 569 So the response time material is related to some trials that they were in with respect to moving servicing assets around the proposed service area. 570 MS. LOTT: Thank you. 571 Those are my questions, Mr. Chair. 572 MR. SOMMERVILLE: Ms. Lott. 573 Ms. Aldred? 574 MS. ALDRED: Thank you. I'll endeavour to make the 15-minute time limit. I might be a bit over. 575 MR. SOMMERVILLE: We won't be watching the clock that closely. 576 MS. ALDRED: Okay. Thank you. 577 CROSS-EXAMINATION BY MS. ALDRED: 578 MS. ALDRED: Mr. Southam, as part of your prefiled evidence, you produced a matrix of -- which you called the "Proposed Sample Evaluation Schema," which we've been discussing this morning at some length. 579 And I note that customer preference is weighted very heavily in your evaluation criteria. In fact, you weight customer preference at 70 percent. 580 Now, when you talk about customers, I presume you mean only the interests of customers in the proposed amendment areas and that you are not meaning to take into account the preferences of the customers of the incumbent LDC? 581 MR. SOUTHAM: I'm sorry. I don't quite understand what you mean. 582 MS. ALDRED: Do the preferences -- when you talk about customers, are you talking about the customers who want to switch distributors, or are you talking about the residual customers of the LDC, the incumbent LDC? 583 MR. SOUTHAM: A customer that is proposing to switch distributors. 584 MS. ALDRED: And in your matrix, you do not, then, other than when you talk about stranding, take into account the interests of customers of the incumbent LDC; is that correct? 585 MR. SOUTHAM: Yes. 586 MS. ALDRED: And if we turn again to page 8 of your prefiled evidence, you state at line 20 that: 587 "The Board ought to give serious consideration to granting a service-area amendment where it can be demonstrated that such a grant would result in lower consumer costs than if the amendment had not been granted." 588 MR. SOUTHAM: Yes. 589 MS. ALDRED: And one element of the consumer costs, I'd assume, would be the rates that consumers pay in the amendment area? 590 MR. SOUTHAM: Yes. 591 MS. ALDRED: And can I, therefore, take it that rates would play a large role in informing customer preference? 592 MR. SOUTHAM: Yes. 593 MS. ALDRED: Now, you act for three applicants who are Erie Thames, EnWin, and Essex, and I gather that the current rates of those LDCs are lower than Hydro One rates in the surrounding area, so you would be counting on current rates for your LDCs driving customer preference in favour of your clients? 594 MR. SOUTHAM: Yes. 595 MS. ALDRED: And I take it that you're familiar with the rate-setting process that was undertaken as a result of the Electricity Competition Act way back in 1999? 596 MR. SOUTHAM: Yes. 597 MS. ALDRED: And the process that was followed in unbundling the rates was set out in the Distribution Rate Handbook; is that correct? 598 MR. SOUTHAM: That's correct. 599 MS. ALDRED: And would you agree that essentially the Board undertook an exercise before market opening with all LDCs in the province in order to simply unbundle the rates; that is, separate the commodity costs from the distribution costs? 600 MR. SOUTHAM: Yes. 601 MS. ALDRED: And in undertaking that exercise, the Board did not require individual LDCs to come forward to the Board for a full cost-of-service review. 602 MR. SOUTHAM: Yes. 603 MS. ALDRED: Is that correct? 604 So that the rates approved by the Board at that time, in effect, constitute a snapshot of rates as they already existed at the point of market opening, and that would include all the historical variation that was already built into the rates? 605 MR. SOUTHAM: I would say so, yes. 606 MS. ALDRED: And would you agree with me that it's the case, as a result, that distribution rates vary across the province from LDC to LDC? 607 MR. SOUTHAM: Yes. 608 MS. ALDRED: And can you agree with me that in some cases, these rates will vary from LDC to LDC by quite a large extent? 609 MR. SOUTHAM: I'm not familiar with the order of magnitude of the variance at the current time. I had -- I accept generically that there can be variances in rates, but I don't know -- I don't know what you mean by significant variances or wide variances, and I really can't comment on the -- on the -- I'm familiar with the clients for whom we do -- somewhat familiar with the clients for whom we have prepared rates. But I can't -- I'm not -- I can't make any statement with respect to rates across the province. 610 MS. ALDRED: Would you agree that the Board will, at some point, have to revisit these rates that were set in 1999 and that LDCs will have to come forward to the Board with cost-of-service studies and over -- and to undergo a cost-of-service review in order to reset the rates? 611 MR. SOUTHAM: That is, as I understand, the current intention and direction of the Board. 612 MS. ALDRED: So that we can assume that the rates which are currently in place are likely to change? 613 MR. SOUTHAM: I -- I'm not certain that we can assume that. 614 MS. ALDRED: We can assume, then, it's quite possible, at any rate, that they would change, given the fact that the Board is going to have to review them in detail. 615 MR. SOUTHAM: I think there is a possibility that they could change, yes. 616 MS. ALDRED: And would you agree with me that at the time of unbundling the rates, the Board was not approving LDCs' rates in the contemplation that the rates would be gained in order to justify these amendment applications? 617 MR. SOUTHAM: As I recall, the Board had a standardized methodology that it applied to all local distribution companies with respect to rate-setting. I'm not familiar with any circumstance that would have caused anybody to say that the rates were designed in a vacuum and would have no economic impact. 618 MS. ALDRED: No, I'm not suggesting that to you. What I'm suggesting to you though is at the time of the unbundling exercise, the Board was not taking into account whether a few years down the road, local LDCs would be coming to the Board and asking for territorial amendments based on their rate level being lower than their neighbour's rate level. Is that fair? 619 MR. SOUTHAM: I don't know what the Board's deliberations were with respect to that and I can't answer the question. But I do know that in the legislative environment, there is no requirement for a cost-of-service study to be completed prior to the application for a licence amendment. 620 MS. ALDRED: Well, let's talk about that. 621 Your prefiled evidence testimony posits that in your view, rates should form an important element of the analysis each time there's a service-area amendment application. 622 That being the case, should the Board undertake a cost of service review each time to ensure that if it is going to rely on rates as a reason for allowing an amendment, that the rates had been is fully examined, analyzed and set? 623 MR. SOUTHAM: My understanding is that the rates that are approved by the Board are considered to be just and reasonable and that for purposes of these licence amendment applications, those are the rates that apply and ought to be the ones that are considered. 624 MS. ALDRED: Would you agree with me that in setting rates under section 78 of the Act, the Board has to determine whether rates are just and reasonable and in so doing, they have to determine what is in the public interest? 625 MR. SOUTHAM: Yes. 626 MS. ALDRED: And would you agree that in determining the public interest, the Board is not necessarily conducting an exercise designed to drive rates as low as possible, but that they have to examine other factors including equities among different parts of the province and the long-term viability of the utilities which they regulate? 627 MR. SOUTHAM: I would say that the Board has several objectives, including the ones you listed. It also has noted, as I've pointed out in the Distribution Rate Handbook, that there are consumer benefits of competition. 628 MS. ALDRED: As you know, one of the concerns expressed by Hydro One about your proposal is that service area amendments should not be granted where they would result in stranded or underutilized assets or in underutilized infrastructure investments. If I could just turn you to page 12 of your evidence which you filed in May, you state at line 22, page 12: 629 "Exhibit 1 recognizes the granting of service area amendments can only occur in the context of evidence that existing and remaining customers of an incumbent distributor or the incumbent distributor itself will not be burdened by unrecovered asset costs directly employed in serving customers that would switch to the applicant utility." 630 MR. SOUTHAM: Yes. 631 MS. ALDRED: In this paragraph, you concentrate only on costs which are directly employed in serving the customers who are switching; is that correct? 632 MR. SOUTHAM: Yes. 633 MS. ALDRED: And then again, over the page on page 13, you again state that your applicants favour a narrow definition of stranded assets, and at line 12 you state that you: 634 "... do not wish to consider investments in assets indirectly employed in serving the customer such as the billing system, servicing vehicles or headquarters building, which are really not fixed costs --" excuse me, I lost my place here -- "which are dependent upon the marginal loss or gain of a customer. This definition also does not include operation, maintenance or administration costs." 635 Is it fair to say that you feel that there are certain costs which you acknowledge should be included in the calculation when we talk about stranded costs and certain costs which you feel should not be included? 636 MR. SOUTHAM: Yes. 637 MS. ALDRED: Can you define for us, because you elaborated a little bit on this area of evidence this morning from what you had in your prefiled evidence, can you explain for us what you mean by "stranded"? 638 MR. SOUTHAM: Well, I would say that I would define "stranded costs" as those that remain unrecovered from a customer who switches distributors. 639 MS. ALDRED: Okay. 640 MR. SOUTHAM: So at some point, a utility has made a decision, based on its revenue forecasts, to make an investment in a piece of distribution infrastructure on the expectation that there will be a customer on the end of that system that will, over time, pay for the cost of that system. Should that customer, sometime ahead of the agreed -- and as I say, the other thing that would be true, as I understand it, is that certainly any incremental connections on a go-forward basis are supposed to be governed by agreements between customers and utilities with respect to the costs of these things. 641 It's certainly reasonable, in my opinion, for the incumbent utility to expect that customer to pay their fair share of those costs. 642 MS. ALDRED: What if the switching of the customer causes an asset of the incumbent to be underutilized? 643 MR. SOUTHAM: That would equally apply. 644 MS. ALDRED: That would equally apply. Do you calculate future revenues which the incumbent was counting on in putting the assets in place? Do they enter into your calculation? 645 MR. SOUTHAM: That would be reasonable inclusion in the calculation, yes. 646 MS. ALDRED: I just want to understand whether, in fact, you've changed your position here, because if I refer to page 9 of your evidence which you filed, your supplemental evidence which we've been looking at this morning, lines 1 to 8 you say: 647 "The Southwest applicants recognize that there will be circumstances under which the economic evaluation model requirements in appendix B of the Distribution System Code could yield a capital contribution requirement. There may also be situations where a customer who is contemplating switching distributors would be required to make a contribution to an incumbent distributor." 648 And then you go on to say: "In these cases the customer would be able to make a choice of distributors based on the cost analysis." 649 You seem, in this paragraph, to be relying on appendix B of the Distribution System Code as a method of determining what capital contribution has to be made. I think I heard you say this morning that you now believe that that appendix B of the Distribution System Code does not capture all the costs that would have to be calculated when you are deciding to what extent there has to be a contribution made to stop stranding; is that correct? 650 MR. SOUTHAM: That is correct. 651 MS. ALDRED: So you favour making amendments to appendix B of the Distribution System Code? 652 MR. SOUTHAM: That's correct. 653 MS. ALDRED: I believe you have included appendix B of the Distribution System Code in the tabbed handout that you gave out this morning. If I can just refer you to the tab, in your evidence you have it at tab 3 -- actually, you've got it at tab 3A. Can you just take a look at appendix B there and help us along here as to what specific changes you think should be made to the Distribution System Code in order to capture all of the costs which you think should be appropriately captured when a customer switches? 654 MR. SOUTHAM: I would modify the section called "Capital costs," to include stranded or unutilized assets. 655 Now, I would also -- that's fine. 656 MS. ALDRED: And again, could we just have a listing of what you would consider to be a stranded or underutilized asset? 657 MR. SOUTHAM: I beg your pardon? 658 MS. ALDRED: What types of assets could be stranded or underutilized? 659 MR. SOUTHAM: Distribution lines, transformers, fixed assets that have been -- fixed distribution assets. 660 MS. ALDRED: Where would these particular assets be located? Would you acknowledge that these assets could be located outside of the amendment area? 661 MR. SOUTHAM: Yes. 662 MS. ALDRED: Would you include billing systems? 663 MR. SOUTHAM: I think I had indicated in the prefiled evidence that billing systems would be excluded. 664 MS. ALDRED: What kind of assets would you include in that calculation for an area which has no customers yet? What would you consider to be stranded in that circumstance? 665 MR. SOUTHAM: You'd have to give me more information about the circumstance. 666 MS. ALDRED: This morning Mr. O'Leary was putting to you the notion of a greenfield where there are no lines yet. And by the way, it's Hydro One's position that there are no greenfields in the province, but we'll just get over that little hurdle. 667 An area of the province where someone is, perhaps, putting a subdivision, and there are no local distribution lines yet - although, probably it's been taken care of in the system planning by Hydro One - that type of area where there's no asset that you can identify in the subdivision yet. 668 I'm sorry, I'm arguing not asking questions. I apologize. 669 MR. SOMMERVILLE: One or the other. 670 MS. ALDRED: So here we have a little pocket of land where there are no distribution assets yet. 671 What would you consider to be available to go in the calculation of stranding? 672 MR. SOUTHAM: Next to Port Stanley, no doubt. 673 At any rate, well, what I would consider if there had been a distribution line that had built -- that was built alongside that piece of land in question on the expectation that there would have been future revenue from the servicing of that land by that distributor, that that -- that the -- that used -- the capacity -- that the portion of the capacity of that line to be used by the development times the revenue shortfall would be the -- would be a back-of-the-envelope estimate of what the stranded costs would be. 674 MS. ALDRED: I believe -- 675 MR. SOUTHAM: I appreciate the question, but that there may be some more detail that we would want -- that I would want to put around those things. 676 But basically that, as I understand it, utilities or companies generally would make investments on the expectation of a revenue stream and would perform some kind of net present value calculation or discounted cash flow calculation to show that over the course of a period of time that they would -- they would get a certain amount of revenue. 677 If, for some reason, that revenue didn't materialize, then -- and there had been -- and that line had been built prior to, say, for example, November 1st, 2000, when these sorts of things were supposed -- are now supposed to be governed by economic evaluations, that the utility ought to be able to recover those costs. 678 MS. ALDRED: You would only include assets that were put in place after? 679 MR. SOUTHAM: I think so, yeah. 680 MS. ALDRED: In direct this morning, you wanted to compensate only for undepreciated capital costs, is that correct, of an asset? 681 MR. SOUTHAM: Yes. 682 MS. ALDRED: Can't the asset, and isn't it often the case given the long planning horizons and long life of distribution assets, cannot the asset continue producing revenue even if it's depreciated on the books of the utility? 683 MR. SOUTHAM: Yes. 684 MS. ALDRED: And why would you not take that into account? 685 MR. SOUTHAM: That it were -- 686 MS. ALDRED: That it still has value and should be included in your stranding calculation? 687 MR. SOUTHAM: Well, simply because the utility has already recovered all of its investment, including its rate of return on that investment. 688 MS. ALDRED: Do you acknowledge that an asset can be -- have a useful life, a useful physical life that extends beyond its depreciation period? 689 MR. SOUTHAM: Yes. Although, I would submit that the -- the depreciation period is supposed to, by generally-accepted accounting principles, match approximately the useful life of the asset. 690 MS. ALDRED: But do you accept that that particular asset could, beyond the depreciation period, continue to produce revenue, which should be accounted for? 691 MR. SOUTHAM: That would -- that would give me more trouble because, as I said, the utility has already recovered all its costs with -- all of its capital costs with respect to that asset. 692 MS. ALDRED: What about re-enforcement costs? How do they figure into your calculations? 693 MR. SOUTHAM: Could you give me a little bit more detail. 694 MS. ALDRED: Costs that are incurred by a utility in order to reinforce and improve their lines? 695 MR. SOUTHAM: If that were -- if those costs were capitalized on a work order and in the normal work order system of the -- of utilities, I would say that those would be recoverable. However, if they were expensed, that would be different, in expenses, maintenance, that would be different. 696 MS. ALDRED: Your proposal for an amendment to appendix B of the Distribution System Code, I take it you would agree with me that that would require an amendment to the Distribution System Code; is that correct? 697 MR. SOUTHAM: That's correct. 698 MS. ALDRED: And is it possible, in your view, that there would be quite some discussion surrounding what appropriately goes in the formula and what doesn't go in the formula between -- between all the parties in this room or among the parties in this room? 699 MR. SOUTHAM: I'm sure that some would have a narrower definition than others. 700 MS. ALDRED: And so therefore it seems to me quite possible, I'm wondering if you agree, that the Board might have to convene yet another proceeding to talk about the calculation that one needs to make about stranding? 701 MR. SOUTHAM: Well, that could well be, but I think that would be a reasonable proceeding, reasonable development. 702 MS. ALDRED: And -- 703 MR. SOUTHAM: I certainly agree that you're -- that that issue is one that has some contention around it; however, the contention that may exist around that is not sufficient, in my view, to -- I mean, that's something that can be worked out. 704 MS. ALDRED: And would you not agree with me that in cases where, even after the code is amended according to the way you feel would be appropriate, there would be still cases where an incumbent LDC and the applicant for a licence amendment could not agree on the calculation and where they'd have to come forward to the Board and get them to adjudicate on it? 705 MR. SOUTHAM: That could happen, yes. 706 MS. ALDRED: Does that not just increase the administrative burden for the Board? 707 MR. SOUTHAM: I'm assuming that the Board would implement a process for delegating resolution of those disputes that would not require hearing time, that -- and the other thing that would be true would be that the incumbent distributor would be much more knowledgeable than an applicant distributor about what those costs would be and would certainly be in possession of the information required to make the determination. 708 MS. ALDRED: Well, that's an interesting point, because -- I mean, what you're actually suggesting is that the onus gets reversed. Your LDC would be an applicant and you're actually asking the incumbent, whose territory is about to be, perhaps, taken, you're reversing the onus and causing them to have to satisfy the Board that there is stranding. 709 Why do you think that's appropriate? 710 MR. SOUTHAM: Well, because the -- that -- I would suggest it not to make more of that than simply the fact that the incumbent utility has the information with respect to the value -- the unrecovered capital cost of its assets, and that the applicant utility in the normal course of business would have no knowledge of that. 711 MS. ALDRED: And that could also be satisfied just through a simple information exchange without changing the burden of proof, could it not? 712 MR. SOUTHAM: Yes. 713 MS. ALDRED: Mr. Chairman, I have a few more questions and I note that I'm over 12:30. I've maybe got another 5 or 10 minutes, if you -- 714 MR. SOMMERVILLE: Please carry on. 715 MS. ALDRED: Okay. Thank you. 716 If we can assume for a moment that the approach which you're suggesting could put upward pressure on the rates for any incumbent customers, should the preferences of these customers who are going to be paying higher rates count? 717 MR. SOUTHAM: You'd have to explain to me how upward pressure on residual customer rates would happen. I don't -- I can't -- 718 MS. ALDRED: Well, quite simply, if a distributor is left with fixed costs and a smaller group of customers over which to spread those costs, it's quite possible that rates will go up for the incumbent utility's customers. 719 MR. SOUTHAM: Well, I would submit that assets, that unrecovered capital cost of assets of switching customers ought to leave with the switching customer and that, in fact, as a result of that, the fixed costs of the incumbent utility would decline. 720 And as the -- fixed asset costs in terms of distribution systems are generally the major portion of the utility's fixed costs. It's difficult for me to see how the incumbent distributor is necessarily going to be worse off as a result of that. 721 MS. ALDRED: What about the loss of the revenue stream from assets which are depreciated and but still there? That may well raise rates for other customers. 722 Really what you want to do is just -- you just want to compensate, in my submission, for a very narrow list of items, and you're leaving out items which we feel drive costs. 723 MR. SOUTHAM: Well, that may well be your position, but it seems to me a fundamental problem that you would have a fully depreciated asset that you are continuing to earn revenue on as if that asset were not fully depreciated and that you were attempting to gain some recovery on. So I mean, in that particular case, that would be -- I mean, I don't know how widespread that would be, but that is in my view, an anomalous situation that ought not to confuse the fundamentals of what we're proposing. 724 MS. ALDRED: Can I just understand your proposition with regard to municipal boundary changes. You're proposing that it would be appropriate for LDCs to expand to the municipal boundary? 725 MR. SOUTHAM: Yes. 726 MS. ALDRED: If that municipal boundary were to change through an annexation or some type of legislation, what do you propose would happen to the service territory? 727 MR. SOUTHAM: I'm assuming that if the applicant LDC in the original case were continued to be owned by the municipality, that there would be some pressure similar to the ones that I've described earlier today to expand again. 728 MS. ALDRED: And would that entail another application to the OEB at that point? 729 MR. SOUTHAM: Yes. 730 MS. ALDRED: And we would be back here talking about stranding again; is that correct? 731 MR. SOUTHAM: Presumably we'll be able to resolve all the issues of stranding once and for all and not have to come back to talk about it in each and every case. 732 MS. ALDRED: I wanted to talk to you about the obligation to serve where you have overlap. As I understand it, what you're proposing is where there is overlap, both utilities have an obligation to connect a customer? 733 MR. SOUTHAM: That's correct. 734 MS. ALDRED: They both have an obligation to make a connection offer; is that correct? 735 MR. SOUTHAM: That is correct. 736 MS. ALDRED: What is the default position? Who is on first? Neither, or one, or the other? 737 MR. SOUTHAM: Well, I would say both. Whomever the customer chooses is the one responsible for connecting that customer. 738 MS. ALDRED: In terms of being able to plan for the distribution system in a particular area, would the position that you're taking be that both utilities have the obligation to connect cause uncertainty, and therefore, affect the ability to plan? 739 MR. SOUTHAM: I see the system planning issue as being essentially an extension of the situation we have today where we have embedded utilities. There is an onus on both the incumbent distributor and the -- or I should say the host distributor and the embedded distributor to share information and to act responsibly with respect to the capacity planning requirements of the system. That is the practical way the system works today, that both embedded utilities and host utilities are in a more or less sustained position of conversation to work together to resolve those issues, and so I would see that as being an extension of the situation today. 740 MS. ALDRED: But how does the utility know which utility is ultimately going to get the customer for purposes of planning? You wouldn't know, would you? 741 MR. SOUTHAM: Presumably at some point, the customer will make a choice and say I wish to be served by Hydro One in this case and at that point, there will then have to be a discussion, as there is today, on all similar types of connections, to say we need X amount of additional capacity on our system, how can you provide that? 742 MS. ALDRED: Are you not wrongly assuming that utility planning takes place on a contemporaneous basis and doesn't require lead times? 743 MR. SOUTHAM: Well, I'm not erroneously assuming that because that is, in fact, what happens, that all connections today, within -- well, I shouldn't say all connections, but all connections that require system expansion on the host distributor's system have to be discussed with the host distributor and that represents a lead time. This is no different, in my view, than what goes on in day-to-day life in Ontario today. 744 MS. ALDRED: What if it's not an embedded connection, though, aren't you talking about embeddeds right now? 745 MR. SOUTHAM: Well, as I mentioned earlier, my feeling is that most of these types of connections will be embedded connections simply because that is a far more cost-effective and efficient way of serving new customers as has been seen throughout the historical development of the system in Ontario than simply duplicating assets. However, if a customer wishes to simply have a dedicated asset -- and there are reasons why customers have duplicated assets. Some customers have, for example, a need for back-up power supply or there are other situations where we have distribution feeders today that run down both sides of a road, that normally speaking, if a customer chooses and is willing to pay for the cost of a duplicate facility, that is certainly not an uneconomic investment from the standpoint of the system and in that situation, presumably there would still have to be some requirement for conversation between the two utilities. 746 MS. ALDRED: There are utilities here though who plan to move out from their own borders and into a neighbouring utility. Which utility would be planning for that kind of growth in your scenario? 747 MR. SOUTHAM: Well, certainly, since Hydro One in one form or another serves all utilities in the Province of Ontario, whether through the high voltage transmission system or through embedded networks or, sorry, through host networks, Hydro One is going to be involved in system planning decisions. That's just the character of the system. 748 However, if we had, for example, an embedded distribution system, say, take the practical example of the Erie Thames application that we've made where there is a significant or potentially significant amount of load growth that would attach to the embedded distribution system of Erie Thames in Port Stanley. There may be a requirement for Erie Thames Powerlines to go to Hydro One and say, We're adding this much load to the system, can your supply feeder into Port Stanley handle that? If not, what is it going to cost us to upgrade that and could you please advise us so we could let the customer know how much it's going to cost them to reinforce your system. 749 I mean, this is not a can of worms. This is what happens today. 750 MS. ALDRED: Well, aren't you really suggesting that what should happen is that Hydro One should plan in such a way as to facilitate growth, whether it appears or not? 751 MR. SOUTHAM: Well, Hydro One, by virtue of Hydro One owning high voltage transmission system and being the principal host utility in the province, that is something that there is a responsibility for now. In my view, that's a practical responsibility, it's not a legal or theoretical one, and that what we have is a situation where the distributors in Ontario, the municipally-owned distributors have a requirement to speak to Hydro One about their system planning requirements. 752 MS. ALDRED: I wasn't talking about the transmission obligations, I was talking about the distribution planning function. 753 MR. SOUTHAM: Well, I don't make a distinction because either way, there is a requirement at the end of the day that all utilities, because Hydro One moves the power from the generation stations to the local utilities in one form or another, that Hydro One has to be informed of future load growth requirements and ought to be able to recover, in my view, the cost of system reinforcement from utilities who are asking for the reinforcement. 754 MS. ALDRED: But who builds the distribution going towards that area where people are building out to? 755 MR. SOUTHAM: Well, it would be dependent upon the situation. 756 MS. ALDRED: But do you acknowledge that you don't just plop it in at the last minute, it requires planning and lead time. 757 MR. SOUTHAM: Yes. 758 MS. ALDRED: I have got one more line of questions, and then I'm going to be done. 759 If you can just turn to the Ontario Energy Board Act. This morning you were talking about the Board's objectives, and you referred us to Section 1.1: 760 "The Board in carrying out its responsibilities under this or any other Act in relation to electricity shall be guided by the following objectives:" 761 And (1) is: "To facilitate competition in the generation and sale of electricity and to facilitate a smooth transition to competition." 762 If we examine Section 1(2), 1(4), 2(2), and 2(4), they all use the word "distribution." 763 MR. SOUTHAM: I'm sorry, could you give me those references again. 764 MS. ALDRED: Yes. Sure. 765 If you look at Section 1(2), you notice the word "distribution." If you look at -- 766 MR. SOUTHAM: Yes. 767 MS. ALDRED: -- 1(4), "distribution." 2(2) talks about "distribution" although it's gas, and 2(4) also uses "distribution." 768 MR. SOUTHAM: Yes. 769 MS. ALDRED: Section 1(1) does not use the word "distribution." 770 Do you still say that "sale" means "distribution" too? 771 MR. SOUTHAM: That's our position. 772 MS. ALDRED: So if "sale" includes "distribution," does it include "transmission" too? 773 MR. SOUTHAM: That would be -- yes. 774 MS. ALDRED: In subsection 1.4, is it your position that it could have said, Promote economic efficiency in the generation and sale of electricity? 775 It doesn't say that, does it? 776 MR. SOUTHAM: No, but I'm not also going to comment on potential wording of a section of the Act. That -- I mean, it -- 777 MS. ALDRED: You did this morning in your direct. 778 Thank you. Those are my questions. 779 MR. SOMMERVILLE: Did you complete your answer to that question, Mr. Southam? 780 MR. SOUTHAM: Well, just that -- just that I wouldn't want to comment on a proposed change to the wording of that particular section of the Act. 781 MR. SOMMERVILLE: Thank you. 782 We'll adjourn at this point. 783 Mr. Rodger, Mr. Lokan, and Ms. Lea remain for examination of the witness. 784 Is your witness panel, Ms. Aldred, prepared for this afternoon? 785 MS. ALDRED: Yes, they are. Yes. 786 MR. SOMMERVILLE: I would expect that we'll reach them at a decent hour this afternoon and -- 787 MS. ALDRED: Good. 788 MR. SOMMERVILLE: -- that you plan accordingly. 789 MS. ALDRED: Thank you. Yes. 790 MR. SOMMERVILLE: We'll adjourn until 2:15. 791 --- Luncheon recess taken at 12:55 p.m. 792 --- On resuming at 2:20 p.m. 793 MR. SOMMERVILLE: Thank you, please be seated. 794 Are there any preliminary matters that we need to deal with before we recommence? 795 Mr. Rodger. 796 MR. RODGER: Thank you, Mr. Chairman. 797 CROSS-EXAMINATION BY MR. RODGER: 798 MR. RODGER: Mr. Southam, as you're aware this proceeding is about establishing guiding principles for service area amendments, and you've been very clear this morning that -- and as was reflected in your evidence -- that for you, the most important factor in the Board's conscious of service area amendments is, wherever possible, introducing competition into the distribution sector. I take it that that is the essential guiding principle that you are putting forward to the Board as your evidence; is that correct? 799 MR. SOUTHAM: We believe in the introduction of competition but we believe that there are other factors which balance against that. 800 MR. RODGER: But does your evidence remain, if I look at page 6 of the supplemental prefiled evidence, line 19, reading: 801 "Overwhelmingly the most important factor in the Board's consideration of service area amendments is the introduction, wherever possible, of competition into the electricity distribution sector." 802 MR. SOUTHAM: Yes. 803 MR. RODGER: And in this regard, you're asking the Board, I take it, as an instructive example, to look at the telecommunications sector? 804 MR. SOUTHAM: Yes. 805 MR. RODGER: And just prior to the hearing commencing this morning, your counsel filed an interrogatory response to a question posed by VECC on this and I just wanted to explore a couple of themes in that answer. 806 Would you agree with me, Mr. Southam, that in the telecom sector, multiple suppliers of carriage services means things like the hard-wire service that Bell provides, the wireless service that Rogers, Fido and Telus provides, those are the kind of providers? 807 MR. SOUTHAM: I will accept that. 808 MR. RODGER: And would you agree with me if I don't like the Bell hard-wire service, then I can switch to wireless? 809 MR. SOUTHAM: Yes. 810 MR. RODGER: And if I don't like the wireless I can go back to the hard-wire Bell or to an Internet telephoning service? 811 MR. SOUTHAM: Yes. 812 MR. RODGER: And it's that ability to choose and to later change your choice, perhaps a different choice, that really is the hallmark feature of the competitive telecom market; would you agree with that? 813 MR. SOUTHAM: Yes. 814 MR. RODGER: Now, on page 6 of your supplemental filing, you also excerpt a quote from a CRTC decision, and this is again on page 6, line 30. Part of that quote from the CRTC decision, there's the statement that: "Effective competition requires the existence of multiple suppliers of carriage services." 815 I take it you still agree with that statement? 816 MR. SOUTHAM: Yes. 817 MR. RODGER: Now, when it comes to the electric distribution system and sector in Ontario, what's your evidence as to what is the technological equivalent for electricity distribution of the hard-wire, wireless service? Who are the multiple carriage providers in distribution in Ontario today? 818 MR. SOUTHAM: Well, as I understand it, there are not competitive suppliers of distribution services today, but we would see that in the context of these applications, that you would have multiple -- potential for more than one distributor serving a similar geographic area. 819 MR. RODGER: I guess the difficulty we're having, Mr. Southam, is what is your intention of what the Board is to take from the instructive telecom sector? 820 I'll give you a personal example. I have a hard-wired Bell line in my house, but I also use my cell phone from my house. What's the equivalent in distribution today for electricity? 821 MR. SOUTHAM: I don't think that we have claimed 100 percent equivalency with the telecom industry. What we have is a situation where we have, in part, a formerly regulated monopoly wires business which is in some ways similar to the electricity distribution business, and that model changed to be one that was more competitive. And so we're simply -- we recognize that there is significant technological differences between the telecom industry and the electricity distribution industry. 822 I would think that the framers of the legislation also recognize similar technological differences but, nevertheless, chose to write a legislative framework that was similar in principle, and I think all we're claiming is that that is an example, but that we offer no warranty with respect to near technological symmetry between these businesses. We recognize that there are significant differences. 823 MR. RODGER: So if you agree that there is fundamental technological differences between telecom and distribution, they certainly can't take anything of that to apply to the -- that would be in the form of a guiding principle for service area amendments. 824 MR. SOUTHAM: Well, we believe that the introduction of competition is consistent with the Ontario Energy Board Act and all we were attempting to do is draw to the Board's attention a parallel example from a different industry. That's the extent of the reference and we feel that the electricity distribution industry, certainly the legislative environment, has evolved in a similar fashion. Beyond that, we would agree that there are significant differences between the two industries. 825 MR. RODGER: Now, in my telecom example, and I mentioned that I can switch from a hard-wire to a wireless service, I take it that you're also saying that what is comparable is the ability of electricity customers to switch. 826 MR. SOUTHAM: There's certainly the ability to introduce overlapping distribution licences which allow customers to choose a distributor. It is in our view also a realistic possibility to allow existing customers of existing distributors to switch, but we recognize that there are rules that should be placed around that switching. 827 MR. RODGER: So I think that's an important qualification of -- and difference of your evidence and perhaps the other evidence we've seen by other parties is that basically in your model, all customers of a utility are contestable, whether they're new or whether they're existing. 828 MR. SOUTHAM: We feel that that is a non-discriminatory way to proceed. 829 MR. RODGER: So the answer is yes, all customers are contestable? 830 MR. SOUTHAM: Yes. 831 MR. RODGER: So that would also apply for, for example, just so I'm clear, to a major commercial office space in downtown Windsor, one of your client's host communities. 832 MR. SOUTHAM: Could be, yes. 833 MR. RODGER: So if a Wirebury-type entity came in, wanted to switch that building from bulk metering to individually suite metering, a contestable customer, then there's a carve out from your service territory? 834 MR. SOUTHAM: Yes. 835 MR. RODGER: And that's no concern of your clients as an LDC or to its municipal shareholder? 836 MR. SOUTHAM: My clients and I have had that specific discussion and they understand the risk and are prepared to accept that risk. 837 MR. RODGER: And in that example that I mentioned of the commercial office building in downtown Windsor, I gather that what you're proposing is that the building would become the customer of Wirebury and the building would, from a go-forward basis, pay simply a wheeling rate rather than the Windsor Hydro rates; is that correct? 838 MR. SOUTHAM: That's correct. 839 MR. RODGER: And should, down the line, another competitor come to that office building and say to those individual customers, you know, We have very cheap interval meters, and if you sign with us, we'll throw in a month's free cable TV, that customer would be free to switch again away from -- 840 MR. SOUTHAM: Assuming that the second -- assuming that all these distributors were licensed by the Board and could provide evidence that they were able to meet the minimum service quality thresholds and could, in fact, do so at a competitive price, that would cause a customer to switch and could, in fact, do so profitably such that they could sustain their operations over time. 841 And so yes, the answer to your question is yes, in theory. But I'm not in a position at this time as to say who those other distributors might be or what their cost structure would be or what the sustainability of their business model would be. 842 MR. RODGER: Yeah. I think the point is that under your view of the world, customers could switch as many times as they like, assuming there was another offer there. 843 MR. SOUTHAM: Yes. Yes. 844 MR. RODGER: Now, I take it that you would disagree with the position that once a customer made a choice, then that customer became uncontestable. In other words, when they -- when the customer made a choice, then we're back to the world of a regulated monopoly, and there was no further room or opportunity for switching. 845 You would disagree with that? 846 MR. SOUTHAM: Yes. In principle, yes. 847 MR. RODGER: Now, I wonder if you could also clarify, Mr. Southam. It was part of your direct testimony, and you seem to be making a distinction between your preference, I think your words were, in an ideal world, and your clients' preference about having shoulder-to-shoulder utilities, but I just didn't -- I wonder if you could just clarify that discussion for me. I wasn't sure where you were going there. 848 MR. SOUTHAM: Well, I believe the question from counsel was do my clients have a preference as to what would be an advisable end state to the business. And they have a view which is similar to that view held by several other of the parties to this proceeding. 849 However, that isn't the world we live in from a legislative point of view, in our opinion, and that -- that there is a different model that is one that is consistent with the -- both the legislation and the regulations that will allow my clients to achieve what they wish to do with their businesses, recognizing that there is an additional element of risk to it. 850 MR. RODGER: And why do you think your clients want that, like, they would prefer the concept of the shoulder-to-shoulder utilities? 851 MR. SOUTHAM: I think it is probably human nature that if you can run a business and not have to have a competitive environment, that that may well be a preferable circumstance. 852 MR. RODGER: Could part of the answer be that your clients have been actually in this business for several decades and it makes sense to them? The best way to run a system, to run a utility, is having shoulder-to-shoulder -- 853 MR. SOUTHAM: It's possible. 854 MR. RODGER: Now, in your prefiled exhibit on page 12, line 3, it reads: 855 "Economic efficiency is promoted when electric distribution service area corresponds to municipal planning areas, helping to provide an easier and more unified, standardized, timely and cost-effective municipal infrastructure servicing and response." 856 I take it this is your evidence as opposed to your clients'? 857 MR. SOUTHAM: Well, this -- this evidence is -- it would be my evidence and would reflect the position of the -- of my clients. 858 MR. RODGER: Now, I wonder if you could just explain how your notion of economic efficiency is achieved in what you propose. 859 For example, why is economic efficiency promoted when the electric distribution service area corresponds to a municipal planning area? 860 MR. SOUTHAM: Well, in the case of municipal economic development initiatives, customer convenience is a factor and -- in economic efficiency, that the location and construction of customer facilities involve several municipal services. 861 In the case of my clients, the municipalities consider electricity to be a fundamental service of significant importance, and they essentially want to be able to be in a position to have the potential business or new development locating in their -- within their municipal boundaries served from one source, and that is the response that they're getting from their -- from those who are considering locating in their communities. 862 MR. RODGER: But if the whole goal here, Mr. Southam, and then the guiding principle you're advancing before the Board is to introduce competition wherever possible, why are municipal boundaries relevant at all? Why not let the market deal with this? 863 MR. SOUTHAM: Well, what we're suggesting is a way to organize competition in a geographically rational area, but with -- and recognizing that there are several factors that are impinging upon the business requirements of our clients. 864 But they are certainly prepared to recognize that competition would be a feature of their new existence, as well as some of these other factors. 865 MR. RODGER: So I take it, then, that what this Board should take from that answer is that while you're saying competition is, perhaps, the most important factor, there are certainly many, many other factors that this Board has to take into account when it comes to service area amendments, that it's not as simple as competition only; is that fair? 866 MR. SOUTHAM: That is fair, yes. 867 MR. RODGER: Now, similarly in your applications, and in your overview this morning, you talked about your clients' need to expand the service areas because, in part, the subject lands being contiguous to your current service territory. 868 Why is the notion of the area you want to annex being contiguous, why is that relevant to the Board's consideration? 869 MR. SOUTHAM: Contiguity? 870 MR. RODGER: Yes. 871 MR. SOUTHAM: I think what I mentioned this morning was that my clients actually are composed of multiple discontiguous or non-contiguous embedded distribution systems as opposed to contiguous distribution systems and that we do not see that -- and that, in fact, that is a feature of the distribution system in Ontario. We do not see that there is a necessary requirement that new distribution systems be contiguous with existing embedded systems. 872 So I don't -- I don't think that contiguity was something that we had indicated would be -- was a requirement. 873 MR. RODGER: Would you agree that -- would you agree with me that contiguity is an important feature of efficient distribution system design or service? 874 MR. SOUTHAM: I would agree with you that it can be a feature of efficient distribution system; although, as I explained this morning, there are numerous examples around the province of Ontario of efficient -- what I certainly consider on the face of them efficient distribution systems that have multiple non-contiguous embedded distribution systems. 875 MR. RODGER: Over the course of -- 876 MR. SOUTHAM: I believe I used the example of Erie Thames Power, which is comprised -- Powerlines Limited, which is comprised of ten such systems spread over a -- well, vary in size from 200 or 300 customers up to several thousand spread over an 80-kilometre area. 877 MR. RODGER: Over the course of your career, which you described, Mr. Southam, have you yourself done any empirical work or research to compare the performance of contiguous and discontiguous utilities? 878 MR. SOUTHAM: No, I haven't. 879 MR. RODGER: Would you agree with me, Mr. Southam, that when this Board, at the end of the day, determines the guiding principles that it wants to establish for service area amendments, it needs to be able to evaluate the range of impacts that the guiding principles will have on the distribution sector in Ontario. 880 MR. SOUTHAM: Yes. 881 MR. RODGER: And as part of your work experience, you note in your CV that you've done valuations for about 50 utilities in Ontario; is that correct? 882 MR. SOUTHAM: That's correct. 883 MR. RODGER: Can you give us an overview of how you perform these valuations? 884 MR. SOUTHAM: They, for the most part, would follow a discounted cash flow analysis. We would take a view as to future revenue streams of the utility, we would take a view as to the future expense streams of the utility, as well as the capital expenditure streams, and we would project those forward and discount those back at the appropriate cost of capital to the current time. 885 MR. RODGER: So is it fair to say that there would be a direct link, then, between your expectation of future customers and therefore discounted cash flow associated with those customers, and the ultimate valuation of the utility? 886 MR. SOUTHAM: Absolutely. 887 MR. RODGER: And would you agree with me that if your approach and guiding principles are adopted and customers could be removed from utilities or else just not perform a part of a rate base of a particular utility, then that could have very significant impacts on valuations for utilities on a go-forward basis? 888 MR. SOUTHAM: Yes. 889 MR. RODGER: And similarly, when it comes to capital planning and system planning, you had a bit of a discussion with my friend from Hydro One prior to the break, but just so I'm clear, part of your current -- your current job description is you're the president of a local distribution company, West Perth, and just so I understand a real-life example of how you would approach this, let's say that within your franchise area, there is a proposal for a new subdivision, let's say a 200-home subdivision. 890 MR. SOUTHAM: Yes. 891 MR. RODGER: And the municipality advises you that you can expect it to be built over the next three to five years. As the president of West Perth Power, how does your capital planning requirements change if you're not sure whether three to five years down the road that new subdivision will be your customer or a Wirebury-type customer? 892 MR. SOUTHAM: Well, certainly as a utility manager, I understand that there is a possibility, I recognize that under section 70(6) of the Act that I do not have an exclusive right to serve or an expectation of exclusivity with respect to the service territory. I recognize that at some point in the future that there could be a situation that would arise where the -- where someone else could apply for distribution service territory covering my service territory. 893 So I would be very interested in ensuring that any capital investment that I made was subject to agreement with the developer as to what the requirements would be and I would certainly include any appropriate provisions protecting the capital of the company as part of the agreement to serve that customer. 894 In addition to that, part of the reason that I feel comfortable in advocating or taking the stance we have with respect to recovery of stranded assets is because it would seem to me that any utility that was making an investment of the sort being proposed would want to have some kind of guarantee to have some recovery of that should that customer choose to leave. 895 MR. RODGER: You said part of your approach would be to go to the developer and start discussions with him. Let's say I'm the developer and I say, I don't know, maybe I'm going to create my own utility in five years, what do you do? As the president of that local distributor, what is your recommendation to your board of directors in terms of how you plan for that eventuality of a possible new subdivision? 896 MR. SOUTHAM: Well, the issue is the customer is going to have to make a choice. If the customer expects me to invest capital into a distribution system on his behalf, there's going to have to be some commitment there. I certainly wouldn't carry to my board of directors a recommendation to invest capital expenditures on spec, if you like, with no agreement with that customer or no clear decision by that customer as to a commitment to be served by my utility. 897 MR. RODGER: So would it be fair to say, Mr. Southam, that part of the discussion here around customer choice is timing around customer choice; that is, the customer, in this case the subdivision, would have to make its choice at such an early point in the planning process to allow you to accommodate the development? In other words, the choice has to be made now, five years prior to the first home being built, rather than two weeks before the houses are being sold. 898 MR. SOUTHAM: Well, I mean any decision of that sort requires lead time and I have no difficulty and am in agreement with that. But I mean, I'm not really in a position to comment on five years -- it certainly wouldn't be two weeks, but I can't imagine the circumstance under which there would be a five-year lead time. 899 MR. RODGER: In the summary of the applications you gave this morning, you spoke about how the goal for you is an overlapping service territory, but it wasn't clear to me why the relief you seek isn't simply a carve-out of the Hydro One area to serve the potential new customers. 900 MR. SOUTHAM: As we understand section, I believe it is, 57 of the Act, that a distributor can't really operate a distribution system, is not permitted to own or operate a distribution system without a licence. Hydro One currently owns and operates a distribution system within the area in question and if there was a carve-out of the licence territory, as proposed, that would essentially mean a carve-out of part of the licence of Hydro One, in which case Hydro One would be in a legally non-compliant situation of owning and operating a distribution system without a licence. So that presumably would cause section 70(13) -- sorry, that would presumably, in order to bring them back into the compliance of the law, they would have to divest themselves of that distribution system. My understanding of section 70(13) of the Act is that that type of an order that was granted by the Board or provided by the Board cannot leave an incumbent distributor in that position. 901 So we see that since those assets are already there, that the only option we have is an overlapping service territory of the sort I've described. 902 MR. RODGER: And is the reason for that because to service those new customers, it would be utility's plan to actually tap into the Hydro One system as a retail point of supply as opposed to you building your own line out? 903 MR. SOUTHAM: Yes. 904 MR. RODGER: In the individual application materials, one of your references on page 11, this is of the EnWin application, it states: 905 "The approval of the application will minimize customer confusion regarding their electricity supplier as a result of the municipal boundary change due to take effect on January 1st, 2003." 906 I wonder if you could just explain that. What is the customer confusion currently? 907 MR. SOUTHAM: The confusion is that customers seeking electricity and service in the city of Windsor in the lands in question do not understand why they cannot be served by EnWin Powerlines Limited. 908 MR. RODGER: So it's not that they don't know who their distributor is, it's why they can't make the choice they want. 909 MR. SOUTHAM: Yes, that's correct. 910 MR. RODGER: If your guiding principles were adopted by the Board, and there was potentially multiple LDCs within your area, do you think that would add to the customer confusion if all of a sudden, rather than just Hydro One, there was potentially four or five local distribution companies? 911 MR. SOUTHAM: It could. 912 MR. RODGER: Do you think that's one of the factors that this Board should take into account in deciding this issue, not to contribute to customer confusion? 913 MR. SOUTHAM: Well, I mean, I'm -- I would -- I suggested by my previous answer that it may be a -- it may be a -- it may be a situation that could lead to greater customer confusion. It is, as I had mentioned, that the confusion on the part of customers is why they do not have a choice to be served by the locally owned utility. That is their -- that is the source of their confusion at the moment, and I don't -- so I'm not -- it's not clear to me with certainty that that is -- that additional customer confusion would result from that. It certainly could. 914 And the perspective that we hold is that the customers ought to be provided with the right to make a choice as we've proposed it. 915 MR. RODGER: Would you agree with me that avoiding customer confusion is something that this Board should take into account when deciding upon guiding principles for service area amendments? 916 MR. SOUTHAM: I would say that in the -- I would say no in the -- in that the -- in that the customers with whom my client, in this case, has had discussions have indicated that they wish that choice. 917 So I -- if there is some prospect down the line of additional customer confusion, I'm not sure that that would emerge, and I don't think at this time that that would be a factor that the Board ought to consider. 918 MR. RODGER: You don't think customer confusion is inconsistent with consumer protection? 919 MR. SOUTHAM: Not necessarily. 920 MR. RODGER: Just finally, Mr. Southam, if I can boil down your -- your testimony to one theme, it seems to me that it's -- that if as long as an incumbent LDC isn't hurt because a switching customer makes the LDC whole through a stranded cost charge, if that happens, the Board shouldn't be concerned, and the public interest is met; is that a fair summary? 921 MR. SOUTHAM: That the -- that would be a reasonable summary that the incumbent utility and its customers were not unduly harmed by that switching decision. 922 MR. RODGER: Would you also agree with me that part of this Board's mandate is a broader public interest consideration, and that is to make sure that the LDC sector as a whole is going to be better off, that that is also a consideration that this Board must take into account? 923 MR. SOUTHAM: From an economic efficiency point of view, I would say that the Board has a responsibility in that regard, yes. 924 MR. RODGER: Thank you, sir. 925 Thank you, Mr. Chairman. 926 MR. SOMMERVILLE: Thank you, Mr. Rodger. 927 Mr. Lokan? 928 MR. LOKAN: No questions. 929 MR. SOMMERVILLE: Thank you. 930 Ms. Lea? 931 MS. LEA: Thank you, sir. 932 CROSS-EXAMINATION BY MS. LEA: 933 MS. LEA: Mr. Southam, I have a few questions on several scattered topics. 934 Mr. Southam, have you had an opportunity to review the report of KEMA-Quantec submitted by Hydro One in this matter? 935 MR. SOUTHAM: Yes. 936 MS. LEA: Okay. I'm not sure you need to turn it up; although, perhaps someone can help you if you want to read it. 937 At page 8 of the KEMA-Quantec report, one of the difficulties which the authors of this report -- okay. 938 MR. SOUTHAM: Maybe I should get a copy of that. 939 MS. LEA: Yes. Certainly. 940 MR. SOUTHAM: Yes. 941 MS. LEA: Page 8 of the report. And at page 8, I'm looking at number 9 in that list. 942 MR. SOUTHAM: Yes. 943 MS. LEA: And one of the difficulties that the authors of this report cite as arising from overlapping service areas and multiple points of supply within a service area are that the transaction costs of undertaking basic tasks would increase. 944 Now, they're talking about several examples here, storm recovery, customer safety, worker safety. I was constraining on safety and customer service issues in thinking of this question. 945 If you had multiple points of supply and multiple distributors in a service area, is there going to be a safety consideration, either because the crews or the customers don't know who their distributor is or who to call? Is there a customer service issue? 946 How do you see that being taken care of under your scenario? 947 MR. SOUTHAM: Well, in fact, as I understand it, those issues are in existence today, that -- we have a situation of, in some cases, multiple distributors within a -- certainly within a municipal -- within a municipality. 948 We have situations today where more than one utility or several utilities in cooperation will respond to customer emergencies of the sort that have been enumerated. 949 All of the utilities are -- today are subject to safety laws and regulatory requirements in regards to safety, and certainly to the -- it is, to the best of my knowledge, the directive of every utility in the province to be compliant with those. 950 MS. LEA: Do you think that the provision of such services will become more confused or possibly less efficient with the introduction of competition over the same service area by multiple distributors? 951 MR. SOUTHAM: I would say that to the extent that there would be any increase in confusion or any decrease in efficiency, we already have these conditions on the field now or in the field now with multiple distributors within municipalities now. 952 MS. LEA: And so you don't -- you do not believe that there will be an increase in such confusion or difficulty if the Board accepts the basic concept of overlapping service areas as a general principle? 953 MR. SOUTHAM: I would say -- I would say that there would be the possibility that there could be some degradation in that regard but that that is not a -- opening a whole new area of difficulty, because many of those circumstances exist today. 954 MS. LEA: At page 10 of your evidence - and now, of course, I can't find the reference - you indicate that -- just a sec. You -- I think it's at page 10. In any event, it's in your testimony. 955 You indicate that all distributors necessarily have high- and low-cost customers; is that correct? 956 MR. SOUTHAM: Yes. What is the line reference? I'm sorry. 957 MS. LEA: Yeah. Well, I thought you'd ask me that. Just a second. 958 MR. SOUTHAM: Oh, yes. Okay. 959 MS. LEA: You've got it? 960 MR. SOUTHAM: One second here. 961 MS. ALDRED: Line 28. 962 MS. LEA: Thank you. 963 MR. SOUTHAM: Yes. 964 MS. LEA: Okay. How is that balance to be maintained if the Board grants overlapping service areas in a general way? 965 MR. SOUTHAM: Could you provide me a little bit more detail of what process -- 966 MS. LEA: It gets back to the issue of cream-skimming, sir. How does the Board ensure that a balance of high-cost and low-cost customers will be maintained within each utility? 967 MR. SOUTHAM: Well, there are actually a number of -- of items there. As I mentioned earlier that we feel that the -- any licensed distributors have an obligation to serve all customers. 968 MS. LEA: Okay. Before we go any further, you'll recall that the actual wording in the statute is the obligation to serve arises from two things. Certainly the request of the customer is one, and the other is that the customer lies along the line of the distributor. 969 Would you agree? 970 MR. SOUTHAM: That's what the legislation says, yes. 971 MS. LEA: Yes. All right. So go ahead, sir. 972 So where you have a customer who lies along the line and makes a request, there is an obligation to serve by the distributor along whose line the customer lies? 973 MR. SOUTHAM: Yes. 974 MS. LEA: Mm-hmm. 975 MR. SOUTHAM: Well, there is an obligation to serve, so what I would suggest is that is -- there is the ability in that situation for a utility to pick and choose between high- and low-cost customers. 976 In addition to that, that -- that customers that would switch would, as we've maintained, would not unduly harm the residual customers of the incumbent utility, because the cost -- unrecovered capital cost of serving those customers would have to go with those customers. 977 MS. LEA: I wanted to move back to the obligation to serve and the ramifications of that. 978 As I understand the legislation and the Board's codes, the obligation to serve arises from those two things that we've just mentioned, lying along the line and a request from the customer. The obligation to make an offer to connect a customer who does not lie along your line derives from the Distribution System Code. Is it possible that a utility who had identified that a certain customer that was requesting a connection and that customer did not lie along the line so there was no obligation to serve but an obligation to make an offer, that the utility could choose to make an offer which was not very attractive to a not very attractive customer? 979 MR. SOUTHAM: Well, again, that would be a hypothetical situation that I'd have to have some more details on in terms of what the practical application of that was, because as I understand it, there is a methodology, a financial methodology, an economic evaluation that needs to be followed. 980 MS. LEA: I guess what I'm getting at, then, sir, is the beginning of my question was how was the Board to ensure that the balance was maintained, and I'm trying to understand once overlap is granted, what might be the role of the Board in ensuring that the public interest in the balance here that we've talked about is maintained and cream skimming does not occur? 981 I agree with you that there is a methodology in the Distribution System Code that should ensure that a fair offer is made. Is the Board to be the agency that reviews those offers to ensure that the utility is making a fair offer? 982 MR. SOUTHAM: My assumption has always been with respect to the distribution licence that I have or that the utility that I happen to run has. 983 When we talk about lying along a distribution line, that to me means that I have an obligation to serve within that entire service territory. That would be the first point. 984 The second point is that as I understand it, the requirements are established by regulation of the Board and that there is an ability of third parties to complain to the Board in the event that a distributor is acting in an untoward fashion. So I think my assumption is that those provisions are in existence and that any distributor that is licensed in the Province of Ontario is subject to those requirements. 985 MS. LEA: So in the end, the Board would be the agency that might make sure that those rules were being followed, is I guess your -- 986 MR. SOUTHAM: Yes. 987 MS. LEA: Thank you. I wonder if we could have a look at your chart on page 5 of your evidence which sets out the schema by which you propose these applications are to be judged. 988 MR. SOUTHAM: Yes. 989 MS. LEA: Just to begin with a couple of questions on customer preference. Under scenario A where there is a customer who is expressing a preference, does the Board have any business in testing the reasonableness of that preference? For example, could the customer prefer to go with distributor A because his brother works at distributor A, even though distributor B is making him a lower cost offer? 990 MR. SOUTHAM: Well, I would assume that customers make their preferences on a rational basis and to meet their own needs, and if a customer is prepared to pay the full cost of that connection, I think that the customer ought to be allowed to make that connection. 991 MS. LEA: So it would be your position then, that the Board should not test the reasonableness of the customer's preference? 992 MR. SOUTHAM: That's correct. 993 MS. LEA: What information, getting to the question which is issue 5 in the Board's issues list about filing requirements, should there be an obligation on the utility that is making an application to the Board to demonstrate that they provided sufficient information to the customer to enable that customer to make a rational decision? 994 MR. SOUTHAM: As I see it, there would certainly be a requirement with respect to the kind of information that a distributor would need to provide to a customer to make an informed decision. That, to me, would be the standard as opposed to making a rational decision. 995 MS. LEA: Okay. For example, then, if there are, say, four distributors operating in an area, all overlapping service areas, would the applicant distributor for whom the customer has expressed a preference -- should that applicant distributor be required to inform the customer that there are three other distributors that he might want to consider? 996 MR. SOUTHAM: I certainly would not have a difficulty with that requirement. 997 MS. LEA: No, no, sir, thanks, I understand you wouldn't have a difficulty with that, but I'm asking you if you think it's a good idea that the Board make that a final requirement of these applications, that the applicant distributor demonstrate that the customer is aware of the choices he has? 998 MR. SOUTHAM: Yes. 999 MS. LEA: And should there be an obligation on the applicant distributor to notify the other distributors in the area, or perhaps, let's take the simpler case, an applicant and one incumbent distributor, should there be an obligation on the applicant distributor to demonstrate that someone has contacted the incumbent and let the incumbent know that someone is seeking connection? 1000 MR. SOUTHAM: That would be fine. Yes. 1001 MS. LEA: My last question on customer preference, and pardon me if this kind of reiterates something that you said before, I just wanted to get it clear. In my understanding of the weighting of this scheme, customer preference is pretty well always going to be determinative. If you give it 70 percent and you give impact on existing customers only 30, then you are going to decide on the basis of customer preference, but what you are going to do is try to make sure that the incumbent distributor or the losing distributor doesn't lose, doesn't lose money through stranding and so on; is that correct? 1002 MR. SOUTHAM: That's correct. 1003 MS. LEA: Turning then to scenario B, and I think you indicated that this was the scenario for at least two of the distributors that you represent and that is there is no customer yet that we can identify; is that correct? 1004 MR. SOUTHAM: There are customers within the application or the service-area amendment area, but there are not customers that cover the entire area. There are some customers who cover part of it but other customers who do not cover all of it. 1005 MS. LEA: For Essex and EnWin should the Board be using scenario A or B to evaluate their applications? 1006 MR. SOUTHAM: In that case, I feel that with the applications as they are constructed, the Board would use scenario B. 1007 MS. LEA: Okay. So let's just go through that then briefly. You've talked quite a bit about the opportunity to promote competition in distribution services, what about the second thing, the quantifiable current price advantage of the applicant distributor? You had a discussion with Ms. Aldred with rates. I had a question about the right-hand side of the chart. Total bill comparison demonstrates customer cost advantage, how would the Board assess this in the case where we don't yet know anything about the cost to connect the customers? Because we're talking a total bill comparison, I'm presuming that you are including in that not merely the customer rates that the customer will pay but the initial connection cost? 1008 MR. SOUTHAM: What I was referring to there, in fact, was a sample monthly utility bill analysis. We can't know, prior to a connection, whether or not or what the capital contribution is going to be, it's situationally dependent of necessity. 1009 What we do know is at various levels of consumption, what the total customer utility bill would be, and that is the evidence that we have at the moment. 1010 MS. LEA: Okay. 1011 MR. SOUTHAM: So certainly that part of the puzzle is available and what we have provided in terms of our total bill analysis is similar to the total bill analyses that are contained in the rate adjustment model, for example. 1012 MS. LEA: Okay. So is it your position that the Board can proceed to evaluate under scenario B in the absence of any evidence or any knowledge about the connection costs for customers, the capital cost to connect customers that they may have to contribute? 1013 MR. SOUTHAM: Yes. 1014 MS. LEA: Okay. Now, the next line is municipal planning considerations, which you've indicated will be a qualitative measure. I think you've indicated that municipal planning considerations do not form part of the objectives of the Board under the Act; is that correct? 1015 MR. SOUTHAM: That's correct. 1016 MS. LEA: And I understand that your argument for considering municipal planning objectives is that there is a benefit in efficiency in having all services, sewer and water and so on, provided or at least relatable to a single agency; is that correct? 1017 MR. SOUTHAM: Yes. 1018 MS. LEA: Do you have any evidence that a benefit actually accrues in these situations? We've heard that your clients believe it and that their shareholders, the municipalities believe it. Are you aware of any jurisdictions that have assessed the benefit or disbenefit that arises when you have coherence between municipal boundaries and utility boundaries and how that compares to the possible disbenefit of multiple distributors within the same area? 1019 MR. SOUTHAM: I don't have any evidence of that, except that we do have -- I don't have any scientific evidence in that respect, but in the individual site-specific hearings, we would be bringing forward customers who have expressed a desire to be served by the applicant utilities and are going to be more than willing to provide the reasons why and the benefits that they foresee as a result of being served by those -- by the applicant utilities. 1020 MS. LEA: And is that based on their idea of municipal boundaries and utility boundaries being consistent, or the better rates that they believe that they will get if they are served by the local LDC? 1021 MR. SOUTHAM: They -- if you'll take my word for it, subject to verification, there is a package of benefits that those customers see both in terms of responsiveness to requests for connection and customer rates. 1022 MS. LEA: Okay. What I'm trying to distinguish, sir, is the difference between measuring up two utilities and deciding which one you want, which is what you've described to me so far, and any evidence that you can bring to the Board that demonstrates that, as a general principle, making utility and municipal boundaries consistent actually brings a benefit at large. 1023 MR. SOUTHAM: I would have no -- no evidence beyond what we -- what we have produced to date in terms of rates, but I will produce with respect to customers and municipalities the views -- the views of those folks. 1024 MS. LEA: Okay. The last block, then, is the impact on existing customers and the incumbent distributor. 1025 How do we assess this in a case where -- such as that of EnWin and Essex where we -- well, how do we go about assessing any impact on stranding and so on in these cases? 1026 MR. SOUTHAM: Well, as we propose that the -- there may not be a specific situation identifiable today with respect to stranded assets but that the -- in the case where such a situation is not available to us or, I should say, is not evident to us that -- as part of a licence application, that the applicant would undertake not to strand any of the assets in a manner similar to the way they undertake to remain in compliant with other -- other regulations and the codes of conduct laid down by the Board. 1027 MS. LEA: Maybe I'm not making myself clear, or maybe I'm not just twigging into what you're saying. 1028 The Board now has to decide whether to grant the applications of, for example, Essex and EnWin, and one thing that you are suggesting the Board assess quantitatively, if possible, is the impact on the existing customers in the incumbent distributor. 1029 For the applications before us today, how does the Board do that for your client group? 1030 MR. SOUTHAM: Well, there is no ability at the moment to assess that quantitatively, just as there is no ability or requirement to assess quantitatively the grant of licences currently where there are -- where there could be future unidentified customers. 1031 That the -- that in practice, what we would see happening is the creation of a mixture of embedded distribution systems and also, perhaps, some line extensions into the service area on a least-cost basis for the customers and the utilities. 1032 But so the only thing that's available at the present time is an undertaking from the applicant utilities not to strand the assets of the incumbent distributor, and that as cases emerge with the connection of new customers that it would then be the responsibility of the applicant utility to conduct the economic evaluations, which are associated with new customer connections, and to seek out advice from the incumbent utility depending on what -- sorry, seek out advice with respect to underutilized or abandoned distribution facilities and the unrecovered capital cost of those systems. 1033 MS. LEA: Okay. And then if there was an argument about stranding at that time, it could be brought to the Board later. 1034 So that the Board should proceed now in the absence of that evidence, and difficulties with regard to stranding and quantification of those costs or losses will be brought to the Board later, would be your position? 1035 MR. SOUTHAM: Yes. 1036 MS. LEA: Thank you. 1037 One moment, please. 1038 Mr. Southam, I'm not sure if you know that the Board does have the ability to award costs of proceedings, and sometimes people seek costs in hearings before the Board? 1039 MR. SOUTHAM: Yes, I'm aware of that. 1040 MS. LEA: Okay. If there was an applicant distributor making an application for an amended service area, and it was necessary for the incumbent distributor to do various studies into the stranding of assets, for example, or providing detailed maps about its customers, existing lines, that kind of thing, who should pay the cost of their required intervention, if I can put it that way, in the matter? 1041 MR. SOUTHAM: I'm not sure I can give you a full answer on that, but I would certainly expect that any applicant utility would bear at least some of the cost of that. 1042 MS. LEA: What about the customer? Should it be -- 1043 MR. SOUTHAM: Well, as I -- as I would see it -- 1044 MS. LEA: Because, I mean, should the applicant utility and ratepayers or -- 1045 MR. SOUTHAM: As I would see it, that those -- that what would eventually flow through is that the -- the -- if there wasn't a specifically-identified customer, that any costs, including the capital, or including a cost associated with securing a licence would, in fact, be part of the capital cost of the connection. 1046 MS. LEA: Okay. And that would be passed on to -- 1047 MR. SOUTHAM: I mean, just as engineering studies and so on now are part of -- are considered capital -- parts of the capital cost of projects. 1048 MS. LEA: Okay. So that wherein a customer is identified, it would be passed on to the customer, and where no customer is identified, I think you've indicated to my friend Ms. Lott that this'll be a shareholder cost for the applicant utility. You're nodding -- 1049 MR. SOUTHAM: Yes. Well, it would certainly seem reasonable to me that if the shareholder is -- is moving to have those -- have the licence amendment put through, that if there are costs of that sort that cannot be directly related to a customer connection, that it would -- it certainly seems to me that those ought not to be included in cost of service to existing customers. 1050 MS. LEA: Okay. Thank you. 1051 And my last topic, sir, you've -- a number of times in your testimony, you've indicated that the situation in Ontario now involves complexities and cooperation to solve those complexities, such as points of supply and upstream load characteristics, that kind of thing; is that correct? 1052 MR. SOUTHAM: That's correct. 1053 MS. LEA: Okay. Do you think that a competitive environment would reduce the incentive for cooperation between embedded and host distributors, for example? 1054 MR. SOUTHAM: Well, my position on that had -- earlier was that -- that I don't feel that there would be an incentive for reduced cooperation, because there exists a requirement on both the part of embedded utilities and host utilities to share information, because one is dependent on the other for service. 1055 MS. LEA: Do you think -- 1056 MR. SOUTHAM: I don't see the introduction of competition in that respect as being one that -- a situation that would cause necessarily the reduction in cooperation between utilities. 1057 MS. LEA: Okay. So in your view, there's no need for any additional mechanism or oversight by the Board to ensure that a competitive environment cooperation would continue? 1058 MR. SOUTHAM: That would be my expectation. However, down the line, if it proved that that was not the case, then the licensees would obviously have recourse to the Board for relief if that is, in fact, what was required. And I think that would be generally true on any matter within the regulatory jurisdiction of the Board. 1059 MS. LEA: Thank you, sir. Those are my questions. 1060 Thank you, Mr. Chairman. 1061 MR. SOMMERVILLE: Ms. Spoel has a question. 1062 QUESTIONS FROM THE BOARD: 1063 MS. SPOEL: Mr. Southam, I just wanted to clarify one point. 1064 You were discussing the concept of the service areas in effect matching municipal boundaries and I'm wondering how you relate that to a case -- and I don't know how many municipalities there are that follow this model, but there are certainly some municipalities where through municipal amalgamation, in effect, got a municipality as a political entity which geographic area includes a number of urban or semi-urban areas and a large rural area, and I think in some cases at least the same local distribution company is serving -- or a major amalgamation of all the former public utility commissions or hydroelectric commissions, and is serving a number of discontiguous embedded points, none of which in fact, as a matter of law, I guess, follow the municipal boundaries because the municipal boundary is the entire area of the former county or region. 1065 How would you apply your municipal boundary model in that kind of case? As I understand, Hydro One Networks is generally serving the rural areas of those municipalities. 1066 MR. SOUTHAM: In fact, those are the very circumstances in which we are asking for the Board's approval that we had, in the case of Essex Power, for example, that represents four -- or is an amalgamation of four former hydroelectric commissions, each of which served an urban municipality which merged with a rural municipality. So what we are, in essence, asking for is the approval to service all of those rural areas within the municipalities that own that particular utility. 1067 So in the case of -- and among our applicants, the case of Essex Power is the one that you described. The utility that I happen to run is one where we had two former PUCs that were amalgamated into one during a municipal amalgamation with three rural municipalities and since then we have been incorporated. So in that case, we have two non-contiguous embedded distribution systems that we serve and those are within the boundaries of a rural municipality. 1068 But certainly in the case of Essex Power, that scenario that you have depicted is precisely what we're asking for. 1069 MS. SPOEL: And would your intention be, then, to have an overlapping service area with Hydro One in those cases so that you are able but won't necessarily be serving all the rural area as well as the urban areas? 1070 MR. SOUTHAM: Yes, that's exactly right. 1071 MS. SPOEL: Thank you, that's helpful. 1072 MR. SOMMERVILLE: Ms. Godby, any redirect. 1073 MS. GODBY: I will be very brief, Mr. Chair. 1074 RE-EXAMINATION BY MS. GODBY: 1075 MS. GODBY: Mr. Southam, some of our friends here today raised the theoretical possibility that there may be numerous LDCs serving the same geographical territory and that this would result in an increase in customer confusion and a corresponding degradation, if you will, in services and safety. 1076 Do you see from where you sit, that this as a practical reality? 1077 MR. SOUTHAM: Well, certainly the licence amendments that we have put in front of the Board involve capable utilities which have the necessary infrastructure in place now to be able to serve the areas for which they are seeking licence amendment. 1078 As we had said, certainly in our view, there is going to have to be some level of diligence and level of evidence in the applications that those utilities put in front of this Board with respect to their capabilities and their ability to service customers effectively. And then the other issue is that not only do utilities have to be capable, they have to be able to provide competitive rates and they have to be able to do so on a commercially-sustainable basis. So I feel that certainly with the applications that we have made and the utilities involved, along with the safeguards that we have indicated with respect to the capability of applicant utilities to service customers and along with the market requirements of customers, that you are going to have a system that is reasonably robust. 1079 MS. GODBY: Mr. Southam, you indicated in response to one of my friends' questions as well that a hearing may be necessary to determine the methodology for adding stranded costs as part of appendix B of the economic valuation model. Do you see a hearing as necessary? 1080 MR. SOUTHAM: Well, at some point, there will have to be some kind of proceeding by which the Board approves that amendment, but certainly there have been -- the history of the development of electricity regulation in the Bill 35 era has been one characterized by working groups and non-litigious methods of coming to grips with some of the issues involved, certainly in the initial stages of the development of those regulations. So it would seem to me that there is an opportunity on many of these issues to get interested parties together to see whether there is the ability to work through some of these issues on a working group basis prior to launching directly into a litigation. 1081 MS. GODBY: Thank you. Those are my questions. 1082 MR. SOMMERVILLE: Thank you, Ms. Godby. 1083 Thank you, Mr. Southam. 1084 We'll take ten minutes to allow for the changing of the panel and reconvene at 20 minutes to 4:00. Thank you. 1085 --- Recess taken at 3:30 p.m. 1086 --- On resuming at 3:45 p.m. 1087 MR. SOMMERVILLE: Thank you. Please be seated. 1088 Ms. Aldred? 1089 MS. ALDRED: Thank you very much, Mr. Chairman. 1090 The CVs of Dr. Chamberlin and Dr. Humphrey were previously filed at J8.10.33, but you have before you a more fulsome version which we thought would be good to have today, so there they are. 1091 MS. ALDRED: Dr. Humphrey and Dr. Chamberlin, could you please describe -- 1092 MS. SPOEL: I think they should be sworn before we start, or have they already -- 1093 MS. ALDRED: Yes, that would be a good idea. 1094 MS. LEA: I wonder, just for identification, too, if we could mark these CVs with a number called -- Dr. Humphrey's CV, E.1.2, and Dr. Chamberlin's CV, E.1.3. 1095 Thank you. 1096 EXHIBIT NO. E.1.2: CURRICULUM VITAE OF DR. JOHN CHAMBERLIN 1097 EXHIBIT NO. E.1.3: CURRICULUM VITAE OF DR. BRUCE HUMPHREY 1098 HYDRO ONE NETWORKS INC. - PANEL 1; CHAMBERLIN, HUMPHREY 1099 J.CHAMBERLIN; Sworn. 1100 B.HUMPHREY; Sworn. 1101 MR. SOMMERVILLE: Ms. Aldred? 1102 EXAMINATION BY MS. ALDRED AND MR. ENGELBERG: 1103 MS. ALDRED: Could you just describe briefly for the Board, in turn, your experience which would lead you to be here today. 1104 DR. CHAMBERLIN: Well, I'm John Chamberlin. I'm executive vice-president of Quantec, an economic and planning consulting firm, and there I'm responsible for our resource planning rates and cost of service and retail market assessment work for utilities throughout North America. 1105 I was previously executive vice-president of Bearcat & Chamberlin, which was, until we sold the company in 1997, one of the largest suppliers of consulting services to the utility industry in North America, where I worked primarily in the areas of economic and resource planning, rate design, energy efficiency program planning and design, corporate planning, supply planning, and related areas. 1106 I've also worked in the area of utility planning, rates, in cost of service for Xenergy, for the electric power research institute, and at one of the national labs in the United States. 1107 During that almost 30 years of experience, I've worked for almost every mid-size and larger utility in North America on matters related to planning rates and cost of service. I've testified as an expert witness approximately 100 times in 30 states and several provinces here in Canada, as well as half a dozen civil proceedings. 1108 During that time, I've written four books and had numerous papers, technical reports, and monographs on various planning and rates cost-of-service related topics published. 1109 I've given more than 100 invited speeches at industry meetings, conferences, and workshops. I've developed and taught dozens of workshops on planning and rate design topics for courses sponsored by EPRI, by EEI, by APPA, and other industry organizations. 1110 I've also personally been involved either as a consultant or as a direct active market participant in every U.S. market that's been opened for restructuring since the past seven years. 1111 Finally, I have a Ph.D. in economics from Washington State University. 1112 MS. ALDRED: Thank you. 1113 Dr. Humphrey? 1114 DR. HUMPHREY: I'm vice-president of KEMA Incorporated, which is a consulting company, an international consulting company. It focuses on energy or, essentially, electric power economics and engineering with the great bulk of our work in the electric power area. I have worked for a number of companies in the U.S. and in Canada with expertise in the economics of electric power, regulation, and policy. 1115 As chief economist at the Edison Electric Institute, I worked on all aspects of electric power restructuring, and while at Xenergy and KEMA, worked with a team that researched every state, every jurisdiction, including Canadian jurisdictions that restructured for competitive purposes. 1116 I have a Ph.D. in economics from Tufts University. 1117 MS. ALDRED: Thank you. 1118 Mr. Chairman, I would seek to have these gentlemen qualified as experts in the field of electricity power economics, policy regulation and planning. 1119 MR. SOMMERVILLE: Are there any submissions on that proposition? 1120 There being none, Ms. Aldred, I think we can accept the witnesses as experts. 1121 MS. ALDRED: Thank you, Mr. Chairman. 1122 Just a housekeeping matter. I don't believe that the KEMA-Quantec report, which has been previously filed, has an exhibit number. 1123 MS. LEA: Can I take that under advisement, Ms. Aldred. I can't -- I don't want to give it one of the E series today, and I've got to go back and have a look at where it would have fit in the C, in the other series. 1124 MS. ALDRED: That's just fine. 1125 MS. LEA: Thanks. 1126 MS. ALDRED: Dr. Humphrey and Dr. Chamberlin, do you adopt the evidence you've filed? 1127 DR. HUMPHREY: Yes. 1128 DR. CHAMBERLIN: Yes, I do. 1129 MS. ALDRED: And the answers to undertakings? 1130 DR. HUMPHREY: Yes. 1131 DR. CHAMBERLIN: Yes. 1132 MS. ALDRED: Your evidence seems to suggest that competition in a distribution function is not in society's interests; however, the Ontario Energy Board Act establishes that electric utilities franchise territories are non-exclusive. 1133 Why should the Board consider your evidence to be relevant? 1134 DR. CHAMBERLIN: Well, while it is true that the Act does establish that franchise territories are non-exclusive, it also gives the Board authority to effect transfers where they're in the "public interest," having regard to the objectives of the Board and the purposes of the Electricity Act. 1135 It seems to me the relevant considerations in the OEB Act and the Electricity Act are as follows, and there are three of them: 1136 First, to protect the interests of consumers with respect to prices and the reliability and quality of electricity service; secondly, to promote economic efficiency; and third, to facilitate the maintenance of a financially viable electricity industry. 1137 Our evidence shows that a general erosion of the electric distribution service franchise territory would detract from these purposes and objectives. In light of these considerations, we recommend that the non-exclusive nature of distribution service territories be interpreted rather narrowly. 1138 Rather than permitting a wholesale entrance of new distribution service providers, society's interests would best be advanced if the provision simply served as a practical means to deal with service territory boundary exceptions and problems. 1139 MR. SOMMERVILLE: Dr. Chamberlin, just for the benefit of the court reporter, if you are reading material, if you could just slow down. That would be of some assistance. 1140 MS. ALDRED: Could you please summarize the economic arguments you made in your prefiled evidence. 1141 DR. CHAMBERLIN: Well, we had a number, but the basic ones, the basic economic considerations, it seems to me, are the following: 1142 First, that the electric distribution function is a natural monopoly. Most costs are fixed, especially in the distribution and transmission function, where almost all costs are fixed, such as the costs of primary and secondary lines. Average costs, therefore, decrease with higher volumes because most costs are fixed. 1143 Both the overlapping and the new service -- new embedded service territory issues leave society as a whole worse off, as costs overall would tend to be higher in these situations. 1144 Secondly, services provided by distribution utilities on a network basis, which means that the system is designed to provide reliable service at the lowest possible cost for all customers as a whole rather than for individual customers. 1145 It says a couple of components that are important: First is that most costs are not directly related to individual customers, but they're upstream from those individual customers. They are the costs associated with substations, billing and customer services, network lines, et cetera. 1146 Secondly, most systems and equipment are long-lived capital items, and many have relatively long lead times to plan, to permit, and to construct. 1147 Finally, in order to ensure reliability, the system is planned, it's sized, and built for expected future customers and future customer load levels. 1148 MS. ALDRED: What problems would you expect to result from competition in the distribution function? 1149 DR. CHAMBERLIN: We discussed a number in the filed evidence, but there are four that I'd like to briefly focus on here. 1150 The first is that scale would be smaller than it would otherwise have to be, which would have the effect of increasing average costs for all customers. 1151 Secondly, stranded cost and the duplication of facilities would occur as customers leave behind the incumbent utility's upstream investments while requiring new investments by the competing service provider. This would occur even if the loss were compensatory. 1152 Third, planning uncertainty would arise as incumbent utility faces new uncertainties and risks throughout the planning, designing, and installation phases of building and operating the network system. 1153 And finally, rates to remaining customers of the incumbent utility would be higher due to increasing average cost, stranded costs, and planning uncertainty. 1154 MS. ALDRED: Now, have other regulatory bodies in North America dealt with this issue? 1155 DR. HUMPHREY: Yes, they have. Numerous jurisdictions in the U.S. have dealt with the relationship between competition and electric distribution. In all cases, they have reinforced the policy of protecting the distribution utility service territory and the principles of natural monopoly economics. This has occurred in three different situations. First, in the specific jurisdictions that have restructured with regard to the redesign of the industry structure; second, in those jurisdictions that have restructured with regard to issues that have arisen such as municipalization, stranded cost recovery, and distributed generation, and the third situation is in those jurisdictions that have not restructured, but have still had to deal with boundary issues that have come before the regulatory authorities. 1156 In every U.S. state that has competitively restructured, the distribution function was retained as a monopoly activity. No jurisdiction having considered the option to open the distribution function to competition has chosen to do so. 1157 The thought behind restructuring was to separate those functions which could be competitive from those functions that had the characteristics of a natural monopoly. Every jurisdiction in the U.S. that restructured made an explicit decision to retain distribution as a regulated monopoly. Texas actually took the opportunity of restructuring to tighten the geographic boundaries of distribution companies. California also expressed its policy of defined service areas in the context of its competitive restructuring. Louisiana and Wyoming who did not proceed to restructure but studied the question, explicitly identified distribution as not appropriate for competitive restructuring. 1158 Stranded cost decisions that have been made between the courts have protected the geographic integrity of the distribution function. 1159 One example we use in our evidence, among others, is a decision by the Alberta EUB, where the EUB stated: 1160 "The establishment of clearly-defined and enduring service areas is a major component of an orderly and efficient electric distribution system." 1161 This example, again, along with the others, shows that the treatment of distribution is consistent with the principles of natural monopoly economics, whether the jurisdiction has restructured competitively or it has not. 1162 The great preponderance of regulation, legislation and economic analysis affirms that distribution should be treated as a regulated monopoly within defined boundaries. Most economists like myself broadly favour competition, but when an industry exhibits the characteristics of a natural monopoly, then competition is inappropriate. A clear example of a court upholding this view is a statement from the Florida Supreme Court cited in the Clay example in our evidence where the Florida Supreme Court stated: 1163 "An individual has no organic economic or political right to be serviced by a particular utility merely because he deems it advantageous to himself." 1164 Again, the broad public interest overrides the interests of any individual consumer. 1165 MS. ALDRED: Would your conclusions change if performance-based rate making was widely implemented in Ontario? 1166 DR. HUMPHREY: No, they would not. Franchise territory erosion would still increase planning uncertainty, raise overall costs, lead to stranded or underutilized investments and place upward pressure on rates. 1167 MR. ENGELBERG: Have you had an opportunity to review the prefiled testimony of Mr. Todd in this proceeding? 1168 DR. CHAMBERLIN: Yes, I have. 1169 MR. ENGELBERG: How would you summarize Mr. Todd's views? 1170 DR. CHAMBERLIN: He agrees that competition in the distribution function for existing customers is generally not desirable, but argues that there may be benefits associated with competition for what he calls unserved and underserved customers. He argues that society is generally better off if these unserved or underserved customers would be allowed to switch to a new distribution supplier as long as the incremental cost of such new service is less than the incremental cost of the incumbent distributor and/or if there is additional value provided to the switched customers. 1171 MR. ENGELBERG: Well, do you agree with his argument that society would be better off if these unserved and underserved customers could switch to alternative distribution providers? 1172 DR. CHAMBERLIN: No, I don't. The premise for the concept of unserved and underserved customers is at best murky. In general, there's no such thing as an unserved customer. While there may be physical areas which don't yet have a service prop or a transformer to a building, there is an entire network upstream of that location which has been built to supply network distribution service to that area. This is an integral part of the utility's planning function. Upstream investments are designed and implemented for future customers as part of the utility's responsibility to ensure reliable service of the network as a whole. Thus, any loss of future customers would inevitably lead to a stranding of those upstream assets made for the future customers. 1173 Regarding the underserved customers, there may well be customers who prefer distribution services different from the level of service provided by the incumbent distribution utility; however, the only examples Mr. Todd cited were customers who might want individual metering on apartment units or larger customers who might want demand integral metering. 1174 Based on those examples, I find it difficult to distinguish between underserved customers and the entire body of existing customers. To me, Mr. Todd's examples of underserved customers appear to be nothing more than existing customers which are those customers currently taking service from the incumbent utility who desire additional electric distribution services such as different metering technology. 1175 But that's not Mr. Todd's view, at least as expressed in his evidence. He notes in several areas of his evidence that he is not recommending implementation of competition that includes switching of existing customers. Thus, I am left with an apparent conflict. It is critical that we address this conflict since certain issues such as the recovery or existence even of stranded costs were discarded under the assumption that existing customers would not be impacted by Mr. Todd's proposal. If underserved customers are in fact nothing more than existing customers, then Mr. Todd seems to be recommending that all existing customers should have the right to switch distribution providers. 1176 Essentially, the wholesale advocation of distribution competition with all the attendant problems including redundant facilities entailed by that. 1177 Secondly, Mr. Todd argues that the relative comparison in order to determine societal benefit is a comparison of the incremental costs of the incumbent utility and the new entrant distributor; that is, the direct cost to connect that customer. 1178 And of course that's wrong. First it ignores the substantial cost of upstream facilities. Second, even if it were true, it ignores -- that is, even if it were true that there were no upstream investments, it ignores the cost of the utilities obligation to service the electric needs of all customers and as a result would lead to additional planning uncertainty for the incumbent utility. 1179 In turn, that increased planning uncertainty leads to a number of undesirable features such as a reduction in the sizes in the lead times, potentially in the siting of new facilities. It also shifts the risk of less reliable systems and those less reliable investments on the remaining customers of the incumbent. 1180 As a side note, I would not agree with Mr. Todd's statement that it is prudent for any distributor to expand facilities only when the need for additional capacity is eminent. As an initial matter, the design and implementation lead time for distribution facilities, which can be up to ten years or longer, prevent utilities from waiting until capacity needs are eminent. 1181 Secondly, since large-scale investments are themselves in place for many years, facility sizes must be designed based on present load, eminent load, as well as future load. 1182 Third, Mr. Todd seems to be arguing that the benefits from competition in distribution services are so significant that they clearly outweigh any costs, but he does not articulate what the benefits are, and he clearly does not quantify those benefits. 1183 The distribution function is not like other industries. It is not even like other portions of the electric utility industry in which competition has been introduced. 1184 It is not like telephone where technological change has created a variety of potential new products, services, and means of delivery. It is not like competition in the commodity business, like electric commodity or natural gas supply. 1185 There are clearly real and tangible benefits associated with maintaining a regulated distribution monopoly. These include a lack of added costs associated with the duplication of lines, poles, substations, transformers, billing systems, customer care services, and other upstream network facilities. 1186 It also includes the minimization of average costs to all customers. It includes the facilitation of basic tasks such as customer connection, equipment repair and replacement, and emergency response, and it entails a reduction in uncertainty and the costs associated with that uncertainty. 1187 In contrast, what are the benefits associated with allowing competition in the distribution function? I can see only two. 1188 First, perhaps somewhat reduced costs for a few customers at the expense of the remaining customers of the incumbent utility. Secondly, perhaps somewhat different metering for a few customers. 1189 MR. ENGELBERG: Some of the proponents in this case and the other parties have argued that allowing new competitive distribution providers would encourage the incumbent utilities to be more competitive. Does this seem likely to you? 1190 DR. CHAMBERLIN: No. If there were abundance of alternative technologies available to bring electric service from a network to customers, there could be some merit to that argument. 1191 In this case, however, it seems clear that the new entrants are simply seeking to take advantage of temporary rate differentials or to avoid costs associated with upstream functions. 1192 The competitive response of incumbent utilities seems likely, therefore, to be analogous to their response in the areas of load retention or bypass rates for cogeneration facilities where an impending discount is matched in order to avoid losing even more revenue. 1193 In either case, the remaining customers of the incumbent are worse off as a result of allowing the opportunity to exist in the first place. 1194 MR. ENGELBERG: You've made some comments about Mr. Todd's -- some of Mr. Todd's theories. Do you have any comments on what we heard this morning from Mr. Southam regarding his characterization of stranded cost recovery? 1195 DR. CHAMBERLIN: Yes, I believe Mr. Southam's positions on the recovery of stranded costs are inconsistent. 1196 He said today that the incumbent and their customers should be kept whole in terms of the recovery of any stranded cost. In his prefiled evidence, however, he said that recovery should be limited to those direct expenses associated with connecting the customer. 1197 In order to keep the incumbent and their customers whole, that would require that all of the fixed cost contributions from the customers in question would form the basis for stranded cost recovery. 1198 Doing that in turn would mean that the recovery rate would have to be equal to the fixed cost portion of the otherwise applicable rate that would be charged to the incumbent's distribution customers, to those customers in competition. Anything less than that would mean that fixed costs would not be fully recovered, and rates to the remaining customers of the incumbent utility would have to rise. Anything less means, in the simplest terms, a subsidy from the customers of the incumbent utility to the customers of the new entrants. 1199 MR. ENGELBERG: Thank you. 1200 Drs. Chamberlin and Humphrey, do you have any concluding remarks or summary? 1201 DR. CHAMBERLIN: We have three brief points. As a general rule, most economists would agree that more competition is preferable to less competition. However, in no instance in the U.S. has competition been introduced into the distribution function, even in states which have introduced competition for the generation commodity function. In my experience working with almost every major utility in North America, I see no difference in the situation in Ontario, which ought to lead this Board to a different conclusion. 1202 Second, with respect to the distribution function, there are clearly many considerations that argue for the preservation for the current regulated monopoly system and against the introduction of piecemeal competition. 1203 Finally, at the same time, there is little or no evidence that anyone, except perhaps for the potential new distributors, those distributors who do not need to plan their own systems, and perhaps a few customers would see any significant benefit. I wonder then why anyone would want to risk harm to the current system for such little benefit? 1204 MR. ENGELBERG: Thank you very much. 1205 That completes direct examination of these witnesses. 1206 MR. SOMMERVILLE: Thank you. 1207 The hour is becoming a little advanced. The one thing that I do not favour is splitting cross-examination over the day. 1208 Is there anyone who is roughly sympathetic with the point of view of the witnesses who will have a relatively brief cross-examination? 1209 MR. RODGER: I have no questions at all. 1210 MR. SOMMERVILLE: That's very brief, Mr. Rodger. Thank you. 1211 Mr. Lokan? 1212 MR. LOKAN: I can match that. 1213 MR. SOMMERVILLE: Well, we're making great progress already. 1214 Ms. Lott? 1215 MS. LOTT: Mine is probably about 15 or 20 minutes. 1216 MR. SOMMERVILLE: That's about the time frame that I'd be looking for, Ms. Lott, if that's achievable. 1217 MS. LOTT: Bingo. Okay. 1218 MR. SOMMERVILLE: Thank you. 1219 CROSS-EXAMINATION BY MS. LOTT: 1220 MS. LOTT: Hi. My name is Sue Lott. I'm the counsel for the Vulnerable Energy Consumers' Coalition. We represent a coalition of low- and fixed-income residential ratepayers. 1221 I wonder if I could just start by stating that you've provided a brief sketch of your backgrounds both in the response to the Board Staff interrogatory and now with your curriculum vitaes that we have in front of us. 1222 I'm just wondering if you could be a bit more specific and describe what experience, if any, either of you have in the area of distribution system planning. 1223 DR. CHAMBERLIN: I have built a few distribution planning models. Much of my experience in distribution planning has been related to rate design and cost-of-service approaches, where I've built and applied distribution planning models for the purpose of identifying the marginal cost associated with a distribution function, for example, and I've done that a number of times. 1224 DR. HUMPHREY: And I have not worked on distribution system planning questions. 1225 MS. LOTT: Okay. I wonder if you could just turn up your response to the Board Staff interrogatory, and that's J.8, tab 10, schedule 30. 1226 DR. CHAMBERLIN: Okay. I have it. 1227 MS. LOTT: You've got that. 1228 Here the Board Staff had asked about whether or not the consequences that you outlined in your report, pages 7 and 8, there were nine consequences. The question here asked whether or not the consequences would still occur under these conditions, whether service areas did not overlap, there is no loss of existing customers, and new customers pay all the relevant connection costs. 1229 And if I look at your response to that, it seems to suggest that the consequences would still exist even with these restrictions outlined in the Board under column A of your responses; would you agree with that? 1230 DR. CHAMBERLIN: Yes. 1231 MS. LOTT: What I wanted to explore with you though, is the extent to which the assumptions that were set out by the Board Staff would serve to reduce the materiality or impact of the various consequences that you've outlined of uncertainty in service area franchises generally. 1232 For example, if we look at consequence 2, which is "load forecasts become more uncertain," is it fair to say that load forecasts would become even more uncertain if there were overlapping service areas and an incumbent utility could potentially loose existing customers? 1233 DR. CHAMBERLIN: Yes, I think the more overlapping of the service territories, the greater is the uncertainty associated with the planning and forecasting function. 1234 MS. LOTT: Similarly, if we also look at consequence 3, where you outline "existing investments are stranded," would it also be fair to say that the potential to lose existing customers would increase concerns with respect to stranding of its existing investments? 1235 DR. CHAMBERLIN: Yes. 1236 MS. LOTT: Okay. And in terms of the fifth consequence outlined which is "redundant networks would develop," would you agree that this is more likely to occur with overlapping service areas? 1237 DR. CHAMBERLIN: It's certainly more likely to occur with the overlapping service territory compared to the embedded service territory models that have been discussed so far in the proceeding, yes. 1238 MS. LOTT: And it would also seem to me that the eighth consequence, which is "the obligation to serve, those issues becoming more muddled," to quote the report. Would you agree that they would become more muddled in the case of overlapping services that when the customer is clearly defined in one utility's service area? 1239 DR. CHAMBERLIN: Certainly. 1240 MS. LOTT: And finally, isn't it also fair to conclude that some of the basic tasks that are outlined in the ninth consequence, and we've referred to these before from your reports, things such as storm recovery, tree trimming, the issue of dig safe, are more difficult as well in the case of overlapping service areas? 1241 DR. CHAMBERLIN: I think so, and the fact that there are coordination issues today is really irrelevant. The issue is that the more there is the uncertainty over whose customer is it and where is that customer located, the greater those kinds of transaction costs that would result. 1242 MS. LOTT: Thank you. 1243 Just going back to your evidence, and I wanted to look at pages 18 and particularly page 19, where the first full sentence there is basically talking about the erosion of the distribution utility franchise territory and how that would detract from the objectives and purposes of the legislation that we operate under, the OEB Act and the Electricity Act. You state there that this paper has shown that erosion of electric distribution service franchise area would detract from these purposes and objectives. 1244 MS. LEA: Sorry, I couldn't hear that last bit and I'm not sure the reporter could either. 1245 MS. LOTT: Just quoting from their paper stating that this paper has shown that erosion of electric distribution utility service franchise territory would detract from these purposes and objectives. 1246 You agree that that's what you state on page 19? 1247 DR. CHAMBERLIN: Yes. 1248 MS. LOTT: Since any change in the service areas will result in an erosion of some utility's service area, on its face this conclusion would suggest that there should be no change in the service areas allowed by the OEB under any circumstances. My question is: Is this what you are, in fact, recommending or would you see circumstances under which a service area amendment would be appropriate? 1249 DR. CHAMBERLIN: I think there always will be circumstances under which limited service territory amendments would be appropriate. For example, the kinds of border issues where one utility may be able to serve a customer or a group of customers at a lower cost or more efficiently than the other utility. Those are the kinds of service area amendments which are generally amenable to compromise and negotiation between the two utilities and would be expected to occur in the future, and that's not what we are discussing. 1250 What we are discussing here is the more wholesale for economic advantage amendments or alterations to service territories. 1251 MS. LOTT: Okay. What about the case where the costs of the alternative utility serving a customer are lower but the incumbent utility claims it has stranded or devalued assets? Would you consider that in this kind of a case? 1252 DR. CHAMBERLIN: Probably. 1253 MS. LOTT: Sorry, you would consider that service area amendments should be allowed in that kind of situation? 1254 DR. CHAMBERLIN: If the context is in conjunction with compensation for the stranded costs then yes. 1255 MS. LOTT: Okay. In that case, I wonder if you could give me your views about how you think the value of the stranded assets should be determined? 1256 DR. CHAMBERLIN: How the value should be determined? 1257 MS. LOTT: Yes. 1258 DR. CHAMBERLIN: Well, in general, the value of the stranded assets would be the unrecovered fixed costs contribution from the departing customer. So it's the fixed costs stream that that customer or those customers would otherwise pay the utility that made the investments to serve those customers, not just in the direct connections but in all the upstream facilities, services, and aspects of their service. 1259 MS. LOTT: Thank you. Back to your evidence, if we could go back to page 7, and I'm interested in point number 1 there. And there, under that point, you indicate that rates for incumbent utility's customers will go up relative to what they would have been otherwise if the utilities lose the opportunity to connect new customers in their existing service area. 1260 DR. CHAMBERLIN: That's correct. 1261 MS. LOTT: Would you agree with that? 1262 DR. CHAMBERLIN: Yes. 1263 MS. LOTT: And if we could pull up the OEB Staff Interrogatory No. 10 which is Exhibit J.8, tab 10, schedule 38. 1264 DR. CHAMBERLIN: Okay. 1265 MS. LOTT: Now, you appear to indicate that the concerns regarding uncertain service areas exist even in the case involving new customers where capital contributions are required; is that correct? 1266 DR. CHAMBERLIN: Yes. 1267 MS. LOTT: Are you familiar with the basis on which the OEB requires capital contributions to be determined for the connection of new customers? 1268 DR. CHAMBERLIN: Generally, yes. 1269 MS. LOTT: And could you confirm that - this is just a high level of analysis here - that the capital contributions are determined based on an economic evaluation that looks at the incremental revenues at existing rates associated with serving the customer and then compares these with the incremental costs of serving the new customer, and to the extent that the costs exceed the revenues, that sets the capital contribution, that difference. Would you agree with that? 1270 DR. CHAMBERLIN: That's my understanding, yes. 1271 MS. LOTT: Would you agree in doing so that the capital contribution calculation is designed such that existing customers are indifferent in the addition of new customers and that this approach to determining capital contributions does not allow for the utility to attribute any of its existing fixed costs to the new customer? 1272 DR. CHAMBERLIN: That's my understanding, but that isn't what the -- I don't think what the IR is addressing, nor what our response is. Our response is addressing whether uncertainty in the service territory would be increased if the question of who were to serve that customer, irrespective of capital contribution requirement, were to exist. But it's who builds the upstream network near that customer, for example, or how likely is it that that customer's load is going to materialize, so that upstream investments can be efficiently planned. 1273 MS. LOTT: Okay. Thank you. A number of parties to this proceeding have suggested that concerns around stranded assets and asset underutilization, that this can be addressed by utilities only constructing facilities when they are truly needed, and I believe that you made this same point on page 7 of your evidence, and I'm looking at point 3 there of page 7 of your own evidence where you talk about existing investments are stranded, some customers depart to be served by another system then the investments made to serve the defecting customers are underutilized or in some cases even stranded. 1274 DR. CHAMBERLIN: Yes. 1275 MS. LOTT: However, if I understand your evidence, the point you are making is that taking this shorter-term perspective in order to minimize stranded assets or underutilized assets is likely to increase the overall costs of the distribution network. 1276 DR. CHAMBERLIN: Yes, I don't think it makes any sense to say that a distribution system or a transmission system or any component of the utility system can be efficiently planned, constructed, designed, permitted and implemented at the time a customer commits to a service connection. It just doesn't happen. The lead times are much longer. In fact, the lead times are longer than the permitting process time or the construction time of the assets themselves. The lead times include, for example, the spatial decisions that are made about where to put a subtransmission line or where to put a substation, and for those to be optimal, that is to produce the lowest average cost for all customers, those have to be planned in a considerate way, sufficiently ahead of the load so that they can be put in at the appropriate time with the appropriate size. 1277 MS. LOTT: Thank you. Just a couple more questions. 1278 Looking at Toronto Hydro and LDC Coalition responses to a Veridian Connection IR on the Yatchew, and that was received December 10th, this year so I don't have an exhibit number attached to it. So I don't know if you can pull that out. It's page 4 of 12, so it's the Toronto Hydro and LDC Coalition responses to Veridian Connection IR, and as I said it was just done on December 10th of 2003. 1279 MS. LEA: Responses to who? 1280 MS. LOTT: Responses to Veridian Connection interrogatory on the Yatchew report, and I'm interested in page 4 of that, I believe it's a 12-page response. 1281 DR. HUMPHREY: I think we have it. 1282 DR. CHAMBERLIN: We have it, but thank you. 1283 MS. LOTT: On that page, in response to Veridian Interrogatory No. 4, there's an indication there that the spatial location of customers will have a material impact on system planning and overall system costs. 1284 Based on your experience, would you agree with this conclusion? 1285 DR. CHAMBERLIN: Yes. If you don't know where the customers are, where do you put the line? 1286 MS. LOTT: If the OEB were to adopt the concept and grant overlapping service areas, is it not reasonable to assume that LDCs will seek to position themselves so they can better compete for contestable customers, would you agree with that? 1287 DR. CHAMBERLIN: I would agree with that. I would think that over time, if that function were really competitive, that they would additionally compete not just for contestable customers but for more profitable, more desirable contestable customers. 1288 MS. LOTT: Would you also agree that one of the key factors in a local distribution company's ability to compete for new customers is the proximity to those customers in question? 1289 DR. CHAMBERLIN: I would think that would be one of the elements. 1290 MS. LOTT: And do you think it's likely that such considerations would influence the way an LDC expands its distribution network in the future? 1291 DR. CHAMBERLIN: It wouldn't be the only one, but I think it would be one, yes. 1292 MS. LOTT: Would it also be reasonable to conclude that if two utilities are doing this in order to compete for the attention of a new group of customers, the utility that fails to win the connection will not have an optimally designed system based on the customers that it's still serving? 1293 DR. CHAMBERLIN: I think that would be true. 1294 MS. LOTT: Thank you, those are my questions. 1295 MR. SOMMERVILLE: Thank you, Ms. Lott. 1296 PROCEDURAL MATTERS: 1297 MR. SOMMERVILLE: We will adjourn for today. Just with respect to our expectations tomorrow, as I've indicated we will not be sitting tomorrow afternoon. I would expect that we will finish with this panel tomorrow morning. 1298 Mr. O'Leary, you will have questions for this panel, take it? 1299 MR. O'LEARY: Yes, I will, Mr. Chair. 1300 MR. SOMMERVILLE: Ms. Godby? 1301 MS. GODBY: Yes. 1302 MR. SOMMERVILLE: Will there be any other cross- examinations. Mr. McLeod? And Ms. Young? 1303 MS. YOUNG: Yes. 1304 MR. SOMMERVILLE: Thank you. So I would expect we would finish with this panel, the question is will we reach Dr. Todd. My expectation is that we should be able to do that. We certainly wouldn't be able to conclude -- oh, I beg your pardon, Dr. Yatchew, I suppose, is next, I beg your pardon. 1305 So we would reach Dr. Yatchew tomorrow but not conclude with Dr. Yatchew. 1306 Do the parties want to sort of consult about that? I just don't want anyone wasting their time tomorrow, I don't want Dr. Yatchew attending for no good reason, and I'll leave that in your hands, Mr. Rodger, to work that out with your colleagues. 1307 But our expectation is we'll sit tomorrow at 9:30 until 12:30, I fully expect that we'll conclude with this panel and hopefully we'll reach you, Dr. Yatchew. 1308 Are there any submissions before we adjourn? Thank you. We stand adjourned. 1309 --- Whereupon the hearing adjourned at 4:30 p.m.