Rep: OEB Doc: 12YP7 Rev: 0 ONTARIO ENERGY BOARD Volume: 11 19 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 Friday, 19 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 19 DECEMBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 DAVID BROWN Board Counsel ROBERT GORDON Board Staff MICHAEL ENGELBERG Hydro One Networks Inc. MARYANNE ALDRED Hydro One Networks Inc. BRIAN GABEL Hydro One Networks Inc. MARK RODGER LDC Coalition JAMES SIDLOFSKY LDC Coalition SUE LOTT VECC BILL HARPER VECC ANDREW LOKAN Power Workers Union DENNIS O'LEARY Wirebury Connections Inc. MIKE McLEOD Veridian Connections Inc. and Centre Wellington Hydro Ltd. SCOTT STOLL Westario Power KELLY FRIEDMAN Electricty Distributors Association TIM CURTIS Fortis Ontario 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [18] SUBMISSIONS MR. LOKAN: [23] SUBMISSIONS BY MR. McLEOD: [82] QUESTIONS FROM THE BOARD: [119] FURTHER SUBMISSIONS BY MR. McLEOD: [151] SUBMISSIONS BY MS. FRIEDMAN: [196] SUBMISSIONS BY MS. ALDRED: [217] SUBMISSIONS BY MR. ENGELBERG: [284] QUESTIONS FROM THE BOARD: [347] SUBMISSIONS BY MR. STOLL: [425] PROCEDURAL MATTERS: [471] SUBMISSIONS BY MR. RODGER: [503] SUBMISSIONS BY MR. O'LEARY: [560] QUESTIONS FROM THE BOARD: [625] SUBMISSIONS BY MR. CURTIS: [646] QUESTIONS FROM THE BOARD: [692] SUBMISSIONS BY MS. LOTT: [702] PROCEDURAL MATTERS: [824] REPLY SUBMISSIONS BY MR. ENGELBERG: [845] PROCEDURAL MATTERS: [857] 10 EXHIBITS 11 EXHIBIT NO. E.5.1: SUBMISSIONS OF THE POWER WORKERS' UNION [27] EXHIBIT NO. E.5.2: EXCERPTS FROM THE POWER CORPORATION ACT [263] EXHIBIT NO. E.5.3: NO EXHIBIT ASSIGNED TO THIS EXHIBIT NUMBER [482] EXHIBIT NO. E.5.4: KEMA-QUANTEC REPORT [483] EXHIBIT NO. E.5.5: SUBMISSION OF HYDRO ONE NETWORKS [499] EXHIBIT NO. E.5.6: MS. LOTT'S SUBMISSIONS [830] EXHIBIT NO. E.5.7: SUBMISSIONS OF WIREBURY [839] 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:40 a.m. 15 MR. SOMMERVILLE: Thank you, please be seated. Mr. Gordon, I think you made a notable entrance. 16 We have convened in the matter of service area amendments. We are at the portion of this proceeding where we are hearing oral presentations. 17 Are there any preliminary matters that we need to deal with before we proceed? 18 PRELIMINARY MATTERS: 19 MS. FRIEDMAN: Mr. Chair, the EDA is at the tail end of the list of parties and to the extent that its convenient for the Board and it's parties, I only have under ten minutes so to the extent its convenient to squeeze it in before a break if there's time, then I'm happy to go whenever you'd like. 20 MR. SOMMERVILLE: In light of that submission, let me suggest that I think our order for this morning was Mr. Lokan followed by Mr. McLeod, and would there be any objections or problems from the other parties if Ms. Friedman was to proceed at that point? 21 MS. FRIEDMAN: Thank you, Mr. Chair. 22 MR. SOMMERVILLE: Mr. Lokan. 23 SUBMISSIONS MR. LOKAN: 24 MR. LOKAN: Thank you. I have distributed to the parties some written submissions which I would like to file and my intention would be that that could shorten my oral presentation because the references are written out in the written submissions I can just hit on the high points, if that's okay. 25 I left four copies on the desk there. 26 MR. SOMMERVILLE: We'll mark this for identification as E.5.1. It's the submissions of the Power Workers' Union. 27 EXHIBIT NO. E.5.1: SUBMISSIONS OF THE POWER WORKERS' UNION 28 MR. SOMMERVILLE: Thank you, Mr. Lokan. 29 MR. LOKAN: As the Board knows, the Power Workers represents the unionized employees of a broad range of participants in the electricity sector. It may be worth noting that in the these proceedings, the PWU represents employees of several LDCs including Hydro One, Hydro Vaughan, Markham Hydro, Great Lakes Power and Erie Thames Services Corporation, which is a services company for Erie Thames Powerlines. 30 So we come at this problem from a variety of angles, if you like. 31 Now, dealing with the issues in the order set out by the Board, let me start with the customer preference issue. The first point we would make is that customer preference has been deliberately left out of the legislative framework. We see this as primarily a question of legislative intent and the best guide to the intent of the legislature, we submit, is the white paper, Direction for Change. That has come up in the evidence several times but it has been noted that the white paper states that: "Local distribution remains a natural monopoly that's not amenable to direct competition." The white paper also recommended that local distribution utilities would have to separate their wires businesses because they are natural monopolies from any competitive business that they may establish. 32 So there is quite a strong division between the concepts there. The rational for that you've heard about in this hearing, is that there are high fixed costs, networks have to be planned and designed for groups of customers and there are universal service requirements; therefore, we would submit the legislature has made the considered judgment that in the long run it's better to have natural monopolies than to attempt to establish a viable competitive market in distribution services. 33 That should be your primary guide. That is of course disputed in part by John Todd, although not in respect of existing customers, he was quite clear on that in page 1 of his report; however, it's the legislative intent which I think is the main point here. 34 Now, when it comes to the actual arguments about customer preference, the PWU's submission is that they are somewhat exaggerated. If customer preference is to be taken into account in particular applications, it should have very limited significance. There really is no compelling evidence that it can do anything to contribute to efficiency in the sector and there are reasons to believe that it will not contribute to efficiency. 35 One of the fundamental points is that the customer doing the choosing in most case would be a developer. We've heard with specific reference to Wirebury how there play be a relationship between developers and Wirebury at the corporate level, that may have some significance. I would ask you also to consider the relationships that developers may have with municipalities. They don't have single interactions with municipalities, they deal with municipalities all the time. They are there over the need for building permits, over zoning changes, they pay development charges. 36 In that context, it's not unimaginable that if a municipality were to say, Gee, why don't you go down the hall and express your preference for our wholly-owned subsidiary LDC, that that would be something that would be quite persuasive to developers. That of course, has nothing to do with the interests or preferences of the ultimate homeowners who purchase homes in the development. 37 So there are a number of reasons why choices made by developers or preferences expressed by developers really would not be connected to economic interests. Those interests can diverge. 38 I think if you do a little reality check here, it verges on fanciful to suggest that when somebody ultimately buys a home in a subdivision, it's even going to be a significant driver which LDC that subdivision is being signed up with. 39 There are also conceptual problems with the idea that customer choice contributes to competition arising from the fact that rates do not reflect the true costs of providing services. I would note that the terminology chosen by Mr. Todd in his memo to me, Exhibit 4.1, E.4.1, is that it's a misconception that allowing customer choice will allow competitive discipline into the market, his word, not mine. 40 Let me comment now on new versus existing customers. There are significant differences in new and existing customers chiefly arising from the fact that the sunk costs problem is more acute with existing customers. If you remove existing customers there is an immediate loss of revenue, there may be no corresponding reduction in costs, assets already developed to service those customers may no longer be used or useful or may be underutilized. 41 Having said that, it is a spectrum, and that was acknowledged by Mr. Todd in cross-examination. There is still a sunk costs problem and with underutilization, even with a switch of new customers. 42 Now, we have heard a lot of discussion in this proceeding about stranding and we've heard different definitions and different models put forward of what kind of stranding, if any, should be recognized and compensated. Wirebury takes a very narrow view, I understand that Erie Thames in its responses to interrogatories has taken a broader view of what stranding may consist of and what compensation may be appropriate if customers are transferred. But I think at the end of the day, if you are to ensure that the amendments to service areas that do take place are the ones which are beneficial to the system as a whole, there really has to be a full recovery, a full compensation for any sunk costs. 43 For this reason, and I turn to this in paragraph 14, the Power Workers' Union would submit that the best approach especially for existing customers is to rely principally on voluntary and consensual transactions, and this can take place under section 86 or perhaps under a joint or consent application to the Board for a transfer of service territory. 44 If emphasis is placed on the need for agreement, that will ensure that the full range of costs is properly and fully accounted for and that will ensure that the transfers that do take place are the ones that should take place, not the ones that shouldn't take place. 45 If the Board has jurisdiction to transfer existing customers without the consent of an incumbent LDC, and you've heard our views previously that there isn't such jurisdiction but I won't revisit that, we would submit that the Board should use that power only in exceptional cases where there's a compelling case of public benefit arising from the transfer. 46 And you would really need to look for evidence that the incumbent LDC has taken an irrational position, irrational in the sense of being highly unreasonable, unduly self-interested. And in any such transfer that there should be insistence by the Board that compensation be paid and that the compensation take into account all costs to the losers, not just those that fit a narrow definition of stranding. That's another matter touched on by Mr. Todd in his memo to me on page 2. 47 Where it comes to new customers, the PWU would acknowledge that there may be a somewhat broader range of situations in which amendments are justified and particularly in circumstances where the incumbent LDC would have to develop significant new infrastructure to connect the customers, and the applicants' proposal is clearly superior from a technical point of view. 48 I think we saw a couple of examples of that, perhaps, in the expedited applications, and I'm thinking in particular of the Hastings Manor application. At the end of the day, it looked like that one, which was on the boundary between two LDCs, that when you looked at who had to be done -- what had to be done by whom in order to make the connections and how it would all work, there was just a clear technical superiority to the Veridian proposal, and that's the sort of case where, perhaps, it's -- amendments should more readily be made. 49 However, in all cases, whether new or existing customers, the applicant should be required to show that the change clearly serves the public interest and on a maximized net benefit basis, to use Mr. Todd's words, and that should also take into account all of the societal costs, not just specific costs to the LDCs. 50 As to what weight current rates should have in the determination, we say they should play a very limited role. They are transitional. They don't reflect the true cost of providing service. 51 Now, getting on to the impact on customers in the amendment area, I think this is a matter that has to be looked at broadly. You need to look at not just the departing customers, but also residual customers, and if we're talking overlapping service areas, they're -- they may be within the same area. And you have to look at the systemic effects on all customers in the province generally. And we submit that you should take into account all of the interests that arise and all of the ways in which they can be affected, as you've heard a lot of testimony in the last few days. 52 When it comes to impact on distributors, the PWU endorses and adopts Hydro One's submission that there is a difference between an incumbent LDC that is required to plan for future customers in its system planning and an applicant LDC for whom new customers may represent a windfall. 53 There is a problem or a potential problem with cream skimming, and the Board should be cognizant of that problem. And Hydro One, we ask you to consider because of its province-wide customer base and its many high cost-to-serve customers, is uniquely vulnerable to loss of future growth in urban in suburban areas. And in Hydro One's prefiled evidence, it's pointed to upward pressure on its rates that would occur in several ways if amendments are allowed too readily. 54 However, and this is the point that I've made before, there will be some cases where, from a system planning and technical point of view, where adjustments between contiguous LDCs may make sense, provided the public interest test is met. 55 On overlapping services areas, the Power Workers believe these should not be permitted for the reasons given by Dr. Yatchew. They are inefficient. They contribute to dilution of customer density. They result in suboptimal planning and they increase the potential for gaming. They will lead to customer confusion, and very importantly to the Power Workers' Union, they could increase risks to worker safety. 56 It is, of course, employees represented by the Power Workers Union that bear the brunt of any increased complexity in safety issues that do arise that represent workers who may be injured, and that's a concern that we take very, very seriously. 57 Let me comment briefly on the Wirebury model. The Power Workers' point of view is that the Wirebury model should be approached with extreme caution for the reasons given by Dr. Yatchew. It suffers from serious flaws as a systemic matter. No witness could point to another jurisdiction where it's being tried. Why should Ontario be the guinea pig? 58 The raison d'etre, we'd respectfully suggest, for the Wirebury model appears to be to give free reign to new distributors to seek out pockets of high-density, low-cost customers. They are not going to be pursuing the rural areas, the remote communities, and the difficult customers. They are going to be looking to pick the cherries or skim the cream. 59 And I note as an aside that part of their model appears to be that once the cherry is picked, it cannot be wrested from its hands by any other party, and there does seem to be a bit of an inconsistency there. 60 This will inevitably result in costs for host distributors, leaving them worse off and their residual customers worse off. It will lead to higher average cost to serve and lower revenues for host distributors. 61 The suggestion has been made that, well, why don't you let them try it and let the market sort it out, and if they fail, the costs of that failure will be borne at a corporate level by the shareholders of entities that are allowed to enter the market in that way. 62 With great respect, that's not a real danger. The danger isn't of the corporate failure of Wirebury-like entities in a few instances. The danger is that they will succeed for the wrong reasons, because there are opportunities out there for regulatory arbitrage, for cream skimming, for gaming the system. And those opportunities, if they exist, will lead to costs that are borne by ratepayers across the province as a whole. So be very cautious with that model. 63 If Wirebury-like entities are permitted to enter the market, all of the comments that I have previously made about new and existing customers and what to look for in service amendments would still apply, of course. 64 On filing and process, with specific reference to service area amendment applications where there are identified customers, one point the PWU would insist on is that the applicant LDC must be able to show that the customers or developers have pursued a meaningful dialogue with incumbent and applicant. This is an issue that came up on the expedited applications, and in two separate decisions this Board noted that there had been some shortcomings in that area. I'm thinking of the Embrun Hydro oral decision and the Chatham-Kent Hydro decision. 65 And I have some sympathy for the position that the Board was placed in on those applications, where it looked like what had happened is the customer had come and spoken to the applicant, had pursued dialogue with the applicant at great length, had worked up a proposal fully -- or the applicant worked up a proposal fully with that customer or developer. Meanwhile, the incumbent had been, perhaps, sent a form letter. 66 And that just is not on. That is not satisfactory. It makes it too difficult for the Board to understand the technical issues that are involved and to be able to assess the situation on a good information base. So that should be absolutely a requirement that that dialogue has been pursued. 67 Likewise, on all applications, the Board should be looking for a demonstration that there have been meaningful negotiations about a proposed amendment between incumbent and applicant and should give a strong preference for negotiated solutions. 68 It's always possible, of course, that an incumbent will be unreasonably intransigent, and if an applicant can show that, look, this is clearly and compellingly in the overall public interest, and we've tried talking to them, we've tried offering compensation, which was calculated in a reasonable way to fully cover all costs, but they just weren't listening, and that -- if that kind of case arose, the applicant should be permitted to come to the Board and make that case. 69 But short of those situations, the best way for these matters to be sorted out is agreement on reasonable principles between reasonable parties, because that ensures full compensation for the real costs of changes and it ensures that the societal costs don't get out of hand. 70 We think that the applicant should bear the onus in all cases of demonstrating public interest and that that should take into account impacts upon the applicant, customers, incumbent, their respective customers, and the system as a whole. 71 We also think the applicant should pay the costs of the application subject, of course, to the Board's discretion to ensure that parties don't come to the Board in a way that is unreasonable. 72 On expeditious and cost-effective process, it may be that some applications can be determined without formal hearing, but the option of requesting a hearing should be there in all cases. There should be specific notice to the incumbent in all cases and there should be posting on the OEB's web site so that other interested parties have the ability to request to intervene and participate. 73 The final area I want to touch upon is considerations other than the OEB Act objectives, and the one that you heard about most in this proceeding is the alleged desirability of having municipal boundaries coincide with municipal LDC boundaries. The Power Workers suggest that this consideration is minor and that the model of expanding these LDCs outwards to municipal boundaries should be rejected, at least at present. 74 In many cases, the incumbent LDC will have assets in that area that the municipal LDC wants to expand into and we draw the Board's attention to the Bill 185 provisions in the former Power Corporation Act. That was an explicit statutory regime where the legislative messages was: In some cases we think this would be a good idea. However, there are numerous conditions which we attach, one of the main among being: There has got to be a mechanism for the transfer of those assets in the service territory and for the fair compensation of those assets. 75 Under the current system, none of that is there, I don't think any legislative inference is warranted that there is any preference for that kind of arrangement. That just leaves municipal lines as being as arbitrary as any other lines. 76 I would further direct the Board to the evidence given by John Todd in cross-examination, and I've given the reference on page 14 of the submissions, where he pointed out that any kind of wholesale change to that model would potentially affect hundreds of thousands of customers, would create very significant policy issues and would raise fundamental questions of equity and rate design. 77 My final point under this heading is that if there is a matter that should be considered that's not explicitly listed in the Board's objectives, it's that of worker safety, and that is an issue that the Board, of course, has recognized in other decisions in past. 78 Subject to any questions, those are my submissions. 79 MR. SOMMERVILLE: Thank you, Mr. Lokan, the Board has no questions. Thank you. 80 Mr. McLeod. 81 MR. McLEOD: Thank you, sir. 82 SUBMISSIONS BY MR. McLEOD: 83 MR. McLEOD: I will be making two submissions on behalf of my clients, the first one will be on behalf of Veridian Connections Inc. and then the second one will be on behalf of Centre Wellington Hydro. What we've tried to do is to make sure we don't duplicate what we're saying and we've tried to be as brief as we can. 84 Veridian Connections appreciates the opportunity to make this submission in the matter of the principles that the Board should be guided by in making determinations concerning distribution utility service area amendments. 85 The principles we believe the Board should rely on are rooted in the provisions of the Energy Competition Act 1998. In our application, our proposed model of what I would call "managed competition" for new customers at the periphery of existing licensed distribution service areas supports the objectives of the Ontario Energy Board Act 1998 and the Electricity Act 1998. It is our view that limited customer choice within the confines of overlapping service areas will promote economic efficiency in the distribution of electricity as well as protect the interests of consumers with respect to prices, reliability and quality of electrical service. 86 Given that the Board is guided all times by the objects of the Electricity Act and the Energy Board Act, both of 1998, as stated in section 1 of each statute, we believe our model is a compelling one that should be adopted. 87 First, I'd like to briefly summarize our proposed model which is distinct from all other models advanced in this proceeding. My client has advanced a service area amendment application that provides for the extension of its service boundaries into the areas of an adjacent distributor. This will create overlapping service areas between existing licensed distributors. Within the area of overlap it is proposed that new customers be given the opportunity to obtain offers to connect from both licensed LDCs and that they be free to connect to the distributor of their choice. Our model would not permit the creation of new embedded supply points. The LDC making the offer to connect would be obligated to extend its existing distribution infrastructure to serve the new customer. Existing customers within the overlapping service areas would not be provided with a choice of distributor. 88 Our application was triggered by the need to address emerging circumstances on the ground as a result of restructuring of the Ontario electricity marketplace. 89 First, the relationship between adjacent distributors has changed. In the past, long-term load transfers were employed by incumbent distributors to serve new customers from an adjoining LDC when it was not economic to do so by extending their own distribution network. These arrangements are no longer permitted under the Board's Distribution System Code. We support the discontinuation of long-term load transfer arrangements, but this change has meant that decisions regarding which LDC will serve a customer in an unserved or underserved area must be made well before the connection can be made. To date, the process for determining this requires a board proceeding. 90 While we appreciate that the Board has a track record of sound and thoughtful decisions in these proceedings, the fact is that the time, the cost and the effort of such proceedings have impacts on customers. New customers typically need service connections within very short time frames and cannot and should not have to tolerate a period of uncertainty with regard to the cost and the nature of their service connection. 91 Secondly, the expectations of customers have changed as well. With the introduction of competition to many aspects of the electricity industries, customers no longer accept that they should be compelled to connect to an incumbent distribution company, when a lower-cost connection option is readily available from a neighbouring LDC. 92 The Board is faced with having to wrestle with a rapidly evolving LDC sector in Ontario where the basic electricity infrastructure network has not changed in decades. The current service area boundaries of the existing distributors have been described as historical artefacts. Mr. Todd recognized that fact in his evidence. We agree with this statement but we also agree with Dr. Yatchew when he contends that the Board must render its decisions in this matter within the context of the long-term view of the evolution of Ontario's electricity distribution industry. 93 It is our view that the Board's decisions must support an evolution to a fewer number of geographically contiguous electricity distributors in the province, each of which is responsible for delivering electricity from the IMO-controlled transmission system directly to the customer. We believe that embedded distribution networks create a myriad of inefficiencies, impair accountability to customers and contribute to regulatory burden. For these reasons, we strongly reject the Wirebury proposal for wide open competition in electricity distribution. We also reject Southwest group's positions that new embedded supply points should be accommodated, and that existing customers should have choice in their distributor. In our view, neither of those models is practical. However, we believe that our concept of managed competition will contribute to the long-term objective of LDC rationalization. 94 Those opposing our model of managed competition for new customers have pointed to difficulties that this would create for load forecasting and system planning. We do not share these concerns. First of all, there are many and growing uncertainties that impact system planning exercises. For example, Dr. Chamberlin of Quantec has raised the issue of distributed generation and fuel cells entering the marketplace, and Mr. Todd commented on the issue of increased energy efficiency in the marketplace. Clearly, there are many factors that impact system planning. 95 Competition at the periphery of existing service areas will not be a central determine in any event of load growth. 96 Secondly, planning horizons are becoming much shorter than ever before as distributors work to better optimize the deployment of capital to serve new load. Shorter planning horizons clearly reduce the impacts of load forecast uncertainty. 97 I hope these comments are helpful to the Board in understanding the position of my client. I will now move on to discuss the issues in that this proceeding was convened to address. 98 The first one was customer preference. While customer preference is paramount under my client's model for managed competition, it should not necessarily be a determining consideration when deciding whether or not to grant overlapping service areas. 99 As described earlier, we suggest that the Board establish a framework within which customer choice will be used to support the rational expansion of distribution infrastructure. Considerations in establishing this framework of overlapping service areas should be limited to ensuring that the service area amendments are based on contiguous service areas with no embedded supply points. 100 We do not believe that the Board should consider rates when deciding on service area amendments as proposed by my client. However, it would be reasonable for the Board to require that each distributor disclose its rates to customers within the overlapping service areas as part of its offer to connect. 101 Number two, impact on customers in the amendment area. Within the context of my client's -- 102 MR. SOMMERVILLE: Mr. McLeod, could I ask you to just slow down. 103 MR. McLEOD: Oh, sorry, sir. 104 MR. SOMMERVILLE: Because we -- you're moving from point to point, and -- 105 MR. McLEOD: My apologies. 106 MR. SOMMERVILLE: -- we wanted to give you the best opportunity for us to hear what you're saying, so if you could slow down just a touch, that would be helpful. 107 MR. McLEOD: Thank you. 108 Number two, impact on customers in the amendment area. Within the context of my client's model, we do not understand or accept that existing customers would be impacted in any way. The incumbent distributor would continue to serve them in the same manner as before the service area amendment took effect. 109 We do recognize that new customers, faced with a decision between distributors, must be provided with adequate information so that an informed choice may be made. Distributors should be obliged -- obligated, sorry, to make available service quality index data and distribution rate information as part of an offer to connect. 110 Number 3, the impact on distributors and their customers. Again, within the context of my client's application, we do not foresee any of the impacts suggested under this issue statement. The incumbent distributor would continue to serve the existing customers as before. 111 Number 4, overlapping service areas. Clearly we support the concept of overlapping service areas. We believe that such a model will relieve the Board of having to deal with service area amendment applications relating to specific customers and thereby provide certainty and choice for those customers. We also believe that it will result in the most economically efficient expansion of distribution infrastructure. 112 The degree to which service areas should overlap will be based on the degree to which there is unserved or underserved areas with the potential for new customer growth. Each distributor must assess its individual circumstances in this regard to determine if overlapping service areas are warranted. 113 With regard to an obligation to connect, we propose that both distributors licensed for overlapping service areas be obligated to provide new customers with offers to connect. The distributor whose offer to connect is accepted by the customer would hold the obligation to connect. 114 In respect of filing and process requirements, to initiate a service area amendment proceeding related to overlapping service areas, it is suggested that an LDC must clearly identify the proposed areas of overlap with other distributors. They should be required to exhibit why they believe that these areas are either unserved or underserved with the potential for new customer connections. 115 In addition to the filing and process requirements, we believe there's also a definite need for a clear definition of terms. The stated issue -- the stated issue raises the matter of the need for clearer definitions in terms of -- and I put in quotes, "network assets, existing customer, new customer, non-discriminatory access, bypass, service area, service territory, lies along, property rights, overlapping service areas, stranded costs," closed quotes, et cetera. 116 The lack of clarity in definitions, terms, and conditions that impact licence amendment applications will continue to impede regulatory efficiency and certainty through the course of electricity restructuring in Ontario. 117 Thank you. Those are the submissions of Veridian Connections Inc. 118 Now, I'll move on to -- if it's okay with the Board, unless there's questions? 119 QUESTIONS FROM THE BOARD: 120 MS. SPOEL: Mr. McLeod, I just have one question so -- I want to make sure I understand how your client's proposal might work. 121 If we could go back, perhaps, to the fact -- the basic, sort of, fact situation of the Hastings Manor case that we dealt with last spring, my understanding in that case was that there was an existing customer, Hastings Manor, which was being rebuilt to be a larger facility that required an upgrade in service -- 122 MR. McLEOD: Correct. 123 MS. SPOEL: -- and that's why the application was made. 124 If that were to -- upgrade were happening in five years from now instead of this year or last year, would that be -- would your client consider that to be an underserved client or an underserved area or -- and therefore, something you would seek to include in your overlapping service areas, or would that -- would you look at that -- or would you not look at that and say, well, there's already a customer there, and therefore, it's served, and there's no potential for -- at the moment we don't see potential for growth in that area. 125 MR. McLEOD: That's a very interesting question. The issue in that case was a new customer, or a customer -- in that case, the new customer being the new manor, because the existing one was disconnected, and would that be considered to be underserved? 126 I think in the case -- in this particular case, because in this circumstance there was a lies-along opportunity where its service could be provided, that, I think, might be an exceptional circumstance in that case. 127 But I really can't -- I'm trying to think of an example just right now where that situation would apply. This, in my view, was just a one-off application in this particular case to deal with a situation that was a lies-along. So whether it was underserved or unserved, that's where the definitions become critical in trying to decide whether or not that customer's one or the other. 128 MS. SPOEL: And if I can just understand your proposal that you're putting forward, what -- the way you -- your client sees it working is that you would -- they would, sort of, examine all the boundaries of their service area, and other LDCs, of course, could do the same. 129 MR. McLEOD: Correct. 130 MS. SPOEL: But we'll just deal with the one. It examines the boundaries, and along all the boundaries, they would sort of look and see are there areas we may want to expand into and that the -- and the -- there's an incumbent LDC in that area already serving or, at least, within which there is -- is in somebody else's service area at present and that there's sort of a boundary area, if you like, that you could go -- and they could similarly look into the edge of your client's service area and say, well, we've got some areas there that we might be able to serve, and you'd have, sort of, a grey area in between the two -- 131 MR. McLEOD: Correct. 132 MS. SPOEL: -- that we're not quite sure who's going to serve, because we don't know yet how it's all going to work out, so we'd like the potential to be able to do it. 133 MR. McLEOD: That's correct. 134 MR. SOMMERVILLE: A question arising from Ms. Spoel's. This area, how big is the grey area? 135 MR. McLEOD: I guess in our discussions we've likened it to an elastic-type of boundary. It's just demonstrating it's this wide, to this narrow; there's flexibility around that. And the issue we need to look at then is assets can -- contiguity of system expansion and things like that. 136 So to -- it may be difficult to draw always in every case tight boundaries around everything, so some degree of flexibility is part of this grey area. 137 MR. SOMMERVILLE: Flexibility for it's own sake or flexibility because we can't decide on how big the grey area should be is my question. 138 MR. McLEOD: Flexibility, in my view, would probably be in consideration of -- we're not exactly sure how big it is, it appears to be this big, therefore, the elastic boundary is in that sense drawn. 139 MR. SOMMERVILLE: If someone suggested, you know, that there is a concept called the urban zone, there's a five kilometre margin around the municipalities, you're not suggesting that a standard of that nature ought to be adopted? 140 MR. McLEOD: If we define urban zone as something, I'm trying to wrestle in my mind what that would be, but I suspect it's the urban zone that's contiguous to the existing incumbent distribution utility. 141 MR. SOMMERVILLE: And just so that I'm clear about the proposal, and I think I know the answer to this, but correct me if I am wrong, the idea is that this grey area would impinge, would form a wide line around the municipal boundaries. So if you had abutting municipal boundaries, they would look into your territory and you would look into theirs and the grey area would be every man's land? 142 MR. McLEOD: That's quite possible and that would make sense to me. 143 MR. SOMMERVILLE: I think Mr. Birchenough has a question. 144 MR. BIRCHENOUGH: Just one question about infrastructure generally. Municipalities have to be put in place for new developments that include roads, water, sewer. Do you see any benefits at all in having the same authority handle electricity expansions as would put in water and sewer and other infrastructure components? 145 MR. McLEOD: Typically, if we look at it just from the planning perspective, I suppose as water and sewer are critical to expanding municipal growth, and that expansion of distribution services follows with that, it would make sense that they have to be related one way or another. Would it be an issue of whether or not municipalities control it or have exercised specific control over it; I'm not certain. But clearly, they grow in progression with one another in terms of our contiguous expansion of service. 146 MR. SOMMERVILLE: Some portion of your client's application deals with the official plan. 147 MR. McLEOD: Correct. 148 MR. SOMMERVILLE: What's the underlying rationale for highlighting the official plan and the contents of the official plan as the subject matter of the service area amendment? 149 MR. McLEOD: The concept behind that was in the absence of -- you need some basis, some foundation upon which to rationalize the contiguous growth into areas that looked like they were going to grow or there was opportunities to grow, that municipalities indicated that over different times under -- at different times, they would be growing in certain stages recognizing that official plans and planning documents and planning are dynamic and change, that was the concept behind it. So that would form the foundation for rationalizing expansion, going forward on a broader extent. 150 MR. SOMMERVILLE: Please proceed to your next presentation, Mr. McLeod. 151 FURTHER SUBMISSIONS BY MR. McLEOD: 152 MR. McLEOD: Thank you. 153 My next presentation is on behalf of Centre Wellington Hydro and Centre Wellington Hydro thanks the Board and appreciates the opportunity to appear before it in this proceeding to deal with the matter of principles. 154 The evidence we've heard to date sends a clear signal that we have barely opened the door on a range of potentially significant policy issues that will have to be addressed going forward. The principles that we believe the Board should rely on are based on what the Energy Competition Act 1998 provides for. The same principles are the basis upon which we have brought the application to permit a change to the LDCs licensed service territories to establish the ability to offer distribution service in growth areas contiguous to our service area. 155 The trigger mechanism for our application is the need to address emerging circumstances on the ground as a result of restructuring in Ontario. 156 The power reliability and security demands of industry, municipalities, distributors, and the government are changing and evolving very quickly. We have heard from the experts that the electricity business is by its very nature in a state of flux. 157 The Board is faced with having to wrestle with a rapidly evolving electricity market in Ontario where the basic electricity infrastructure network has not changed in decades and was not designed or built with the notion of competition, per se, in mind. 158 The current service area boundaries of the existing distributors in Ontario have been described by Mr. Todd as historical artefacts. Except for very few, the electricity distribution companies operating in Ontario are owned by public shareholders, either the province of Ontario or the municipalities. They are not traditional private investor owned utilities. So even though the Ontario market has been restructured, we are still dealing with publicly-owned entities. 159 If we consider this to be true, then the public interest must be protected. Even though the distribution companies as Ontario business corporations operating in Ontario work in the shareholders' interest, this is really a public interest matter and therefore, unless and until the LDCs are in the hands of private enterprise, we are still working in the public interest in each case. Shareholder returns allow the municipality or the province to defray taxes. In either case, it is the public that pays at the end. 160 We have heard from the electricity industry experts and have examined significant amounts of evidence in this proceeding about customers. Unfortunately, we have not heard from any of the customers themselves who are or could be affected by service area amendments. We have not heard anything about their issues and what they need or want from their electricity distribution companies. To help illustrate some of the changes that we can expect in the market, that the market will have an impact on distribution networks, Dr. Chamberlin raised the issue of distributed generation and fuel cells, I mentioned that a moment ago, and Mr. Birchenough raised the issue of distributed generation with Dr. Yatchew. Mr. Todd also raised the issue of energy efficiency in the marketplace. 161 This recognizes the fact that the electricity industry in Ontario is changing or would be exposed to constant change over time. 162 The distribution utilities and the Energy Board, in fact everyone involved in this market from supplier to consumer and all points in between, must respond to these changes, and this proceeding is clearly demonstrating the enormity of this issue. 163 Having regard to the issues in this proceeding and the need to identify the set of principles that can be used to guide all parties concerned with service area amendments, we offer the following: In respect of the principles, at the outset we believe that, given the current state of the electricity industry in Ontario, the principles that must be established can be identified as followed. And they are not in any particular order. The first one is that the public interest must be protected. 164 The second one is: Electricity is an essential service. 165 Third one is: Further rationalization of distribution utilities should be encouraged through expansions, amalgamations, purchases or the use of shared services to achieve optimum efficiencies in service, reliability and cost. 166 The fourth one: There is contestability for new customers at the boundaries of existing contiguous distribution companies, and the customer should be able to choose, based on the offers of connection presented by two LDCs. 167 The fifth one: Distribution utilities by their nature operate primarily as regulated monopolies. 168 Sixth: The cost recovery of stranded assets should be allowed based on the use of the standard methodology of assessment. 169 The last one: The distribution companies should operate and maintain themselves in an economically efficient manner, this being confirmed through light-handed regulation PBRs administered by the Ontario Energy Board. 170 Dealing with the issues and customer preference, currently the distribution companies are limited to operating under existing legislation, and given the evidence we have heard so far in this proceeding concerning such things as distribution utility structure, contestability, and competition, there may be a need for legislation and the role and mandate of the provincial shareholder to be revisited and the broader public policy that drives it revisited. 171 Although customer choice for connection in boundary areas may not lead to the lowest system cost, it is quite clear from the evidence that the customers may prefer to connect to another utility if it is in their interest to do so, based on their own business decisions. And Dr. Yatchew and Dr. Todd were examined on this matter. Individual customer choice and protecting the public interest, while similar, are different because of potentially competing needs and wants. 172 There are economic and individual issues for new customers in contestable areas that existing customers may not concern themselves with, because they are protected in a regulated monopoly situation. 173 We heard that the weight or importance of rates in a customer's decision regarding choice is only one of the many that may be of concern to the customer, whether the customer is a residential, industrial, or commercial entity. This is purely a customer choice matter. It may or may not be true that customers make decisions simply on rates and how these rates impact on system cost, given that the customer must act on an offer to connect. 174 For example, in the manufacturing industry, reliability and response time to customer concerns may be more important than just rates. Again, we didn't hear any evidence from the customers regarding their concerns on this matter. 175 Number 2: Impact on customers in the amendment area. We heard evidence from the experts that there can be indirect competition at the boundaries for customers. The experts from KEMA-Quantec and Dr. Yatchew explored this. We need to clearly understand who the customers are. For example, it could be individual residences, large residential developers, industrial, commercial, or institutional developments proposing to locate in an amendment area. Consequently, there is the possibility of one distributor losing the potential for adding customers and improving its customer density to lower its overall cost to the advantage of the other in the contestable areas at the boundaries. 176 In contestable areas, customers need adequate information to make informed decisions. They need to have the necessary information to know that they have a choice they can make. This information should be provided by each of the companies to the customers. 177 Number 3: The impact on the distributors and their customers. We are concerned about the potential for stranding assets of the utility and believe that it should be a basic principle that assets are not stranded. How we determine what assets are stranded and to what degree and for how long, et cetera, has not been determined and needs to be explored by the Board. Dr. Yatchew suggested that a formula, a new formula of some kind was required. 178 The risk of stranded costs needs to be addressed through the development of some type of formula, but there is an issue related to how this would be developed for comparing utilities. This issue is likely to be complicated by the fact that there also appears to be some doubt as to the size of the distributor based on minimum efficient scale. 179 We do know from the evidence that the utilities that expand in a contiguous manner are likely to be economically efficient. It makes little economic sense to attempt to duplicate distribution facilities and to increase costs to customers in already licensed service areas. 180 We heard evidence that it is difficult to correctly and accurately determine the cost impacts on utilities and customers. Where utilities are expanding their service territory, it is preferred that contiguous service areas be promoted and developed over time. Where it makes sense to connect a customer who wants to be connected to a distribution utility which is not the incumbent, it should be the choice of the customer whether or not there is an apparent compromise to scale or density economies. 181 The Board is faced with the difficulty of balancing the requirement of customer choice and ensuring the financial viability of both regulated distribution utilities. 182 Number 4: In terms of overlapping service areas, the evidence from KEMA-Quantec states that electricity is considered an essential service. Therefore, any distributor in any particular geographic area has an obligation to provide service if requested to do so by a customer. 183 Because the non-exclusivity of licences and the interest of potential new customers to connect to our distribution system, we initiated our application applying for an expansion to our service area as a practical way to offer choice to customers who have a viable alternative available to them. 184 Our interest in overlapping service areas is to be able to connect new customers when it is viable. No duplication of facilities is proposed, and it would make little economic sense again to do so. By the historical nature and the development of the distribution network in Ontario, the hard rules of utility economics and exclusive franchises will not work well, especially where the distribution or transmission components of one utility intersect or pass through the licensed service area of another utility, and there is a potential to connect customers. 185 To achieve the necessary economies of scale for distribution utilities in Ontario, as discussed in this proceeding, the consideration of utilities -- the utilities will need to consider -- sorry. I apologize. The consolidation of utilities will need to occur to both tighten boundaries into more functional service areas and reduce the need for service area amendments over time. This will be difficult to achieve if utilities promote asset retention policies and practices, regardless of the overall public interest or the impact to the customer. 186 Number 5: Filing and process requirements. When a service area amendment application is made to the Board, it must carefully weigh the advantages and disadvantages of approving amendments by taking into account the needs and desires of the customer, existing and future, who is paying for the network service, as well as to ensure the viability of a distributor or the distributors to provide and maintain the services. This includes the potential for stranding or bypass or the disposition of assets of approving an amendment by taking into account the needs and desires of new customers. 187 We need a simplified regulatory approach to make simple amendments where utilities and customers agree to a change that would follow a streamlined approval process before the Board. 188 And I believe those are my submissions, sir, on behalf of Centre Wellington Hydro. 189 MR. SOMMERVILLE: The Board has no questions of this portion, Mr. McLeod. Thank you very much for your submissions. 190 Your clients do have a right of reply that is limited to five minutes. Depending on the outcome of matters, we would appreciate it, if you have an intention to avail yourself of that, and I'm not asking you to stipulate that at this stage, but to stipulate at the earliest possible time so that if we need hearing room time further down the road, so we can plan for that appropriately. 191 MR. McLEOD: Thank you, sir. 192 MR. SOMMERVILLE: Thank you. And I will, sort of, leave that with you to actively indicate, speak or forever hold your peace, with respect to your intention to avail yourself of that opportunity. 193 MR. McLEOD: I appreciate that. Thank you. 194 MR. SOMMERVILLE: Thank you. 195 Ms. Friedman? 196 SUBMISSIONS BY MS. FRIEDMAN: 197 MS. FRIEDMAN: In this proceeding, the Board should set principles which will promote an efficient distribution sector. The EDA submits that an efficient sector can be achieved by the Board adopting principles for service area amendment applications, which promote a development of shoulder-to-shoulder utilities with exclusive service areas. 198 Why? Because of the capital-intensive nature of distribution infrastructure with very little residual value, efficiencies in the distribution sector are driven by economies of scale and density. 199 Further to the development of an optimal shoulder-to-shoulder structure, the Board should allow the territories to expand with the commensurate shrinking of neighbouring territories if the utility can show that the expansion of its service territory will have positive impacts on the overall commercial viability of the distribution sector and distribution customers. To put it another way, to use the words of Dr. Yatchew, the expansion should be allowed if it is likely to result in a net benefit to the system as a whole. 200 The EDA notes that the shrinking of service territories may lead to increasing rates in the shrinking territories. This highlights the continued role for rural rate assistance in the province. 201 The need for rural rate assistance will continue to exist because of the capital-intensive nature of distribution infrastructure and the continued existence of low density areas in the province. The vulnerability which drives the need for rural rate assistance in the province is not properly captured in the current rural rate assistance eligibility criteria. This contributes to the inefficiency of the distribution sector. 202 The rural rate assistance program therefore must be revised to properly address a need which will continue to exist, will always be a problem in the province, and as Mr. Todd said in his evidence on cross-examination by Mr. Engelberg, costs will continue to increase to low density customers because of the loss of cross subsidization by high density customers. The answer, however, is not cross subsidies but a properly functioning rural rate assistance program. 203 Now, where do the parties in this proceeding, the LDCs in the province and the experts agree? I think everyone agrees that we all want clear rules. Mr. Todd in his direct exam and then again in response to questions from Board Staff, highlighted the need for clear rules. Dr. Yatchew put it a slightly different way but talked of the need to articulate a clear vision of how the distribution industry should evolve over time. Mr. McLeod, again, in his submissions on behalf of Veridian, talked of the need for clear rules and clear definitions. 204 Despite the contentious nature of this proceeding at some points, there is actually substantial consensus among the parties and among LDCs on certain fundamentals for the industry. Although the Southwest applicants and Chatham-Kent begin from a premise that competition and customer choice is in the public interest and Toronto Hydro, the LDC Coalition, Hydro One on the other hand, begin from a premise that exclusive service territories are in the public interest, a review of the evidence in this proceeding makes it clear that all of those parties and the other parties agree on certain fundamentals, three in particular. The stranding of assets without appropriate compensation ought not to be permitted. 205 Two, cherry picking of low-cost customers ought not to be permitted. 206 And three, duplication of assets is expensive and inefficient. 207 My cross-examination of Mr. Todd revealed that he is in agreement with those principles as well. 208 In service area amendment applications, the EDA submits that the applicant must demonstrate that there are net benefits to the distribution system as a whole. It cannot focus on the benefits or costs to any one customer or any one group of customer. All customers are entitled to move toward better long-term prices, reliability and quality of electricity service. The EDA submits that the way to do that and to ensure no stranding without compensation, no cherry picking, no duplication of assets is to promote shoulder-to-shoulder exclusive territories while allowing the economically rational expansion of territories. 209 Thank you. Those are my submissions. 210 MR. SOMMERVILLE: Thank you, Ms. Friedman. 211 Thank you very much, the Board has no questions. 212 MS. FRIEDMAN: Thank you. 213 MR. SOMMERVILLE: I do not see a representative from Hydro Embrun and I guess there was some doubt as to whether they were actually going to attend to make a presentation, so we'll move to Hydro One Networks. 214 Now, we will take our break in about 20 minutes. Does that punctuation cause you any difficulty, Ms. Aldred? 215 MS. ALDRED: It really doesn't. Mr. Engelberg and I were going to split up the presentation, so if it's convenient I'll do my bit and we could perhaps break and then Mr. Engelberg could take up after the break. 216 MR. SOMMERVILLE: Thank you very much. 217 SUBMISSIONS BY MS. ALDRED: 218 MS. ALDRED: Some care has been taken by participants in this proceeding to frame their proposals as reasonable and limited, but their proposals are not limited. The applicant LDCs and Wirebury are understandably here to look out for what is best for the relatively small numbers of people who would benefit. LDCs want to expand to municipal boundaries to satisfy local customer wishes and the wishes of the municipal shareholder. New embedded utilities are here to satisfy developer interests and maybe, though doubtfully, the wishes of the people to whom they sell the houses. 219 These participants represent a few customers who would want to change to get temporarily low rates and they can't be blamed; however, they are not looking out for the broad public interest and the provincial distribution pool. This Board must do that. 220 Hydro One is here to represent its customers who would be harmed by these proposals. Hydro One has 1.2 million customers, 25 percent of whom, or about 300,000, are within the licensed service territories of other LDCs and provide one quarter of it's $700 million annual revenue. Sorry, within the licensed service territories of other municipalities, I meant to say, within the borders of other municipalities. It's a good thing Mr. Engelberg is here. 221 If Hydro One's customers are added to those of Toronto Hydro and the LDC Coalition, that pool represents 70 percent of Ontario distribution customers. That pool provides a more fair consideration of the public interest than a few LDCs who represent a few customers. If permitted by the Board, those LDCs would have the opportunity to take the lower cost to serve urban areas outside their boundaries at the expense of the remaining higher costs to serve customers who would stay behind with the incumbent. 222 As Mr. Todd noted yesterday, this would be a significant policy decision for the Board to make. The proposals may sound reasonable to the few who benefit, but substantial concerns have been raised about the impact of these changes on the remaining customers of the incumbent, which is often Hydro One. These customers are harmed. The harm to them far outweighs the benefits to the few and would not satisfy the public interest test with which the Board is charged. 223 We have heard that customers want to switch to benefit from lower rates and that incumbent utilities must be compensated to their ratepayers will not be harmed. Various witnesses also stated that the present distribution rates do not provide a fair basis of comparison. Mr. Todd stated that the present distribution rates are transitional and Hydro One says that too. Various witnesses have also stated that the formulas in the Distribution System Code do not provide an accurate means of addressing the loss to the incumbent utility. 224 Various witnesses have also stated that the present LV or wheeling rates were not set in a way that accurately addresses the loss of customers by a host utility and the cost of providing service to the new embedded utility. 225 In other words, nothing is yet in place in Ontario to compensate the customers of incumbents for the harm they will suffer as a result of what the applicants and Wirebury seek from the Board. In that regard, I would remind the Board that rural rate assistance regulation has a sunset clause as it is now drafted. 226 Perhaps in the future cost of service distribution rates will be set that true comparisons may be done. Perhaps accurate wheeling rates or LV rates will be set to reflect the true cost of this service. Perhaps the Board will be able to determine a formula for determining the value of the loss of the revenue stream by the incumbents and the scope of assets and upstream assets that are stranded or underutilized as a result of the loss of the customers. But none of these things has been done at this time or will be done in the near future. 227 None of the applicants or intervenors has been able to produce any evidence which demonstrates that the greater public interest will be served by the introduction of so-called competition into the distribution sector. 228 Hydro One's points which are backed up by its prefiled evidence filed on August 7th, 2003, and the expert report of KEMA-Quantec, as well as by the evidence of a number of the intervenors and witnesses are as follows. 229 Number 1: Electricity distribution is a natural monopoly that does not lend itself to open competition. Distinct, certain, constant service boundaries are in the public interest. 230 Number 2: The Energy Competition Act never intended that there be open competition in electricity distribution, and it should not be interpreted that way. 231 When Section 1 of the act means distribution, it says "distribution." When it does not say "distribution," it does not mean distribution. It says that competition is in the generation and sale of electricity, and you have been provided with quotes from the White Paper and from Hansard that agree with those statements. 232 Number 3: Overlapping service territories and embedded service territories are the worst choices for efficiency and rationalization in the distribution sector. We have many embedded service territories because of our historical legacy, but we should not be taking steps to increase them. 233 Number 4: For all practical purposes, there is no such thing as a greenfield or unserved area when it comes to electricity distribution in Ontario. The incumbent LDC has already planned and built to serve such areas, and its ratepayers have paid and continue to pay for all the upstream assets for such areas. 234 Number 5: The applicant LDCs seek to cherry-pick high-growth areas in Hydro One's service territory. This cherry-picking harms Hydro One's customers the most. 235 You have probably noticed that there is no LDC at this hearing to ask for an amendment to try to get Hydro One's rural customers outside town boundaries, except maybe some that are in an area that is on the verge of becoming high-density. 236 The applicants say it's not cherry-picking, because they're trying to take all the customers in a particular area and not playing hopscotch. But it is cherry-picking, because all of those customers are in the highest density portions of Hydro One's service territories, the areas immediately outside the boundaries of LDCs but within municipalities. That is cherry-picking in its purest form. 237 Number 6: The Section 86 MAADS process is there for LDCs to expand. Negotiated territory transfers are also feasible where the change is rational and benefits all customers. The third method is a forced service area amendment, and it follows that compensation must be paid to the incumbent for lost revenues associated with existing and future customers so that the incumbent's customers will not be harmed. 238 The expert evidence in the reports of KEMA-Quantec and Dr. Humphrey's oral evidence show that no other jurisdiction in North America is doing what the applicants and some intervenors are asking you to do. Drs. Chamberlin and Humphrey also affirmed that although there are 3,000 LDCs in the United States, no jurisdiction has adopted the models proposed by the applicants and intervenors. They also confirmed that they were not aware of any aspect of the electricity sector in Ontario which would make their comments less applicable in this jurisdiction. 239 Electricity distribution constitutes a natural monopoly that does not lend itself to open competition. Throughout the province, investments in distribution infrastructure were made many years ago and made recently also, based on forecasted need and based on the obligation to serve that need. This is true of investments made not only by Hydro One, but also by other LDCs. It is the nature of the distribution business to forecast need and build infrastructure to satisfy this need well in advance. 240 Power system assets have very long, useful lives. A change in the basic tenants contained in the legislation and codes, which have informed the system planning for the last 90 years, will increase rates, strand and underutilize assets, and present serious practical problems. 241 It is clear that it was never the intention of the drafters of the White Paper or of the legislature in passing the Energy Competition Act to open up distribution to competition, and I refer you to Exhibit J.8.12.24, page 2 of 2. 242 In the words of the Minister, when he introduced the bill at first reading and summarized its features, the distribution business is a monopoly. The White Paper said: 243 "However, transmission and local distribution remain natural monopolies and are not amenable to direct competition." 244 Now, Hydro One does recognize that the act allows for the possibility of customer choice for a lie-along customers in circumstances where there would be no stranding of assets, including upstream assets, of the incumbent distributor. In those limited case where this type of limited competition is allowed, the Board should have regard for the basic principle that the pool of Ontario's electricity customers, existing and future, should be held harmless by not allowing a few customers to benefit to the detriment of the large remaining pool of customers. This would be the type of amendment which would be amenable to negotiation and compromise between the two utilities. 245 Distinct service, constant service boundaries are in the public interest, because they result in, (a), a stable planning horizon to ensure long-term, cost-effective supply to customers, (b), a stable financial performance to ensure the lowest cost of capital, and (c), the minimization of underutilization of assets. 246 Some of the applicants have tried to portray Hydro One and certain other LDCs as asking the Board to disregard the fact that the statute says that licensed territories are non-exclusive. This is untrue. That section of the statute is there and was put there so that rational changes could be made with the necessity of licence amendments. This fits with Section 28 of the act, which obliges a distributor to make an offer to connect to a building which lies along its lines, even if that customer is not within its licensed service territory. These provisions of the act are there to provide a rational and acceptable basis for licence amendments in limited circumstances. 247 Hydro One therefore supports amendments where the incumbent cannot connect the customer at equal or lower cost, and service by the applicant would not result in an underutilization and possible stranding of the incumbent's assets. 248 Hydro One has worked with other LDCs to process amendments in five such situations where a border adjustment made sense. For example, three with Veridian, including Hydro One's own application in this proceeding. 249 Hydro One recognizes that the principle of customer choice has some validity in circumstances where it is not at the expense of current customers or the pool of electricity ratepayers. Customer choice could have some validity in situations where the two LDCs find that there is an economic justification for the non-incumbent LTC to service a particular customer, because of the configuration of distribution lines at a particular location. 250 Drs. Humphrey and Chamberlin both stated that customer choice based primarily on the issue of rates is not a rational basis on which to make amendment decisions, because individual customers or groups of customers have interests that may not be in the public interest as a whole. 251 Furthermore, as stated by Dr. Yatchew, the rates and prices in a competitive market would be determined by the market, not by a regulator. 252 The widespread introduction of competition to distribution outside of the voluntary transfer of assets provided for by Section 86 would mean the introduction of additional risk to the distribution sector and would ultimately result in upward pressure on rates, not just for Hydro One's customers, but also for the customers of other LDCs. 253 In addition, the prefiled evidence of Hydro One states that Hydro One's credit rating would be harmed and result in a higher cost of capital, and that danger was confirmed by Dr. Chamberlin, who stated that competition would cause Utility A to plan and build differently to be sure that it will be in a better position than Utility B to get that new subdivision when it materializes. Utility B will plan and build differently too, and there is no reason to believe that that race will benefit the public interest and the broad pool of customers. 254 Let us consider the two scenarios for competition being promoted by various applicants and intervenors. The first is expansion of an LDC's existing system into another LDC's licensed territory on the pretext of a new municipal urban plan area, and the second is the creation of new embedded service territories, taking the supply from the incumbent LDC either by neighbouring or new LDCs. 255 The harm to the incumbent's residual customers is the same under either approach. There is absolutely nothing about these concepts to be found in the Energy Competition Act; so where did they come from? 256 The answer to the first concept is that it was found in the old Power Corporation Act. In the 1970s and 1980s before rationalization was contemplated, when MEUs were agents of the municipality and did not have an independent legal existence, municipalities could create or expand their MEUs by annexing service territory and assets within their municipalities from the old Ontario Hydro. 257 Legislation required municipalities to follow a set process, and I'm just going to ask Mr. Engelberg if he'd assist me by handing out excerpts from the old Power Corporation Act, which you may find of some use. 258 MR. SOMMERVILLE: Ms. Aldred, the same comment as I made to Mr. McLeod. While I've emphasized the importance of keeping our time constraints, and we are determined to try to do that, it's most important that you not provide your argument so quickly that my poor abilities can't keep up. 259 MS. ALDRED: Well, I would be quite pleased to slow down a little bit, and we will be handing this -- I'm reading, as you can tell, and we will be handing this out afterwards. 260 MR. SOMMERVILLE: That's very helpful. Thank you. 261 MS. ALDRED: So you hopefully now have a copy of the old Power Corporation Act, and I don't propose to take you through these sections, I just want you to have them. 262 MR. SOMMERVILLE: This will be E.5.2. 263 EXHIBIT NO. E.5.2: EXCERPTS FROM THE POWER CORPORATION ACT 264 MS. ALDRED: This legislation required municipalities to follow a set process and in 1994, those provisions and the formula became part of the Power Corporation Act. The purpose of looking at this section is to show you that the old legislation contained a provision for municipalities to have their hydro department expand to municipal boundaries. Unfortunately, this old procedural formulae are of no help to us today in determining what an LDC must pay to an incumbent for stranded and underutilized assets: You who will note that those transfers and payments were not on a commercial basis. 265 Ontario Hydro was even required to pay money to the municipality for five years to help the municipality and the ratepayers, and some of the customers even stayed behind and remained customers of Ontario Hydro. But there was no problem. Both Ontario Hydro and the municipalities at that time raised their rates to pay whatever needed to be paid because the scheme at that time was on a cost-plus basis. 266 The result is that the payment formula under the old legislation is of no use, nor is it appropriate in today's commercial setting. However, the old sections of the Power Corporation Act are of some use in showing the legislature's change of intention. When the Energy Competition Act came about, rationalization was the new focus, the legislature decided to remove the linkage between utilities and municipalities so as to require independence in both a legal and operational sense. To that end, LDCs were created as corporations under the Business Corporations Act. 267 Any municipality with a pre-existing MEU was required to transform it into an LDC unless the assets were sold by a certain date. However, LDCs do not even need to be owned by municipalities, although almost all of them still are but that can change. Not surprisingly, under the new regime the old idea of creeping boundaries of service territories to municipal boundaries was rejected and tossed out. Every single one of the annexation provisions of the old PCA was discarded. The fact is that there are none and that is no accident. Instead, the legislation inserted provisions regarding the sale of the shares of these new LDCs and the merger of these new LDCs. 268 MAADs applications were created by the statute, that's section 86, so that LDCs could buy assets from each other. This is the way significant adjustments to LDC boundaries were envisioned. The entire idea of town and utility being synonymous was discarded as they are now required to be separate corporations. 269 MAADs applications contemplate a commercial transaction which does not result in the purchaser having to pay damages by way of compensation to make the incumbent distributor whole. This voluntary process is in stark contrast to the suggestion that the legislation contemplates involuntary transfers of territory to the detriment of the customers of the incumbent. 270 You have heard substantial evidence that when there are forced service area amendments compensation, fully compensatory compensation must be paid to the incumbent utility because the incumbent LDC's ratepayers must be compensated for the lost revenues associated with existing and future customers, less the costs that can be mitigated. 271 Every witness stated that compensation would need to be paid, though there were different views as to the categories of items for which compensation would be required. It must be paid for the immediate and upstream assets that are stranded or underutilized even if the calculation of those items is difficult. 272 In addition, questions were asked during this hearing as to whether a properly set LV rate or wheeling rate could properly compensate host utilities for the stranding caused by the insertion of new embedded utilities and whether a revision of the Distribution System Code could help too. The gist of the evidence given by witnesses was that it is generally accepted that whether that would be possible or not, today's LV or wheeling rate does not compensate the host utility for the stranding that results from new embedding or from overlapping and expansion of LDC service territories to municipal boundaries and that LV and wheeling rates would need to be reworked to see to it that the compensation is truly compensatory. 273 However, you will recall that Dr. Chamberlin stated that some of the values of stranded items are very difficult to quantify such as the damage that occurs from uncertainty in the industry. One of the items mentioned by Dr. Chamberlin was the increased cost of borrowing which would result from uncertainty. That would not be an amount that's difficult to quantify. 274 Mr. Todd stated that the incumbent utility must be paid by revenue stream lost as a result of the departure of the customers, which in Hydro One's case could be 300,000, one quarter of its customers whether the territory is transferred exclusively to the LDC or whether overlapping is granted, which Mr. Todd said would result in a de facto loss of the customers by Hydro One if customers were permitted to make a choice on the basis of what works out best for them, namely lower rates. 275 He also said that the loss of Hydro One's customers inside municipalities would give the government another headache because Hydro One would have to raise its rates for the remaining customers or run into difficulty. But it was clear from the evidence that certain losses to the incumbent and its ratepayers could not be quantified, including the loss of the ability to plan and the general loss of certainty. 276 That's my portion of the presentation. 277 MR. SOMMERVILLE: Thank you very much, Ms. Aldred. I guess we'll leave questions to the end for both presenters. 278 MS. ALDRED: Thank you. 279 MR. SOMMERVILLE: We'll stand adjourned until 20 minutes after 11:00 by my watch. 280 --- Recess taken at 11:04 a.m. 281 --- On resuming at 11:27 a.m. 282 MR. SOMMERVILLE: Thank you. Please be seated. 283 Mr. Engelberg? 284 SUBMISSIONS BY MR. ENGELBERG: 285 MR. ENGELBERG: Thank you, Mr. Chair. 286 The parties putting forward the idea of desirability of expansion to municipal boundaries have not satisfied the onus on them to show that such expansion is desirable and good for the system as a whole. They allege that it makes it easier to attract business and makes for one-stop shopping for a new industry, but they've not provided evidence to support those allegations. 287 Electricity distribution is like gas distribution. Are Ontario gas distribution lines built on a municipality-by-municipality basis? No. Can new industry or developers arrange with City Hall for gas service? No. They have to go to the gas distributor. Can new industry arrange with the municipal council for electricity service for the new plant or the subdivision? No. 288 The developer or the new industry has to go to the LDC. The LDC is by law a separate corporation that may presently be owned by the municipality, but which is operated and must be operated as a separate business with separate obligations that are fulfilled in ways different from the ways in which the municipality fulfills its municipal obligations. 289 So in answer to the question asked by the Board earlier this morning: Shouldn't a municipality have the ability to put in electricity like water or sewer, the LDC can't do that now. The municipality no longer has the power to put in electricity service or to deal with electricity. 290 This alleged desirability of expansion based on municipal considerations is inappropriate and is nowhere to be found in the legislation or in any preceding policy papers. Furthermore, the damage that is caused to the customers of the existing licensed LDC is exactly the same whether the boundaries of the applicant LDC are creeping within the municipality or outside the municipality. 291 Hydro One represents more distribution customers than any other LDC in the province, 1.2 million. You've heard that approximately 25 percent of those customers are within the limits of a municipality where there is already another LDC that currently has a municipal shareholder. 292 The notion of expansion of municipally-owned LDCs to the boundaries of their current shareholder is not such a benign and sensible concept as some parties would have you believe. Such expansions, as you have heard from Mr. Todd, would have very serious consequences for Hydro One's existing customers, as most of Hydro One's projected growth is located in these areas, and expensive infrastructure has been put in place to serve these very areas. 293 Yesterday you were provided with a map by Chatham-Kent showing that Hydro One has just as many distribution stations, 15 of them, in the municipality as the locally owned LDC has. This infrastructure was installed by Hydro One on the understanding that the areas were within its licensed service territory and that Hydro One was both obliged and entitled to plan for that growth. Underutilization or stranding of those assets and failure to achieve projected growth will put upward pressure on the rates of Hydro One's remaining customers. 294 The notion of simply expanding the boundaries of an LDC to the municipal boundaries necessarily entails overlap, because Hydro One currently serves customers in what would be the expanded LDC in virtually every such municipality in the province. 295 Electricity planning is not local, electricity planning is regional. Electrons do not respect municipal boundaries, they flow in and out of the municipality without regard to lines on a map. No one can plan based on political boundaries. The municipality and the local LDC can't plan based on municipal boundaries. There has been no workable solution put forward by any party which addresses the fact that Hydro One assets and customers are in the so-called expanded area. 296 Veridian in Belleville, and the Southwest utilities are seeking to expand to the municipal boundaries. Transfer of customers and service territory without regard to particular localized lot-by-lot considerations leads to thousands and thousands of customers paying their monthly bills to an LDC which does not own any of the assets to which customers are connected. 297 Mr. Southam pointed out the problem. In fact, he said: 298 "We also took account of section 70(13) of the Act, which causes the Board not to take any action that will force the distributor to dispose of a distribution system." 299 Then Mr. Todd gave evidence about the problem as well, discussing the situation that would exist when virtually all the customers in the municipality had chosen the local LDC, because of cheaper monthly rates. But all of those customers who had previously been with Hydro One would be connected to Hydro One owned assets. The Board cannot simply transfer the assets to the locally owned distributor, because that would force the incumbent to dispose of its assets. 300 No participant in this proceeding has alleged that the applicant LDCs represent the 300,000 existing customers of Hydro One who live within the municipality but are not customers of the local LDC. Hydro One therefore submits that the Board should not make any decision which transfers those existing customers and territories to LDCs. 301 And Dr. Chamberlin, Dr. Yatchew, and Mr. Todd spoke of the myriad of problems that would be caused by attempting to deal with this problem by creating overlapping to the municipal boundaries. 302 The second scenario, that of an existing or new LDC seeking a new embedded service territory, is equally undesirable. One of the purposes of the redesign of the electricity industry through the Electricity Competition Act was to rationalize the distribution sector. Adding even more service territories by creating new embedded service territories will worsen the situation. 303 Not only will there be inefficiencies from duplication of effort, but also the cost for the industry will be higher because of the need for metering and back office facilities and systems that would otherwise not be required. 304 You heard from Dr. Chamberlin and Dr. Yatchew that the idea that new embedding does not result in the stranding or underutilization of the assets of the host distributor is an idea that just doesn't hold water. Harm to the ratepayers of the incumbent host utility still occurs. As Dr. Chamberlin put it, there would be no benefit to the customers of the new embedded utility unless there is stranding of the host's upstream assets. 305 What is that damage that will occur to the remaining Hydro One customers who are not cherry-picked by an applicant? As Hydro One's written submission shows and witnesses have stated, electricity distribution is a high-fixed cost business and responsibility that involves long-term planning and building. The just-in-time concept of ordering and stocking merchandise at the last possible minute does not work in the electricity distribution world. 306 Only Mr. Southam said that planning and building can occur when the new growth is imminent. Other witnesses that we heard spoke in terms of four to ten years. Hydro One planned for years, as any incumbent would have, as needs to be done, to have infrastructure in place at optimal location, distribution stations, adequate lines and configuration, trucks, repair crews, a call centre, a billing centre, so that when customers built or materialized anywhere within its licensed service territory, Hydro One would be able to serve them. 307 Hydro One's planning process is set out in detail in its prefiled evidence filed on August 7. Hydro One, like every other LDC, was required by its licence to do that planning and building, this is not new. 308 Prior to the current legislation, Ontario Hydro was required to do that planning and building under the Power Corporation Act, and local electric commissions were required to do that under the Public Utilities Act. 309 Furthermore, the nature of the assets in this business is such that much of the equipment is manufactured in standard incremental sizes. Distribution stations and transformer equipment are built through fixed capacities that do not increase by tiny increments, standardization is the norm for economic reasons. To obtain the size necessary to serve present and future needs, unused capacity sometimes results. 310 This does not mean that the purchaser, the incumbent utility, overbuilt. And the lines and the poles that are built from the road to the individual houses, businesses, or factories are the minute tip of the iceberg in terms of what needs to be done in this province, or anywhere else, to serve a distribution customer. The legislature understood this need to plan for the long term and the folly of short-term planning. It's for that reason that the present legislation still has licensed service territories in order to protect the certainty necessary for utilities to be able to engage in rational planning and to protect the ratepayers from rate increases caused by duplication of assets, overcapacity in the system as a whole, and increased cost of capital resulting from financial uncertainty. 311 Wirebury and the Southwest applicants and Veridian would have you believe that a 50-acre field in Hydro One's service territory is virgin territory with no poles and no wires on it, and therefore, there would be no underutilization of Hydro One facilities if an applicant threw up some poles and wires and connected them to the applicant's own neighbouring distribution system or to Hydro One's distribution system outside the field. They inaccurately call these situations "greenfields" or unserved, to suggest that there will be no harm to the incumbent if they take the site. But if we look around the province, we see that there is inevitably electricity infrastructure in the vicinity of all areas of new development in the province. For all practical purposes in Ontario, there is no such thing as a greenfield or an unserved area when it comes to electricity distribution. There is an incumbent LDC everywhere. 312 Once the infrastructure is in place to serve these anticipated customers within the licensed service territory, it goes without saying that it is in the interest of the ratepayers of the incumbent LDC that the new customers for whom it built are not taken by an applicant LDC. The new connection customers will mean that the costs of the incumbent's infrastructure will be shared by more customers. The existing distribution station in the area will serve more people without building an addition. The existing call centre will serve more people without buying additional software or hardware or hiring proportionally more staff. The billing office will bill more people without buying additional software or hardware or hiring proportionally more staff. Even Mr. Todd admitted yesterday in cross-examination that reduced scale of the incumbent utility decreases efficiency, though he said that LDCs could take steps to try to mitigate that loss. 313 When these customers who materialize in the incumbent LDC's licensed territory are taken by another LDC, of course it is to the benefit of the ratepayers of the applicant LDC. In fact, they have filed material with the Board to show how getting more customers will from incumbents be of benefit to them. Of course it is. Getting these new customers from the incumbent is of benefit to them for the same reason that it harms the ratepayers of the incumbent. The applicant LDC tells you it has a distribution station that can handle the new customers, so it can serve them without building one. It has an existing billing department and a call centre that can handle the new customers without adding proportionally more costs. Every argument that an applicant LDC makes as to why it will be of benefit to them to take the new customers away from Hydro One is an argument as to why it will benefit the ratepayers of Hydro One to serve these new customers in its territory. 314 So the question I think the Board has to answer in that regard is: Who should win as between the incumbent's ratepayers and the applicant's ratepayers? We say that the ratepayers of the incumbent should win for two reasons. A, the incumbent LDC was required by the terms of its licence and by due diligence to plan, design, build and have capacity and facilities in place to serve any customer that might materialize in any part of its licensed service territory. The applicant LDC had no such obligation and no such right, although the applicant LDCs would not even be here unless they, themselves, had capacity to serve these customers, the fact is they did not build for those customers, they did not plan for those customers, they had no right or obligation to build for those customers, and they had no right or obligation to plan for those customers. 315 That same reasoning applies to LDCs who do not serve to the limits of the town in which they are located. They had no right and no obligation to plan to serve customers in those portions of the municipality which were not within their licensed service territory. 316 B: As in every proceeding, the onus is on the applicant to satisfy the Board that the licensed service areas should change. The onus is not on the incumbent to satisfy the Board that the licensed service area should not change. The onus is also on the applicant, as we've heard throughout this proceeding from various witnesses, that the applicant must show that the benefit to the few; namely, the applicant's existing customers and the ones it would obtain, is more important than the harm to the many; namely, the incumbent's existing customers and remaining customers. The Board should look at the purposes of the OEB Act to see if the applicant has proven that all the questions raised by those purposes result in the answer that the request for territorial change should be granted. 317 As Hydro One's submissions show, it is the customers of Hydro One who will be harmed most if the Board sanctions these creeping boundaries within municipalities or embedding, whether to the municipal limits or beyond. Hydro One has calculated that its customers will suffer a 5 percent rate increase if the utility loses only half of the projected growth, and we're not even talking there about the existing customers, that's just half of the growth. 318 More significantly, if Hydro One were to lose the 300,000 customers it serves within municipal boundaries, Hydro One's customers would suffer significantly. There's no difference between Hydro One's loss of growth within municipal limits or outside. 319 The representative from Chatham-Kent after pointing out the fact that Hydro One has just as many distribution stations in the municipality as Chatham-Kent Hydro does, said that if Chatham-Kent were permitted to serve to the municipal boundaries, there's no doubt that 30 distribution stations would not be needed. One need look no further than that to see a fraction of the significant stranding that occurs when just one LDC expands to municipal boundaries and that does not even address the assets and infrastructure and upstream assets than the incumbent utility has outside the municipal boundaries. 320 Hydro One's areas that applicants to serve are by no coincidence the most densely-populated areas in Hydro One's service territories because they border the urban areas of the municipalities. They are cherries. For the LDCs to take these customers would be cherry picking. 321 Hydro One knew that these customers would materialize one day, all of them are in Hydro One's service territory inside town limits or just outside of towns. 322 What about the impact on customers in the actual amendment area? By and large we are dealing with customers who are not yet connected. Developers are behind many of these applications, but the developers are not the customers. When the homes are sold or the industrial parks are built, the residents, the factories, will be the customers. Municipalities are supportive of some of these applications, but the municipalities are not the customers either. They have a self interest. They earn dividends from their LDCs, so of course it is in their interest to support the cherry picking by taking the high density portions of Hydro One's service territory. 323 It is in the municipality's self-interest to support applications for more customers to be served by the excess capacity of their LDCs. 324 Wirebury's ownership includes developers who may have their own reasons for choosing in favour of a new embedded distributor. But what are the benefits and disadvantages to the actual customers in the amendment areas? 325 In Hydro One's submission, no party to this proceeding has made reliability, service quality, response times, et cetera, a real issue. The gist of the LDCs' case as to impact on customers in the amendment area is that in a number of cases, their monthly distribution rates are lower. Where that fact situation exists, it's because of the temporary anomaly known as transitional distribution rates. 326 There is no evidence before the Board that the situation exists because the higher monthly cost utility is less efficient than the applicant LDC. Where a price difference exists, it results from the fact that the present rates are transitional, postage-stamp rates, which apply to all Hydro One customers across the province. The differential occurred because of the spot where the various LDCs stood when the transitional rates were set. 327 For example, and this material was filed earlier concerning Veridian's rates, Veridian's rates in one location are as much as four or five times as much as they are in another location less than 100 kilometres away. Not 4 or 5 percent, but 400 percent. 328 In Hydro One's submission, that doesn't mean that Veridian is more efficient in one part of the province than it is 60 miles away. And when Hydro One's monthly rates are higher than those of a neighbouring LDC, it doesn't mean that Hydro One is a less efficient distributor. 329 A PBR system and a move to more cost-based rates, which are envisioned, should put an end to these anomalies. So transitional distribution rates should not be used to conduct a comparison of one LDC to another. 330 Some of the parties have told you that the rates are not transitional, they are OEB-approved rates that must be just and reasonable. But the fact is, and the evidence is that the present rates were never intended to be in place for the long-term. They resulted from a simple exercise of unbundling of rates that had been set when the regime was a cost-recovery, non-commercial scheme. 331 Let's say that the distribution rates were not transitional and that one LDC's rates are lower than the rates of a neighbouring LDC. Taking that territory away from the incumbent and awarding it to the applicant will provide lower monthly cost to the new customers once they build their houses. There will be a benefit to them in the short-term, and there will also be a benefit to the existing ratepayers of the applicant, but there will be harm to the ratepayers of the incumbent. 332 It is Hydro One's position that the benefit to the few should be outweighed by the harm to the many. It is also Hydro One's position that licence amendments as envisioned by the legislation were never intended to be used to add more customers to lower-priced utilities and to subtract more customers from higher-priced utilities. How would that benefit the electricity distribution system in the province? That's not rationalization. It's not planning. 333 Conditioning customers to act based on price signals in a marketplace which is regulated and which is not yet mature will lead to decisions based on short-term criteria in an industry based on long-term planning. Licence amendments to serve areas were intended to be used in very specific and limited cases for specific customers or specific small areas where the exigencies of a specific customer's location would result in an unreasonable amount of building of distribution facilities in order for the licensed LDC in that area to connect the customer. 334 There's nothing in the legislation or in the policy statements that would lead us to believe that the licence amendment provision that no doubt exists was intended to be used for moving multiple customers, for creeping boundaries, for expansion to municipal boundaries, for changing maps, for non-stop change, for uncertainty. Such uncertainty would affect the credit ratings of all LDCs' ability to raise money and increase interest costs over and above the difficulty that these changes would mean to long-term planning and building. 335 The worst possible proposal is overlapping service areas. Overlapping service areas would be the antithesis of efficiency, result in lower density, and would be the antithesis of rationalization of the distribution sector. 336 Two LDCs operating in one defined area. Two LDCs trying to build lines to serve the same area. Two LDCs trying to plan and build infrastructure. Two LDCs' trucks driving around the same area. Planning would become very difficult, even if there were cooperation. 337 How many of the future customers would want to connect to LDC Number 1? How many of the future customers would want to connect to LDC Number 2? The answer is anyone's guess. 338 So it's natural that customers' preference will be for the utility with rates that are lower right now, and the Board may certainly consider that, but that preference must be considered in light of the interests of all ratepayers in the province. 339 MR. SOMMERVILLE: Mr. Engelberg, you're slightly over time. Could you conclude, please. 340 MR. ENGELBERG: I'll finish up. 341 It's Hydro One's submission that the Act should not be interpreted in a manner that dramatically changes the face of electricity distribution in a way that would make Ontario stand out as an anomaly in North America. The Act should not be used in a manner that will inevitably lead to higher costs for more ratepayers for the purpose of benefitting pockets here and there. 342 An issues list for the proceeding was agreed upon months ago, and the resolution of those issues is needed not only to address specific applications before the Board but so that LDCs will know on a going-forward basis the principles that will govern these types of situations. 343 Therefore, Hydro One asks the Board to issue a decision with a clear statement of principles. For example, the Board should clarify where it stands on overlapping, and the answer should be against. The Board should deny service territory amendments that cover entire subdivisions and even broader swaths of an incumbent's territory as contrasted with amendments for rationalization for a particular customer here and there. 344 The Board should state whether it finds that the Electricity Competition Act stands for the proposition that there should be competition in distribution or whether competition is desirable on other grounds, and the Board finally should state whether the preference of a particular customer or a number of customers in a subdivision should be considered over the broad pool of ratepayers, and the answer should be that the benefit and harm to the broad pool of ratepayers must always carry the day. 345 I'm sorry I went over. I apologize, Mr. Chair. 346 MR. SOMMERVILLE: Not at all, Mr. Engelberg. 347 QUESTIONS FROM THE BOARD: 348 MR. BIRCHENOUGH: We've heard some discussion over the last few days about issues related to the potential to create inequities between LDCs in changing service areas. 349 If you look at the role of this Board and understanding the discussion that's gone on but carry it beyond that now to the role of the Board in ensuring that Ontario is competitive, grows, draws economic development, would in your view the role of the Board be mainly to resolve the internal inequities, or would you think that the Board should be looking more broadly at the competitive position of Ontario, recognizing that many industries that have to choose between jurisdictions have the cost of energy as a major component of their cost. 350 What would be the overriding principle? I understand there are a number of principles, but where would you think the OEB should be looking primarily in exercising its public interest mandate? 351 MR. ENGELBERG: Well -- 352 MR. BIRCHENOUGH: That's a pretty long question, and I'm sure there's not a simple answer. 353 MR. ENGELBERG: My answer to that would be that the Board objectives as stated in the OEB Act were clearly that the Board was to facilitate competition in generation and sale. That's why retailers were established for the sale portion. Competition was established in generation so that the energy commodity would become competitive and priced as cheaply as possible. 354 What the Board must do, in my submission, with distribution is the Board has a role in the third purpose of the objectives to protect the interests of the consumers with respect to prices and the reliability and quality of electricity service and to promote efficiency in generation transmission and distribution. Perhaps you could draw from that that the Board has a role in attracting industry, but that would fall, I would suggest, as a result from the Board's role in ensuring that transmission distribution is done in an efficient way so that costs will not be driven up in the sector. 355 We heard something yesterday with respect to attracting industry, and in that regard I would suggest that any LDC and every LDC wants to attract industry and works with developers, industrial park builders and factory builders to try to attract industry to its service territory, whether that happens to be within a town or outside a town. 356 Overall, the goals of cheap service, cheap distribution, and cheap transmission are done by looking at whether there is harm to incumbents, benefits to applicants, and what the benefit is to the system as a whole. 357 MS. ALDRED: If I could just add one point, one of your concerns was attracting industry to Ontario and what do we need to do about that. I just remind the Board that many large industries are actually -- large industrials are direct customers and so they would not be affected by lower residential rates, they're direct customers of the transmission system. 358 MR. BIRCHENOUGH: Could I just come back on that, then. If an industry had a choice, they're locating in a municipality where Hydro One actually serves, and that industry could be served more cheaply by the local utility, would you see an amendment being justified in a case like that, say, on a case-by-case basis? 359 MS. ALDRED: Well, I guess we go back to our position on the circumstances where an amendment is appropriate and there may be circumstances where that particular industry is actually located closer to the applicant's lines, maybe it's on the border, and it can be served more economically from a system viewpoint as a whole. In that circumstance, I think we would say if it makes sense to the electricity system as a whole, not just to the incumbent and the applicant, then they should be served by whoever can serve them most economically. 360 MR. ENGELBERG: And I would add to that that if the Board has a role, it would be to attract industry to the province and not to a particular spot within that province. That does not benefit rationalization or the province as a whole. 361 MS. SPOEL: I have a couple of related questions to ones Mr. Birchenough asked. 362 You stated, Mr. Engelberg, that electricity distribution is like gas distribution in the sense that you don't have a choice of who your distributor is going to be, but can I suggest, if you'd like to comment on this, that there are differences. First of all there isn't gas distribution everywhere in the province, there's only gas distribution in the areas where it's economic for new customers to have gas and that there is not an LDC available everywhere in the province to supply gas. 363 MR. ENGELBERG: Well, that's true, but the point of Hydro One's making this statement was not to show lack of choice. The point was to say that a new developer, builder of a subdivision or builder of an industrial park or factory can't go to City Hall to get one-stop shopping. If you want gas service for the new subdivision, or for the new industrial park, or for the factory, you go to Enbridge Consumers Gas or whoever happens to be the provider of gas service. 364 MS. SPOEL: But if you were in an area where there is no gas service, you don't go to anybody? 365 MR. ENGELBERG: That's true. 366 MS. SPOEL: Similarly, you just referred to direct industrial customers that were direct customers of the transmission system. So there are a number of large industrial customers in the province who, in fact, aren't served by any LDC, because although served now by Hydro One Networks you wouldn't consider them to be part of your local distribution function; is that -- do I have that right? 367 MR. ENGELBERG: Yes, I believe you do, but if I can just confer with Ms. Powell on that. 368 MS. SPOEL: I'm a bit confused on that. 369 MR. ENGELBERG: Ms. Powell informs me that although there are a number of large factories connected directly to the transmission system and not to any LDC, Hydro One also has large customers who are connected directly to Hydro One and within the boundaries of towns. 370 MS. SPOEL: And if a new -- let's say GM, for example, wanted to open a new plant, let's say in the northeast corner of Scarborough, which I assume although it's fairly rural still is probably part of Toronto Hydro, would Hydro One Networks' position be that they will be unable to serve a new General Motors plant because it's in Toronto Hydro's area, or would you seek to be able to serve them as, in effect, either direct customers off a transmission system or -- as I think is a case of General Motors current plant in Oshawa. How would you anticipate handling that sort of situation, a very large industrial customer situated in an area that is within an existing LDC? 371 MR. ENGELBERG: Well, for example, the GM plant in Oshawa, it's my understanding, within the territory of the LDC there, is connected to Hydro One transmission and is a direct transmission customer. 372 So I would say the answer to your question is it depends what kind of service the new customer requires. If the customer requires transmission service, and it's in the northeast corner of Scarborough, it would be connected to the transmission system. 373 MS. SPOEL: So you would anticipate that Hydro One Networks would keep all those transition system customers regardless of their geographic location within another LDC. 374 MR. ENGELBERG: Yes, and I don't believe that -- again, it would depend on whether anyone else could supply transmission service. I don't believe anyone else could, so the answer to the question would be driven by the need. 375 MS. SPOEL: I have another question, but I can't remember what it is so I'll leave it. 376 MR. SOMMERVILLE: Mr. Engelberg, one question that I have relates to the actual area of your incumbents. As I read the licence, it seems to suggest the incumbency is related to areas in which you have distribution lines to which they extend. When you said that there is no area of the province that is not subject to an incumbency; is that true? 377 MR. ENGELBERG: I believe the words I used for all practical purposes there is no area, that is true. When we use the word as the other parties in this proceeding used the word greenfield, they were taking the position that because you had a parcel of a number of acres there and it doesn't have lines and poles on it that it was greenfield. Our position was in all settled areas of the province, there are an LDCs' assets everywhere, some LDC's assets, and if you would go up in a helicopter from this 50-acre parcel, you would see that either one LDC or another, including Hydro One, has facilities very close to it. 378 In cases where it doesn't, and in cases where an applicant LDC's assets are much closer, they lie along pursuant to section 28, and it's cheaper, the evidence that we've heard is that the two LDCs would make an agreement that whatever is best for the customer, what is cheapest for the system as a whole, would be done. And that's why we gave examples that almost half a dozen of these have already been done by Hydro One where Hydro One assets may have been nearby but not as close as the applicant. 379 MR. SOMMERVILLE: Some of these arrangements were subject to power transfer arrangements in the past and I guess -- well, thank you for your answer on that. 380 The other question that I have, and it's going to sound more pointed than I really mean it to, I think, but I don't know how to phrase it exactly. You indicated in your assessment of the evidence of Chatham-Kent that they had identified a number of bricks and mortar assets that could be disposed of were they to, and presumably were you -- if the thing was to go the other direction, were you to acquire exclusive rights over that entire municipal territory, that half of those bricks-and-mortar assets could be disposed of. 381 What does that tell us about the system and the efficiency of the distribution system within that municipality? Doesn't it mean that it's been grossly inefficiently supplied? 382 MR. ENGELBERG: Well, first of all, I didn't get the understanding from the witness from Chatham-Kent that all 15 of the other one could be done away with. 383 MR. SOMMERVILLE: Let me change the word "grossly" to simply "inefficiently supplied." 384 MR. ENGELBERG: But there is no question that the system as it was built in this province left us with a legacy of some things that were not done in as efficient a way as possible. 385 One of the examples that we heard throughout the hearing about that was embedded distributors throughout the province, and we heard that there are ways that you can try to deal with the inefficiency of those situations but that more of those shouldn't be encouraged. 386 With respect to the situation in municipalities like Chatham-Kent, I would suggest that there will come a time when assets reach the end of their useful life when those inefficiencies will start to disappear. But to try to make them disappear by having a utility with cheaper rates right now that were set on a transitional basis and acquire all those customers will result in a stranding that will be of greater cost to the system right now and for the foreseeable future than doing away with the redundancy quickly. 387 Unfortunately, that's the legacy that we're left with. 388 MS. ALDRED: If I could just add to that, in Chatham-Kent's case, I believe that it's an amalgamation. Their utility is an amalgamation of several small towns, and in the intervening area, Ontario Hydro and Hydro One have the obligation and duty to serve. 389 So that duplication that they're talking about, well, there is distribution stations that Hydro One put in with the legitimate expectation that they would need them. 390 MR. SOMMERVILLE: I take your point, Ms. Aldred. I'm not suggesting that this was somehow a mental lapse on the part of anyone at any time but that there's a situation that exists that reveals a significant overservicing, if you like, of that territory. 391 And as we consider what we're doing, we need to think about how do we -- in looking at the service area amendments within the confines and limitations of this case, what we can do to prevent that, as you pointed out, Mr. Engelberg, you know, when these superfluous assets finally wither and die, that we don't have a situation where somebody's been building them up in the meantime or building new ones that are equally duplicative. 392 That's the issue that -- or one of the issues that I think is at least to some extent invoked by this proceeding. 393 MS. ALDRED: If I could just make the suggestion to you that the way to ensure that that does not happen is to make sure that service boundaries are certain so that people can plan rationally, and you don't end up with these situations. 394 MR. SOMMERVILLE: Thank you, Ms. Aldred. I think that's -- 395 And the other question that I had, Mr. Engelberg, was the observation that you made with respect to planning activities and the idea that planning activities are not undertaken on a municipal basis, I think -- I wouldn't suggest that all planning activities take place on a municipal basis, but I think many municipalities would be surprised at that suggestion. 396 It seems to me that the official plan mechanism that we have in the province and that the primary instrument for many planning activities, including the provision of many different services to presently unserviced land and that kind of timing horizon, many of those aspects are really undertaken by municipalities today. 397 And it is at least a -- I think it's an issue that we have to consider as we look at this as to whether that planning activity ought not to have some influence on the electricity planning or that -- or vice versa, that the electricity planning ought not to have some measure of connection to the municipal planning activity that really is -- it's kind of the agent of planning here in Ontario, isn't it? 398 MR. ENGELBERG: I would agree with what you've said, Mr. Chair, and I think what Hydro One is saying, that to the extent that electricity planning is within the responsibility and hands of the municipality, the municipality must then go to an LDC in order to realize those plans. 399 Ever since the new act came out a few years ago, the municipality doesn't do it anymore. The hydroelectric commission in law had no independent legal existence. It was part of the city. 400 Now, the municipality, to the extent that it does that, will have to go to an LDC, and all that Hydro One is saying, it will either have to go to the LDC whose shares it owns, or it will go to another LDC like Hydro One, who is licensed for the area. It can't do it itself anymore; it's prohibited by law. 401 MR. SOMMERVILLE: You would agree with me that its planning focus relates to the municipal boundaries and the areas that are within its jurisdiction so that when it -- whoever it goes to, in order to give effect to the planning vision that it has, it's related to those municipal boundaries to some extent; is that a fair characterization? 402 MR. ENGELBERG: I think that's fair, but I would say that we've heard no evidence in this proceeding that another licensed LDC for the territory would not do just as good a job. When we had the critical connection hearings in May, it was clear that the licensed LDC for the territory, whether it be Hydro One or somebody else, was always there, was always ready, willing, and able to serve, had a plan, and was ready to build a line as quickly as possible. 403 So the idea that you would get good service from the LDC whose shares you own, and you wouldn't get good service from the LDC whose shares are owned by the provincial government just doesn't hold water, and there hasn't been any evidence to that effect. 404 MR. SOMMERVILLE: That's a fair answer. 405 I think Ms. Spoel -- 406 MS. SPOEL: I remembered my question, and it relates back to the gas example. 407 My understanding, and this comes up from the notion of having transmission system customers for electricity. It's my understanding that that situation doesn't exist in the gas area either, that it -- that companies like General Motors, that General Motors or whoever of the world are not free to contract directly with TransCanada PipeLines to obtain their gas service, that if you -- that it must go through either Union Gas or Enbridge Consumers Gas, whatever they're called now, as part of their distribution, in effect, their transmission and distribution system, because they -- I think they have some elements of both. 408 But there isn't a concept of, sort of, opting out entirely from the local distribution system, and that's another distinction between the electricity system and the gas system in this province. 409 I'm not sure of the relevance of this, but I'm curious. 410 MR. ENGELBERG: If I may, I'll ask Mr. Gabel of Hydro One Networks to provide that answer. 411 MR. GABEL: I used to work at Union Gas. The answer would be that's correct. It's more for physical reasons than anything else. 412 The transmission system, say, of Union Gas operates at about -- between 800 and 900 pounds of pressure, and customers just aren't able to utilize that kind of pressure, so it's going to be taken at a different point in the system. 413 MS. SPOEL: There are two classes of customers in the sense that some are transmission customers and some are LDC customers, as we now have with Hydro One. 414 MR. GABEL: Well, if I'm going to be correct, I'd say that there are transmission customers of, say, Union Gas's Dawn-Trafalgar system. They tend to be utilities, such as Enbridge Consumers Gas is a customer of the Dawn-Trafalgar system, as is Gaz Metropolitain, as is TransCanada PipeLines, but they are ultimately receiving their delivery service from -- or whoever these customers are are taking their deliveries in some other way. 415 MS. SPOEL: They're not end-use customers? 416 MR. GABEL: That's correct. 417 MS. SPOEL: They're not industrial customers or -- 418 MR. GABEL: Not in terms of taking their deliveries directly off that system, no. 419 MS. SPOEL: Thank you. 420 MR. SOMMERVILLE: Thank you very much, Ms. Aldred, Mr. Engelberg. 421 It is now 12:15. Do we have anyone who wants to make a submission who may either find a useful break at a 15-minute point or may be able to conclude? Mr. Stoll. 422 MR. STOLL: Yes, my submissions should only take about five minutes. 423 MR. SOMMERVILLE: Thank you, Mr. Stoll. 424 MR. STOLL: Thank you very much and Westario thanks the Board for the opportunity to speak to the very important issues that present itself in this proceeding. And I do intend to be brief. 425 SUBMISSIONS BY MR. STOLL: 426 MR. STOLL: For those who may not be familiar with my client, Westario is a local distribution company that provides distribution services in several small what we would refer to as islanded communities within Hydro One area. There is approximately 15 such villages and towns such as Kincardine, Walkerton, Wingham, Port Elgin, just to provide some context. 427 In that respect, we are somewhat similar to Chatham-Kent, although we do extend beyond the county boundaries in some areas. 428 In enacting Bill 35 this province made the certain choice to pursue the benefits of competition in the electricity industry. Section 1 of the now Ontario Energy Board Act 1998 provides the guiding principles for this Board to make decisions. And in the Board's Procedural Order, the Board listed five issues upon which it was seeking comments from industry participants. Included in each issue were a number of questions and Westario would like to make some brief comments with respect to some, but not all, of those issues. 429 The first issue is overlapping service area. Westario believes that the Board has the authority to issue distribution licences with overlapping service areas. Furthermore, we would submit that the use of overlapping service areas in some instances meets several of the objectives of section 1 of the OEB Act. 430 The use of overlapping service areas will allow for competition among distributors and benefits for consumers in certain areas. Westario does not feel that the arguments of resource duplication and suboptimal investment are sufficient in all cases to prevent the Board from endorsing the use of overlapping service areas. 431 When describing the licensed service area, Westario would submit that there are several reasons to provide for an area that goes beyond a single customer or developer. First, by providing a larger area, the distributor is able to plan for the possibility of servicing other customers in that vicinity. 432 Second, it is administratively more efficient both in terms of the Board's resources and the resources of the distributor in making the application. 433 While there is some merit in the submissions of the Southwest applicants and Chatham-Kent regarding the use of municipal boundaries, Westario cannot fully support the blind adoption of such a description for the licensed service areas. We have inherited an electrical system and municipal boundaries that were not established in concert with each other and therefore are not the only logical boundary, but rather, there needs to be recognition that the physical infrastructure that is developed over time may provide the more efficient and practical solution. 434 Now, I'd just like to turn to the issue of customer preference. We are unable to place the same weight on the issue of customer preference at the front end of the decision-making process, and that's partly as a function of the fact that we're talking about a service area that goes beyond a single customer but would include an area around the current licence service area. 435 My client feels that more emphasis should be placed upon the economics, service quality indicators and system reliability, rather than client or customer preference at the early stages of establishing the service area. If a local distributor is trying to establish a long-term plan which is a reasonable course of action, the individual customer may not exist in an identifiable form. However, once the area is established, the issue of allowing the customer to choose the distributor should increase in importance. 436 With respect to the use of current rates, Westario feels that it isn't entirely appropriate to make decisions upon the current rate structures unless the service area amendment would necessarily cause an adjustment in the current -- with an adjoining rate application. The current rates are the best available information for making decisions and the use of the best available information is in keeping with the Board's mandate to make decisions within the public interest. 437 With respect to the impact on customers in the amendment area, Westario believes that customers in the overlapping area should be allowed to choose their distributor; however, cost for the customer switching should include the costs of reimbursing the incumbent distributor in order to prevent that incumbent distributor from being negatively impacted. 438 Westario does not feel that it is appropriate at this time to determine the basis of how that compensation should be calculated and that further discussion needs to happen on this matter. 439 We feel that there are mechanisms in an amendment to the offer to connect calculation could account for some of these costs. 440 MR. SOMMERVILLE: Sorry, Mr. Stoll, what was that last sentence? 441 MR. STOLL: Westario feels that there is a mechanism in an amendment to the offer to connect calculations that can accommodate such costs. 442 Westario does not feel that existing customers should be negatively impacted by a service area amendment. The issue of stranding assets can be taken into account during the determination of any offer to connect. 443 Finally, I'd just like to take a couple of minutes to talk about the filing requirements. 444 Some of the filing requirements that the Board should consider are the permanency of the service area that would be created by the service area amendment, whether we are going to continually revisit this issue on an incremental basis or whether this is a one-off application and will not likely come back to the Board again. 445 Evidence that the incumbent distributor has been treated appropriately, service quality indicators and any anticipated change in service quality levels that would flow from the service area amendment, and this would include any impact, beneficial or detrimental on system reliability. 446 Rates are also another important consideration for the Board. Finally, the other considerations that should influence the decision this Board in determining the principles for making decisions regarding service area amendments would include regulatory workload. One thing the Board should be aware of is the regulatory burden that will be placed on distributors, the Board, Board Staff and even the customer if we continually have to revisit these issues over and over again. 447 Furthermore, we should not create a system that is burdensome and drags on for indefinite periods of time. Clarity in the principles will help this. 448 Finally, the Board should consider the regulatory principles it has developed over time and as much as possible, be consistent with these principles, such as a user-pay principle, so that we do not have an incumbent distributor that is harmed, be it the user -- be it the customer who would pay for any detriment that would proceed on the incumbent. 449 Just to wrap up, no party has said that under no conditions should the Board fail to approve the service area amendment. There are specific instances when this is in the best interests of all. It may be for the Board that it is impossible to articulate the exact criteria or formula that should be used in all applications regarding service area amendments the weighting of factors may change depending upon the specific facts of the application. And although we would appreciate that certainty would provide benefits, the Board may only be able to provide indicators of whether a change is more likely to occur or less likely to occur, the public interest which guides the Board is not concrete, set and immoveable, but is fluid, changes shape with the circumstances, but retains the same character. 450 Those are my submissions subject to any questions. 451 MR. SOMMERVILLE: Thank you, Mr. Stoll. We don't have any questions. 452 MR. STOLL: Thank you. 453 MR. SOMMERVILLE: I neglected to indicate, as I had with the other applicant presenters, that you have a right of reply and it is limited to five minutes according to Procedural Order No. 7. We appreciate it if you would communicate before the end of today's proceeding your interest in availing yourself of that opportunity. 454 We'll stand adjourned until 2:00. I think, barring reply submissions, we have three remaining -- as I look into the crowd, I see three presenters for this afternoon. Mr. Rodger, Mr. O'Leary, and a representative -- and forgive me. 455 MR. CURTIS: Mr. Curtis. 456 MR. SOMMERVILLE: Mr. Curtis. I think those are the three that remain. So it makes it conceivable that we will conclude this portion today and not have to sit on Monday, which makes the indications with respect to reply submissions all the more -- I think it's safe to say at this stage that we will hear them today, if at all possible, and avoid any coming back. Someone may come in this afternoon which may change that picture, but that's the way it stands. 457 So we'll stand adjourned until 2:00. 458 --- Luncheon recess taken at 12:25 p.m. 459 --- On resuming at 2:03 p.m. 460 MR. SOMMERVILLE: Thank you. Please be seated. 461 The order that I have would have, Mr. O'Leary, you beginning at this stage and then the LDC Coalition, and that's subject to change, consent, submissions. 462 MR. RODGER: That's fine with me, Mr. Chairman. 463 MR. O'LEARY: Actually, it doesn't matter, but I actually had thought that Mr. Rodger was next on the list, but maybe I was looking at an older list, which is fine. 464 MR. SOMMERVILLE: Mr. Curtis, do you have any travel issues that may be of concern? 465 MR. CURTIS: Just a longer drive, that's all. I'm okay either way. 466 MR. SOMMERVILLE: As long as that's -- and Ms. Lott, I note that you are present and going to make submissions this afternoon. 467 MS. LOTT: That's correct. 468 MR. SOMMERVILLE: In which case, Mr. Rodger, do you want to start? 469 MR. ENGELBERG: Mr. Chair, I have one procedural matter. 470 MR. SOMMERVILLE: Sure. 471 PROCEDURAL MATTERS: 472 MR. ENGELBERG: I noted that no exhibit number was given to the submissions of Hydro One, and no exhibit number was given to the KEMA-Quantec report the way it was to the other reports that have been filed, and I wondered if this would be a good time to do it. 473 MR. SOMMERVILLE: The KEMA-Quantec report, which was included as part of the evidence in the initial filing -- 474 Mr. Brown? 475 MR. BROWN: Mr. Chair, I was discussing with Robert, and we weren't sure if the reports of that nature actually had exhibit numbers or not, like, the Yatchew report. 476 MR. SOMMERVILLE: To the extent they were filed as evidence, they wouldn't get an exhibit number. 477 MR. BROWN: Right. 478 MR. SOMMERVILLE: They would -- 479 MR. ENGELBERG: All right. I had wondered if it would be helpful in referring back to them. For example, Mr. Todd's was given an exhibit number. I think others were -- another one was given an exhibit number, so I wondered if it would make Hydro One's harder to find or to refer to if it weren't given one. 480 MR. SOMMERVILLE: I don't think anything turns on it, Mr. Engelberg. I'm certainly happy to give it one if you want to give it one for today. That is we'll -- so long as there's no misunderstanding that we're receiving the report for the first time today and which, of course, we are not. 481 So we can refer to the KEMA-Quantec report as -- and I won't look for the reference right now, but the date of the report might be helpful for the reporter, Mr. Engelberg, if you could provide that. We'll call that Exhibit E.5.4. 482 EXHIBIT NO. E.5.3: NO EXHIBIT ASSIGNED TO THIS EXHIBIT NUMBER 483 EXHIBIT NO. E.5.4: KEMA-QUANTEC REPORT 484 MR. SOMMERVILLE: You mentioned the submissions -- 485 MR. ENGELBERG: Yes, that we passed up before lunch. Would that be E.5.5? 486 MR. SOMMERVILLE: The power corporation? 487 MR. ENGELBERG: No, the Power Corporation Act is Exhibit E.5.2. 488 MR. SOMMERVILLE: We have not received any other submissions from Hydro One. 489 MR. ENGELBERG: The ones that were passed up, the summary of the 45-minute submission? 490 MR. SOMMERVILLE: We have not seen that. 491 MR. ENGELBERG: The Board Staff had -- 492 MR. SOMMERVILLE: The only thing I have are the excerpts from the Power Corporation. 493 MR. ENGELBERG: Sorry. We gave them to Mr. Gordon, but I guess they didn't make their way up to you. 494 MR. SOMMERVILLE: That's the root of our confusion, Mr. Engelberg. We haven't received it. 495 MR. ENGELBERG: Thank you. 496 MR. SOMMERVILLE: So this will be 5.5, being the submission of Hydro One Networks. 497 Thank you for that, Mr. Engelberg. 498 MR. ENGELBERG: Thank you. 499 EXHIBIT NO. E.5.5: SUBMISSION OF HYDRO ONE NETWORKS 500 MR. SOMMERVILLE: I think we will try to conclude this portion of the proceeding. We'll sit as long as we need to in order to accommodate the submissions today. I think that's the most effective way to handle this. 501 If anyone has a different point of view or one emerges in the course of the afternoon, please feel free to make submissions on it. 502 Mr. Rodger? 503 SUBMISSIONS BY MR. RODGER: 504 MR. RODGER: Thank you, Mr. Chairman. 505 The southern distribution utilities, which comprise the LDC Coalition, are pleased to have had the opportunity to work together as part of a cooperative intervention in this proceeding, and they appreciate the opportunity to make a final submission to the Board at this time. 506 I will begin my submissions by addressing the Wirebury concept and will follow with my clients' submissions on overlapping service areas. Finally, I will conclude with the LDC Coalition's recommendations for guiding principles for service area amendments involving contiguous utilities. 507 First, the Wirebury concept. It is our client's submission that the Wirebury concept is wholly inappropriate for Ontario and should be clearly rejected by this Board. The Wirebury concept is economically inefficient. Dr. Yatchew's expert opinion is that the Wirebury concept will create unnecessary and inefficient discontiguities in the Ontario distribution system. 508 Contiguity is a fundamental feature of efficient distribution system design worldwide. The empirical objective evidence surrounding this matter, which has been presented over the course of this proceeding, should be accepted by the Board. 509 During this proceeding, you also heard evidence from Dr. Yatchew and Dr. Chamberlin that the Wirebury concept could dilute scale economies and economies of density, have adverse effects on capital planning and on borrowing and financing costs. 510 It must be clearly recognized that if the Wirebury concept were to be approved through the adoption of guiding principles by the Board, all existing and future licensed distribution entities will be able to play the same game. We submit that the structural impacts of multiple utilities attempting to capture customers in various locations could play havoc with service territory boundaries, utility revenues, and even impact credit ratings. This result is not in the public interest, in our submission. 511 This has been Dr. Yatchew's evidence, which is rooted in sound and tested empirical work, not just his, but that of others. Indeed, there is unanimity that electricity distribution is a natural monopoly. Even leading deregulators, such as Professor Steven Littlechild, continue to refer to the network as a monopoly. 512 Moreover, we note that Dr. Yatchew has unequivocally indicated his support for real, direct competition. In particular, with respect to distributed generation, he stated: 513 "I'm very much predisposed towards competitive alternatives. I would repeat that my preference would be for the regulator to encourage the developments of such alternatives." 514 The Wirebury concept increases regulatory burden. You heard testimony from Dr. Yatchew, Dr. Chamberlin, and Dr. Humphrey that the Wirebury concept would increase regulatory burden in at least five different ways: Firstly, there could be many applications for distributor licences and distribution rates; secondly, there may be many more utilities to regulate; thirdly, complex locational tariffs and multiple wheeling rates could emerge; four, capital expenditures may require increased regulatory scrutiny; and five, there are likely to be disputes over predatory behaviour, which the OEB would need to adjudicate. 515 The Wirebury concept creates risks of LDC-sector structural instability. The term to describe this risk, which Dr. Yatchew used quite appropriately, in our submission, was the vulcanization of the distribution system. There could also be adverse financial impacts and suboptimal capital planning and the creation of new uncertainties. 516 With respect to new capital planning uncertainties, Dr. Chamberlin's evidence was to the effect that if it is uncertain where the customers will be, one will not know where to plan for new LDC infrastructure. 517 Dr. Chamberlin went on to explain his opinion that over time, if the distribution function were really competitive, LDCs would additionally compete not just for contestable customers but for more profitable, more desirable contestable customers. He agreed with Ms. Lott that one of the key factors in a local distribution company's ability to compete for new customers is the proximity to those customers in question and that that would be one of the considerations that would influence the way an LDC expands its distribution network in the future. 518 Furthermore, Dr. Chamberlin agreed that if two utilities were doing this in order to compete for the attention of a new group of customers, the utility that fails to win the connection will not have an optimally-designed system based on the customers that it is still serving. 519 LDC valuation problems: Mr. Southam testified that he had performed valuations on many Ontario local distribution companies. As part of that analysis, Mr. Southam considers future revenue streams of the utility. Mr. Southam confirmed a direct link between expectation of future customers, the anticipated discounted cash flow associated with utility and the ultimate valuation he could determine concerning that utility. 520 If guiding principles are adopted in this proceeding which result in unforeseen customer changes not experienced up to this point in time, then this could have very significant impacts on valuations for utilities on a go-forward basis. In our view, the introduction of LDC valuation uncertainties will be a serious impediment for further LDC consolidation as both buyers and sellers will need to address this variable and important new risk in share purchase and merger transactions. This result would be contrary to provincial policy which continues to encourage the rationalization and further consolidation of the Ontario local distribution company sector. 521 Creation of new uncertainties for the service territory boundaries are also uncertain if there is a new market share forecasting problem. Accordingly, the result is to have all the sources of uncertainty that already exist but to add new uncertainties, but again, for no discernible benefit. 522 The comparison made between electricity sector restructuring and telecom restructuring: There has been references made many times in this proceeding to the telecom industry. In one sense there is an analogy between the electricity industry and telecom. Both industries began on the road to deregulation by unbundling or separating the competitive portions from those that were monopolistic. In telecom, you heard that competition began in the long distance market while local service was a natural monopoly. Moreover, the transition to competition in long distance services had its bumps, just as we are having difficulties in deregulating electricity generation in this province. 523 Now, consider what Mr. Todd is urging you to do. He is urging you to deregulate local distribution, which is clearly a natural monopoly, while generation competition remains stalled. This is the equivalent of a regulator attempting to deregulate local telephony more than two decades before there is any technological alternative and even before long distance competition has had an opportunity to develop. 524 The evidence of Mr. Todd: In contrast to the report Mr. Todd filed in September, which contains no empirical basis or precedent, the LDC Coalition's conclusions that electricity distribution continues to be a natural monopoly and that dilution of customer density has significant adverse cost impacts is firmly routed in tested and objective findings based on real distribution utilities operating in various jurisdictions. 525 The memorandum prepared in July by Mr. Todd for Mr. Lokan and the Power Workers' Union and introduced into the record yesterday afternoon, is an extraordinary document, in our view. In our submission, Mr. Todd's July memorandum fundamentally contradicts the main premise of his testimony before this Board, that is, that individual customer choice and individual customer savings should be paramount in determining service area amendments. 526 For example, and consistent with Dr. Yatchew's testimony, Mr. Todd, in the July Power Workers' Union memo stated: 527 "There is no reason to expect that the best deal for any specifics group of customers is the option that best achieves broader public interest objectives. It would not be appropriate to even accept an option that provides benefits to the customers in the service area affected by the proposed service area amendment if that option imposes greater costs on other Ontario electricity consumers." 528 Mr. Todd's Power Workers' Union memorandum would seem to explain why Mr. Todd did not appear in this proceeding in support of the Wirebury concept. As Mr. Todd testified yesterday: "I'm not advocating that anything in particular be accepted for Wirebury's application." 529 In our submission, Mr. Todd's evidence is, at best, and to use his own word, "agnostic" with respect to Wirebury, and at worst his evidence is self contradictory. In the result, no guiding principles can be adduced from Mr. Todd's representations which support the Wirebury concept. 530 Deconstructing the Wirebury concept reveals regulatory opportunism: I would like to turn to the record with respect to the Wirebury business model itself. In our submission, the Wirebury concept is a fiction. It will not create a new distributor. It does not add value. It is a shell corporation which would appear intent on contracting out all functions. One wonders what the core business and core competencies are of the enterprise. If the ability to arrange subcontracts constitutes the necessary requirements for a distribution licence, then it would seem that any competent individual, including an individual homeowner, could become a licensed distributor in Ontario. The Board should not be a party to this fiction by adopting guiding principles which endorse or otherwise support this concept. 531 The very structure proposed by Wirebury suggests that it may be nothing more than a pretext for exploiting opportunities for regulatory arbitrage. This is confirmed by the Wirebury materials before the Board. Wirebury proposes a single low wheeling rate throughout the province. If, for example, homeowners currently served by an existing utility would switch to Wirebury, the host distributor rate would be bypassed with a windfall profit to Wirebury and with potentially disastrous financial consequences to the host and its remaining customers. 532 To summarize the Wirebury concepts succinctly, I would refer the Board to Dr. Yatchew's response to Mr. O'Leary's final cross-examination question: 533 "You asked me a question about is it possible for the Wirebury model to coexist with PBR, and your idea of competition and what I see it as is this: The earlier phrase that I referred to was competition where possible, regulation where necessary. And what I see the Wirebury model as doing is trying to create competition where it is impossible, and introducing regulation where it is unnecessary. It actually turns the original idea on its head." 534 For all these reasons, the Wirebury concept should be rejected. This, however, does not preclude Wirebury from its business model. As Dr. Yatchew indicated, if the Wirebury approach of contracting out every function is more efficient, then it should acquire or lease an existing local distribution company that serves a contiguous area and then apply for a licence to operate it in this form. It will not only be more efficient because of the absence of discontiguities, it will avoid damaging the distribution system at large by avoiding the creation of discontiguities. 535 The next section is overlapping service areas. I would like next to turn to the area of overlapping service areas. It is our recommendation that such service areas should not be created. First, customer density would tend to be diluted for reasons similar to those put forth with respect to the Wirebury concept. 536 Second, there is increased potential for suboptimal capital planning or redundancies with more than one firm competing for customers in the area. 537 Third, there is potential for further inefficiencies and need for increased regulatory scrutiny as a result of gaming between firms. As Dr. Yatchew illustrated in perhaps a quaint example of two electricians competing to finish first in rewiring a house, the consequences of true competition between two or more utilities could easily lead to duplication of capital. 538 Finally, if a modestly-sized overlapping service area, as is being proposed by some in this hearing, is a good idea because competition will be promoted in the area, a larger overlap must be a better idea because it would promote even more competition. The logical end point of this reasoning is that allowing all utilities to operate anywhere in Ontario should lead to the most competition and, by extension, be the best idea. That is why not make the entire province one huge common service area where any utility can develop distribution facilities wherever it chooses? 539 In our view, direct competition in distribution through large or small overlapping service areas is not appropriate, and for all these reasons, overlapping service areas should not be adopted by this Board. 540 Guiding principles for service area amendments. Our clients recommend the following guiding principles: First, scale and density economies should not be compromised. The studies referenced by Dr. Yatchew, we submit, are persuasive on this point. 541 Second, discontiguities should not be created except in exceptional cases. Again, the empirical evidence and arguments provided by Dr. Yatchew, in our view, are persuasive. 542 Third, the change that should serve the public interest, one would need to clearly demonstrate that there are net benefits to the distribution system as a whole. In this connection, individual customer preference can be a relevant consideration in determining service area amendments; however, individual customer interests should not override the broader public interest, which is to ensure that overall distribution system costs are as low as possible, and you've heard this theme from others over the course of the morning. 543 Moreover, current rates may have little relevance when considering service area amendments. Of primary importance is not whether the service area amendment results in a sustained reduction in the actual costs of servicing individual customers in the amendment area, but rather how overall distribution system costs are impacted. 544 The current economic valuation methodology is not suitable for this purpose, as was confirmed by a number of witnesses, including Mr. Southam, Dr. Chamberlin, and Dr. Yatchew. 545 Current distribution rates, because they reflect average cost characteristics of a utility are not necessarily a reasonable indicator of relevant incremental costs between two or more utilities. 546 The redesign of the economic evaluation methodology may also lead to further proceedings before this Board. Mr. Southam has acknowledged that there are likely to be differences of opinion as to when assets are stranded and how to value those assets. This may likely require further adjudication by the Ontario Energy Board. 547 He also acknowledged that there may be disagreement surrounding the amendment of the economic evaluation contained at Schedule B of the Distribution System Code, leading to another Ontario Energy Board proceeding to consider the calculations that must be done to address stranding, and further proceedings before the Board where disputes remain between distributors and customers regarding the actual calculations. In summary, a new economic methodology needs to be devised for inter-utility comparisons. 548 Fourth, regulatory uncertainty should be minimized to the extent possible. In the present context, regulatory uncertainty about service area boundaries could result not only in suboptimal capital expenditures but an increase in borrowing and financing costs of distribution utilities. 549 Fifth, regulatory burden should be an important factor in determining the nature of the service area amendment process. It would seem that a comprehensive economic methodology to deal specifically with service area amendments would substantially reduce regulatory burden. 550 This would be so, not only because it would streamline the applications process, but it would discourage applications that were not meritorious as possible applicants would be able to obtain a reasonable assessment ex ante. 551 Indeed, it is unclear how the Board could satisfy itself that a particular service area amendment is to the overall benefit of the Ontario distribution system as a whole in the absence of such a methodology. At the very least, codification of a new comprehensive economic evaluation formula would provide greater assurance to all stakeholders and should be pursued by this Board. 552 Sixth, for reasons of system planning and financial stability, it would be most desirable if changes in the distribution industry structure would be stable and predictable. Nevertheless, this should not preclude substantial industry restructuring if the Ontario government and the regulator should determine that it is appropriate. 553 Seventh, opportunities for regulatory arbitrage or regulatory opportunism should be minimized. To a significant degree, this can be achieved by ensuring that the economic evaluation methodology for inter-utility comparisons properly captures the net system benefits of a service area amendment. This will reduce the likelihood that applications are motivated by the desire to exploit rate design imperfections. 554 Eighth, consensual service area amendments should be encouraged between contiguous local distribution companies; however, the Ontario Energy Board should have a direct role in ensuring that distribution system-wide benefits are clearly demonstrated. 555 Finally, the importance of the guiding principles. As our clients have indicated on various occasions during the course of this proceeding, they view the guiding principles to be decided by the Board as a critical policy development for the Ontario distribution sector. The guiding principles decided in this hearing should be very important and extremely influential to both the individual applications now before the Board as well as in connection with all future service area amendment applications involving contiguous utilities. 556 Those are our submissions, Mr. Chairman. 557 MR. SOMMERVILLE: Thank you, Mr. Rodger. 558 The Board has no questions, Mr. Rodger. Thank you very much. 559 Mr. O'Leary? 560 SUBMISSIONS BY MR. O'LEARY: 561 MR. O'LEARY: Thank you, Mr. Chair. 562 I'm joined, as I introduced Mr. Rakus earlier in the week, but Mr. Rakus, who is the chief operating officer with Wirebury Connections Inc. is joining me today and is prepared to answer any questions the Board may have, as I am prepared to do so at the conclusion of our submissions. 563 I should start by indicating that Wirebury echoes the -- and supports the capable submissions of counsel for the Southwest applicants, and I by no means will attempt to repeat what Ms. Godby stated, nor will I be reviewing in any great detail what is contained in Wirebury's prefiled submissions in respect of the principles in the filing requirements. We made some recommendations there, and they are available to you, and in the interests of time, I will not repeat it. 564 Mr. Chair, it is probably an understatement to say that there are few occasions, at least that I'm aware of, where a potential participant in the electricity industry has received such attention in a generic proceeding prior to the Board even giving formal notice of its application to participate in the industry. I am sure that it has come as much as a surprise to you as it has to Wirebury that certain parties have felt it necessary to expand the parameters of this proceeding substantially beyond what anyone initially felt. 565 The transparent objective of the largest distributors in Ontario and, noticeably, not all of the distributors in Ontario is for the Board to devise a set of rules which will prohibit the consideration of innovative changes to the electricity distribution market. The fight against innovators like Wirebury is being brought at this proceeding and, in my respectful submission, inappropriately, given the obvious fear that these distributors have about change and innovation. 566 The fight has been brought here prior to the distribution licence application, because if the Board examines the business partners, and you'll recall that part of the application was marked as an exhibit, if you examine the business partners, which make up the Wirebury business model, as noted by Mr. Todd in his cross-examination, the new resources, the expertise, and the specialization brought by each of these business partners to Wirebury easily rivals that of the other significant players in Ontario's distribution industry. 567 Perhaps it is because those who strenuously oppose Wirebury are concerned they will have little success at the distribution licence application stage that they have felt it appropriate to try and kill it procedurally at this point. 568 The inalterable truth is that inevitable change in Ontario's electricity distribution sector, which those parties which are opposed to Wirebury fear, is both underway and inevitable. At first -- and I don't propose to walk the Board through what you've heard in respect of the various sections of the Ontario Energy Board Act, but obviously subsection 70(6) and the exclusivity one section is a relevant, but not as often discussed in this proceeding is a provision in regulation 161-99 to the Energy Board Act. Subsection 4.01 in this regulation exempts distributors, certain distributors from various obligations under the October, most notably are those obligations requiring that distributor or the entity that owns or operates the distribution system on a particular type of property from the obligation of obtaining a licence or approval for rates. 569 More specifically, this includes the distribution system in condominiums, apartment buildings, certain private properties, commercial institutions. So we already have in the province a substantial number of unlicensed embedded distribution entities and pursuant to that regulation, those entities are entitled to charge reasonable rates. 570 These unlicensed distributors do exist and they are akin to the embedded networks that exist in New Zealand and Australia to which Mr. Todd referenced in his cross-examination. Embedded distribution is not something new to the province as you know. There are already 75 fully or partially embedded distributors existing today. In addition to, of course, the unlicensed distributors I just referenced. 571 The point that I'm trying to illustrate is the makeup of the electricity distribution industry is well down the path which Dr. Yatchew and his principals fear. Wirebury's proposal is to take a further baby step forward and one which, it is submitted, is in the public interest. Wirebury is voluntarily seeking a distribution licence to give the public confidence that it will be subject to and comply with all operating requirements that existing LDCs are required to comply and this includes the review and approval of its rates. 572 The inevitable future which Dr. Yatchew and the principal distribution companies in the province also fear is the impact of distributed generation. Interestingly, each of the expert witnesses acknowledges that this is a pending reality, particularly in Ontario. Hydro One's experts were prepared to admit that distributed generation is an issue of some currency and urgency given the anticipated shortfall we face. 573 Dr. Yatchew refused to acknowledge in response to questions from Mr. Birchenough, that there are indeed similarities between the impact of distributed generation and the impact of embedded distribution. Distributed generation will most certainly -- unless only existing distribution companies in the province are granted the liberty to operate as distribution generators, the existence of such distributed generators will result in the very Swiss cheesing and theoretical levels of uncertainty which Dr. Yatchew fears. The fact is that the province is already going down this road. Rather than fear the associated change, Wirebury submits that the Board should move expeditiously in the development of appropriate principles, tests and rates so that a more efficient distribution industry will emerge, one compatible with the onset of significant embedded distribution and distributed generation. 574 Turning first to some of the fears that were raised by the Wirebury concept, and it's important to point out that in Wirebury's respectful submission, there is no evidentiary basis to indirectly deny Wirebury's distribution licence application which Wirebury submits is the real intent behind the LDC opposition and that of Hydro One. 575 It was suggested that the Wirebury business model would create inefficiency and that it would tend to duplicate plant. Wirebury submits that this theory of monopoly economics simply makes no sense. 576 As stated by Mr. Todd in his evidence in chief, the shareholders of Wirebury are not going to incur capital costs to construct duplicate plants which will not generate a reasonable rate of return and would be valueless in the event of a business failure. More importantly, it is clear to everyone in this room that the Board is not going to permit a party to recover the capital costs of redundant or duplicate plant. I don't believe that the Board or intervenors to any application by an applicant seeking to recover such costs would allow such to proceed unopposed. There is simply no real-world threat of this occurring. 577 Second, it is alleged that embedded distribution will create an unspecified further degree of planning uncertainty. As Drs. Chamberlin and Humphrey admitted, there is also a certain degree of planning uncertainty in the distribution industry in any event, that's self-evident. 578 As clarified by Mr. Todd, planning is always uncertain and requires regular review and revision based upon what actually transpires. By contrast, the construction of facilities occurs on a more just-in-time basis which, according to Mr. Todd, may only be a matter of months, and this is understandable given that it would be uneconomic to overbuild the distribution system before demand is imminent. But it is important to draw the distinction between planning, which by its very nature is an ongoing iterative process that requires ongoing and regular review and the decision to constructed facilities which is obviously to take place closer in time to that point when the actual plant is required. 579 Wirebury submits that any potential planning uncertainty is fully and appropriately managed by the mechanisms already in existence including the Distribution System Code and it's requirement to undertake an economic valuation of the incremental cost of connections and the requirement to develop a wheeling rate under the distribution handbook. Perhaps the only valuation tool not yet formally adopted by the Board is a methodology for the calculation of any assets which may be stranded as a result of customer switching. 580 It is Wirebury's view that with the appropriate valuation tools in place, LDCs will know that they would be kept whole and they will still plan appropriately for future load growth and in accordance with the good utility practice with which they are required to comply. 581 This brings me to the next fear raised which is of the stranding of upstream costs. For all the opportunity that the expert witnesses produced by Hydro One and the Toronto Hydro LDC Coalition had to identify what these stranded upstream costs would in fact be in reality as opposed to theoretically, we heard and we see in the record very little. The fear is that there will be some marginal element of investment in vehicles, systems and employees which might not be as fully utilized as if the new customer chose the incumbent distributor. 582 Mr. Todd recommended use of the definition "unused and unusable" to determine those assets which are truly stranded and will remain stranded in future. Only where the asset or part of the asset will be permanently unused or unusable does it meet the definition of stranding. Underutilized does not mean unused. As Mr. Todd stated in evidence, that may be used by the neighbouring development, it may simply be a matter of a short delay in terms of the utilization of that capacity unless there is some permanency to the loss of its use, then there is not a stranding of that asset. 583 The exclusion of costs which are not truly stranded is simply illogical. First, costs related to vehicles, for example, are not comparable to the stranding of assets on the ground. Vehicles are bought and sold, the decisions in respect of when they're bought and sold can be accelerated or delayed, as can decisions in respect of staffing levels. These things, in accordance with good utility practice, change all the time. Plain and simply, an efficient distributor will respond to such changes in the market. They should be doing that now. As Mr. Todd stated, local distribution companies will mitigate the impact of any such changes and in many instances, Wirebury wishes to remind the Board there is no impact because many of these functions have already been outsourced, which means that there would, in fact, be nothing to incur or to allege that there is stranded. 584 Second, in situations of embedded distribution, there simply is no stranding of the physical electricity delivery assets as the load which the incumbent planned to deliver and the infrastructure it built to deliver that load is all being fully used just as if the incumbent distributor was chosen by the customer. 585 Third, and perhaps most importantly, where an embedded distributor is chosen by a customer, the incumbent is relieved of its obligations to maintain the customer's distribution plant, to read that customer's meter, to bill and try to collect monthly from that customer or customers and to provide appropriate customer care. You will recall that Hydro One and Toronto Hydro counsel did not ask Mr. Southam, nor Mr. Todd, any questions about the impact of avoided operations and maintenance and capital costs and the benefits to the incumbent. And that's an important point, that there has not been a great deal of questioning by my friends in front of me in respect of the avoided costs as a result of embedded distribution. 586 Another fear raised by the opponents of innovation was the primary concern expressed by Dr. Yatchew that the province will see an even greater number of discontiguous service areas. He pointed to reasons of economy of scale and density. 587 Wirebury accepts that such issues are relevant in respect of the traditional electricity distribution model; however, these issues must be assessed in the context of what is proposed by Wirebury. 588 As stated by Mr. Todd in evidence, maintenance of plant is, by its very nature, discontiguous. It is important, therefore, to look at matters pragmatically. Even if it were relevant from Wirebury's perspective, recalling that the Wirebury model involves reading meters remotely, which means that there's a whole level of staffing that is not required, therefore, no travel time, even if it were relevant to Wirebury's model, it would be interesting to know whether an LDC is better served where their staff is required to travel 2 miles in central Toronto or 10 miles from a point in Markham to a point in the neighbouring service area. 589 Given traffic and the vicissitudes of the busy city, are there really inefficiencies of discontinuity in that situation, or is the travel time between the more rural areas actually less than what it takes in the city of Toronto? 590 The theoretical conclusion that discontiguity should prohibit a Wirebury-type business model is simply not borne out as a matter of pragmatics. 591 It was also suggested that embedded distribution should be prohibited, because electricity distribution is a natural monopoly, leaving no room for competition. This assertion, of course, was dispelled by the admission by Dr. Chamberlin that the true natural monopoly relates only to the wires which run down the street. All of the other functions of a distribution company are not naturally monopolistic and are appropriate for competition. 592 As noted by Mr. Todd, the peeling back of the layers of what an electricity distribution company does to examine the various functions that are meter reading, maintenance, billing, customer care, is the next and appropriate evolutionary baby step, which follows with the restructuring of the electricity industry in Ontario when the various functions of generation, transmission, distribution, and retail were segregated. 593 By contrast, Mr. Todd's evidence, it is submitted, is far more compelling than that of the experts presented on behalf of the LDC Coalition and Hydro One, if only by reason of its clear logic. Competition will not incent existing distributors to act less efficiently and irrationally. I believe common sense would suggest just that. 594 Wirebury submits that it simply stands to reason that faced with a potential loss of future customers, existing distribution companies will rise to competition. Rather than sit on their hands, it is more likely that what Dr. Yatchew predicted will come true. The Toronto Hydros and the Hydro Ones will all try and compete with Wirebury and provide distribution service at lowest cost and improve customer service. 595 And that, in fact, was Mr. Todd's bottom line, and the bolded portion of the paper that my friends have referred to, the bottom line from Mr. Todd's evidence is that the ultimate best interests of the public is to provide distribution service at lowest cost. 596 Most importantly, the introduction of competition into the distribution sector will, according to the testimony of Mr. Todd, enhance PBR, driving out, through real competition, efficiencies that would not otherwise occur in the PBR regime alone. 597 There appears to be agreement as stated by the EDA that it is the impact on the system as a whole that is important. So where competition allows a distributor to connect a customer at lower incremental cost than the incumbent, the net impact is positive and in the public interest. 598 So too are the behavioural benefits of competition on existing distributors. As stated by Mr. Todd, in the same way that Bell responded to competition by improving customer service and becoming more efficient as a result of the introduction of competition, so too will the province's local distribution companies. 599 And it is noteworthy that it is the largest LDCs, those with the most advantages and the greatest opportunity to compete, that are most protective of a monopolistic structure. This Board and other regulatory bodies in Canada have heard this before and have determined that the benefits of competition are too inviting to reject. 600 Turning to generally the principles that Wirebury is suggesting that the Board consider, the most important evidence of all in this proceeding is that which can assist the Board in its task of setting the rules for future service area amendments. Mr. Todd made a number of recommendations for consideration by the Board, which Wirebury hopes it finds helpful. 601 First, Mr. Todd reminded the Board that many of the tools necessary to administer service area amendments are already in place, and while I will not run through the list, our evidence in -- prefiled evidence does in some detail, it is worth noting that the Distribution System Code already contains several provisions dealing with the responsibility of a distributor to other distributors, one might simply say good faith, and the Board has every reason to anticipate and expect that distributors, whether embedded or not, will conduct themselves in good faith and deal and negotiate in respect of connection agreements in good faith, and that's already required under the Distribution System Code. 602 There's also Appendix G, which codifies a process which would facilitate all such connections between distributors, big and small. Wirebury submits that the Board, however, should make it clear that where a connection request involves an embedded distributor proposing to serve a particular customer, such as a subdivision or a new condominium development, the incumbent utility should be held to the same standard expected of it as if the connection request had come from the customer itself. 603 The concern is that Appendix G sets out certain timelines, which might not be consistent with the construction timetable of the developer in question. Accordingly, we request that it be made clear that the response to any request to connect should be no greater than that to which the incumbent distributor would have been required to respond, had it come from the customer directly and not an embedded distributor like a Wirebury. 604 Mr. Todd also recommended that the Board codify the importance of customer choice. You will recall that both Mr. Chamberlin and Mr. Todd agreed that it is only the customer who can assess what is reasonable and of value. It is submitted that it is not the Board's role to second-guess customer choice, so long as it is clearly expressed, and in Wirebury's submissions, evidence of that would be with the filing of a customer connection agreement, and the customer's prepared the reasonable costs associated with that choice. 605 You will recall that it was the submission of the representatives of Chatham-Kent yesterday that customers greatly value service and need responsiveness and certainty. The fact that customers in Chatham-Kent feel it necessary to look for an entity other than the incumbent presently responsible for serving them is illustrative of the concerns that exist today and gives rise to the question of whether there truly is the degree of responsiveness and certainty; in other words, is there the customer service that Ontario's customers require? 606 Mr. Todd suggested that the Board adopt the lowest incremental cost of connection test, where no contribution to the incremental cost of connection by the customer is required to ensure that the public interests are served. 607 With clear rules set, Wirebury submits that notwithstanding the existence of competition, each host distributor and each embedded distributor will know that they are required to operate and deal with one another in good faith. Each will know, and your rules should make it clear, that frivolous opposition to a connection application which is referred to the Board for resolution will have cost consequences. 608 Wirebury submits that the Board should make it clear that such cost consequences will follow inappropriate conduct by an applicant or incumbent to encourage the resolution of any outstanding disputes. This is what Mr. Todd recommended. 609 As the industry has adopted and adapted to the rigors of the various codes, which the Board has developed over the last few years, and are now required to be followed as a condition of each distributor's licence, so too when any new rules that the Board adopts be followed and respected by the province's industry. The fear of regulatory burden simply will not occur. 610 Mr. Todd has also suggested the Board adopt definitions to clarify which customers are contestable. Now, at least from Wirebury's business perspective, the definitions that Mr. Todd proposed are that of an unserved customer, which means a customer for which there is presently no electricity service, such as unserviced lots in a subdivision or the yet to be built units in a condominium. Underserved customers would be defined as meaning a customer, while receiving electrical service, does not receive electrical service that meets a minimum standard. 611 Mr. Todd proposed that minimum standard being that the customer or prospective customer have the ability to choose a commodity retailer. Stated differently, while that customer or prospective customer such as a tenant in a multi-unit residential building is receiving electrical service, does that customer have a meter? From an administrative standpoint, Wirebury submits that overlap is administratively the best means to administer the service area amendment process. Overlap would place upon each licensed distributor in a service area the obligation to respond to a request to connect within that service territory. This would clearly address the theoretical issue of cream skimming. 612 As stated in its prefiled evidence at paragraph 12(g) Wirebury supports the development of a process which to the greatest extent possible is self-regulatory and administratively expedient. 613 Finally, while Wirebury submits that there is no need to develop a methodology to value stranded assets in respect of its business model, because there will be no stranded assets. As I said on a motion that you entertained many months ago, the Board may want to develop a model to add to the Distribution System Code a methodology to value stranded assets in the event of customer switching. 614 In conclusion, Wirebury requests the following: First, we urge the panel to enjoy its Christmas holidays, and on behalf of Mr. Rakus and everyone we wish to extend our gratitude for the fact that the Board has acceded to our request to deal with this matter so late in the year. 615 Commencing in the new year, Wirebury respectfully requests that the Board give this proceeding as much priority as is possible to eliminate the obstacles which are presently presenting themselves by various distributors who are attempting to inhibit the preference of customers. More importantly, we ask the Board to follow through on the recommendations of Mr. Todd and the statement to the effect that alternative models of distribution should be considered. 616 Finally, I wish to respond very briefly to one final point raised by my friend, counsel for Toronto Hydro and the LDC Coalition, in respect of Mr. Todd's reason for being presented as an expert. 617 Mr. Todd, in our respectful submission, provided the most balanced evidence and we hope his recommendations will be of assistance to you. 618 Mr. Todd was not presented as a witness to either confirm or disconfirm the business model of Wirebury. He was presented as a witness to provide confidence as to the efficiencies that will flow from adding competition to the distribution sector. 619 Having said that, I propose to quote from paragraph 803 of the transcripts, a statement by Mr. Todd: 620 "I have not looked at their business model in detail," obviously referring to Wirebury, "to say that 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 anyone else whether the model will succeed or fail, simply have a mechanism in place that protects the public regardless of the outcome 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." 621 Wirebury therefore respectfully suggests the Board not adopt service area amendment principles or rules that, in effect, prohibit the entrance of new, innovative distribution into the industry. Ontario has the chance to be an industry leader, possibly within an exportable and marketable industry model. 622 With those comments we are welcome to -- we entertain any questions from the Board, sir. 623 MR. SOMMERVILLE: Mr. O'Leary. 624 Mr. Birchenough. 625 QUESTIONS FROM THE BOARD: 626 MR. BIRCHENOUGH: Mr. O'Leary, first, I was planning to enjoy my Christmas holidays. 627 MR. SOMMERVILLE: I can vouch for that. 628 MR. BIRCHENOUGH: My fridge is full and ready to go. 629 MR. O'LEARY: Mine is still half empty, sir, I have some work to do. 630 MR. BIRCHENOUGH: The issue of safety was brought up this morning by the Power Workers' Union and looking at your model I'm assuming that if, in fact, you had a number of properties in the service area of a municipal utility, that the list of contractors that you have here, you have a number of contracted out services, that those contractors could be different contractors from site to site within the same service area; is that -- 631 MR. O'LEARY: Perhaps I should ask Mr. Rakus to respond to that. 632 MR. RAKUS: That could be a possibility, Mr. Birchenough, but our business model is to use a relatively large contractor like you've seen in the licence application of Black and McDonald, it covers most of the province, our intent is to use the same contractor with same design standards so that any utilities or any incumbent utility where we're working would know what our standards are and would have a close working relationship with the incumbent LDC. 633 MR. BIRCHENOUGH: I'm trying to get to the issue of confusion that's brought up that might be led potentially by this model, and confusion that say a property owner, an apartment owner might encounter in making a call for emergency service, not knowing where to turn. Would they go to Wirebury, would they go to one of your contractors, would it be the same response area each time? 634 MR. RAKUS: If I can maybe answer it this way. With our business model and our communication plans with the customers we hope to get as we get acceptance of our business model and licence, our Wirebury customers will know that it's Wirebury that they call so there will be a Wirebury emergency number that will be called and we'll have similar dispatch facilities to dispatch a workforce to respond to those emergency calls anywhere within our service areas. 635 MR. BIRCHENOUGH: So you wouldn't see any time delay being introduced by the fact that there will have to be a call to Wirebury and then possibly other calls to other contractors? 636 MR. RAKUS: Well, we're basically -- the contractors are providing the service, maintenance service on behalf of Wirebury, so it would be a direct dispatch once the call comes in to the contractor to respond in a very timely manner. 637 MR. SOMMERVILLE: I have no questions, thank you very much, Mr. O'Leary, Mr. Rakus, I do appreciate your submissions. 638 MR. O'LEARY: Thank you, sir. 639 MR. SOMMERVILLE: I think we'll take ten minutes at this stage. Once again, by my clock it's almost exactly 3:00. We'll reconvene at 10 after. 640 --- Recess taken at 3:00 p.m. 641 --- On resuming at 3:15 p.m. 642 MR. SOMMERVILLE: Thank you. Please be seated. 643 Mr. Curtis, you will be speaking on behalf of Canadian Niagara and Fortis Ontario? 644 MR. CURTIS: Yes, Mr. Chair. 645 MR. SOMMERVILLE: Thank you. 646 SUBMISSIONS BY MR. CURTIS: 647 MR. CURTIS: Members of the Board, ladies and gentlemen, on behalf of the management of Fortis Ontario, we thank the Board for the opportunity to present our views at this generic hearing. 648 Fortis Ontario's position on service territories is, we believe, straightforward. We believe in customer choice. We believe that customers, whether they be new or existing customers, should have the choice as to who their electricity distributor should be. As such, we support overlapping or shared service territories. 649 Fortis Ontario recognizes this position differs from that of some other distributors and some other intervenors; however, our belief in this viewpoint is a result of our own historical experience, which as private-sector distributors, is significantly different from that of most, if not all, public-sector utilities. A little later I'd like to elaborate on this historical experience for the Board's benefit. 650 Before I do, I would like to discuss briefly Fortis Ontario's view as to the future direction of the electricity distribution sector. A number of papers during this process and in other forums have expressed views as to the optimal rationalization of a distribution sector. Most recently was the input from the EDA on that very topic. 651 Our view is slightly different. While we believe that further rationalization is necessary and are doing what we can to help it, we do not believe that there is one optimal solution. The requirements of the distribution sector are continually evolving. The most economic structure will therefore also continuously evolve. 652 Just by way of example, over the past few years we've seen the responsibilities of distributors change significantly with the introduction of standard supply, the introduction of retailing, and the introduction of its collection agency role with respect to DRC, IMO charges, rural rate assistance, and transmission charges. 653 Over the next five to ten years, we will likely see different roles evolving, possibly including roles related to demand-side management, distributed generation, and load-serving. 654 As a result, in some parts of the province, you may see shoulder-to-shoulder utilities as advocated by the EDA, while in other parts of the province, you may see more of a Swiss cheese structure, similar to what exists in most of the province with one or more utilities serving the broad, likely rural, areas, and other utilities serving confined, likely urban, areas. No doubt there will be other variations. 655 In our view, the only way to ensure that the distribution sector structures itself to respond to these evolving requirements is to let economic forces dictate the outcome. 656 Fortis Ontario recognizes that this rationalization is largely a policy matter outside the requirements of the Board. However, the Board will have considerable impact as a result of its policy advising ability and as a result of its regulatory decisions and requirements, including this hearing. We encourage the Board to keep these principles in mind in its decision-making. 657 I would like to return now to our historical experiences. 658 Fortis Ontario currently services four communities, Fort Erie, Port Colburn, Cornwall, and Gananoque. Much of Fort Erie has always been served by Canadian Niagara Power. The historical town of Bridgeburg was first served by CNP in 1907 as CNP searched for customers for its Rankin generating station at Niagara Falls. Bridgeburg became Fort Erie, and CNP continues to invest in and serve the growing number of new customers in much, but not all, of Fort Erie. 659 In addition, CNP also added to other customers along its lines between Bridgeburg and Chippewa, which is now part of Niagara Falls. Customers in this area could historically choose their electricity provider between CNP and other local utilities, including the Chippewa utility. CNP's service territory therefore represented what was the most economically efficient and did not reflect any political boundaries. 660 Now however, in 1980, the government decided to change all this, and as a result of the Niagara Municipal Hydroelectric Service Act, CNP's service territory was rationalized to the political boundaries of Port Erie as the whole area of Niagara region was rationalized, and in that respect became similar to that of municipal utilities, which is reflected in our current licence. 661 Before the Electricity Act, Port Colburn was served by a hydroelectric commission, just like that of the over 300 other plus municipal utilities in Ontario at that time. The service area of that utility grew as the legislative service area or the legislative municipal boundaries of Port Colburn grew. The service area reflected political boundaries, not engineering or economically-efficient boundaries, and Port Colburn was never exposed to competition. I would suggest that Port Colburn's historical experience is similar to most municipal utilities in this respect. 662 Cornwall Electric, our third area, services customers in the city of Cornwall, the townships of South Glengarry and South Stormont, and the Ontario portion of the Mohawk territory of Akwesasne. All these service territories are non-exclusive, and Hydro One also has customers in all these territories except the Mohawk territory. They're a -- they're a bright bunch. 663 All new customers in any of these territories have the option of obtaining quotes from both Cornwall Electric and Hydro One for connection, and this frequently occurs. 664 Over the years, there has also been switching of customers between Cornwall Electric and Hydro One. One example of this switching occurred earlier this year. 665 There was a small industrial customer north of Cornwall. This was fed by a Hydro One 44 kV line. It's our understanding that Hydro One was rationalizing their activity, their circuitry in this area, and as part of this, provided that customer with a quote to provide service from their 8 kV line while they abandoned the 44 line. The customer also obtained a quote from Cornwall Electric, and upon review, accepted our quote. 666 A second example of switching is expected to occur earlier next year. A manufacturer, which has been a Cornwall Electric customer since 1992, has indicated they wish to switch to Hydro One. Prior to their being a customer of Cornwall Electric ten years ago, they were a Hydro One customer, so the connection facilities exist, making the switching a bit easier. 667 The customer -- as the reason for the change, the customer has indicated they intend to sign on with a retailer to get competitive commodity, and so to do this, they need to switch to the Hydro One network. 668 Cornwall Electric is not objecting to the switch. We have to be true to our principles, but we will be charging the customer for the recovery of our stranded costs. This charge will be calculated to reflect the depreciated capital costs of the assets being stranded and do not reflect the loss of economic value, which will be considerably higher. The ability to choose, therefore, exists and benefits both new and existing customers in this part of Ontario. 669 The particular customer cited above switched for reasons of either connection charges or rates; however, there have been numerous other switches over the years, many of which have switched for quality of service reasons, particularly those in the city of Cornwall. 670 My last example, Eastern Ontario Power, formerly Granite Power, serves customers in the town of Gananoque and in the surrounding communities. Customers in the surrounding communities are typically fed off the lines which run from Granite Power's generating stations to Gananoque, and radial lines have developed off these and have been developed, as new customers have sought connections. 671 These customers have had the choice of being served by either Hydro One or Eastern Ontario Power. As a result, there are a number of streets where there are both Eastern Ontario Power and Hydro One customers. And we know this because we both took a look at it recently and both kind of threw up our hands and, like, wow. New customers have had the choice of choosing their distribution service provider. 672 Now, Eastern Ontario Power service territory has also changed over time based on economic conditions. At one time Granite Power served customers in downtown Kingston on Montreal Street as a result of a line which was later abandoned, and these customers are now served by Kingston Hydro. Left to the market, rationalization can occur where it makes economic sense. Economics was allowed to dictate the service territory, and this service territory has changed over time. 673 Fortis Ontario believes that choice such as the examples just provided should be available to all customers in Ontario. 674 Now, having said this, we recognize that the reality is this will not be available to most customers. A customer over on Avenue and Eglinton in a new residence will not be able to economically hook up with anybody but Toronto Hydro. We recognize that. Electricity distributors are still natural monopolies for most customers. 675 Nevertheless, we believe that allowing this choice will provide benefits to the customers that receive the choice, and ultimately this will be of benefit to all customers. 676 As we have seen in the above examples, individual customers also have different reasons for selecting a distribution provider. Rates, connections charges, reliability and the quality of customer service will all have different levels of importance for different customers. Choice will allow customers to select providers based on their own priorities. 677 Choice is also important as the Ontario market is characterized by different utilities with different approaches to customer service. My own broad characterization of this is that the industry has developed with Ontario Hydro, now Hydro One, serving the large thinly populated rural areas and municipal utilities serving the more densely populated urban areas. Hydro One has structured itself to economically serve this large, rural area while the municipal utilities are structured to serve their individual urban territories. 678 Now, development typically does not take heed of political boundaries. A new development may be economically part of the municipality but politically outside the municipality. Choice would allow these new customers to choose a distributor which is focused on serving the economic rather than political municipal entity should they so prefer. 679 Fortis Ontario also submits that making this choice of available to new and existing customers in instances such as this does not constitute cherry picking, but rather, allows the choice of a distributor to reflect the underlying economic reality. We believe choice will ultimately provide benefits to all distribution customers while providing a degree, though limited, of market discipline. If competition for new customers or even existing customers forces a distributor to improve its service offering, all customers will benefit. Both Board oversight and natural economics ensure that a distributor cannot segregate its customer by location so improved service offering should benefit all customers. 680 As a hypothetical example, if improvements are made to customer service response times as a result of the loss of some customers on the borders, then all customers should benefit. 681 Choice may also encourage distributors to offer new and innovative services. Some of these such as prepaid electricity, residential interval meters and remote meter-reading are being tried in some areas and are currently in the news. Only time will tell what will and will not be successful, but a competitive environment may help make sure that these future innovations are tested. 682 We believe that innovation should be encouraged, particularly as it's recognized that the regulated environment is considered to be innovation unfriendly due to the fact that generally successful innovations are rewarded to the customers while unsuccessful innovations go to the shareholders. 683 Finally, choice and competition provide a management incentive, and this is the one that I personally believe is the most important, that is not available if there are regulated exclusive service territories. There is nothing like the performance incentive offered by the opportunity to grow at the expense of your competitor to create effective incentive for improved performance. Appealing to base desires is always the most effective performance. 684 Our preference for choice and competition does not mean that there are not important roles for the Board. It does not mean that there are not important rules and regulations for the distribution utilities to follow. A utility can only offer to make a connection to a customer in its licensed service territory. The Board, therefore, has the responsibility of defining service territories. Obviously, our position is that these can be overlapping or shared but that the applications for these must first be approved by the Board though they can be made on broad service territories in anticipation of future customers. 685 The Board will also need to determine the grounds on which these can be granted. Our view is that the ability to provide a service should just be the main criteria. 686 With service territories comes the responsibility to connect, and I think one of my learned friends talked about the hypothetical, Why not let anybody connect everywhere? And the response to that is, when you have a service territory with that comes responsibility and that becomes the obligation to connect. So if you expand your service territory, you expand that obligation. 687 If distribution utilities are given the right to connect existing customers of other utilities, then we agree that these other utilities should have the right to collect stranded costs. The ability to collect these costs calculated in a fair manner should limit the number of such switches to all but the most egregious cases of poor customer service or rate subsidization. Even so, they represent choice and should help provide the benefits described above. 688 A competitive environment may also lead to more disputes between distributors. A timely and impartial arbitration process will be required. These should not require participation by the Board itself but can hopefully be delegated to Board Staff or an independent third party responsible to the Board. As has been noted by other intervenors, speed and efficiency are critical for this dispute resolution process to be effective. 689 Fortis Ontario hopes that the Board finds some thoughts worth considering in our proposals. Distribution utilities we realize are largely but not wholly natural monopolies, but we believe that customers can benefit from the limited amount of competition that can be made available to them. Our own history has provided some examples of the benefits of competition and customer choice and we have provided more theoretical arguments in its favour. We hope we can continue to provide this benefit to our current and future customers. 690 Thank you, and I would be pleased to answer any questions. 691 MR. SOMMERVILLE: Thank you, Mr. Curtis. 692 QUESTIONS FROM THE BOARD: 693 MR. SOMMERVILLE: Mr. Curtis, I have a question. You referred to the history of Canadian Niagara and the fact that at one point, the service area was aligned with the municipal boundary or roughly aligned with the municipal boundary, and you indicated that municipal boundaries are not the most appropriate engineering boundary for a service area. What is the appropriate engineering boundary for a service area? What are the attributes of the optimal service area from an operational point of view? 694 MR. CURTIS: First, just let me correct. Actually, historically, prior to 1980 our service area was a mixture of Fort Erie and Niagara Falls and it was the legislative act that moved us to our just Fort Erie territory. 695 MR. SOMMERVILLE: I thought it was in alignment with the municipal boundary of Fort Erie? 696 MR. CURTIS: Sorry. It was the legislative act that made it such. 697 MR. SOMMERVILLE: That was my understanding, and I thought your point was -- 698 MR. CURTIS: Right, prior to that in our case, part of the problem with the answer to your question is it will depend on the individual circumstances. In our case, our service territory roughly followed the transmission line that we had built from our generating station to Fort Erie and it became economically efficient to connect customers to that. In terms of other areas, typically I would say that if you are dealing with a municipal environment, the sort of economic municipality and the areas around it are likely, from an engineering perspective, subject to other changes, kind of the most efficient. Though in other cases where you are dealing with maybe small towns, it may be a regional. I don't think there is really one answer. I think it really depends on the transmission lines and the efficient use of DSs and TSs, I guess. 699 MR. SOMMERVILLE: Thank you very much. Thank you for that presentation and your assistance in the matter, Mr. Curtis, I appreciate it. 700 Ms. Lott. 701 MS. LOTT: Thank you, Mr. Chairman. 702 SUBMISSIONS BY MS. LOTT: 703 MS. LOTT: I'd like to start just by introducing my colleague next to me. His name is Bill Harper and he is acting as a consultant to VECC and would be happy to assist me in answering any questions the Board might have. 704 MR. SOMMERVILLE: Mr. Harper's reputation precedes him. 705 MS. LOTT: This submission is being made on behalf of the Vulnerable Energy Consumers' Coalition which consists of the Ontario Senior Citizens Coalition, the Toronto Metro Tenants Federation and the Ontario Coalition Against Poverty. These are organizations that represent low income and low volume consumers. 706 We are going to specifically address the five topics that were identified in the issues list for this proceeding, but we will also take a step back and briefly address the larger issue of the Board's objectives and the role of competition. 707 Overall, the main points VECC would like to leave with the Board are that, first of all, regarding the Board's objectives, we think that facilitating competition in distribution is not a specific objective of the Board under the Act and that furthermore, creating competitive markets for distribution services is not an appropriate means for achieving the objectives laid out for the Board in the OEB Act. 708 The reason for this is that distribution is a natural monopoly and the proposed attempts to facilitate competition will only provide choice to a small subset of customers while leaving the balance of customers at risk -- both for the costs of stranding and the additional costs incurred by utilities as a result of competition. 709 Economic efficiency in the distribution of electricity is best achieved through the use of PBR and similar regulatory schemes as opposed to competition. 710 With respect to the issue of customer preference, while customer preference is an important consideration, it cannot be relied upon to yield results that are necessarily in the overall public interest. In addition, customers should not be allowed to exercise choice at the expense of other customers, particularly those who do not have the same opportunities. 711 With respect to the weight to be given to current rates, it is our position that little to no weight should be given to rate comparisons when the Board is assessing proposed service area amendments. Capital contributions can also represent a significant cost, and as a result, rates are an inappropriate way to measure the economics of a particular connection. 712 With respect to impact on customers in the amendment area, it is our view that rate comparisons are not a useful measure of customer price impacts, again, primarily because most customer connections will also require capital contributions. As a result, the appropriate price measure is the total incremental connection cost. 713 Now, concerning reliability and service quality, it is our view that as long as both the incumbent and the applicant meet the Board's prescribed targets, aggregate utility service quality performance measures are not relevant factors in the determination of service area amendments. In the case of the applicant, there may be instances where it is necessary to demonstrate that the required level of service can be provided to the area in question. 714 With respect to impact on distributors and their customers, our view is that most of the benefits claimed by the applicants for service area amendment are gained at the expense of the incumbent and its customers. We reject the claims by some parties that incumbent utilities and their customers will benefit from competition created by a liberal approach to service area amendments, because the potential loss of customers will incent all utilities to become more efficient. 715 We are of the view with a properly designed PBR scheme, through that utilities can be sufficiently incented to operate more efficiently. We also reject the position of certain parties that the distributive cost impacts of service area amendments are not relevant in the Board's determination. Consideration of distributive impacts, i.e., to the extent that there are losers as well as winners, are a key component in the Board's mandate to promote the interests of customers with respect to price. 716 Furthermore, we maintain that the uncertainty created by a liberal approach to service area amendments will increase the costs for all utilities. 717 With respect to overlapping service areas, it is our position that overlapping service areas should not be approved by the Board. There are three reasons for this: First, overlapping service areas will increase costs for all utilities; secondly, it will significantly increase the likely occurrence of underutilized and stranded assets; and thirdly, it places too much reliance on customer preference. 718 With respect to service area boundary changes, our view is that such changes should be allowed when it can be demonstrated that they reduce the overall cost of service to all customers and that other customers on the system are held harmless. It is our view that service area amendments should be considered by the OEB on a case-by-case basis. 719 With respect to compensation for stranded assets, it is our view that provided the OEB maintains exclusive service territories, compensation for stranded costs and underutilized assets can be based on an approach similar to that used by the DSC for new customer connections. 720 For existing customers, this would mean basing compensation on the value of the lost revenue less any cost-savings to the incumbent as a result of the customer being connected to an alternate utility. And for new customers, this would generally lead to compensation only in those instances where a capital contribution was not required; although, we accept that there may be specific exceptions. 721 With respect to process and filing requirements, our view is that utilities should be encouraged and incented to cooperate in their system planning processes so as not to ensure customers are served at the least cost and that underutilized assets are minimized. 722 Where utilities have reached agreement, particularly in response to an expressed customer preference, the filing requirements should be relatively simple, mirroring those of the MAADs process, and an expedited approval process at the staff level should be implemented. 723 Where utilities are unable to agree, more detailed filing requirements similar to those proposed by Hydro One would be required along with a more formal review and approval process by members of the Board. 724 Finally, with respect to embedded distributors, VECC has no particular problem with the concept of an embedded distributor when considered on an individual-case basis. However, we are concerned that a proliferation of new embedded distribution utilities could introduce diseconomies into the overall electricity distribution sector. In any event, embedded distributors should be responsible for any incremental costs incurred by the incumbent that are not addressed through approved wheeling charges. And furthermore, the shareholders of any new embedded distributors should be held accountable for any commitments made with respect to rates and services to be provided. 725 Turning now to expanding on that summary, the first area we'd like to address is the objectives the Board is to consider in determining service area amendments. 726 While the objectives of the OEB are clearly set out in the OEB Act, there are significant differences between the various parties to this proceeding as to whether, (a), creating a competitive market for distribution services is, in itself, one of the purposes of the Act and objectives of the Board, and, (b), if it isn't an actual objective of the Board, should the Board seek to create a competitive market for distribution services as a means to achieving the other objectives set out for it in the Act? 727 With regard to the first objective set out in section 1 of the Act, which is: 728 "... facilitating competition in the generation and sale of electricity and to facilitate a smooth transition to competition." 729 Which applies to the distribution of electricity, it is VECC's position that it, in fact, does not. We submit that the sale of electricity refers to electricity retailing and is distinct from distribution. In fact, the reason why the Board's objectives include: 730 "... to provide generators, retailers, and consumers with non-discriminatory access to distribution, " is because distribution is monopoly service, while retailing is considered to be a competitive service. 731 Now, various parties before you have argued that by introducing and encouraging competition between utilities in the provision of distribution services, the OEB will be contributing to its other objectives with respect to economic efficiency, customer protection, and financial viability. 732 The premise that competition encourages economic efficiency in the form of lower costs presupposes that firms engage in competition in order to profit but also at their own risk, i.e., that it is the shareholders that lose when companies misgauge the market. It is these circumstances that drive firms to seek out the least cost alternatives and to innovate in order to provide what the market truly wants. 733 Now, this also presupposes that virtually all customers have choice. This is a critical aspect, because it means that all customers have an opportunity to benefit thereby limiting the harm that one customer's actions can impose on others. 734 It is our position that neither of these two propositions are met in the case of electricity distribution utilities and the offering of distribution services. 735 It is generally acknowledged that distribution will continue to be regulated. As regulated utilities, it is customers that are typically at risk for both the incumbent's stranded costs when competition is successful and for the cost of any failed excursion into the market by competing distributors when it is not even under PBR. 736 It is also our view that -- and apparently the view of many of the parties to this proceeding that the majority of customers will not have the same opportunity to choose and will continue to be captive to their current distribution utility and its regulated rates. 737 Now, some parties may argue that the additional costs incurred by utilities engaging in competition could be identified and excluded by the regulator. We disagree and point out that this is one of the main reasons why under the act transmission and distribution companies are required to divest themselves of their competitive activities and carry them out in a separate business. 738 Finally, there are the increased costs and risks associated with the distribution business. If competition, particularly in the form of overlapping service areas, is permitted, that will generally increase costs for all customers. This is a result that by definition is inefficient. 739 In our view, the introduction of competition should not be seen by the OEB as the key approach to encouraging economic efficiency; rather, the Board should encourage the economic efficiency through the development of appropriate PBR schemes and similar mechanisms, which are more suited to application in regulated industries. 740 We also reject the claim that competition, even limited competition, will protect customers' interests and should, therefore, be facilitated. 741 First, as noted earlier, not all customers have choice, and there is a real risk that customers benefitting from choice will do so at the expense of other customers. A result that may be economically efficient in a technical sense is not necessarily in the public interest. Finally, given the natural monopoly characteristics of distribution, competition will lead to increases in costs in certain areas, such as system planning and capital acquisition. These are costs that will tend to offset the benefits to those customers who even do have a choice. 742 Now, with respect to the specific topics on the issues list, the first is customer preference and the weight it should receive in the determination of service area amendments. 743 Many parties have argued that relying heavily on customer preference is consistent with the Board's objective of promoting the interests of customers with respect to price, reliability, and quality of service. 744 In the case of service area amendments, the mechanism by which this occurs is the offer to connect and the associated capital contribution requirements determined by an economic evaluation prescribed in the Distribution System Code. Ideally, the customer compares the rates and capital contribution requirements of both utilities, factors in any perceived differences in reliability and service quality and then makes a rational economic decision. 745 However, this approach assumes that the economic evaluation that is performed by all the utilities is using the same methodology and using the same cost factors. It also assumes that the customer making the choice is presented with all of the costs for the alternative service options and will be responsible for paying them. And thirdly, it assumes that no other customers are impacted by the choice. 746 We submit that there are a number of circumstances where these conditions aren't met. For example, there may be upstream costs that will vary from one service provider to another and that aren't captured in the economic valuation, such as transmission connection costs or distribution system network costs or LV costs. Indeed, given that there are 95 utilities in the province, there are likely variations in how the economic evaluation is performed across utilities. This means that the results are not directly comparable and choices based on such comparisons are rightly contested. 747 As noted in the Wirebury evidence where capital contributions are not required, it is rates and not costs that the customer will compare such that the resulting choice will not reflect the lowest cost option. In the case of service area amendments not all customers have choice. Others may be impacted by the decisions of customers who do have choice. The customer may not have all the information from both distributors required to make that informed decision. In certain circumstances the customer making the decision is not the ratepayer and is only responsible for part but not all of the costs such as developers. 748 In other circumstances, the customer may not be indifferent between distributors and the decision influenced by factors other than the objects of the OEB Act. For example, the customer may be the owner of the one of the distributors. As a result, it is our view that while customer preference can be a key factor in considering service area amendments, the process must allow for the consideration of other factors. 749 One implication of this is that it would be inappropriate to approve overlapping service areas and allow customer preference to be the sole determinant as to which utility connected specific customers. Provision must be made for the OEB to be involved in a case by case basis. 750 In our view, customer preferences can be considered without having to resort to broad-based competition. Utilities should be encouraged to work cooperatively to meet the changing needs of customers at the lowest cost. 751 Now, the issues list also raised the questions as to the weight that should be given to current rates in the consideration of service area amendments. 752 Our view is that rates in and of themselves should not be a material consideration and should receive little to no weighting in determining the economics of service area amendments. This view is based not on the transitional nature of current rates, but rather on the fact that rates charged to existing customers, even if based on an approved revenue requirement and cost allocation methodology, are not the appropriate measure to use in determining which utility can most economically serve a specific customer or group of customers. 753 This is particularly so in Ontario where rates are developed on a postage stamp basis using historical costs. In most situations they are not the only price consideration that will impact the customers concerned. Capital contributions will frequently be required. 754 Now, even in situations where no capital contribution is required, rates are not the appropriate measure as noted in the evidence prepared for Wirebury and even acknowledged by the Southwest applicants' witness. 755 Finally, under the topic of customer preference, the issues list also raises the question of whether there should be any difference in the treatment of service area amendment applications for new versus existing customers. 756 While most of the applications focused on new customers, some have acknowledged that existing customers were also a potential target or would be offered service if requested. 757 Clearly, the same OEB objectives apply in both cases. But the potential for duplication and stranding of assets is much more real in the case of an existing customer. This increases the concerns regarding impacts on the incumbent utility and its other customers and it further reduces the ability to rely on customer preference and the economics of the traditional offer to connect process. 758 In such circumstances, we submit that compensation of and agreement by the incumbent utility are also a critical determination. Indeed, in the case of existing customers, the question is not one of stranded assets, but rather the stranded revenues which the incumbent utility had expected to continue to receive and has accordingly incurred costs to service these customers. 759 Turning to the second topic of the impact on customers in the amendment area, service area amendments can have impacts on existing and future customers in the amendment area with respect to price, reliability, and quality of service. There will typically be two types of customers in the amendment area, those who become customers of the applicant utility and those who remain customers of the incumbent. The latter are better dealt with as part of the discussion on the impact on distributors and their customers, which I will deal with shortly. Comments regarding on this topic will focus on the impacts for those customers who are to be served by the applicant utility. 760 It is our view that price impacts must be considered to include both rates and any requirements for capital contribution. As discussed earlier, rates in and of themselves should not be determinative in service area amendments. We submit that the types of rate comparisons presented by the Southwest utilities in their applications and in their overall weighting scheme takes too narrow a perspective and are limited in considering service area amendments. 761 In their applications for service area amendments, some parties have submitted their historical performance with respect to the OEB's service quality measures to demonstrate that their proposal meets the Board's objectives. Others have gone a step further and provided information regarding the reliability with respect to the specific feeders for the service area in question, and their ability to respond to emergency calls in the specific area. In some situations, the applicant has even suggested that their reliability would be greater than that of the incumbent. 762 It is our view that the overall historical performance of a utility, be it the applicant or the incumbent, is not indicative of the service quality that will be provided to the specific amendment area by either party. However, we submit that the inability of distributors to immediate the Board's target reliability criteria should factor in in determining whether a utility is permitted to expand its service area. 763 We consider the evidence provided by appellant utilities as to their ability to serve the specific amendment area in question as being useful but only to the degree that it confirms their ability to meet the Board's criteria. However, there may be specific circumstances when such information is particularly relevant. For example, in non-contiguous embedded utility situations, and when the service area in question is at the fringe of a utility's existing service area. 764 In general, we submit that if both utilities meet the Board's service quality targets, then no further consideration should be required other than what is reflected through customer preference. 765 Regarding the impact on distributors and their customers as another potential factor in the determination of service area amendments. There has been an extensive amount of evidence and even more argument presented on this aspect with most of it having focussed on the rate impacts on customers and the financial impacts on distributors as a result of service area amendments. 766 We will first share with the Board our view on the favourable impacts that have been ascribed to service area amendments and then deal with the unfavourable impacts. 767 Now, applicant utilities proposing these service area amendments have submitted that there will be favourable rate impacts for their current customers arising from factors such as the ability to spread the fixed costs of operation over a larger customer base, the ability to utilize existing upstream excess capacity on their systems, and the ability for more effective utilization of the existing workforce and the equipment assets. 768 However, in our view, all of these arguments are only valid where no capital contributions are required. Otherwise, other customers of the applicant utility are not better off but they are rather just held harmless as a result of a service area amendment and the connection of additional customers. Unless the situation is such that no capital contributions are required by the applicant utility but are required in the case of the incumbent, these favourable impacts will accrue to the applicant and its customers at the expense of the incumbent utility and its customers. 769 We submit that the claims by applicant utilities as to the beneficial rate and financial benefits from service area amendments must be carefully scrutinized and can only be validated within the context of service area amendments related to specific customers as opposed to more generic applications. 770 Furthermore, it is only within the context of a customer-specific application that one can determine whether the rate and financial benefits to the applicant are gained at the expense of the incumbent distributor. 771 If this is the case, rather than being a benefit, we submit that the interests of the incumbent utility should be considered paramount. After all, it is the incumbent utility that had the ongoing obligation under the DSC to service existing customers and plan for future supply in the contested area. 772 In terms of favorable impacts for the incumbent utilities, applicant utilities have argued that the risk of losing revenue from customers, including existing customers, who desire to switch to an alternate utility, will encourage lower prices, a lower cost structure, and better service in order to attract and retain customers, which would benefit all customers of the incumbent utility. It is our view that through regulatory mechanisms such as PBR, utilities are sufficiently incented to reduce their cost base. 773 Furthermore, utilities, in particular, distribution utilities in Ontario do compete indirectly, both in terms of new customers seeking to locate in Ontario and customers moving locations and residences. Furthermore, as we heard from Mr. Southam, they are under constant pressure from their shareholders to improve their financial performance. 774 As a result, utilities, particularly those under PBR schemes, are incented to innovate and expand the range of cost-effective value-added services provided to customers. We submit that the benefits arising from the additional incentive that would be created for utilities by the threat of losing customers in their current service territory are offset by the costs and risks that would arise and which we will address shortly. 775 We submit that suggestions that incumbent utilities can offset the potential rate impact arising from the loss of customers, particularly -- that would include new, but in particular, existing customers -- are somewhat disingenuous. Given the high fixed-cost nature of the distribution business, the existing incentives created by PBR, and the government's three-year freeze on distribution tariffs, it's unrealistic to suggest that utilities could find further savings in variable costs required to offset any significant loss of such customers. 776 Now, various intervenors to this proceeding have identified a number of unfavourable impacts that service area amendments could have on incumbent utilities and their customers. These impacts include: Potentially higher rates for the incumbent utility and its customers as a result of having to recover fixed costs, various fixed costs from fewer customers; higher facility costs as a result of increased uncertainty and load forecasting and the system planning process; higher capital costs due to the increased business risk; higher rates as a result of cherry-picking of the high-value customers on the border of the incumbent's service area by alternative suppliers; additional operational complexities and increased costs for utilities and potential service quality issues for customers; and the need to recover the cost of stranded or underutilized assets from either the incumbent utility's customers or its shareholders, depending on the degree of recovery or compensation that the Board allows for. 777 In our view, all of the impacts identified are relevant factors for the Board's consideration when dealing with service area amendments, and we'd like to expand further on just a couple of these. 778 With respect to the higher rates and the distributive impacts due to fixed-cost recovery, we disagree with the position of Wirebury's consultant that the distributive impacts on rates arising from service area amendments are irrelevant when they cancel out, for example, higher rates for some at the expense of lower rates for others. 779 The public interest extends beyond simply choosing what's the lowest-cost solution. It must also look at the impacts on various stakeholders of obtaining such results. Furthermore, we submit that it is inappropriate to suggest that the applicant has the same right as the incumbent to the target customers when it comes to fixed-cost recovery. 780 Again, as we said before, the incumbent has the responsibility under the DSC to plan its system with a view to meeting the loads of both the current and future customers in its service area and will have prudently incurred costs to do so. The applicant has no such obligation. 781 With respect to increased costs, load forecasting, and system planning, various parties have suggested that utilities can respond to the load forecast and related system planning uncertainty that could be created by a liberal approach to service area amendments by simply shortening their planning horizons and expanding facilities only when the need for additional capacity is imminent. 782 While this response on the part of utilities would limit the non-utilized or underutilized assets occurring in the future, there would be a cost in that the overall design and configuration of the electricity system may be less efficient than if a longer-term perspective had been taken. We note that these implications are particularly important for electricity distribution, given the high capital costs associated with this industry. 783 Also, allowing for service area amendments, particularly generic applications and ones that lead to overlapping service areas, will induce utilities to plan their system expansions so as to be able to serve new growth in the contested areas as well as confirm customers. 784 The incremental costs of any such activities will be borne by the utility's current customer base, as will any risks associated with not eventually gaining the new customers. This is counter to the normal competitive model where it is the shareholder who would ultimately be responsible for such risks. 785 Furthermore, current regulations, which exempt distribution system network extensions from oversight by the OEB, significantly reduce the ability of the Board to effectively protect customers from such an event. 786 Parties have also suggested that increased uncertainty with respect to the growth and the customer base for utilities could increase their borrowing costs, as debt lenders recognize the increased risks to electricity distribution. 787 We're also concerned that this increased forecast risk would likely lead distribution utilities to seek an increase in their allowed return on equity, putting added upward pressure on customer rates. 788 We submit that utilities should be encouraged to work cooperatively during their planning processes to identify and facilitate service area amendments that lead to lower costs overall in the service provided to new and, hence, all customers. This must be done within a framework that provides a reasonable degree of certainty to utilities as to what their future service area will be and thus allows them to construct necessary capacity and locate it geographically in a manner that reduces overall costs. 789 Concerning stranded assets. While most parties agree that compensation for stranded assets should be made, there is a wide variation of opinion here as to what should be considered a stranded asset and how the associated level of compensation should be determined. 790 We submit that the objective in recognizing and compensating for stranded assets is to hold other customers harmless as a result of service area amendments. As a result, should the Board adopt the view that competition between distributors should be allowed and/or overlapping service areas be provided, then we suggest that the need to recognize and compensate for the economic value of stranded assets becomes paramount if the interests of all customers with respect to price are to be protected. 791 If a conservative approach to service area amendments is adopted by the Board, that is one where overlapping service areas are not allowed, and amendments are considered on a case-by-case basis, then we believe that the appropriate measure of held harmless is current rates, and the DSC and the economic evaluation methodology outlined therein could be adapted to determine the value of stranded assets. 792 Applying this methodology to existing customers means compensation for stranded assets would be determined based on lost revenues, since the customers are already connected, less any future cost-savings arising as a result of transferring the customer to the applicant utility. 793 We recognize that one of the implications and, indeed, drawbacks of using the economic evaluation methodology set out in the DSC is that there is no compensation for underutilized assets if the assets have pre-built to serve new load and are already reflected in rates. 794 Hydro One and other parties have noted that good planning practices have required them to plan for future load growth in their service territories and construct upstream facilities with the expectation that they would be serving new customers in the future. They also argue that such facilities will be underutilized if the customers are eventually served by another distributor, and that distributor serves the customers through alternate upstream network facilities leading to higher customer rates for the incumbent utility than would otherwise exist over the long-term. 795 We are of the view that to the extent there are circumstances where this occurs, they can be captured in a case-by-case consideration of service area amendments. 796 In order to ensure that all of the relevant costs are included in the analysis and that existing customers are truly held harmless, the Board should ensure that in those situations, where the cost of the expansion is more than the estimated amount used to establish the capital contribution from the new customers, that some, if not all, of the cost overrun or estimating error is borne by the utility's shareholders and not the ratepayers. Otherwise, there will be a strong incentive for utilities making offers to contestable customers to lowball the estimated system expansion costs knowing that through the regulatory process, the rates for existing customers can eventually be increased to cover the difference. 797 We submit that although not discussed by other parties to this proceeding, there is also the potential for unfavourable impacts to arise for the applicant utility and its existing customers. 798 Many of the utilities making service area amendment applications have argued that they currently have sufficient upstream capacity to service these new loads without having to construct additional facilities. However, when questioned during the interrogatory process, some of these same utilities indicated that no detailed studies had been undertaken as to the increase in load that could arise from the amendment, the cost of serving this targeted area or the implications for upstream LV facilities. 799 It is critical that the economic evaluation prepared by the applicants start with a base case that includes the current expected load growth and the corresponding plans for new distribution network capacity and upstream facilities and then looks at the incremental impact of adding new customers. This will ensure that network facilities and upstream capacity built to meet its current planning needs aren't inappropriately used to reduce the real impact on the utility and subsidize service area expansions. 800 We also view that many of the factors identified as potentially increasing costs for incumbent utilities will equally impact the overall cost and rates for the applicant utilities, such as the increases in the cost of debt and equity as a result of the increased business risk, the higher overall facility cost due to inefficiencies in the system process, and the higher costs due to increased operational complexities. 801 In addition, utilities seeking to increase their customer base as a result of service area amendments will be inclined to expand their networks so as to better position themselves to serve the targeted area. Any inefficiencies arising in overall system design or underutilized costs arising as a result of being unable to connect the targeted customers will also be borne by the LDC's customers. 802 Concerning overlapping service areas, it is our view that overlapping service areas are not necessarily required in order to either offer customers appropriate choices or ensure least-cost service to customers. These ends can be achieved through cooperative system planning processes, timely response to customer preferences and individual applications. 803 The principle advantages of overlapping service areas are that they could potentially reduce the regulatory administrative burden for both the OEB and the utilities and they could reduce servicing delays by not requiring a formal approval of a service area amendment each time a customer chooses or the utilities concur with service from an alternative distributor. 804 However, both of these advantages are predicated on the assumption that either the customer preference is the deciding factor with no recourse to the OEB, or if recourse to the OEB is required, the relative number of times will be minimal. 805 As indicated earlier, there are a number of circumstances where reliance on customer preference isn't appropriate and overlapping service areas will tend to aggregate these circumstances. For example, overlapping service areas will over time increase the degree of proximity of the facilities for the distributors concerned and thus, increase the numbers where capital contributions are not required by either distributor with the result that customer preference based on rates does not yield the correct result and reference to the OEB will be required. 806 If, on the other hand, the expectation is that there will generally be a consensus amongst all parties such that recourse to the OEB, while provided for, will not be required, then what would serve equally well is some sort of expedited OEB approval process that does not require formal hearing processes and involvement by the Board members themselves. We note that recent amendments to the OEB Act provide for just such processes. 807 Against what are really the administrative gains and efficiencies that may arise through the approval of overlapping service areas must be weighed the various disadvantages that have been identified by the parties as discussed earlier. 808 Also, while various parties advocating competition have suggested that the costs incurred by utilities in positioning themselves to compete will be at the risk of the shareholder, there are no mechanisms in place to ensure that this occurs and it is unlikely that all such costs could effectively be separated out. As a result, increased costs arising due to the introduction of competition and those costs associated with any failures to compete will more than likely be borne by the distributor's customers. 809 However, even more fundamental is the fact that the introduction of overlapping service areas is predicated on the view that competition and selection of a service provider based on customer choice can be relied upon to meet the objectives of the Act. Both of these premises are incorrect as we discussed earlier. 810 Also, parties have identified a number of safety and reliability issues associated also with overlapping service areas. 811 Overall, we are of the view that the Board should not grant service areas amendments which result in overlapping service areas. 812 With regard to service area boundary changes, this is not to say that distribution service area amendments should not be allowed where the result leads to more efficient use of resources overall. Indeed, all parties to the proceeding have generally accepted this fact. 813 However, the appropriate processes for allowing such results to occur is by encouraging utilities to work together during their system planning processes and in response to customer requests to mutually recognize and act on such situations as opposed to introducing competition on a formal basis. 814 With respect to filing and processes requirements we just wanted to say a few words, we view the filing requirement proposal put forth by Southwest as overly simplistic, particularly in terms of its reliance on customer preference and rate comparisons. It is also one-sided in its consideration reliability and service quality since the only requirement for the approval is that the applicant meet the Board's standards. 815 For service area amendments where there is an agreement amongst the parties concerned as to the terms of the amendment, then the filing requirements would be used similar to those used in the MAADs process. In such situations, the Board should also be able to implement an expedited approval of process that doesn't require formal consideration by the Board members or a formal proceeding and is administered at the staff level. 816 For proposed service area amendments where there is no agreement, more detailed information would be required regarding the costs, impacts and points of disagreement. 817 The filing requirements suggested by Hydro One cover most of the significant issues although allowance should also be made for customers to express their preference with supporting rationale and for issues regarding service quality and reliability to be raised if considered relevant by any of the parties. 818 Finally, the last point I'd like to make is that the Board has asked for input on what other considerations apart from its objectives should be taken into account in determining the appropriateness of service area amendments. 819 Several parties have suggested that the Board should give deference to service area amendments that align utility and municipal boundaries on the basis that this will facilitate the planning process. 820 No evidence has been presented to this proceeding that would suggest municipalities have difficulty dealing with more than one electricity distributor or that the cost savings associated with such an alignment would be material. In fact, the move to have municipal electricity utility boundaries aligned with the municipal corporation's physical boundaries all appear to be driven by the interests of the municipalities themselves. If this is the case and there is value to be gained by such an alignment, the municipalities should seek to acquire, on a commercial basis, the area in question as opposed to indirectly through a service area amendment. VECC submits that this objective should be given little to no weight in any consideration of such amendment requests. 821 Another suggestion was that service area amendments should not conflict with the province's policy regarding consolidation of the utility sector by creating new fragmented utilities. The province's policy with respect to distribution rationalization calls for geographic rationalization on a commercial and voluntary basis. We submit that it would be inappropriate for the Board to deny a service area amendment simply on the ground that it increased the number of distributors in the province. However, we are concerned that a proliferation of new embedded discontiguous distributors could increase the overall cost of distribution in the province and that provincial policy with respect to utility rationalization may require further clarification. 822 At a minimum in allowing new embedded distribution through service area amendments, the Board should require such applicants to compensate incumbent for all incremental costs associated with serving an embedded distributor and ensure that it is the shareholder of the embedded utility that is generally held responsible for meeting any commitments or undertakings with respect to the cost of service and the services to be provided. 823 Those are our submissions. 824 PROCEDURAL MATTERS: 825 MR. SOMMERVILLE: Thank you, Ms. Lott. A very comprehensive argument. 826 MS. LOTT: Thank you. 827 MR. SOMMERVILLE: Mr. McLeod, you have a right -- 828 MR. BROWN: Mr. Chair, I was just going to point out that Mr. Harper has given me a hard copy. Should we give it an exhibit number? 829 MR. SOMMERVILLE: I think we should. I think that would be 5.6. 830 EXHIBIT NO. E.5.6: MS. LOTT'S SUBMISSIONS 831 MR. SOMMERVILLE: Do you have more than one copy, Mr. Brown. 832 MR. BROWN: Unfortunately not. 833 MR. HARPER: I'm sorry, we acted on your suggestion that we provide copies to the court reporter and Board Staff so unfortunately we just provided the two. 834 MR. SOMMERVILLE: In which case I will ask Mr. Brown to make copies available to the other parties. 835 MR. HARPER: Thank you. 836 MR. SOMMERVILLE: It will be marked for identification as E.5.6, I believe that's correct. If I have missed a number, we will correct it in due course. 837 MR. O'LEARY: Mr. Chair, perhaps while we're on housekeeping matters, I do have copies of most of the submissions that were made orally on behalf of Wirebury and would be pleased to file that with you as well and, perhaps, give it a number as well. 838 MR. SOMMERVILLE: That would be very helpful. That would be 5.7, the submissions of Wirebury. 839 EXHIBIT NO. E.5.7: SUBMISSIONS OF WIREBURY 840 MR. SOMMERVILLE: Mr. McLeod, you have a right of reply, limited to five minutes. 841 MR. McLEOD: Thank you, Mr. Chair. 842 Veridian Connections Inc. will not have a reply and Centre Wellington Hydro will also not have a reply. 843 MR. SOMMERVILLE: Thank you, Mr. McLeod. 844 Mr. Engelberg, you have a right of reply limited to five minutes. 845 REPLY SUBMISSIONS BY MR. ENGELBERG: 846 MR. ENGELBERG: I'd like to take advantage of it, Mr. Chair. Thank you. 847 First of all, Ms. Lott referred several times to her client's adoption of the filing requirements as put forward by Hydro One in its prefiled evidence, so I would just like to say, since I did not say that in my submissions, Hydro One relies on the filing requirements as laid out in its prefiled evidence that was filed on August 7th. 848 I next wanted to refer to a couple of things said by Mr. Curtis on behalf of Fortis Ontario and CNP. I understood Mr. Curtis to say that Hydro One has structured itself to serve rural customers, that that should be taken into account by this Board. 849 I wanted to correct that by stating that Hydro One has structured itself to serve municipalities throughout the province, has done so since it's inception, many more municipalities than Fortis serves. And that in addition to the ones that were always served by Hydro One and still are served by Hydro One, Hydro One acquired 87 more during 2001 and 2002, so Hydro One is structured and experienced in serving municipalities and municipal urban areas across the province. 850 Secondly, Mr. Curtis referred to the matter of switching in the context of Cornwall, Granite Power, Eastern Ontario Power. I would like to state for the record that Hydro One's position in that matter and the principles that it has gone by are consistent with the principles that Hydro One has stated in this proceeding. 851 The situation is obviously very complicated there because of historic and legislative reasons, and that customers are generally not switching, and that I think we're all awaiting a Board decision on that matter. But the Hydro One position is consistent. 852 Finally, one more matter for just clarification for the members of the panel, Hydro One filed earlier with the Board as part of its submission by Ms. Aldred Exhibit E.5.2, which were excerpts from the Power Corporation Act concerning the old method when it was considered desirable for municipal utilities to move out to the municipal boundaries when the ownership was common. 853 Throughout those sections, the word "Corporation" is used with a capital C, and you would not know this if I did not tell you, but "Corporation" with a capital C means Ontario Hydro. That was in the definition section of the old act, and it doesn't make any sense without that. 854 MR. SOMMERVILLE: Thank you for that clarification, Mr. Engelberg. 855 MR. ENGELBERG: Those are all my submissions. 856 MR. SOMMERVILLE: Thank you very much. 857 PROCEDURAL MATTERS: 858 MR. SOMMERVILLE: This concludes this portion of the proceeding. The panel will proceed to render a decision in due course. We will try to produce a decision in the earliest -- at the earliest possible time. I know that the parties are very interested in this -- the principles portion of this proceeding, and we'll try to accommodate that interest as expeditiously as possible. 859 Once again I'd like to thank counsel very sincerely on behalf of the Panel for the very high standard of professionalism and civility. It's been of great assistance to the Board, as have the very able presentations that have characterized this last portion of the proceeding. 860 So thank you very much. Have a nice holiday season and a safe one. Thank you. 861 I'd also like to thank the court reporter for her very spirited and enthusiastic support of the hearing. Thank you. 862 MR. ENGELBERG: She's typing that too. 863 MR. SOMMERVILLE: I'm sure that will be in bold type. 864 --- Whereupon the hearing adjourned at 4:22 p.m.