Rep: OEB Doc: 13BF6 Rev: 0 ONTARIO ENERGY BOARD Volume: 6 21 SEPTEMBER 2004 BEFORE: P. VLAHOS PRESIDING MEMBER J. CARR VICE-CHAIR & MEMBER C. CHAPLIN MEMBER 1 RP-2004-0117 2 IN THE MATTER OF a hearing held on Tuesday, 21 September 2004, in Toronto, Ontario; IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15, Schedule B; AND IN THE MATTER OF an Application by Hydro One Networks Inc., Toronto Hydro Electric System Limited, Enersource Hydro Mississauga Inc., London Hydro Inc., for an order or orders approving or fixing just and reasonable rates. 3 RP-2004-0117 4 21 SEPTEMBER 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 MIKE LYLE Board Counsel HAROLD THIESSEN Board Staff MARY ANNE ALDRED Hydro One Networks MARK RODGER Toronto Hydro-Electric System Ltd. JAMES SIDLOFSKY Enersource Hydro Mississauga Inc. PAUL VOGEL London Hydro Inc. ROBERT WARREN CAC ROGER WHITE ECMI Coalition JAY SHEPHERD School Energy Coalition SUE LOTT VECC CAROL STREET CME TOM BRETT AMPCO RANDY AIKEN LPMA BRIAN DINGWALL Energy Probe 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [20] LONDON HYDRO INC. PANEL 1 - STEPHENSON, WILLIAMSON, SHARMA, ROSEHART: [35] EXAMINATION BY MR. VOGEL: [41] CROSS-EXAMINATION BY MR. WHITE: [219] CROSS-EXAMINATION BY MR. SHEPHERD: [251] CROSS-EXAMINATION BY MR. AIKEN: [558] CROSS-EXAMINATION BY MR. DINGWALL: [682] CROSS-EXAMINATION BY MS. LOTT: [874] CROSS-EXAMINATION BY MR. LYLE: [985] QUESTIONS FROM THE BOARD: [1195] RE-EXAMINATION BY MR. VOGEL: [1359] PROCEDURAL MATTERS: [1371] 10 EXHIBITS 11 EXHIBIT NO. I.6.1: LONDON HYDRO'S LIST OF PANEL MEMBERS INDICATING THEIR POSITION AND RESPONSIBILITIES [50] EXHIBIT NO. I.6.2: LETTER DATED SEPTEMBER 17TH, 2004, FROM SPI GROUP INC. TO LONDON HYDRO [188] EXHIBIT NO. I.6.3: SPREADSHEET ENTITLED "LONDON HYDRO REGULATORY ASSETS ALLOCATIONS" [396] 12 UNDERTAKINGS 13 UNDERTAKING NO J.6.1: TO PREPARE AND FILE AN UPDATED INTEREST CALCULATION ON THE ACCOUNT REFERENCED IN TAB 4.2, PAGE 7, BASED UPON THE ASSUMPTION THAT INCLUSION OF THE $1.7 MILLION OF INITIAL CIS SPENDING WERE NOT ALLOWED BY THE BOARD [622] UNDERTAKING NO. J.6.2: TO PROVIDE DETAILED CALCULATIONS FOR OPTION 4 LISTED IN EXHIBIT I.6.3 [797] UNDERTAKING NO. J.6.3: TO PROVIDE AN UPDATED SPREADSHEET CONTAINING CORRECTED FIGURES AS TO RECOVERIES AND TOTAL ALLOCATION [1181] UNDERTAKING NO. J.6.4: IN REFERENCE TO EXHIBIT I.6.3, PAGE 2, PROVIDE THE ALLOCATION METHODOLOGIES THAT HAVE BEEN USED, FOCUSING ON THE RECOVERY OF THE REMAINING THREE YEARS, THE BILL IMPACT PER MONTH ON A DOLLAR BASIS AND A PERCENTAGE-OF-THE-TOTAL-BILL BASIS, ASSUMING THAT THE ENTIRE AMOUNT IS ALLOCATED TO THE VOLUMETRIC PORTION OF THE CUSTOMER'S BILL [1189] 14 --- Upon commencing at 9:03 a.m. 15 MR. VLAHOS: Please be seated. Good morning, everyone. Any preliminary matters, Mr. Lyle, or anybody else? 16 MR. LYLE: I'm not aware of any, sir. 17 MR. VOGEL: Mr. Chair, as you can see we're missing a panel member who has just arrived. So I think, sir, that preliminary matter is closed. 18 MR. VLAHOS: If there are no other matters, Mr. Vogel. I'm sorry, Mr. Shepherd. 19 MR. SHEPHERD: I have one preliminary matter. 20 PRELIMINARY MATTERS: 21 MR. SHEPHERD: Mr. Rodger provided an answer to an undertaking yesterday. I wasn't here when he provided the response. We have only had a preliminary chance to review it, but we want to advise the Board that we expect to come back tomorrow and ask the Board to order him to produce the agreements that he did not produce. We're not ready to make submissions on it yet and Mr. Rodger is not here -- 22 MR. RODGER: I'm right here. 23 MR. SHEPHERD: Oh. We're not ready to make submissions on it, but we are just advising the Board that we haven't accepted his response and we will ask to make submissions on it tomorrow. 24 MR. VLAHOS: Does it have to be tomorrow, Mr. Shepherd? If we had the time today, does it need to wait for tomorrow? 25 MR. SHEPHERD: The problem is I have another commitment this afternoon, Mr. Chairman, also an OEB matter, and I just can't get out of it. 26 MR. VLAHOS: Okay. We'll schedule that in sometime tomorrow. 27 MR. SHEPHERD: Thank you, Mr. Chairman. 28 MR. RODGER: Mr. Chair, I'm not sure, which undertaking response is Mr. Shepherd referring to? 29 MR. SHEPHERD: This is the one with respect to the call-centre contracts. 30 MR. VLAHOS: And you'll be asking what, Mr. Shepherd? 31 MR. SHEPHERD: I'll be asking the applicant to deliver the contracts. 32 MR. VLAHOS: Okay. 33 Any other matters? There being none, Mr. Vogel. 34 MR. VOGEL: Thank you, Mr. Chairman. Perhaps the panel could be sworn. 35 LONDON HYDRO INC. PANEL 1 - STEPHENSON, WILLIAMSON, SHARMA, ROSEHART: 36 J.STEPHENSON; Sworn. 37 D.WILLIAMSON; Sworn. 38 V.SHARMA; Sworn. 39 M.ROSEHART; Sworn. 40 MR. VLAHOS: Mr. Vogel. 41 EXAMINATION BY MR. VOGEL: 42 MR. VOGEL: Thank you, Mr. Chair. 43 Very briefly by way of opening and by way of introduction to the Panel, Mr. Chairman. London Hydro's prefiled evidence on this application consists of three volumes of prefiled evidence, the interrogatory responses, and the reply evidence. In section 6 of the prefiled evidence, there is a balance for each of the accounts for which London Hydro seeks approval as at December 2002 and December 2003. 44 On this prudence review, Mr. Chair, London Hydro relies on the presumption of prudence as established by the Board in other cases, and London Hydro's submission to the Board will be that the amounts as recorded in their accounts are reasonable, particularly in the context in which they were incurred. 45 The RSVA and what we've called non-1570 accounts, that is, accounts other than 1570, were established and maintained in accordance with regulatory directives that were largely non-discretionary, and the accounting with respect to each of those accounts is provided in that prefiled evidence in section 4.1. 46 The transition costs principally relate, as you've seen, to the acquisition of the CIS. It's discussed in the prefiled evidence. The legacy system, as you've read, was not capable of being modified to accommodate deregulation functionality. And again, in section 4.2 of the prefiled evidence, there's a APH 480 schedule that sets out the seven London Hydro initiatives, and for each of the seven initiatives, as you've seen, there are management representations in section 4.2, A to G, which address the CPIM criteria. 47 The allocation proposal advanced by London Hydro on this application is in section 5 of the prefiled evidence. 48 By way of introduction to the Panel, we have previously distributed last week a listing of the panel members indicating their position and responsibilities at London Hydro. Perhaps that can be made an exhibit at this time. 49 MR. LYLE: We'll mark that as Exhibit I.6.1. 50 EXHIBIT NO. I.6.1: LONDON HYDRO'S LIST OF PANEL MEMBERS INDICATING THEIR POSITION AND RESPONSIBILITIES 51 MR. VOGEL: By way of introduction to the Panel, then, Mr. Chairman, commencing with Mr. Stephenson. 52 Mr. Stephenson, you are the vice-president, CFO and secretary of London Hydro? 53 MR. STEPHENSON: Yes, I am. 54 MR. VOGEL: Could you briefly describe to the Board your involvement of the deregulation of the electricity market and participation in the costs that have been incurred which are the subject of this application? 55 MR. STEPHENSON: Certainly. Beyond the regular financial matters dealing with regulatory filings and our annual financial statements, I was also responsible for contractual matters with IT vendors, legal and general financial management issues as we dealt with the transition initiatives, and as well as, as noted in our witness panel summary, I was a member of our senior management team that regularly met to deal with the progress of all the initiatives. 56 MR. VOGEL: Thank you. And I understand, Mr. Stephenson, that you and Dr. Sharma will be principally responsible for answering questions with respect to account 1570? 57 MR. STEPHENSON: That's correct. 58 MR. VOGEL: Dr. Sharma, you are vice-president of customer services and strategic planning at London Hydro. Could you briefly describe for the Board your participation in deregulation and the responsibilities with respect to these costs. 59 DR. SHARMA: Yes, sir. 60 As you mentioned, besides customer services and business planning aspects of the corporation, I was involved very intimately with the design of our CIS for customer care and billing system, as well as I sat on the oversight committee and monitored the progress of the project. I was also involved in certain design aspects of the system. 61 In addition to that, I helped the oversight committee to prepare reports, monitor progress, and submit those reports to authorities or powers that be. 62 MR. VOGEL: Thank you, Dr. Sharma. 63 Mr. Williamson, you are the director of finance and regulatory affairs at London Hydro? 64 MR. WILLIAMSON: That's correct. 65 MR. VOGEL: And could you briefly describe for the Board your participation in deregulation and responsibility for these costs? 66 MR. WILLIAMSON: My responsibilities have been primarily in the areas of financial and regulatory reporting, preparation of rate submissions, and the recording of RSVA accounts and the non-1570 detailed information and general application of the various Board guidelines to the accounting for London Hydro. 67 MR. VOGEL: And, Mr. Williamson, I understand that you and Mr. Rosehart will be principally responsible for answering questions with respect to the RSVA, non-1570 accounts? 68 MR. WILLIAMSON: Yes, that's correct. 69 MR. VOGEL: And in addition, you will be primarily responsible for answering questions with respect to allocation? 70 MR. WILLIAMSON: That's correct. 71 MR. VOGEL: Thank you. 72 And Mr. Rosehart, finally, you are the director of utility support services and energy management at London Hydro. Could you briefly describe for the Board your participation in deregulation and responsibility for these costs. 73 MR. ROSEHART: My role at London Hydro, I've been directly involved with all aspects of deregulation and change management for the transition; actively, as a role of business lead and project manager for many of the functional specifications and definitions of the initiatives; designed an implementation for the wholesale and retail settlement systems and complex billing; participated extensively with rate design and transition rates and distribution. 74 MR. VOGEL: Thank you, Mr. Rosehart. Mr. Chairman, for the assistance of the Board, I intend to, or I would process to, take a few minutes to have the panel review and summarize for you the principal elements of this claim. I would think that we'd probably be about 20 minutes. 75 MR. VLAHOS: That's fine, Mr. Vogel. 76 MR. VOGEL: Starting with you, Mr. Stephenson, and addressing the current claim and differences from previous filings, if you turn with me to section 6, that's the green tab 6, in your prefiled evidence. That sets out your claim in this application; is that correct? 77 MR. STEPHENSON: That's correct. 78 MR. VOGEL: And the total of the RSVA non-1570 costs at December, 2003, are shown as $15,003,508? 79 MR. STEPHENSON: That's correct. 80 MR. VOGEL: And the transition costs account 1570 balance at December 31st, 2003, $9,594,536? 81 MR. STEPHENSON: Yes, that's correct. 82 MR. VOGEL: All right. And that's a total, then, of $24,598,044, as shown in that schedule? 83 MR. STEPHENSON: Correct. 84 MR. VOGEL: And the balance shown there for the RSVA -- sorry, the transition costs at December 31st, 2002, after interest and recoveries, is $8,854,510; is that correct? 85 MR. STEPHENSON: That's correct. 86 MR. VOGEL: And that's something more than the transition costs which were included in your January '04 filing; is that right? 87 MR. STEPHENSON: That's right. 88 MR. VOGEL: And if you turn with me to section 4.2 in the prefiled evidence, the schedule following the yellow page insert there, this is London Hydro's APH 480 schedule; is that right? 89 MR. STEPHENSON: That's correct. 90 MR. VOGEL: And turning to page 8 of that schedule, this schedule describes the changes from the previous filing; is that right? 91 MR. STEPHENSON: That's right. 92 MR. VOGEL: Could you review those for us. 93 MR. STEPHENSON: Certainly. I think we indicated in our prefiled evidence that, up to January '04, we had principally reported our regulatory assets in accordance with generally accepted accounting principles. In so doing, the labour that was directly attributable to the project was capitalized. When it came to our attention that we would be part of this hearing, we undertook a more detailed scrutiny of our accounts, and in accordance with the instructions that we received whereby labour is more narrowly defined for regulatory purposes as being outside of the rate base, we made an adjustment where we removed some of that capitalized labour, in the amount of about a million dollars. 94 We additionally were able to identify in the customer-education activity area a labour that was associated with back-filling certain positions that were used to undertake the IT development, as well as additional labour that was used for increased call-centre activity. 95 In addition to that, there was specific labour that was identified relating to the IT development in the amount of about 359,000, as well as some settlement service costs with EnerConnect in the amount of $195,000. Those adjustments totalled $512,000, in addition to our previously-filed amount. 96 MR. VOGEL: Thank you, Mr. Stephenson. 97 Mr. Williamson, with respect to the RSVA non-1570 costs, in paragraph 27 of your prefiled evidence, there's a general discussion of those costs which refers to them being -- those costs being incurred as a result of regulatory directives relating to deregulation and market-opening. Can you tell us, were all those costs incurred and reported in accordance with the Board's regulatory directives? 98 MR> WILLIAMSON: Yes, they were. 99 MR. VOGEL: And was there any significant element of discretion in either the incurring or the recording of those costs? 100 MR> WILLIAMSON: No, there was not. 101 MR. VOGEL: Back to you, then, Mr. Stephenson. With respect to transition costs, in paragraphs 24 through 26 of the prefiled evidence, you deal with the development of the new CIS to replace the existing legacy system, and the costs incurred to December 31st, 2002, to -- for the base system, and with respect to the development of deregulation functionality, was approximately $5.9 million; is that right? 102 MR. STEPHENSON: That's right. 103 MR. VOGEL: And then there was an additional $2.6 million incurred to December 31st, 2002, for labour and other non-capital customer-education and settlement system requirements. 104 MR. STEPHENSON: Correct. 105 MR. VOGEL: And that's what you referred to earlier; correct? 106 MR. STEPHENSON: Correct. 107 MR. VOGEL: And in appendix 1 of the prefiled evidence, then, there's a schedule that lists the seven London Hydro initiatives comprised in the costs for which you seek approval. Briefly, could you describe for the Board what this schedule is. 108 MR. STEPHENSON: This schedule attempted to summarize the seven initiatives, as well as indicate the regulatory catalyst that drove us to undertaking those initiatives, and as well, to identify some of the cost mitigation strategies that we continually evaluated through the course of the initiatives that we undertook. 109 MR. VOGEL: And the regulatory catalyst, which is the left-hand column of that schedule, it then lists the various regulatory directives and legislative impetus which have prompted London Hydro to incur these costs? 110 MR. STEPHENSON: That's correct. 111 MR. VOGEL: Starting with the MacDonald Report and the White Paper in 1996/1997, through to market-opening and Bill 10 in 2002. 112 MR. STEPHENSON: That's right. 113 MR. VOGEL: And on the fourth page of that schedule, there's a section called "Supplier Selection Footnotes." What are those? 114 MR. STEPHENSON: As well, the schedule tried to indicate, or did indicate, the supplier selection deliberations that we went through for each supplier providing the service to these initiatives, and it indicates that we followed a competitive-bid process, or competitive process, for selecting our suppliers, to the extent that we could, given the time lines we were facing and some of the issues that we faced with the suppliers we were using. 115 MR. VOGEL: All right. And then, in the far right-hand column, the "Comments and Costs" column, that summarizes the impacts of the legislative requirements, and the regulatory directions and the time limits that you were required to comply with from time to time, and the costs which you incurred as a result thereof? 116 MR. STEPHENSON: That's right. 117 MR. VOGEL: Dr. Sharma, if I can turn to you for a moment. In paragraph 115 of your prefiled evidence, which is in section 4.2, you've listed various elements of deregulation functionality which were required in the CIS. Could you just briefly review for the Board what was required in the CIS in order to address deregulation. 118 DR. SHARMA: Yes, please. London Hydro undertook an exercise to find a suitable system that could enable it for meeting all the regulations of the deregulated market, I like to call it a re-regulated and competitive market. And some of the key requirements were that we should be able to have flexible rate structure in the system, we should be able to offer customer choice, that is, electronic business transactions and retailer rules, as well as have unbundling of services so that we can display those unbundled services on the bill. 119 As a result, due to these key requirements, we looked for a system that could enable us to proceed to meet the compliance of the various codes. And as an explanation we have given in our evidence, various aspects that we felt would be required in such a system in order to become enabled, and one of the things was business functionality, business functionality to deal with various rate structures, flexibility in the rate structure and unbundling, which was not at all possible with our old technology. Our hardware, of course, had to be able to be support more users and more customer service representatives. The old computer system could not support that hardware because in the new system there were more transactions to handle, more storage required. 120 Continuing with those reasons, of our old system was also written in archaic languages for which the programmers would not be available, at least not at an economic cost, and these were COBOL and RPG2 and CICS programming languages which we felt were very archaic at the time, given that the system was developed in the '70s. 121 Lastly but not least, our architectural database was not relational, so we could not have entered in market for the size that we were looking for, given London Hydro's customer base, to undertake the volume of transactions without a relational database. Those were the reasons that we embarked upon acquiring this enabling technology. 122 MR. VLAHOS: Just one second, Mr. Vogel. 123 Dr. Sharma, just to make sure that we get every word, you tend to trail off at the end, you tend to look towards the dais, which is fine, but when you do that, try to get closer to the microphone. 124 DR. SHARMA: I will, sir. 125 MR. VLAHOS: Thank you. 126 MR. VOGEL: Dr. Sharma, you've described, somewhat, the sufficiencies of the existing legacy system. By 1999, had the capital cost of the legacy system been fully depreciated? 127 DR. SHARMA: Yes. 128 MR. VOGEL: And was any portion of the capital cost of the legacy system included in London Hydro's 1999 rate base? 129 DR. SHARMA: No. 130 MR. VOGEL: And has London Hydro included any of the operating costs with respect to the new CIS in the transition costs for which it seeks approval on this application? 131 DR. SHARMA: No. 132 MR. VOGEL: Dr. Sharma, can you tell us, but for transition, would London Hydro have replaced this legacy system? 133 DR. SHARMA: At this time when we were using the system, it was quite capable of meeting all the requirements, and I think it would have met those requirements for some time to come but for the new changes in the marketplace. So management and I included did not feel the need for its replacement at the time. 134 MR. VOGEL: Mr. Stephenson, if I can just return, then, briefly to you, and back to appendix 1. With respect to the seven London Hydro initiatives, starting at page 2 of the schedule on appendix 1, could you just very briefly describe for the Board, what is -- what was initiative 1. 135 MR. STEPHENSON: Initiative 1 was the acquisition of the base CIS system. It was what Dr. Sharma referred to as our enabling technology that would provide us with the platform to then later layer on the functionality required to deal with the codes as they developed. That base system was provided by Sierra Consultants at a fixed price of $2.3 million, and it was actually put into service in April of 2000, which was our first step toward allowing us to unbundle our rates. 136 MR. VOGEL: So the base CIS was developed over the period 1998 to 2000? 137 MR. STEPHENSON: That's correct. 138 MR. VOGEL: And of the contract price of $2.3 million, how much did you actually pay Sierra? 139 MR. STEPHENSON: We paid $1.7 million of the 2.3, primarily because during that time we had concerns about their ability to deliver on time line. We were still facing November 2000 market opening, and we also knew that the speed of regulatory development was accelerating and we had concerns that they could deliver the next stage. So at that time we decided to move on. 140 MR. VOGEL: And initiative 2, what was that? 141 MR. STEPHENSON: Initiative 2 followed from what I just spoke to in terms of our concerns with Sierra. At that point in time, we knew that there were many regulations being issued and the pace was accelerating, and we undertook an analysis of our needs and the functionality that would be required to match the codes that were now being developed. The Gap analysis that's provided in the evidence is a fairly concise mapping of the specific code requirements to the functionality that we needed to put into the system to go the next step. 142 We did that with IBM as an assessment leading to our ultimate retaining of IBM to take us through the next stage. 143 MR. VOGEL: All right. Now Sierra in initiative 1 was selected through an RFP process; is that correct 144 MR. STEPHENSON: That's correct. 145 MR. VOGEL: And similarly, with respect to initiative 2, was IBM selected through some competitive process? 146 MR. STEPHENSON: The process that we embarked upon, given the time line, was not a formal RFP. We were still faced with market opening in November 2000. However, we had gone to Sierra in the course of our discussions with them in the spring of 2000, before we left them, to have them size what they thought they needed to do to take us through the next phase. And in so doing, they came up with a price that was unacceptable to us, it was in the range of $3.7 million. There was also concern from them that they might not even have the ability to take -- to undertake the next stages of the development. 147 MR. VOGEL: All right. Now, in the right-hand column there, there's a reference to the overall project cost recovery from utilities Kingston in the amount of $1.9 million. Could you tell us about that. 148 MR. STEPHENSON: When we embarked on our next stage of development with IBM, and in our discussions with them, we were also continually analyzing what other people's systems were, whether there was anyone else using a Sierra platform, and IBM and Utilities Kingston -- we became aware that Utilities Kingston, through IBM, was also using the same system, also having the same problems, and also having the same development facing them. So we took it upon ourselves to contact Utilities Kingston and to structure a cost-sharing arrangement with them where we would manage the development of a single platform and allow them to use that platform. That cost-sharing arrangement resulted in us reducing our costs by $1.9 million, approximately, and that was about 24, 25 percent of our overall development. 149 MR. VOGEL: Continuing over the page, then, initiative 3, what was that? 150 MR. STEPHENSON: Initiative 3 was the follow on where IBM was engaged to now deliver the functionality that was required and specked primarily in the Gap analysis as well as the deal with what we were seeing in terms of the EBT standards and the retail settlement codes and some of the initiatives or standards that were being announced. And IBM was engaged through almost to the end of 2001 to ensure that we were in compliance with those codes. 151 MR. VOGEL: All right. And the initial contract price with IBM was? 152 MR. STEPHENSON: $1.6 million. 153 MR. VOGEL: And the balance of the costs shown there net of the recoveries from Utilities Kingston resulted from what? 154 MR. STEPHENSON: The amounts that are being shown in initiative 3 was the carry-on work that was done by change control and it was being matched to the codes and the continual development of regulatory process. And the gross amount that we're showing here was the amount that we paid to IBM net of the Kingston recovery. 155 MR. VOGEL: Okay. So the original contract price from IBM was about $1.6 million, and then you had change orders which -- to deal with developing dereg requirements which results in the costs indicated in the schedule; is that right? 156 MR. STEPHENSON: That's correct. 157 MR. VOGEL: And did you have a competing bid -- the IBM contract price was $1.6 million. Did you have a competing bid for that? 158 MR. STEPHENSON: The competing bid, as I mentioned, was really our test to Sierra before we embarked on the future development. We looked to them whether we could provide the same amount, and their amount was $3.7 million. 159 MR. VOGEL: All right. So it was more than double the IBM cost at that time? 160 MR. STEPHENSON: Correct. I should mention, just on phase 3 as well, if I could, that this development time -- this development process or initiative was very much compressed by the time line, you know, the evolution of the changing market dates, and in the end, it did enable us to be fully compliant with the self-certification at the end of 2001. 161 MR. VOGEL: Could you describe for us briefly initiatives 4 and 5. 162 MR. STEPHENSON: Initiatives 4 and 5 are the customer-communication temporary call-centre costs. We have $384,000 in advertising and customer-communication costs that we feel are directly attributable to communications that were either mandated or, we felt, required in dealing with our primarily-residential customer base. As well as -- we have temporary call-centre costs of $1.7 million. As I mentioned earlier, that can be apportioned between back-filling certain jobs of our IT development team, as well as dealing with the exponential increase in our call-volume activity, as well as duration of call. 163 MR. VOGEL: Thank you. Finally, over the page, could you briefly describe initiatives 6 and 7. 164 MR. STEPHENSON: Yes. 6 and 7 is the final development phase of our CIS system, in order to implement the EBT retailer work-flow management, as well as deal with the retailer-customer enrolment requirements leading up to market-opening in May, 2002. It was primarily performed by Promatis, because we had seen that there were some -- we had some questions and concerns about that last leg of development as proposed by IBM, and we selected Promatis in comparison to IBM, based on a recommendation from Oracle who -- because we're predominantly an Oracle solution, we were able to find some people who were very much experienced in the work-flow arena, and we used them. 165 MR. VOGEL: All right. And in the bottom, then, of the left-hand column, it shows a total capital/non-capital cost of the seven initiatives at $8,482,000 to December 2002; is that correct? 166 MR. STEPHENSON: That's correct. 167 MR. VOGEL: And that's net of the Utilities Kingston recovery that you described? 168 MR. STEPHENSON: Yes, net of the recovery of approximately $1.8 million. 169 MR. VOGEL: And can you tell us, Mr. Stephenson, are all of the costs reflected in this schedule incremental costs? 170 MR. STEPHENSON: Yes, they are. 171 MR. VOGEL: And were they all necessitated by transition to the deregulated market? 172 MR. STEPHENSON: Yes. 173 MR. VOGEL: And are any of those costs included in your current rates? 174 MR. STEPHENSON: No. 175 MR. VOGEL: Now, Dr. Sharma, if I can come back to you, in paragraph 21 of the prefiled evidence, you've made reference there, Dr. Sharma, to an independent audit which was undertaken on behalf of a third party utility of the CIS as developed by London Hydro. What was that audit? 176 DR. SHARMA: One of the Ontario utilities was looking for a new customer-information system for the Ontario market, and actually they issued an RFP and we were part of that RFP process. We had submitted our solution as an alternative for them to use. And, in doing so, they selected us, short-listed all the way to the final competition. And in the process, they engaged an international consultant, who came and paid a two-day site visit to evaluate the system of London Hydro. And in doing so, in the report that he prepared where he recommended that the solution is very viable for that utility, he put these comments. And we took some excerpts from that report, without destroying the confidentiality of the report, and included them in this evidence. 177 MR. VOGEL: And what was his conclusion? 178 DR. SHARMA: His conclusion, as mentioned here, is indicative of two -- I should say, three features of our system; one, that this is a -- very much client-server-oriented, modern technology, object-oriented programming, and has the capability to be market-ready in Ontario on a very short time-line, as indicated in this. The technology is quite extensive and very open architecture, non-proprietary. So the underlying cost is only of Oracle license. That's one thing. 179 The second he mentioned was the electronic business transaction; that is, the functionality to provide a customer choice in this market is very functional, integrated and much automated, so you don't need much operating cost in running that system. That was his conclusion on the first point. 180 The second point, he referred to the scalability of the system, because the utility that was looking for a system is larger than London Hydro, and he felt that, with some tweaking of the database and tuning of the database, his words, this system could easily be adapted for their application. And those were the key features of this evaluation. 181 MR. VOGEL: Paragraph 22, you made similarly a reference to a study by an independent hub operator which ranked London Hydro's CIS number one in the province. What was that study? 182 DR. SHARMA: SPI is one of the hub operators in the province, and we are a customer of theirs, so are 60-odd other utilities. And they are able to independently look at the transmission that goes through their hub, and look at the accuracy and completeness of those transaction as utilities provide their documents to them electronically. And they undertook evaluation of ten utilities, large, medium, and small, and compared how many of the documents they were sending were being rejected by their hub, so as to measure the quality and completeness, as well as compliance with the EBT standard. And in doing so, they found out that London Hydro was, at that time, number one in their accuracy and completeness, and actually we were number one by a large margin. The second one is 20 percent behind us, in terms of accuracy. And we were competing with the largest utilities in Ontario, as well as small. 183 MR. VOGEL: Paragraph 23, you've made reference to international recognition of London Hydro's CIS system. What is that? 184 DR. SHARMA: In further evaluation of our system -- this association in the U.S. has various categories in which they allow competition for new customer-information systems, because these days all utilities are embarking upon acquiring such systems, and the idea is to provide the performance of various utilities, as to how successful they are. And this includes cost and functionality, as well as level of automation and system, because automation impacts operating cost of the utility. So we competed in that system, and we won internationally among the utilities of ten, which were municipal-only utilities, across international borders, and we were number one in that competition, as well. 185 That just highlights three things, as I said before: First, our system, because of its accuracy and completeness, provides good customer service. Second, it met all Ontario market rules. Third, it had the level of automation that helped us decrease the cost of operation on an annual basis. 186 MR. VOGEL: Finally, Dr. Sharma, we've circulated this morning a letter dated September 17th, 2004, from SPI Group Inc. to London Hydro. I'd like that marked as an exhibit, Mr. Chairman. 187 MR. LYLE: We'll make that Exhibit I.6.2. 188 EXHIBIT NO. I.6.2: LETTER DATED SEPTEMBER 17TH, 2004, FROM SPI GROUP INC. TO LONDON HYDRO 189 MR. VOGEL: Dr. Sharma, this is a letter from the SPI Group Inc. Who is that? 190 DR. SHARMA: It's one of the hub operators in the province for managing the transmission of all electronic files within retailers and utilities. 191 MR. VOGEL: And it provides certain analysis with respect to the accuracy of London Hydro's system. What does that indicate? 192 DR. SHARMA: There are two indices mentioned in that letter. The first is really the reflection of the continued completeness and accuracy of our system. As I indicated earlier, in an earlier study they felt our system was number one in the province in that category. 193 For example, in the first paragraph, it says that "rejection of our documents by the hub was less than half a percent," whereas other market participants, there are 60 of them that SPI deals with, had an experience of an average of 4 percent rejection in their documents. That just goes to show two things: That it, our documents, once they leave our system, are complete; and second, it shows that they meet all the EBT standards. 194 In the next paragraph it shows that, in the documents that they received, how fast our system responds, and this is a reflection of level formation, which I mentioned helps to reduce the operating cost of the system. We respond in a very automatic manner within 24 minutes, on average, for every document that comes from the hub, whereas the rest of the market, that is, the rest of the participants in the market, are responding in five hours or more. And that just goes to show, again, the level of integration and automation of the retailer system for which we were recognized internationally as well. 195 MR. VOGEL: Dr. Sharma, what's the significance of accuracy and turn-around time for London Hydro customers? 196 DR. SHARMA: It's really two-fold. In terms of completeness and accuracy of our submission to the hub means retailers do not have to repeat their work. We don't have to repeat our work. Plus, what we send is accurate in terms of customer information for either its historical usage, or it is change location information, et cetera. So that's enhanced customer service as well as reduction in operating costs because we don't have to repeat any of the -- at least very minimal repetition of any work. 197 In the second one it's really customer service, meaning we respond quickly so that customers can get updated information in our system or the retailer system in a very prompt manner. And this just goes to enhance our customer service. 198 MR. VOGEL: Thank you, Dr. Sharma. 199 Finally, Mr. Williamson, with respect to London Hydro's proposal regarding application -- regarding allocation, the initial proposal set out, as I said, in section 5 of the prefiled evidence, and in one of the IR responses, this is the response to the School Energy Coalition No. 12, deals in part with the allocation of transition costs, and indicates that while originally London Hydro had proposed allocation by distribution revenues by customer class, now the suggestion that a more appropriate allocation may be by number of customers. Why is that? 200 MR. WILLIAMSON: Yes. As we stated in our initial prefiled evidence, it was our opinion that the 1570 transition costs, which are primarily the customer billing costs, are primarily customer-driven costs, and they are fixed costs. And we felt that fixed costs by customer class would be an appropriate allocator because we also felt that it would reflect the relevant number of customer in each class. 201 Subsequent to that, we performed the calculations and discovered that that relationship did not exist. What we discovered was that a more appropriate allocator should be number of customers per customer class to truly reflect that relationship between those customer-driven costs in 1570. 202 MR. VOGEL: Thank you, Mr. Williamson. 203 If you could just briefly turn with me to appendix 14 in the IR responses. Mr. Williamson, this schedule shows London Hydro's allocation proposal and the impact of it both as a percentage of the total cost of power and as a percentage of distribution charges; is that right? 204 MR. WILLIAMSON: That's correct. 205 MR. VOGEL: As well as the annual dollar impact for the various customer classes? 206 MR. WILLIAMSON: Yes. 207 MR. VOGEL: And at page 4 of that schedule, at the top of the page there in the left-hand column, that lists the various allocators proposed by London Hydro with respect to these accounts? 208 MR. WILLIAMSON: That's correct. 209 MR. VOGEL: And specifically with respect to 1570, transition costs, the proposal as reflected in the schedule is number of customers. 210 MR. WILLIAMSON: That's correct. 211 MR. VOGEL: Thank you, Mr. Chairman. 212 The panel is available for cross-examination. 213 MR. VLAHOS: Thank you, Mr. Vogel. 214 Is there a particular order the witnesses -- sorry, the intervenors would like to follow? 215 MR. SHEPHERD: Mr. Chairman, the intervenors have agreed that Mr. White will go first, followed by myself, Mr. Dingwall, Mr. Aiken, and Ms. Lott. Mr. Warren, Mr. Brett, and Ms. Street have all advised they will not be cross-examining this panel, although Mr. Warren asked me to advise the panel that he will be here tomorrow for the benchmarking evidence. 216 MR. VLAHOS: All right. Thank you, Mr. Shepherd. 217 Mr. White. 218 MR. WHITE: Thank you, Mr. Chairman. 219 CROSS-EXAMINATION BY MR. WHITE: 220 MR. WHITE: Good morning, panel. My questions, again, are of a general nature and are intended to get at some of the 90,000 foot-level type questions. 221 In the 1571 account, I believe that's a premarket opening purchase power variance account, the one that addresses the seasonality and potentially the 2001 power variance amounts, do you propose to allocate any of those amounts to time-of-use customers, whether they be general service, commercial, or other time-of-use classes? 222 MR. WILLIAMSON: No. They are being allocated solely to the non-time-of-use customers. 223 MR. WHITE: When the market was opened, did your utility continue to use your old billing system, or did you prorate your bills in some fashion so that the post-market opening uses would be billed at the new rates? 224 MR. WILLIAMSON: We prorated our quantities before and after the market opening, so the quantities before market opening were at the legacy rates and the quantities after market opening were at the new rates. 225 DR. SHARMA: If I can add just one comment to that. This proration was done to the hour. 226 MR. WHITE: The additional question I would have in that regard is, there was -- was there any proration required associated with other profile-billed accounts, such as street-lighting, or interval-metered accounts? 227 MR. WILLIAMSON: No. 228 MR. WHITE: Thank you. 229 If you look at the post-market opening purchase power variance account, if you were to look at the year 2003, would that be -- and again, I'm at the 90,000-foot level, so I don't think you need specific numbers -- would that be useful in terms of allocating or in terms of determining what your system losses are or other unallocated energy consumption which is not directly passed on to customers? 230 MR. WILLIAMSON: Certainly, that balance would contain any variance in system losses between actual losses and the Board-approved losses. It will also include estimations of unbilled revenue and any difference that might exist between actual unbilled revenue and the estimated values. 231 MR. WHITE: Thank you. 232 Can we turn for a moment to LV charges. By way of background, are you, as a utility, taking any power from a Hydro One Networks-owned transformer station within your service area? 233 MR. WILLIAMSON: I'll let Mr. Rosehart answer this one. 234 MR. ROSEHART: Yes, we are. 235 MR. WHITE: Do you face any potential low-voltage charges from Hydro One? 236 MR. ROSEHART: Yes, we do. 237 MR. WHITE: In those situations, why are you not taking that power that is currently delivered to you over the low-voltage system, why are you not taking it from a transformer station located within your service area? 238 MR. ROSEHART: This is sort of a legacy of the old system where, through least-cost planning, the former Ontario Hydro would take the least-cost approach to service an area, as well as we've gone through a period of annexation and this could be part of the legacy of that system. 239 MR. WHITE: When you take power from the low-voltage system, does that power first go through a high-voltage DS or a transformer station before it's delivered to you at the low-voltage level? 240 DR. SHARMA: Yes. 241 MR. ROSEHART: Yes, it would. 242 MR. WHITE: Is it fair to characterize the LV system as similar to moving a transformer station to the LV delivery point to your utility? 243 DR. SHARMA: In concept, it is actually -- you could imagine that at the boundary of that, there is a TS. It could be far away from that boundary, but there is, in concept, that equivalency. 244 MR. WHITE: If Hydro One is permitted to pass on low-voltage charges to your utility, would it be fair for you, as a utility, to recover those LV system charges in the similar period or over the same period as which you incur them from Hydro One? 245 DR. SHARMA: Yes, it would be appropriate. However, I do have to give one specific example of London Hydro. Our low-voltage charges are very minimal because we only have about, I think, 300, or less than 300 customers that are served under this scenario. So our demand for those 300 varies a minimum of 150 kilowatt to maximum of 400 kilowatts. So it's not much of a charge on an annual basis. 246 MR. WHITE: So, while it may not be material to your utility, if it were material to your utility, you would be probably much more concerned about that close tracking of costs? 247 DR. SHARMA: Yes. 248 MR. WHITE: Thank you very much. That's my questions, Mr. Chairman. Thank you to the panel. 249 MR. VLAHOS: Thank you, Mr. White. 250 Mr. Shepherd. 251 CROSS-EXAMINATION BY MR. SHEPHERD: 252 MR. SHEPHERD: Thank you, Mr. Chairman. 253 Let me follow up on that, Dr. Sharma. You have only a few hundred customers served by the low-voltage system; right? Have you estimated how much Hydro One would be charging you in the transition costs, if their proposal is accepted? For low-voltage? 254 DR. SHARMA: On the assumption that the charge is fifty-six cents per kilowatt -- approximately half a dollar per kilowatt, that would result in $250 for us per month, at most. 255 MR. SHEPHERD: 250? 256 DR. SHARMA: Dollars. 257 MR. SHEPHERD: Per month? 258 DR. SHARMA: Per month. 259 MR. SHEPHERD: Now I'm going to turn to account 1570. This was basically sort of an IT project; right? And that's how you've described it. It was primarily an IT project. 260 MR. STEPHENSON: There are other costs in there. Primarily an IT initiative on the capital side. 261 MR. SHEPHERD: Dr. Sharma, have you seen Hydro One's Exhibit G11, schedule 1? 262 DR. SHARMA: Yes. 263 MR. SHEPHERD: And that's an architecture of their system? 264 DR. SHARMA: I would describe -- more of a functional diagram of their system. 265 MR. SHEPHERD: Okay. How does your system compare with that? Is it a similar architecture? Is it simpler? Is it more complex? Can you sort of give us an idea? 266 DR. SHARMA: While I cannot comment on specific selection by the utilities -- but in terms of functionality, we have almost all the functionality, but not the same software. 267 MR. SHEPHERD: Okay. Then how come your system is so much cheaper? 268 DR. SHARMA: There could be various factors, and I really cannot speak as to one versus another system. I can only talk about our system, why it is the way we've architectured it. The reason we have contained the cost of our development is primarily because we have used everything in Oracle base, so we have used Oracle architecture, Oracle utilities and Oracle programming languages, and there's nothing outside. So no software, per se, of major significance is included in our system. 269 MR. SHEPHERD: So I take it, then, for example, Hydro One's system has an extensive work-flow engine that they use as a type of middleware to tie it all together, to integrate it. You don't have a similar piece in your system? 270 DR. SHARMA: Not that I'm very knowledgable in this area, but I'll caution you to mix the words "middleware" and "work-flow" in one sentence, in one characterization. The reason is -- work-flow is more of a tool to schedule things, and sometimes it may have some programs, whereas middleware is a different application altogether. Middleware will be required only when you have a large number of users accessing the database, and hence avoid conflict and locking of the data. So those are the two different applications. There are software vendors who combine middleware and work-flow in one application, but that's beside the point. 271 Now, a work-flow utility -- again, I cannot comment as to what other utilities have done, but we have used Oracle work-flow utility to schedule and program all the electronic business transactions, so that we do not have to have manual labour in completing that task. Because reception of those information is through electronic means, completion of that task is through electronic means, and sending back to the hub is through electronic means. And there we have used work-flow. 272 MR. SHEPHERD: When you designed your system, you were one of the few utilities that actually shared costs of a new system with another utility; right? 273 MR. STEPHENSON: I can't really speak for other utilities. To the best of my knowledge, we were one. 274 MR. SHEPHERD: Okay. 275 MR. STEPHENSON: One of a few I can imagine. 276 MR. SHEPHERD: But it sounds from your direct evidence that that was a little bit accidental, in the sense that IBM told you that they had another client that had a similar problem to yours, and then you took that opportunity; is that right? 277 MR. STEPHENSON: No, that's not right. Actually, that's not the way it worked at all. What happened was, we were -- we knew which parties were using some form of the Sierra platform right from the get-go. We knew that because we investigated who was using it in selecting Sierra, so we knew who was using it. It came to our attention, through discussions with IBM, that they were contemplating, or were doing work for Utilities Kingston. But to suggest that IBM took the initiative to bring these three parties together is incorrect. We took that initiative. 278 We had been speaking to the Utilities Kingston to see how their project had been working well before the late summer of 2000, and when it came to our attention, we were the ones that contacted Utilities Kingston; we were the ones that suggested, on top of just the appearance of an easy cost-share method by which we could manage two developments -- because, you know, they were on a different stream, a different time line, a different revision. It was up to us to bring it together, and we were the ones that structured the agreement with them, on an economic basis and on a development basis. 279 MR. SHEPHERD: It sounded in your direct evidence like, when you built your CIS, you had a plan let's see if we can recover some costs from other utilities by marketing it to them, and in fact you bid into some RFPs along the way; right? 280 MR. STEPHENSON: It didn't quite work that way, and I think we have outlined that a little bit in all the documentation. But let me summarize it for you. 281 We had a license with Sierra, originally, that didn't allow us to really go out and market the product. Now, there is a clause in there talking about potentially an extra -- paying them an extra dollar account, something along those lines, which was more a visionary idea of -- if we got through the development, and we were then operating as we are now, and we contemplated trying to sell it to other utilities that did not have the system of the like, there was an opportunity there. But the license itself did not allow us to go out and actively market it. 282 It was only through the course of our disengagement of Sierra that we were able to, or afforded the opportunity to look at other alternatives. And I want to be clear about that, because when we disengaged them, the first phase was really dealing with them in terms of our proprietary right -- not to market it, or to cost-share it, initially, but just because we were going to develop it with IBM and another supplier, that we would still have the intellectual right to whatever we were carrying on with. 283 So that was the first phase. It was only after we had made market-opening that we were really undertaking to look at reducing the overall cost of our system by looking at other utilities that may not be in as similar situation as ours. And what, I think, Dr. Sharma referred to was -- and the reports that we had prepared on the effectiveness of the system, were more in the time frame of 2003, early 2003, and it was only at that point, where we had actually gone back to Sierra, and asked them for a full release and a full opportunity for us to deal with whatever we wanted to deal with with the software. 284 MR. SHEPHERD: Two questions about that. First, it sounds like at the time of market-opening, and we've heard this from other witnesses, from other applicants, that you didn't really have a whole lot of time to collaborate with any of the utilities. It was just too fast. Is that right? 285 MR. STEPHENSON: The time line was very compressed. Collaboration was very difficult, and there are some inherent hurdles to doing that. You have limited number of vendors in the marketplace, you have limited opportunities, and they all have very restrictive views on their systems, their licensing, and their own intellectual capital. So there are some issues with even getting there. And the time line in itself was very compressed. 286 MR. SHEPHERD: In hindsight, if you had more time, do you think you could have collaborated with more with other utilities and saved more money? 287 DR. SHARMA: See, time crunch is one aspect of -- I should say, hurdles in seeking collaboration, but there are other hurdles as well that you have to appreciate. One of them is the business processes. A lot of utilities have certain business processes. We design a system that we describe here with certain understanding of our business processes. If a -- so in collaboration, it's not just a system, it's also an agreement that you will use similar business processes. 288 Even if time was available, I think the negotiation on using the same business processes as well as training the employees on these new business processes would be very difficult. So you cannot say that it would have been easier. One could say that one could attempt that process. 289 MR. SHEPHERD: You're still, today, making attempts to market your system, because it's so successful, market it to other utilities in the province where you can; is that right? 290 MR. STEPHENSON: You know, the primary driver is not just it being successful, the primary driver, as we have always held to, is to reduce costs. We are always looking for opportunities to reduce the cost, and if we can find someone who is willing to either co-share in a development or would like to use the final developed product, then we are always open to dialogue with them to try to reduce our own costs. We think that's the right thing to do for our ratepayers. 291 MR. SHEPHERD: Let me ask you one question about the Kingston situation. Kingston sort of co-developed a component of this with you; correct? One phase. 292 MR. STEPHENSON: Yeah. We actually drove the development and they shared in what was being done. 293 MR. SHEPHERD: Was there an -- 294 MR. STEPHENSON: So co-development might not be the right word in terms of I think the development was really quarterbacked from London Hydro, and the economic arrangement was for them to use that. And that's principally because of size. They didn't have the resources to run at the same speed that we could when we were doing it. 295 MR. SHEPHERD: Was there an incremental cost to developing it for both utilities instead of just one, do you think? 296 MR. STEPHENSON: I don't think that there would be much of that. It certainly would not be material. We were very cognizant of that when we looked at -- particularly at the outset, what starting points we were at and whether the starting points in terms of the revision that they were running was, you know, fundamentally different from where we were at. 297 Additionally, there had to be a good sizing of what functionality they wanted and what we wanted. Obviously, there was a difference in size, and at some point there is a difference of what is needed, or a different requirement for each utility. 298 MR. SHEPHERD: So would it be reasonable for this Board to conclude that you had a net saving, a marginal saving, on this project of close to $1.8 million because of the Kingston deal? 299 MR. STEPHENSON: Well, I think it's more than reasonable. The number is $1.8 million. 300 MR. SHEPHERD: Okay. You were here yesterday, weren't you, when Enersource talked about their new CIS and billing systems? 301 MR. STEPHENSON: I was here for only part of their day yesterday. 302 MR. SHEPHERD: You're aware that, at roughly the same time as you decided to go ahead with a new system, they decided to go ahead with one, but theirs came in service earlier; you're aware of that? 303 MR. STEPHENSON: I wasn't -- I don't know the time line exactly, but we can assume that. 304 MR. SHEPHERD: Well, you originally decided to go ahead with the new CIS in 1997; right? 305 MR. STEPHENSON: Correct. 306 MR. SHEPHERD: And that just -- while I'm on that, you said in your direct evidence that the reason why you went ahead for a new CIS is because of market opening, but I would have thought in 1997, it was too early for you to have been making that decision, that you need a new CIS for market opening. 307 DR. SHARMA: Actually, just to straighten the time line, in '97 that you referred to, we began the RFP process for it, so there was a lot of internal work on putting estimated specs, and also do not forget the underlying words that we wanted enabling technology not, per se, a deregulation-ready system. 308 So at this time also, if you read our evidence, it's very clear, the MacDonald report and our participation in the market design committee led us to foresee the challenges that we will have of our legacy system. And that is when management decided to replace the enabling technology so that we are ready when this market is ready for opening. Otherwise, we would have failed. So there was the RFP process in '97. 309 MR. SHEPHERD: So would I be right in characterizing this as: You saw that there would be big changes, you didn't quite know what they were just yet, but you knew there were going to be big changes, and you said, we better get going and get our systems in order? 310 DR. SHARMA: In order to be prudent management, yes. 311 MR. SHEPHERD: Okay. 312 Now, the in-service date of yours was delayed because of the Sierra problem; right? 313 MR. STEPHENSON: Sorry, can I hear that again? 314 MR. SHEPHERD: The in-service date of your system was delayed? 315 MR. STEPHENSON: Yes. 316 MR. SHEPHERD: And in fact, had you not had the delays, it would have been in service before it qualified as a transition cost; isn't that right? 317 DR. SHARMA: I think you -- what you're really asking is if it was in service earlier than the date it came on, it would not be qualified as a transition cost. We, in our opinion, feel that is not true, but the question is one of determination of rate. '99 became the reference here, and that is what the -- I think the defining criteria is, rather than the year of service. So I think it is a transition cost in all its application because it was an enabling technology. The question is how much of that is reflected in '99 rate design year. 318 MR. SHEPHERD: Okay. Now, you'll understand that the question is going to be raised by people in argument, presumably; you have two utilities, yourself and Enersource, you both in 1997 do the right thing and embark on some changes in getting a new system, they're faster than you are, and as a result they're limited in their claim to the changes after their system was implemented whereas your claim is for your full system. You understand that that's a problem; right? That people are going to ask that question. 319 MR. STEPHENSON: I understand the people asking the question. I don't really see it as a problem. 320 MR. SHEPHERD: Why not? How do you reconcile the two situations? 321 MR. STEPHENSON: With respect to our situation, I'm not sure it's for me to reconcile the two, but I think with our situation, we undertook an initiative, we managed it well, we were compliant with the codes, we were compliant with market opening, we did everything that was asked of us, we cost-shared, we have a good system, and it meets the test that enables it to be a cost for review at this hearing. If, for some reason beyond those tests, we need to engage in a discussion about what was in 1999 rate base versus what wasn't, what was a qualifying asset, the fact that some utilities had spent some money on their IT system prior to 1999, therefore their cost is less than what we put before this panel, I can only say that we had a system; that system worked. That system worked very well, even to the point where we, as a contingency plan, had it adjusted for -- to deal with the year 2000 issue, and we continue to run it. It's clearly attributable to market-opening. And, you know, we could have spent money on a system prior to 1999. We chose not to do that. And during that period of time, instead of spending money on an IT system, we turned $13 million back in terms of a voluntary rebate to our ratepayers, and we reduced our rates by, I think, 2 percent, in the year 1997 or 1998. 322 So, you know, if we're going to engage in choice -- or engage in discussion about 1999, pre-, post-, and what matters, I'm not there. 323 MR. SHEPHERD: Mr. Stephenson, no one is suggesting that your system was either overpriced or poor quality. In fact, it appears that you had the cheapest one and it's of pretty good quality, thanks very much. The question is about the technical qualification of this expense, and then the question is whether the delays in your project are the only reason that you qualify, technically. It sounds like you're saying -- and tell me if I'm right -- even if that's true, you have such a good system, and you did such a good job for your ratepayers, that the Board should allow the expense. Is that what you're saying? 324 MR. STEPHENSON: I don't believe that it's true, I think that I've said that, and I think that I've said in my previous response that we believe that we have qualified for the expenditures that are put forward for review. And when I say "qualified," we've met the tests that have been required of causality, and the SPI test that has been prescribed. The rules have been put before us, we've adhered to the rules, we've stated to that, and that's where we're at. 325 MR. SHEPHERD: Now, you're claiming 100 percent of the cost of your new system and, as I understand your evidence, the reason is because there was a 75 percent rule which said that, if 75 percent of the reason for something was transition, you got to claim 100. Isn't that -- do I understand your evidence that way? 326 MR. STEPHENSON: We've stated that we've met that test. 327 MR. SHEPHERD: And so your interpretation of the rule is, if 75 percent -- if 75 percent of the reason for an expense is transition, then you're allowed to claim 100 percent; is that right? 328 MR. STEPHENSON: My understanding is, in the instances where you can't directly link an expenditure to an initiative, in the case of, say, some of our situations where we have a fixed-price contract, that test was put in place so that we could deal with those circumstances where you couldn't have a one-for-one link. And my understanding is that, if you meet the 75 percent test, then you're allowed to claim all of the expenditure, yes. 329 MR. SHEPHERD: In fact -- now, I'm looking at your response to London Property Management Interrogatory No. 4. Do you have that? 330 MR. STEPHENSON: Yes, we have it. 331 MR. SHEPHERD: So that says -- I think I understand this correctly -- that, in your view, 90 percent of your CIS costs were for transition compliance and functionality; right? 332 MR. STEPHENSON: Correct. 333 MR. SHEPHERD: So your system cost, what, a little over $8 million? 334 MR. STEPHENSON: The system was about $5.9 million. 335 MR. SHEPHERD: Okay. Let's say 6. So do I understand, then, your answer to that interrogatory to be that, if not for market-opening, you would have had a new CIS system for $600,000, 10 percent of that? 336 MR. STEPHENSON: I don't know whether I'd phrase it that way. I think what we've said is, if it were not for market-opening, we wouldn't have a new system, we would be running the system we had. We were quite comfortable with doing that. It was compliant for the year 2000, and it was continuing to bill. It just didn't have the functionality, as Dr. Sharma has indicated, to deal with the new codes and regulations. So we wouldn't have spent any money. 337 MR. SHEPHERD: Didn't I see somewhere that your operating costs of your legacy systems jumped from $100-odd-thousand, in the early '90s, to $455,000 a year in 1997, 1998? Of your legacy systems? 338 MR. STEPHENSON: Can you point to that? 339 MR. SHEPHERD: I'd have to go look for it, but is that not correct? 340 MR. STEPHENSON: I'm not sure that I can say that it's correct without seeing the numbers. I think that somewhere in one of the interrogatories that -- we had spoken to the level of the operating costs prior to 1999, if that's what you're referring to. 341 MR. SHEPHERD: Yes. I'm looking at Energy Probe Interrogatory No. 2, the second page. 342 MR. STEPHENSON: Okay, I have that. 343 MR. SHEPHERD: So doesn't that show that, by '97, you needed a new CIS anyway? 344 MR. STEPHENSON: I wouldn't come to that conclusion. First of all, I think that we've indicated in this that this is the cost of running all of our systems, including our SCADA, our HR system, our financial system. So this is the operating costs of all the IT department in London Hydro. So I'm not sure -- and I think we've indicated here that it would not be possible to even dedicate the dollars associated with operating the legacy systems in this bundle, because we didn't do it. 345 MR. SHEPHERD: Sorry, I didn't understand that. Can you -- 346 MR. STEPHENSON: It says here: "It is not possible to estimate the dedicated dollars solely expended to manage the CIS systems in this bucket. So this is our entire IT department. 347 MR. SHEPHERD: Do you have an idea of what your similar costs are for, say, 2003, to operate the systems -- the current systems? 348 MR. STEPHENSON: I don't have that information here, and I -- I'm not sure that it's a valid contrast. We're dealing with a completely different scope of operation than what we were doing in 1997. I think that's the reason why we're here. You can see from the expenditures that were incurred by all applicants that they embarked on developing a fairly sophisticated system to deal with market-opening, and the costs of maintaining that, only logically, would increase. So I don't think that you can really compare the two worlds. 349 MR. SHEPHERD: So it might actually still be $500,000 a year, but for other reasons, not because of dealing with legacy systems, but because of dealing with a more complex market situation; is that fair? 350 MR. STEPHENSON: Can you run that by me again? I'm sorry, you lost me on that train of thought. 351 MR. SHEPHERD: It might still be high, it might be $500,000 a year to run these systems even though you've got better systems because there's a more complex market to deal with; is that fair? 352 MR. STEPHENSON: Can I just have one moment on that. 353 Sorry, I'm just having difficulty in comprehending the question in terms of when you say the $500,000 and you're drawing -- I'm not trying to be difficult. I just don't quite understand what the -- 354 MR. SHEPHERD: I was trying to understand your answer. 355 MR. STEPHENSON: Okay. 356 MR. SHEPHERD: Until 1996, the costs of running your legacy systems were $100,000 to $150,000 a year, according to your interrogatory response. Then in '97, they started to go up dramatically, and in '99 they were over 500,000. So I asked you, would they now be back down to the old cost because you have a new system, and I understood your answer to be, it's not a valid comparison because, even if it's still up at 500,000, it wouldn't be for the same reasons, it would be because we have a more complex market to deal with. 357 MR. STEPHENSON: Right. Well, firstly, the basis of asking that question -- we've answered in the interrogatory here that the jump in '97 through '99 was because we had taken on additional development in ancillary systems. So, you know, to attribute that increase to, say, legacy maintenance, whatever the case may be, is probably not the right start. If we were to go forward running the legacy system as it was in the new world, I would not think that the operating costs would be substantially different than what we see here, but I can only guess. I mean, obviously things get older, and they need more maintenance. 358 MR. SHEPHERD: One of the reasons that you said that you needed to replace the system was because it was written in COBOL, an ancient machine-language system in which I once trained, before the last ice age and other languages that some of us learned in university a long time ago; right? 359 DR. SHARMA: It had archaic technology, yes, and a flat file, a text file architecture. 360 MR. SHEPHERD: And so it's a lot more expensive to operate, isn't it? 361 DR. SHARMA: Seeking an RPG2 programmer at this time is very expensive. 362 MR. SHEPHERD: Mr. Chairman, I don't know what your plans are for a morning break, but I have one more area to deal with which will take about half an hour, and if you wish to break now, that would be convenient. It's up to you. I'm in your hands. 363 MR. VLAHOS: Why don't we break. It is 25 after 10:00, and we'll return at a quarter to 11:00. 364 MR. SHEPHERD: Thank you, Mr. Chair. 365 --- Recess taken at 10:25 a.m. 366 --- On resuming at 10:52 a.m. 367 MR. VLAHOS: Please be seated. 368 Any preliminary matters? 369 MR. LYLE: Other than Hydro One has provided some further answers to interrogatories, Mr. Chair, there are none. 370 MR. VLAHOS: I see J.1.3 and J.1.7? 371 MR. LYLE: That's correct, Mr. Chair. 372 MR. VLAHOS: Okay, thank you. 373 Mr. Shepherd. 374 MR. SHEPHERD: Thank you, Mr. Chairman. 375 Let's start -- we're going to talk about cost allocation, and so let's start with the sort of basic principle, which I think you agree with, is that the proper way to allocate costs is by cost causality; is that right? 376 MR. WILLIAMSON: That's correct. 377 MR. SHEPHERD: And could you turn to Toronto Hydro's evidence, tab 1 of their interrogatory responses. I'll just read you the -- 378 MR. STEPHENSON: We don't have it. 379 MR. SHEPHERD: I'll read you the quote and you can tell me if you agree: "If rates were to track cost causality, it would be more appropriate to allocate transition costs by number of customers." 380 I take it you agree with that? 381 MR. WILLIAMSON: Yes, I agree with that. 382 MR. SHEPHERD: I'm reading another quote from the Hydro One rate case. This is where they got interim recovery of the transition costs, and the Board says in their decision: "Networks also submitted that the pertinent cost driver to determine the allocation of market-readiness transition costs was the number of customers." 383 I take it you agree with that? 384 MR. WILLIAMSON: Yes, I would agree with that. 385 MR. SHEPHERD: You were here yesterday and heard the Enersource evidence; correct? 386 MR. WILLIAMSON: That's correct. 387 MR. SHEPHERD: Do you recall Mr. Buckler talking about allocating transition costs based on kilowatt-hours rather than number of customers to reflect the intended benefits of market opening? Do you recall that discussion? 388 MR. WILLIAMSON: I heard that discussion, yes. 389 MR. SHEPHERD: Do you agree with the conclusions he gave us in that evidence? 390 MR. WILLIAMSON: I think he had some very good logic for taking that approach. We've taken a different approach, which we believe is more of a cost-causality approach, but I cannot comment on his approach. 391 MR. SHEPHERD: Are you saying that if the Board went with kilowatt-hours for transition costs, as suggested by Mr. Buckler, if the Board went with that in the case of London Hydro, you would think that was as good as number of customers? 392 MR. WILLIAMSON: Using kilowatt-hours as an allocator for system billing costs implies there's some form of a relationship between the quantity consumed by a customer in relationship to the costs of billing that customer, and I have no evidence to suggest there is such a relationship. 393 MR. SHEPHERD: Thank you. 394 I'm showing you now a four-page spreadsheet entitled "London Hydro Regulatory Assets Allocations." I wonder if we could get an exhibit number for this. 395 MR. LYLE: We'll mark that as Exhibit I.6.3. 396 EXHIBIT NO. I.6.3: SPREADSHEET ENTITLED "LONDON HYDRO REGULATORY ASSETS ALLOCATIONS" 397 MR. SHEPHERD: And I guess, Mr. Williamson, can you identify this document? 398 MR. VLAHOS: Mr. Shepherd, just one minute. We don't have copies of those. 399 MR. THIESSEN: We do. 400 MR. SHEPHERD: Mr. Chairman, I think the intention was that the Panel would memorize the numbers and wouldn't have to refer to them. 401 MR. VLAHOS: I will pass on the opportunity to comment on that. 402 MR. SHEPHERD: Mr. Williamson, can you identify this document? 403 MR. WILLIAMSON: Yes, I've seen this document. This is the document that you provided to us, I believe, it was last Friday to input our data and verify your calculations. 404 MR. SHEPHERD: And you've made some changes to these numbers, and the numbers now presented to you are correct? 405 MR. WILLIAMSON: Yes, I believe they are. 406 MR. SHEPHERD: So I'm going to ask you to go to the first page. I'm going to get to the summary on the last page in a few minutes, but let me just start with the -- well, actually, you know what, let's start with the last page because I want to make sure we understand each other right away. The last page you added and is a summary of four different allocation methods; right? 407 MR. WILLIAMSON: Correct. 408 MR. SHEPHERD: And the first three are the ones in the spreadsheet? 409 MR. WILLIAMSON: That's correct. 410 MR. SHEPHERD: And the fourth one is the actual proposal that you've included in your evidence; right? 411 MR. WILLIAMSON: That's correct. 412 MR. SHEPHERD: And if I understand correctly, we'll get back to the details in a second, but if I understand correctly, your proposal is essentially the same as number 2 but you've altered a few of the numbers somewhat to be more precise in your allocations; is that right? 413 MR. WILLIAMSON: That's correct. 414 MR. SHEPHERD: Okay. So now I'm going to go back to page 1, and about half -- well, three-quarters of the way down the page you'll see a line "Total Allocation"? 415 MR. WILLIAMSON: Yes. 416 MR. SHEPHERD: And that represents the amount to be collected -- the total amount, of the total regulatory assets, that's the amount to be collected from each rate class in this particular allocation assumption; right? 417 MR. WILLIAMSON: Correct. 418 MR. SHEPHERD: And then we see two lines below that, "Collections In Phase 1 and Interim Recoveries." These are the amounts you are either collecting this year, collections in phase 1 is what you're collecting in 2004, and interim recoveries are what you collected prior to phase 1; is that right? 419 MR. WILLIAMSON: That's correct. 420 MR. SHEPHERD: So these numbers are actual numbers, these are the actual amounts you're collected from each rate class, or have collected. 421 MR. WILLIAMSON: Yes. 422 MR. SHEPHERD: And so then you have a line, "remaining to be collected," and that's how much still remains to be collected over 2005 and 2007? 423 MR. WILLIAMSON: That's correct. 424 MR. SHEPHERD: So, for example, if we look at the residential class, we see that on this set of allocation assumptions, which is transition costs by distribution revenues and RSVA accounts by kilowatt-hours, the allocation to the residential class is $11.7 million; is that right? 425 MR. WILLIAMSON: That's correct. 426 MR. SHEPHERD: And by the end of 2004, you will have collected about $2.6 million of that? 427 MR. WILLIAMSON: Correct. 428 MR. SHEPHERD: Leaving about 9 million left to collect, or $3 million a year for three years; right? 429 MR. WILLIAMSON: That's correct. 430 MR. SHEPHERD: And so similarly, the large-volume customers -- now, you have only have three large-volume customers; right? 431 MR. WILLIAMSON: Right. 432 MR. SHEPHERD: And so their share is just under $750,000 over the -- of the entire amount? 433 MR. WILLIAMSON: That's correct. 434 MR. SHEPHERD: Of which you've collected half of it -- no -- yeah, more than half of it as of the end of this year; right? 435 MR. WILLIAMSON: Correct. 436 MR. SHEPHERD: So you only have $350,000 to collect over the next three years; right? 437 MR. WILLIAMSON: That's correct. 438 MR. SHEPHERD: On this set of assumptions. And similarly, if you look at the general service over 50 kilowatt class, there's an allocation of $7.9 million on these assumptions. 439 MR. WILLIAMSON: Correct. 440 MR. SHEPHERD: Of which you've collected about 3 million? 441 MR. WILLIAMSON: Correct. 442 MR. SHEPHERD: Leaving 4.9 million to collect over three years. 443 MR. WILLIAMSON: That's correct. 444 MR. VLAHOS: Mr. Shepherd, I wonder if I can just ask a question by way of clarification. 445 When the amounts of recovered are shown on these schedules, are they annualized amounts - and if you don't understand this, I can explain it - or are they absolute amounts that have been recovered and nothing have to do with the total dollar amount recoverable on an annualized basis that is reflected in rates? Did I make that clear? 446 MR. SHEPHERD: Yes. And maybe I'll ask the witness. 447 The amounts for collections in phase 1 and interim recoveries, are those actual dollars for those periods, or are they annualized? 448 MR. WILLIAMSON: That's the -- that's the total that will be -- the 6.4 million is the total that will be collected from April 1, '04 to, I believe it's, February the 28th, '05. 449 MR. SHEPHERD: And the interim recoveries, that's the total amount collected over those 26 months? 450 MR. WILLIAMSON: Correct. Those are actual recoveries. 451 MR. SHEPHERD: So these are dollars that you don't have to collect because you've already collected them as at the end of this year. 452 MR. WILLIAMSON: The 724,000 is already collected, and by the end of next February, the 6.4 million will have been collected. 453 MR. VLAHOS: Okay. Mr. Williamson, let me -- I just want to make sure I understand this. The $724,000, that was collected through an increase in rates? 454 MR. WILLIAMSON: Correct. 455 MR. VLAHOS: And that increase in rates, is that still there in the current rate schedules? 456 MR. WILLIAMSON: No. That was removed with the April 1st rate-filing. 457 MR. VLAHOS: Okay, so that was removed. And in place of that, we have a new rate adjustment that would generate, everything else being equal, would generate, on an annualized basis, $6.4 million? 458 MR. WILLIAMSON: Yes, that's correct. 459 MR. VLAHOS: Now, are we talking about a full 12 months here, April 1st -- 460 MR. WILLIAMSON: Yes, over a 12-month period, that's the amount that would be collected. 461 MR. VLAHOS: All right. So -- okay. The current rates would generate -- if unchanged, would generate $6.4 million for London Hydro. 462 MR. WILLIAMSON: Let me clarify that a little bit. Actually, because that 6.4 million is being collected over an 11-month period -- that's actually a value that will be collected over an 11-month period, rather than a 12-month period. 463 MR. VLAHOS: Okay. So the current rates, the current rates reflect recovery of $6.4 million, but on an 11-month basis. 464 MR. WILLIAMSON: Correct. 465 MR. VLAHOS: So everything else being equal, they're, if I can use the word, "inflated" by one-twelfth. 466 MR. WILLIAMSON: Yes, that was how it was dealt with in the rate application, because it was being implemented over an 11-month period. 467 MR. VLAHOS: All right. Thank you very much for that. 468 MR. SHEPHERD: Thank you, Mr. Chairman. 469 So now you have just under 120,000 residential customers; right? 119,000 and change. 470 MR. WILLIAMSON: Yes. 471 MR. SHEPHERD: So the $3 million that on this -- a year that, on this proposal, or on this set of assumptions, would be collected from them, that would be about $25 each per year? 472 MR. WILLIAMSON: I haven't made that calculation. 473 MR. SHEPHERD: Would you accept that, subject to check? 474 And, going to your large-volume customers, in this set of assumptions, you have to collect from them about $117,000, from the three of them, each year for the next three years; right? 475 MR. WILLIAMSON: That's right. 476 MR. SHEPHERD: And similarly, if you look at general service over 50 kilowatts, you would be collecting on this set of assumptions about $1.6 million a year from that class? 477 MR. WILLIAMSON: Yes. 478 MR. SHEPHERD: And so that's -- you have just over1,400 customers in that class; right? 479 MR. WILLIAMSON: Yes. 480 MR. SHEPHERD: So would you accept, subject to check, that that's about $1,100 per year each? 481 MR. WILLIAMSON: Yes. 482 MR. SHEPHERD: And that, in total, they'd be paying about $5,400 each over the four years? 483 MR. WILLIAMSON: Yes. 484 MR. SHEPHERD: Now, unlike the other LDCs in this proceeding, you have been able to provide, in response to an interrogatory, information on the schools in your franchise area, which we can find at appendix 15 of your IR responses. Do you have that? 485 MR. WILLIAMSON: Yes, I have that. 486 MR. SHEPHERD: And so you have two school boards in your franchise area? 487 MR. WILLIAMSON: Yes, I believe that's correct. 488 MR. SHEPHERD: And what this IR response shows is that you have 124 schools in your area; is that right? Schools and school buildings. 489 MR. WILLIAMSON: Yes, that's correct. 490 MR. SHEPHERD: Just as an aside, can you tell the Board why it was so easy for you to provide this information? 491 MR. WILLIAMSON: It wasn't actually that easy. 492 MR. SHEPHERD: Sorry, I thought it was. 493 MR. WILLIAMSON: Apparently it took some work for our customer-billing department to extract this data from our systems, but they did manage to do that and summarize it in the appendix that we've presented here. 494 MR. SHEPHERD: Your CIS, in fact, has the sort of functionality that allows you to extract information of this type more easily than some other systems, doesn't it? 495 DR. SHARMA: Yeah, when he says there was difficulty, difficulty only in prioritizing the work, because billing support -- we have a very small staff to support all our inquiries, so we have to free up some time to do reporting on an ad hoc basis. But you are very correct in saying our database has all records stored in there, easily accessible, because it is relational and structured -- architectured very efficiently, and we have reporting tools that are available to the front-line staff that they can use to make ad hoc inquiries. 496 MR. SHEPHERD: Now, like other LDCs -- tell me if this is true -- that each of the 124 school buildings is treated as a separate customer for billing purposes? 497 MR. WILLIAMSON: That's correct. 498 MR. SHEPHERD: So, if I understand the first page of this exhibit, the upshot of this proposed allocation, this option, would be that the two school boards in your franchise area would pay a total bill of somewhere around $675,000 for regulatory assets. Am I in the right range? 499 MR. WILLIAMSON: If this allocation method was used, yes, that would be the result. 500 MR. SHEPHERD: Okay. So now I'd like you to turn to the second page of this spreadsheet. And can you confirm that this is identical to the first page, except that 1508 and 1570 are allocated on the basis of number of customers? 501 MR. WILLIAMSON: Yes, that's correct. 502 MR. SHEPHERD: So one of the results of that is -- because you have a heavy residential base, that would mean that your residential customers, instead of bearing 11.7 million of the costs, would bear 14.5 million of the costs; right, roughly? 503 MR. WILLIAMSON: Yes, that's correct. 504 MR. SHEPHERD: And we saw that, in the first option, over the next three years, it would be $25 per residential customer. In this example, it's around $33, isn't it? 505 MR. WILLIAMSON: Subject to check, I'll accept that. 506 MR. SHEPHERD: Would you accept that the difference between the two is around 65 cents per customer per month, in that range? 507 MR. WILLIAMSON: Yes, it would be in that range. 508 MR. SHEPHERD: But now, if we go over to the large-volume customers, again, there's only three of them, on this allocation, you only need to collect $150,000 from them, instead of $350,000 from them; right? 509 MR. WILLIAMSON: Which lines are you comparing here? 510 MR. SHEPHERD: This is the total amount to be -- remaining to be collected for large-volume on option 2 and option 1. Option 2, 153,000; option 1, $353,000. 511 MR. WILLIAMSON: Yes, that's correct, 153,000. 512 MR. SHEPHERD: So on average, for the three of them, they would save $66,000 a year each if you used this option. 513 MR. WILLIAMSON: That's correct. 514 MR. SHEPHERD: Now, if you go to the general service over-50-kilowatt class, this shows, if I understand it correctly, that instead of collecting 7.9 million from them, as in the first example, you'd only be collecting 3.6 million from them; is that right? 515 MR. WILLIAMSON: That's correct. 516 MR. SHEPHERD: Now, just to complete this, the third page represents the same allocations as page 2, but allocating the RSVA accounts by distribution revenues rather than kilowatt-hours; is that right? 517 MR. WILLIAMSON: That's correct. 518 MR. SHEPHERD: And you disagree with the allocation by distribution revenues, don't you? 519 MR. WILLIAMSON: Yes, I do. 520 MR. SHEPHERD: Can you explain why that is? 521 MR. WILLIAMSON: That's because the RSVA variances are the direct result of buying energy from the IMO at given prices and billing that energy to customers at varying prices. And in London Hydro's situation, 80 percent of the variances are directly linked to kilowatt-hours purchased and sold, so in our view, kilowatt-hour allocator is the most appropriate allocator from a cost-causality perspective. 522 MR. SHEPHERD: And your distribution revenues are only driven about 30 percent by volume; right? 523 MR. WILLIAMSON: That is correct. 524 MR. SHEPHERD: So you don't have a tracking of causality there. 525 MR. WILLIAMSON: We receive about 40 percent of our distribution revenues from the variable revenue component, which is composed of kilowatt-hours and demand values. The remaining 60 percent is the allocation of the fixed charges of the utility. So, yes, only 30 percent of the distribution revenues can be related to energy quantities. 526 MR. SHEPHERD: Now, is that unique to your utility? Is that a particular rate design thing that makes your distribution track those causes less? 527 MR. WILLIAMSON: That flows from the initial unbundling and rate-setting process that occurred with the Board's RUD model in 1993 -- 1999, excuse me, where we unbundled the energy and the distribution charges and we allocated the distribution revenues between the fixed and variable components. And there was some flexibility provided to each utility and how much was to be allocated in that process. 528 MR. SHEPHERD: And I understand that you went heavy on the fixed side. 529 MR. WILLIAMSON: I don't know that we're heavier or lighter than any other utility. The main driver in that allocation process was the need to mitigate the rate impacts to customers at the time. And the splits that we ended up with were the ones that produced the best results from a rate-mitigation process. 530 MR. SHEPHERD: And if I understand what you just said a minute ago, it's basically 60 percent fixed, 10 percent demand, and 30 percent volume. 531 MR. WILLIAMSON: That's correct. 532 MR. SHEPHERD: Okay. So finally, then, let's turn to the last page. And your fourth option there, which you've also described in appendix 14 of your IR responses; correct? 533 MR. WILLIAMSON: That's correct. 534 MR. SHEPHERD: Your fourth option is RSVA by kilowatt-hours and transition costs by number of customers but with adjustments; is that right? 535 MR. WILLIAMSON: Transition costs by number of customers, but the number of customers being the number of customers at the end of December 2003 versus the method that's used in this schedule, which is December 2002. 536 MR. SHEPHERD: Okay. And you also allocated 1571 slightly differently than the standard model. 537 MR. WILLIAMSON: 1571 allocations are based upon the exact calculations of energy variances that we submitted in our prefiled evidence. 538 MR. SHEPHERD: So it's by class. 539 MR. WILLIAMSON: By customer class. 540 MR. SHEPHERD: So it's essentially the same concept as the standard approach, you've just done it more precisely. 541 MR. WILLIAMSON: Yes. We've tried as best we can to get as precise a match as possible from a cost-causality basis. 542 MR. SHEPHERD: Was there -- again, I guess I'll ask you, because you were the only utility, as far as I know, that did this: Is there something in your systems that makes this easier for you to do as opposed to other utilities? 543 MR. WILLIAMSON: We -- on a monthly basis, we get very detailed customer statistical data on energy by customer class, by customer type, and we maintain this data in a table that enables us to achieve this type of analysis. 544 MR. SHEPHERD: And I guess -- and this may be an unfair question to ask you, and if it is, just tell me -- do you think it would be unreasonable for the Board to ask other utilities to do a similar calculation? 545 MR. STEPHENSON: I think it's unfair to ask us that. I mean, you know, we can only speak to what we have here and the way that we do things. I don't think it's fair to comment on -- you know, utilities have different systems and different business processes, and the ease or difficulty for which they can pull information and do analysis is really, I think, unique. 546 MR. SHEPHERD: I'm just trying to understand, and I'm not going to pressure you on this, but I'm just trying to understand whether this is about something unique in your systems, that it's not fair to ask other people who do have it to do. 547 MR. VOGEL: Mr. Chair, I think the witnesses are indicating they can answer for the London Hydro system, but asking a general question about what's possible under somebody else's system, I mean, how would they know. So I think they've probably gone as far as they can go. 548 MR. VLAHOS: Mr. Shepherd? 549 MR. SHEPHERD: That's fine, Mr. Chair. 550 Those are my questions. Thanks very much. 551 MR. VLAHOS: Thank you, Mr. Shepherd. 552 Mr. Dingwall. 553 MR. DINGWALL: There was some discussion at the break, and Mr. Aiken has indicated he has some time conflict at 12:30 and has asked to go next. 554 MR. VLAHOS: Mr. Aiken, is that conflict lunch? 555 MR. AIKEN: I wish it was. It's another working group meeting, I'm afraid. 556 MR. VLAHOS: Go ahead, sir. 557 MR. AIKEN: Thank you. 558 CROSS-EXAMINATION BY MR. AIKEN: 559 MR. AIKEN: Good morning, panel. My name is Randy Aiken. I'm here representing the London Property Management Association. 560 Mr. Shepherd has touched on a number of the issues that I had intended on crossing you on, so I, hopefully, will be briefer than I had expected. 561 If we could turn to tab 6, page 95, and near the middle of that page I see the $9.6 million in transition costs to the end of 2003, which includes 1.2 million in interest and a reduction of 600,000 in amounts recovered through distribution rates to the end of 2003. 562 First, a general question. Do you agree that these transition costs are costs that were required to move the electricity market to a competitive market for the commodity? 563 DR. SHARMA: In our opinion, as we indicated earlier, it's a re-regulation and competitive market, it's the onset of both aspects in the market. 564 MR. AIKEN: Then if I look at appendix 8 of the interrogatory responses, and I don't know whether you need to pull this up, but there's an additional $110,000 that's indicated was recovered in 2004. I assume this is for January through March of 2004? 565 MR. WILLIAMSON: That's correct. 566 MR. AIKEN: And it's an actual amount, not a forecasted amount? 567 MR. WILLIAMSON: That's an actual amount. 568 MR. AIKEN: Have you recovered anything in rates since March of 2004? 569 MR. WILLIAMSON: Beginning April the 1st, 2004, the rate recoveries we discussed with Mr. Shepherd of an annual -- of a value of approximately 6.4 million over an 11-month period is currently being collected through our rates. 570 MR. AIKEN: And that's strictly related to the transition costs? 571 MR. WILLIAMSON: That's been identified in the rate filing as an initial recovery of RSVA balances. 572 MR. AIKEN: If you could turn to LPMA Interrogatory No. 4, the answer there indicates that: 573 "90 percent of the costs incurred" -- "90 percent of the $5.9 million occurred in replacing the legacy CIS system were incurred to achieve deregulation compliance and functionality." 574 I want to refer you to page 10 of your evidence, in paragraph 24 where there's also a reference to a $5.9 million figure, and I just want to confirm that these are the same figures that we're talking about in these two places. 575 MR. STEPHENSON: Yes, I believe so. 576 MR. AIKEN: Then in tab 4.2, on page 1, and this is of the original evidence, for the period December of 2002, where would I find this 5.9 million in this table? 577 MR. STEPHENSON: It's on the summary line under "Capital Sub-Account 5.E," $5,837,521. 578 MR. AIKEN: Good. That's what I was hoping it was. 579 MR. STEPHENSON: Good. 580 MR. AIKEN: Then following the yellow page update to the end of 2003, that 5.8 million has been updated to 6.26 million; is that correct? 581 MR. STEPHENSON: That's correct. 582 MR. AIKEN: Now, within that capital sub-account, if I work backwards from line 5, the retailer customer requirement, just over $2 million, are all of those costs related to the market-opening? In other words, are they -- 583 MR. STEPHENSON: Sorry, can you give me that number again? I missed that. 584 MR. AIKEN: Sorry, just over 2 million. 585 MR. STEPHENSON: Yeah, the 2,022,339? 586 MR. VLAHOS: Gentlemen, only one at a time, please. 587 MR. STEPHENSON: I'm sorry. 588 MR. AIKEN: My question is, is all of that expense in there related to market-opening, all the things that you had to do to comply with regulations and such? 589 MR. STEPHENSON: Yes. 590 MR. AIKEN: Is the similar true for the 27,000 in line 3, the settlement systems, validation, et cetera? 591 MR. STEPHENSON: Yes. 592 MR. AIKEN: And is the same true for your phase 1 and phase 2 numbers of 84,000 and the 2.4 million? 593 MR. STEPHENSON: Yes. 594 MR. AIKEN: Thank you. 595 Does London Hydro provide any billing or customer information services to any other utilities? 596 MR. STEPHENSON: No. 597 MR. AIKEN: Have you in the past? 598 MR. STEPHENSON: Can you clarify "past"? 599 MR. AIKEN: Since 1998. 600 MR. STEPHENSON: Not that I'm aware of. 601 MR. AIKEN: Now, at tab 3.2, on page 19, your evidence there indicates that London Hydro needed to acquire a CIS system to reduce operating costs, and to obtain uniformity and facilitate maintenance with related cost savings through standard technologies. 602 My question there is, did the new CIS system succeed in reducing your operating costs? 603 DR. SHARMA: Yes, it did. 604 MR. AIKEN: Are you able to quantify that reduction in costs? 605 DR. SHARMA: It is a relative measure for the resources required to operate in this new competitive and re-regulated marketplace. I can only give you an example of what we have been able to achieve. 606 We state in our prefiled evidence, and I do not know if it's an interrogatory response, that our system helped us to reduce two night computer-operators that were there in old times, as well as contain the cost of customer-service resources. 607 MR. AIKEN: If you move to page 62/63 of your prefiled evidence, paragraph 133, you have a number of bullet points there that's a list of the objectives that were accomplished by the procurement of the new CIS system. 608 DR. SHARMA: Can you give me the paragraph one more time? 609 MR. AIKEN: Yes, 133, on page 62 and 63. 610 DR. SHARMA: Yes. 611 MR. AIKEN: And there you list a number of the objectives that were accomplished with the new CIS system. Can you provide the cost reductions from these individual points, or these points in total? 612 DR. SHARMA: As you can see, these are the performance aspects of the system, and as we indicated, we achieved the modern technology and a customer-service-rep-friendly interface to the computer system, as compared to the old system. Now, many of the bullets here, you see, help in containing the cost of customer-services, as well as the automation which helps us reduce those two computer-operators. Each bullet itself does not result in a quantifiable dollar. It's the collection of those attributes that has helped us achieve that. 613 MR. AIKEN: Now, I notice that no one has asked for an undertaking to this point today, but I might be the first. If you can go back to table -- sorry, tab 4.2, page 1, following the yellow page, so it's the December 2003 balances -- actually, at page 7 of that package, which is the interest calculation. And my question is, would you undertake to file an updated interest calculation on this account, assuming the Board did not allow the inclusion of the $1.7 million of your initial CIS spending? Would that be difficult to do? 614 MR. VOGEL: Mr. Chairman, I think the undertaking requested anticipates a determination from the Board that has yet to be made, and in those circumstances, my submission to you would be that that undertaking is an improper request. 615 MR. VLAHOS: Mr. Aiken? 616 MR. AIKEN: It would be my submission, Mr. Chairman, that if the Board were to deny the 1.7 million, there's a significant amount of interest associated with that, because that 1.7 million was the first expenditure that has been recording interest since April of 2000. 617 MR. VLAHOS: Okay. 618 Witnesses, how much of an effort is that? 619 MR. STEPHENSON: We don't see it as a big effort to do it. 620 MR. VLAHOS: Okay. Would you please do it? 621 MR. LYLE: We'll mark that as Undertaking J.6.1. 622 UNDERTAKING NO J.6.1: TO PREPARE AND FILE AN UPDATED INTEREST CALCULATION ON THE ACCOUNT REFERENCED IN TAB 4.2, PAGE 7, BASED UPON THE ASSUMPTION THAT INCLUSION OF THE $1.7 MILLION OF INITIAL CIS SPENDING WERE NOT ALLOWED BY THE BOARD 623 MR. AIKEN: I'm turning now to the calculation of the RSVA accounts. Were there any bad debts included in the calculation of these accounts? 624 MR> WILLIAMSON: No, there were not. 625 MR. AIKEN: If you could turn to appendix 5 of the interrogatory responses, and it's page 8 of appendix 5. This is account 1584. 626 MR> WILLIAMSON: We have that, yes. 627 MR. AIKEN: I just want to go through an explanation of some of the rows in that table. 628 The first question I have is on the row called "Total Monthly Customer Billings." Are these figures in here based on the month that's based on the calendar, or on the cycle numbers? 629 MR> WILLIAMSON: These are the actual values that are billed to our customers during the calendar month. 630 MR. AIKEN: Okay. And the IMO invoices on the following line are for the billing from the IMO for the previous month, as well? 631 MR> WILLIAMSON: That's correct. 632 MR. AIKEN: The next line is labeled "Hydro One Invoices Paid Re Previous Month." What are these costs for? 633 MR. WILLIAMSON: These are costs associated with long-term load-transfer customers. In the areas that were annexed in London a few years back, there were approximately 400 customers that are in London Hydro's service territory, but the energy that they consume is currently going through wholesale meters of Hydro One. And we bill those customers, and the revenues for those customers are in our revenue numbers that you see here. So, in order to properly account in the variance account for the other side of that entry, we're accruing the estimated cost of the power associated with those customers. 634 MR. AIKEN: So, in essence, is part of your distribution territory essentially embedded within Hydro One? 635 MR. WILLIAMSON: Yes. Hydro One is the physical distributor for these 400 customers that are in our service territory. 636 MR. AIKEN: And these charges are separate from the low-voltage charges that were talked about earlier this morning? 637 MR. WILLIAMSON: Yes, they are. 638 MR. AIKEN: Okay. Did I hear right? On the low-voltage charge, it was going to be something in the magnitude of $250 per month? 639 MR. WILLIAMSON: That's correct. 640 MR. AIKEN: Okay. I will not ask any questions on that, then. 641 The final topic I want to turn to is the allocation recovery of the costs in a number of the accounts. The first one is account 1508. This is the cost of the rebate cheques, I believe. And your allocation is based on the number of cheques, which I assume is virtually the same as the number of customers, if not the same? 642 MR. WILLIAMSON: Account 1508, the dollars have been allocated to the two classes that the cheques were issued to, which was the residential customers and the general service under 50 kilowatt customers. The -- I believe in our evidence we've quoted a value per cheque. 643 MR. AIKEN: And the allocation is based on the number of cheques, which is essentially the same as the number of customers within those two rate categories? 644 MR. WILLIAMSON: The allocation is based on the number of customers in the residential and general service under 50 class, with the assumption that virtually 100 percent of those customers got a cheque. 645 MR. AIKEN: Now, I understand your recovery proposal is on a per-kilowatt-hour basis, and the rationale for that is that the rebate was a refund of commodity cost; is that correct? 646 MR. WILLIAMSON: Yes. We've suggested that the -- in essence, what they got was a refund of the energy costs that they had paid, and the most appropriate way of giving that back to them would be a reduction in energy costs on a kilowatt-hour basis. 647 MR. AIKEN: So that allocation, then, is essentially driven by the benefit. It was a commodity benefit, a reduction, and therefore it's a recovery through a kilowatt-hour charge rather than a fixed charge. 648 DR. SHARMA: Just to carry on with the principle of cost causality, which I suspect is your intended question, in this case, Mr. Williamson just answered the cost and the benefit going to that class, of course, is also due to that class, and that benefit was directly related to the reduction in commodity price to 4.3 cents per kilowatt-hour going back to May 1st, and hence cost was also incurred for the same purpose. And that is the relationship. 649 MR. AIKEN: So based on your proposal, a larger customer will pay a greater share of this cost than a smaller customer. 650 MR. WILLIAMSON: Yes. There would be a difference which would also relate to the benefit that they would have received. 651 MR. AIKEN: But am I correct that everybody received a cheque in the same amount? 652 MR. WILLIAMSON: They did, and subsequent to that, there was a further reconciliation for customers who -- there was a calculation made of a rebate based on their energy consumption - I believe it was from market opening to December the 1st - and some customers got a further rebate that went beyond the $75 value. 653 MR. AIKEN: So essentially your proposal recovers a higher cost from customers who received a higher benefit, essentially? 654 MR. WILLIAMSON: Yes, I believe that's correct. 655 MR. AIKEN: Okay. One quick question on account 1571, the premarket opening cost of power. I wasn't quite sure from the evidence and from the discussion this morning how you were actually allocating these costs. Are they allocated in a similar manner to the RSVA account, in other words, kilowatt-hours? 656 MR. WILLIAMSON: From an allocation perspective, the allocation of customer class is the result of the calculations we made to determine what the variance was, by customer class, based upon the revenues we collected from those customers during the applicable time frame and the estimated cost of that power during the applicable time frame. 657 From a recovery basis through rates, I believe we have suggested on a kilowatt-hour basis. 658 MR. AIKEN: My next number of questions have to deal with accounts 1518 and 1548. These are the retail cost variance accounts. And it would simplify things substantially if you had volume 1 of the transcript from last Monday. There are a number of questions posed to Hydro One on this issue, and I just want to see if you would agree or disagree with the answers provided. 659 MR. VOGEL: Can I have the reference, please? 660 MR. AIKEN: Yes, I'm starting at paragraph 503 of volume 1. 661 That's where Mr. Warren is starting his cross-examination on the retail cost variance accounts. At paragraph 505, he asks Ms. Frank if she could tell him how those costs arose, and then at paragraph 507, I guess it is, an answer was provided. My question is, do you agree with that answer? Or do you have any comments? 662 MR. WILLIAMSON: No, I think that's generally correct. 663 MR. AIKEN: And then the following question in paragraph 508 and the response at 509, would you agree with that? 664 MR. WILLIAMSON: I believe that's correct. 665 MR. AIKEN: Now, is your proposal to allocate and recover these retail cost variance figures the same as that of Hydro One, that is, to allocate these costs to all customers instead of only to retailers? 666 MR. WILLIAMSON: I believe we've recommended that the costs should be allocated to only those customers who are using those services through a retailer. 667 MR. AIKEN: So you would be recovering those costs only from -- you would not be recovering those costs from customers who remained on the SSS. 668 MR. WILLIAMSON: That's correct. 669 MR. AIKEN: In account 1570, the transition costs, I think you've already agreed but maybe I should reconfirm this, do you agree that the whole -- the goal of the whole process was to benefit all customers through lower generation costs? That was one of the key goals behind all the costs incurred? 670 DR. SHARMA: As we indicated earlier, it was a dual purpose; first, of course, the competitive commodity market and, second, the re-regulation of the industry. 671 MR. AIKEN: And I think my final question, following up on something Mr. Shepherd asked -- if the Board were to determine that these costs should be allocated on a volumetric basis, are there any mechanical or structural impediments to your allocating these costs in that way? 672 MR. WILLIAMSON: Are you referring to account 1570? 673 MR. AIKEN: Yes. 674 MR. WILLIAMSON: No. If that was the Board's determination, we would have the ability to allocate it on whatever method was determined. 675 MR. AIKEN: Thank you, panel. 676 Thank you, Board. Those are my questions. 677 MR. VLAHOS: Thank you, Mr. Aiken. 678 Mr. Dingwall? 679 MR. DINGWALL: Sir, I'm anticipating between 45 minutes and an hour, that would be an hour standard time rather than metric time as was yesterday, so I'm in the Panel's hands as to when they wish to break. 680 MR. VLAHOS: The Panel has another commitment right at 12:30, so we have to break at 12:30, Mr. Dingwall. So if you're not finished by then, then you'll have to come back after lunch. 681 MR. DINGWALL: Certainly, sir. 682 CROSS-EXAMINATION BY MR. DINGWALL: 683 MR. DINGWALL: My first question is with respect to Energy Probe Interrogatory No. 1. Would you turn that up, please. 684 This interrogatory derives from a portion of the evidence that makes reference to strategic business plans and reports, and things like that. In response to this interrogatory, no reports were produced. Do such reports exist? 685 MR. STEPHENSON: I think that they don't exist, and the answer in the interrogatory was to reflect that. The strategic work that we were referring to in the evidence was the work that was undertaken by senior management, internally, to assess the White Paper and other developments in the marketplace, regulatory or otherwise -- and to assess that in light of where we were going as an organization is something that we regularly do. We don't necessarily develop a plan out of that. We don't necessarily document that. That's something that this management at London Hydro does. 686 MR. DINGWALL: As a result of these considerations, was a plan developed for market-readiness? 687 DR. SHARMA: Just to continue where Mr. Stephenson left off, yes, what it led us to do is to actively participate in this new -- or in preparation of this new market. We did that through setting up of goals to participate in the market design committee, and also take an internal review of our system that could meet the future, whatever the future is, as we mentioned at the time. And that's what we did. 688 MR. DINGWALL: Now, in context of the development of a market-readiness plan and the incurrence of transition costs, was a plan or a budget produced which addressed that? 689 MR. STEPHENSON: I think it was a little bit more simple than how you're characterizing it. We knew that there were changes forthcoming; we knew that our billing system wouldn't work. The costs that are before us here today are, principally, those costs of developing a new system. We scoped that by going out to the market and defining what we needed and, through a competitive process, we received responses and that was -- in essence, the marketplace determined what our budget was for that initiative. 690 MR. DINGWALL: So, Mr. Stephenson, would I be correct to assume, then, that the budget that the utility derived for its market-readiness project was based on the feedback from the various RFPs, or other communications that the company had with the various vendors in the marketplace? 691 MR. STEPHENSON: Obviously, that was a piece of our assessment, matching that to what we saw as the requirements of the new marketplace. 692 MR. DINGWALL: So essentially a budget was created. 693 MR. STEPHENSON: Well, I think a budget -- a budget was established for the implementation of the system. When you use the words "market-readiness," it conveys to me something a little bit broader than that, and that's what I'm fussing on. 694 MR. DINGWALL: Well, there are a number of elements of transition costs that you're seeking recovery for here, in addition to the basic CIS costs which have been the focus of much of the discussion today. What I'm trying to determine is whether you're a utility that wrote things down or a utility that, like the other applicants so far, didn't have actual budgets and budget comparisons and all of that. 695 MR. STEPHENSON: Well, again, I think that there aren't a number of costs when you really look through the APH 480. There is a development cost. We went to the market. We established what we needed to do in terms of functionality to achieve where we needed to be for that particular item. When dealing with vendors, obviously you scope the level of participation that you have internally. You need to dedicate resources to achieving those objectives, and that's what we did. The result of that was that we determined a certain number of business users had to get involved, to dialogue with the vendor providing the system. And, of course, that creates some need to back-fill, for lack of a better term, those positions, and hence there was some temporary labour associated with that. 696 If you were to boil down what's in the APH 480, it's principally those development costs, with some labour to deal with back-filling and other issues. So, you know, I don't know whether there would be a greater need for a more detailed budget process, because there aren't that many costs that we're dealing with. 697 MR. DINGWALL: Was there a business plan written down, committed to paper, prior to the incursion of the transition costs? 698 MR. STEPHENSON: There was no business plan produced. There was no formal business plan produced. I don't think that we needed to have a document that would encapsulate a business plan, per se. We -- as I said, this was something that was fluid in terms of regulatory development, and otherwise, and we met on a regular basis and developed what needed to be done to address the issue of the day and the issue on the horizon. But that wouldn't necessarily be encapsulated in a formalized business plan document. 699 MR. DINGWALL: My next questions are going to relate to Energy Probe Interrogatory No. 2, so I'm going to ask you to turn the page, please. 700 In response A to that interrogatory, there's the indication that there were no formal external studies done of the legacy CIS. Were there any internal studies done of the functionality of the legacy CIS? 701 MR. STEPHENSON: I'm not aware of any document that -- of that nature, no. I think that it was clear to us -- beyond what we had provided in the evidence, I don't think that there is anything. The submission to our board, I think some of which is in the evidence, indicates our thought process. Obviously we had a legacy system that was very old and we knew, just by its nature, that it could not address the functionality that was going to be required even early on, particularly unbundling. So I don't think that there was a need to necessarily have a formal document. 702 DR. SHARMA: Can I further add to that. There is always a debate of a prudent expenditure and imprudent expenditure, and we're here to address that as well. At the time our internal staff quickly realized and recommended that this system will not support the added functionality because of many fundamental difficulties with it, such as database architecture, and also, other factors we have indicated in our evidence. So we quickly decided as a management to start looking for its replacement, and that is what we embarked upon in a strategic sense. 703 MR. DINGWALL: So, Mr. Stephenson, you have given your evidence on personally not recalling whether any studies were done. Mr. Sharma -- I apologize, Dr. Sharma, I'm wondering if you have any recollection of whether any studies were done from the period 1992 to 1997. 704 DR. SHARMA: As I indicated, well -- first of all, I did come on board in '98 only. But prior to that, as I indicated, internal staff who were very familiar with our legacy system, we had to depend on their recommendation of what the future will hold. Having discussed in a general nature what we suspect that future is, they recommended that this system, given its database, will not support. And later on, repeatedly it has become obvious to us that that legacy system would not have supported. 705 MR. DINGWALL: I understand from some of the other questions from this morning that the system was not completed until May of 2000; is that correct? 706 DR. SHARMA: April of 2000. 707 MR. DINGWALL: April of 2000, I apologize. When -- now, that's the completion date. When was the system first put into service? 708 DR. SHARMA: April 13th, 2000 was the day when the system was launched on-line. 709 MR. STEPHENSON: The first phase of the system was put in April 13th, put in production on April 13th, 2000. 710 MR. DINGWALL: Now, I understand one of the concerns with respect to the older system was year-2000 compliance. 711 MR. STEPHENSON: Correct. 712 MR. DINGWALL: Was the older system, then, continued into operation post-December 31st, 1999? 713 MR. STEPHENSON: Yes, it was. 714 MR. DINGWALL: And was there a -- had there been forecasted an earlier start date for the Sierra CIS? 715 MR. STEPHENSON: Absolutely. 716 MR. DINGWALL: Now, here we are four years later, maybe a bit less scared of Y2K than we might have been back in 1999, but did the delay in the Sierra system require any reworking of the legacy system to then continue its use into the year 2000? 717 MR. STEPHENSON: Yes, I think that we indicated that we spent, I think it's 200, $300,000 to make the -- in rough terms, to make the legacy system compliant for year 2000. And that was done principally as a contingency plan to keep our system running in the event that we had any further issues with going live with the first phase of our new system. 718 MR. DINGWALL: So I understand, are those costs related to the enhancement of the legacy system here today as transition costs? 719 MR. STEPHENSON: No. 720 MR. DINGWALL: Now that you've had some rest, I'm going to ask you to turn two pages to Energy Probe Interrogatory No. 4. 721 Now -- 722 MR. STEPHENSON: We have that. 723 MR. DINGWALL: -- you've quoted or you've provided some excerpts from the TMG Consulting report in your evidence. Did you seek TMG's permission in order to excerpt that confidential report? 724 DR. SHARMA: Sorry, I thought Mr. Stephenson was answering this. Yes, we did discuss with them to use some part of the language in another format, as well as publications. 725 MR. DINGWALL: And where, principally, do the concerns about confidentiality arise in the context of this study? 726 DR. SHARMA: The study, as we indicated in our evidence and testimony, was done for another Ontario utility, and there are various aspects of their needs, their requirements, and their specifications which are addressed in very specific detail, and that is the nature of confidentiality that really applies to the utility in question here. 727 MR. DINGWALL: So would it be fair, then, to say that it's those aspects of the study which address the other utility's specific needs and might even be used to identify the other utility that are considered confidential? 728 DR. SHARMA: Partly, yes. 729 MR. DINGWALL: And presumably any pricing that might be contained in the study? 730 DR. SHARMA: That report did not address the pricing because it was a performance evaluation of the system. 731 MR. DINGWALL: Would you have any objection to contacting TMG to provide a redacted version of the report with the confidential information excluded or blacked out? 732 MR. VOGEL: Mr. Chairman, I don't think my friend has established a need for anything further than what's been produced. What's in the prefiled evidence are the conclusions from the report. The witnesses have addressed those in their direct evidence this morning, and beyond that, the witness has indicated the reasons for the confidentiality requirement on further release of that report. Therefore, I'd object to the requested production of that report. 733 MR. VLAHOS: Mr. Dingwall? 734 MR. DINGWALL: It really comes down to the weight that the Board can give the report or the mentions of the report if the report's absent. If the applicant doesn't wish to produce it for whatever reasons, then that will really come down to a matter of argument on the weight. 735 MR. VOGEL: The weight, Mr. Chairman, is certainly -- 736 MR. VLAHOS: Mr. Vogel, I'm sorry, give us a second. 737 [The Board confers] 738 MR. VLAHOS: Mr. Dingwall, the Board will not require the production of that report. 739 Mr. Vogel, I was just following practice that the last word goes with the requester, and that's why I cut you off. 740 MR. VOGEL: Thank you, Mr. Chairman. 741 MR. VLAHOS: Normally. 742 MR. DINGWALL: During the cross-examinations of both Hydro One and Toronto Hydro-Electric System Limited, those applicants described various initiatives undertaken in conjunction with their market-readiness projects whereby certain expenses were withdrawn from their transition claims prior to presentation of their prefiled evidence. Did London Hydro undertake any such effort to review their own cost incursions with respect to transition costs, or other costs, and did they -- did you exclude any costs from the presentation? 743 MR. STEPHENSON: As I indicated earlier in the morning, we had made some adjustments as detailed in the APH 480 that revised the balances for -- from what we had previously indicated at January, 2004, to where we are today. In so doing, we excluded about a million dollars of capitalized labour, which was inappropriately capitalized for the purposes of this application, but would normally be considered appropriate for generally-accepted accounting principles. That million dollars was pulled out of our costs, and as well, we identified some supplementary costs that were included in our application, as detailed in APH 480. 744 MR. DINGWALL: Now, my next question relates to Board Staff Interrogatory No. 4. You don't need to turn it up, but if you wish to, you certainly can. 745 I understand that in the company's financial statements, the numbers reported for regulatory assets are different from the numbers claimed in this proceeding. Can you take me through that, Mr. Stephenson. 746 MR. STEPHENSON: I think we've indicated in this response that, for financial statement purposes, we have arbitrarily made an allowance for some amount of the regulatory assets, and we've done that primarily because of issues relating with uncertainty of collectibility, as opposed to the validity of the amounts. It's an issue that's been before many of the auditors, audit firms, as well as the local distribution companies that are carrying balances on their balance sheet as to trying to wrestle with recovery and how those should be reflected in the annual statements. 747 MR. DINGWALL: And in which areas did you write down the regulatory assets for the purpose of your financial statements? 748 MR. STEPHENSON: I think I indicated in the statements -- we have written off provisions for the cost-of-power variance in the years of 2001 and 2002. Then I think that we indicated in our disclosure in the annual statement fiscal 2003 that, depending on the outcome of the regulatory process here -- that there may be reason for reviewing and reversing, adjusting, those provisions, when greater certainty would be provided. 749 MR. DINGWALL: The last statement seemed somewhat general. Were there any specific matters that you identified as being contestable? 750 MR. STEPHENSON: I'm trying to be as specific as possible. I don't know where I was general. But I don't see any of the items, really, as being contestable. I think that that is for review here, and for the Board to determine what is appropriate. What we're doing in the annual statements is trying to balance the uncertainty with the process and the collectibility of the accounts to proper disclosure necessary for the readers of the statement. In keeping with generally-applied concepts for accounting principles, of neutrality and presentation conservatism, that's what we're wrestling with in dealing with the annual statements. I see it's somewhat different than what we're dealing with here. 751 MR. DINGWALL: My next series of questions relate to the general booking of accounts. Am I correct in assuming that London Hydro reported IMO expenses based on the month of payment, rather than the month of invoice, to calculate RSVA account balances? 752 MR. WILLIAMSON: That's correct. 753 MR. DINGWALL: From our observations, it appears the other applicants did not do this. Why did you choose this method? 754 MR. WILLIAMSON: The method we chose was the billed approach, and the billed approach was the method that the Board recommended in article 490, with the exception of year-end, where we were requested to make an accrual for unbilled amounts at year-end. 755 MR. DINGWALL: Can you tell me if London Hydro reported total monthly customer-billings based on month of payment, or month of invoice, to calculate RSVA account balances? 756 MR. WILLIAMSON: The entries in the monthly RSVA accounts for billings are based on what was actually billed in that month to the customers, which is on a billed basis. 757 MR. DINGWALL: Did London Hydro do any cycle-billing lag-adjustment in reporting total monthly customer billings to calculate RSVA account balances? 758 MR. WILLIAMSON: No. The only entries in the monthly RSVA accounts for billings are what was actually billed and mailed out to the customer during that month. 759 MR. DINGWALL: In accounts 1580, 1584, 1586 and 1588, there's the term "Hydro One Invoices Accrued Re Long-Term Load Transfers." Can you give me an indication of how these charges are allocated among the four RSVA accounts, please? 760 MR. WILLIAMSON: As I indicated earlier, those charges relate to approximately 400 customers that we bill but Hydro One currently is being invoiced by the IMO for those costs. We've calculated a monthly amount for each of the four RSVA accounts that is being billed to those customers, and those charges are being allocated to each of the four RSVA accounts equivalent to the amounts that we estimate that we're collecting from those customers. So, in essence, it's one offsetting the other. 761 MR. DINGWALL: In the Toronto Hydro and Enersource applications, rebate and credits flow-through amounts are included in RSVA variance accounts. Can you tell me whether rebate and credits flow- through amounts are included in the variance, RSVA variance accounts? 762 MR. WILLIAMSON: Yes. In terms of fixed-price energy credit rebates, the credits that relate to London Hydro's default supply energy flow through our RSVA variances and reduce the cost of power. 763 MR. DINGWALL: My next series of questions relate to account 1571. Can you tell me if London Hydro reported retail-billed consumption based on month of payment, or month of billing, to calculate account 1571 variances? 764 MR. WILLIAMSON: Those calculations are based on the actual billings. 765 MR. DINGWALL: And can you tell me if London Hydro reported monthly wholesale cost-of-power based on the month of payment, or the month of purchasing, to calculate account 1571 variances? 766 MR. WILLIAMSON: That -- the calculation in that particular account -- what we did was, we determined from actual billing information what was billed and collected from the customer, and from that information, calculated the equivalent cost-of-power. So, over the total time frame, it would be what we actually paid in the form of invoices to the energy suppliers. 767 MR. DINGWALL: Okay. With respect to London Hydro, distribution rates were unbundled on May 1st, 2001. And during the period from January 1st, 2001, to May 31st, 2001, the energy portion of bundled billings was calculated using a Board-approved bundled rate, as per your prefiled evidence. In the uniform system of accounts, for purposes of recording costs -- 768 MR. VLAHOS: Mr. Dingwall, could you please slow down, because the reporter is having difficulty following the speed. 769 MR. DINGWALL: Certainly, sir. With respect to London Hydro, distribution rates were unbundled May 1st, 2001. During the period from January 1st, 2001, to May 31st, 2001, the energy portion of bundled billings was calculated using a Board-approved bundled rate. In the uniform system of accounts for purposes of recording costs of power variances in this account, Board-approved unbundled cost-of-power rates was deemed effective January 1st, 2001. For this reason, Energy Probe considers it not appropriate to estimate COP billed to customers without taking into account unbundled rates approved by the Board. 770 Now, on the basis of that, does London Hydro agree that to calculate the 1571 energy variances for the period January 2001 to May 2001, that an unbundled rate schedule should be used? 771 MR. VLAHOS: Mr. Williamson, I hope you don't ask for a repeat of the question. 772 MR. WILLIAMSON: I'm just -- I need to bring up my schedule to do this. 773 For the period -- for the period January 1 to May the 31st, 2001, which was the period that rates were not yet unbundled, for the revenue collected under energy, the determination was made by taking the actual billing quantities and using the Board-approved unbundled energy rate which, in our billing system we did not put into place until June the 1st, 2001, but we still used that number which was soon to be a component of the bundled rate during those first five months. So we believe we've done the calculation appropriately by using the Board's approved rates for that time frame, even though they were not unbundled in that time frame. 774 MR. DINGWALL: In calculating bulk cost-of-power costs and revenue billed to customers for 1571, Energy Probe believes that both transmission and commodity must be included in both costs and revenues, and it appears from our analysis that that's what London Hydro did; is that correct? 775 MR. WILLIAMSON: In the calculation of the 1571 variance, yes, the rates were still bundled in the sense that they included energy and transmission rates. 776 MR. DINGWALL: Now, you gentlemen were here yesterday, I believe, during the discussion between Ms. Lott and Mr. Amar. In that discussion, it seemed to flow that the basic idea in the calculation of 1571 is to subtract the cost of power sold to time-of-use customers from the total power delivered to the utility with the result being the cost of power sold to non-time-of-use customers. Then one would subtract the bulk cost of power associated with the non-time-of-use sales, compare it with non-time-of-use revenues, and that should result in the account 1571 balance. 777 Energy Probe believes that for this calculation to be accurate, that metered volumes delivered to time-of-use customers must be grossed up for losses. It appears that this is what London did. Can you confirm that? 778 MR. WILLIAMSON: Yes, we did gross it up. 779 MR. DINGWALL: One of the assumptions upon which the claims of many of the applicants appear to be based is that time-of-use customers premarket opening paid rates that exactly matched the bulk power rate London paid to OPG. In fact, was the matching of those rates exact and natural? 780 MR. WILLIAMSON: It was not exact. The net variance for all of the time-of-use customers was a very minimal number, but there was a net variance, and that stems from the fact that those rates incorporate an estimation of coincident demand factors for large customers. And to the extent that there are any variances between those coincident demands and the actual coincident demands, it would generate a costing difference. 781 MR. DINGWALL: Sir, I'm about to move into another area of questions. I'm anticipating that that area will take longer than ten minutes. I'm happy to continue, or I'm happy to be broken in the middle. It depends on what's more fluid for the Board to consider. 782 MR. VLAHOS: Just a minute, please. 783 [The Board confers] 784 MR. VLAHOS: We will take our lunch break now, Mr. Dingwall, and we'll return at 1:30. 785 --- Luncheon recess taken at 12:20 p.m. 786 --- On resuming at 1:37 p.m. 787 MR. VLAHOS: Please be seated. 788 Any preliminary matters? 789 MR. LYLE: Not that I'm aware of, Mr. Chair. 790 MR. VLAHOS: There being none, Mr. Dingwall. 791 MR. DINGWALL: Thank you, sir. 792 My first question is -- has been passed along to me by Mr. Shepherd who is not with us this afternoon. 793 With respect to Exhibit I.6.3, showing the calculation of the allocations proposed by London Hydro, I believe that there's an option 4 on the summary page of that exhibit, and Mr. Shepherd's request is that the calculation for option 4 be shown or prepared as an additional page, if necessary, in the same format as the first three options. Is that possible? 794 MR. WILLIAMSON: Yes, that's possible. In fact, in our IR responses, in appendix 14, page 4, I believe, we have an analysis that's very, very similar to Mr. Shepherd's. It's only missing a couple of lines that Mr. Shepherd has added. So yes, we can undertake to do that. 795 MR. DINGWALL: Thank you. Could I have that, for the record, as an undertaking, please. 796 MR. LYLE: We'll mark that as Undertaking J.6.2, I believe. 797 UNDERTAKING NO. J.6.2: TO PROVIDE DETAILED CALCULATIONS FOR OPTION 4 LISTED IN EXHIBIT I.6.3 798 MR. DINGWALL: Thank you. In context of my next question, I've just got one bit of background. In Energy Probe Interrogatory No. 2, the response in paragraph B lists a number of costs associated with information systems maintenance and upkeep from the years 1992 to 1999. Now, I take it that these costs are not costs which are being sought for recovery today as transition costs; is that correct? 799 MR. STEPHENSON: That's correct. 800 MR. DINGWALL: Thank you. 801 Now, in Energy Probe Interrogatory No. 9, there's some discussion of the determination of rate base in the previous base year for PBR, which was 1999. And am I correct in understanding that, from the rate-base numbers for 1999, there was no amount included in rate base as an asset for the legacy CIS system; is that correct? 802 MR. STEPHENSON: That's correct. 803 MR. DINGWALL: Now, according to the Electricity Rate Handbook, initial distribution rates were calculated by subtracting 1999 supplied cost of power from the 1999 total revenues and dividing by volumes. Could you confirm that the 1999 rate base was not used in determining the initial unbundled rates? 804 MR. STEPHENSON: The rate base was only used for purposes of establishing the MAR calculation that subsequently followed the unbundling process, as I understand it. So there was no use of the rate base in the unbundling -- the initial unbundling of rates. 805 MR. DINGWALL: If costs -- do you agree that initial distribution unbundled rates kept the same structure as the previous bundled rates? 806 DR. SHARMA: Could you repeat the question one more time? 807 MR. DINGWALL: I could. Do you agree that the initial distribution unbundled rates kept the same structure as the previously bundled rates? 808 DR. SHARMA: You can't say, and there is no one-to-one relationship in that regard, because '99 revenue -- net income is being used to establish what are adders and subtracters. Prior to that, what was the distribution rate structure, nobody knows, because the gross margin on which we were established. 809 MR. DINGWALL: Would you agree that if costs for CIS-like functions were included in the previous rates, these costs would be included in the initial unbundled distribution rates? 810 MR. STEPHENSON: I'm sorry, I missed the last part of that question. 811 MR. DINGWALL: Would you agree that if costs for CIS-like functions were included in the previous rates, these costs would be included in the initial unbundled distribution rates? 812 MR. VLAHOS: Mr. Dingwall, I need some help on that as well. The previous rates? Which rates are we referring to now? 813 MR. DINGWALL: Before 1999. 814 MR. VLAHOS: I think the witness has also said that in 1999 there was a rebasing to come up with the net income for the purposes of the MAR, so I'm at a loss as to the purpose of that question. 815 MR. DINGWALL: Okay, I'll move on, then. 816 I'm presuming, and please correct me if I'm wrong, that the reason that the costs referenced in section B of Energy Probe Interrogatory No. 2 are not being sought as transition costs is that they're contemplated by the existing base rate structure; is that correct? 817 MR. STEPHENSON: Well, I think they're not being sought because, in applying the guidelines and the tests for costs that are eligible for transition costs, it didn't seem that anything prior to these costs would be eligible. 818 MR. DINGWALL: And were there further costs of this nature incurred after 1999? 819 MR. STEPHENSON: Well, we have -- we obviously have IT operating costs and maintenance costs that we have on an annual basis to support whatever system that we are currently using at the time, so yes, there would be some form of maintenance costs in every year that we're looking at, and certainly in 1992 to 1999. 820 MR. DINGWALL: So do any of the costs reflected in Energy Probe Interrogatory 2B relate to the new CIS? 821 MR. STEPHENSON: No. 822 MR. DINGWALL: Can you give me an indication of the functionality of the CIS upon determination of Sierra's involvement in the project? 823 DR. SHARMA: Can you be a little bit more -- can you elaborate a little bit more in terms of what it is that you want us to give an indication of? 824 MR. DINGWALL: Certainly. Let's start with this: What was the approximate date of the termination of Sierra's involvement? 825 MR. STEPHENSON: It would have been in the -- it would be in the summer of 2000, as I recall. August, early August. 826 MR. DINGWALL: Right. And I believe your evidence earlier was that the Sierra system began operating, began being rolled out to customers in April of 2000; is that correct? 827 MR. STEPHENSON: That's correct. 828 MR. DINGWALL: So would it be fair to say that the system was up and running for the purposes, as they were then known, at that time? 829 DR. SHARMA: It was -- okay, now, let me explain. It gave us the enabling technology and allowed us to bill customers as we were billing at the time, yes. 830 MR. DINGWALL: So at the time of the termination of Sierra's involvement, you had a billing system that was up and running that was able to bill customers? 831 DR. SHARMA: Yes, for the environment that was in effect at that time. 832 MR. DINGWALL: Which is pre-market-opening? 833 DR. SHARMA: That is pre-market and pre-re-regulation and pre-unbundling services, as well. 834 MR. DINGWALL: Okay. Would you agree with me that, if the decision of the Board were to be to separate the base CIS costs from those costs associated with transition to the competitive market and the unbundling of rates, this point in time that we're talking about would be the most sensible point in time, if that approach were to be taken? 835 DR. SHARMA: That approach is not a -- well, those two things are not mutually exclusive to each other. They are, rather, inclusive. One cannot happen without the other. So enabling technology has to be acquired first in order to provide the functionality that we have today, and hence that separation cannot be made. 836 MR. DINGWALL: I think Mr. Shepherd has asked you a number of questions this morning about the comparability about your state of affairs versus Enersource's state of affairs, so I'll by pass that point. 837 But I'd like to think about a scenario where, if the Board thought it best to keep the utilities on a common footing, and decided to give CIS costs, other than directly transition-related CIS costs, under the approvals in this case, would that -- let me just take a second here. 838 Would there any be any material change to the depreciation rate or time period associated with your CIS, if the recovery of that were to move to the 2006 filing from the transition-cost filing? 839 MR. STEPHENSON: The system -- there would be no change to the methodology employed or the depreciation rate. If you were to take that regulatory asset, the system, and put it in and now consider it to be an asset eligible for rate base, I think that we would probably find that it's almost fully-depreciated. So, therefore, it would not be included in a rate base, presumably, under the rules that I understand them to be and, therefore, we wouldn't be compensated for that. 840 MR. DINGWALL: In Energy Probe Interrogatory No. 4, Energy Probe asked for an explanation of the amortization approach set out in the prefiled evidence at 4.2, page 4, for the base CIS. In using your methodology, our calculation came out at a slightly different number. I'm wondering if you could, off-line, just confirm the number of $710,077. 841 MR. STEPHENSON: Can you give me the reference again, please? I lost track of it. 842 MR. DINGWALL: 4.2, page 4. 843 MR. STEPHENSON: But was there an interrogatory response that you were referring to? 844 MR. DINGWALL: Energy Probe No. 4. 845 MR. STEPHENSON: Is that not the TMG interrogatory? 846 MR. DINGWALL: Although I'm not under oath, I'll venture to answer that. You're right, so my cite and question are wrong. And since it's a calculation question, maybe we'll move that question to an off-line discussion rather than in this room. 847 I'd like you to then turn up Board Staff Interrogatory No. 19. 848 MR. STEPHENSON: Right. We have that. 849 MR. DINGWALL: The second paragraph appears to be using the numbers filed by the five applicants in this phase of the process for comparison purposes. Is London Hydro suggesting that there are some forms of costs which should be used to compare the performance of the various utilities? 850 DR. SHARMA: Actually, this reference -- answer is just to show that management was all along prudent and looking at every step of the way which course is more economic than others. So in the process, as we indicated, we sought offers from others as to who could have helped us at the time. 851 As Mr. Stephenson indicated much earlier this morning, there was a time crunch, so performance was critical to us and time was critical to us, and we were looking for other economical ways to achieve that performance, given the time crunch. And in that context, these two offers that we mentioned were solicited. 852 MR. DINGWALL: In the paragraphs subsequent to the paragraph that you're referring to, it appears that your answer is using comparisons with other utilities to justify the argument that your costs are reasonable; is that correct? 853 DR. SHARMA: Just a caution, these are not examples of the costs incurred by other utilities. These are examples of the costs offered to us for application in our environment, so there's quite a distinction between those two. 854 Lastly, it just shows the offers that were available to us and our in-house course. Our decision to stay the course with our in-house system was more economical, and performance has also indicated that we were on the right path. 855 MR. DINGWALL: London's main reply evidence to the evidence of Energy Probe contains, in addition to Mr. Adamson's statements, a report that appears to be from the utility. Can you tell me who the author of that section of the evidence is? 856 MR. VOGEL: Mr. Chair, I think I indicated at the outset that certainly our understanding was that the reply evidence and the whole issue of benchmarking was to be dealt with following disposition of the application, so that my submission would be that questions regarding London Hydro's reply evidence should properly be presented to the London Hydro panel, which will be presented, presumably, tomorrow, with respect to those issues. And as I indicated at the outset, the panel consists both of Mr. Adamson as well as representatives of London Hydro. 857 MR. DINGWALL: I'm just wondering which representatives of London Hydro -- I'm not intending on getting into the evidence itself, I'm just interested in the authorship, since that will, of course, influence who should be on that panel. 858 MR. VOGEL: Well, certainly, Mr. Stephenson and Dr. Sharma will be on that panel. 859 MR. DINGWALL: Thank you. 860 London's evidence at 4.2, page 14, makes the suggestion that the activity level of retailers and marketers is a cost-driver for transition costs. Can you elaborate on that, please. 861 DR. SHARMA: Page 14? 862 MR. DINGWALL: That's correct. 863 DR. SHARMA: I don't have page 14. 864 MR. STEPHENSON: Can you give us the reference again? Sorry. 865 MR. DINGWALL: I believe it's section 4.2, page 14. 866 MR. VOGEL: I think the reference is incorrect. 867 MR. DINGWALL: It appears the reference is incorrect. I apologize for that. 868 Moving on to the statement of the -- does London Hydro perceive that there is some connection between the activity level of retailers and marketers and the cost for transition costs? 869 DR. SHARMA: As we indicated earlier in our testimony, and also in our evidence, there are two key drivers. There was a re-regulation of the industry, and codes were being defined and unbundled services were being defined. That is a very big driver of transition costs. Plus the competitive nature of the market, be it whether the retailer associated market or default supply market. Both presumably are competitive markets, and competitive options available to the customers. So those were the key drivers. 870 MR. DINGWALL: Okay. Thank you very much, panel. Those are my questions. 871 MR. VLAHOS: Thank you, Mr. Dingwall. 872 Ms. Lott. 873 MS. LOTT: Thank you, Mr. Chairman. 874 CROSS-EXAMINATION BY MS. LOTT: 875 MS. LOTT: Good afternoon, panel. My name is Sue Lott. I'm counsel for the Vulnerable Energy Consumers' Coalition. 876 DR. SHARMA: Good afternoon. 877 MS. LOTT: I'll start by saying that a number of my questions were asked already this morning, so I'm hoping to be somewhat brief. 878 I wanted to start out with some questions around the RSV accounts, and I wonder if you could turn up your interrogatory response binder, Exhibit H3, and I'm interested there in appendix 5, if you could go to page 11 of appendix 5. 879 MR. WILLIAMSON: Yes, we have that. 880 MS. LOTT: You have that in front of you. It deals with the power variance account 1588. Now, I'm aware that in your evidence and in your testimony this morning, you've indicated that a very small portion of your power comes from Hydro One under long-term load transfers; is that correct? 881 MR. WILLIAMSON: That's correct. 882 MS. LOTT: What I'm curious about is if we look on that page 11 of appendix 5, I don't see any actual payments to Hydro One. I do see a section towards the bottom of the chart which is entitled "Hydro One Invoices Accrued Re: Long-term Load Transfers." I'm just wondering if you could explain what is going on here month by month. I understand -- are you receiving monthly invoices from Hydro One for load transfers? 883 DR. SHARMA: What we have done is we had discussion with Hydro One. Until market opening 2002, we settled everything, and from there on, Hydro One has not invoiced us for the amount. But we have kept up to date with them submitting other consumption data and the dollars we're estimating, and there have been close discussion -- there's a verbal agreement that those will be cleared up. We're just waiting for Hydro One action on that. 884 MS. LOTT: Okay. And if we also go to page 3 of appendix 5, where you're showing monthly accruals of wholesale market charges, that's account 1580, associated with the Hydro One load transfers, again, no actual payments. Is this the same process that's going on here as with the power variance accounts? 885 MR. WILLIAMSON: Yes, this is the very same process. 886 MS. LOTT: Okay. Thank you for that. 887 Now, if I could turn to page 26 of your May 31st application, Exhibit G3, and I'm also going to ask you to look at appendix 5 we've just been looking at, page 11 that I had you turn up a minute ago. You've got those in front of you? 888 DR. SHARMA: Yes. 889 MS. LOTT: So I note on page 26 that -- I understand that you note here that one of the reasons for power variance is the difference between your actual losses and the loss factors approved by the Board for use in retail rates; is that correct? 890 MR. WILLIAMSON: Yes, that's correct. 891 MS. LOTT: And again, if we go back to the appendix 5, page 11, the year-end accruals that you're doing, for example, if we look at the December 2002 line item there, do you use actual loss factors or the approved loss factor in determining unbilled customer recoveries? 892 MR. WILLIAMSON: Actually, unbilled revenues are determined by reviewing the actual billings that happened for approximately a six- to seven-week period after the year-end, taking those actual billings and estimating what portion of that energy on a prorated basis would've been consumed in the prior year, and then valuing that energy at the appropriate rate to arrive at an unbilled revenue calculation. The losses are an outcome of those calculations. 893 MS. LOTT: And do you have any sense as to the extent to which the variation in losses, which leads to the year-end power variances, is this the main factor? 894 MR. WILLIAMSON: That would certainly be one of the larger components of that. 895 MS. LOTT: Okay. Do you have any IMO market participants that you service through your distribution system? 896 MR. WILLIAMSON: No, we don't. 897 MS. LOTT: Okay. Thank you. 898 I'd like to now ask a couple of questions around the issue of Bill 210 rebate, and again I'd like you to -- if we could stay with appendix 5, page 11, that I'd ask you to draw, as well as the following page 12. I have one last question here about power variances. Do you have that in front of you? 899 MR. WILLIAMSON: Appendix 5, pages 11 and 12? 900 MS. LOTT: Yes, the same reference, page 11, appendix 5, and then the following page 12. 901 MR. WILLIAMSON: Yes, I have. 902 MS. LOTT: I notice at the very bottom of the chart, under "Power Charges," there is a line item for the fixed energy rebate settlement amount. Now, am I correct that this is the bill credit that you get from the IMO to offset the fact that, under Bill 210, the commodity price for certain customers was fixed at 4.3 cents; is that correct? 903 MR. WILLIAMSON: That's correct. 904 MS. LOTT: Now, if we look at page 12, if we look from month to month, I note that the amounts vary quite significantly from month to month. I'm just wondering if you could explain how these amounts are determined, and why they would vary so significantly. 905 MR. WILLIAMSON: Those -- what those variances represent is the difference between the 4.3 cents and the spot market price, so the variance is affected by the level of the spot market price combined with the level of consumption. And so as consumption goes up or down, or as the spot market price goes up or down, those variances will fluctuate accordingly. 906 MS. LOTT: Okay. And if we look at the December 2003 entry, my question is simply: The entry that you have here, does that capture the settlement amounts required up to the end of that year, or were there further billing adjustments in 2004 to reconcile the fixed rebate settlement amounts required up to the end of 2003? 907 MR. WILLIAMSON: If we're looking at the December '03 column, the 1.8 million credit? 908 MS. LOTT: That's right. 909 MR. WILLIAMSON: That would relate primarily to energy that was purchased in the month of November. There's approximately a one-month lag between the billing of the energy and the claiming of the rebate credit. 910 MS. LOTT: Okay. Thank you for that. 911 A couple of questions around the premarket opening energy variances account 1571. I just wondered if you could turn up again your May 31st, 2004 application, Exhibit G3, and I'm interested there in page 18, as well as the first page of appendix 6 to your May 31st application. 912 MR. WILLIAMSON: Yes, I have that. 913 MS. LOTT: Do you have those in front of you? Okay. 914 If we look at page 18 of Exhibit G3, I notice at the very bottom of the page -- could you confirm that the total amount that you're requesting for recovery for account 1571, the pre-market opening variances, is that figure which is indicated, which is $5,427,213? 915 MR. WILLIAMSON: Yes, that's correct. 916 MS. LOTT: Okay. Now, if we look at appendix 6, that first page, I notice that the total -- if we look at the item under the column, first column, "item reported", down to where it says "total billed", and then "paid variance", I notice that if we go over to the total amount, that amount is $5,319,523. Am I correct about that? 917 MR. WILLIAMSON: That's correct. 918 MS. LOTT: Can you confirm that this 5.3 is the total pre-market-opening variance for the period January, 2001, to the end of April, 2002? 919 MR. WILLIAMSON: That's correct. 920 MS. LOTT: So my question would simply be, why would it then be appropriate to ask for recovery of $5.4 million? 921 MR. WILLIAMSON: The Board's instructions were to calculate the pre-market-energy variance on the non-time-of-use customers, only, and the amount we're claiming is for the non-time-of-use customers, only. In making those calculations, we also determined that there was actually a pre-market energy credit of approximately $100,000 for the time-of-use customers. And the 5 -- 922 MR. VLAHOS: Let's try again. 923 MR. WILLIAMSON: The number of $5,319,000 is the net of those two numbers. 924 MR. VLAHOS: Sorry, just a second. Let's try again. Reporter, can you hear me? Go ahead. 925 MS. LOTT: Had you finished your response? 926 MR. WILLIAMSON: Yes. 927 MS. LOTT: Thank you. Just a number of questions now about transition costs, and I wonder if you could turn up tab 4.2 of your May, 2004, application, Exhibit G3, and I'm interested in looking at page 1. 928 MR. WILLIAMSON: Can you repeat that again? 929 MS. LOTT: It's tab 4.2 of the May, 2004, application, Exhibit G3, and I'm interested in page 1, which has a chart entitled "APH 480 Qualifying Transition Costs Incurred Period to December 31st, 2002". 930 MR. STEPHENSON: We have that. 931 MS. LOTT: Now, if we look at page 1, and I look down to the totals for all categories, and I go over to the non-capital labour costs, I note that those amounts are -- that amount is $2,065,573. And then, if we move to page 5 of your application, where you do a further breakdown of this amount, and you distinguish between additional and temporary staff -- sorry, additional staffing requirements, where you have temporary staffing and special hires for the customer call-centre, the temporary staff, and then special hires for the deregulation work. 932 Now, I'm just wondering, with respect to the first labour item, which is the additional staffing requirements -- and here I'm looking at page 5, for the customer call-centre -- I wonder if you could turn up your response to an Energy Probe Interrogatory, No. 13, part B, and that's found at Exhibit H3, under the Energy Probe tab, page 17. You have that in front of you? 933 MR. STEPHENSON: We're there. 934 MS. LOTT: Am I correct that what you're indicating in your answer here is that you have had temporary staff at the call-centre for each of the years from 1999 to 2003, inclusive; is that correct? 935 MR. STEPHENSON: That's correct. 936 MS. LOTT: How did you determine the incremental call-centre staff that were attributable to market restructuring? 937 DR. SHARMA: Actually, there's a schedule, and I'd have to look for it in our prefiled evidence, where we give the temporary staff starting-time and ending-time, and that is the basis of our determination. I'll just let you know -- 938 MS. LOTT: Where the reference is, that would be helpful, thank you. 939 DR. SHARMA: Appendix 11 in our prefiled evidence. 940 MS. LOTT: I'm sorry, could you repeat that? 941 DR. SHARMA: Appendix 11 in our prefiled evidence. 942 MS. LOTT: And that will give me how many temporary staff in each year were assigned to transition costs? 943 DR. SHARMA: And for the years we are claiming, which is only 2000, 2001 and 2002. 944 MS. LOTT: Thank you for that. 945 Turning to the second category listed on page 5 of your prefiled evidence, under "Special Hires," can you indicate when these special hires first started? 946 DR. SHARMA: There's a schedule for that as well. 947 MS. LOTT: Okay. 948 DR. SHARMA: Appendix 12, sub-bullet 1, behind the yellow page. 949 MS. LOTT: Sorry, I missed the second reference. Appendix 12... 950 DR. SHARMA: Appendix 12, sub-bullet 1, and there is a yellow page inserted, behind the yellow page, there are those special hires, the start-date and end-date are given. 951 MS. LOTT: Thank you for that. Can you confirm that all of these special hire arrangements are now terminated? 952 DR. SHARMA: Except for two that were hired initially under contract and were later on retained with the corporation. 953 MS. LOTT: Just two of those, you said? 954 DR. SHARMA: Just two of those. 955 MS. LOTT: And can you tell me what that annualized cost is? 956 DR. SHARMA: It's included in that schedule. 957 MS. LOTT: In appendix 12? 958 DR. SHARMA: Appendix 12, sub-bullet Roman numeral I. 959 MS. LOTT: I wonder if you could turn up Appendix 12 I of your May, 2004, filing, Exhibit G3. This is the one dealing with settlement costs up to the end of December, 2003. 960 DR. SHARMA: Yes, we have it. 961 MS. LOTT: You have that in front of you. Could you confirm that the transition costs you are claiming for recovery include $293,159 for EnerConnect settlement services? 962 MR. WILLIAMSON: Yes, that's correct. 963 MS. LOTT: Looking at that page, if I look at the comments you have, or the footnote to that page, you're suggesting that since London Hydro subsequently developed its own system and EnerConnect costs are no longer recurring monthly costs, that they should qualify as transition costs. Is that what you're indicating in that comment? 964 DR. SHARMA: Yes, and there is a little background to that. When the market was opening, and, as Mr. Stephenson has testified, there was a time crunch with us, we were at a crossroad either to -- in a rush to develop our system, which was a much cheaper option of our design -- but we didn't have the time and the runway to do so, so we retained a service, for one year, only, so we could overcome that and, in the process, develop a much cheaper in-house system which is not being claimed here at all. 965 MS. LOTT: So are you sing that the incremental costs of your in-house system now are less than that $24,430 a month that you were being charged by -- 966 DR. SHARMA: The one-time development cost was much cheaper. I cannot estimate as to how much was the total. 967 MS. LOTT: If you don't know the -- if you're not able to estimate, how do you know that EnerConnect was the more prudent approach to the settlement costs, then? 968 DR. SHARMA: As I indicated that the time crunch and the runway was not there for us to develop our in-house system, so we entered into an EnerConnect contract for one year. If the intent of the question is to ask how much estimation is there for our internal development cost, all I can tell you is it was designed by the folks sitting at this table and it was over a time within -- about six months it took us to finish it. 969 MS. LOTT: So am I correct that you do have ongoing recurring costs of an amount that you can't estimate for me now that are associated with settlement? 970 DR. SHARMA: One-time costs, which was, in kind, the people sitting here. 971 MS. LOTT: Thank you. 972 My last question, if you could turn up School's No. 16, your interrogatory response, which is found at page 19 of the School's tab at Exhibit H3. And it's page 19 I'm looking at there. Do you have that? 973 MR. STEPHENSON: Yes. This is the School's IR No.17? 974 MS. LOTT: Yes. 975 MR. STEPHENSON: I have that. 976 MS. LOTT: I noticed in the second-last sentence in your response that you negotiated the outright ownership of the software; is that correct? 977 MR. STEPHENSON: That's correct. 978 MS. LOTT: Okay. Could you tell us what software this was, and how much the ownership rights cost you? 979 MR. STEPHENSON: It's the software in phase 1, it's the Sierra Systems software for which we're claiming $1.7 million, of which, in the contract itself, you'll see that the license fees, I believe, were about $650,000 of that. So this was part of the amount that we have in the application. 980 MS. LOTT: Thank you very much. 981 Those are my questions, Mr. Chairman. 982 MR. VLAHOS: Thank you, Ms. Lott. 983 Mr. Lyle? 984 MR. LYLE: Thank you, Mr. Chair. 985 CROSS-EXAMINATION BY MR. LYLE: 986 MR. LYLE: I want to start with one quick question with respect to your RSVA power account, and I understand that you're claiming $731,000, approximately. 987 MR. WILLIAMSON: That's correct. 988 MR. LYLE: And I believe an interest component is included with that? 989 MR. WILLIAMSON: Yes, it is. 990 MR. LYLE: Would you be able to point me to a document that authorizes carrying charges with respect to that account? 991 MR. WILLIAMSON: I'm sorry, could you repeat the question? 992 MR. LYLE: Could you point me to any sort of Board document or any other statutory or regulatory provision that authorizes carrying charges with respect to the RSVA power account? 993 MR. WILLIAMSON: Yes, that would be the Board's article 490. 994 MR. LYLE: Okay. 995 I want to turn you to your RCVA accounts. And are you familiar with the position of Toronto Hydro that the Board's materiality threshold provisions apply to these accounts? 996 MR. WILLIAMSON: No, I'm not. 997 MR. LYLE: Have you calculated a materiality threshold with respect to these accounts? 998 MR. WILLIAMSON: It's my understanding that the materiality criteria does not apply to these accounts, as per instructions in article 490. 999 MR. LYLE: Could you calculate for me, though, the materiality threshold, should the Board determine that these thresholds do apply? 1000 MR. WILLIAMSON: If a materiality threshold was applied to these accounts, I believe it's something in the range of 200,000. 1001 MR. LYLE: That's based on your -- 1002 MR. WILLIAMSON: Based on our rate base. 1003 MR. LYLE: And that is approximately how much, sir? 1004 MR. STEPHENSON: Our rate base? 174 million, approximately. 1005 MR. LYLE: Thank you. 1006 Now, I want to turn you to Board Staff IR 14. And you were asked by Board Staff for the reason for the large difference in the RCVA retail account balance between 2003 and 2002, and your answer was that the revenues associated with this particular account are variable and dependent on the number of customers with the retailer, and in fact the number of the customers with the retailer had declined in 2003; is that correct? 1007 MR. WILLIAMSON: That's correct. 1008 MR. LYLE: And can I turn you to your prefiled evidence, appendix 4I. Do you have that? 1009 MR. WILLIAMSON: Yes, I have that. 1010 MR. LYLE: And under the column "Revenue 2002," there's an amount of $170,000, approximately; is that correct? 1011 MR. WILLIAMSON: Yes, that's correct. 1012 MR. LYLE: And when you look under revenue for 2003, it appears there's an amount of $245,000. 1013 MR. WILLIAMSON: That's correct. 1014 MR. LYLE: So it appears that revenue has actually increased despite the decline in number of retail customers. 1015 MR. WILLIAMSON: The revenue in 2002 is for an eight-month period, I believe. The number in 2003 is for a 12-month period. 1016 MR. LYLE: But even if you were to prorate that over that -- that 170,000 over 12 months, it wouldn't be significantly different from the 245, would it? 1017 MR. WILLIAMSON: I haven't done that calculation. 1018 MR. LYLE: Well, let me do it for you. 170,000, add an extra 50 percent, that's about 255,000; right? 1019 MR. STEPHENSON: Sorry, the question was would they be relatively close then? 1020 MR. LYLE: Yes. 1021 MR. STEPHENSON: It would seem to me that it would be, based on that number. 1022 MR. LYLE: So that doesn't really properly explain the increase in the variance in this account, does it? 1023 MR. WILLIAMSON: I think if you look at the 170,000 and go down below that to the next section where it lists 30 -- revenue item of 34,000 in 2002, if you look at the equivalent number in 2003, that's 5,000, so there's quite a significant drop there. 1024 MR. LYLE: So it's the decline in revenues with respect to the STR account that you're pointing to? 1025 MR. WILLIAMSON: Yes. 1026 MR. LYLE: And that's because fewer customers are signing retail contracts? 1027 MR. WILLIAMSON: In 2002 there was quite a bit of activity relating to the start-up of the market. 1028 MR. LYLE: Now, I want to ask you how you're proposing to allocate the costs in this account, and I understand your proposal is based on the relative percentage of customers in each class that are with a retailer; is that correct? 1029 MR. WILLIAMSON: That's what we propose, based on the most precise cost-causality method that we could come up with for these accounts. 1030 MR. LYLE: And if I could turn you to Board Staff Interrogatory 31. 1031 MR. WILLIAMSON: Yes, I have that. 1032 MR. LYLE: And your answer there is a breakdown of how you propose to allocate amongst the classes; is that correct? 1033 MR. WILLIAMSON: That's correct. 1034 MR. LYLE: And I see, for instance, that in residential classes approximately 92 percent to residential? 1035 MR. WILLIAMSON: Yes, that's correct. 1036 MR. LYLE: And how does that compare if you were to break down the classes based on the number of customers? 1037 MR. WILLIAMSON: That's actually very close. I think residential customers are approximately 90 percent of the customer base. 1038 MR. LYLE: And I believe, actually, Mr. Shepherd provided some numbers with respect to the customer breakdowns in Exhibit I.6.3? 1039 MR. WILLIAMSON: Yes. 1040 MR. LYLE: Are there any classes where there's a significant variance between the number of customers signed up with a retailer and the percentage of your total customer base in that class? 1041 MR. WILLIAMSON: I don't know the answer to that, unless I compare those numbers to -- in respect of percentage numbers for customers. I suspect there's a greater variance in the higher-volume customers. 1042 MR. LYLE: Given the relatively minor differences between the percentages of each class, if you were basing it on number of customers versus number of customers with a retail contract, and the small amounts that are actually in this account, why are you proposing this approach rather than, perhaps, a simpler approach of number of customers? 1043 MR. WILLIAMSON: The only reason we proposed this approach was to try and get the most precise cost-allocation methodology that we could come up with. But if we were to allocate these costs on the general percentages of customers per class, and given the level of dollars involved here, I don't think there would be any material differences in allocations. 1044 MR. LYLE: Thank you. I want to turn you, then, to account 1508. I understand you're claiming about $240,000 with respect to this account, related to your costs of mailing Bill 210 rebate cheques? 1045 MR. WILLIAMSON: That's correct. 1046 MR. LYLE: And did you pay all these rebates by December 31st, 2002? 1047 MR. WILLIAMSON: Yes, we did. 1048 MR. LYLE: And I want to turn you to page 39 of your prefiled evidence. At paragraph 80 on that page, you indicate that you reviewed your costs to undertake this activity with the costs of 15 other utilities. 1049 MR. WILLIAMSON: Yes. 1050 MR. LYLE: And how did you undertake this review? 1051 MR. WILLIAMSON: We used the information that the Board published on its website after the phase 1 January filings, and they listed all of the account numbers and the amounts being claimed by the 94 utilities. 1052 MR. LYLE: I see. And, in your view, is this an activity where it's appropriate to compare the costs of utilities to each other? 1053 DR. SHARMA: Yes, indeed, because this is one -- a very unique, specific event where everybody is doing the same activity through a bank. 1054 MR. LYLE: So it's sufficiently an apples-to-apples comparison, so it's possible to draw -- 1055 DR. SHARMA: Yes. 1056 MR. LYLE: I want to turn you, then, to account 1570, and take you to the first page of appendix 1 of your prefiled evidence. And we're back to a discussion of this base-CIS-system acquisition. 1057 MR. STEPHENSON: Okay. 1058 MR. LYLE: Can you indicate for me when the 1570 deferral account was established? 1059 MR. STEPHENSON: If you'd just give us one moment, please. 1060 MR. LYLE: Certainly. 1061 MR. STEPHENSON: It's our understanding that Article 480, APH 480, was issued January 17th, 2001, and the effective date was January 1st, 2000. And we believe that's where the reference for 1570 and the deferral account was prescribed. 1062 MR. LYLE: And did you incur any costs with respect to this base-CIS-system activity prior to January 1, 2000? 1063 MR. STEPHENSON: Yes. 1064 MR. LYLE: Are you able to break down approximately how much of the $1.7 million was incurred prior to January 1, 2000? 1065 MR. STEPHENSON: We certainly had billings before that date. Whether they mirrored exactly the work that was being done prior to January 1st, 2000, would be difficult for us to ascertain because we'd probably have to actually look at the work-flow and the development that occurred prior to that, as opposed to the billings, just because, to some degree, it was a fixed-price contract and the payment schedule was adjusted accordingly, given delivery issues. 1066 However, prior to January 1st, 2000, whatever we had incurred at that time, I believe, was WIP, work-in-progress, and had not been put in service, and therefore I don't think it would be 1570-eligible. 1067 MR. WILLIAMSON: No, it would not have been entered into1570 until it was put into service. 1068 MR. LYLE: I see. 1069 MR. WILLIAMSON: Which was in the year 2000. 1070 MR. LYLE: Now, I understand you ended the relationship with Sierra Systems in the fall of 2000? 1071 MR. STEPHENSON: Sierra Systems in the fall of 2000? 1072 MR. LYLE: Yes. 1073 MR. STEPHENSON: Sierra Systems, we actually were involved with them in '98 and '99 -- 1074 MR. LYLE: I'm sorry, sir, you ended your relationship -- 1075 MR. STEPHENSON: Oh, "ended". I thought "entered", I'm sorry. Yes, we ended it in approximately August, 2000. 1076 MR. LYLE: And that contract had originally been for $2.3 million. 1077 MR. STEPHENSON: Correct. 1078 MR. LYLE: Did you have any difficulty in exiting that contract? Was there any legal dispute involved in that? Did you pay any penalties? 1079 MR. STEPHENSON: We didn't pay any penalties. We had some difficulty in the context that, as I mentioned earlier -- we spent some time, prior to ending it, discussing with them whether they would be able to accommodate the future initiatives that were in front of us, and getting costing from them. We spent a lot of time to see whether they could still deliver or not. That was difficult. But the actual termination was not. We didn't pay any penalty, nor was it particularly difficult. 1080 MR. LYLE: Now, I want to turn you to Board Staff Interrogatory No. 19. 1081 DR. SHARMA: Excuse me, you said 18? 1082 MR. LYLE: I'm sorry, 19. 1083 DR. SHARMA: 19. 1084 MR. STEPHENSON: We have that. 1085 MR. LYLE: And looking at that last paragraph, you indicate that there's been a recent confidential 2003 survey of utilities that found that your system was lowest cost of the utilities surveyed. 1086 DR. SHARMA: It's not a system cost, it's an operation cost of the utility. It's really a survey from the total cost of operation, which includes every aspect of the business. 1087 MR. LYLE: I see. So this is not, then, relevant to your capital costs that are in your account 1570. 1088 DR. SHARMA: No. 1089 MR. LYLE: I want to turn you to page 8 of your prefiled evidence, and I'm looking at the quote from the independent assessment that was done. And towards the bottom of the page, it states that: "One key design objective for the application was support for 1 million customers." 1090 Given London Hydro's size, can you explain to me why that was a key design objective? 1091 DR. SHARMA: As we were embarking upon this enabling technology, based on a modern client-server-base architecture and relations database, the idea was could it be scalable, because the only limitation we have in our system is the limitation of Oracle database, and that Oracle database is, supposedly, we haven't tried it, good for as many customers as you wish, as long as you have the infrastructure, the hardware, and sometimes what I referred to in the morning as the middleware or application layer that comes in. We have not adapted those, but the system is capable of being adapted for that application. 1092 So when we embark any new acquisition, we would like the vendor to support those future -- if potentially ever comes to us, to be able to provide the service. And that was the reason. 1093 MR. LYLE: So scalability, then, as a concept, is just the ability for the system to bulk up quickly to be able to absorb a larger number of customers? 1094 DR. SHARMA: Scalability refers to two key aspects. One is number of customers, which apparently is very obvious to all of people. But when you serve a large number of customers, what is not obvious is the number of people you need on the customer services side that access the system. And access is much more critical than just having number of users and the processes that are designed. 1095 In that case, when you have more than, I don't know what the finite number of people, accessing the database is concerned, you have to go to a three-tier system, and that means you have to have a middle layer where database conflicts do not occur. And that's the scalability aspect. 1096 Our system is capable of being adapted to that architecture. London Hydro has not done that. 1097 MR. LYLE: Did you incur any capital costs in building a system that had that capability as opposed to focusing on a system that had a more limited capability of dealing with, say, 150, 200,000 customers? 1098 DR. SHARMA: Cost only to the point where -- that you buy Oracle license, because you have to have Oracle database. No extra cost. 1099 MR. LYLE: What extra cost would you incur, then, if you were going to increase the capacity of your system to be able to serve a million customers? 1100 DR. SHARMA: If that were ever to happen, the London Hydro board of directors would be very happy. But nevertheless, we would have to be able to buy a middle layer, so application has to move from Oracle into a middle layer, and that's a very extensive and very time-consuming affair. But the technology is certainly adaptable to that. 1101 MR. LYLE: Do you have any, sort of, order of magnitude of the capital costs that would be involved in that project? 1102 DR. SHARMA: I'm sorry, I can't even imagine to estimate, because we have seen certain applications of larger utilities with middleware, such as Hydro One that Mr. Shepherd referred to in the morning session. I cannot imagine the cost of that middle layer. 1103 MR. LYLE: Now, I understand that you also had a plan at one time to bill for third parties, and I think you indicated that if that opportunity came up, you'd still be open to that opportunity; is that fair? 1104 DR. SHARMA: As we indicated, our system is well integrated and automated so you could adapt that concept to a larger application if you wanted to. Another aspect of our system is that we can run a parallel system for other utilities to use, and we could maintain that system in parallel. So there will be new hardware, but, yes, we could do the billing for other utilities. 1105 MR. LYLE: I think you said currently you're not billing for other utilities? 1106 DR. SHARMA: Yes. 1107 MR. LYLE: And that includes gas and water, I take it -- sorry, sewage and water? 1108 DR. SHARMA: Sewage and water we do for the city hall. 1109 MR. LYLE: You do currently do that then? 1110 DR. SHARMA: Yes. That has been the legacy ever since. 1111 MR. LYLE: And how do you address the costs associated with that? 1112 MR. STEPHENSON: The -- what costs would that be, the ongoing costs or the costs that we're discussing here? Could you clarify that? 1113 MR. LYLE: I guess what I'm trying to clarify is how you bill the city for those services. 1114 MR. STEPHENSON: We have an agreement with the city, it's basically on a cost basis, and it's always been that way. It's been reviewed, I think, every few years, determined what our costs are, and we just pay the cost for that. 1115 MR. LYLE: And would those include some of the system capital costs that would be integrated into that billing to the city? 1116 MR. STEPHENSON: At the present time, I don't think that there's a proxy or an amount in that billing to them for the capital that we're discussing here. Historically, there has been a small charge to the city for an information technology piece. I'm not sure, I don't think it has capital in it. It's more for the actual ongoing maintenance. There is not a big -- there is not an amortisation proxy of any substance in it or any capital. It's mainly to deal with IT personnel that we would have to deal with any issues that would arise, or maintenance. 1117 MR. LYLE: Now, I believe you said to Ms. Lott that you paid Sierra approximately 650,000 in license fees, and as a result, you own that software? 1118 MR. STEPHENSON: We do own the software now. I think as I indicated this morning, there were a couple of phases to that because we -- if you look at the actual agreement with them, there is a license piece of it. And certainly, we could not come to terms with them at any level unless they were paid for at least the license portion of it, and we had done that. 1119 Then the part that we did not pay them for, that full fixed-price contract, was development, the development piece that we agreed to. The next phase was then to ask them in August 2000 to make sure, to confirm with them that we then had the right to do what we wanted to do with it with other suppliers going forward. That was important to us because we didn't want to invest dollars into that project without ensuring that Sierra had no recourse to that. 1120 MR. LYLE: Now, in terms of your ability to use the Sierra software to provide services to third parties, did you pay Sierra anything for that right? 1121 MR. STEPHENSON: No. Actually, the original agreement was structured for a -- it was on a variable rate. X amount of dollars per customer that we ever added to it, that was a visionary thing established in 1997 to make sure we had some basis if and when we ever got there post-deregulation. So we're not paying them or have paid them anything in relation to additional customers. 1122 MR. LYLE: I'm going to turn you to page 10 of your prefiled evidence. In paragraph 24, you indicate that you're seeking recovery of an additional $524,000. 1123 MR. STEPHENSON: Correct. 1124 MR. LYLE: Can you tell me what that's related to? 1125 DR. SHARMA: This is regarding the -- there are two aspects of system changes that were undertaken after Bill 210. One was regarding the Bill 210 implication on billing, and there were some aspects of some of the billing changes that were incorporated in the system, plus there was EBT standard 2.2 that, soon after market opening, the EBT working group recognized as an error or omission by them in its transition standard, and hence they embarked on a global issue 686, also called EBT 2.2 standard, which was implemented as per OEB directions by -- actually, initially to be done by April 3rd, but then later on to be done by July the 7th of 2003. 1126 MR. LYLE: And when did you incur this additional $524,000? 1127 DR. SHARMA: This was incurred over time, starting in about November 11th of 2002, continuing -- and we finished up our design sometime around March of 2003. 1128 MR. LYLE: Would you be able to separate out the cost that were incurred in 2002 from the costs that were incurred in 2003? 1129 DR. SHARMA: It was, again, a continuous expenditure. I'd have to think about that. I don't have an answer to that. I don't know about the possibility of doing that. 1130 MR. LYLE: Do you have any thoughts on that, Mr. Stephenson? 1131 MR. STEPHENSON: I think we'd have to look at that to see. I'm not personally close to the expenditure and the time line, so I'd have to really go back and see whether it would be possible. 1132 MR. LYLE: Could I ask for an undertaking, then. 1133 DR. SHARMA: If it's possible, to the extent that we can do it. 1134 MR. LYLE: A breakdown of the $524,000 between costs incurred in 2002 and costs incurred in 2003. We'll make that Undertaking J.6.3. 1135 DR. SHARMA: My colleague is indicating a schedule, and let's see the schedule first, before we confirm that undertaking. What's the schedule? 1136 MR. WILLIAMSON: It's under tab 4 -- there's a tab called "2003 Costs," and there's a blue page which itemizes 426,000 of those costs, and I believe the remaining balance of that is -- 1137 MR. VLAHOS: Mr. Williamson, we can't hear you very well. Can you straighten the microphone towards you? Just straighten it out. 1138 MR. WILLIAMSON: Sorry. Yes, the blue page indicates 426,000 of that 524, and the remaining 95, I believe, were the EnerConnect settlement costs that were incurred in the first four months of 2003, for approximately 95,000. 1139 MR. LYLE: I'm sorry, do I take from that $426,000 figure that that's the costs you incurred in 2003? 1140 MR. WILLIAMSON: Yes. 1141 MR. VOGEL: Does that dispose of the undertaking request, Mr. Lyle? 1142 MR. LYLE: Just one moment, Mr. Vogel. 1143 I just have one clarification, gentlemen. When I look back to paragraph 24, page 10, it indicated you were seeking approval of 524,000, which did not include staff labour costs of 95,000. 1144 MR. STEPHENSON: Right. 1145 MR. LYLE: Is that correct? 1146 MR. STEPHENSON: That's correct. 1147 MR. LYLE: Then if I'm looking at the $426,000 figure for 2003 -- 1148 MR. STEPHENSON: Right. 1149 MR. LYLE: -- are those costs that include the labour or exclude the -- 1150 MR. STEPHENSON: They are exclusive of the labour. I think the point in the text here was that there was no labour included in that claim. The difference between the 426 and the 524 are the EnerConnect fees that Mr. Williamson referred to earlier. 1151 MR. WILLIAMSON: Yes. The other -- the remainder is in the appendix 12, section I. 1152 MR. STEPHENSON: So it's the last four lines there, the January '03 to April '03 EnerConnect service fees at 24,000 per month. 1153 MR. LYLE: That's what the 95,000 is made up of? 1154 MR. STEPHENSON: That's the 98,000, which would be the difference between the 426 that we referred to and the 524 on page 10. 1155 MR. LYLE: Does that mean, sir, that of the 524, there's no costs that were incurred in 2002? 1156 DR. SHARMA: Actually, Mr. Williamson is right, when I was indicating the work was done. The question is: Do we have the capability to further split that 426,000 in the labour expenditure that we incurred in 2002 and 2003? That was your undertaking. Although all of our expenditures were recorded when the project was completed, and those are identified in that schedule we just referred to. 1157 MR. LYLE: One moment. 1158 We can dispense with the undertaking, Mr. Vogel. 1159 MR. VOGEL: Thank you, Mr. Lyle. 1160 MR. LYLE: Yes, I just want to turn you back to the spreadsheet that Mr. Shepherd provided, Exhibit I.6.3, and I'd also like you to turn up page 95 of your prefiled evidence. And turning, first, to page 95, there's an amount in the 2003 column, three lines up, of negative 613,000, approximately. Do you see that? 1161 MR. WILLIAMSON: Yes, I see that. 1162 MR. LYLE: And that's described as amounts that have already been recovered through the end of 2003? 1163 MR. WILLIAMSON: Yes. 1164 MR. LYLE: And then, as I understand it, that amount is deducted off the total of the transition costs? 1165 MR. WILLIAMSON: Yes. Actually, that number is part of the deduction number of 724,000 -- the 724,000 being the recoveries up to April the 1st, '04. 1166 MR. LYLE: Yes. But that deduction, then, leads you to the number 24,598,000; is that correct? 1167 MR. STEPHENSON: On page 95, you're referring to? 1168 MR. LYLE: Yes. 1169 MR. STEPHENSON: Yes, that's correct. 1170 MR. LYLE: And if I turn you back to Exhibit I.6.3. 1171 MR. STEPHENSON: Okay. 1172 MR. LYLE: And I'm looking towards the left-hand side of the page, at the bottom of the page, we see once again the line "Total Allocation," and that's the $24.6 million? 1173 MR. STEPHENSON: Correct. 1174 MR. LYLE: And on the third line, it appears that interim recoveries of $724,000 are deducted from that? Is that an error? 1175 MR. WILLIAMSON: Yes, I believe you're correct. 1176 MR. LYLE: Okay. Now, gentlemen, given that Mr. Shepherd provided this spreadsheet, I'm not sure whether you have the capability of updating it with a new number. Is that a problem for you? 1177 DR. SHARMA: Is it possible that, since he has the electronic version of it, we can give the right number to Mr. Shepherd, and he can then correct? 1178 MR. LYLE: Well, perhaps, then, what I'll ask you to do is undertake to provide an updated spreadsheet, dependent upon the cooperation of Mr. Shepherd. 1179 DR. SHARMA: We hope we get that cooperation. 1180 MR. LYLE: I'm sure you will. We'll mark that as J.6.3. 1181 UNDERTAKING NO. J.6.3: TO PROVIDE AN UPDATED SPREADSHEET CONTAINING CORRECTED FIGURES AS TO RECOVERIES AND TOTAL ALLOCATION 1182 MR. LYLE: And then finally, gentlemen, I'd like one further undertaking, and it relates to the rate impact for 1,000-kilowatt-hour-per-month residential customer. Looking back at Exhibit I.6.3, and page 2 of that, I'd like you to use the allocation methodologies that have been used on page 2, and I'd like, focusing on the recovery of the remaining three years, the bill impact per month on a dollar basis and a percentage-of-the-total-bill basis, and assume that the entire amount is allocated to the volumetric portion of the customer's bill. 1183 MR> WILLIAMSON: Do you mean -- 1184 MR. LYLE: Can you do that? 1185 MR. STEPHENSON: Are you asking for that now? 1186 MR. LYLE: No, not now. I'm asking for an undertaking. 1187 MR. STEPHENSON: Yes, we can do that. 1188 MR. LYLE: We'll mark that as Undertaking J.6.4. 1189 UNDERTAKING NO. J.6.4: IN REFERENCE TO EXHIBIT I.6.3, PAGE 2, PROVIDE THE ALLOCATION METHODOLOGIES THAT HAVE BEEN USED, FOCUSING ON THE RECOVERY OF THE REMAINING THREE YEARS, THE BILL IMPACT PER MONTH ON A DOLLAR BASIS AND A PERCENTAGE-OF-THE-TOTAL-BILL BASIS, ASSUMING THAT THE ENTIRE AMOUNT IS ALLOCATED TO THE VOLUMETRIC PORTION OF THE CUSTOMER'S BILL 1190 DR. SHARMA: If I could add a comment to that, Mr. Chair. The only comment I would add is in London, historically the average consumption is 795 kilowatt-hours a month, but we will do the 1,000 kilowatt-hour computation as well. 1191 MR. VLAHOS: Thank you. 1192 MR. LYLE: Thank you, Mr. Chair. Those will all my question. 1193 MR. VLAHOS: Thank you, Mr. Lyle. 1194 The Board has some questions. Ms. Chaplin. 1195 QUESTIONS FROM THE BOARD: 1196 MS. CHAPLIN: Thank you. I'd just like to go back to one area you discussed with Mr. Dingwall, and this was some discussion you had around the RSVA account and also, I believe, 1571, and you pointed out that you used a billed approach rather than an accrued approach. Do you recall that conversation? 1197 MR. WILLIAMSON: Yes. 1198 MS. CHAPLIN: Are you aware that some of the other applicants have used an accrued approach for their revenue recognition? 1199 MR. WILLIAMSON: Yes, I'm aware of that. 1200 MS. CHAPLIN: Would you be in a position to perhaps give us, you know, the benefit of your views as to the differences that are involved with the two approaches, if one would be -- maybe the pros or cons, some sort of discussion around that? 1201 MR. WILLIAMSON: Well, it was my understanding that the primary purpose of the RSVA accounts was to track the cash flow overages or shortages that would be experienced by utilities in the settlement process. And in doing that, you have to use the billed approach which deals only with what you've received or what you've actually paid to get to a cash-flow balance. 1202 In addition to that, the Board compensates utilities' interest on cash shortages or, in turn, we must pay interest on cash overages. So in order to make those calculations, you have to use the billed approach. 1203 MS. CHAPLIN: Okay. Thank you very much. 1204 MR. VLAHOS: Mr. Carr? 1205 MR. CARR: Thank you. 1206 I just wanted to pick up on the area that Mr. Lyle was talking about, which related to the provision by London Hydro billing services to the City of London with respect to water. Let me tell you why I want to get to it and that will help, perhaps, with your answers to the questions. 1207 I guess, given this is a shared service, I wanted to get some comfort that the costs are appropriately shared between, obviously, the electricity service and the water service. So I guess the first question is: I believe you said that the city pays London Hydro on a cost-recovery basis; is that correct? 1208 MR. STEPHENSON: That's correct. 1209 MR. CARR: And that cost recovery, as I understood it from your answer, did not include any aspect related to the capital cost of the billing system. 1210 MR. STEPHENSON: That's correct. 1211 MR. CARR: So is the -- what is the basis of the cost -- the amount they pay? What costs are incurred? 1212 MR. STEPHENSON: Right. 1213 DR. SHARMA: There are many aspects of it, and I'll just give you, perhaps, a slightly longer answer, because background is also equally important. 1214 In '99, when rates were established using that reference year, cost as well as revenue for water services was recognized in offsetting factors in that rate. So our revenue is grossed up from the city, as well as our cost is grossed up against that service. 1215 Going forward, these costs are reflected -- customer services costs, the staffing costs and -- because we provide customer care, part of the bill-mailing costs that are also created from city, and part of the bill print because we use an outsourced agency to print our bills paper that goes with it. Credit and collection, because we have sometimes a collection of total amount which includes water and electricity, so we share any collection agency cost in proportion to the amount that we collect from those accounts. 1216 So those are the expenses that we cover plus partially the support services from IT as far as reporting is concerned or any ad hoc issue is concerned. 1217 MR. CARR: You're saying that's what you used to do or that's what you do now? 1218 DR. SHARMA: That's what we do now and that's what we used to do. 1219 MR. CARR: And how is -- are those monies reflected anywhere in the evidence that you've filed? 1220 MR. STEPHENSON: No. 1221 DR. SHARMA: No. 1222 MR. CARR: So where are they reflected? Where is that? The payments you receive from the city, where do they appear? 1223 DR. SHARMA: As indicated in '99, when our net income was recognized, that net income included the revenue and the cost of that water services in our rates, electricity rates, that is. 1224 MR. CARR: So they do not appear on the books of London Hydro at all? 1225 MR. STEPHENSON: Oh, yes, from a corporate -- I think Dr. Sharma's answer was more in line with thinking of the regulatory environment. It does -- it's actually in our financial statements, you'll see it in both years that we've filed. It's a separate line item disclosed in our statement of operations and there's a related party note that speaks to the nature of the services as well as the fact that it's at cost. 1226 For what it's worth, that's also something that's reviewed by our external auditor in terms of the disclosure around it and the appropriateness of how we deal with it. 1227 MR. CARR: And the -- when you say costs, some of these costs are labour costs, I think? 1228 DR. SHARMA: Yes. 1229 MR. CARR: So is the cost basis a fully-loaded basis or is it just the salary or -- 1230 DR. SHARMA: Fully-loaded basis. 1231 MR. CARR: Finally, I guess, is it fair to characterize the situation with your billing system and your whole IT environment that perhaps this transition to a restructured electricity system is the first time you have had to make any substantial capital investment in your IT systems? It seems to me perhaps you had a long-standing legacy system and you sort of made incremental things which, perhaps, weren't even recognized as capital costs. 1232 MR. STEPHENSON: I would agree with that. There isn't much capital additions or capital recognized in the pre-1999 era related to the legacy system. Whether that's a function of it just not being identified, I doubt it. I really think it's probably more so it was a system that just percolated along billing, and billing quite well, albeit old. 1233 MR. CARR: Okay. Thanks very much. 1234 MR. VLAHOS: Thank you, Mr. Carr. 1235 Gentlemen, just a couple of areas. One, just to follow up on Mr. Carr's questioning. My question would be, are there any increases that have been passed on to the city since 1999 because of higher costs for the utility? 1236 DR. SHARMA: We -- actually, it is currently under development. We are negotiating with them to reflect that increased cost to the business. 1237 MR. VLAHOS: Have there been any increases from 1999 to the end of 2003? 1238 DR. SHARMA: There was an increment, I believe, in 2003 of $400,000 that we charged them, but we are negotiating future increases. 1239 MR. VLAHOS: And this was the beginning of 2003? 1240 DR. SHARMA: It was for the year of 2003. 1241 MR. VLAHOS: And this would be, what, in lieu of higher costs of operations or higher capital costs or all of the above? 1242 DR. SHARMA: Mostly in the areas of customer care that we provide services to them, because they, on an ongoing basis, give us various issues to manage because we are the cradle-to-grave customer service shop for the city. And in doing so, if our time increases of that labour allocation, then we reflect that in a change to them in cost or in charges to them. 1243 MR. VLAHOS: Dr. Sharma, just going forward, in your view, if we end up with a normal regulatory world where rates are set by this Board and there are some exclusions or some reflection of some other revenues you may be collecting, what is your view, that you can adjust those rates to the city at your own will or the utility's will or... 1244 DR. SHARMA: Just to reflect, there is really an Affiliate Relationships Code that the OEB has set, in effect, these days. The city has gone to the market with our request for information, and they've got competing bids from other service providers and that is the basis they are negotiating with us. So other internal drivers are cost-based, while they are coming with market-based information. So we are in the middle of negotiation. 1245 But as far as the recognition of revenues and costs, yes, it will be done, and it should be done by the regulator. 1246 MR. VLAHOS: And it will probably have to be done on a forecast or estimated basis, because that can be renegotiated at any time. 1247 DR. SHARMA: Indeed. But the Affiliate Relationships Code requires the submission of those aspects to the Ontario Energy Board. 1248 MR. VLAHOS: I'm sorry, submissions -- 1249 DR. SHARMA: Submission of the contracts and the service level agreements. 1250 MR. VLAHOS: Right, but not necessarily a rate adjustment. 1251 MR. STEPHENSON: That's right. I would agree, you'd probably have to do it, look at it on a forecast basis if you wanted to, you know, shorten the period between -- 1252 MR. VLAHOS: I guess all this is to ask again, should any of the incremental revenues from the city in 2003, should they go towards offsetting some of the costs that the utility is seeking relief for? 1253 DR. SHARMA: Insofar as transition cost is concerned? 1254 MR. VLAHOS: Yes. 1255 DR. SHARMA: Actually, transition cost is for the incremental purpose of meeting the deregulation time line and the compliance with the code. The recognition of that increased business cost and also increased revenue shall reflect -- I assume it will reflect, actually, in the 2006 design of rates. 1256 MR. VLAHOS: Right. And to the extent that you're -- there's a new cost structure in the utility because of expenditures, transition costs being one source -- to the extent that transition costs would impact higher cost of service to the utility, and that in turn may turn into higher revenues, higher prices, therefore, revenues from the city, should those be subtracted from the relief you're seeking? 1257 DR. SHARMA: Mr. Stephenson may add more to it, but I'll say one thing -- as far as operation costs are concerned. But we are not claiming any of those related operating costs in the transition expenditure. 1258 MR. VLAHOS: You're saying all the increases you are negotiating -- or, you have negotiated in 2003 -- they only relate to the operating side of the utility. 1259 MR. STEPHENSON: Right. And 2003 was really an interim agreement while we worked through, I think, the logistics of what we normally do -- look at our actual costs of serving specifically their service -- 1260 MR. VLAHOS: On the operating side, wouldn't you include depreciation expense, for example? Which is a capital -- has a capital base? 1261 MR. STEPHENSON: I think it's a new issue that we're probably looking at now as opposed to -- it's a good question, should we have looked at it. Well, we had a legacy system that was fully-depreciated, so it was somewhat of a non-issue in the recent past. 1262 Whether it needs to be considered going forward, given the amount of the expenditure that we've done and the system that we have, maybe yes, maybe no, because a lot of what we've done is really not related to the service that we provide to them. So I'm not sure whether it would be fair to charge them a higher level of amortization for a system that is predominantly there for the transition -- you know, for the electricity market, as opposed to their needs. It's something that we would have to look at. 1263 MR. VLAHOS: But you don't recall -- none of you gentlemen recall that the specific cost pressure for the new prices that you negotiated was the amortization or the depreciation of your new expenditures from the new system? 1264 MR. STEPHENSON: Not to my recollection. I think it's predominantly based on labour. 1265 DR. SHARMA: I think my colleague just pointed out one more thing, and it may not be of any material significance at this time, but may play a role in the future. Our understanding is that the Ontario Energy Board, as well as the legislation, would impact on the provision of water services, and if it were to be removed from Hydro, then Hydro will be left with unrecovered costs, if any changes were to be made in transition cost. And also the contention that Mr. Stephenson just made, that this really is a transition for the electricity market of a legacy system, would have continued for the water bill, otherwise. 1266 MR. VLAHOS: Thank you for those answers. 1267 Just following on Ms. Chaplin's questions, I thought I heard, and I can't recall who said this, that if -- this goes to accrual versus billed. Even if it's on a billed basis, the last month of the year, and I would assume we're talking about 2003 in this case? 1268 MR. WILLIAMSON: RSVA accounts? 1269 MR. VLAHOS: Yes. 1270 MR. WILLIAMSON: Yes. 1271 MR. VLAHOS: Okay. That would have been on an accrual basis. 1272 MR. WILLIAMSON: Yes. 1273 MR. VLAHOS: So with that, then, is there any difference between the two methods in terms of the amounts that we end up for disposition? 1274 MR. WILLIAMSON: No, the only difference would be on a month-to-month basis during the year. But at the year-end date, there should be no difference -- no difference in the balances, provided the interest remains to be calculated on the cash or billed-only approach. 1275 MR. VLAHOS: One second. 1276 [The Board confers] 1277 MR. VLAHOS: So there's no -- 1278 [Audio feedback] 1279 MR. VLAHOS: Are we on, reporter? 1280 I'm just trying to get a sense of the degree of difference between billed versus accrued if, indeed, even in the case of London Hydro, that has followed the billed approach, they do have to follow the accrued approach for the last month, which is like a true-up, if you like. 1281 MR. WILLIAMSON: Yes. 1282 MR. VLAHOS: Does the Board need to worry -- is there a substantial difference between the two methods at the end of the day? 1283 MR. WILLIAMSON: The balances, in our submission, at the end of December, 2002, or December, 2003, include a year-end accrual for unbilled and unpaid energy amounts, which is in accordance with the Board's guidelines and primarily for the purpose of establishing appropriate year-end reporting numbers. 1284 MR. VLAHOS: So is there an issue for the Board, then? Should there be an issue for the Board there? 1285 MR. WILLIAMSON: I don't believe there's any issue for the Board. 1286 MR. VLAHOS: So either way would be fine, you'd suggest. 1287 MR. WILLIAMSON: The -- I suppose the accrued method, if it were used month-to-month throughout the year, is fine as long as it's not impacting the calculation of the interest. 1288 MR. VLAHOS: And that would be just a small portion of the total? 1289 MR. WILLIAMSON: Yes. 1290 MR. VLAHOS: And how does meter-reads, the frequency of meter-reads enter into this discussion? Can you help us with that? 1291 DR. SHARMA: Actually, that was a very good point you brought up, Mr. Chair. 1292 MR. VLAHOS: Actually, it was Mr. Carr's, but I'll take the credit. 1293 DR. SHARMA: Yes. I think my colleague was trying to mention that accrual process always have a estimation if you're doing month-to-month, and that estimation can sometimes be erroneous and may result in variance either way. Overall, Mr. Williamson is right, it may not have effect if, every year, there is a correction to that estimation being made. 1294 If you read on a regular basis, ideally, as frequently as possible, then you will track these variances very close to reality. At London Hydro, we use monthly billing, and that's why Mr. Williamson is able to do month-to-month balancing. Herein also, his unbilled estimation is further reduced in any error because he waits for a few months for billing to finish, and then estimates from those billed amounts as much of unbilled revenue as possible and brings it to the 31st of December. So monthly meter-reading helps significantly in reducing any error. 1295 MR. VLAHOS: Thank you. Now, there was a lot of discussion today and previous days, I don't know whether you were here, on cost-allocation issues. But I'd just like to shift a bit from that towards the rate design. We talked about how you allocate the cost. There was not much discussion about how you recover those costs. There was some discussion about fixed versus variable. 1296 Now, can you just remind this Panel as to what instructions may exist from the Board in terms of how to recover those monies -- in the guidelines that you have reviewed, are you satisfied that they are appropriate, or are there any difficulties you may have with them? 1297 MR. WILLIAMSON: I'm sorry, are you asking what instructions the Board has provided with respect to rate design for this process? 1298 MR. VLAHOS: Yes. When you say you can recover from residential customers -- 1299 MR. WILLIAMSON: Yes. 1300 MR. VLAHOS: -- I'm not sure whether we've gone far enough in the discussion, whether it's a fixed charge, a variable charge, or somewhere in between. 1301 MR. WILLIAMSON: For phase -- for the rates that went into effect on April the 1st, '04 for the initial recovery of RSVAs, the Board's proposed recovery and the method that's being used was a mark-up on the variable distribution revenue component based on kilowatt-hours. I don't believe the Board has proposed any rate design methodology for the remaining portion of the regulatory assets. I don't believe we've suggested any specific allocation between fixed and variable rates at this point in time, and I don't have a specific recommendation other than I think the issue of rate mitigation would have to be one of the factors in designing those rates. But as of this point in time, I don't have any specific recommendations for that. 1302 MR. VLAHOS: All right. So there's nothing in the Board's guidelines and there's nothing in your evidence to suggest how those monies should be recovered, and I'm thinking even more complicated rate designs, like you may have a demand charge versus a variable charge. 1303 MR. WILLIAMSON: Yes. 1304 MR. VLAHOS: And if there's no guidance from the Board up to this point and there's no proposal in your evidence, then are we missing something? 1305 DR. SHARMA: Actually, if I may. Actually, the evidence that has been provided by us and other utilities is based on two fundamental factors. One is number of customers and kilowatt-hours, that is, the consumption. So what I would submit to the Panel is that if the Panel determines the amount for approval and the methodology of allocation, then we, the utilities, can undertake to design a rate and submit to the Board the implication of that exercise, which will result in proper allocation to kilowatt, kilowatt-hour, or fixed amount if it is -- 1306 MR. VLAHOS: I'm trying to avoid another hearing, Dr. Sharma. Okay. So if it is per customer, then is your suggestion that it should be from a fixed charge as opposed to a variable charge? Is that what you're suggesting? 1307 MR. WILLIAMSON: Yes. Let me clarify a bit. I believe we have -- in terms of the RSVA variances, I believe we have suggested that these variances occurred primarily on a kilowatt-hour basis, so an appropriate method for recovery would be on a kilowatt-hour basis. 1308 MR. VLAHOS: Yeah, there's no issue there. 1309 MR. WILLIAMSON: And 1570, we've suggested that it should be allocated based on the number of customers per class, with the remaining decision required of how much would we allocate to the fixed revenue component versus the variable revenue component. That may require some work to determine the optimum allocation in order to mitigate the rates for various classes of customers. 1310 MR. VLAHOS: Well, that's what worries me, that it may require some work and therefore some filing and therefore another get-together here with intervenors. I'm not sure that that's what was contemplated. 1311 MR. WILLIAMSON: Yeah. 1312 MR. VLAHOS: Alternatively, the Board could specify the method of recovery. 1313 DR. SHARMA: Yes. 1314 MR. WILLIAMSON: Yes. 1315 MR. VLAHOS: And the options are, we're talking about the -- we're talking about transition costs now, is to be from a fixed charge or demand charge, or from a variable charge or a combination of the two. I mean, there's no -- there's three options. 1316 MR. WILLIAMSON: I mean, if we consider the system billing costs as primarily a fixed distribution cost, then we would probably allocate it to the fixed charge component. 1317 MR. VLAHOS: Okay. But that's something that the Board has to deal with. 1318 MR. WILLIAMSON: I believe so. 1319 MR. VLAHOS: Okay. 1320 And just lastly, gentlemen, the initial implementation of the new rates. If the Board were inclined to find a cost allocation that is different from the interim methodology -- and I did ask that question, I believe, of the previous utility when Mr. Shepherd was cross-examining, and there was an issue of whether there would be a one-time adjustment retroactively -- whether the rates that we're going to strike pursuant to this hearing should supersede the interim arrangements, the interim rates, going back to April 1st, 2004, and therefore would that necessitate a one-time adjustment. 1321 Now, I just want to talk about this for a minute. First of all, do you agree with me that if we're going retroactively, that's what will have to happen? 1322 MR. WILLIAMSON: I don't believe there would be a retroactive adjustment. The recoveries at the moment that are occurring are for London Hydro at least, for RSVA accounts are being recovered on a kilowatt-hour basis, which is the method we're recommending. So I believe any new recoveries would use the allocation -- would be recoveries of the remaining regulatory assets using whatever recovery mechanisms are determined for those accounts. 1323 MR. VLAHOS: Okay. Mr. Williamson, maybe you need a bit of help with this. In London's case, we have received X percent, is it 25 percent you received, of the -- 1324 MR. WILLIAMSON: Yes. 1325 MR. VLAHOS: The 25 percent. That 25 percent was within the RSVA total, was it? 1326 MR. WILLIAMSON: Yes, it was. 1327 MR. VLAHOS: And the Board allowed rates that would change only the commodity portion. 1328 MR. WILLIAMSON: The -- 1329 MR. VLAHOS: I'm sorry, I shouldn't say the commodity, the variable portion. 1330 MR. WILLIAMSON: Correct. 1331 MR. VLAHOS: Okay. And if it's a different system -- if the 25 percent did not cover the RSVAs, or the Board allowed more than 25 percent, which is not uncommon, then there is an issue. 1332 MR. WILLIAMSON: Those situations would have an issue, yes. 1333 MR. VLAHOS: Okay. And again, just bear with me for a minute, it may not be an issue in the case of London Hydro, but I just want to get your experience about retroactive adjustments and system change implications and billings and customer complaints and that kind of thing. Can you just give us your history of it? 1334 MR. ROSEHART: Customer complaints as related to customer allocation of charges? 1335 MR. VLAHOS: I'm talking about retroactive adjustments to customers and all the implications of these. 1336 MR. STEPHENSON: Well, my experience with any retroactive adjustment is the sooner the news can get out, the better, obviously. People don't like to have retroactive adjustments, I think, in general. And if it is to occur, then it needs to occur as soon as possible, because certainly it does create a strain or an additional nursing, communication, to explain why people are receiving a retroactive adjustment. And I think that that impacts customer care and other things. That would be our experience. 1337 MR. VLAHOS: Thank you. And your understanding is that the new rates will take effect when? 1338 MR. WILLIAMSON: I believe that would be March the 1st, 2005. 1339 MR. VLAHOS: So if I were to look at schedule I.6.3, that's the schedule prepared by Mr. Shepherd, I'm just trying to follow this in terms of implementation again. What we have here is the total allocations, in the case of London Hydro, $24.6 million, and then there are certain subtractions, one of them being the interim recoveries, which is to April '04. 1340 Now, if the new rates are going to take effect March 1st, '05, I'm just not entirely sure about the applicability of those numbers. 1341 MR. WILLIAMSON: I believe the impact on -- the impact in March '05 would be that the current recovery amount of 6.4 million that's in today's rates would be removed and replaced with a new recovery component of a lesser value, which would appear to be approximately 5.8 million. So, in effect, there would be a net rate reduction at that point in time for the customers. 1342 MR. VLAHOS: I'm sorry, and what happens to the 724 million -- I'm sorry, 724,000? 1343 MR. WILLIAMSON: Yes, as we discovered earlier, the 724,000 has -- 1344 MR. VLAHOS: Has been removed, yes. 1345 MR. WILLIAMSON: -- hasn't been factored in here correctly. 1346 MR. VLAHOS: Okay. And so all we need to look at is the 6.4 versus the new number, which in this case is the 5.8. 1347 MR. WILLIAMSON: That's correct. 1348 MR. VLAHOS: I believe I already discussed with you, Mr. Williamson, earlier this afternoon that the 6.4 is a grossed-up number; that it does recover a year's -- 12 months' worth in 11 months? 1349 MR. WILLIAMSON: Yes, I believe that's correct. 1350 MR. VLAHOS: So we need a different number, then, don't we -- 1351 MR. WILLIAMSON: Yes. 1352 MR. VLAHOS: -- to remove from the rates. 1353 MR. WILLIAMSON: Yeah. When we correct these calculations, I think it's essentially a -- it's either no change in rates or possibly a slight decrease. 1354 MR. VLAHOS: Okay. And in your case, it was 11 months; in other cases, it could have been different, it could have been 10 months. The recovery of the total amount over a lesser time period than 11 months in other systems, it's possible. 1355 MR. WILLIAMSON: Yes. 1356 MR. VLAHOS: Thank you very much, gentlemen. 1357 Mr. Vogel, those are the Board's questions. Any redirect? 1358 MR. VOGEL: Just very briefly, Mr. Chairman. 1359 RE-EXAMINATION BY MR. VOGEL: 1360 MR. VOGEL: Dr. Sharma, with respect to a couple of questions that were asked by Mr. Dingwall and by Mr. Lyle. 1361 First of all, Mr. Dingwall had suggested to you that some consideration might be given to what he termed putting utilities on a common footing with respect to the CIS costs that you had incurred to Sierra. Now, that $1.7 million that was paid to Sierra, did it include the capacity to then develop CIS functionality? 1362 DR. SHARMA: Yes, it did. The database architecture was structured for the eventual market that would be set upon us. 1363 MR. VOGEL: Okay. So in that $1.7 million, some significant portion of that is attributable to the capacity to develop deregulation functionality. 1364 DR. SHARMA: As I indicated in our analysis, really, that technology certainly could do everything that legacy system did, but could do more than the legacy system could not do. So it is an integrated system, and that is why we have characterized this as a transition cost, because without this, nothing else would be possible for London Hydro. 1365 MR. VOGEL: All right. You incurred, then, through IBM and Promatis, deregulation functionality costs. Mr. Lyle then went on to ask you about scalability of the system in future development, and specifically referred to an example of a million customers. Am I correct that, to date, London Hydro has only incurred the cost of dealing with its current customers and not a million customers? 1366 DR. SHARMA: That is correct. 1367 MR. VOGEL: All right. And if you were going to develop the system to handle a million customers, then you'd have to get into the middle-tier and the -- and that was the substantial additional expense that you referred to; is that correct? 1368 DR. SHARMA: There would be -- for a million customer size, there would be a significant redesign of some aspects of it; without changing the modules, but layering them differently, yes. 1369 MR. VOGEL: Thank you, Mr. Chairman. Those are my questions. 1370 MR. VLAHOS: Thank you, Mr. Vogel. 1371 PROCEDURAL MATTERS: 1372 MR. VLAHOS: Mr. Lyle, I just want to address a couple of matters for tomorrow. Do you have anything? 1373 MR. LYLE: I also have a couple of matters, Mr. Chair. One is a correction of the transcript, and also I believe Mr. Vogel needs to address a concern with the schedule for written argument. 1374 MR. VLAHOS: Okay. Why don't we go with you first, Mr. Lyle. 1375 MR. LYLE: It's the transcript from yesterday, Mr. Chair, and if I could turn you to paragraphs 1873 and 1875. It was during my cross-examination of Enersource. I misspoke myself. There's references in both to account 1570. Those references should be to account 1571. I believe it's clear from the context that the witness was certainly under the impression that he was speaking to account 1571. 1376 MR. VLAHOS: Okay, thank you. 1377 Mr. Vogel? 1378 MR. VOGEL: Thank you, Mr. Chairman. 1379 I reviewed your comments, Mr. Chairman, last Friday with respect to written argument, and I have indicated to Board Staff and to Mr. Lyle, I'm tied up in another proceeding next week and I think the proposal had been for delivery of written argument by the applicants. I'm wondering if we could have until October 8th for delivery of written argument by the applicants. Because of these other commitments, I'm just not in a position where I can do that next week. 1380 MR. VLAHOS: Any comments by anyone else? 1381 Okay, Mr. Vogel, we'll advise you of this. I'm a little concerned about the -- it's a full week, full working week. The schedule would call for Monday the 4th, assuming we finish Friday, and now you're asking for Friday the 8th. 1382 MR. VOGEL: That's correct, Mr. Chairman. 1383 MR. VLAHOS: We will advise you tomorrow or in the next day or two. 1384 MR. VOGEL: Thank you, Mr. Chairman. 1385 MR. VLAHOS: Thank you. 1386 Now, for tomorrow, we should proceed with Mr. Shepherd's request at 9:00, and, Mr. Thiessen, perhaps you can put that on our hot line. Mr. Rodger is here. And to be followed by Mr. Adams of Energy Probe, to be followed by Dr. Lowry, to be followed by Mr. Adamson and a panel of two, Mr. Vogel? 1387 MR. VOGEL: Yes. 1388 MR. VLAHOS: Your panel? So you'll be the last. 1389 MR. VOGEL: Thank you, Mr. Chairman. 1390 MR. VLAHOS: Okay. If there's nothing else, then, we'll adjourn until 9:00 tomorrow morning. 1391 --- Whereupon the hearing adjourned at 3:37 p.m.