Rep: OEB Doc: 12YP6 Rev: 0 ONTARIO ENERGY BOARD Volume: 10 18 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 Thursday, 18 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 18 DECEMBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 DAVID BROWN Board Counsel ROBERT GORDON Board Staff CAROL GODBY Southwest Applicants MICHAEL ENGELBERG Hydro One Networks Inc. MARYANNE ALDRED 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 KELLY FRIEDMAN Electricty Distributors Association JIM HOGAN Chatham-Kent Hydro JIM WICKETT Chatham-Kent Hydro DAVID KENNEY Chatham-Kent Hydro 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [18] WIREBURY CONNECTIONS INC. - PANEL 1; TODD [28] CROSS-EXAMINATION BY MR. MCLEOD: [30] CROSS-EXAMINATION BY MS. LOTT: [64] CROSS-EXAMINATION BY MS. FRIEDMAN: [228] CROSS-EXAMINATION BY MR. ENGELBERG: [246] PRELIMINARY MATTERS: [528] WIREBURY CONNECTIONS INC. - PANEL 1; TODD [547] CROSS-EXAMINATION BY MR. ENGELBERG: [549] CROSS-EXAMINATION BY MR. LOKAN: [579] CROSS-EXAMINATION BY MR. RODGER: [754] CROSS-EXAMINATION BY MR. GORDON: [931] QUESTIONS FROM THE BOARD: [954] RE-EXAMINATION BY MR. O'LEARY: [978] SUBMISSIONS BY MS. GODBY: [998] SUBMISSIONS BY REPRESENTATIVES OF CHATHAM-KENT: [1067] 10 EXHIBITS 11 EXHIBIT NO. E.4.1: ISSUES LIST COMMENTS, JULY 17, 2003, GENERATED BY MR. TODD [589] EXHIBIT NO. E.4.2 SERIES OF FOUR DIAGRAMS, FIRST DIAGRAM ENTITLED MULTI-UNIT COMMERCIAL BULIDINGS [749] EXHIBIT NO. E.4.3 EXCERPT FROM THE WIREBURY CONNECTIONS INC. RATE APPLICATION FOR DISTRIBUTION OF RATES [752] EXHIBIT NO. E.4.4: MAP OF THE MUNICIPALITY OF CHATHAM-KENT [1079] EXHIBIT NO. E.4.5: ONE-PAGE DOCUMENT ENTITLED "SUBMISSION OF THE MUNICIPALITY OF CHATHAM-KENT" [1081] EXHIBIT NO. E.4.6: UNTITLED DOCUMENT SUBMITTED BY CHATAM-KENT NUMBERED 22 AND 23 [1083] 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:35 a.m. 15 MR. SOMMERVILLE: Thank you, please be seated. 16 We are reconvening in the matter of service area amendments applications. 17 Mr. Todd is available for cross-examination and I think unless there are some preliminary matters that need to be dealt with -- are there any? Mr. McLeod. 18 PRELIMINARY MATTERS: 19 MR. McLEOD: Mr. Chair, yesterday at the close of the proceedings, you asked me whether or not I had any questions and I believe I said I didn't believe I had questions. I do have a couple of questions to clarify on the Veridian IRs, and I would appreciate it if I could ask Mr. Todd those questions with the approval of the Board and the parties. 20 MR. SOMMERVILLE: Thank you, Mr. McLeod. 21 Mr. O'Leary, do you have any objection? 22 MR. O'LEARY: We have no objection, sir. 23 MR. SOMMERVILLE: Would you like to go now, Mr. McLeod? 24 MR. McLEOD: That would be fine. 25 MR. SOMMERVILLE: Are there any other preliminary matters that we need to deal with? 26 In which case, Mr. McLeod, please. 27 MR. McLEOD: Thank you, sir. 28 WIREBURY CONNECTIONS INC. - PANEL 1; TODD 29 J.TODD; Previously sworn. 30 CROSS-EXAMINATION BY MR. MCLEOD: 31 MR. McLEOD: Dr. Todd, if I could ask you to turn up our Veridian Interrogatory No. 6 -- 32 MR. TODD: It's actually Mr. Todd. 33 MR. McLEOD: Okay, Mr. Todd, thank you. 34 -- No. 6, where we are talking about expansion and competition. In response to Veridian's question, it's stated that Wirebury's response is that is supportive of customer choice and open competition in the areas not currently being serviced by an incumbent LDC. However, in Wirebury's response in IR Nos. 9 and 10 of Veridian's questions dealing with reliability and stranding of assets, there is a strong focus on existing customers. So I take it that Wirebury is targeting or aiming to capture existing LDC customers as well as new ones yet to be connected to a system. Is that correct? 35 MR. TODD: I think first of all, these responses, I was not involved in -- 36 MR. McLEOD: Oh. 37 MR. TODD: -- preparing these. However, the point you raise flags an issue. I think there's been some confusion created in the initial Wirebury evidence which was filed at the beginning of the process was a response at a policy level to the questions being proposed by the Board and in those responses, my understanding is that they were expressing their views not explaining their business model. And in expressing their views in competition, their statements made there about such things as the competition generally, including competition for existing customers, my understanding is that's their, shall we say, view of the world. 38 In terms of their business plan which is laid out in their application, it's restricted to new customers that are attaching to the system, new developments, and to high rises where customers are served by bulk meters. My understanding is that they are not -- their business plan does not contemplate switching existing customers. 39 MR. McLEOD: I think that probably helps clarify that for us. 40 Can I ask you just to turn up No. 9, Interrogatory No. 41 There's a number of questions Veridian is focussing on that deal with the issue of pancaking and supply points. In dealing with pancaking, we're talking about the addition of more embedded distributors on top of embedded distributors is the idea of pancaking. 42 As I understand it, the issue of confusion in customers in terms of pancaking is that as you add more embedded distribution utilities and more supply points are added to the system, customers, whoever they are, may be become increasingly confused or not sure about who is actually serving them, even though I think earlier on or later on it was discussed yesterday, that one's bill will indicate who the supplier is. But is this not going to cause some difficulty in operating and maintaining system reliability inside all these embedded distributors if there's -- if we already know or recognize that there are problems with supply points now? In other words, the more supply points that we're adding, every time we add an embedded distributor is this not going to cause more problems and more confusions for customers? Who should they call if they're out, and that kind of thing. 43 MR. TODD: I think there's a couple of points in there. 44 Let's take them one at a time. 45 Part of the issue was customer confusion. I think that the bill is the essential contact point that creates or dispels customer confusion. One of the areas, one of the jurisdictions I've worked in is B.C., and as you may be aware, Terasen, previously BC Gas, until a couple of years ago previously had its billing done by B.C. Hydro due to historical circumstances. And I recall the court reporter who had been sitting through hearings for years and years and years complaining about B.C. Hydro's delivery of gas service to him because the bill came from B.C. Hydro; in other words, customers associate whatever name is on the bill as being their supplier. 46 Similarly, in Ontario, with the transition on that gas side to competition, I was always a great advocate of having the name of the retail supplier on the bill for the same reason, and I feel that that's the key to avoiding customer confusion about who is the supplier. 47 You also raised the point of, shall we say, coordination. It's just -- if it is coordination for emergency response, I think that, again, provided that each distributor who is issuing bills to their customers is licensed, is operating in accordance with the DSC, they're going to have in place a mechanism for appropriate emergency response be it through cooperative effort with the distributor that they're embedded within or on their own behalf. Clearly, there will be a mechanism in place. There must be that support requirement. There would be appropriate phone numbers on the bill and parties would clearly have to -- distributors, that is, would cooperate in emergency response as they do at the present time and has been mentioned in the hearing so far. 48 There's not going to be -- I would be astounded if there was a spiteful response where people say, you know, I'm not going to cooperate with you on matters of public safety because we are competitors. I can't imagine that happening. 49 MR. McLEOD: So the key thing in making sure that it works smoothly, is this cooperative effort, that becomes the critical factor in this? 50 MR. TODD: Yes, which could be using common phone numbers for emergency response, it could be patching through. I mean, we've gone through these kinds of issues with retailers. Every time there is a discussion of a retailer -- sorry, on the gas side, where we've gone through this a little bit more, but similarly on the electricity side where there's also, at least in theory, retailers now, those issues are always addressed of how does the customer know where to go for emergency response? And the problem is potentially much more severe when the supplier is only supplying the electrons or the molecules and not even the distributor. So it's hard to see that as a sky is falling scenario. 51 MR. McLEOD: And if we look at number C -- and I apologize with my voice, I thought I was coming down with a cold yesterday and I think I probably am. If we look at item C under IR No. 9, Wirebury's response states that: 52 "It doesn't recommend any specific maximum level of pancaking of the distribution utilities. 53 I guess my question is: If there's no specific maximum, have you considered what kind of level, how many utilities is appropriate, if there's no particular maximum? I'm assuming the minimum is one or two. Do you have any comment on that? 54 MR. TODD: I think from the question you're saying is they're saying no maximum, would I actually provide a number for a maximum? 55 MR. McLEOD: I'm not sure you need to provide a number, I just want to put some kind of bounds around this and I'm not sure what that is. 56 MR. TODD: I would be reluctant to put a number to it, and I'm not sure that it's a practical necessity how much pancaking is likely to happen. It would be a while before we get into -- presumably into Wirebury, for example, having large enough embedded territories that there would be further embedding within them to get to three levels or others coming in. 57 But pancaking is an old problem. It's been dealt with through -- in the transmission side where there's been changes and there are -- there are ways to deal with the pancaking. I assume what you're -- dealing with the pancaking is the rate issue of -- the pancaking of rates, which if you just have just multiple wheeling rates that are additive, you can run into problems in terms of a reasonable competitive marketplace. 58 MR. McLEOD: Yeah, and part of it would be rates, and also it comes back to the whole reliability issue and supply points ultimately at the end of the day. 59 MR. TODD: A chain is as strong as its weakest link, but it's not weaker than its weakest link, and all the links are being, you know, regulated and monitored in terms of reliability, so I don't see how adding some more links to the chain, all of which are strong, weakens the chain. 60 MR. McLEOD: Thank you, sir. Those are my questions. 61 MR. SOMMERVILLE: Thank you, Mr. McLeod. 62 Ms. Lott? 63 MS. LOTT: Thank you, Mr. Chairman. 64 CROSS-EXAMINATION BY MS. LOTT: 65 MS. LOTT: Good morning, Mr. Todd. 66 MR. TODD: Good morning. 67 MS. LOTT: I wanted to start by following up on some testimony you gave yesterday in response to Ms. Godby's questions. You may recall that she asked you about PBR and how it fits in with your competitive model through distribution. 68 MR. TODD: Yes. 69 MS. LOTT: And I believe you indicated that you thought the two complemented each other, and if I understand your reasoning for that, it was that distribution utilities that are competing for customers may be tempted to game the system by low-balling their capital contribution calculation to have the lowest offer, but that PBR would ensure that in such cases, it would be the shareholder that paid for the -- any underrecovery of costs as opposed to other customers on the system. 70 Am I correct about your argument? 71 MR. TODD: Firstly, if the goal of -- one view of the competitive marketplace is that the competitors would set as their goal signing up customers. If that were their objective and the way -- one way to sign up customers is to be very aggressive in the way you do your economic analysis to determine the costs of attaching the customer, so that when you do the present value of the rates, so you take off that revenue from the costs and you're left over with customer contribution, you have a low customer contribution number, so that the package of the cost to the customer is low. And that would, potentially, be a strategy for winning customers. 72 Now, if in doing that you actually low-balled, i.e., you went below the true cost on average, you're so aggressive that basically you are underestimating your costs, under a PBR regime, you can't pass through that shortfall to the -- to your customers at higher rates. 73 Now, under the Board's PBR Rate Handbook, we are in the first phase of PBR. Part of that is that the Rate Handbook sets out that there is an expectation that there will be a review and potential rebasing at the end of Phase 1. 74 Potentially, if a company were to low-ball, gain the customers, end up with a shortfall that's put into rate base, it could come back to the Board at the time of a rebasing exercise and say, We should be allowed to recover these costs by including them in the rate base and recovering them from customers. 75 If there is no rebasing mechanism, the company would never have the opportunity to recover from its customers any shortfall in its estimates of the costs of connection. If there is a rebasing exercise, it would be incumbent on the Board to allow estimated costs, not actual costs, in setting rates on a going-forward basis as part of a rebasing exercise in order to ensure that a competitor cannot game the system in order to attach a number of customers by underestimating its costs. 76 My expectation is that after the first phase of PBR potential rebasing, it will be a long time, if ever, before there's another rebasing, the way it's basically conceived, so the problem will go away. 77 In the short term, if there is rebasing, there would be a need for records to be kept on estimated costs as well as actual costs so that the rebasing exercise could be done appropriately. 78 Interestingly, I think the rebasing was envisaged to happen in 2003, which has been, obviously, put off now. But it's presumably not going to be too far in the future, and the rebasing is something which isn't necessarily going to occur. 79 MS. LOTT: Well, if you could turn up your response to the VECC Interrogatory No. 18, which is Exhibit No. J.12, tab 11, schedule 18. 80 MR. TODD: Yes. 81 MS. LOTT: Just before we look at that, I just wanted to confirm yesterday that you -- your evidence was that distribution rates would continue to be subject to regulation under your proposal; is that correct? 82 MR. TODD: Yes, this is not price competition. 83 MS. LOTT: Right. Okay. 84 MR. TODD: Rates will be regulated. 85 MS. LOTT: So if we look at the first paragraph of your response to that interrogatory, it indicates that: 86 "If distribution rates are to be subject to continued regulation, is it reasonable to assume that any PBR scheme will be subject to periodic rebasing." 87 And I think that you've -- you've indicated that. Am I correct about your response to that? 88 MR. TODD: That's been the experience -- that's the approach, and, in fact, I call it, really, multi-year rate base rate of return regulation, with gas in Ontario and other PBR regimes across the country, where you're dealing with a manageable number of regulated companies. 89 Having participated in the PBR of -- the Ontario Energy Board PBR task force on the yardsticking committee and having worked through some of the mechanical details of how difficult it is to do yardsticking PBR and how even far more difficult it would be to do rate base rate of return regulation, I'm anticipating, as I indicated a couple moments ago, that Ontario would be an exception, and it would be more akin to the British approach or the Quebec approach in rent control, where the regulator, shall we say, tweaks the -- the price cap or the PBR regime in terms of productivity levels to respond to developments in the marketplace. So that if we could call it rebasing, it's done on a generic basis, i.e., adjust the productivity level, not a company-specific rebasing. 90 And I think my response, perhaps, could be clarified by distinguishing between a market-wide rebasing i.e., an adjustment in the productivity level, because the rates are too low or too high, versus a company-specific rebasing, which would allow -- potentially allow the pass-through of costs that are inappropriate; although, ideally the regulatory system would identify those in any case and not allow them to be passed through. 91 MS. LOTT: But would you agree that we don't know how the rebasing is going to be done in this scenario? 92 MR. TODD: I agree. 93 MS. LOTT: And based on your experience with PBR schemes in regulated environments, is it fair to say that this kind of rebasing will occur, on average, every three to five years? 94 MR. TODD: That has been the experience with company-specific PBR regimes such as Union, Enbridge, Terasen, et cetera. 95 MS. LOTT: Okay. Now, if there is rate basing, I believe that your response would suggest, if we look back at your response again, that while shareholders must pay the costs of failure, in this case gaming in the near term, it's ratepayers that will pay in the longer term if there is rebasing. 96 MR. TODD: It depends on if it's, shall we say, blind rebasing, yes. If the rebasing were designed and appropriate record keeping is required to ensure that the costs that go into rate base for projects is estimated costs not actual costs, then you don't have the problem. 97 MS. LOTT: Okay. Thank you. In other work that you have done, we had some indication of your curriculum vitae yesterday, has any of it involved working with the electricity distribution utilities on system planning-related issues? 98 MR. TODD: I've not worked with distribution utilities on system planning. Interestingly, my very first job just out of electrical engineering was with Bell Canada and I was manager of central office planning which was a similar function, and so I did spend a bit of time doing the planning exercise, doing the annual updates, looking at forecasts, adapting to changing environment. So I have some "ancient" as my kids would say, sort of back in the middle ages experience with system planning, but that was telephone switching equipment not LDCs, distribution systems. 99 MS. LOTT: Other experts that have submitted evidence to this proceeding have indicated that planning for distribution systems involve long lead time, sometimes as much as four years, and have also indicated that capital costs are highly influenced by spatial distribution contributions such as customer location. Do you have any reason to disagree with either of these points? 100 MR. TODD: No, and I did yesterday distinguish between the planning process which you're always looking at the future well in advance, and the construction process, certainly in the involvement I was just referring to, part of the concept was you don't actually build until you actually need facilities because you don't spend money any sooner than you have to. 101 MS. LOTT: And just to clarify that four years is not the planning portion, it's the actual putting the facilities in place; am I correct? 102 MR. TODD: If you're talking about a major distribution rebuild, I think the planning horizon in referring to engineering and constructing facilities is a bit different, much shorter for a project for a particular developer. The turnaround time from when a developer identifies that they're building in a particular location, if it was four years, we would have a lot of difficulties outside of the LDC sector and a lot of difficulties in the development sector. So I think we're talking, you know, four, six, eight months, not four years. 103 MS. LOTT: But what about for major substations and that sort of thing? 104 MR. TODD: Yeah, if you're talking the upstream facilities, capacity being upgraded, you're talking multi-year time frames. 105 MS. LOTT: I wonder if you could turn up your response to VECC Interrogatory No. 20, and that's Exhibit J.12, tab 11, schedule 20. 106 MR. TODD: Yes. 107 MS. LOTT: And looking at that response, I take it from that that you accept that an LDC has a responsibility and, in fact, an obligation under the Distribution System Code to plan for reasonable load growth and that as you have stated in your answer, this must take into account the timing. Location and size of customers' connections. 108 MR. TODD: Yes. 109 MS. LOTT: Is it fair to say that LDCs when doing such planning would focus on their existing geographical service area? 110 MR. TODD: Up until this proceeding, and the assumption of monopoly, certainly, they would not plan for beyond their boundaries, they would not plan for less than their boundaries and the outcome of this proceeding could change the planning parameters a lit bit, but that's correct. 111 MS. LOTT: Okay. And I believe that you just agreed with me that there can be lead times as much as four years involved in planning and construction of some utilities' facilities, we are talking there, you made the proviso about major substations. 112 MR. TODD: That's correct. 113 MS. LOTT: And is it also fair to say that investments in network capacity such as substations are often made in discrete increments? I believe the term that is used sometimes is lumpy? 114 MR. TODD: Precisely. 115 MS. LOTT: And if you combine those two factors, is it fair to say that the utilities may find frequently find themselves having excess upstream capacity based on plans they would have put in place to meet reasonable load growth and new customer connections? 116 MR. TODD: From the date you construct to the -- from the date you construct one upgrade to the date you construct the next upgrade, if you've timed them both perfectly, by definition you've got excess capacity throughout the period, you've got excess capacity all the time. 117 MS. LOTT: Just holding those points, I wonder if you could turn up your response to VECC Interrogatories 14 and 19 and have a look at those. 118 MR. TODD: Yes. 119 MS. LOTT: Now when I look at both of those responses, you seem to be saying where there are two adjacent utilities that have the necessary upstream capacity to serve a new connection it doesn't matter which LDC ends up serving the customer which it comes to the issue of stranded assets or assets being underutilized. 120 MR. TODD: From an individual utility's perspective, it matters a lot. If I get the customers and improve my utilization as an individual utility, that's obviously helpful. 121 Now, over a longer term, what I have suggested in my IR responses, interrogatory responses is that if all you're doing is changing the rate of growth, then what you change is the frequency of upgrades. Over the longer term, in present-value terms there's going to be no impact. What you do when you have less growth is you defer the next major capital investment and upgrade. 122 If what you do is you eliminate growth, then clearly you've created a permanent underutilization of the facilities and that's when the shareholders get concerned and tell management to get more competitive. 123 MS. LOTT: But would you agree with me that what you've indicated in those answers essentially says that the two potential harms cancel each other out that it doesn't really matter which LDC? 124 MR. TODD: On a global basis, you're shifting the rate of growth from one LDC to another; therefore, you are deferring the next upgrade for one LDC and advancing the next upgrade for the other LDC. 125 MS. LOTT: Right. Okay. Now, as we've just discussed it's the incumbent LDC who has responsibility to plan and assure that necessary upstream assets are in place to serve the new customer. Doesn't this suggest that the incumbent has a stronger case to argue that the new service area amendment results in an underutilization of assets than the alternate LDC and that it should be compensated for this underutilization of its existing facilities? 126 MR. TODD: That depends on your view of the regulatory compact and the guarantees that go with that planning approach. The exact same arguments were put forward by the telephone companies when faced with competition, and essentially, the response of the CRTC was we're not going to compensate you for stranded assets, that defeats the entire purpose of incentives. Their response was to allow the companies to come in in what they used as their proceeding to establish going in rates, what they called going-in rates for the price cap regime, and they allowed companies to accelerate the depreciation of their assets to reflect the economic life under a scenario of competition as opposed to the physical life which was more relevant as an economic life in the absence of competition, and they also allowed them to increase their return equities to reflect the higher risks of the competitive environment and that was essentially adopted in lieu of the historic regulatory compact, We'll let you recover your costs approach. 127 So there's more than one way to skin this cat. Yes, they may have a claim to say, We should be compensated for stranded assets, but in my view, for the reasons I laid out there such as it's really a timing of upgrades because in all cases, we're talking about the timing of upgrades which is uncertain in any case due to all sorts of factors. 128 Where there is true stranding, i.e., an asset that becomes unusable because of its location and the absence of customers, yes, I'd say there's an argument to say that they would be compensated for that stranding, but only in that relatively limited case. And even with that, there are alternatives to compensation for stranding. 129 MS. LOTT: If we looked at it another way, couldn't it be said that your approach is tantamount to either rewarding the alternate utility for poor planning in the instance where it's overbuilt beyond what it needed to meet the reasonable load growth, or are you simply robbing Peter to pay Paul by committing upstream facilities to serving this new customer in the incumbent's existing service area when the capacity will eventually be required to meet the needs of the alternate utility's service area? 130 MR. TODD: Well, I certainly wouldn't say it that way, because I try not to present argument. But I think that in reality, we're not robbing Peter to pay Paul. 131 We're changing the -- we're shifting where the growth takes place, and actually what we're rewarding is the competitor who is offering the best deal to the customer. And the simple reality of the marketplace model, remember, the Ontario government, the previous government, forced the nonprofit municipal electric utilities to corporatize. They instilled a public -- or private sector mindset to the extent they could into these utilities. 132 And I remember going through some of the earlier processes around here, and quite frankly, what I observed was some MEUs were saying, This is ridiculous; we are here to serve customers; we want to keep our rates at a nonprofit level. Others reacted with, Here's an opportunity to work like private sector companies, and we're going to earn the highest return we can for our shareholder, the municipality. And different municipalities viewed it differently. 133 What we've seen is that there are -- some LDCs are out there aggressively pursuing, in essence, competitive approaches to this new paradigm. Others are backing off from it. You're seeing that in this hearing room. Just different approaches to the changing rules. 134 What you're rewarding are the people who are adapting, in my view, adapting to the new marketplace and approaching this like competitive companies, and you're rewarding those who are able to gain customers. 135 MS. LOTT: Okay. I wanted to turn for just a couple questions related to the issue of compensating for stranded or redundant assets, and I wanted to look at VECC -- your response to VECC Interrogatory No. 15, J.12, tab 11, schedule 15. 136 MR. TODD: Yes, I'm there. 137 MS. LOTT: You've got that in front of you? 138 MR. TODD: Yes. 139 MS. LOTT: It's a question that was put to you about interval metering, and if we look at the -- the paragraph that you begin after the quote from the DSC, you suggest that the cost to customer has to pay an incumbent LDC in order to obtain interval metering, could be an impediment to the customer opting for retail options. 140 MR. TODD: Yes. 141 MS. LOTT: And if we look at the reference section of the DSC in the quote above that, it seems to me that it indicates there are really two types of costs being referred to; the incremental cost to providing for the interval meter, and then the cost of that -- of the existing metering being made redundant. 142 MR. TODD: Yes. 143 MS. LOTT: So if the interval meter is provided by a third party, you would agree that the price charged by that party would include recovery of the incremental costs of providing the interval meter, which could be higher or lower than those of the incumbent; would you agree with that? 144 MR. TODD: Yes, and it gets a little tricky if you're not just providing the interval meter, as in the Wirebury case. I mean, they're offering you service, which includes an interval meter. But clearly as a profitable business, which it hopes to be, it's going to recover all of those costs. 145 MS. LOTT: Thank you for that. Would you also agree that if the interval meter is provided by a third party, that the incumbent utility should still be compensated for the cost of the existing metering that's been made redundant by that choice? 146 MR. TODD: There's a couple of approaches to that, and it depends on how you define the cost or value of that meter. 147 First of all, in a standard customer request, I would presume that at most, the utility would be charging depreciated value of the meter, and potentially an alternate party that strands that meter would, obviously, have to pay -- in effect, buy that meter at the depreciated value. 148 If they're paying for and, therefore, buying that meter at depreciated value, they, of course, should get it and be able to get some salvage value out of it, if there is any salvage value. 149 At the same time, I look at the broader policy perspective, and, perhaps not right away, but certainly one can contemplate that in an environment where we are encouraging the transition to interval meters, we could be very close to a situation where, as a matter of public policy, the old metering technology is simply being replaced on an ongoing basis, and those meters are being effectively tossed out, and there's a swapping-out being done without the customer having to pay for those meters. Under this section of the code, they do pay for it. 150 But I think we should be cognizant of potential changes in public policy, given the kinds of discussions our -- policy statements our new government's been making, and make sure that any rules that are set in place do not end up being inconsistent with broader government policy. 151 MS. LOTT: Okay. But we're not -- we're not there yet. 152 MR. TODD: We're not there yet, no. 153 MS. LOTT: Okay. I wanted to move on to some -- a couple questions about the issue of overlapping service areas. 154 MR. TODD: Yes. 155 MS. LOTT: And as I understand your suggested approach as outlined in your evidence, and I'm looking there at pages 13 to 15 of your evidence, and I'm going to quote here. You say that: 156 "In instances where customers are unserved and underserved, the choice of distributor would be left to customer preference, unless the situation arises where no capital contribution is required from one or more of the competitive distributors. And in that case, the OEB would become involved in determining through some kind of administrative process which distributor's proposal was in the public interest." 157 And also: "That once a customer was served, that customer would become uncontestable." 158 MR. TODD: Yes. And given some of the IRs and discussion, I think that the definition I added to "unserved" and "underserved" yesterday, which I had taken granted before from CRTC definitions, has to be factored into those statements. 159 MS. LOTT: Okay. And is it fair to say that the closer in proximity that two adjacent distributor systems are that the more likely it's going to be that capital contributions will not be required? 160 MR. TODD: If we're talking developments, developers, developments, essentially, the history of the development of the Ontario distribution system has been that developers have paid for essentially putting in the distribution system, and then hand it over to the local utility. 161 That means that rates generally do not reflect -- distribution rates do not reflect the full cost to the system, including historically the building of the distribution system. And therefore, rates are not designed to recover the full cost of putting in the plant plus recovering all of the O&M costs. That's just not the way our system developed and not the way -- that's not the level of our rates. 162 As a result, it is almost inconceivable that any development could proceed where the full cost of the distribution system, even if it's just across the road from other facilities, could be paid for out of existing rates. 163 So closer, would we have less contribution, but while I won't rule out the possibility that there will be cases where there would be no contribution required, closeness is unlikely to be that factor. 164 MS. LOTT: Now, your evidence doesn't address directly the question of overlapping service areas, and we know that some distributors have applied for, in the case of Southwest applicants and Veridian. Now, under this model two utilities are granted licence to serve a common territory and subsequent decisions about which utility serves a specific customer are based solely on customer choice. 165 Now, I'd like to get your comments on whether your model for distributor competition would be affected at all by the introduction of overlapping service areas. Does it require overlapping service areas and would it be facilitated by overlapping service or would overlapping service areas tend to somewhat confound the application of your model? 166 MR. TODD: There's two parts to that. You're referring to my model. My model has focused on the more restricted issue of serving unserved and underserved customers as opposed to the full competition which has been proposed by others. 167 Certainly in the context of my model, I view the issue of boundary change versus overlapping as essentially an administrative issue. If you have overlapping service areas, then each time there is a new development, the parties, the distributors that have the overlapping service areas are entitled automatically to serve those customers; whoever can sign them up can proceed. Other than sort of an approval process of the specific application, there would not have to be a boundary change proceeding, so it makes it procedurally a simpler matter it seems to me. Whereas, if you do not have overlapping areas, then what you're looking at is a boundary change and that requires a different kind of OEB approval, different kind of process. I suspect a more cumbersome process than approval to connect some customers within an area that a party is entitled to serve. 168 So I would essentially view the overlapping model as one which is more facilitative of competition but the approach used, other than those administrative processes, conceptually it wouldn't affect my model. 169 Clearly, if you're talking about the other model of full competition for all customers, it only works if you have overlapping service areas. 170 MS. LOTT: But Mr. Todd, would you agree that before we proceed too far down that kind of path of overlapping service areas, that it would be advisable for the OEB to confirm that all LDCs are applying the economic evaluation methodology in the same manner? 171 MR. TODD: Again, you're referring to my more limited form of competition of unserved and underserved? 172 MS. LOTT: That's correct. 173 MR. TODD: I think it is important that the Board make it clear that if it gets involved, it's going to do an apples-to-apples comparison, because there is no doubt that under the DSC, the method of doing an economic evaluation leaves some flexibility for different distributors to do the calculation differently. And either by laying out the more detail of how it expects the calculation to be done or by simply saying, We expect an apples-to-apples comparison and if there's two parties in dispute and they're going to come to us, we're going to adjust them to a common ground, one to match the other, or somewhere in between. That is certainly necessary because you would ultimately need an apples-to-apples comparison if the Board gets involved. 174 Now, if you recall my comments from yesterday on a more generic level, it doesn't mean the Board would have to do that in every case where contribution is required because in a sense, with the PBR calculation or the PBR process guiding rates, you can really view it as two competitors making competitive offers and each one, these are my comments from yesterday, each party has an incentive to make sure that its calculation accurately reflects its true incremental costs from the perspective of underlying economics as opposed to underlying accounting. Because if they don't reflect their true incremental costs and they underestimate what they are, the shareholder will be out of pocket. If they overestimate them it gives the other party an advantage to underprice them. 175 MS. LOTT: That only occurs where there's a situation of no rebasing; isn't that correct? 176 MR. TODD: It occurs if there's no rebasing or if there's rebasing exercise that says, We will only allow as prudently incurred costs your estimated costs. 177 MS. LOTT: Okay. Mr. Todd, to your knowledge has Wirebury applied for an overlapping or an exclusive licence in this application that it has before the Board? 178 MR. TODD: I didn't see that in the application, but I presume it's -- I shouldn't speak -- my assumption is -- what we're looking at, what my model is saying is that you would end up, in effect, with an embedded exclusive right so you're not talking overlapping. But I think you could, depending on the rules on overlapping, you could end up in the same place, which comes back to my reference to the administrative side of it. 179 If you said, We don't want to have to deal with every one as a boundary change application, my assumption would be, my expectation would be that you could create some rules around overlapping that says it's overlapping in terms of right to offer to connect but the connected customers can't switch. 180 MS. LOTT: Okay. Thank you. 181 Just two more areas of some questions and I'll be done. I wanted to ask you a couple questions about regulatory treatment of new utilities entering the market, and I wondered if you could turn up, again, your response to VECC Interrogatory No. 24 which is Exhibit J.12, tab 11, schedule 24. 182 MR. TODD: Yes, I'm there. 183 MS. LOTT: Now, in response to the question, you indicate that Wirebury has proposed postage-stamp rates for all customers. I believe you say that in B of your response. 184 MR. TODD: Yes, and that appears in the application document which was circulated yesterday. 185 MS. LOTT: Okay. And as I understand it, Wirebury currently is not licensed, it has no customers and it has no approved rates. 186 MR. TODD: My understanding, and you know, I have limited ability to speak for Wirebury, my understanding is that they have had a licence application into the Board for some time. The distribution application licence which was circulated a couple of days ago is dated May 29th, 2003. My understanding is that application is underpinned by having, shall we say, signed up some customers, but clearly, until they get their licence they can't actually have customers. 187 MS. LOTT: So if this approach to distribution is found to be acceptable by the Board, I'd like to look at how events would subsequently unfold. You have indicated something about signing up interested customers. Would you agree that one approach would be for Wirebury to sign up the interested customers based on the anticipated costs or rates and then approach the OEB for a licence to serve them and rate approval based on forecasted costs? 188 MR. TODD: Yes, they could do that. 189 MS. LOTT: Okay. And under such approach what happens if the actual costs are higher such that subsequent rate applications by Wirebury call for increases in rates over those they used to originally sign up those customers and obtain the licence to serve them? Should such customers be responsible for those costs or should the Wirebury shareholders, in your view? 190 MR. TODD: In my comments today and yesterday about the elegance of the solution, my view was that the costs that would be allowed would be the forecast costs, the costs included in the application. And the company may incur variances from that forecast, but as long as the variances were positive and negative and turned out to the small overall, the shareholder and the customer would not be harmed. 191 If, of course, they were underestimating on a consistent basis, the shareholder would ultimately be out of pocket provided that the regulatory system only permitted the forecast costs to go into rate base. From the public interest perspective that would be appropriate. 192 MS. LOTT: Thank you for that. If I could sort of give sort of a general summation of where we're at in terms of this proceeding in terms of the sort of general way the arguments are falling out, if I could just state your view, is that in a very broad and high-level sense, that benefits from competition outweigh the costs, where as others here have indicated that opportunities for competition in the distribution sector are limited, there are costs involved which outweigh the benefits. 193 The bottom line here is that there is no quantifiable evidence that will help the Board to resolve this one way or the other to prove -- either prove or disprove either of these claims. But can we at least say this, that while there may be benefits of competitive models, such as the one you're positing, that if such models increase uncertainty in terms of the number and/or location of future customers, there will be increases in costs attributable to such models? 194 MR. TODD: The way I put it is somewhat different, as you can imagine. The summation of my view is that we do not know whether the Wirebury model is an innovation which will take over the world, or an innovation that will disappear a year from now. 195 I'm sure that Wirebury is convinced they're going to take over the world. I'm sure that some others, such as the LDC Coalition, believe that it is a flawed approach, and I'm agnostic. I'm not here to say their model is a good model and that the Board should be buying into it, because it's a good model. I'm here to say that competition -- and similarly, I cannot say that -- quantify the benefit of competition. 196 What I can say is, starting from the McDonald Commission, the decision was made that we know there are costs to competition. We know there are transition costs. We know there are -- it creates uncertainty. We know that competition increases risk for all parties, which increases the cost of capital. 197 And despite those clearly-identified and clearly-quantifiable costs, we believe that competition will result in greater efficiency, because we believe in incentives. 198 And why do we believe that? We believe that for many reasons. We believe that, because the Berlin Wall came down. We believe that, because we look at power in Ontario, as recently as last week, with further discussions about private -- about a publicly-owned corporation, OPG and the problems it's run into. Many of the problems that Hydro One or at Ontario Hydro in the old days were attributed, in part, to it being a public-sector company; although, the evidence is clear that both public- and private-sector companies can be efficient. 199 But there's a -- a problem with monopoly. Competition creates choice. Competition in -- in creating risk, which has a cost, creates a response to that risk. 200 MS. LOTT: But, Mr. Todd, I think there has been some consensus here that -- agreement that competition in generation is a good thing. I think the -- what is really at issue in this proceeding here is the benefits as applied to the distribution sector, where there -- we don't have any agreement about the benefits of competition. 201 MR. TODD: No, I think what we have as a general agreement -- no, well, if there's no general agreement here, obviously. 202 My view, and my view has always been that effective -- where you can find some effective competition, where you can find any form of incentive, incentives work better than regulatory oversight. 203 And what I'm suggesting here, first it must be clear, I am not proposing full and open competition. In fact, in retrospect, I wish I had called this model an incentive model as opposed to a competition model, because we're not talking competition, because we're not talking price competition. We're talking a limited form of competition. 204 What we are talking about is injecting an incentive to be very efficient in connecting customers. We are creating an incentive to provide services that are attractive to customers. And the way I look at it, the upside potential is significant. The downside risk for the public interest is minimal. 205 The risk of failure of this innovation will be borne by the ratepayers of Wirebury or other people who copy the Wirebury model, not by the public interest under the approach that I've been suggesting. 206 MS. LOTT: I just have a few more questions on the last topic. They'll be brief. 207 You've suggested in your report that one of the benefits of competition is an improvement in technical efficiency, and I'm looking there at pages 3 and 4 of your own report, where you talk about reduced costs through technical efficiency. 208 MR. TODD: Yes. 209 MS. LOTT: Okay. You're aware that LDCs in Ontario have been under a PBR-type regulation since 1999. 210 MR. TODD: Yes. 211 MS. LOTT: And indeed, given subsequent provincial legislation, even rate increases that would have been allowed under PBR have been precluded. 212 Would you agree that these restrictions on rates over the past four years have provided LDCs with an incentive to reduce their costs? 213 MR. TODD: PBR provides an incentive. I do not believe that PBR comes anywhere close to competition or any form of competition in terms of driving management to look hard at costs. 214 In 1972/'73 I was at Bell. I can tell you that the corporate culture inside of Bell believed, as far back as that time, that they were efficient, and they were hard done by the regulator and being squeezed, and they were doing the best they could. 215 MS. LOTT: But, Mr. Todd, do you have any practical -- 216 MR. TODD: Let me finish. 217 MS. LOTT: Okay. 218 MR. TODD: They still, when I was on the other side of the table in the early 1990s were still of that view. 219 When competition was introduced, they suddenly and miraculously found the ability to cut costs significantly, even though they had gone for ten years without a rate increase. 220 MS. LOTT: Those are my questions. Thank you very much. 221 MR. SOMMERVILLE: Ms. Lott. 222 Ms. Friedman, you were not present yesterday when we canvassed -- 223 MS. FRIEDMAN: No, I was not. 224 MR. SOMMERVILLE: Do you have questions for this witness? 225 MS. FRIEDMAN: I do. I just have three questions. 226 MR. SOMMERVILLE: Please proceed. 227 MS. FRIEDMAN: Thank you. 228 CROSS-EXAMINATION BY MS. FRIEDMAN: 229 MS. FRIEDMAN: Good morning, Mr. Todd. 230 MR. TODD: Good morning. 231 MS. FRIEDMAN: My name is Kelly Friedman. I act for the Electricity Distributors Association. 232 Just three short questions for you: To the extent that a service area amendment or the granting of a new licence leads to stranding of assets, do you agree that there sought to be some compensation to the utilities' whose assets are stranded? 233 MR. TODD: As I indicated earlier, one approach to the issue is to compensate companies for stranded assets in the sense of assets become unused and unusable. 234 Beyond that, the approach that is taken by the CRTC, which I agree with, is to say compensation does not create an incentive, and there needs to be an incentive to avoid those costs of stranding where they can be. 235 And if it is seen to be a serious problem, and frankly, particularly under the Wirebury model, they -- they're using the upstream assets, so it's difficult to see it as being a serious problem, but if it is a problem, I'd suggest approaching it a different way, which retains the incentive to be efficient and avoid stranding, such as adjusting depreciation rates and allowed returns to reflect risk. 236 MS. FRIEDMAN: Okay. I appreciate your explaining the different options. My question is this, however: If it leads to stranding, so there is evidence that the new licence has led to stranding, should there be compensation in that case? 237 MR. TODD: And the beginning of my last answer said, yes, where there is an unused, unusable asset. 238 MS. FRIEDMAN: Okay. Thank you. 239 To the extent that a service area amendment or granting of a new licence leads to duplication of distribution assets, do you agree that that would be inefficient? 240 MR. TODD: As a concept, yes. 241 MS. FRIEDMAN: To the extent that a distribution -- that a distributor is granted a licence over a particular service area, do you agree that the distributor should have the obligation to offer to connect any customer in that area who requests a connection? 242 MR. TODD: Yes, the existing obligations that apply to distributors should apply to all distributors. 243 MS. FRIEDMAN: Thank you. Those are my questions. 244 MR. SOMMERVILLE: Mr. Engelberg. 245 MR. ENGELBERG: Thank you, Mr. Chairman. 246 CROSS-EXAMINATION BY MR. ENGELBERG: 247 MR. ENGELBERG: I'd like to explore with you first of all, Mr. Todd, a question that you answered to Ms. Lott and you used the phrase, "You are adapting to the new marketplace," and I believe you said that in the context of what would happen if one distributor were harmed and the other distributor gained from that, do you recall that? 248 MR. TODD: Yes. 249 MR. ENGELBERG: And you said it matters a lot to an individual utility as to whether it gets the customers or not. 250 MR. TODD: Yes. 251 MR. ENGELBERG: Now, why does it matter to the utility who is losing the growth or losing the customers? 252 MR. TODD: Every competing business in every sector of the economy wants to get customers, does not want to lose customers. Every customer it gets adds to its bottom line, and every customer it doesn't get means a loss. 253 In a competitive environment, you win some you lose some. I'm a consultant, I write RFPs, I win some, I lose some. If I lose too many, I go out of business. It doesn't mean those potential customers don't get served, it means somebody else serves them who can do it better, the winner serves them. And an LDC in this environment is like anybody else, in any particular contest for customers, it will be relatively better off if it wins, relatively worse off if it loses. If it comes out a winner in a high enough percentage it doesn't matter which areas that it wins in, it will in a sense be no worse off, no better off than it was. If it is the consistent winner it will be better off. If it is the consistent loser it will be worse off. 254 MR. ENGELBERG: Is that what you meant when you gave Ms. Lott the answer that you are adapting to the new marketplace? 255 MR. TODD: Adapting to the new marketplace, that's the first step. The next step is management leading a firm that is the relative winner gets rewarded with the bonuses and the pat on the back and management leading a firm that is the relative loser on an ongoing basis has its owners come in and say, Either shape up or we'll find somebody who can do a better job, or we will sell out it to somebody else who can run this organization better and it becomes competitive. 256 MR. ENGELBERG: Well, let's talk about the situation that exists in Ontario right now and how that fits into the new marketplace and your idea of you lose some and you win some. Does that theory assume a level playing field when you talk about a new marketplace? Should there be a level playing field? 257 MR. TODD: Again, these issues have been discussed at great length with the CRTC and I think there's an important distinction to be made, which they did, between fair advantage and unfair advantage. It's an important concept. A level playing field, if you're talking about the avoidance of unfair competitive advantage, yes, that's the goal of design of a marketplace is to make sure there's no unfair advantage. And in that sense, I'd say yes to a level playing field. 258 If you're talking about inherent differences, the goal of the new paradigm is not to protect those who have an inherent disadvantage which is not an unfair disadvantage. So with that clarification, I would say yes, it does assume a level playing field. 259 MR. ENGELBERG: Well, I'll put to you that what we have in Ontario is a regime where there isn't a level playing field in the sense that, for example, an incumbent LDC that we have in this proceeding today, whether it be Hydro One or Toronto Hydro, or EnWin or Erie Thames, was required and is required by the legislation in Ontario, by the codes that are in place, and by the terms of its licence issued by this Board, to plan to develop and to build in order to be ready and able to serve every customer that might materialize and can be expected to materialize within its service boundaries as part of its licence. Would you agree with that? 260 MR. TODD: No, I would not. 261 MR. ENGELBERG: Can you tell me why you would not? 262 MR. TODD: I don't know if I actually have to turn to the exact words, but the words are in the vein of reasonable forecast growth. Again, this precise issue was fought out before the CRTC. The CRTC position on it was, and I agree with it entirely, the obligation is to put in facilities to serve the customers you expect to have to serve, which is exactly what a private sector company does. The difference is that there is a service area in which you have to provide service. 263 It does not mean that you have to have in place facilities for every potential person that could come your way. In a competitive environment, you would have to factor into that market share. Now, to the extent that we're changing the rules of the game, I think what you're saying is historically, an appropriate planning process would have envisaged 100 percent of the customers coming the way of the distribution company and, therefore, up to today, they have planned on that basis. 264 So first we have to separate going forward versus historical. Clearly on a going-forward basis, if there is a situation where there are alternative providers, the obligation is not to have facilities for everybody, it's only to have facilities for a reasonable estimate of who you will be actually serving. 265 In terms of the historical perspective, the point you're making is one of the reasons why, in my view, the Wirebury model is actually the model which is least harmful to the LDCs because they're not competing for customers in the boundary as to which direction they will go, they are looking at an embedded model where they will serve customers and attach themselves to the upstream facilities of the incumbent LDC, and therefore, in terms of upstream facilities there is no difference in the number of customers served. 266 So from that perspective, there's no harm. I can see a modest argument where you're talking about boundary changes and a neighbouring LDC taking the customer and serving them with their upstream facilities when you expected them and that potentially could lead to some upstream stranding. 267 Frankly, why I referred to the CRTC in the beginning was the CRTC said that is a non-issue, but I recognize that part of the reason they recognize that as a non-issue was by going through the going-in rate exercise which did recognize accelerated depreciation, in part because the useful life of some assets were shortened, and it recognized the increased risk with increases in the allowed ROE. 268 MR. ENGELBERG: Well, I'm not sure I understood all of that, but are you saying that the legislation and the licences issued to the various LDCs in the province does not require them to provide service and to plan for growth within their licensed service territory? 269 MR. TODD: It does require them but what I'm saying is that part of the planning for growth is anticipating how many customers you will have and in doing that, you take into account all factors, economic trends, how much empty land there is that may be developed and also what proportion of those customers will end up being attached to you and in what way. And all of those aspects have some uncertainty around them. 270 Planning means that you on an ongoing basis update with your best guesses. Clearly, it would not make sense from a policy perspective, and therefore, I assume the legislation does not say that you should provide facilities for customers you're not going to get. 271 MR. ENGELBERG: Well, I put it to you, though, that we have a number of live applications here today, they are here for changes in connections and territorial boundaries today and they are based on the way the situation has existed in the province up until this time. Would you agree with that? 272 MR. TODD: I would agree that this -- the reason we're having a policy proceeding, a generic proceeding at this time, is that the rules of the game may be changed, and that will have implications, yes. 273 MR. ENGELBERG: Right. But you said that that was based up until now, then, on best guesses of utilities. Is that referring more to the future or to the past? 274 MR. TODD: In the past it would have been appropriate for Hydro One, for example, to plan on the basis of the rules of the game that were in place, perhaps modified by expected changes, which, until the last couple of years, the changes we're talking about today were probably not contemplated. 275 MR. ENGELBERG: All right. Well, I'll give you an example, I think, then, that will illustrate what you're talking about. 276 If there is an existing LDC, let's say it's shaped like a circle, and Hydro One is the licensed provider for a larger circle outside that LDC so that Hydro One surrounds or is on the border of that LDC, Hydro One notices that that LDC, the growth in that urban area is moving out steadily to the northeast. 277 MR. TODD: Yes. 278 MR. ENGELBERG: Growth is occurring, therefore, in the southwest portion of the Hydro One territory, which abuts the northeast portion of the LDC. And the situation as it has existed until now was exclusivity of service territory licences. 279 MR. TODD: Yes. 280 MR. ENGELBERG: Would Hydro One not have been reasonable and not making any guesses in building and planning growth over the past ten years systems infrastructure and backup services to make sure that it would be able to provide the service required by its licence to the southwest quadrant of its territory, where it saw the growth occurring? 281 MR. TODD: Yes. 282 MR. ENGELBERG: Should Hydro One have guessed that it would lose those customers and therefore not make these expenditures? 283 MR. TODD: What I have said about planning is there's a difference between planning and construction. It's not clear to me that with the regulatory time frame that we've gone through that by the time the customers are actually lost, that you would have had to actually construct facilities for them as part of the normal planning process. 284 In theory, what you're saying is correct. They should have been planning for them, but if those developments still have not taken place, I would be surprised if those facilities had been constructed as recently as a year or two ago, so if you're talking about further upstream, some generic facilities, I think that, again, these issues have been dealt with extensively in other jurisdictions. So in principle, I have some sympathy, but it's limited. 285 There may be cases where, yes, there -- a growth, customer growth down the road was a factor in a particular upgrade, and if that can be demonstrated, one of the possible solutions would be to look at compensation for it. 286 In that event, an alternative to compensation would be that those customers actually be served off of the Hydro One grid, which would mean they would be using those upstream facilities in any case, in which case the problem goes away. 287 And, in fact, it is my understanding, although I'm not sure I can confirm it, but it was my understanding that even with some of the boundary change proposals being made that the local distribution companies that are looking at taking -- moving their boundary so that they can entrench on traditional Hydro One territory, the idea is to have embedded -- an embedded structure where they would be serving those customers off the Hydro One grid in which case the planning would be correct. 288 But yes, theoretically, the scenario you lay out is possible. 289 MR. ENGELBERG: Okay. Well, I put it to you that it's a little bit more than theory, because we're here today because those subdivisions have materialized. They have materialized in Hydro One territory, and those homeowners will want connection. 290 Hydro One and the adjacent municipality would have had to build and plan, I believe you said four years -- other people -- you said four years for the construction, I understood. Other people have said ten years for the planning and construction as a whole. 291 So I'm not sure that we're saying anything different from each other, but either way, upstream facilities would have had to be built and planned so that when the subdivision materializes and the homes take six months to build, somebody will be ready to provide service to them; would you agree with that? 292 MR. TODD: The theory I was referring to was not the existence of the customers. The theory I was referring to was whether in any specific circumstance there actually had been money spent that would not have been required if it were not for those customers. 293 In my limited experience with system planning for Bell, we had a ten-year plan. We recognized that there are a lot of variables that could change that, so the ten-year plan did not involve any construction-specific plan. 294 We would get into engineering processes, perhaps, a couple of years ahead of the earliest date that new facilities may be required, and we would get into actual construction of them -- this was -- these were central offices, so it was inside, planned a bit easier than wires, but we would really not do the -- start construction until a few months before it was required. So you're continually fine tuning your target date to avoid spending money until the last minute. 295 So when I was referring to -- and it may be a bit theoretical, is I think that the demonstration that money had been spent for a particular, you know, growth in a particular area would be subject to review in a particular case. And it may -- it may be supported, and it may not, but we can't assume in all cases that the problem exists. 296 MR. ENGELBERG: Would you agree that if it is supported, that as between the incumbent LDC and an applicant LDC that the incumbent LDC that was required to do that building and planning should be the one who obtains the customers or else should be compensated for losing them? 297 In other words, did an applicant LDC also have the duty, in your opinion, to make sure that it could build and plan for customers that might materialize outside its service boundaries? 298 MR. TODD: An applicant would not have a duty to provide facilities for growth outside a service area; I agree with that. And I do agree that in one way or another, the problem should be recognized. It's a real problem; I agree with that. It's a problem that should be recognized. 299 One way of doing it would be to -- subject to showing that there are actual dollars that were spent and stranded, that either those facilities should be used, exactly the way you put it, or they should be compensated. 300 But there is the broad alternative that I've mentioned a couple of times that there may be different ways to deal with the problem that on an ongoing basis. I mean, you've -- on a forward-looking basis are better in terms of providing an incentive and avoiding creating incentive to invest in the facilities, so you can then claim they're being stranded. And that was what the CRTC tried to do. 301 MR. ENGELBERG: Okay. Just to clarify one point with you, Mr. Todd, the other witnesses that have testified in this proceeding say that when they use the word "stranding," they are including stranding, partial stranding, and underutilization under that same term. In other words, that an asset, an upstream asset doesn't need to be completely stranded in order to be something that has to be compensated for. 302 Would you agree with the use of the word "stranding" by the other people who have testified, or does "stranding" to you only refer to an upstream asset that is totally unusable because of the change in territory? 303 MR. TODD: I have used, I think, a couple of times today the words "unused" and "unusable" in the sense that they are stranded. Now, the stranding in theory could be a portion of capacity of something. It isn't necessarily a complete asset. The most obvious example would be a meter that is no longer required, it gets thrown in the junkyard. It could be a line going somewhere that now is a dead end. Conceivably, it could be a transformer station that's upgraded and specifically was upgraded and can be shown to have been upgraded with some capacity to serve a particular location. But I would use a comparatively narrow definition of it because what you don't want to do is get into a situation where a company is being compensated for stranded capacity which it can then go and reuse for other customers because it may lose growth in one development. But if it's doing a good job it's going to gain growth in another development which may be right beside the one they just lost and may be in the other distributor's service territory and you'd end up with double compensation in a sense. 304 MR. ENGELBERG: But you are allowing that underutilization and partial stranding are things that would need to be taken into account, the same way that stranding would; is that correct? Assuming it couldn't be used elsewhere with all the caveats that you put on to it, underutilization and partial stranding are things that might be relevant in given situations? 305 MR. TODD: The concept is the economic concept of unused and unusable, which could go beyond 100 percent of a physical asset. 306 MR. ENGELBERG: Would unused and unusable also include underused? Because to me, unused and unusable mean 100 percent. 307 MR. TODD: Okay. What I'm thinking of is -- again, I'll take us to an example. I'm going back to my hands-on experience. In a central office you had line cards so you could actually have complete flexibility by not putting in equipment until you needed it. In a transformer station you have capacity as a whole, you could have built it smaller, you built it larger. There is additional equipment in there. Some of the equipment essentially should not have gone in, you can take one corner of the yard and say that should be thrown away because it was put in with the expectation of certain growth. 308 The biggest problem is you're getting on a slippery slope there, which is why while I accept the concept. My urging to the Board would be, unless it's very clear 100 percent unused and unusable, you just take the hard-nosed decision and say therefore, there's nothing to recover unless it's very clearly stranded. 309 MR. ENGELBERG: I understood you to say a few minutes ago that if that transformer station or distribution station were built with the development in the quadrant that has been applied for, with that development in mind, and if it can't be used somewhere else, and therefore, the transformer station isn't used to its full capacity, that it is therefore underused, it's still being used to supply some other parts of the municipality, but the underused portion would be taken into account. Are you resiling from that? 310 MR. TODD: No. What I was agreeing to was it was the theory, but let's clarify in practical terms. 311 If you've got a portion of the transformer station which you're saying is, Oh, that's there for this new development which is no longer ours, but there's probably other growth taking place in that general area, next door to it on the other side, that portion of the transformer yard can be used in other ways in general. 312 MR. ENGELBERG: Let's say it can't be used for another area because the other growth is taking part in a different part of the service territory. 313 MR. TODD: That's why I'm saying to the Board to apply a rigid test recognizing that as soon as you get into upstream facilities, by and large they are flexible, and therefore, by and large you can't call them unused and unusable. There may be exceptions and, you know, I'm not going to be so arbitrary to say no exception could possibly occur. Obviously, in this hearing room you can come up with a concept that I would say, yes, that's unused and unusable. In the real world, have fun doing it. 314 MR. ENGELBERG: Thank you. Would this be an appropriate place for the morning break, Mr. Chair? 315 MR. SOMMERVILLE: I'm happy to accommodate that, Mr. Engelberg. 316 MR. ENGELBERG: I'm willing to go another 15 minutes. 317 MR. SOMMERVILLE: Let's take our break now and we'll reconvene at 11:15. 318 --- Recess taken at 11:01 a.m. 319 --- On resuming at 11:27 a.m. 320 MR. SOMMERVILLE: Thank you. Please be seated. 321 Mr. Engelberg? 322 MR. ENGELBERG: Thank you, Mr. Chair. 323 Mr. Todd, isn't it fair to say that you agree with the analysis and conclusion of the KEMA-Quantec experts in the context of existing customers, namely, that there's no economic rationale at this time in Ontario for having competing electric distribution providers serve existing customers? 324 MR. TODD: I wouldn't be so absolute. In my view, allowing competition throughout the province for existing customers probably requires a bit of further thinking about the regulatory framework, which is why I've raised the CRTC example in my first footnote in the evidence about what they have done to facilitate resale competition through creating regulated wholesale rates. 325 And it's a bit more -- the switching of customers issue is a bit more complicated, because there is a difficult problem of what do you do with the upstream facilities? One approach would simply be to, in effect, of a wheeling rate that -- for taking power through the distribution network to the customer and viewing it in much the same way as a development. 326 That, if the Board wished to go in that direction, that, perhaps, would be an acceptable short-term solution, but I would consider it to be appropriate only as a short-term solution in the way that further thought should be given to truly facilitating full retail -- and when I say "retail" competition, it's not the way we think of it -- energy, which is retail for the commodity only, but full retail competition for a package of services by instituting a mechanism of unbundling of the components of the services currently provided by distribution companies. 327 So that, in effect, a competing service provider could buy from the incumbent utility an unbundled -- what in telephone terms they call a "local loop," which would be -- the equivalent would be the wire facilities or the capacity in this case for carrying the power to the customer. That gets into issues that are beyond the scope of this proceeding. 328 MR. ENGELBERG: All right, then. Well, in the context of the existing customers, we're just talking about existing customers, you concur with the analysis and conclusions of the KEMA-Quantec report? 329 MR. TODD: I think that the KEMA-Quantec report essentially says it's a bad idea. What I'm saying is it is a full competition with the appropriate regulated structures in place. It maybe something worth considering. Frankly, I haven't turned my mind to it extensively, but I do recognize that it is an issue that has been addressed in the case of telecom, and they've come up with solutions. The concepts, I see no reason up front why they couldn't apply in the case of electrical distribution. 330 And if -- at most if there were a commitment to take a closer look at it, I would suggest the Board should adopt an interim -- interim approach to facilitating it or simply defer it until there's a way to design a good model for full competition. 331 MR. ENGELBERG: Well, would it, perhaps, then be more fair to say that you differ from the analysis and conclusions in the KEMA-Quantec report? 332 MR. TODD: Yeah, I recognize the concerns that they've raised, and I think they raise concerns that should be addressed as opposed to seeing them as concerns which should be an impediment to introducing competition. 333 MR. ENGELBERG: Do you believe that the electricity distribution function is a natural monopoly? 334 MR. TODD: I believe that the -- you say the distribution -- distribution hardware is a natural monopoly in that you should not have parallel facilities running down the street. In saying it's a natural monopoly, though, it's important to recognize that what "natural monopoly" means is it naturally evolves to one company. It was not sustainable to have more than one, and so market solutions would -- would just lead you to having one company. Whoever has the greatest market share ends up taking over the entire market within -- you know, when I'm talking the entire market, be the entire market associated with a particular distribution line. 335 MR. ENGELBERG: So then would you say that the distribution function is naturally monopolistic? 336 MR. TODD: My approach in telecom, the approach here is exactly the same, and it's you have to disaggregate what we have traditionally thought of as a monopoly, as everything, into its component parts, which is exactly what we've done in the electricity sector so far, but at a very crude level. 337 We've said -- we've basically said there's generation, transmission, distribution, which have different characteristics in terms of opportunities for competition. As we now move to getting a little bit more refined in our thinking, we would have to take distribution and break it down into component parts and recognize what is naturally competitive and what isn't. 338 What is naturally competitive is essentially the wire. I'm not so sure about all the transformer stations and so on, but to some extent, they would be, depending how far downstream you are. 339 MR. ENGELBERG: So the wires portion of distribution is competitive? 340 MR. TODD: No, I'm saying that's the one part that is monopoly, a natural monopoly. You can't have -- it would not be sustainable to have two distribution wires running down the street. 341 MR. ENGELBERG: And transformer stations and distribution stations, I understood you to say, are not a monopoly, not monopolistic? 342 MR. TODD: Well, I'm saying not necessarily in all cases. 343 An illustration would be -- and I keep coming back to telecom, because they've done it there, so I can talk about real examples and how it turned out. 344 In telecom, what's called the "local loop," the wire to the residents, is a natural monopoly. A little south of us, King and Bay area where you've got office towers, the local loop is not a natural monopoly. The reason is that the density of service is so great that there is a plethora of underground fibre optic lines. I've done some work with the City of Toronto, and you should see the maps of what it looks likes under the street. It's just mind-boggling. 345 But there's at least four or five companies that have their own telecom distribution systems in the downtown core, and there's no natural monopoly there, because the total capacity facilities you need is large enough that you can have what may appear to be redundant facilities still operating on a relatively efficient basis. 346 Similarly, there may be locations and facilities where demand is large enough, perhaps, you know, a particular large industrial customer, where it would not be redundant to have more than one facility, but that's a case-by-case issue. 347 MR. ENGELBERG: Could I ask you to take a look at your report, Mr. Todd, that you -- was filed by Wirebury, page 1, line 19. 348 MR. TODD: Yes. 349 MR. ENGELBERG: Is that available to everyone? Thank you. 350 Would you read the paragraph beginning at line 19, please. 351 MR. TODD: "I concur with the analysis and conclusions of KEMA-Quantec in the context of existing customers." 352 MR. ENGELBERG: Let me interrupt you right here. I tried a few minutes ago twice to say -- to get you to say that you concur with their analysis and conclusions, and you wouldn't say that. You wouldn't use the word that you concur with them. 353 Have you changed your opinion on that? 354 MR. TODD: Well, the sense that -- the paragraph goes on to identify specifically what I concur with, and that is: 355 "The distribution function is naturally monopolistic and that it would be both economically inefficient and unsustainable to allow for more than one distributor to offer service to a customer or group of customers using duplicative facilities." 356 So that's my agreement with them. 357 MR. ENGELBERG: You still stand by that? 358 MR. TODD: Yes, I still stand by that -- 359 MR. ENGELBERG: Thank you. 360 MR. TODD: -- if you take all the words in the sentence. 361 MR. ENGELBERG: Isn't also fair to say that you believe stranded costs are not a major issue in this proceeding from Wirebury's point of view, since you're not recommending implementation of competition that includes the switching of existing customers? 362 MR. TODD: That's right. As far as I go in my evidence, I'm talking about competition for new customers only -- well, unserved and underserved customers. 363 MR. ENGELBERG: So is it fair to say that your idea is that territory could change hands one time; in other words, Wirebury, Hydro Connections, Veridian and the Southwest Utilities who are making such applications in this proceeding, Wirebury being an intervenor as well as Hydro Connections, sorry, those companies should get the right to connect new subdivisions if there aren't already poles and lines where the houses are being built, but once Wirebury gets that right, gets that territory, gets that licence, the homeowners there are captives? 364 MR. TODD: Yes, and I think it's incumbent upon me to clarify a little bit of those comments that I have made because parties have suggested there is an inconsistency. 365 Let's understand clearly what I've meant by unserved and underserved. So first of all, what you're referring to is the unserved. Unserved would be defined as an area where there's locations, i.e., what was formerly farmland is being redeveloped. Instead of being one large farm, we now have a number of lots. Those lots have no electrical service to them. I've referred to them as green fields as far as the electricity perspective. Those lots would be unserved, and therefore, they would be contestable until they are served. 366 I've also made reference to underserved. In the CRTC context as I was mentioning yesterday, the underserved means there is a set of criteria. So as long as the customers being served meet the current criteria for being adequately served, they would not be contestable. If, at some time in the future, probably due to evolving standards in terms of those criteria for being adequately served, any customers, be they the new development of Wirebury, be they anywhere else, if they fell below the criteria of the day for being adequately served they would become underserved, and at that point they would become contestable. 367 MR. ENGELBERG: So after the competition takes place to initially serve the subdivision, is that the end of competition? 368 MR. TODD: Barring them becoming underserved is the point I was trying to make, because in my model there's not switching. What I have laid out is that this evidence talks in the context of this proceeding, and I've flagged the fact for clarity that with further process one could go to the next stage, I'm not saying that that would be impossible, but in the context of the proceeding, this is as far as I would go. 369 MR. ENGELBERG: Thank you. 370 We have talked about the example of a subdivision and that brings up the question of who should have the right to that initial competition. Is it the homeowners in the subdivision or is it the real estate development company that sells the houses in the subdivision? 371 MR. TODD: The customers, whoever is the decision maker at the time that the decision is being made as to how the distribution system is put in place, which in reality, means the developer would be the one making that decision in most cases. 372 MR. ENGELBERG: What if the homeowners don't like the choice that was made for them by the developer? Let's say there are 500 lots in the subdivision and they're not happy with what the developer chose. 373 MR. TODD: One of the decisions that a customer makes when they're buying a house is they look at all the characteristics of the house and they take it as a package. This issue, as I flagged in an interrogatory response, is the same thing as the developer making the decision between electric baseboard heating, which is cheap for the developer to install, and natural gas heating. He designs his houses, he builds his development so it will sell to customers. He's trying to make sure that customers want his houses. 374 The developer makes all sorts of decisions for the end-use customer and the end-use customer either says as a package, We like what you're offering to me at the price you are offering it to me, or we don't. What I'm saying is the decision as to who the distributor is serving is just one more of the items that the distributor, or sorry, that the developer includes in the package that he offers to the public. 375 MR. ENGELBERG: I understand that. Would you then agree that as other people, other witnesses in this proceeding have said, that the developer could have reasons for its choice of electricity provider other than what's best for the public interest at large and the customers of the various surrounding utilities at large? 376 MR. TODD: The developer makes the decision based on what enables him to offer the best package price and services to his customers, i.e., the people who buy his houses, just as an end-use customer, when given a choice about anything, will choose what works best for him or her. 377 MR. ENGELBERG: Could the developer have other reasons other than what enables him to offer the best package? 378 MR. TODD: A developer is a person so, yes, as an economist our assumption is that people are rational, and when I say the best package, I mean the package that has the best value and will, in effect, return him the greatest profit because he can charge the best price relative to the cost of providing it. That's his motive. 379 MR. ENGELBERG: All right. So to take a specific example, if a developer chooses a distributor some of whose shares are owned by the developer, would that be a reason to make the choice? In other words, there is a corporate affiliate shareholder shared-interest relationship between the distribution company and the developer. 380 MR. TODD: If the combined profitability generated by being the distributor and the developer leads the highest gain, then, yes, they would do that. Presumably, they would not engage in cross-subsidy because cross-subsidy reduces profitability, but that could be a factor as it is with embedded networks such as trailer parks which are viewed differently because there's ongoing ownership. Some trailer parks have expressed interest and other jurisdictions are expressly allowed to have embedded networks. I mean trailer parks, malls, such places, New Zealand, Australia, many places around the world, they have embedded networks where in theory there's a conflict between the owner of the facilities and the customers, but that's the way markets work and the expectation is that the market will discipline the developer. 381 MR. ENGELBERG: You're aware, then, I take it that developers have an interest in Wirebury? 382 MR. TODD: There's a broad group of participants. We saw the list the other day. In terms of the financial ownership structure, I'm not sure of that, but it doesn't make any difference to me. 383 MR. ENGELBERG: I thought you just said it would make a difference if the developer were making a choice of distributor based on that relationship and the possible financial benefits that could accrue from it. 384 MR. TODD: That may affect their choice. What I have said is that in the approach that I have proposed we have regulated rates, we have a contribution requirement, if there's cross-subsidy involved it would be borne by the shareholder, therefore the customer would not be hurt, and if there is an inappropriate level of estimate of the cost in order to identify a lower incremental cost than the utility, that will be borne by the shareholder. And if the higher incremental cost is being chosen, there's a process. You know, a complaint could be made to the Board. 385 What I've identified is a limited circumstance for doing that. Frankly, from a markets perspective, the only way off the top that I can see that being a problem is if there's cross-subsidy, but cross-subsidy only hurts the cross-subsidizer and not the cross-subsidizee. So I don't think that's a problem in any case. 386 MR. ENGELBERG: You said a minute ago that stranded costs are not a big issue because you're not recommending the implementation of competition in such a way as to enable the switching of existing customers. 387 Is it fair to say that where customers don't switch, but the incumbent utility successfully demonstrates that it's incurred underutilization of assets or stranded costs, that the incumbent is entitled to full compensation from the competing utility? 388 MR. TODD: Are you just -- are you distinguishing from the previous questions and answers where I've identified in restricted circumstances that compensation would be appropriate, where there's unused and unutilized -- 389 MR. ENGELBERG: Yes. 390 MR. TODD: It's the same question? 391 MR. ENGELBERG: No, I'm distinguishing between the two. 392 MR. TODD: Sorry. I've missed the distinction. 393 MR. ENGELBERG: Well, the customers don't switch. They're not allowed to switch, right? 394 MR. TODD: Okay. That's not switching. 395 MR. ENGELBERG: In your -- in your -- 396 MR. TODD: So where is the stranding? 397 MR. ENGELBERG: Well, let's say we have the case of an underserved area. Can you explain what you mean by "underserved." 398 MR. TODD: Oh, so we're moving to an example of an apartment building, large building that's bulk-metered -- 399 MR. ENGELBERG: Yes. 400 MR. TODD: -- and customers are being switched over and being individually metered, okay? So where is the stranding that we're dealing with here? 401 MR. ENGELBERG: In your model, is there any stranding of assets that would occur if the -- all the customers of that apartment building switched to another distributor? Because other witnesses have said that there would be upstream assets that would be underutilized or stranded when that occurs. 402 MR. TODD: Well, if customers within a building who are not, by the way, customers of the former LDC, in any case; it's the building would be the customer. So if instead of the building, the individual customers are now the customer of somebody else, using the facilities upstream of the building, which are the distributor's facilities, the only potential stranding I can see is the bulk meter, but the bulk meter could be used in any case for keeping track of the utilization of the building. 403 Now, if there's stranding, because the people in the building utilize their electricity more efficiently, because they move on to -- they have interval meters and then, perhaps, move on to time-of-use rates when those are available, and, therefore, peak usage, for example, is less, I don't see that as a reason for compensation, if that's what you're talking about. 404 MR. ENGELBERG: How about the service trucks of the incumbent utility, the repair features, the call centre, the billing? How about those upstream assets? 405 MR. TODD: Those -- none of those assets are assets which in my view come anywhere close to being unused and unusable. The truck will be on other service calls. 406 Certainly, if there is a -- or if there are enough buildings that switch over to a different supplier, firstly, the only maintenance difference that I see there is inside wire, which is not the responsibility of the incumbent in any case. So it's not clear where there's a service call that will no longer require the trucks. 407 If it were, then the company would be either growing its fleet at a slower rate or would not -- or could decrease its fleet over time. 408 MR. ENGELBERG: Isn't it a cost to the ratepayers, the customers of the incumbent utility if that truck is being used less? 409 Nobody's alleging that because a couple of buildings cancel their service with the incumbent and go to Wirebury that the truck is going to be parked in the parking lot all day long. 410 MR. TODD: It is the responsibility of every company to operate its business efficiently, given the number of customers it has. 411 The only -- the concern that, perhaps, you're addressing is an economies-of-scale issue, that if the scale is slightly less, efficiency is a little bit less. And what I'm suggesting is, as in any other market, it's the responsibility of each company to continue to do its business and know that precedents such as -- as the CRTC do not recognize that kind of stranding. 412 It says that the companies have an obligation to operate efficiently, and I -- I think if we go back through some of this Board's decisions on issues such as the movement of rental hot water tanks out of Enbridge Consumers Gas, these kinds of issues were addressed, and there is obligation placed on the company to operate efficiently, given the scale of its operations. 413 MR. ENGELBERG: So I did understand you to say that as economies of scale get reduced, efficiency gets reduced? 414 MR. TODD: You have seen extensive evidence from Dr. Yatchew around that. There is additional evidence out there, for example, a subsequent article by Filippini, who says minimum efficient scale is 100,000. My view is we don't really know what the minimum efficient scale is. 415 But beyond the minimum efficient scale, scale economy differences are there, but they are very minimal, is what the empirical evidence shows. 416 If a company -- if what you're talking about is that we're going to pretend that there's a 20,000 customer rigid cut-off for a minimum efficient scale, and because of competition, somebody's going to go from being efficient to, you know, 20,000 customers and ten down to 19,990. Should that be a concern? I would say no. 417 If they are at an inefficient scale, they, as managers, must respond to market forces and find ways of achieving efficiency. That's one of the drivers that I suggested was good, because it may lead to rationalization of the energy sector. 418 MR. ENGELBERG: Two or three minutes ago in response to a question by me you said that as the economies of scale reduce, efficiencies go down. Do you stand by that statement? 419 MR. TODD: As economies of scale -- with smaller numbers, to the extent that there are economies of scale, and there is empirical literature on the record about that, which is minimal differences in terms of once you get up to above the minimum efficient scale, there is a difference. What I have -- it affects efficiency, but there are many other ways to achieve efficiency. 420 So what I've also said is that it's incumbent upon people to find other ways to be efficient, which is what minimum efficient scale is all about. Once you've achieved that, there are different ways of being efficient, whether you're at 200,000 or 50,000 or 20,000. 421 And in fact, the literature also recognizes that those are statistical results. There are small companies that are very efficient. Even small companies can find ways to be inefficient. 422 In both the evidence, you know, writings of Dr. Yatchew and my own comments say, through innovation, they can -- even small-scale firms can find ways to be efficient. 423 You look at Switzerland, a tiny country with 1,200 distributors. They found ways to be efficient. One of the ways they found to be efficient is that there's joint ownership of all of them. There's a structure that keeps them at 1,200, but there's a common ownership and a sharing, which is, in a sense, very similar to what Wirebury is doing. Distributors can do that too. 424 MR. ENGELBERG: So are you saying that as a utility loses scale, it loses efficiency, but it can mitigate against that loss of efficiency? 425 MR. TODD: I wish I had said it that way. 426 MR. ENGELBERG: Thank you. 427 Now, as I understand it, your big point throughout your report as to the benefit of competition in the technological field is namely metering; is that a fair statement? 428 MR. TODD: In terms of technological change, that's at the present time the big issue. I mean, there's certainly other, in a sense, issues of technological change for electric distribution in particular, distributed generation, which is, in effect, an alternative for distribution. 429 MR. ENGELBERG: Okay. Well, I think we've heard distributed generation is not yet here, so let me take you to your report at page 3. Line 7 you refer to individually metered, and at line 10 you refer to different metering technology. At line 11, you refer to interval meters. 430 On page 5, line 5, again, you refer to -- line 4, pardon me, you refer to interval meters. At line 20, you refer to sophisticated meters, at line 31, you refer to standard meters versus interval meters. On page 6 at line 4, you mention interval meters as being the benefit. On page 12, at line 23, again, the benefit is interval meters. 431 Now, is that the benefit that you feel that Wirebury can offer that other LDCs operating in the province cannot or will not offer is individual meters, smart meters, interval meters? 432 MR. TODD: Firstly, I have not suggested that anyone else cannot or would not offer, in fact, they are required to offer upon request from others. 433 I have used that illustration many times, not just in this evidence but in at least three or four different presentations at conferences. My message was, Let's get the metering changed. 434 For me personally, as we move to an open marketplace with an hourly Ontario energy price, the market fails if demand cannot respond to price. Demand can only respond to price if it pays a price that is at least time of use, better yet hourly, better yet the actual market price, so that people can respond to price signals. If demand does not respond to price signals, the whole act of competition or having a market price fails. 435 And I have been a very outspoken advocate for interval meters. One of the reasons why I feel very comfortable with the Wirebury proposal is that's their standard offering. One of the concerns I have is that amongst incumbent distributors, there is a very wide range of response to that opportunity. That's why, at a policy level, there is discussion of giving it some more impetus and push, which I strongly, strongly favour. 436 So others can offer it, but as a standard offering, it may move the market toward, transition the market toward an interval-metered market more quickly. That's all I'm saying. 437 MR. ENGELBERG: I believe you also talked about individual meters for apartment buildings as opposed to bulk metering, and I believe your idea is that people would be more aware of conservation if their bill were directly affected by their own electricity usage; is that fair? 438 MR. TODD: I have been both an apartment renter with the utilities included in the rent and a homeowner and I can tell you a combination of being a father of kids who always leave the lights on and being an owner and paying my own bill, I'm a lot more conscious of that light going off as well as windows being closed and the back door to let the cat out being closed afterwards and things like that, than I was as an apartment owner where I wasn't paying the bill. I guess I'm assuming that other people are like myself, that when you see the consequences of your bill, you are more conscious of conservation issues and in addition, it's just simply the sensitivity. 439 If you're bulk metered in a large building, you do not have access to the retail market which as we move forward is an important part of the overall competitive marketplace, and clearly, you will not have access to time-of-use rates, which again, will be an incentive to the individual and, as our Minister, Dwight Duncan, keeps telling us, is part of the supply, supply, supply solution. 440 MR. ENGELBERG: I think we're all in agreement on that. 441 Are you aware that, for example, using where we are right now, the City of Toronto that when an apartment building is built, some of them have bulk meters, some of them choose to have individual metering, is that something that is here today? 442 MR. TODD: Yes. 443 MR. ENGELBERG: It's not unique to Wirebury? 444 MR. TODD: I've never suggested it's unique to Wirebury. I've said that if Wirebury has the opportunity to come in and swap them out, it's a message to me that the incumbent hasn't been quick off the mark keeping their customers happy in that regard. 445 MR. ENGELBERG: And if the province, if the government decides to introduce a scheme for pricing of the energy commodity based on time of use and so forth, do you have any reason to believe that many LDCs in the province would not introduce and offer to their customers meters that would enable the customers to take advantage of those rates? 446 MR. TODD: That correct, which is why I like incentives. Their incentive to do so will only be increased by having the risk of losing their customers if they don't. 447 MR. ENGELBERG: So you expect that they will introduce them? 448 MR. TODD: Some already do, but what I said was we have 93 distributors. Everyone is individual, their responsiveness to their customers varies over a wide range. Their attitude to new metering technologies differs. 449 You see, it's not as just simple as putting a new meter in. They have to look at different issues. Interval meters have to be read, they're read -- there's automatic automated meter reading. They require upstream facilities to handle the data. You can't just give somebody a time of use meter and actually use it until you create an infrastructure to support it, and an individual distributor has to make that decision to seriously seed with not only allowing the customer to have a time of use meter in their home, which may be useless without having the upstream facilities, they have to make a commitment to going that path. 450 The DSC says you must respond to a customer's request to putting in the meter. The DSC doesn't say you have to make a commitment to reading those meters and collecting the hourly data and time of use rates. It doesn't go that far. That's an individual distributor decision. 451 MR. ENGELBERG: I'd like to take you to your views on competition in general, Mr. Todd. You gave some of the benefits of having distribution competition. Do you also believe that distribution competition might carry some risks? 452 MR. TODD: I believe what I've said is that the downside risks are minimal and the greatest risk would be a risk of regulatory failure to control the market properly, but I believe that's a controllable risk and I have faith in the Ontario Energy Board to do that. 453 The upside potential is significant. Every decision in life has some risk involved. I'm just saying on the balance, I see this one as a low downside, high upside and consistent with the general trend of regulatory policy in Ontario and elsewhere; therefore, it is something that is appropriate to do at this time. 454 MR. ENGELBERG: One of the risks that you mentioned in your report that would be introduced by competition in distribution would be introducing uncertainty or increasing uncertainty, it would be fair to say, in load forecasting. Can you explain why competition in distribution will increase forecasting uncertainty? 455 MR. TODD: In the boundary change model, the simple explanation, and this has been gone through by other witnesses, the simple explanation is there is incremental uncertainty about the number of customers you will have. Given the level of uncertainty in any case, and I mean, again, I keep coming back to my little bit of experience. Within one year, one year's forecast, the next year's forecast, even with that limited experience we saw significant changes in the forecasts of growth in particular areas. So yes, there's an additional risk being introduced, but as I've also suggested for a long time, that risk is, number one, well, the risk is very small compared to the risk of we're going to lose all these distribution customers to distributed generation. 456 Within the normal planning time horizon of ten years, that is a risk that, number one, is very, very significant; number two, is almost impossible to predict for the reasons we heard from Dr. Yatchew yesterday. We don't know when it's going to be available. Could be five years; could be 20 years that it's significant. 457 So part of the planning process is that it has to plan in a way that mitigates those risks, and that's one of the factors you take into account when you grow your distribution system and the capacity. 458 I would suggest that in the -- even in the current environment, with or without competition, there is a need to be more conservative than we were in the past about building excess capacity. 459 Excess capacity is something that has got the Ontario electricity system into trouble in the past, and look at the change in forecasts when the demand/supply plan was put forward and, you know, was withdrawn, because the forecasted growth turned around overnight. 460 MR. ENGELBERG: All right. Well, then, let me ask you about something that's being proposed now, as opposed to distributed generation in the future. 461 The prefiled evidence of Hydro One states that it has approximately 1.2 million customers and that 25 percent of those or 300,000 customers are within the borders of municipalities. They are inside Hydro One's licensed service territory. 462 It has been suggested by a number of participants in this proceeding that it would be a good thing and a good principle for this Board to set as a result of this proceeding, that it's desirable for LDCs to move their service territories out to the municipal boundaries of the shareholder municipality that happens to own them. 463 What kind of strains would you see shifting 300,000 customers to another utility place on the system as far as stranding, forecasting, and all of those things do? 464 MR. TODD: I think that you raise an issue, which is a very significant policy issue. What we're -- what we're really talking about is that Hydro One currently has a customer base, which is a mix of relatively low-density, expensive-to-serve customers, and higher-density, cheaper-to-serve customers, and clearly a range in between. 465 To some extent, the high-density areas are dealt with through rural rate assistance so that their rates can be kept down, but it clearly does not equalize totally. 466 MR. ENGELBERG: Let me ask you a question right there, Mr. Todd. In your knowledge, would it be fair to say that the great bulk of these high-density customers that you refer to that Hydro One has are within municipalities and just outside the border territory of LDCs? 467 MR. TODD: Without having conducted a study, it is my understanding that definitely that's what's happening is cities are growing in Ontario, certainly in particular parts of Ontario, and they've grown outside the traditional municipal boundaries into Hydro One service territory. 468 When we're talking about connections, connections and contribution analyses are based on incremental costs. So I would say in that context, Hydro One is at no disadvantage, because we are focussing on incremental cost. In fact, if anything, they have an advantage, because their rates are higher, and therefore, the contribution requirement is lower when they go to a developer. 469 But if you're talking about switching customers, what you're looking at is customers saying potentially they can switch from a comparatively high cost, because of average low density, distributor to a lower-priced distributor, because they got lower prices with lower cost of service due to higher density. Clearly those customers will benefit from the switch. 470 In effect, what we're doing is equivalent to creating regional rates for Hydro One where they would offer rates that reflect the lower cost to high-density areas rather than -- essentially urban areas in their territory, and have higher rates for -- for other customers. 471 It's the same thing. And, in fact, if that -- if the proposal were to occur or be accepted that municipalities can expand their boundaries, the next step, almost certainly, would be Hydro One would be saying, we have to defend our customers by adjusting rates for those customers that reflect their costs. 472 Therefore, what this Board faces is a policy decision that one way or another, do we want to move away from the postage-stamp rates within specific distributors' territories, in particular, Hydro One's, want to move away from that and get rates by region, which more closely reflect costs. 473 To some extent, that's what has been done historically in the development of the MEU systems, that the -- the whole MEU system is developed as carving out urban areas, which are lower cost, and letting them have lower rates. That's why all the MEUs were created. 474 The Board may say that has been appropriate to date, and we should continue that. One way to do that is to allow the form of competition being proposed here, but what they're doing is saying we want to extend that principle of having Hydro One serving the other territory and all customers, including new-growth customers, should have access to lower rates through the municipal electric utilities. And that would be a very legitimate policy decision, but it is a policy decision this Board will have to make. 475 MR. ENGELBERG: Dr. Chamberlin stated and -- in the first part of his evidence when he was asked about it, Dr. Yatchew stated that instead of a wholesale or willy-nilly transfer, if I can put it that way, that what you should do when considering whether to transfer large numbers of customers in broad swaths of territories to another LDC is to look at what is of benefit to the public interest at large at this time. Would you agree with that? 476 In other words, they said don't look at just the fact that these individual customers will be paying what happens to be a lower rate right now. 477 MR. TODD: And that's why I say it's a policy issue, and I think the policy issue is basically one of different views of equity, and it's a very difficult one, because we are not like a Manitoba, which has one distributor for the entire province but does have some regional rates, recognize the differences. And we don't have the political will, in my view, in this province, to simply say we are going to rationalize the distribution sector in Ontario totally. 478 It is really an issue of the equity of the people who are inside the territory of existing MEUs, the people who are on the fringe of that territory but are similar to them, and those that are outside in the urban areas. 479 From an equity argument of like people being treated in like manner, people just outside of the boundary of an existing MEU could argue should be treated exactly the same as the people just inside, and therefore, those changes should be made one away or another. 480 The other argument, of course, is, well, if they get the better treatment that leaves less cross-subsidy to the lower-density customers in Hydro One's territory, as an economist, I would argue, let that change happen, and if you want to have a cross-subsidy, make it explicit with a rural rate assistance program that is more refined. 481 But government policy very often rejects what the economists say and says, We'd rather have the cross-subsidy in an internal basis, which is what we have right now. 482 MR. ENGELBERG: I think what you're saying, then, is that the rates that we have in place in the province now don't do anything to see to it that the broad pool of customers and, certainly, the remaining customers of the incumbent utility would not be harmed by a loss of 25 percent of that utility's customer base; is that correct? 483 That in the future or at any time soon, a rate structure in the province could be introduced so that there would be no cross-subsidization and so that the low-density customers of a utility like Hydro One would not be harmed by the loss of virtually all of the urban high-density customers, but we're not there at this point? 484 MR. TODD: In a sense that's true, but to be more precise, I think the existing cross-subsidy has resulted from almost a fluke of development. 485 When municipal electric utilities were initially set up, they picked up all of the high-density customers and Hydro One was the leftover. 486 What's happened is through growth, Hydro One has benefited from encouraging it into its territory of development and high density and that cross-subsidy has emerged not as a result of policy decisions, but as a result of natural growth. 487 Do you change things? Well, what I'm saying, it's a policy issue and you change things by making a policy decision. Any changes should be done with a full understanding of the policy implications of what you're doing. 488 MR. ENGELBERG: What result would you expect absent a complete restructuring of rates, what result would you expect to occur if a utility like Hydro One lost 25 percent of its customers, including virtually all of the highest-density customers, its cheapest to serve customers? What effect would that have now? 489 MR. TODD: Well, first of all, it would give our current government another headache like the last one, because they would be seeing either Hydro One running into difficulty or Hydro One having to raise its rates for its remaining customers. 490 MR. ENGELBERG: Sorry, raise its...? 491 MR. TODD: Raise its rates for the remaining customers. And that if the decision wasn't made with a recognition of the policy, implications up front, they would have to deal with the policy implications after the fact, and I think as Art Weston has said, Let's get the policies set first and then deal with the details. 492 So at some point, we would have to come to grips with the realities that your changing the environment and it could either be through increases in rates or it could be through an extension of existing rural rate assistance mechanisms. Any distributor can apply for rural rate assistance, it's in the Distribution System Code and I haven't looked at those exact details completely, but it may change things and guess what, we may end up in actually a much more balanced system where everybody in high-density areas is contributing in a like manner to the rural rate assistance going to low density areas assuming that policy is something that is reinforced and continued. 493 MR. ENGELBERG: Would this increase or expansion of rural rate assistance require government involvement, government direction? 494 MR. TODD: To me, right now with what I've read, I'd say that's a legal question. I don't know the answer to that. I know that there's an opportunity to request rural rate assistance for all distributors. In my head, I don't have all the rules around that. 495 MR. ENGELBERG: Me understanding is that rural rate assistance expires in 2004, so if that's correct, then it would have to be extended, expanded by the government. 496 MR. TODD: If that's a legislative comment, I will accept that it's something that will have to be done and I would expect that something, you know, would be done in any case, but yeah. 497 MR. ENGELBERG: Well, then, let me ask you about another proposition that's out there. This one is somewhat different. It's my understanding that some of the utilities are saying that if they expand their service territory boundaries outward to the municipality boundaries but don't take the territory and the customers away from Hydro One, but instead have overlapping so that you have Hydro One licensed to serve those 300,000 customers and you also have LDCs licensed to serve those 300,000 customers, what would happen, in your view, as to the 300,000 existing customers and the future growth of customers within the municipality. What would this look like? 498 MR. TODD: Well, where there is -- clearly, I would expect that the municipal utilities that would be most interested in the overlapping service territories would be ones where there is a relatively noticeable difference in rates and it would be a relative no-brainer for customers to go to the low rate, and it could be close to a de facto change in service territory. 499 Again, there is a policy implication that the Board should be aware of and make sure that the transition takes place in a way they deem to be appropriate in terms of compensation and so on. 500 MR. ENGELBERG: Compensation to Hydro One's ratepayers? 501 MR. TODD: If the de facto result is you've transferred service territory from one company to another, that raises the issue of physical assets are in effect being transferred, could be a wheeling rate charge, but, you know, this battle has been going on for a lot of years in terms of changing the boundaries. 502 This is just a way within the existing rules to affect that change, and you know, policy decision has to be made as to whether that's an acceptable change or not. 503 MR. ENGELBERG: You've pointed out a problem there and that is a problem with the physical assets. When the Board changes an LDC's licensed territory, my understanding, and I would ask you to take this as a given, is that customers can be transferred, the customers then become the customers of the utility to whom they change, but there isn't a transfer of assets. Transfers of assets occur by purchases and sales under section 86 of the Act. 504 What would you do, then, in that situation where 300,000 customers transfer either by licence or de facto as you talk about, transfer from Hydro One to an LDC that has expanded outward but all of the assets in that service territory belong to Hydro One, so all of the customers are hooked up to a utility of which they are not a customer? How would that work? 505 MR. TODD: Well, that is exactly analogous to local resale competition in the telecom marketplace and it means you have to have a wholesale rate or a wheeling rate in place to pay for that. 506 Now, if a territory has totally switched over, it creates a situation where the parties would probably consider a negotiation of a transfer of the assets, presumably under the sections you cited, it just makes sense, perhaps, to them, where clearly, that transfer would take place at a market value that reflects the value to Hydro One of receiving those wheeling rates. And in terms of transfers of assets in the past, I have had the opportunity to look at several situations and my position has been that any transfer of assets should take place at market value. 507 MR. ENGELBERG: Absent a sale like that that's agreed to under section 86, we talked earlier about customers know who their supplier is because they look at their bill. So we have these 300,000 customers, they're getting a bill from LDCs other than Hydro One, but all the lines and all the facilities belong to Hydro One. Who would they call for repair service? 508 MR. TODD: Presumably under the Distribution System Code there's a requirement for the distributor to provide service to their customer. It depends on the kind of repair service you're talking about, but presumably they would call the distributor, the distributor would clearly have to sort out arrangements with Hydro One because my understanding is the distributor would not be able to physically repair, I should say, a damaged line; therefore, either the wheeling rate would cover the cost of that maintenance, in which case, the distributor would presumably pass along the call, would manage the calls going through to get that repair effected, or with a different level of wheeling rate that doesn't include maintenance, they would pay on a contracting out basis for Hydro One to do it. Or, on that basis, there could be service agreements which allowed them to do it themselves or get someone else to do it, but that would require permissions and so on to be in place. 509 MR. ENGELBERG: And if a sale of assets were to occur, what components would you expect to be considered in the pricing of the sale of those assets; in other words, assets that Hydro One has in municipalities all over the province serving 25 percent of its customers, what components would go into setting the pricing of those assets? 510 MR. TODD: The normal way of valuing assets and transfers is to take a net present value of the revenue stream that would come from them, minus the cost, and end up with, in effect, the net present value of the value of those assets. 511 As a -- if the company -- if the seller retains them versus the value to the buyer if they buy them, and the differences in value create room for negotiation, and they would negotiate somewhere in between, assuming the buyer's value is higher than the seller's value. 512 MR. ENGELBERG: Okay. But so I'm not sure I got all of that. It would be the value of the physical assets within the transferred territory, right, and you said the loss of the revenue stream to Hydro One? 513 MR. TODD: I think you're -- you're looking at it from a regulatory perspective; I'm looking at it from a market perspective. 514 MR. ENGELBERG: I don't want to restate it, but you mentioned revenue stream, and you mentioned physical assets. 515 MR. TODD: It's exactly the same as in an unregulated industry, the valuing of assets. We'd say from Hydro One's perspective it's a revenue stream. There's costs, which we shed by disposing of those -- selling those assets. 516 The difference is a net profit or contribution, whatever you want to call it, that can be present valued to get a value today. The buyer can look at it the same way. What's the revenue stream to them, costs avoided, so on, the net value to them; present value it at their discount rate, here's our value. 517 If the buyer's value is above the seller's value, there's room for a transaction. 518 MR. ENGELBERG: How about compensation to Hydro One's remaining ratepayers for the underutilized portion of all the assets that have remained behind in Hydro One territory but were built and planned for these 300,000 customers and for the future growth of that territory when it still belonged to Hydro One? Call centre, trucks, transformer stations, distribution stations that are all outside the territory, because at the time there was no boundary there, but they're not being transferred to the LDC that's acquiring the customers. 519 How do you compensate for that? 520 MR. TODD: If the company is being paid the value of the revenue stream, the other customers are made no worse off. Therefore, there's no need to consider it, I think, at all. 521 MR. SOMMERVILLE: Mr. Engelberg, we're going to take our break. 522 MR. ENGELBERG: I'm sorry, Mr. Chairman. 523 MR. SOMMERVILLE: Thank you very much. 524 We'll reconvene at two o'clock. Thank you. 525 --- Luncheon recess taken at 12:30 p.m. 526 --- On resuming at 2:05 p.m. 527 MR. SOMMERVILLE: Thank you. Please be seated. 528 PRELIMINARY MATTERS: 529 MR. SOMMERVILLE: Just before we begin, Mr. Engelberg, our program for this afternoon is to commence the oral presentations, and I believe, the Chatham-Kent representative is going to be here this afternoon. 530 MR. GORDON: They're on the train when they last called me an hour ago. So they're on their way up here. 531 MR. SOMMERVILLE: That means they're probably around Kitchener now. So we'll play that one by ear. 532 Ms. Godby, I think you are scheduled to be the first up this afternoon. 533 MS. GODBY: That suits me just fine, Mr. Chair. 534 MR. SOMMERVILLE: Now, that brings me back to you, Mr. Engelberg. How much longer do you think you might be? 535 MR. ENGELBERG: I have three questions, Mr. Chair. 536 MR. SOMMERVILLE: That gives me some comfort, but do you have a time estimate as to how long the answers might be? 537 MR. ENGELBERG: Perhaps I should ask Mr. Todd. 538 MR. SOMMERVILLE: Well, it's in your hands to some extent. 539 MR. ENGELBERG: I can't imagine this would be more than 10, 15 minutes. 540 MR. SOMMERVILLE: Thank you. 541 Mr. Rodger, just so that we have an idea as to our timing for the rest of the afternoon, do you have some estimate that we might be able to -- 542 MR. RODGER: Yes, Mr. Chairman, I've managed to be able to reduce my cross-examination quite a bit so I think maybe 15 minutes. 543 MR. SOMMERVILLE: That means we have a realistic prospect of meeting some of our targets for this afternoon. 544 MR. RODGER: I should mention, Mr. Chairman, that my colleague, Mr. Lokan, has asked that he proceed me in the cross-examination today and that's certainly fine with me. 545 MR. SOMMERVILLE: So that I don't put us beyond any targets. 546 Mr. Engelberg, please. 547 WIREBURY CONNECTIONS INC. - PANEL 1; TODD 548 J.TODD; Previously sworn. 549 CROSS-EXAMINATION BY MR. ENGELBERG: 550 MR. ENGELBERG: Thank you. 551 Mr. Todd, it's my understanding that your report said that you're not recommending the implementation of competition that would include switching of existing customers; is that correct? 552 MR. TODD: That's correct. 553 MR. ENGELBERG: Are what you call underserved customers existing customers? 554 MR. TODD: Potentially. The target here, technically they're not customers because they don't have the meter, where the context within this evidence of underserved would be a high rise with a bulk meter, those customers are technically not customers at the present time. 555 One could imagine, and certainly conceptually it would exist to current customers that are underserved the way I've explained it, I guess having been retained by Wirebury, the point is that that's not part of their business plan. 556 MR. ENGELBERG: So in other words -- 557 MR. TODD: Conceptually, I have no objection to it, subject to all the comments I'm making today and will not repeat now. 558 MR. ENGELBERG: So it's an existing apartment building with existing residents with an existing load and you would be talking about switching them in the Wirebury model from one -- 559 MR. TODD: Well, switching from the building owner or management of the building to switching -- yeah, you could call it -- it's semantics, it's switching that building. 560 MR. ENGELBERG: Okay. One other question, and it's about the LV rate or wheeling rates as it's sometimes called. I understood the previous evidence to have been that it would be possible, perhaps, to design an LV rate or wheeling rate that would be compensatory to the host utility; is that your understanding? 561 MR. TODD: Yes, and there would be different views of what would be compensatory, but whatever of the view of compensatory is, one could be designed to reflect that. 562 MR. ENGELBERG: Well, I'm using compensatory in the sense of designed to fully cover stranded underutilized costs. Would that be a fair definition? 563 MR. TODD: No. When I use the word compensatory, my presumption in a wheeling rate would be that it recovers the fully allocated cost of the elements of the system that are in use. So that would include basically all the hardware for transporting the system with fully allocated overheads. It would not include things such as the billing system, except as it relates to the billing of other distributors. 564 MR. ENGELBERG: Whatever that wheeling rate or LV rate would include, and I understand there's a big difference from the position of the some of the participants here, from your position as to what it would need to include in order to be fully compensatory to the host. 565 MR. TODD: Yes. 566 MR. ENGELBERG: Is the present LV rate and wheeling rate compensatory in your view, or would it have to be changed? 567 MR. TODD: I have not looked at that. 568 MR. ENGELBERG: Just one moment. 569 Is it possible that in the competitive marketplace or the incentive-based marketplace as you're proposing, that the added risk and so forth would entail a redesign of the LV rate or wheeling rate to be sure that it had the proper components in it? 570 MR. TODD: Potentially, given that I have not looked at it specifically beyond the scope of my retainer, that's quite possible, but I don't know. 571 MR. ENGELBERG: But the present LV rate and wheeling rate has been in existence for some time, so it reflects what people thought was relevant a number of years ago? 572 MR. TODD: I'll agree with that. It was designed with a different purpose in mind and it certainly makes sense to review it. In general, the way these things are handled is that the current rate could be viewed as transitional for purposes of moving on, and the process is to review it and correct it down the road. Similar to with the introduction of the PBR, cost allocation studies are at a phase 2 and current rates were used as a base upfront. Although ideally it would have had cost allocation rates upfront. 573 MR. ENGELBERG: So those rates, too, could be said to be transitional. 574 MR. TODD: As far as I'm concerned they are transitional because they are subject to further review and correction. 575 MR. ENGELBERG: Thank you very much. I have no further questions. 576 MR. SOMMERVILLE: Thank you, Mr. Engelberg. 577 Mr. Lokan. 578 MR. LOKAN: Thank you. 579 CROSS-EXAMINATION BY MR. LOKAN: 580 MR. LOKAN: Mr. Todd, I've given you and other counsel a copy of a memorandum and there's copies for the Board as well, I wonder if they could be handed up. 581 Now, you'll confirm that this is a memorandum from you to me from earlier in the year? 582 MR. TODD: That's correct, the date is wrong. 583 MR. LOKAN: Okay. And we discussed during the break the fact that I think you had an automatic date function on the memorandum, so this reflects the date I printed it rather than the actual date that you sent it. 584 MR. TODD: That's correct, and I checked back to determine the details. 585 MR. LOKAN: And what was the date you sent it? 586 MR. TODD: I checked back. The file is named "030714 Issues List Comments" which suggests that I think what happened was I received the issues list on the 14th of July from you, and in my billing system, there is one hour and 38 minutes identified on June -- sorry, July 17th, '03, and no other time in that general area. So I obviously prepared this memo and met with you on July 17th. 587 MR. LOKAN: Yeah, I'm not sure I remember the meeting, but certainly the timing sounds right. 588 MR. SOMMERVILLE: Mr. Lokan, we'll identify this as E.4.1. 589 EXHIBIT NO. E.4.1: ISSUES LIST COMMENTS, JULY 17, 2003, GENERATED BY MR. TODD 590 MR. SOMMERVILLE: And we will change the date. I think that's the burden of the last testimony, we should be changing the date to July 17th. 591 MR. LOKAN: Sure. 592 MR. TODD: Thank you, Mr. Chairman, yes. 593 MR. SOMMERVILLE: Sorry, Mr. Lokan. 594 MR. LOKAN: Now, just in terms of the context, just to ask you to confirm that at an earlier stage in the proceedings, you were retained by the Power Workers' Union to give some advice on these proceedings? 595 MR. TODD: There was no -- I've had an ongoing retainer with the Power Workers' Union for close to a decade to propose my take on public interest issues for them. 596 MR. LOKAN: Okay. 597 MR. TODD: And this was -- I was requested to comment on this, which I did, as a continuation of that retainer. 598 MR. LOKAN: Okay. In any event, you were sent a copy of the issues list by me and you made these comments and sent them back to me. 599 MR. TODD: That's correct. 600 MR. LOKAN: And just one other detail, again, as discussed, there is one redacted sentence, which is above the heading "Customer Preference," which for the information of the Board and parties, is something that I took out, because it reflected solicitor/client advice that I had given. I'm not asking you to comment on that. I'm just advising the parties. 601 Just some questions about this memo. You start out with a discussion of customer preference, and I'm looking at the second sentence: 602 "There's no reason to expect that the best deal for any specific group of customers is the option that best achieves broader public interest objectives." 603 I take it that's still your view? 604 MR. TODD: I have had the opportunity to review the memo. 605 MR. LOKAN: Yes. 606 MR. TODD: I would note that it was written in one hour and 38 minutes or less, i.e., off the top of my head, and I stand by everything in the memo taken in full context of the comments, not comments taken out of context, and they are consistent with my evidence. 607 MR. LOKAN: Okay. So you're not resiling from that statement that: 608 "There's no reason to expect that the best deal for any specific group of customers is the option that best achieves broader public interest objectives." 609 MR. TODD: At a broad policy level, responding to the issue, clearly without examining any of the specifics of the case, because that was -- you know, this was a response at a very high-level principle, those statements are significantly -- in fact, absolutely true. 610 MR. LOKAN: And again, the statement about it not being appropriate to accept an option that provides benefits to the customers in the service area affected if that option imposes greater costs, again, subject to those qualifications, you stand by that? 611 MR. TODD: Well, in fact, that's exactly what I'm saying, yes. 612 MR. LOKAN: Okay. Now, you discuss three possible tests here: A no-harm test, a no-net-harm test, and a maximized-net-benefit test. 613 MR. TODD: Correct. 614 MR. LOKAN: You rejected no-harm fairly quickly. Under no-net-harm your comment is: 615 "This option may provide insufficient protection against uneconomic amendments." 616 I take it because the full system-wide costs might not be captured under a no-net-harm approach, is that what you meant? 617 MR. TODD: Yes, and that's why I go on to -- to a broader concept of benefits. 618 MR. LOKAN: And your point under maximizing net benefits is that you really have to look at the cumulative impacts; correct? 619 MR. TODD: Correct. 620 MR. LOKAN: And you cite several of these, including the longer-term impact on the sustainability of Hydro One, as an example. 621 MR. TODD: Correct. 622 MR. LOKAN: And this may include increasing rates as average costs rise, lost operational efficiency, need for an increased rural rate subsidy, devaluation of a province's investment in Hydro One. 623 MR. TODD: Correct. 624 MR. LOKAN: And all of these broader systemic factors, if you like, it's appropriate and, indeed, necessary to take into account; correct? 625 MR. TODD: That's correct. 626 Are we going to go to the bolded sentence, which is the bottom line? 627 MR. LOKAN: Sorry. The bottom line of -- 628 MR. TODD: I state at the end of that section in bold type: 629 "The bottom line is that the option approved by the Board should be the one that enables customers to be served at the lowest present value of future incremental costs," which is, of course, the basis of my evidence for Wirebury. 630 MR. LOKAN: And you say at the bottom of this bullet point that: 631 "This approach is analytically the most defensible. It best serves the public interest as reflected in the lowest societal costs." 632 MR. TODD: Yes. Minimizing future incremental costs. 633 MR. LOKAN: Okay. So just to be clear there, societal costs, it's got to be system-wide. It's not just for a particular subgroup of the province. 634 MR. TODD: It's not one group of customers; it's system-wide, correct. 635 MR. LOKAN: Thank you. 636 Now, just turning over the page, you comment on how this approach can be used for either new or existing customers, and you point out that there may be a difference where you involve existing customers, particularly in terms of the sunk costs that are likely to be relevant; do you see that? 637 MR. TODD: Yes, and I would -- in interpreting some of the words there, I would like to point out one thing, which is if you go to the very end of page 3, it states: 638 "We probably need a system analogous to EBO-188 procedures that are used to determine the feasibility of natural gas system expansions." 639 MR. LOKAN: Yes. 640 MR. TODD: That was written, because in my hour and 38 minutes, I did not go back and review the Distribution System Code and did not take into consideration my comments here what exists in the DSC, which is, in effect, a system which is analogous to the EBO-188 procedures for determining contribution. 641 And, in fact, having spent many days in the EBO-188 proceeding, which bases contribution on a portfolio approach, I did not take into account in this memo the reality that on a project-specific basis. The DSC requires projects to be -- break even with contribution, and that is -- was not taken into account in my comments and is taken account into account in my evidence, and, therefore, my evidence goes well beyond what you see in this memo. 642 MR. LOKAN: Now, you have already told us in your evidence that the Distribution System Code approach does allow for some flexibility in how costs are estimated; correct? 643 MR. TODD: Well, it allows for interpretation of incremental costs. The principle underlying it is incremental costs. 644 MR. LOKAN: Okay. Can we get back to the sunk-costs comment. I take it your point here is that for existing customers, it's more likely that you will have greater sunk costs. 645 MR. TODD: Existing customers have more sunk costs; that's correct. 646 MR. LOKAN: But there's no hard-and-fast line? For example, you could have just built a distribution line to the edge of a subdivision which is then awarded to a different LDC, and that line you just built would be completely stranded, some wasted sunk costs, even though they're new customers? It may be a bit of a fanciful example, but it's possible; correct? 647 MR. TODD: Well, you said "fanciful," so I don't have to say it, but, yes. In that scenario, if the incumbent utility were unwise enough to build facilities before the customers are in-hand, that could happen. 648 MR. LOKAN: But, in fact, utilities build facilities all the time before customers are in-hand. They're required to do so, as you reviewed with Mr. Engelberg. 649 MR. TODD: They grow their system. They're not -- they're not required to put in place capacity to handle all future customers. They're required to grow their system in an appropriate manner based on expectations at the time. Part of that is recognizing the uncertainties of economic development and growth. 650 MR. LOKAN: Is it fair to say there's a spectrum of sunk costs and that the sunk-cost problem is more acute for existing customers? 651 MR. TODD: That's fair to say, and also sunk costs in -- the key with existing customers is that they're switching, and the question is do they stop using some existing facilities and start using some other facilities? 652 MR. LOKAN: Yeah. 653 MR. TODD: From that perspective, for example, the Southwest utilities approach, as I understand it, they'd be continuing to use those facilities, even though they're being switched. It's not as though the pre-existing facilities are going to be abandoned and new facilities built for them, so -- 654 MR. LOKAN: But you've had a discussion this morning with Mr. Engelberg about underutilization, and I take it your point there is eventually underutilized assets might be used for something else. 655 MR. TODD: But the real problem of underutilization doesn't come from switching customers, which I think is what you're referring to. There's a very narrow condition under which switching -- or, sorry, under which assets can be stranded, and that comes with new customers on the boundary. It's not a matter of switching. Switching creates other problems. 656 On the boundary, if facilities were built to serve the customers on the boundary, and then those customers become served by a different distributor, right, then the facilities that were built for that customer would not be utilized because the customer's not, sort of, coming from that direction. The electricity is not coming from that direction, it's from the other direction. 657 I find it hard to imagine where there's a switching customer that there would be facilities that are abandoned, except over time, perhaps, that -- with growth and with change, a distributor, in theory, could reconfigure the system to serve an area off of their upstream system, rather than, for example, off of the upstream system of Hydro One, you know, which could happen if the rules envisage that. 658 MR. LOKAN: Okay. And I think you've explained that point a few times. My question is simply this, that there exists underutilization when new customers can be awarded to one LDC rather than another, it is a possible problem, is it not? It is possible to have underutilized assets at least for temporary periods? 659 MR. TODD: What I've said at the very beginning is there are always underutilized assets because these are lumpy extensions. 660 MR. LOKAN: And time is money, is it not, Mr. Todd? And there will be less utilization if you have fewer customers for any reason. 661 MR. TODD: That's correct. 662 MR. LOKAN: So being able to use those facilities in two years versus in ten years, there is a cost to that? 663 MR. TODD: Yes. 664 MR. LOKAN: As I say, it's a spectrum. 665 MR. TODD: Yes. 666 MR. LOKAN: Okay. You go on to comment in the next paragraph that: "Giving weight to customer preference is akin to relying on customer choice to achieve customer efficiency --" 667 MR. TODD: I've lost track. Where are we now? 668 MR. LOKAN: We're on the second full paragraph of page 2. 669 MR. TODD: Sorry, I had flipped my page ahead. 670 MR. LOKAN: Do you see the paragraph that starts: "Giving weight to customer preference..." 671 MR. TODD: Yes. 672 MR. LOKAN: Second sentence. 673 "There may be a misconception that allowing customer choice will introduce competitive discipline into the market by enabling distributors to compete for customers. This view would be valid only if the rates charged by LDCs were determined in the marketplace. They are not." 674 As you've said, taken in context, you don't resile from anything in this memorandum and that would include those comments, would it? 675 MR. TODD: Yeah, the bottom line, as the words "bottom line" say, following paragraph, that bottom line that I stated then is the bottom line of my evidence and the only difference is that in my evidence, I recognize the Distribution System Code requires extensions to take place on a break-even basis, and therefore, some of the problems that I identified are addressed because we have a contribution test which is based on incremental costs of a project. 676 MR. LOKAN: All right. Now, further down the paragraph, you identify the problem. This is the sentence starting "Competition..." 677 "Competition for customers would lead to uneconomic decisions where low cost to serve customers could move from high rate distributors to lower rate distributors even if the cost of serving them increases." 678 That's the problem with customer preference, if you like? 679 MR. TODD: And that's the problem that I discussed with Mr. Engelberg sometime ago this morning. 680 MR. LOKAN: Okay. What about where the cost of serving them is the same between two LDCs, are there not still costs just inherent in the switching? For example, the uncertainty that Dr. Yatchew spoke of? 681 MR. TODD: Yes and I have said throughout that there are costs to competition, I've simply said that there are also benefits in terms of the incentive effects. So, yes. 682 MR. LOKAN: Now, as I understand the Wirebury proposal, it is to use upstream assets of a host distributor but then, if you like, step in at the last minute and grab the prize of the customer providing the connection to those upstream assets. You don't have to agree with my rhetoric, I'm just using that. If Wirebury's costs of connecting and the host utility's costs of connecting are the same, it's still possible to have a gaming of the system if you allow customer preference to be the test, is it not? 683 MR. TODD: Well, as I have indicated, cost and even the incentive effect of having competition is not the only factor here, there are also service issues, and if the customer makes a choice where the cost is identical but they perceive that one supplier can provide better service to them, then it should go in that direction. You know, to me, quite clearly. 684 MR. LOKAN: And you make some specific comments on that in your points 1, 2 and 3 at the bottom of the page. 685 MR. TODD: Yes. You started your previous sentence with the Wirebury model -- 686 MR. LOKAN: Yes. 687 MR. TODD: -- and of course, at the time, in July, I had no idea of Wirebury's participation in this proceeding, let alone what the Wirebury model was. So these are obviously not comments on the Wirebury model, they are comments on the question and each of the numbered headings is a question posed by the Board as a generic issue. 688 MR. LOKAN: Yes. 689 MR. TODD: So commenting on the impact on customers in the area with nothing in front of me except the Board's question. 690 MR. LOKAN: And as you saw the issue then, you didn't think there were going to be vast differences in reliability and quality of service, you weren't thinking about Wirebury at the time? 691 MR. TODD: Reliability and quality of electric service. What I was referring to there was the quality of the power itself. 692 MR. LOKAN: Okay. 693 MR. TODD: I wasn't referring to customer service issues and things like that. I was referring to the reliability, you know, power going out, and talking about the quality in terms of voltage control and so on. 694 MR. LOKAN: You outline three ways of dealing with professed preferences for greater reliability or a different kind of service, and that's the benefits approach, the significance approach and the costs approach. 695 MR. TODD: Yes. 696 MR. LOKAN: If you turn the page, you identify a problem if customer preference prevails on claimed differences and services. And the problem is, is it not, that in reality, customer preference could mix gaming considerations with preferences for one kind of service or another, so you really need to unpack the two, do you not? 697 MR. TODD: Well, assuming that gaming is possible, which is where earlier and again, in the middle of the second paragraph under heading 3, I say, the focus should be on future incremental costs. As long as you've dealt with the financial end of it through a look at incremental costs as I am proposing, then the gaming opportunity moves away and you have unpacked the mixing of dare we say financial gaming from the issue of customer preference. 698 MR. LOKAN: And that presupposes complete reliability of the economic evaluation process, then? 699 MR. TODD: No, that implies a realistically workable mechanism, which is what we always have in the regulatory world and we accept as the best available. It's an approximation, always. Competition is not perfect, regulation is not perfect, that's all. 700 MR. LOKAN: In any event, in the memorandum, and regardless of what you've said today, in the memorandum you identify a potential problem that customer preference allegedly for some type of service could mask gaming. 701 MR. TODD: I was concerned that if you did not look at incremental costs, that you could end up with a customer preferring something which has higher incremental costs even adjusted for differences in quality. 702 MR. LOKAN: And those higher incremental costs, as you've said before, you have to be considering the system-wide costs, everybody, the whole system? 703 MR. TODD: Yes, what I've said in my evidence and what I've indicated in this memo is that you have to look at the incremental costs to the distribution system as a whole, exactly. 704 MR. LOKAN: Yeah, okay. Now, under impact on distributors, the last paragraph, you talk about: 705 "Where service area changes are in the public interest, benefits to winners will exceed losses to losers." 706 Do you see that? 707 "As a result, it should be possible for winners to compensate the losers so that they are held whole." 708 MR. TODD: Yes. 709 MR. LOKAN: And you say: "The winners should enjoy, at most, the net benefits of the change." 710 MR. TODD: Yes. 711 MR. LOKAN: And I take it again you're talking here about taking into account all societal costs, all costs to both distributors and not just a particular narrow definition of stranding. 712 MR. TODD: That's right. 713 MR. LOKAN: Okay. And what role would consensual transactions or agreements between winners and losers have here? 714 MR. TODD: As I indicated to Mr. Engelberg before the break, we were talking about the valuation of the transfer of assets, and for many years, I'm on record as favouring transactions at market values and that's what we're talking about implicit here, that I think that the valuation would not be, for example, a depreciated value it would be a market value. 715 MR. LOKAN: Now, just thinking about contiguous service areas for a moment, contiguous LDCs, if it's really an overall net benefit for a part of the service area to transfer from one utility to a contiguous utility, would you not expect the parties to be able to reach an agreement to come jointly to the Board either under the MAADS process or some other process? 716 MR. TODD: In a competitive environment, they would, and I suspect that in a partially competitive environment, such as what I'm proposing, that that would create a greater incentive. 717 Under the existing regime, the -- I guess from my perspective, it would be anecdotal evidence, is that parties like the status quo when there's not a lot of serious negotiation over the transfer of assets. 718 MR. LOKAN: So it's possible to have a market failure where the parties have not negotiated rationally; is that fair to say? 719 MR. TODD: Well, no, because in a context where there is no competition, what's rational, I think, may be a little different. So I wouldn't say negotiated rationally. Certainly when you combine that with public ownership, the issue becomes very confused. And certainly I have, again, been on record over many years as having concerns about the way decisions are made under public ownership. 720 MR. LOKAN: Right. Now, however, if you start from the premise that there's going to be a transfer of service territory and then it's just dealing with the assets, negotiation might not work there, because the assets may not -- what else can the incumbent LDC do with them? 721 MR. TODD: Well, where -- before the break with Mr. Engelberg, what we were talking about was a situation where the customers have moved; the assets have not. At that point, you probably would get the parties negotiating in a normal, perhaps what you call, rational fashion to just come up with the right number in order to rationalize the system. 722 And in addition, the more -- the higher the cost of not taking the efficient solution, the more likely it is that owners will start insisting on management undertaking the efficient solution, i.e., the higher the cost of -- well, if a utility is losing potential customers on an ongoing basis, because it's inefficient, that will flag to the owner that there's a problem and will lead to either better operations in the utility or rationalization through change of ownership, mergers, things like that. It's more likely to occur if you've got the signal of the ability of an LDC to compete for customers. 723 MR. LOKAN: But if you don't have the proper regulatory regime in place, you could be losing customers, not because you're inefficient, but because customers are permitted to game the system, as you've identified in the memo; correct? 724 MR. TODD: I agree. If you are adding customers without looking at the comparison of incremental cost adjusted by the service quality differences, then you could have -- you would have problems. 725 MR. LOKAN: Okay. Now, under "Overlapping Service Areas," second sentence, you say: 726 "That would indeed be the least cost solution ..." And then you have in brackets "unlikely." 727 Can you explain what you meant by that word. 728 MR. TODD: Again, that comment was made without taking into account the DSC appendix, which forces consideration of incremental costs. 729 It also, in part, I suspect -- and I don't recall my thinking at the time -- I suspect included the type of situation I was talking about before the break with Mr. Engelberg, where you're actually switching the customers, and they may just be looking at the lowest cost. 730 Overlapping service areas probably implies -- probably implied to me at the time competing for customers that exist, potentially as in a Hydro One overlap with an local LDC. 731 MR. LOKAN: And as you said, the concerns outlined in the KEMA-Quantec report are valid concerns. It's just a question of what's the proper public policy response to them? 732 MR. TODD: Yes. 733 MR. LOKAN: The final thing I'm going to ask you about is the filing and process requirements. You said: 734 "The key requirement is that the distributor seeking the service area amendment should have to provide a full analysis of all future costs and benefits to all parties so that the overall impact on the total cost borne by the Ontario electricity industry can be assessed by the Board." 735 You've already commented on EBO-188, but I take it that relates back to your insistence that it's got to be societal costs that are considered, the full range of societal costs should be identified? 736 MR. TODD: Well, as really -- similar to EBO-188 is Appendix B of the Distribution System Code. That's what I was referring to. 737 MR. LOKAN: And -- 738 MR. TODD: That's why that comment on EBO-188 is there. It's saying what we need is that kind of approach, which is an incremental costing approach, which is also what Appendix B of the DSC is. 739 MR. LOKAN: But Appendix B of the DSC doesn't say where you need to provide a full analysis of all future costs and benefits to all parties system-wide for Ontario, does it? 740 MR. TODD: No, that's the incremental costs that are relevant for purposes of connecting new customers. 741 MR. LOKAN: And there's nothing in there, for example, that would capture regulatory uncertainty? 742 MR. TODD: No, and I would -- unless I'm making conceptual comments, which some -- some of which are contained in this memo and which I make quite frequently from practical purposes. I think also in this memo I've indicated some things aren't quantifiable, and you're not going to include them in an incremental costing study. You're going to include -- there is some reference in here, I forget where, to, you know, real measurable costs. 743 MR. LOKAN: Thank you. Those are my questions. 744 MR. SOMMERVILLE: Thank you, Mr. Lokan. 745 Mr. Rodger? 746 MR. RODGER: Thank you, Mr. Chairman. I have a couple of exhibits I'd just like to refer to briefly during my cross-examination, and I have multiple copies at the front. Perhaps those could be marked for identification purposes. 747 The first is a series of four diagrams. On the first one there is the heading "Multi-unit Commercial Building." If that could be an exhibit please. 748 MR. SOMMERVILLE: We'll call this one E.4.2. 749 EXHIBIT NO. E.4.2 SERIES OF FOUR DIAGRAMS, FIRST DIAGRAM ENTITLED MULTI-UNIT COMMERCIAL BULIDINGS 750 MR. RODGER: And the second document is an excerpt from the Wirebury Connections Inc. rate application for distribution of rates. If that could be marked as well, please. 751 MR. SOMMERVILLE: That would be E.4.3. 752 EXHIBIT NO. E.4.3 EXCERPT FROM THE WIREBURY CONNECTIONS INC. RATE APPLICATION FOR DISTRIBUTION OF RATES 753 MR. RODGER: And just for the Board's information, I'll also be referring to briefly an exhibit that was put in yesterday, Exhibit E.3.2, which is an excerpt from the Wirebury distribution licence application. 754 CROSS-EXAMINATION BY MR. RODGER: 755 MR. RODGER: Mr. Todd, just to start, to refer to this memo that you've prepared that my friend Mr. Lokan has just taken you through, you said that this memo was prepared around mid-July 2003? 756 MR. TODD: That's correct. 757 MR. RODGER: When were you actually retained by Wirebury? 758 MR. TODD: With respect to this evidence for this proceeding, Wirebury contacted me on September the 12th. I was retained on September the 17th, because my initial reaction was that there was a conflict, and it took five days to sort that out between the parties. 759 It was particularly difficult because Wirebury had a retainer with my firm dating to a year earlier to assist them with the rate application written in such a way that they had a legitimate claim that I was under retainer to provide this evidence. 760 And I sought legal counsel, and Torys gave me a legal opinion, which told me that the correct thing to do was give the evidence. And it took five days to sort that out. 761 The evidence was then filed nine days later on September 26th. 762 MR. RODGER: Just to understand that, Mr. Todd, so you had been retained by Wirebury for almost a year? 763 MR. TODD: My firm had been retained by Wirebury, and under that retainer, they had the right to use me to provide evidence to assist them in, broadly speaking, their rate application, broadly speaking. 764 MR. RODGER: So although you'd been -- your firm had been retained by Wirebury for a year, you yourself didn't know about the entity when you prepared this memo for the Power Workers' Union? 765 MR. TODD: I did not know about Wirebury's participation in this proceeding. 766 MR. RODGER: But you knew about the business concept generally? 767 MR. TODD: Yes. And their business concept did not involve border changes as I understood them. As I understood the issues in this proceeding, we're talking about changes in borders between incumbent LDCs. 768 MR. RODGER: And it was that understanding under which you accepted the retainer to prepare the Wirebury report yourself? 769 MR. TODD: No, no. Sorry, I thought you were talking about July. What point in time -- if you're talking about what my understanding was of this proceeding, I had no knowledge of this proceeding in July except the list of questions the Board had asked. 770 In September, I was approached and said, Wait a second, I may have a problem, and at that point, I learned more about this proceeding. 771 MR. RODGER: But when you wrote this memo you were certainly aware of the Wirebury concept? 772 MR. TODD: In September, I was. 773 MR. RODGER: But in July, you were not? 774 MR. TODD: Well, in July, I guess I was aware of the Wirebury concept because I had some -- I had been at a couple of meetings early on and then my role essentially ended. What I was not aware of in July was Wirebury's participation in this proceeding. 775 MR. RODGER: Now, when my friend took you through this memo, you made special emphasis of the one sentence on page 2: 776 "The bottom line is that the option approved by the Board should be the one that enables customers to be served at the lowest present value of future incremental costs." 777 Since you wrote this memo and since your retainer and your active involvement with Wirebury in this proceeding, have you calculated the present value of future incremental costs and impacts associated with the Wirebury option? 778 MR. TODD: No, that would relate to specific areas they're looking at. 779 MR. RODGER: So you haven't done that work at all? 780 MR. TODD: No. 781 MR. RODGER: Notwithstanding that there are specific applications now before this Board? 782 MR. TODD: Not in this proceeding. I could be retained to look at that come the proceedings for those particular applications. 783 MR. RODGER: So at this time, and at this hearing dealing with guiding principles, you have no evidence, whatsoever, to say that the Wirebury model will, in fact, produce the lowest present value future incremental costs? 784 MR. TODD: No, as your question points out, this is a proceeding of principles and when the principles are decided, any specific allocation that Wirebury brings forward would succeed or fail on the basis of the principles that are established. 785 MR. RODGER: But for this hearing -- 786 MR. TODD: I'm not advocating that anything in particular be accepted for Wirebury application. I'm saying, Here are the principles that should guide the decisions of the Board. That's all. 787 MR. RODGER: So you're not here today advocating the Wirebury business model to this Board in terms of the guiding principles that it should adopt? 788 MR. TODD: In terms of the guiding principles, I am advocating that Wirebury should have the right to make an application, that it should not be precluded from being considered as an applicant for distribution licence and it should not be precluded from serving customers, but I'm not suggesting that there's prima facie evidence to say up front that it should be the one accepted without having to demonstrate that its proposal is in accordance with the guiding principles. 789 MR. RODGER: Mr. Todd, the discussion you had with my friend, Mr. Engelberg, when you will an exchange about historical practices, the way the LDC market in Ontario and that sector developed over time was the past, but here we are today, here we are on the edge, on the verge of a brand new world where there is this fundamental policy principle before this Board that they are being asked to adopt. Would you agree with me, sir, that this hearing on guiding principles really represents a fundamental policy crossroads for this Board? 790 MR. TODD: I agree entirely and I do not believe in setting policy principles on the basis of one specific case or application. They should be made on principled grounds, not the specifics of an individual case. And so my principles as laid out here, are not based on the specifics of any one application, it's a comment on Wirebury, Wirebury-like companies. And Wirebury-unlike companies who come up with different business models as a basis for applying for a distribution licence. 791 MR. RODGER: Would you agree with me, sir, that the reason why all the intervenors have invested so much time and energy into this hearing is to establish guiding principles that will either pave the way for the Wirebury business model or establish principles that this Board will say, No, we don't think that's appropriate for this sector at this time. 792 Do you understand that that's why all the parties are here and have been here over the past several months? 793 MR. TODD: Part of the goal of some parties appears to be to preclude competitive alternatives without considering the benefits in terms of the public interest of a specific application. All I'm saying is that the application should be permitted because it may be in the public interest and if, in this case, my client Wirebury is able to demonstrate that it is in the public interest to have its application accepted, it should be. 794 MR. RODGER: So is your evidence, sir, that the guiding principles that this Board ultimately determines are irrelevant entirely to the site-specific applications that may come forward? 795 MR. TODD: I don't understand how you got that from my comment. I have said the guiding principles should determine the decision. The specifics would be brought forth and would be evaluated based on those principles. 796 MR. RODGER: But isn't a threshold question, the policy question, whether we want certain kinds of applicants coming forward for specific border amendments or not? 797 MR. TODD: That is your position is that certain -- you are asking the Board to prejudge a business model and say they should be precluded because of the consequences. What I'm suggesting, and perhaps it's approaching principles in a different way, is that we should establish principles which go back to the public interest that establish the framework for deciding and not preclude options before we've fully heard them. 798 I mean, frankly, it's a basic premise of all the work that I've done is that if you want to get the best alternative, you have to consider them all, you don't rule some out before you've even considered them. 799 MR. RODGER: So let's assume that this hearing is now over and we're at the occasion of hearing Wirebury's individual licence and rate application, I take it you'd expect all these exact same parties to make the identical policy issues all over again, at that time? 800 MR. TODD: The policy issues will be decided, okay. I think we're talking on a different plane. I think that what you're saying is that as a matter of policy, embedded distribution should not be allowed. That's not where I'm at. I suppose that where I'm at is that alternative models of distribution should be considered. They should be allowed to succeed or fail in the marketplace, and I guess that's a principle that will be decided. And where we're hitting cross purposes and churning up time is with my statement that as a matter of principle, Wirebury should be heard. Your position as a matter of principle Wirebury should not be heard, that will be decided here. 801 It will be a second stage which, once the principles are established, determines whether or not the Wirebury proposals in their specific instances should be accepted in accordance with the principles that are established for embedded generation -- or embedded distribution. 802 MR. RODGER: Well, before we get to the primary principle, I just want to be clear that specifically with respect to the Wirebury business model for this proceeding, I believe your evidence was that you're agnostic, you're not here as an advocate for the Wirebury business model? 803 MR. TODD: That's right. I have not looked at their business model in detail to say I think it will succeed or fail, and frankly, my opinion even as an expert opinion whether it would succeed or fail should be irrelevant to this Board because, in my submission, my view is saying that the market should be the one to decide whether they succeed or fail as long as the design is such that the public interest is not harmed if they do fail, which is exactly the way things are designed. Therefore, I'm saying don't listen to me, don't listen to anybody else whether the model will succeed or fail, simply have a mechanism in place that protects the public regardless of the income but provides the opportunity to gain all the benefits of having this form of competition, which is discipline on the existing players as well as any new entrants. 804 MR. RODGER: And I take it, then, that a central guiding principle you would put forward to this Board is that simply the Board, out of this hearing, the principle to be established should be that you want to reward those who can make the best deal to the customer. I mean, it's really no more difficult than that. 805 MR. TODD: If the different deals are based on the incremental costs, in other words, if two competing distributors are offering a customer connection at their incremental cost, then what I'm saying is the customer should be able to choose the one with the lowest incremental cost. 806 The lowest incremental cost is determined by incremental revenues minus incremental costs, which produces a contribution, and so rates plus contribution reflect incremental costs. 807 That's the way Appendix B of DSC operates in principle. 808 MR. RODGER: Now, you'll see that the next few questions I have, Mr. Todd, is really aimed at trying to understand specifically what Wirebury hopes to do in Ontario. 809 MR. TODD: So we're talking my understanding of the Wirebury model right now? 810 MR. RODGER: That's right. Your understanding of your own client. 811 Do I take it that as long as a corporation can apply to the OEB and get a distribution licence, then any corporation should be able to participate in these Wirebury-type business opportunities? 812 MR. TODD: Any type of corporation that fits within whatever rules are established by the Board, which means, as I understand it, they would have to be qualified to be licensed, which immediately would preclude a lot of potential players that one could dream up. So yes, anybody who qualifies for licence, becomes a licensed distributor, would then be able to provide distribution services. 813 MR. RODGER: And I wonder if you could refer to Exhibit E.3.2. This is the excerpt from the Wirebury distribution licence application. 814 And you'll see on page 2, item 2, the applicant is applying for ownership and operation of a distribution system. 815 MR. TODD: Yes. 816 MR. RODGER: And over the next page, which is actually page 11 of the application, technical ability, and I touched on this yesterday -- 817 MR. TODD: Yes. 818 MR. RODGER: -- you'll basically see that every single service is being contracted out to a third party, everything from design right down to management. 819 And my question for you, Mr. Todd, is it appears that Wirebury itself is basically a shell company that is contracting everything out to others, and do you have any concerns at all around issues of core competencies and qualifications when, really, what we have here is a shell? 820 MR. TODD: Since I have been a part of high-level discussions with Wirebury for a year and a half or so, I think I can safely say you should interpret what you see in this page correctly. Contracted out is a term of contracting out to somebody. The reality of the relationship -- in a normal contracting out relationship, it's a subcontract to somebody who is off at a distance, a call centre that may be in New Brunswick, and they simply say, Okay, you're providing these services, and it's a -- it's like hiring somebody to clean out the gutter in your house, beyond the providing of the services, there's no relationship. 821 What Wirebury is doing is they have assembled, if you want, a team, not to create a formal partnership, but to create a partnering arrangement where they have selected companies with leading expertise in each of these areas, design, construction, inspection. What they have done is they've taken leaders in each segment of the industry, put them together into a package, treating -- essentially created a partnership of these organizations so that they are assembling a -- very high core competencies in all these areas, probably much greater core competency than you could put together in one company, such as an LDC operating in isolation. 822 MR. RODGER: But in terms of the actual entity that's going to be licensed and who is seeking the distribution licence, and that is Wirebury, are you saying that internal in-house capability is irrelevant? 823 If you partner up with everybody else, the company who is actually the holder of the licence itself, it's irrelevant whether they have any experience running a distribution company or not. 824 MR. TODD: Partnering in order to provide a service or a product is a common business practice. Organized -- companies get together that don't have the full breadth of core competencies, and sometimes, if it is a senior partner relationship, and you contract out specific subtasks to somebody else, other times corporations come together to form partnerships. Some succeed, some fail, but they form -- they work together and collaborate in order to provide a service. And that's -- that's what Wirebury is doing, as other companies do. 825 MR. RODGER: So, Mr. Todd, your evidence before the Board is that you have no concerns with this -- with this approach of contracting out every single service. 826 MR. TODD: By bringing in partners who have very strong core competencies in the areas specified, I have no concerns. 827 MR. RODGER: Are you aware, Mr. Todd, of any time in the past of this Board expressing concerns that where distributors contract out certain services, that perhaps that contracting party should be licensed as well? They should have distribution licences as well if they are really the entity that's carrying out the operation of the distribution system? 828 MR. TODD: I haven't looked at the details of that specifically, no. 829 MR. RODGER: Would you agree with me that if that is a Board concern, and if the Board should decide in these type of situations that, really, all these one, two, three, four, five, six, seven, eight, nine, ten contractors should have distribution licences, then that's going to exacerbate further some of the regulatory burden issues that you've heard about over the past week, because there's now going to be a whole other multitude of layer of licensing, potentially. 830 MR. TODD: And you may raise that in the context of the licensing application, and the Board will decide what it thinks on it. Because it's -- what the Board thinks is far more important than what I think on the matter. 831 But what I have said just a moment ago is that when you bring together organizations with strong competency, you create a product. Whether licensing is a concern, whether some sort of undertaking is something the Board would like to see, it can ask for that and get it. And if it doesn't get it, then Wirebury will not get a licence. 832 MR. RODGER: My point is, Mr. Todd, that it's conceivable that Wirebury may not just represent one new additional distributor in Ontario, but 11 new distributors. 833 MR. TODD: Well, that sounds to me like utter speculation on your part, Mr. Rodger. 834 MR. RODGER: But you just told me you had no indication of any concern the Board may have expressed in the past about this issue. 835 MR. TODD: I still say it is speculation to suggest that Black & McDonald would have to become a licensed distributor and that Marshall Macklin Monaghan would become a licensed distributor. 836 But that, I suppose, is more of a legal question than an economic question, so I should probably back off from that. 837 MR. RODGER: Now, I wonder if you could turn, Mr. Todd, to my diagrams, Exhibit E.4.2. 838 MR. TODD: That's the four pages? 839 MR. RODGER: Yes. 840 MR. TODD: Yes. 841 MR. RODGER: Actually just before I get to that, one other point, you mentioned in your earlier answers to a cross-examination, I think it was from my friend from Hydro One, that really, what you're seeking here under the Wirebury concept was an exclusive franchise area for Wirebury. Did I hear that correctly? 842 MR. TODD: It would be an exclusive franchise in exactly the way that the existing LDC franchises are exclusive franchises, so the same rules would apply to them so they would be as vulnerable to having unserved or underserved customers within their areas as others. Now, I was referring to that at a level of principle. I was not referring to the specific applications of Wirebury. Having reviewed the application, and as I indicated earlier today, one approach to getting that end result is to actually, for administrative purposes, to actually have overlapping licences. But the overlapping licences can be administered in a way that has the result we're talking about, which is, you come in, you serve a customer, and that's what I referred to, the de facto monopoly once it's in place, and you achieve that by identifying who is a contestable customer, and a contestable customer is limited to those who are unserved or underserved within the franchise area. 843 MR. RODGER: Let's turn to that. If you could turn to Exhibit E.4.3, this is the Wirebury application for distribution rates. 844 MR. TODD: Yes. 845 MR. RODGER: And just turn to page 3 of 24, it's paragraph 2.4. 846 MR. TODD: Yes. 847 MR. RODGER: I just want to read this paragraph: 848 "The ability of new competitors to enter the electricity distribution business requires the initial investment and start-up costs to be recovered over a period sufficient in duration to support the development of a financially viable business. Without this capability, new entrants would not be able to keep rates at a reasonable level and fund the capital required to build a distribution system. By using a reasonable development period, a start-up company can ensure the customers who are attached in the latter years help to pay for the shortfall that occurred during the initial start-up." 849 My question is this, you've gone to a considerable effort over the course of this hearing, beating the drum that competition is good, and that that is a key driver of why you're here. These subdivisions and large subdivision developments, you'll agree with me, they typically build out in phases over several, several years, do you agree with that? 850 MR. TODD: Yes. 851 MR. RODGER: And I'm thinking about a situation, a greenfield development, let's say of 2000 homes and they're going to do the first 500 over the first two or three years and then there may be another four or five years before they build the second group. 852 MR. TODD: Yes. 853 MR. RODGER: If Wirebury connects those first set of homes in phase 1, and Wirebury is the distributor, but five years down the line for those second groups of homes there is a cheaper supplier than Wirebury that can do the hook up, what is it about competition that should be eliminated for those second-phase customers? 854 MR. TODD: There is no elimination of competition from the second-phase customers, where did that come from? 855 MR. RODGER: The idea that Wirebury would somehow have an exclusive franchise over a new subdivision. 856 MR. TODD: It would have an exclusive franchise over the customers served by the facilities that are put in under a contract with the developer, but if there's additional undeveloped land, I don't see anything to suggest that that would not be contestable. That would be unserved by my definition. 857 MR. RODGER: Okay. So it could very well be that one big new subdivision built over four phases, in your model, could have four separate distribution companies? 858 MR. TODD: In theory. I mean, if I was managing Wirebury, I haven't discussed this with them, but if I was managing it and there was one developer who was developing the four years in four phases, I would come in and do a deal for the whole thing, but there would be contestability and competition for the four phases although it may occur at one point in time. 859 MR. RODGER: But your evidence is it could happen that there could be multiple distributors, who knows, the developer could go bankrupt, he could have sold the development before it was built out, there could be any number of reasons why there may or may not be the same individuals that started it that end up with the final phases. 860 MR. TODD: You can speculate to all sorts of scenarios where if there's no contract in place to serve that property, then it's contestable. 861 MR. RODGER: All right. Now if you could turn back to my diagrams, Exhibit E.4.2. And I prepared page 1 of this diagram really to try and understand better the underserviced customer. So if you just assume, Mr. Todd, that let's say this multi-unit commercial building, it's in existence today in the city of Toronto. 862 MR. TODD: Okay. 863 MR. RODGER: It's bulk meter. And it wants a type of service that perhaps it can't get from the incumbent, let's assume that. 864 MR. TODD: Okay. 865 MR. RODGER: I take it that this would be a kind of target that is within the business model of Wirebury? 866 MR. TODD: Potentially, yes. 867 MR. RODGER: Now, why I prepared this diagram is I think one of the fundamental issues that my clients have been struggling with is what really it is that Wirebury is doing, and let me give you an analogy if I can. 868 There's a very serious point to this which I'll make in a second. You mentioned over the past day about your children and your greying hair and if you can think back to when your children were young I don't know whether they liked stories but some of my kids' favorite stories are the Emperor's New Clothes. 869 In that story you'll remember that, like today, we're kind of waiting for the big new entrant to come to town, the big new distributor and we're all dressed up and we're at the parade ground and we're watching the floats come by and we say the main float for the new distributor on the flatbed truck. You will be happy to note that the truck has been contracted out to Bob's Ladder and Wire, and there's a thrown on the truck but that's it, there's not even a prince with fancy undergarments; we see nothing. So my diagram is to ask you to help me to see where are the emperor's clothes here? What is the distribution system that Wirebury is operating, if you go to page 2, because the customer has said, we want -- in this case could be a submeter, could be an interval meter, Wirebury comes in and puts in these meters, what is the distribution system? 870 MR. TODD: At the risk of churning through some more minutes, I think if you can tell a story, I'll take the liberty of telling a short story as well. 871 Mine was Tom Parkinson's story, the president and CEO of Hydro One last week when he was speaking at the Canadian Australian Chamber of Commerce and he was telling his story about he had bought a house in Muskoka, which is Hydro One territory, and he decided he would be like any other customer and instead of using the president's office to get a connection would just go the normal course of things. And he tells the story that he arrived at his cottage and on the door of his cottage was a door knocker that said: "Here are five things that you must do within the next seven days or we will disconnect your service." 872 His comment on that was that was unacceptable. Unacceptable customer service. He went back to make an effort to get his organization to turn around and have new customers met with a welcome package that says, "We are glad to have you as a customer, we'd appreciate you give us a call so we can sort things out," to treat them differently. 873 The success of that change is yet to be seen, but I think it is illustrative of the reason why Wirebury can come into these situations, because they potentially will treat the customer differently. 874 What they are providing is customer value. Most importantly, what they are providing is discipline to the marketplace for everybody to care about the customer. 875 And that flips back to my comments that I've made a couple of times to the telecom situation, where the competitors, such as Unitel, which no longer exists saw an opportunity to steal customers from Bell by providing better customer service. Bell pulled up its socks, just turned around, and provided the better service and kept the customers. 876 In this model, I would suggest to you that the primary service that Wirebury will be bringing to them, to the customer, is simply better service, more customer response, perhaps getting meters in quickly and at a price that the customer finds attractive as opposed to saying, Well, we'll do it sometime in the next six months. 877 I mean, I'm not sure exactly what it is, but they will only get in this building if they provide the customer something the customer wants. And you know what, the incumbents are likely to respond to that, and Wirebury is likely to have a lot more trouble than they think they might have right now, just as the people did at competing against Bell. 878 So that's the -- that's what's sitting in the emperor's chair, service. 879 MR. RODGER: Okay. Let's remember, Wirebury has applied for a licence to own and operate a distribution system. As you know, it already has a meter affiliate, if I can call it that. 880 Let's go back to my diagram, page 2, and let's assume -- let's say this is within Toronto Hydro's service area. Let's say Toronto Hydro comes right to the exterior, that the left of the bulk meter. And let's say Wirebury installs a bulk meter and puts in all the individual suite meters. 881 What is the distribution system of Wirebury? 882 MR. TODD: The distribution system of Wirebury is lines presumably from the bulk meter to the units. It involves meters. In a way, it perhaps is analogous to the distribution service that Union Gas provides to TransCanada for generation facilities, which is a meter and nothing more. 883 We have lots of examples of regulation where a distribution system to a customer is a meter, period. Those are accepted by the Board. They have been discussed before the Board. 884 But the customer is getting served in a way that they want to be served, and so it's quite legitimate. So the service is perhaps some feet, even, of electrical wiring, some meters. But more important it is the package of service being delivered to the customer, which may include a type of meter that allows them to participate in a retail market, allows them to opt for time-of-use rates, which hopefully will come in the near future, that type of thing. 885 MR. RODGER: So in this specific example, assuming Wirebury isn't also changing the wires to all the individual suites, by virtue of the fact of simply putting in a meter, there is this magical transformation to becoming a distributor. 886 MR. TODD: Yes, and in fact, if you turn, as I have, on the Internet, and you go to countries such as Australia and New Zealand, you'll find that they have what are called embedded networks, which are exactly this. You know, this is being done around the world. They're doing it for -- in those two cases for trailer parks, for commercial buildings such as this, for residential buildings that are high-rises, for malls with stores in it. 887 They are explicitly identified. They're part of the system, and it's totally accepted, fully established. 888 MR. RODGER: And let's assume we look at this picture on December 31st of the year, just to pick a day. They're a Toronto Hydro customer. They pay, among other things, the Toronto Hydro general service rate. 889 On the 1st, these meters are installed. It becomes a Wirebury customer. 890 MR. TODD: Yes. 891 MR. RODGER: I take it that there is now a wheeling rate that is paid rather than the Toronto Hydro distribution rate; is that correct? 892 MR. TODD: That presumably would be the next step, and as I've indicated earlier today in cross-examination, that may be reviewed as the marketplace structure changes in terms of what the level would be, yes. 893 MR. RODGER: And are you aware, Mr. Todd, that -- it's actually page 12 of Exhibit E.4.3, the Wirebury rate application, in paragraph 13.2: 894 "The applicant expects that the --" 895 MR. TODD: Slow down a sec, page 12? 896 MR. RODGER: Paragraph 13.2. 897 MR. TODD: 13.2, yes. 898 MR. RODGER: Wirebury describes that: 899 "The applicant expects that the actual wheeling rates would be considerably lower for the distributors in the market area." 900 And of course, Toronto is included as part of the market area. 901 So on January 1, they go from the higher rate to this considerably lowered wheeling rate. That would be one change, wouldn't it? 902 MR. TODD: Well, what it says here is: 903 "The applicant used Hydro One's approved rate as a proxy for a reasonable wheeling charge from the host distributor." 904 When I read that, I assumed that they were making an assumption about what the future rate would be, because it's uncertain. And so they are bearing some risks about what it will be, or depending upon the relationship with the customers, that they're passing through to the customers, they customarily have some risk, certainly, around that. 905 MR. RODGER: So they pay a wheeling rate, and they also pay, as I understand it, a Wirebury local distribution charge rate. 906 MR. TODD: Correct. 907 MR. RODGER: So could you explain to me what is the charge levied against? If all you've done is put in meters in a building, where is the distribution charge? What is it going to -- what is it going to pay? Nothing has changed from the 31st of December except -- to the 1st of January, except for the meters, and now there is a distribution charge for, if you like, that internal wiring. 908 MR. TODD: As we have seen in many hearings before this Board, the -- providing a service to a customer involves more than the facilities. There's a billing system, a customer information system, a call centre, all of the items related to customer service, and those -- the responsibility in those areas would transfer over from, in your example, Toronto Hydro to Wirebury in terms of collecting the billing information, processing it, and so on. 909 So there's -- you know, there are other costs that are transferring. 910 MR. RODGER: If you could just turn to the next page, next we have a detached residential unit, and I'd like you to assume that this is a new house in a greenfield development. 911 MR. TODD: And indeed, your friend beside you cringing each time you use that term "greenfield." 912 MR. RODGER: And Wirebury connects this customer, and here I've got a bulk meter. I take it that there's no magic in that, even though your evidence is that you believe that's Wirebury's business case to put in an interval meter. Wirebury could decide there just isn't a market for it, or they're too expensive; we're going to put in bulk meters, but that wouldn't change your evidence about anything else? They'd still be entitled to do this with a bulk meter, I take it? 913 MR. TODD: If it's in accordance with all the rules, we've got a new residential unit. Let's put it this way: Assuming the rules permit it, a Wirebury-like company could come in -- it's not specifically identified that this would be done by Wirebury, but, yes, once it's licensed, it could do anything that its licence and the rules of the Board permit. 914 MR. RODGER: Okay. All right. So this is a Wirebury customer. It's -- it's connected this house. 915 If you flip over to the final page, page 4, now the developer sells the house to a real individual, and the individual creates a couple of apartments in his house, a tenant for the top and a tenant for the basement. 916 And it goes to Wirebury and says, I'd like to put in interval meters on three suites, because I want to bill my tenants separately. And Wirebury, for whatever reason, says, I don't want to do that. Then now this tenant becomes underserved. So the tenant or the landlord goes to Toronto Hydro and says, Would you do this for me? 917 I take it in that case, the customer could switch from Wirebury to, in my example, Toronto Hydro; would you agree with that? 918 MR. TODD: Yes, given your story is about as realistic as one that you read to your children, but yes. 919 MR. RODGER: Well, let's just see. Just bear with me. 920 And in this case, the landlord could certainly make an application to become a licensed distributor, and he could then distribute it to his two tenants. Do you agree with that? 921 MR. TODD: The landlord would be permitted to make a licence application? 922 MR. RODGER: Yes. 923 MR. TODD: The Board would be permitted to accept it if it wishes and your story would come to fruition. 924 MR. RODGER: Yes. And this may be three apartments, it may be 300 apartments and there may be groups of landlords that see an advantage in turning a cost into a potential revenue. So we should leave it to the market, shouldn't we, to let these creative arbitrage opportunities come to fruition, and if they don't that's fine, but if they do, we shouldn't stop that, should we? 925 MR. TODD: Well, if we want to be like Australia, if we want to be like New Zealand, if we want to be like the U.K., then yes, we should do that and there should be no impediment. In fact, again, in Tom Parkinson's speech he indicated he thought what had been done in Australia was very good. So I would be surprised if there's a lot of opposition to Canada following the lead of some of these others. 926 MR. RODGER: If you had enough of these apartment buildings, Mr. Todd, you might be able to flip them into an income trust, who knows. 927 Those are my questions, thank you, Mr. Chairman. 928 MR. SOMMERVILLE: Thank you, Mr. Rodger. 929 We're going to carry on. Are there any questions from Board Staff? 930 MR. GORDON: Thank you, Mr. Chair, just a couple on my end. 931 CROSS-EXAMINATION BY MR. GORDON: 932 MR. GORDON: Mr. Todd, I want your opinion on should the Board encourage applications on service area amendments where both the applicant and the LDC and the customer or customer's consent to the amendment? What's your view on that? 933 MR. TODD: I'm not sure what you mean by "encourage," should they permit it? Should they hear it? 934 MR. GORDON: Should the Board encourage negotiated agreements between all parties? 935 MR. TODD: Yes, in fact, what I have always believed is the Board should be creating as clear-cut rules as possible so that the parties know that if they come before the Board, they know in advance what the outcome would be, and therefore, they would not have difficulty predicting that outcome, and therefore, making a settlement without incurring the cost to them and the Board of coming to the Board. 936 MR. GORDON: Could you see any circumstances where you get this negotiated scenario where the Board may not provide approval, would there be potential scenarios that you could see? 937 MR. TODD: Well, I think if we go back to a couple of days where there was an example put forward by counsel to Wirebury, I think, where there were five potential distributors, I suppose it would be conceivable that there would be negotiations between a potential customer and, say, two of them, so negotiations would occur, but perhaps for some reason, the alternative that would be very low incremental cost to attach was left out of the negotiations because nobody wanted to talk to them, perhaps they would have the opportunity to register an objection and from a public interest perspective, that would make sense. 938 The judgment the Board has to apply is: From a process perspective is the potential harm, you know, worth the incremental administrative effort? And it may be that others should be able to raise an objection and force reconsideration. 939 Clearly, you don't want this being dealt with through a process such as we've endured here. You don't want the cost of people like myself giving evidence in these things. What you want is to have an administrative process with Board Staff or a delegated person ideally reviewing the facts and helping the parties come to a sensible and rational decision. 940 MR. GORDON: Final question, who should pay for a service area amendment application, which party? 941 MR. TODD: Who should bring it forward? 942 MR. GORDON: Which party should pay for the service area amendment application? 943 MR. TODD: If it's disputed? 944 MR. GORDON: Whether it's disputed or not disputed. 945 MR. TODD: Okay, if it's not disputed, it's a relatively straightforward process I think we're talking about, and I would expect that the applicant, the party who's going to be connecting the customers, would bear the cost of the process. 946 In a disputed process, you know, it's a judgment call, either the parties pay their own costs or one of the ways to reduce administrative burden for the Board is essentially the loser pays, which creates a greater incentive for the parties to come up with a settlement themselves. 947 MR. GORDON: And finally, who pays for the incumbent's costs associated with the application? So let's say the applicant files and then the incumbent says, Okay, you know, we maybe have to calculate stranded costs, what have you. Who should pay in that scenario? 948 MR. TODD: I'm trying to remember, but I don't offhand recall, I believe under the Distribution System Code -- let's just put it this way, the Distribution System Code sets out what the customer can be charged for, they're entitled to an estimate of costs and so on; therefore, I think it's specified if additional information is required, just as the customer would pay or another applicant on their behalf, somebody else would obviously have to bear the cost of providing information above and beyond the requirements of the Distribution System Code. 949 I mean, I think it's important to recognize that under the Code at the present time, a customer can go to somebody else to have their facilities constructed. Though in that respect, there's no difference between a Wirebury coming in and constructing the facilities and then operating it versus somebody coming in and constructing the facilities and then passing over the operation to the embedded distributor. So I think the existing rules cover the situation. 950 MR. GORDON: Okay. Thank you, Mr. Chair, I don't have any further questions. 951 MR. BROWN: No questions for me. 952 MR. SOMMERVILLE: Thank you, Mr. Brown. 953 Mr. Birchenough has a question. 954 QUESTIONS FROM THE BOARD: 955 MR. BIRCHENOUGH: I just had one. If you could refer to page 11 of 25 of the Wirebury application, licence application, item 15, technical ability, you'll see in bold type there, the company -- 956 MR. TODD: Sorry, this is the licence application not the rate application? 957 MR. BIRCHENOUGH: The licence application. 958 MR. SOMMERVILLE: 8.3.2. 959 MR. BIRCHENOUGH: Page 11 of 25. It says in bold type: 960 "The company will be managed by a team of experienced distribution managers." 961 And then if you go down to the bottom of that page and look at the item called other, management services: 962 "Contracted to Enbridge Distribution Management Services Inc." 963 Is it your understanding that this team of experienced distribution managers will be an Enbridge Distribution Management Services team? 964 MR. TODD: My understanding is it will be individuals from the Enbridge family corporation, which would be assigned to it. I'm not certain of the corporate structure of where Enbridge Distribution Management Services Inc. fits in, but it is an entity that can provide these services that is presumably drawing on the expertise of Enbridge. 965 MR. BIRCHENOUGH: So if you read that statement that says, "The company ..." and I'm assuming this is Wirebury here. 966 MR. TODD: Yes. 967 MR. BIRCHENOUGH: "... will be managed by a team of experienced distribution managers." 968 Do we assume from that that Wirebury will be managed by Enbridge Distribution Management Services Inc? 969 MR. TODD: Yes, I believe that's correct. So it will be managed by the distribution managers, i.e., the people that have distribution management experience. 970 And the last item says: "Enbridge Distribution Management Services Inc. will be providing the management services." So that is the member of the team that provides that function. It's similar -- in a way, this Board has heard issues around head office activities, you know, Union Gas used services from Westcoast, that was reviewed in a hearing four or five years ago. Management services, some things around their securities and investor relations and so on were provided by a senior entity in the corporation. I think it's similar to that kind of a relationship. 971 MR. BIRCHENOUGH: If I read that statement literally though, do you not agree that it says the company, Wirebury, is, in fact, being managed by Enbridge Distribution managers? 972 MR. TODD: Yes. 973 MR. BIRCHENOUGH: Thank you. 974 MR. SOMMERVILLE: Thank you, Mr. Birchenough. 975 Mr. O'Leary, redirect? 976 And we will take a short break immediately following this and then recommence with the oral presentations. 977 MR. O'LEARY: Mr. Chair, you will be pleased to know that I have just one question, and you may ultimately determine that it wasn't necessary, but just for the purposes of ensuring a record that is correct. 978 RE-EXAMINATION BY MR. O'LEARY: 979 MR. O'LEARY: Mr. Todd, you were discussing earlier about the risk of adding incentives to the distribution market, and you indicated that there is both upside and a potential risk of the downside, which you described as minimal. You indicated that in the event that a Wirebury-type model should fail, my notes indicate you said that it would be the ratepayers of Wirebury that would suffer that or incur that loss. 980 I just wanted to know if you meant to use the term "ratepayers." 981 MR. TODD: If I said that, I definitely did misspeak myself, and there's probably other places where I've referred to that. Certainly it's the shareholder that would bear those costs. That was clear in the discussion around PBR, yes. 982 MR. O'LEARY: Those are my questions, sir. 983 MR. SOMMERVILLE: Thank you, Mr. O'Leary. 984 We'll reconvene at quarter to, by my watch, which is ten minutes from now. 985 And we'll come back to your presentation, Ms. Godby, and Chatham-Kent will follow that. That will probably -- we'll see how things go, but that may exhaust today's time. 986 I want to indicate that the Board will rigorously enforce the time frames for these presentations. And once again, I strongly urge the parties to avoid redundancy. 987 We have heard a good deal of policy and what is a hair's breadth away from argument, and there is no value, in my view, in going over the traces again and again and again. We certainly look forward to the very expert presentations that I'm sure we're going to receive, but just with that caution and the idea that we will rigorously enforce the time limits. 988 So we'll stand adjourned until a quarter to. Thank you. 989 --- Recess taken at 3:35 p.m. 990 --- On resuming at 3:50 p.m. 991 MR. SOMMERVILLE: Thank you. Please be seated. 992 Ms. Godby? 993 MS. GODBY: Thank you, Mr. Chair. 994 I just wanted to clarify something you had mentioned earlier that -- or you had noted something about written submissions, and I wasn't clear whether or not you wanted a copy as well as our oral submissions or -- 995 MR. SOMMERVILLE: I think the court reporter, in particular, finds it to be very helpful if you have reduced your submissions to writing to get a copy of that. 996 MS. GODBY: Okay. Thank you. 997 MR. SOMMERVILLE: Thank you. 998 SUBMISSIONS BY MS. GODBY: 999 MS. GODBY: There are several licence amendment applications before the Board, and there are several more pending. But these issues before the Board have, to put it mildly, ballooned. The question is no longer confined to an examination of the specific facts, but rather what should the vision be for the future of the distribution sector in Ontario? Should the status quo be preserved? 1000 The Southwest applicants and many other LDCs think the status quo is entirely unsatisfactory. Should the legislation be rewritten? Again, the Southwest applicants do not think this is an efficient solution. 1001 What the Southwest applicants propose is not to turn the industry on its head, but to introduce, albeit in a limited way, competition to the distribution sector. 1002 As you have heard Mr. Southam describe, this does not open a can of worms; rather, it is a natural, logical, and legal progression of what is already in place, and to suggest otherwise is, well, a bit chicken-littleish. 1003 The Southwest applicants have proposed overlapping distribution licences out to their municipal boundaries to incorporate new customers, increase contiguity, density, and economies of scale. This arrangement comes with important safeguards to protect the incumbent, its existing customers, and the integrity of the system as a whole. 1004 The Southwest applicants see overlap as the only lawful way to proceed. Otherwise, what is to be done with the current 90-odd licences issued today on a non-exclusive basis under 70(6)? Are we to revoke them, and if so, what is the mechanism for doing that? 1005 Such an endeavour in and of itself would likely pose an enormous administrative burden for the Board. If geographical boundaries were redefined, wouldn't that further require substantial hearings involving all stakeholders and likely an amendment to the legislation. 1006 And how would the distribution assets of one distributor ending up in the new service territory of another be handled without convening Section 70(13)? How do you draw boundaries around shared assets? What is the timing of the business decisions facing the applicants who have already had their applications before the Board for quite some time? How much longer are they to wait? 1007 While the Southwest applicants might prefer a different model, the one which they offer is the one that best fits with the new practices, the intention of restructuring, and the legislative environment. 1008 The Southwest proposal moves us forward within the existing legislative framework to provide discernible benefits today to customers in response to their desire to be served by their municipally-owned utility. 1009 You have heard evidence from Mr. Southam, who appeared before you not as an expert in theoretical economics, but as one who has provided advice to over 50 utilities in the province, who is himself acting as the president of a utility, and who is intimately familiar with not only the corporate finance in rates issues, but also the regulatory environment in which these utilities operate and have operated both pre- and post-restructuring. 1010 You have heard Mr. Southam testify as to the real on-the-ground pressures utilities are facing from both their shareholders and potential customers who are within the municipal boundaries. These people want all of their services from the same source, and they want their municipalities to provide them with electricity, because the rates, the service, and the reliability is quantifiably better. Such an evolution leads not to customer confusion, but rather to customer satisfaction. 1011 KEMA-Quantec's report offered, in part, an analysis of the legal and regulatory framework governing distribution in many other jurisdictions outside Ontario. They propose that the regulatory compact model would bring the most benefits to the distribution sector here; however, they did not appear to be familiar with our regulatory framework or appreciate the unique features of our distribution system. Their evidence did not offer any insight into how their proposal might be implemented in this province. 1012 The Southwest applicants see that the tools for implementing their proposal already exist. Such tools include the Electricity Distribution Rate Handbook and particularly Section 11.3.3, which provides for distribution wheeling rates, and Appendix B as well of the Distribution System Code. Appendix B provides a standard economic methodology for the evaluation of customer connections and system expansions. 1013 Dr. Yatchew characterized economic evaluation methodology, this particular one in the Distribution System Code, as insufficient as it lacked a mechanism for inter-utility comparisons. 1014 The Southwest applicants propose that the economic evaluation model be employed in precisely the manner intended by the Board; namely, to present customers with a determination of the cost of connection to its system, including the cost of departure from the incumbent utility. 1015 Having different utilities perform the same calculations pursuant to the same methodology offers, we submit, an appropriate basis for comparison. 1016 The Southwest applicants submit a stranded-asset calculation can be independently established according to a methodology to be specified by the Board. This figure can be included as a separate input entry into the economic evaluation of connecting the departing customer to a different utility. This is precisely the analysis required and the one that is proposed by the Southwest applicants. 1017 While the Board may be required, in fact, to entertain submissions as to the most appropriate methodology for calculating stranded costs, this is far less onerous, we submit, than what would be required should the existing licensing regime be turned on its head. In fact, even Networks has noted in its interrogatory response to Board Staff appearing at J.8, tab 10, schedule 6, page 1, that if the Board decides to proceed with overlapping service territories, then the Board should set principles for compensation to be paid to incumbent LDCs so that they and their customers are held harmless, insofar as it is possible. 1018 The Southwest applicants' proposal contains elements similar in some respects to those advanced by the others here before you today; however, it is their own position which has been responsibly developed to reflect the needs of the various stakeholders which are the customers, other utilities, shareholders, and businesses. 1019 Months ago, parties were asked to turn their minds to several issues which would assist the Board in developing guiding principles to determine licence amendment applications. The Southwest applicants put their mind to this in earnest and developed a methodology for evaluating such applications. While the schema was previously described in the prefiled evidence of the Southwest applicants, Mr. Southam provided the Board with a more fulsome picture of the principles which were incorporated into the development of this approach during his evidence in chief. 1020 The schema not only balances the factors that ought to be considered, but it provides a process for implementing them as well. Legitimate concerns no doubt must be taken into account; however, the Southwest applicants submit that in their view some of the concerns raised by other parties have been overstated and overplayed. Cherry picking or cream skimming, for instance, the Southwest applicants agree that this is a problem in theory. To date, however, only theoretical and not practical examples have been advanced. Further, the potential for cream skimming is mitigated by the obligation to serve all customers in the licensed area. In addition, stranded costs would have to be paid by customers proposing to switch. 1021 Dr. Yatchew identified regulatory arbitrage in the context of a case where a customer chose to bypass a distribution charge of an incumbent utility by choosing to be served by a different utility and paying only a lower distribution wheeling rate. The Southwest applicants specifically foresaw this problem and have proposed a stranded cost recovery mechanism to prevent uneconomic bypass and regulatory arbitrage. This concern is misplaced in our view. 1022 Obligation to serve could be muddied. All licensed distributors in the Southwest applicants' view would have an equal obligation to serve any customer who requests connection under the Southwest applicants' proposal. We draw a distinction between the obligation to serve and the obligation to plan. The latter of which is the responsibility of both host and embedded utilities and which is a feature of the system in Ontario today. Hydro One being the largest distributor and the preponderant transmitter in Ontario has the largest obligation to plan. 1023 Duplication of assets, again, the Southwest applicants have proposed that stranded asset cost as well as the cost of any duplicate asset be included where a customer switches to an applicant utility. 1024 In addition, the Board has already recognized the inherent value of embedding as a means to minimize the duplication of assets by allowing utilities composed entirely of embedded systems to hold distribution licences and providing for distribution wheeling rates. 1025 The Southwest applicants would not support the position that the Board ought to regulate against the possibility of customer choice. Where the customer is willing to pay the stranded costs, they should be entitled to bear the consequences of that decision. Otherwise, we feel that arguments regarding discriminatory practices may be advanced. 1026 The Southwest applicants submit that rational customers would generally choose the lowest cost connection option which would often be the embedded system thereby eliminating uneconomic duplication of facilities. 1027 To the extent that some residual customers end up paying more for distribution service based on the cost of service is a principle that the Board has already apparently accepted by ordering cost-of-service studies and ought not to be confused with residual customers paying higher rates because they have been saddled with stranded costs. 1028 To the issue with respect to current rates, current rates, we submit, are the appropriate basis for rate comparison between distributors today. These rates have been approved by the Board and they've been approved as just and reasonable rates. The notion that these rates which are frozen until May 1st, 2006, are transitional because they may change in a favourable direction relative to another distributor's rates as a result of cost-of-service studies which have not even begun let alone been completed is not valid in our view. 1029 System planning: Some parties have indicated overlapping licences would prejudice the ability to forecast load and perform basic tasks in a cost-efficient manner. These arguments ignore the realities on the ground in Ontario today. 1030 Embedded and host utilities have a long history of communicating and cooperating with each other now on system planning issues and basic tasks as required. Dig safe issues, for example, are coordinated between the municipalities, the gas, telephone cable and electricity suppliers on a regional basis. 1031 To suggest that businesses would be unable to coordinate their efforts in this regard or that increased communication would not occur because competition exists is not a valid argument and should be rejected by the Board. 1032 Suboptimal capital investment decisions are unlikely due to the embedding and the requirements of appendix B of the Distribution System Code. Uncertainty about future customer growth is a factor of the system today. Host distributors must talk to embedded utilities and therefore know about growth requirements. 1033 Revenue instability will be mitigated where switching customers are required to pay stranded costs, meaning that switching costs will be set at a realistic level, which in many cases will be higher than the customer wants to pay. The Southwest applicants do assume that the majority of the customers are acting reasonably or will act reasonably. 1034 Having said that, however, no distributor should assume that future revenues from unidentified future customers should assume -- sorry, future revenues from unidentified future customers since they do not have exclusive licences now and to find that there exists an exclusive right to a future revenue stream would be tantamount to rewriting, in other view, section 70(6). 1035 As to the argument that competition may lead to complex locational rates, Dr. Yatchew testified yesterday as to the complex locational rates we have now and those which are being contemplated in the future. We say this is something which is not outside the Board's area of expertise. 1036 The licence amendment applications before the Board today have arisen precisely because Ontario electricity distribution licences have been granted on a non-exclusive basis. 1037 As noted by Dr. Yatchew, the retail technical panel of the market design committee published a report in January of 1999. It recommended that distribution licences be granted on an exclusive basis. The reasons for this were clearly set out. In spite of this recommendation, the Board, in April 1999, opted to grant licences to distributors without the provision that they be exclusive and since that time, another round of licensing has occurred and the Southwest applicants are aware that these licences have also been renewed on a non-exclusive basis for lengthy periods of time. 1038 It seems obvious to the Southwest applicants that there is only one conclusion that can be reasonably drawn from these facts. The time has more or less come and gone with respect to revisiting arguments in favour of exclusivity. To use an adage from the southwestern part of the province, the horse has already bolted from the barn. 1039 The model described by KEMA-Quantec might exist somewhere else, but it does not exist in Ontario. The arguments offered cannot be characterized as new or as consistent with the legislative and regulatory framework that exists today. In fact, they are arguments more closely associated with regulatory economic theory of a bygone era in Ontario's past. 1040 Several assertions about fearsome consequences were offered, but none were empirically substantiated. It is apparent that should competition as proposed be implemented, the Board would need to regulate in the area of stranded assets. 1041 As noted by the Southwest applicants, we are not advocating competition at the expense of public interest, and as such, the incumbent utilities and their customers must be held whole. 1042 On the issue of what constitutes stranded assets, the parties can disagree today and work out a common solution tomorrow. The possibility of asset stranding necessarily requires regulation, but it is not a sufficient condition to deny the application sought. 1043 We should be mindful of what has been unleashed by the amalgamations between rural and urban municipalities. These amalgamations have led and will lead in future to the progressive urbanization of rural areas with customers demanding the levels of service and rates associated with urban utilities, not those of utilities who have specialized in rural distribution. 1044 Hydro One has traditionally connected urban municipal utilities to the grid, very often through embedding, which is simply the joint use of distribution assets. Now the urban municipalities have grown, and their local distribution utilities have a need to grow also. 1045 Competition at the margin of electricity distribution as applying only to differences between economic development that would choose Ontario over Quebec or a neighbouring U.S. state is not an argument that would prove very convincing to municipal officials in southwestern Ontario, who are interested in bolstering their competitiveness in the market, in attracting economic development to their communities, and in meeting demand of both potential and existing customers. 1046 In this regard, the Southwest applicants point out the evidence of the LDC Coalition and Dr. Yatchew at page 15, line 16, with respect to whether there can be exceptions to the principle that discontiguities in utility service areas should be minimized as far as possible. 1047 Dr. Yatchew's evidence, as we understand it, and as it's been filed, is that one possible exception is a utility which has an obligation to service large expanses of populated territory, such as Hydro One. 1048 In this case, the optimal industry structure may include one or more utilities, which specialize in rural distribution and whose service territories have a Swiss cheese type structure. The holes in the cheese, however, are municipal utilities, which themselves should achieve minimum efficient scale wherever possible and serve customers over a more or less contiguous area. 1049 This is precisely the model the Southwest applicants are proposing in their applications, and it is a concept which is obviously lacking in the potential for customer confusion, that the LDC Coalition characterizes it as possibly the optimal industry structure. 1050 If the LDC Coalition could offer an alternative legally-compliant approach for the Southwest applicants to achieve this structure, we would be most interested indeed. Unfortunately, there does not appear to be an alternative, short of rewriting the legislation, and this, in our view, is not viable, given the demands utilities are facing today. 1051 The Board ought, in our respectful submission, to take into account the unique characteristics of the Ontario distribution system in rendering its decision on general principles. We submit that most of the requirements for a transition to distribution competition have already been implemented and that the Board can order that transition while providing safeguards against the excesses of direct competition. 1052 In our submission, the Board ought to refrain from exercising any power or performing any duty if it finds that a licensee is or will be subject to competition sufficient to protect the public interest. In this case, we would ask the Board specifically to refrain from denying the overlapping licence amendments. 1053 A similar forebearance provision appears in the Telecommunications Act, and despite the efforts of some to distinguish too finely the differences between telecommunications and the distribution sector, the Southwest applicants are confident that the Board is able to see the broader similarities, and particularly given the testimony of Mr. Todd, who has appeared as an expert before both tribunals. 1054 We can debate the merits of any given weighting offered by the schema, the definition of possible stranded assets, and what additional information ought to be included. We can build in the safeguards to protect the interests of the incumbent, their customers, and the public at large. 1055 The Southwest applicants are of the view that most of these safeguards already exist, but where they do not, our model proposes to create them. 1056 These are the details which necessarily must be worked out but are not reasons for invalidating the suggestion and denying the application. Competition in the manner proposed is lawful and preferable to heavy handed regulation. 1057 And based on the above, the Southwest applicants respectfully request the Board to adopt its proposal for moving forward. 1058 Thank you, Mr. Chair. 1059 MR. SOMMERVILLE: Thank you, Ms. Godby. 1060 The Board has no questions, Ms. Godby. 1061 Pursuant to the procedural order, you have a right to a five-minute reply at the conclusion of all of the submissions. I'm just bringing that to your attention in the event that you want to avail yourself of that once the submissions have been completed. 1062 MS. GODBY: I'm sorry, Mr. Chair. You had indicated that we have the right for a reply? 1063 MR. SOMMERVILLE: The procedural order indicated that applicants have a right to reply for a five-minute period after all of the other submissions have been completed. 1064 MS. GODBY: Thank you, Mr. Chair. I can advise that we will not be availing ourselves of that. Thank you. 1065 MR. SOMMERVILLE: Thank you, Ms. Godby. 1066 The representative from Chatham-Kent, I think, is present, and I wonder if you could identify yourself for the record, sir, please. 1067 SUBMISSIONS BY REPRESENTATIVES OF CHATHAM-KENT: 1068 MR. HOGAN: Thank you, Mr. Chair. 1069 I'm Jim Hogan, the chief financial and regulatory officer of Chatham-Kent Energy, the holding company of Chatham-Kent Hydro. 1070 To my left is Dave Kenney. Dave Kenney is the president of Chatham-Kent Hydro, and Chatham-Kent Hydro is the LDC in Chatham-Kent, and they are the LDC that's regulated by the Ontario Energy Board. 1071 To my right is Mr. Jim Wickett. He is legal counsel for the Municipality of Chatham-Kent, and the Municipality of Chatham-Kent was an intervenor in our specific application, which was heard in the springtime. 1072 I want to thank the Board for allowing us to be here today and accommodating our schedule. 1073 First off, we did provide a few handouts. I'm not sure if you have them, Robert? 1074 I apologize. We don't have a lot for everybody here today, but we do have some for the Board and Board Staff. 1075 What we've provided as a first item is a map of Chatham-Kent, of the Municipality of Chatham-Kent, and it's -- 1076 MR. SOMMERVILLE: Mr. Hogan, I think just before we start, we will mark these for identification. 1077 And I'll ask you, Mr. Gordon, to arrange for copies for the rest of counsel at the earliest opportunity. Thank you. 1078 This would be 4.3, I think. Pardon me, 4.4 being a map of the Municipality of Chatham-Kent. 1079 EXHIBIT NO. E.4.4: MAP OF THE MUNICIPALITY OF CHATHAM-KENT 1080 MR. SOMMERVILLE: E.4.5, a one-page document, which is headed the, "Submission of the Municipality of Chatham-Kent." 1081 EXHIBIT NO. E.4.5: ONE-PAGE DOCUMENT ENTITLED "SUBMISSION OF THE MUNICIPALITY OF CHATHAM-KENT" 1082 MR. SOMMERVILLE: And finally, E.4.6, which is a two-page document, which is untitled, but which has the number 22 and 23 at the top of the respective pages. That will be E.4.6. 1083 EXHIBIT NO. E.4.6: UNTITLED DOCUMENT SUBMITTED BY CHATAM-KENT NUMBERED 22 AND 23 1084 MR. SOMMERVILLE: Mr. Hogan. 1085 MR. HOGAN: Thank you. 1086 Before we start, I just wanted to mention about the map or describe the map a little bit there. That's a map of the total municipality of Chatham-Kent, it's about 2,500 square kilometres, and the yellow highlighted areas, those are the areas that Chatham-Kent Hydro has as service territories. So there's 11 service territory areas that we distribute electricity to, so about 32,800 customers. 1087 The other area in white, that's currently served by Hydro One. There there's about 17,000 customers. So of all the electricity customers in the municipality of Chatham-Kent, we serve about 60 percent. 1088 As far as the revenue and energy that flows through the community, I would think that we are much higher than the 60 percent because we provide service to the majority of the commercial and industrial customers. 1089 So with that, I think how we would like to do this is we'll start with Mr. Wickett, and he'll make some presentations and submissions on behalf of the municipality of Chatham-Kent, and then Dave Kenney and myself will make some submissions regarding the five issues on our issues list for this proceeding. 1090 MR. SOMMERVILLE: Mr. Wickett. 1091 MR. WICKETT: Thank you, Mr. Chair. It is my pleasure to speak on behalf of the municipality of Chatham-Kent and to take a small port of the Chatham-Kent Hydro time and I appreciate that opportunity. 1092 The matter of establishing the principles to be followed for service area amendments is a matter which has significant impact upon planning and economic development in Chatham-Kent and hence, are matters about which the municipality feels very strongly and passionately. 1093 My comments will be related primarily to the issue of customer preference and first, I believe it is useful to look at some of the background applicable to the Chatham-Kent situation. 1094 You have the map that Mr. Hogan has alluded to. The municipality of Chatham-Kent, you may recall from our previous visit to the Board, was the subject of a municipal restructuring order effective January 1, 1998. The untitled two pages that you have in the package of documents is actually part of the initial discussion points in that restructuring order that are applicable to the amalgamation of the PUCs who were providing hydro service at that particular time. 1095 So there were 23 municipalities amalgamated into one single tier for the entire county of Kent and the city of Chatham, the effect of that was that there was 11 PUCs for the urbanized areas within the new municipality which were amalgamated into one and with the advent of the Electricity Act, Chatham-Kent Hydro took over that responsibility. 1096 The result is somewhat of an anomalous situation in that one municipal hydro distributor service provider exists for all of the urbanized islands within the municipality with Hydro One, the distribution service provider for the surrounding sea of rural areas. So all of the highlighted areas on that map are the urbanized areas of the municipality of Chatham-Kent, they are all serviced by Chatham-Kent Hydro, everything else is serviced by Hydro One. 1097 The preamble that I have handed out, especially on the second page, recognizes this anomaly, also talks about the savings that were anticipated as a result of the restructuring, and at the bottom of that second page, indicates that, and this is what the anticipation was at the time of the restructuring order, eventually the new commission would be in a position to take over all hydro services in the former county, boundary to boundary, including the area now served by Ontario Hydro with immediate savings in the order of $1 million. 1098 So I bring this to your attention not because it was part of the actual substantive portion of the order but because it was part of the discussion that was included in the restructuring order at the time. 1099 The municipality submits that the principles to be adopted by the Board for service area amendment applications should allow for Chatham-Kent Hydro to expand its service area outside of its urbanized islands and to the limits of the municipality. The municipality submits that it is in the public interest of the municipality and its ratepayers that the electricity consumers have a choice of distributor and that one of the choices should be the municipally-owned distributor Chatham-Kent Hydro. 1100 Why does Chatham-Kent believe this is in the public interest? Pursuant to the Municipal Act and the Planning Act, Chatham-Kent is charged with the responsibilities for economic development and planning and zoning. 1101 The availability and the cost of hydro distribution plays a critical role in both economic development and planning and zoning. There are crucial synergies which can be greatly enhanced by allowing the municipality or the municipally-owned utility the opportunity to provide service beyond their current service areas. The availability of Chatham-Kent Hydro as a service provider for areas outside of the current urbanized areas will allow the municipality to exercise its planning responsibilities with the knowledge that it can be respond promptly to development applications, with the knowledge that it can respond and plan growth beyond the urban boundaries, that it can plan and direct economic development to preferred areas of Chatham-Kent, even where such areas for development and growth may not be consistent with the Hydro One growth plan and infrastructure. 1102 So we believe it is crucial that Chatham-Kent Hydro be allowed to expand beyond the existing boundaries that it has in order to accommodate the growth plans that the municipality will have even where the growth plans do not dovetail with what Hydro One has in mind. 1103 The provision of some measure of local control over the availability of hydro distribution service will greatly assist the municipality in executing its economic development strategy. The municipality submits that customer preference and customer needs are of paramount importance in the execution of its economic development strategy. 1104 The municipality recognizes that it must be able to respond and respond promptly to the demands of the global marketplace. There is great competition for economic development among municipalities. We went to some length, sir, at the hearing previously this year dealing with those economic development issues and the competition that Chatham-Kent has experienced in that area. 1105 Companies planning an investment look at all costs associated with the prospective site. The hydro costs are often a significant component of development costs and the costs of the operation of the site are a similar significant issue. 1106 Investors are looking for not only the most competitive capital costs and distribution rates, but also the certainty with respect to capacity, capital cost and rates. Investors also insist on reliability of supply and service. 1107 The municipality submits that their competitiveness for new development will be greatly enhanced where Chatham-Kent Hydro is an available service provider. This will give the developer and the consumer a choice, competition will ensure the best available rates, competition will ensure the best available capital costing, will also ensure the most reliable service. And we believe that it will also ensure that there will be some certainty for prospective developers. 1108 Part of the Chatham-Kent economic strategy is to offer very competitive rates for not only new business but existing business. Chatham-Kent has been able to keep its rates lower because of, firstly, the savings from the restructuring and the savings from the restructuring are alluded to in the document from the restructuring order. 1109 There were significant savings from the restructuring from the amalgamation of the 11 PUCs. And the second point that has allowed Chatham-Kent to keep their rates low is that they have established a lower ROE, a return on equity, to its shareholders and this is simply not by accident, this is part of the development plan to keep the rates lower to try to entice more development to the area. 1110 Chatham-Kent has been using this as a marketing tool and wants to be able to offer this marketing tool beyond the existing boundaries of the Chatham-Kent Hydro service areas. 1111 Competitiveness, rates, and responsiveness to the needs of the customers are also very important issues with respect to the existing customers. Business retention is crucial to the municipal economic strategy. 1112 Questions have arisen, and there was evidence that was actually presented at the Chatham-Kent hearing in May of this year regarding the service that some existing industrial customers have that are outside of the current Chatham-Kent Hydro service area. Because of some service inadequacies, it has resulted in requests of Chatham-Kent Hydro that they provide the service. That cannot be done at this particular time. 1113 What we are asking is that the principles recognize that there ought to be another -- another service provider in Chatham-Kent. It's very important that the municipality maintain a strong reputation as being able to provide all the necessary services for developers and for existing industry. 1114 So I cannot emphasize enough the importance of economic development and retention for Chatham-Kent. We've been through some tough times in Chatham-Kent, and this is extremely important. It is, without a doubt, the number one issue for our municipality. And the municipality submits that allowing Chatham-Kent Hydro to expand its service areas will be of great assistance in the execution of its economic strategy. 1115 Thank you very much. I'd like to turn this over to Mr. Hogan now. 1116 MR. SOMMERVILLE: Mr. Wickett. 1117 MR. HOGAN: Thank you. 1118 Well, now Dave Kenney and myself will now make some comments regarding the five main issues in this case. 1119 The issue regarding the role should -- what role should customer preference play? Customer preference should play a significant role in the Board's consideration of service area amendments, because customers are directly affected by the services provided by the distributor. 1120 The customers are impacted by the variability in the pricing of distribution services, connection costs, service quality, power quality, and reliability that may exist among potential distributors. 1121 Section 1 of the Ontario Energy Board Act 1998, states that the Board in carrying out its responsibilities should be guided by several objectives. One of these objectives is to protect the interests of consumers with respect to prices and the reliability and quality of electricity service. 1122 Allowing consumers to choose their distributor will force the LDC sector to be more competitive-like, which should result in lower distribution costs and higher quality of service for end-use customers. 1123 In regards to the decision for the licence amendment of Chatham-Kent Hydro, July 15th, 2003, in paragraph 39, the Board's decision said: 1124 "The municipality was convinced that the electricity rates and reliability it could present to potential occupiers of the business park would be significantly more favorable were the utility, the supplier. The Municipality is prepared to risk a capital contribution sufficient to cover the costs of the proposed utility expansion. The Board finds it is in the public interest to grant the licence amendment." 1125 On another point, the Southwest applicants in their Exhibit 1 of their submission, they suggest that a weighting of 70 percent for customer preference when there is an actual customer requesting service is a reasonable weight. 1126 Chatham-Kent Hydro also supports this weighting. In order to promote economic growth in Chatham-Kent and in Ontario, it is important to provide the new customers with the choice of services that they require. 1127 How should the Board treat licence amendments where there's new and existing customers? We believe that it should be different in that when new customers -- such that new customers should have the right to choose their distributor. In cases where expansions are in greenfield areas, the incumbent distributor may not strand significant costs. Therefore, the applicant LDC should have an opportunity to provide those services. 1128 In amendment applications for service areas where existing customers are concerned, some of the following factors should be considered. Customers should not be forced to move from one distributor to another. Distributors should continue to be obligated to accept both low- and high-density customers. Transfer of customers between distributors should be based on a business case between the distributors. Customers should not have the ability to change distributors many times, as the assets invested are long-term. 1129 Price impacts to the remaining low-density portions of Hydro One's service areas, so we have to deal with that issue. How do we manage that? 1130 Another issue would be the rural rate assistance for all of Ontario. How can that -- how does that impact taking over other customers? 1131 In summary, Chatham-Kent Hydro believes that customer choice is essential to Chatham-Kent Hydro being afforded the opportunity to expand its service territory to the municipal boundaries, which is the preference of a majority of the residents of the Municipality of Chatham-Kent. 1132 The second issue, impacts on existing and future customers. Some of the major factors in reviewing the impacts on customers are prices, reliability, power quality, and emergency response times. 1133 In regard to prices, as far as prices are concerned, the distributor with the lowest total cost to provide the service should be allowed to provide the distribution service. By allowing the lowest-cost distributor to provide the services to the new customer, it will assist in economic growth in Ontario and in Chatham-Kent. 1134 Allowing the distributor with the lowest marginal cost to be the provider of the services will reduce the total costs in the Ontario electricity industry. 1135 And I think Mr. Todd in his submission on behalf of Wirebury on page 7, lines 15 to 19, does make that reference, that the lowest marginal-cost utility should have the opportunity to provide the distribution services. 1136 Regarding reliability, power quality, and emergency responses, some of the factors in comparing the service reliability and power quality would be the emergency -- would also be the emergency response time, outage indices, and other service quality indicators that the Board deems relevant in the application. 1137 Currently we all provide service-quality indicators on an annual basis to the OEB, so that's a way of identifying and evaluating the different distributors. 1138 Another factor affecting the reliability and quality of electrical services are the length of the supply feeders, and this really impacts some of the Chatham-Kent areas. Reliability and quality are directly related to the distribution lines with the least exposure to elements, such that long rural feeders are more susceptible to power interruptions than short urban feeders. 1139 Consequently, in order to best serve customers, preference should be given to the distributor with shorter and least exposed feeders. And also in the Chatham-Kent Hydro application, Mr. Bill Schwarz from Alexar Engineering, who provided some evidence and was a witness on the -- in the transcript of May 14th, 2003, on paragraph 881, he made that claim that the shorter line, shorter feeder line will provide better service. 1140 Now Mr. Kenney will provide some submissions. 1141 MR. SOMMERVILLE: Thank you, Mr. Hogan. 1142 MR. KENNEY: Mr. Chair, and I would request you refer to the map that's been provided. 1143 Another factor, factor number 3 is service area amendments, can have an impact on the applicant and the incumbent distributor and their existing customers. 1144 Some of the impacts for the applicant distributor and the customers that may be considered are rationalization of distribution asset areas, and that map refers to the 11 areas that Chatham-Kent serves in -- within the boundaries of the Municipality of Chatham-Kent. 1145 And if rationalization were to occur, and Chatham-Kent was afforded the opportunity to expand to its borders, those impeded points would be significantly reduced from the 11 down to a fewer number, and there is some benefit to that, which I'll get to in just a second. 1146 Just to make one point, one of those points is transmission connected. The Chatham point is 50 percent of the load, and the remaining points are -- the other 50 -- make up the other 50 percent of the load. 1147 Reductions that could occur are -- include wholesale metering costs, reduction in costs, reduced settlement costs with the independent market operator, and more efficient settlement processes. Local operational control improvements could occur. 1148 Another example of that is controlling the efficiency of the system but also controlling power interruptions, and I can give one example of that. An example is recently a power interruption affected one of our communities, a planned interruption that our host distributor had planned but did not inform us or our customers of affected an entire community for five hours at Erieo. Those types of things, if there was some local control on the system, wouldn't occur. It would reduce customer confusion also. Quite often, customers on one side of the street have power while on the other side of the street they don't. So some of the those issues would be reduced. 1149 Electricity ratepayers who are customers of both Chatham-Kent Hydro and Hydro One are bearing the costs associated with additional wholesale meters and distribution stations required to separate the assets, energy consumption, and the customers of the two distributors. One example of that is in Chatham-Kent there are 25 wholesale meters owned by Chatham-Kent Hydro and Hydro One. They are required for settlement purposes. 1150 The IMO market rules pertaining to metering requires that these be updated to more stringent standards when the seal dates expire. These seal dates of these meters are expiring over a six-year period, and based on Chatham-Kent's experience of upgrading three meters in 2003, the cost per meter to upgrade one of them is $50,000 at a minimum. 1151 If Chatham-Kent Hydro was afforded the opportunity to expand our service territory to municipal boundaries, it is quite possible there would be 15 fewer meters of these wholesale meters required for settlement purposes. That would save all the ratepayers of Chatham-Kent a minimum of $750,000 of capital costs and approximately $115,000 in annual maintenance and depreciation expenses. 1152 In addition to the meters or substations, there's 15 substations owned by Chatham-Kent Hydro and another 15 approximately owned by Hydro One within the municipality of Chatham-Kent. In Chatham-Kent Hydro's opinion, a significant reduction of the number of substations would occur if Chatham-Kent Hydro were provided the opportunity to expand to their municipal boundary. Voltage conversion plans which are designed to reduce system losses and improve efficiency and are included in Chatham-Kent Hydro's five-year capital plan would not stop at community limits but would be extended to include other customers which are located on the perimeters of these unnatural boundaries. For example, a reduction of one substation can reduce annual operating costs of an LDC by up to $10,000. This is another significant cost savings the ratepayers of Chatham-Kent would realize should Chatham-Kent Hydro be provided the opportunity to expand to its municipal boundary. 1153 There's other operational efficiencies that would result in lower distribution costs to ratepayers in Chatham-Kent. They include the reduction of non-distribution-type assets like fleet, equipment and buildings which would not be required if Chatham-Kent Hydro were again to be provided the opportunity. 1154 Some of the impacts on the incumbent distributor and their customers that may be considered and need to be considered are stranded costs and underutilized costs. There are some low voltage charges. If the incumbent LDC finds that the current rates do not cover those costs that are stranded, the LDC has the opportunity to apply to the OEB for a rate change. 1155 We do recognize that in this rate freeze period of bill 210 and bill 4, in the short run it may be difficult but that option still remains. 1156 Chatham-Kent Hydro believes that the OEB objectives number 3, 4 and 5 as outlined in section 1 of the OEB Act of 1998 includes the mandate to promote efficiency and to protect the interest and consumers in the distribution of electricity. This objective can be realized should Chatham-Kent Hydro be provided the opportunity to continually expand its current service territory to its municipal boundaries. 1157 I'll turn it back over to Mr. Hogan. 1158 MR. SOMMERVILLE: Mr. Kenney. 1159 MR. HOGAN: Issue 4 discusses overlapping service areas. Chatham-Kent Hydro believes that overlapping service territories are permitted under subsection 70(6) of the OEB Act. It is Chatham-Kent Hydro's opinion there circumstances where overlapping will reduce the potential for the duplication of assets and will help meet the OEB objectives to promote efficiency in the distribution system. 1160 In such cases, consideration should be given to the elimination or reduction of the duplication of distribution assets, eliminate or minimize load transfers and the economic impact on the customers. 1161 How does the OEB ensure LDCs will meet their obligation to serve in overlapping service territories? A risk that I've heard mentioned in this proceeding is LDCs cherry picking or cream skimming such that if an LDC does not want to serve an uneconomical customer it will offer a high connection charge. If the customer or the developer believes that they are unfairly treated they have an opportunity to appeal to the OEB. 1162 On the positive side of having overlapping service territories, the customer will have an opportunity for choice and the competing LDCs in that area will try and provide the lowest cost, highest quality service to the customer. 1163 On the fifth point, filing requirements that an LDC and applicant should have in an amendment application. Minimum filing requirements for a service area amendment application would be: A connection agreement with the customer, in some cases a recommendation from a third-party consultant, as to which distributor should be providing the service, ensuring expansion costs meet the economic evaluation model that's approved by the OEB, and the Distribution System Code that should be provided, evidence supporting the amendment that would include cost of services and data related to power quality, reliability, and service quality, evidence that the amendment would satisfy the Board's objectives set out in the Act. 1164 There also should be some evidence to ensure that the incumbent LDC has been contacted by the customer and they be given a fair opportunity to serve that customer. 1165 Another item that I've heard discussed quite a bit here in this proceeding is the cost awards in such applications. We believe that the applicant should be paying for the OEB proceeding. It's part of their costs and part of their making the application. However, we do not believe that the incumbent should be awarded their costs. We believe that it's part -- the incumbent has a choice as to whether they will be an intervenor or not; however, we do believe that if the incumbent LDC does believe that the applicant was negligent in coming forward with their application, that in those certain circumstances, the incumbent should be awarded some costs. 1166 My final notes, the residents of the municipality of Chatham-Kent would like to be served by Chatham-Kent Hydro and as such, the service territory would be required to be moved to the municipal boundary. At this time we can't go to that level; however, we are requesting the Board through section 70(6), the non-exclusivity of service territories, and section 70(1), the ability to amend licences in the public interest, we would like to submit to the Board that to continue or to not restrict those subsections or those sections of the Act allowing the residents of Chatham-Kent, the municipality of Chatham-Kent to receive service from Chatham-Kent Hydro. 1167 And I think as a final point, Chatham-Kent Hydro is considered a local distribution company as many of us are, and what that means to the municipality of Chatham-Kent and the residents are: Local accountability, local ownership, you have local management, local influence, local service centres, local call centres, a local control rooms, the operations. 1168 That is of value to the municipality of Chatham-Kent, that is of value to the residents and with that, what we're hoping to do, Chatham-Kent, is that we would be afforded the same opportunities as many other LDCs such that they serve to their municipal boundaries and that's where we would like to have that opportunity to get there some day. Thank you. 1169 MR. SOMMERVILLE: Thank you very much, gentlemen. I appreciate your effort and contribution that you've made to the proceedings. Thank you very much. 1170 We will adjourn for the day to recommence tomorrow morning at 9:30. At that time, Mr. Lokan, I think you will be first up followed by Mr. McLeod, and the order from there will follow the list that was provided in the procedural order number 7. 1171 We are at a stage in this proceeding where we may start to see an erosion of attendance to some extent and I just want to, with as many counsel and representatives here as possible, to thank counsel and their assistants for the very capable, civil, and courteous work that's been done in this proceeding, it's a very difficult matter in many ways and the Board has been greatly assisted by the very high standard of service that you've provided to your clients and to the Board. So we thank you for that. 1172 Without further ado, we'll stand adjourned until tomorrow morning at 9:30. Thank you. 1173 --- Whereupon the hearing adjourned at 4:50 p.m.