Rep: OEB Doc: 13BF7 Rev: 0 ONTARIO ENERGY BOARD Volume: 7 22 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 Wednesday, 22 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 22 SEPTEMBER 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 MIKE LYLE Board Counsel HAROLD THIESSEN Board Staff MARTIN DAVIES 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 MOTION BY SCHOOL ENERGY COALITION: [23] SUBMISSIONS BY MR. SHEPHERD: [24] SUBMISSIONS BY MR. DINGWALL: [51] SUBMISSIONS BY MS. STREET: [60] SUBMISSIONS BY MR. RODGER: [67] REPLY SUBMISSIONS BY MR. SHEPHERD: [90] ENERGY PROBE PANEL 1 - ADAMS: [109] EXAMINATION BY MR. DINGWALL: [152] CROSS-EXAMINATION BY MS. STREET: [175] CROSS-EXAMINATION BY MR. VOGEL: [204] CROSS-EXAMINATION BY MR. LYLE: [445] QUESTIONS FROM THE BOARD: [498] HYDRO ONE NETWORKS INC. PANEL 2 - LOWRY: [554] EXAMINATION BY MS. ALDRED: [556] PRELIMINARY MATTERS: [622] HYDRO ONE NETWORKS INC. PANEL 2 - LOWRY: [646] CROSS-EXAMINATION BY MR. WARREN: [648] CROSS-EXAMINATION BY MR. DINGWALL: [764] CROSS-EXAMINATION BY MR. LYLE: [796] QUESTIONS FROM THE BOARD: [843] LONDON HYDRO INC. PANEL 2 - ADAMSON, STEPHENSON, SHARMA: [898] EXAMINATION BY MR. VOGEL: [902] CROSS-EXAMINATION BY MR. DINGWALL: [1003] CROSS-EXAMINATION BY MR. SHEPHERD: [1043] CROSS-EXAMINATION BY MS. STREET: [1056] CROSS-EXAMINATION BY MR. LYLE: [1080] QUESTIONS FROM THE BOARD: [1091] DECISION ON MOTION BY SCHOOL ENERGY COALITION: [1155] PROCEDURAL MATTERS: [1159] 10 EXHIBITS 11 EXHIBIT NO. I.7.1: CURRICULUM VITAE OF DR. LOWRY [614] 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:03 a.m. 15 MR. VLAHOS: Please be seated. 16 Good morning, everyone. 17 Mr. Lyle, any preliminary matters? 18 MR. LYLE: I don't believe so, Mr. Chair. 19 MR. VLAHOS: Anyone else? 20 MR. SHEPHERD: I wish to make submissions with respect to interrogatory response J.3.5. 21 MR. VLAHOS: Yes, Mr. Shepherd. You're on first thing this morning, so why don't you go ahead. 22 MR. SHEPHERD: Okay, Mr. Chairman. 23 MOTION BY SCHOOL ENERGY COALITION: 24 SUBMISSIONS BY MR. SHEPHERD: 25 MR. SHEPHERD: I'm going to be quite brief here. We probably picked some bad documents to argue this point on because, in the end, it's hard to get excited about call-centre contracts. But this issue had to come up at some point, and it might as well come up now, I guess, as any other time. 26 What's happened here is that the process, in this case an intervenor, but it doesn't matter who's asked for it, has asked for some documents from the applicant, and the applicant has claimed confidentiality, and proffered instead that their counsel would look at the documents, decide what's relevant in them and tell the Board. With apologies to Mr. Warren who has used this phrase before, that's patently ridiculous. To have counsel who is in a conflict of interest advise the Board on what's relevant in evidence that the Board can't look at is just silly. 27 The bottom line here, in fact, is Mr. Rodger is not allowed, is not allowed to tell you something contrary to the interests of his clients. It would be against the rules for him to do so. So the possibility that the applicant's counsel, in a conflict, would describe the evidence to you instead of getting you to look at it is not sensible. 28 That aside, however, because that's not really the issue here, the solution they've offered is not the point, the point is whether you should be able to see these documents. So we asked ourselves the question: Why is Toronto Hydro not letting you look at these call-centre documents? It's not like they're the nation's top secrets. The idea that they don't want you to see them because they're confidential, it's just hard to imagine that there would be something in a call-centre document that's so mind-boggling that it shouldn't be seen in open hearing. 29 So we looked at why are they saying no, you can't have these, and it seems to us there's three possibilities. 30 The first possibility is this is part of a regulatory strategy of Toronto Hydro to provide as little information as possible to the regulator on the theory that if you do so, then the regulator has as little as possible to whack you with. And, indeed, they wouldn't be the first utility that took that strategy. It's a relatively common strategy. And indeed when an intervenor, when a ratepayer asks for information, you assume that the ratepayer, you if you're a utility, assume that the ratepayer isn't asking for it so they can help you. You assume that they're going to try to hurt you with it in some way, and therefore you don't want to give it to them. 31 So one of the possibilities is that their strategy is to stonewall every request for additional information, as much as possible, on the theory that that's the best strategy from a regulatory point of view. If that's the case, I don't like the very adversarial nature of the process that sometimes happens, but if that's the case and the Board accedes to that request, I think what the Board is doing in that case is sending a message not just to Toronto Hydro, but if you look around the room you'll see the senior executives of London Hydro and Hydro One and Enersource in the room, and you're sending the message to them and everybody else reading the transcripts, that's the right way to handle this process. Give as little information as possible. It will help you. 32 The second possibility is that there's something untoward in the agreements. Now, it's hard to imagine. They're call-centre agreements, after all. It's hard to imagine there's really something untoward. But we had to figure out, well, what could be confidential in those agreements, and the only thing that we can think of that would be confidential would be something that embarrasses Toronto Hydro. 33 So we looked at the things in J.3.5 and we see that they've talked about some of the things that might be in there, like cross-default. But, for example, they haven't talked about whether the pricing schedules give the retailer the similar volume discount to the regulated entity, even though the regulated entity presumably has much higher volumes. They haven't talked about things like whether there were upfront costs that were only shared by -- only paid by the regulated entity and not the retailer. I'm not going to go on with a lot of examples, but I can give you hundreds of examples of things that are in there. 34 But the best way to describe this is to recall the Enbridge 2003 rate case. In the Enbridge 2003 rate case, what happened was that Enbridge Gas Distribution had contracted with a quasi-affiliate, a limited partnership that was, to all intents and purposes, an affiliate, but had been set up so it technically wasn't, for whatever reason. And then did a back-to-back contract with a third party, an arm's length third party, to provide those services. And so their argument -- they didn't want to show the agreements for that, and their argument was, Well, we don't have to show these agreements because it's a third party, at the end of the day, and so of course it must be at fair market value; right? Everything's fine. 35 There was a big fight about the motions and countermotions and decisions and additional decisions. And at the end of the day they were required to show this and everybody had to sign confidentiality documents, and you would have thought the world was coming to an end how important this was, and it turned out that in that agreement, and we couldn't have guessed, in that agreement there were two things that affected the Board's decision dramatically. One was there was an expressed multi-million-dollar-a-year kickback by the third party that was not part of the pricing. It was a kickback, straightforward. Nobody told us about this. 36 And secondly, there was an analysis of the benefits, like a cost-benefit analysis, of the back-to-back transaction that demonstrated that the ratepayers weren't getting any of those benefits. 37 At the end of the day, the Board decided that Enbridge had to reduce the amount they were recovering on that by $7 million a year, and that continues until now. 38 The point is not that there was something bad in the agreement, and the point is not that there was a $7 million adjustment in rates. The point is that the Board could not have decided that without looking at the agreement. It wouldn't have mattered what questions anybody asked. If you hadn't seen the agreement, you couldn't have made that decision, which was the right decision in the end. 39 So the second possibility is that there might be something in the agreements, and if that's the case, it seems to us, straightforward, that you have to see them in order to find out. 40 Now, my friend is going to say, fishing expedition, my friend doesn't know what he's asking for so he's just fishing. A standard argument. And I think the answer to that is, if you create a situation where there is a potential that an affiliate was benefited, if you create that situation either by back-to-back contracts, by parallel contracting, or however, you are then in a position where you have to provide enough evidence to show that that's not the case. You can't say, Oh, no, tell us how we're making money offshore. What you have to say is, Here's the evidence; you can see for yourself. That's the second possibility. 41 The third possibility, the third reason why they might be resisting this is, this is -- a lot of people think that this hearing is a bit of a warm-up game because what's happening next year is the first cost-of-service applications for many of the LDCs. And Toronto Hydro, certainly, will have a full hearing and Hydro One and some of the other big ones will have a full hearing, and all these issues will come up there. And it may be that the strategy of Toronto Hydro is they don't actually care about the call-centre contracts, but there are other contracts next year that they don't want to have to show you because they are embarrassing. And so in order to avoid that, they are trying to have the fight now and get it over with. 42 So, Mr. Chairman, I can't think of another reason why they're refusing to provide these documents. The one that they have proffered, which is they're confidential, just doesn't make sense to me. And the others that are possible, in every case it seems to me that it's in the Board's interest to ensure this these documents are delivered to the Board. 43 Those are our submissions. 44 MR. VLAHOS: Thank you, Mr. Shepherd. Just to clarify, if the Board were to order production of those documents, then they would be filed and then used in argument; is that the plan? 45 MR. SHEPHERD: They might be. As I said, it might turn that there's a materiality issue and there's nothing material to argue about. But assuming there's something material in them, yes, they would be used in argument. And the Board has a confidentiality policy, if it turns out that there is something confidential in them, that would allow the confidential portions to be protected. 46 MR. VLAHOS: That would not exclude recalling the witnesses? 47 MR. SHEPHERD: I suppose if there was something that really needed questions asked, yes, you might have to recall the witnesses, but I'd be surprised. 48 MR. VLAHOS: Thank you, Mr. Shepherd. 49 Who wishes to go next in support of this request? 50 Mr. Dingwall? 51 SUBMISSIONS BY MR. DINGWALL: 52 MR. DINGWALL: I'm not going to provide much of a resounding echo of Mr. Shepherd's arguments, and I certainly concur with the suggestion that he's making, so I'll limit my submissions to talking about the process and the timing. 53 In reviewing the prefiled evidence, the interrogatory responses, and the transcripts, it becomes quite clear that the question surrounding the sharing of an outsourced call-centre really came to light within the timing of the hearing and the cross-examination of the applicant's panel. So to that extent, I don't think it is untimely for Mr. Shepherd to be seeking copies of the agreements at this point in time. 54 With respect to the materiality of the agreements, I believe that both sides of the equation, being not just the agreement between the call-centre and the LDC but also the agreement between the call-centre and the affiliate, are necessary in order to understand whether the ambit of the Affiliate Relationships Code was, in fact, kept in mind and whether the requirements were met. 55 The factual circumstance echoes the circumstance which was the subject of a complaint before the Board by the Heating, Ventilation and Airconditioning Coalition a number of years ago with respect to a shared outsourced call-centre with Enbridge and its affiliate at the time, which was found to be preferentially directing customers from the regulated entity to the affiliate. So certainly the factual circumstance suggests a situation whereby future or further inquiry is necessary. 56 Accordingly, we support the motion from the School Energy Coalition for the production of these documents, and believe that there is no circumstance of confidentiality which should apply to these documents, especially given the fact that Toronto Hydro's affiliate is no longer in the marketplace and there is no business sensitivity with respect to the factual circumstance, and that they're necessary to be part of the record in this proceeding to give a full context of the incursion of the costs. 57 Those are my submissions. 58 MR. VLAHOS: Thank you, Mr. Dingwall. 59 Anyone else in support? There being no response -- I'm sorry, Ms. Street. 60 SUBMISSIONS BY MS. STREET: 61 MS. STREET: Just briefly, Mr. Chair, my CME does support the motion, very generally, based on the principle of the importance of disclosure to the Board of all relevant information and documentation. And the assertion of confidentiality in and of itself, in our submission, has to be more adequately supported by Toronto Hydro. If it's going to make that assertion, I think we need some information as to why it's considered confidential and why it cannot be disclosed, and I don't believe we have that information. 62 In the absence of that, I simply reinforce Mr. Shepherd's position that full disclosure is appropriate and necessary for the Board to make its decision. 63 Thank you. 64 MR. VLAHOS: Thank you, Ms. Street. 65 Can I turn to the applicants. Who wishes to comment on this before I turn to Mr. Rodger? Anyone else from the applicants? 66 There being no response, Mr. Rodger. 67 SUBMISSIONS BY MR. RODGER: 68 MR. RODGER: Thank you, Mr. Chairman. 69 Undertaking J.3.5 involved inquiries being made of both the applicant and its affiliate, where I referred to in the undertaking responses, the retailer, to review contracts concerning any use of a call service provider in question that arose during cross-examination. I did make those inquiries of both the applicant and the retailer, and they both refused this request for production of these agreements. 70 Firstly, it's not clear what the basis would be to have the retailer, which is a completely separate company and not a party to this proceedings, to be ordered to deliver up a contract with a third party. Mr. Shepherd's view, as expressed this morning, as I understand it, that any time there's even a potential for sharing of services between a regulated entity and its competitive affiliate should be basis enough to produce it. But is that to say that any time, no matter what the circumstances, that an unregulated company happens to have a supplier in common with a sister regulated company, the competitive entity will always be required to produce these contracts for public review? In our submission, this is not the kind of policy the Board should embark upon. 71 What the applicant has done is to provide what it believes is a highly responsive and satisfactory reply to the specific issues raised by my friend which gave rise to the undertaking. For example, and for the record, the reference is volume 3, line 456, Mr. Shepherd asked, and I quote: 72 "Mr. Chairman, what I am really looking for is what are the prices. Did, for example, the unregulated affiliate get a price break because the regulated company was contracting with the same people?" 73 My client's response as contained in the undertaking answer is no. As referenced in the answer, both Toronto Hydro-Electric System Limited and the retailer pay the same amounts for the same services rendered pursuant to each agreement. And you may recall, Mr. Chairman, that I had a discussion with Mr. Carr about this tell the response was filed, and I agreed with Mr. Carr that another way to express this is that the prices are identical in both agreements. So my friend already has an answer to the question he asked as a basis for the undertaking, and I suggest to you that there is no additional helpful information on this question to be provided. 74 Mr. Shepherd also asked if the two contracts were signed by the two person on the same day, and the answer contained in the undertaking response is no. The two agreements show two different companies at two different business addresses, and the two agreements have different dates. So these questions have also been answered. 75 Mr. Shepherd asked about whether cross-default provisions existed, and again this is addressed. The answer is no cross-default provisions. 76 It is important to note that Mr. Shepherd's assumption upon which he based his original inquiries about these contracts is incorrect. At line 455 of volume 3, Mr. Shepherd states to the effect that the contracts had been concluded and are no longer outstanding; therefore there's no issues. But that was a wrong assumption. I'm advised that both contracts are still in effect, and I would ask the Board to take this into account. And as indicated in the undertaking response, both agreements are clearly marked confidential and proprietary. 77 So my submission, Mr. Chairman, is that Mr. Shepherd already has the answers to the questions he asked. The response to the undertaking answers go to the questions raised. It was filed on a timely basis, and that is all the applicant should be reasonably required to do in these circumstances. 78 What should not be permitted is to allow my friend to use an undertaking arising from cross-examination, which has already been answered in a fulsome way, in our view, as a vehicle to commence a discovery-like process for matters which he now may become interested in but after the applicant's witness panel has already been concluded. 79 And just to respond to some of the other comments. If you hear what my friend is suggesting, he believes that this process should basically be a public audit of LDCs for transition costs, and it's not really an oral hearing but a public audit. In our view, that should be rejected. 80 Because these are ongoing agreements, obviously pricing is a sensitive matter for both sides, and I just can't imagine Mr. Shepherd saying that there should be no issues. I think that should just be rejected at the outset. 81 And I think the bottom line is, my friend Mr. Shepherd is very creative in his assumptions or surmisings why utilities may take a certain course, but the bottom line is that Mr. Shepherd will never be satisfied unless every single lunch receipt and pencil receipt is produced for this type of proceedings. And I would call the -- I would recall the Board's initial procedural orders where part of this process is to establish what is the evidence for the other 90 LDCs in Ontario. So I would suggest that that is also not a road that the Board wants to go down, is to establish precedence here which my friends will also be raising for the other 90 applications that come forward. 82 Accordingly, sir, the applicant refuses my friend's request for production of the agreement. It is not necessary because of the answers provided. In our view, there's nothing helpful to what has already been produced for the Board to determine the matters before it, given the tests that you actually have to apply in this case for a prudence review. 83 Finally, since the agreements continue to be effective, contrary to the initial assumption of my friend, the proprietary pricing details and confidentiality expectations of the parties should be determinative of this matter. 84 Those are my submissions, sir. 85 MR. VLAHOS: Thank you, Mr. Rodger. 86 Mr. Lyle, anything to add? 87 MR. LYLE: No, not at this time, Mr. Chair. 88 MR. VLAHOS: Thank you, Mr. Lyle. 89 Mr. Shepherd. 90 REPLY SUBMISSIONS BY MR. SHEPHERD: 91 MR. SHEPHERD: Mr. Chairman, I have a brief response. There are five points that my friend raised that need a short response. 92 The first is that my friend will be aware that School Energy Coalition, in fact, tends not to initiate procedural issues. We haven't been in the forefront of these in the past because, generally speaking, we like to focus on the substance and not the procedural. But every once in a while you have to deal with a procedural matter to get to the substance, and this is one of those cases. 93 My friend argues that it's too late to ask for this now because the witnesses are gone. Well, we asked for it when the witnesses were on the stand, and my friend said, Oh, I haven't looked at the agreements and I have to go look at them first, and now he's saying it's too late. Well, sorry, we asked for it in time. 94 Third, my friend says, the thing you are really asking for is whether there was some sort of price break, and we answered that, there isn't any. The prices are identical. Well, that was the evidence in the Enbridge Gas Distribution case last year as well, the prices are identical, back-to-back, and they were. What they didn't tell us was that there were other provision that is made the net costs different. And now we could ask question after question after question, trying to get to all the various possible ways that there could be a benefit between these two agreements, but the better way to deal with that is let's just look at the documents. 95 And indeed, my friend, in all of the particular points, he uses what we used to call, when I was much younger, a fallacy of attacking the example. Take the example and say, Well, the example's not right, this particular point is not right, therefore the whole principle is not right. Well, that's a well-known fallacy of logic and it doesn't work here either. 96 Finally, my friend says that what we're asking for is that any time there are shared services, that there are these type of parallel relationships, we think the Board should be able to see what's going on. And he seems outraged by that, but that's exactly what we're asking for. That's exactly what we're saying. Any time there's a situation like that, the Board should be able to see what's going on. Does it need to be done in public? No, it doesn't. The Board has well-accepted confidentiality rules for documents that are, indeed, confidential, that allows the confidentiality to be protected without the Board being forced to deal with things blind. And so if there is a real concern about confidentiality, then it seems to me that we can exercise -- we can use those rules, but the Board can still see the documents and determine for itself whether there's a problem or not. 97 Those are our submissions. 98 MR. VLAHOS: Thank you, Mr. Shepherd. 99 One question. I'm looking at the Affiliate Relationships Code for electricity distributors, and can you help me whether your request can be granted in that document? 100 MR. SHEPHERD: I have to say I haven't looked at whether there's a specific provision that I can rely on. Perhaps I should have. I'm less lawyer than policy guy, I think, sometimes. 101 MR. VLAHOS: The reason I'm raising this is that I've looked at the code itself and there's nothing provided here in terms of affiliates -- or the utility providing documents for affiliates with another third party, unlike in the case of the proposed code for gas, which is in the proposal stage, where there's some provisions -- I'm not sure how it's worded, but there's some provisions in the document. There's nothing in there for distributors. I'd like to know where you ground that request. 102 MR. SHEPHERD: I guess, Mr. Chair, the spirit of the code is to try to get in front of the Board whatever it needs to see to show that affiliates aren't getting a benefit on the back of the ratepayers. That's essentially the bottom line. And so, for example, the Affiliate Relationships Code for gas in 2003, when we had the Enbridge case, didn't have a provision that said that a technical non-affiliate, in that case Customer Works Limited Partnership, which had a contract with a third party, had to provide that third party. In fact, we had the lawyers for both the quasi-affiliate and the third party in saying, No, no, no, the Code doesn't require this. But the Board said it doesn't matter what the words of the code are, it matters what the intent of the code is. And the intent of the code is to get at this stuff and so we need to see it in order to make a determination. 103 MR. VLAHOS: Thank you, Mr. Shepherd. 104 One moment, please. 105 Mr. Shepherd, the Panel will reserve its decision in this matter and can't tell you when we'll get to it. It will definitely be before the end of the evidentiary portion. Thank you for that. 106 Now, then, we'll go to Mr. Dingwall. 107 MR. DINGWALL: Thank you, sir. As a preliminary warm-up to the beginning of live discussion, it's Energy Probe's intention to not specifically qualify Mr. Adams as an expert with respect to benchmarking; however, Mr. Adams has a long and significant history of appearances before this Board and involvement in the design and operation of this energy market over the last 20 years, so it is our intention to put forward Mr. Adams as an expert with respect to the Ontario electricity market. And I'm wondering, sir, rather than going through that line of questions, whether we might preempt that by gaining an understanding from the other parties in the room whether there would be any questioning of that qualification. 108 MR. VLAHOS: Well, I think -- perhaps Mr. Adams can be sworn first, and then we can discuss that, Mr. Dingwall. 109 ENERGY PROBE PANEL 1 - ADAMS: 110 T.ADAMS; Sworn. 111 MR. VLAHOS: Welcome, Mr. Adams. 112 MR. ADAMS: Thank you. 113 MR. VLAHOS: Mr. Dingwall, perhaps the first order of business, you wish to qualify your witness? Maybe you can just tell us how -- the qualifications, and then we'll invite the other parties to state any objections to Mr. Adams being qualified as an expert witness in the matters in which he intends to testify on. 114 MR. VOGEL: Mr. Chairman, if it's any assistance to the Board, I may be the only one of the applicants cross-examining this witness, and the evidence in issue, as you've seen, deals with benchmarking. As I understood Mr. Dingwall's introductory comment, he's not purporting to qualify this witness as an expert in benchmarking, so obviously the weight that the Board chooses to give to this evidence will take into consideration the fact that this witness is not an expert and doesn't purport to be an expert in benchmarking, which is the subject of the evidence. 115 I don't have objections to Mr. Adams' qualification, as indicated by Mr. Dingwall, with respect to the design and operation of the energy market in Ontario, if that's of any assistance to you. 116 MR. VLAHOS: Yes, it is, sir. Thank you very much. 117 Mr. Rodger, you want to say something? 118 MR. RODGER: Yes. Again, just to be absolutely clear, if my friend Mr. Dingwall is saying that Mr. Adams really has acquired no special knowledge, either through study or experience, in the areas of benchmarking, and we're clear on that, then that's fine, there's no objection. The one question I would have, though, is what's the purpose of the expert qualification, and that is, how does that qualification impact on the benchmarking issues that he will speak to? It seems to be that the qualification isn't needed if it's not relevant to the benchmarking analysis, per se. 119 MR. VLAHOS: So what do you suggest we do, Mr. Rodger? 120 MR. RODGER: I'd like Mr. Dingwall to explain why -- is there a link between the qualification that he proposes to have for Mr. Adams and the evidence he's going to be speaking to this morning? 121 MR. DINGWALL: I think Mr. Rodger could probably flesh that out more in cross-examination than in the qualification. The evidence is the evidence. 122 MR. RODGER: But the issue is how the qualification impacts on that evidence. Mr. Dingwall is saying that Mr. Adams is not going to be qualified as an expert on benchmarking because he has no particular skill, knowledge, or expertise in that area, which we support. So therefore, what relevance, or what's the importance of the qualification on that evidence, then? And that's a matter that should be dealt with at the outset, Mr. Chairman, in my submission. 123 MR. VLAHOS: I'm not clear on that, Mr. Rodger. Either we have Mr. Adams here or we don't have him here. Once we have him here, then you're free to cross-examine and argue as to the weight of his evidence. I'm just not sure how to deal with the -- 124 MR. RODGER: Well, my understanding, sir, is that for any witness that is to be qualified as an expert, challenges come at the outset, before the witness has started his evidence in chief. And Mr. Dingwall is saying here that Mr. Adams is not qualified as an expert on benchmarking, and my question for Mr. Dingwall, then, is what is the link, the relevance, between a general designation of expert on electricity generally and the evidence before the Board? And the issue is if he's not an expert in benchmarking, he's not an expert in benchmarking, period, and expertise in another area, where it's electricity or jam-making, is not relevant to the matters before the Board that he's speaking to today. So it's understanding what the impact that my friend hopes to leave with the Board about this general qualification for expertise but not relevant to the specific benchmarking analysis. 125 MR. VLAHOS: Thank you, Mr. Rodger. 126 Anybody else wish to comment? Mr. Shepherd? 127 MR. SHEPHERD: Mr. Chairman, I only have one comment. Everybody in this room knows who Tom Adams is and knows how much he knows about the electricity market in Ontario, and to attempt to exclude his evidence or somehow downplay it because of a physical discussion about how many angels dance on the head of a pin seems to us to be inappropriate. Those are our submissions. 128 MR. VLAHOS: Thank you, Mr. Shepherd. 129 MS. ALDRED: Mr. Chairman, I'd like to comment both the comments of Mr. Vogel and Mr. Rodger. I think it would be very useful for the Panel, given the fact that the area of testimony is benchmarking, if Mr. Dingwall was to explain what weight he intends Mr. Adams' evidence on benchmarking to hold. I think that would be quite useful for us to know at the outset. 130 MR. DINGWALL: In listening to these comments -- 131 MR. VLAHOS: One second, Mr. Dingwall. 132 Anyone else? 133 Mr. Lyle, any comments? 134 MR. LYLE: I'd, perhaps, Mr. Chair, like to clarify with Mr. Rodger. Are you seeking to have Mr. Adams' testimony excluded, or are you only going to argue as to the weight that it should be given? 135 MR. RODGER: I'm not saying the evidence should be excluded. This goes to weight and whether Mr. Dingwall is saying his general expertise somehow adds greater weight to the benchmarking evidence in which he is not an expert. 136 MR. VLAHOS: Mr. Dingwall? 137 MR. DINGWALL: I'm somewhat confused -- 138 MR. VLAHOS: Sorry, Mr. Lyle, did you have a follow-up on this? 139 MR. LYLE: No, Mr. Chair. 140 MR. DINGWALL: I'm somewhat confused by the focus of Mr. Rodger and Ms. Aldred's comments. They seem to presuppose the whole purpose of cross-examination, which is to take the evidence, examine the evidence, examine the positive merits and negative aspects of the evidence in order to then determine the weight. Having the weight of the evidence determined as a matter of the qualification of the witness prior to presenting and testing that evidence seems, frankly, absurd. 141 I'm in the Board's hands as to whether or not we wish to go down the road of not qualifying Mr. Adams as an expert in benchmarking, which we don't propose to do, or going through Mr. Adams' history before this Board, which is acknowledged by all parties as being significant in providing him with a good context and expertise in respect of this market. But frankly, in terms of the factual context of where we are in the process and the fact that we're putting forward evidence and testing that evidence, it really, in my mind, is more incumbent upon the parties challenging the evidence to do so through cross-examination than through the process of what label is placed upon the witness. 142 MR. VLAHOS: Thank you, Mr. Dingwall. 143 [The Board confers] 144 MR. VLAHOS: Mr. Dingwall, the Board, while it recognizes that Mr. Adams may not be a formal expert in benchmarking, the Board will accept Mr. Adams as providing testimony to his written evidence. 145 Mr. Rodger, unless you wanted to challenge, which you have not, you have not challenged the appearance of Mr. Adams, we'll allow the -- his evidence to be tested by yourself and others. And in terms of weight I guess we'll go to the argument. 146 MR. RODGER: Could I just clarify one thing, Mr. Chairman. 147 With that, is the expectation that Mr. Adams would be allowed to express his opinion about benchmarking? 148 MR. VLAHOS: We're here to receive as much assistance as possible, Mr. Rodger, and it's up to you and others to argue at the end of the day that whatever Mr. Adams testifies to is relevant or irrelevant. 149 MR. RODGER: Thank you, sir. 150 MR. VLAHOS: Thank you. 151 MR. DINGWALL: Thank you, sir. 152 EXAMINATION BY MR. DINGWALL: 153 MR. DINGWALL: Mr. Adams, was the evidence prepared by you or under your direction? 154 MR. ADAMS: Yes. 155 MR. DINGWALL: Are there any corrections to the evidence as it was originally filed? 156 MR. ADAMS: The originally filed spreadsheet as appendix A contained a number of errors. These are corrected in response to Energy Probe's response to Hydro One's Interrogatory No. 4, where a replacement spreadsheet is provided. For numerical analysis, the response to -- Energy Probe's response to Hydro One's Interrogatory No. 4 is the best place to start. However, the numerical changes are relatively minor. So if you're looking at the original prefiled evidence, the results shown there are fairly close to the final version. 157 MR. DINGWALL: Where are your recommendations set out in the evidence for how benchmarking should be applied by the Board in dealing with these applications? 158 MR. ADAMS: The application of our recommendations are presented in the evidence, in the prefiled evidence, at paragraph 46 through 49, and also in response to Board Staff -- Energy Probe's response to Board Staff Interrogatory No. 11, VECC Interrogatory 5, Great Lakes Interrogatory No. 2. 159 MR. DINGWALL: I'm wondering, Mr. Adams, if you could give a general overview of that context. 160 MR. ADAMS: Energy Probe is presenting evidence today with respect to productivity indices for assessing the relative costs of the claims of the applicants in this case, in the context of the cost claims of all of the Ontario electric LDCs with respect to costs associated with account 1570, transition costs. 161 Energy Probe is not recommending a Procrustean application of the results of our comparative review. Rather, we are recommending that the review be considered in the context of the rest of the evidence available to the Board for its overall determination on the prudence and appropriateness of the cost claims of the applicants in this case, with, hopefully, some learning coming out of this case for the successive applications of the remaining LDCs that have regulatory assets to be disposed of by this Board. 162 MR. DINGWALL: Mr. Adams, in paragraph 34 of your prefiled evidence, you suggest that London Hydro's base CIS costs should not be recovered in transition costs. Do you have any comment on how these costs should be recovered? 163 MR. ADAMS: In recommending the removal of London's base CIS costs from the decisions in this case, Energy Probe is not suggesting that these costs become a shareholder responsibility. The proposed removal would allow London to be less unique by maintaining its accounts in line with those of other applicants. Energy Probe hopes that the appropriate costs for needed CIS services would be captured in the 2006 review of rates, now proceeding in another OEB process. 164 MR. DINGWALL: That concludes, Mr. Chairman, the examination-in-chief of Mr. Adams. Mr. Adams is now available for questions from the other parties. 165 MR. VLAHOS: Thank you, Mr. Dingwall. 166 Mr. Vogel, you will cross-examine. Anybody else in this room? 167 MR. LYLE: Board Staff will be asking some questions, Mr. Chair. 168 MR. VLAHOS: Thank you. Anybody else? 169 MS. ALDRED: No, Mr. Chair. 170 MR. VLAHOS: Ms. Street? 171 MS. STREET: I just have a few questions, Mr. Chair. 172 MR. VLAHOS: Mr. Vogel, would you prefer Ms. Street to go first? 173 MR. VOGEL: That's fine. 174 MR. VLAHOS: Ms. Street. 175 CROSS-EXAMINATION BY MS. STREET: 176 MS. STREET: Mr. Adams, just so I'm clear, you used the words a moment ago, you don't want a Procrustean adoption of your recommendation, that what you're proposing is some thoughts for consideration by the Panel; do I understand you correctly? 177 MR. ADAMS: Yes. 178 MS. STREET: And so as I understand that, then, what you're suggesting is that the Board take into consideration your comments for future reference not only with these applicants but with the other LDCs still to come; is that correct? 179 MR. ADAMS: Yes, that's correct. 180 MS. STREET: You've also said in your report that benchmarking on a cost-per-dollar of distribution revenue is not a preferable benchmark. Can you explain why you came to that conclusion. 181 MR. ADAMS: The evidence we presented uses a normalization on the basis of customer numbers. Now, there are a number of alternative possibilities to normalize the data so that they can be compared. 182 Just as a side point, in the evidence that I presented, I've attempted to consistently use the term "normalization" to refer to a method of comparison. In some of the other evidence that's been presented, and in some of the interrogatories, other parties have used the term "normalization" to refer to ways of adjusting the base data. I'm attempting to consistently refer to normalization with reference to comparison. 183 So there are a number of candidate options for comparing Ontario's electric LDCs. One option is to compare on the basis of distribution revenue; another option is to compare on the basis of customer numbers. 184 Now, with respect to distribution revenue, there are a number of factors that influence distribution revenue related to cost that are unlikely to be strongly correlated with costs associated with making the market transition. On the other hand, when we tested statistically the relationship between transition costs and customer numbers, the correlation turns out to be very high. 185 We present that correlation in an interrogatory response, and it's response to Board Staff Interrogatory No. 10. The coefficient of correlation between customer numbers and transition costs for the entire data set is 97 percent. If you remove from the data set those applications at phase 1 where the applicants were presenting cost claims of below $10 per customer, a claim that seems hard to understand on its face, the coefficient of correlation rises to 98 percent. 186 On this basis, we conclude that there's a strong justification for normalizing and being able to compare the cost claims of the various applicants on a cost-per-customer basis. 187 MS. STREET: Thank you, Mr. Adams. Just one last question. 188 On page 12, the conclusion of paragraph 32 of that -- at the top of that page, you say in the last sentence: 189 "The observed movement of reported costs suggests that further review of the quantum of transition cost claims of all LDCs is justified." 190 Could you clarify what sort of further review you think would be appropriate? 191 MR. ADAMS: We have, in preparing this evidence, come to the conclusion that the information provided to the Board in the phase 1 filings is -- has some already detected imperfections and complications that weren't evident in the phase 1 filings, as demonstrated by the changes that were revealed in this process with regard to these specific applicants for their 1570 accounts. A number of the 1570 accounts moved around a little bit. 192 On the basis of that observation, we are suggesting to the Board that reliance on the phase 1 filings presents some risk of data inaccuracy in the analysis. So we are suggesting that the appropriate course of action is some further review for the remaining applicants before there's a disposition order with respect to their 1570 claims. 193 Now, my hope is that the review process can benefit from what's happened in this room with these applicants so that there's efficiencies gained. But at the end of the day, the Board can have access to, and the public can have access to, data that's -- that is sifted to the point where we can rely on it. 194 And I already commented on the point that there are some applicants that are making, in phase 1, applications for recovery that don't seem credible and there needs to be some explanation as to what is going on in those cases. 195 MS. STREET: And just if I could turn you to the very last paragraph on page 49, where you say that: 196 "The Board should urge the LDCs to be less unique, to consistently apply the existing rules, and to highlight and quantify any departures from the rules." 197 Is that -- do I understand you, is that the same thought you've just expressed? 198 MR. ADAMS: Yes. We believe that the LDCs should be less unique with regard to their presentation of information before this Board so that can facilitate the Board's review in an efficient and accurate fashion. 199 MS. STREET: Thank you, Mr. Adams. 200 Thank you, Panel. Those are my questions. 201 MR. VLAHOS: Thank you, Ms. Street. 202 Mr. Vogel. 203 MR. VOGEL: Thank you, Mr. Chairman. 204 CROSS-EXAMINATION BY MR. VOGEL: 205 MR. VOGEL: Mr. Adams, my name is Paul Vogel. I represent London Hydro. 206 If you could turn with me to Energy Probe's response to Great Lakes Power Interrogatory No. 6. I just want to be sure I understand some of these interrogatory responses. I'm going to go through some of them with you, Mr. Adams, so I understand your position. 207 Looking at Great Lakes Power Interrogatory No. 6, Energy Probe's response, you would acknowledge, I gather, then, that the benchmarking proposal that you've advanced in your evidence does not provide sufficient guidance to establish prudence? 208 MR. ADAMS: The evidence is presented to assist the Board in assessing prudence. 209 MR. VOGEL: Yes. 210 MR. ADAMS: We think that the evidence identifies some claims that are out of line with regard to the claimed costs, and that this -- the causes for these excursions need to be identified with greater accuracy. 211 MR. VOGEL: But you would agree that benchmarking, as you've proposed it itself, does not provide sufficient guidance with respect to establishing prudence. I think that's the point you make in the last paragraph there. Isn't that correct? 212 MR. ADAMS: Benchmarking is proposed here as part of a review process but not the whole content of the prudence review process. 213 MR. VOGEL: All right. And, in fact, the benchmarking exercise that you've presented in your evidence, you would agree, does not in itself establish prudence; correct? 214 MR. ADAMS: In itself? 215 MR. VOGEL: Yes. 216 MR. ADAMS: No. 217 MR. VOGEL: All right. And if we turn it number 7, Great Lakes Power Interrogatory No. 7, Energy Probe's response, you'd agree at this point we don't know what, if any, correlation there may or may not be between the quantum of transition costs of different utilities and the issue of prudence with respect to those costs; you'd agree with that? 218 MR. ADAMS: This question didn't make much sense to me when it was first asked. The purpose of this quantitative analysis that I'm presenting is to provide coefficients between measurable quantities. Prudence is not a measurable quantity until it is subject to decisions of a tribunal such as this. 219 MR. VOGEL: But you'd agree, Mr. Adams, from that response, I gather, that there is no necessary correlation between the quantum of transition claims claimed by individual utilities and the prudence with respect to those costs. There's no necessary relationship between the amount and the prudence. 220 MR. ADAMS: The cost stack that I presented which shows the unfavourable cost claims at the top -- 221 MR. VOGEL: Yes. 222 MR. ADAMS: -- and the more favourable cost claims at the bottom -- 223 MR. VOGEL: Yes. 224 MR. ADAMS: -- it's -- the interpretation of prudence that I would apply to this is a matter of gradation. On its face, the ones moving towards the unfavourable end of the cost stack appear to be less prudent, and the ones towards the bottom, more prudent. 225 MR. VOGEL: Possibly. But haven't you agreed in your response to Interrogatory No. 7 that there's simply insufficient information what, if any, correlation may exist between quantum and prudence. You can't look at any particular utility, determine the quantum of its transition costs and say that is or is not prudent; you'd agree with that? 226 MR. ADAMS: I'm resisting the suggestion that prudence is something that can be subject to quantitative analysis. 227 MR. VOGEL: Fair enough. 228 MR. ADAMS: In this fashion. 229 MR. VOGEL: So you'd agree, as I think you've said in the response, that you can't correlate quantum, an objective amount, with prudence; you'd agree with that? I think you have agreed with that. 230 MR. ADAMS: Yes, I have. 231 MR. VOGEL: All right. And in response to one of London Hydro's interrogatories, and this is your response to Interrogatory 6A. In looking at the last paragraph of your response there, I take it you also agree that the Board should apply its own criteria to the prudence review of these transition costs; do you agree with that? 232 MR. ADAMS: Yes. 233 MR. VOGEL: All right. And that would include -- I think the relevant criteria are excerpted in London Hydro's reply evidence, but that would include, from the Distribution Rate Handbook, section 5, page 6, "The utility will need to justify the reasonableness of the cost relative to other options that utility may have had." Correct? 234 On this prudence review, the job the utility is to justify the reasonableness of its cost relative to its other options. That's one of the criteria the Board should apply; you agree with that? 235 MR. ADAMS: That's one f the criteria, yes. 236 MR. VOGEL: All right. And in section 5.5.1 of the Distribution Rate Handbook, "The option selected must represent the most cost-effective option not necessarily the least initial cost for the ratepayer." 237 You'd agree that's a criteria the Board should be applying here; correct? 238 MR. ADAMS: As it -- 239 MR. VOGEL: Is that correct? It's a criteria defined in the Distribution Rate Handbook that the Board should be applying at this hearing; is that correct? Yes or no? 240 MR. ADAMS: I -- I suggest that a yes/no answer is not a complete answer. If I'm restricted to a yes/no answer, I'll say yes, with the identification that that's not a complete answer. 241 MR. VLAHOS: Would you complete your answer, then, Mr. Adams? 242 MR. ADAMS: The filings in this case, the application in this case, invited the utilities to present the quantum of their costs, not the life cycle of their costs. The Board does not have before it right now an understanding of the complete life cycle associated with these various systems, customer care systems and whatnot. 243 So my evidence is somewhat limited in its scope by virtue of the scope of this proceeding. It's -- it is theoretically possible, not just theoretically possible, but as a matter of practical utility operations, there are trade-offs between capital costs and operating costs. Some high capital cost options may have low running costs and the other way around, some low capital cost options might have high running costs. So one might be concerned that we're leaving out a part of the picture of the total costs when we're assessing prudence here. 244 But a couple of points, I think, are relevant to the answer. One is that the -- there is a successive process of the Board with respect to 2006 rates. So if a utility came forward -- had adopted a strategy of minimizing their upfront costs at the expense of very high costs in the future, the Board will have in front of it the information to make the appropriate adjustments to the overall cost impact on ratepayers. Is that more helpful? 245 MR. VOGEL: I think the question is more simple than that, Mr. Adams. I just suggest to you that the criteria defined in the Distribution Rate Handbook, including section 5.5.1, which says that the option selected must represent the most cost-effective option, but not necessarily the least initial cost for the ratepayer, is a criteria that the Board should apply in considering the prudence of the costs in this hearing. Isn't that -- you would agree with that? 246 MR. ADAMS: Yes. 247 MR. VOGEL: All right. And similarly, in Article 480 of the APH, at page 5, which says that: "Transition costs eligibility is based on utility-specific circumstances." You'd agree that the Board, in this hearing, should be looking at the specific circumstances of each utility in assessing the prudence of its costs. 248 MR. ADAMS: That's one of the issues the Board has an opportunity to review in this particular case, with these specific applicants. With respect to the next phase of the proceeding, it's not clear how much specific review the Board will have time to undertake. 249 MR. VOGEL: All right. But in terms of your IR response and your agreement that the Board should apply its own criteria, that's one of the criteria the Board should apply in this hearing, you'd agree, in this hearing. They should be looking at these costs on a utility-specific basis; correct? 250 MR. ADAMS: In this proceeding, the Board has the luxury of detailed evidence from the four applicants, yes. 251 MR. VOGEL: All right. 252 Now, looking at whatever consideration the Board may or may not give in this proceeding to cost comparisons between utilities, in your response to London Hydro No. 5, Interrogatory No. 5B, what you've proposed there, as I understand it, is -- and in your evidence, that the Board -- the approach that you're advocating purports to follow two things: The academic approach, which is outlined by Professor Yatchew in his paper and, to some extent, the regulatory experience of benchmarking for gas LDCs in Ontario. Is that a fair summary? 253 MR. ADAMS: I think my evidence refers to other applications in a regulatory context for benchmarking. I think the Board can be informed by all of those -- all of the experience. 254 MR. VOGEL: All right. But essentially what we've got in your response to Interrogatory 5B is you really have two approaches. One is Professor Yatchew's paper and the approach that he discusses there and the other is, to some extent, the regulatory experience of benchmarking for LDCs. That's the foundation, as it were, of your evidence; is that correct? 255 MR. ADAMS: I've answered the question a previous time. I can repeat my answer. 256 MR. VOGEL: Well, do that. 257 MR. DINGWALL: I don't think that's necessary. Mr. Vogel has asked the same question now twice. I don't think it's appropriate for him to -- 258 MR. VOGEL: Well, I -- 259 MR. DINGWALL: -- just because he didn't like the answer the first time. Mr. Vogel, could I finish? 260 MR. VLAHOS: Mr. Adams, would you repeat the answer, please, and we can move on after that. 261 MR. ADAMS: Benchmarking is used in regulatory context in many jurisdictions. I've referred to some of those in other places in the evidence. I believe the Board can be informed by all those cases. 262 MR. VOGEL: All right. But if I look at your response, for example, to London Hydro No. 4, in terms of international benchmarking programs, you'd agree that none of those, in fact, refer to LDC transition costs? 263 MR. ADAMS: In many ways, the experience in Ontario with respect to electricity reform is unique in very particular features. One example is Ontario's decision to simultaneously introduce retail competition for both wholesale and retail customers, or customers of all sizes. That repeats Ontario's experience with respect to natural gas in the early -- in the mid-1980s. But what it does is it makes the Ontario experience with regard to the impact of transition on the electric distributors more difficult to compare with other examples in other jurisdictions. 264 MR. VOGEL: Fair enough. And, in fact, you're not aware of any international benchmarking studies that specifically refer to LDC transition costs; is that correct? 265 MR. ADAMS: Not in the fashion in which Ontario's electricity reforms were undertaken. 266 MR. VOGEL: All right. And if I look at your response to OEB Staff Interrogatory No. 2, I further take it, then, that Energy Probe is not, in fact, aware of any instances of benchmarking being used for a one-time cost recovery; is that correct? 267 MR. ADAMS: The evidence that I presented in response to interrogatory responses discusses a number of instances where CIS costs were subject to comparative review, informing the ultimate disposition of the regulatory cases. There is some similarity there in the sense that often these CIS costs are one-time lump sums retrospectively reviewed. 268 MR. VOGEL: In your answer to Board Staff Interrogatory No. 2 is: "Energy Probe is not aware of any instances of benchmarking being used for one-time cost recovery." 269 Is that answer correct? 270 MR. ADAMS: With regard to the specific scope of the transition costs proposed for recovery here, that answer is correct. 271 MR. VOGEL: All right, that's fine. 272 And I think the -- perhaps the IR response that you did make reference to, in part, in any event, is your response -- Energy Probe's response to London Hydro Interrogatory No. 2. And I take it that, Mr. Adams, even to the extent that you've discussed consideration of Enbridge's CIS costs as being possibly relevant, you agree that the review process of Enbridge's CIS costs extended over a number of years? 273 MR. ADAMS: Yes, it did. 274 MR. VOGEL: And it certainly wasn't a review undertaken with respect to a one-time cost recovery of expenditures resulting from market deregulation, was it? 275 MR. ADAMS: To some extent, it was. The gas market is deregulated and there were impacts on the CI -- on the scope of the CIS that Enbridge undertook to be able to facilitate some of the transactions that are permitted under the regulatory rules for -- 276 MR. VOGEL: Fair enough. But the review process involved in the Enbridge case extended over a number of years, and wasn't with respect to simply a one-time expenditure, was it? 277 MR. ADAMS: It was with respect to a one-time expenditure in the beginning. In the end, the review process morphed into extended corporate relationship between Enbridge and both internal and external corporate partners and parties. 278 MR. VOGEL: Yes. And the eventual disallowance of $7 million came after some extended period of review lasting a number of years, didn't it? 279 MR. ADAMS: That's correct. 280 MR. VOGEL: Thank you. So what we're really left, then, with, Mr. Adams, it seems to me, is the approach that Professor Yatchew has described in his article as the basis for your benchmarking proposal. Now, from the CV attached to your evidence as appendix D, I understand you have a degree -- master's degree in environmental studies from York University? 281 MR. ADAMS: That's correct. 282 MR. VOGEL: And you're not an economist yourself, I gather? 283 MR. ADAMS: No. 284 MR. VOGEL: And you're not purporting to come here before this Board as having expertise in benchmarking yourself. 285 MR. DINGWALL: I think we covered that off in the introduction to the witness, sir. 286 MR. VOGEL: Well, now I'm cross-examining which is where I was told to pursue this. 287 MR. ADAMS: I have presented to this Board in evidence a quantitative analysis of utility costs in three cases, two of them electricity-related where viva voce evidence was presented. The subject matter of that evidence was a statistical regression model that I developed with respect to production performance of some generating units. The third instance of this kind of quantitative analysis is presented in evidence in response to Energy Probe's -- the interrogatory to Energy Probe from Hydro One, No. 9. In that instance, the evidence did not get to the stage of viva voce evidence. It led to -- the evidence was disposed of in relation to a negotiated settlement in that case. 288 MR. VOGEL: Fine. And just turning up that interrogatory response, that says that the -- that that study was the only other benchmarking study that you've undertaken; is that correct? 289 MR. ADAMS: That's the only other benchmarking study that I have published or presented in regulatory form; that's correct. 290 MR. VOGEL: All right. So I take it here, and I think as Mr. Dingwall indicated in his introductory remarks, I take it here that you are not purporting to be an expert in benchmarking; rather, you rely on the academic qualifications and expertise of Dr. Yatchew in advancing the proposal that you have regarding the benchmarking of transition costs on this application; is that correct? 291 MR. ADAMS: Well, I've been -- yes, that's correct. 292 MR. VOGEL: All right. And that article is attached to your response to OEB No. 3, if you could turn that up. 293 Looking at the discussion of yardstick competition/regulation at page 57 of that article, you'd agree with me that this article isn't specifically referable to transition costs, it doesn't refer to transition costs, it deals more generally with what's called unit costs; is that -- is that your reading of this article? 294 MR. ADAMS: The specific example that he provides is a unit cost analysis, yes. 295 MR. VOGEL: In fact, no where in the article does he make any reference to transition costs, does he? 296 MR. ADAMS: No. This article, I believe -- I've just lost the page here. Yes, the data set here that's used predates the transition. 297 MR. VOGEL: Fine. And under section A in the article, then, page 57, Dr. Yatchew is discussing four possible methods of benchmarking these unit costs, and he starts out with an assumption: 298 "Suppose you have 100 firms of similar size and characteristics but with unit costs which vary significantly." And then in B, he goes on to say, "Of course, a regulator rarely has the luxury of regulating a large number of similar firms. The firms often vary widely in size and characteristics." And then in the third column on that page, he concludes that, "A sensible approach would be to estimate mean, median, and quantile regressions, and to evaluate the difference in results." 299 So essentially what he's proposing there is a method of economic analysis to normalize differences between a large number of different firms; is that your reading of the article? 300 MR. ADAMS: Yes. 301 MR. VOGEL: And page 60, in his conclusions, he seems to emphasize that if you're going to use benchmarking for regulatory purposes, what is required, he says there is a -- this is in the first column at the top, "... careful definition of variables and a methodology that ensures comparability across utilities." 302 I take it you agree with that proposition? 303 MR. ADAMS: Yes. 304 MR. VOGEL: Now, in response to London Hydro Interrogatory No. 10B, Energy Probe is asked, what regressions had been stated, and your response was that because of data anomalies, it was not useful to undertake an economic -- econometric analysis. 305 I gather, then, that in connection with the benchmarking proposal you've advanced here, you haven't undertaken any econometric analysis for the reasons that you've indicated; is that correct? 306 MR. ADAMS: In evidence is all the analysis that I've presented, so there are some regressions but mostly they're productivity indices. 307 MR. VOGEL: Yes. It doesn't include any econometric analysis of the data, does it? Your evidence? You haven't conducted the regressions, the statistical regressions, mean, median, average, or quantile, that Dr. Yatchew discussed in his article, did you? 308 MR. ADAMS: We did regress the customer numbers against claimed cost to see if there was a relationship, and we contended, ourselves, on the basis of those results that there is a relationship. But that's the extent to which we've used regression tools. 309 MR. VOGEL: So you didn't do the mean, median, or quantile regressions that Dr. Yatchew describes as possible approaches in his article. 310 MR. ADAMS: Yes. The reason there is we were concerned about the impact on the results of those calculations that would arise from the large number of cases in the tails of the data. 311 MR. VOGEL: Fair enough. 312 MR. ADAMS: The data does not present an easy, normal distribution of data. 313 MR. VOGEL: Fair enough. And as you said in that response to 10B, it's because of those data anomalies that you couldn't undertake this econometric analysis; isn't that fair? 314 MR. ADAMS: Well, we could -- 315 MR. VOGEL: But you didn't. 316 MR. ADAMS: -- but it wouldn't make much sense. 317 MR. VOGEL: Right. So it's because of those anomalies that you didn't undertake that analysis. 318 MR. ADAMS: That's right. We think the more appropriate approach is the simpler one, given the limitations. 319 MR. VOGEL: Okay. I gather, then, from the response to Toronto Hydro IR No. 1, that all you really did to normalize, in your terms, the data was you divided the total transition costs per utility by the number of customers and that's how you came up with the cost-per-customer metric. That was the extent of your, as you call it, normalization of the data? 320 MR. ADAMS: Yes. This is where there may be some -- confusion may have arisen because of the two uses of the term "normalization." 321 MR. VOGEL: Fine. So you told me you did no econometric analysis. And in London Hydro IR 6D, I take it you didn't give any other consideration to how the variables that are listed in that IR, 6D, may have affected the transition costs that were incurred. That's not part of your analysis; correct? 322 MR. ADAMS: The interrogatory draws attention to some service quality outcomes, and they are not specifically presented here. In preparation for my appearance, however, I did have a look at some of the numbers that are available to respond to the question that has arisen in the evidence about service quality impacts -- or the appropriate consideration of service quality outcomes -- 323 MR. VOGEL: Yes. 324 MR. ADAMS: -- that arise. And one of the questions was -- that we've heard, which is relevant, really, to Energy Probe's response to part D here -- part E, is the ability of the LDCs to get ready for market opening as an outcome of their transition process, a quality outcome. 325 So I reviewed the list that the Board provided in April of 2002 about market-readiness of the LDCs to see what kind of relationship might exist between the cost stack from the unfavourable to the favourable claims relative to the market-readiness. And what we find there is kind of interesting, and so I actually think it's -- amends, to some extent, my response to this interrogatory that you've pointed me to. 326 There were 21 LDCs just before market opening identified by the Board as not ready to go for market opening. Of that 21, eight of them appear in the cost stack above the 25th percentile cutoff point or criteria. I shouldn't use the term "cutoff point." So it appears that in the case of, really, quite a large number of the utilities that were unsuccessful in getting to market opening on schedule, many of those utilities had -- they are overrepresented in the group of very high cost claim utilities. 327 MR. VOGEL: But you haven't done an analysis of those eight or, in fact, of any of the others to know what other particular factors may have affected the incurring of those costs, apart from the fact that they relate to market. Is that fair? 328 MR. ADAMS: Well, actually, I did one other review of this type, and that was to look at the service quality data that the Board has collected under the RRR process that was released to Energy Probe. The Board collects data on various categories of service quality, many of which relate to, kind of, engineering performance of the utility assets and are not directly related to the kinds of outcomes you would expect from transition cost. 329 There is one area that may have some relationship, and that is what's identified on the service quality indicator data as telephone accessibility, and there's quite a range of performances there. And specifically with respect to London, the data that's presented for 2002 shows that London's telephone accessibility rating is in the bottom 20 percent of the LDCs. 330 MR. VOGEL: Mr. Adams, let me get back to my question, which was: There's a number of factors listed in paragraph 6D which, I take it you would agree, may affect the incurring of transition costs by utilities; correct? 331 MR. ADAMS: Yes. 332 MR. VOGEL: All right. And you told me that you hadn't done any econometric analysis, as proposed by Dr. Yatchew. You told me the only normalization of the data you had done in presenting this benchmarking proposal was the division of the total cost by the number of customers. So is it fair to conclude, and I think this was my question that I asked you, is it fair to conclude, then, that you haven't considered in that benchmarking proposal that you've advanced the possible relevance of these various other factors listed in Interrogatory 16? That's fair, isn't it? 333 MR. ADAMS: Well, I just discussed two examples of service quality issues that were identified in the list in that London interrogatory. 334 MR. VOGEL: But of all those factors there, they don't appear anywhere in your analysis, in your evidence, do they? 335 MR. ADAMS: Only to the extent that in preparation for my appearance, I reviewed some of these other available data sources. 336 MR. VOGEL: All right. And you've told us about that. And to the extent that those are possibly relevant factors, those are the very factors Dr. Yatchew says would require careful definition in evaluation, as he says in the article; correct? If you were going to apply benchmarking, these, amongst other factors, would have to be subject to careful definition and evaluation; correct? 337 MR. ADAMS: Your question is general in nature, but you identify this list, and I take exception to some of the specific items on the list. For example, utility complexity -- 338 MR. VOGEL: Let me simplify things for you, Mr. Adams. You would agree with me there are a number of factors that you haven't considered in your evidence for data quality issues or whatever, whatever the reason is that you haven't considered in your evidence if you were going to apply benchmarking in the econometric analysis that Dr. Yatchew proposes, those are all variables that require careful definition and evaluation; correct? 339 MR. ADAMS: Not all of the items that are identified in the list are -- 340 MR. VOGEL: There are many variables that would require careful definition and evaluation; that you haven't considered to date in the proposal you're advancing; you would agree with that? 341 MR. ADAMS: Perhaps I could be more helpful if it was a less hypothetical question. 342 MR. VOGEL: I think the question is simple. Do you agree -- 343 MR. ADAMS: Can you give me some examples? 344 MR. VOGEL: Well, there's a list of them there. Do you agree, Mr. Adams, that there are a number of factors that affect the incurring of transition costs which you have not considered in the proposal that you have advanced to date, and that if you were going to apply benchmarking to transition costs, would require, as Dr. Yatchew says, careful definition and evaluation; would you agree with that proposition? 345 MR. ADAMS: You referred me specifically to this list -- 346 MR. VOGEL: I've now asked you another question. 347 MR. DINGWALL: I'm sorry, could Mr. Vogel let Mr. Adams finish a sentence, please. 348 MR. VLAHOS: Mr. Adams. 349 MR. ADAMS: On this list are a number of candidates for consideration in a comparative review, and I don't want to take the Board's time with, you know, going -- itemize each of the examples. There are quite a number of them. But one of the examples here is utility complexity. From a customer's perspective, they don't care how much -- how complex a utility chooses to organize itself. They care about how effective it is in delivering. 350 So I wouldn't -- I would resist any attempt to adjust the data to make life more comfortable for utilities that choose to manage themselves in a way that makes themselves more complex than others. Sometimes simplicity is the right answer. So -- 351 MR. VOGEL: Let me get this clear, Mr. Adams. Is your proposition to the Board that you don't have to go beyond this simple cost-per-customer metric, you don't have to look at any of the variables, you don't have to do Dr. Yatchew said, you know, carefully define and evaluate all those variables that may affect cost, in order to carry out a benchmarking analysis as proposed by Dr. Yatchew, is that your understanding of what Dr. Yatchew is saying? 352 MR. ADAMS: I'm suggesting that with the limitations we have in the data, we can still conduct useful benchmarking at some level, and that's a relatively simple level. These are very simple calculations. 353 MR. VOGEL: But you're not disagreeing, then -- 354 MR. VLAHOS: Mr. Vogel, let the witness finish. 355 MR. VOGEL: Are you finish, Mr. Adams? 356 MR. ADAMS: I'm complete, thank you. 357 MR. VOGEL: Mr. Adams, you're not suggesting that Dr. Yatchew is wrong in saying that you have to identify and evaluate the variables that affect cost if you're going to carry out a benchmarking analysis. You're not suggesting Dr. Yatchew is wrong, are you? 358 MR. ADAMS: No. I'm suggesting we have to start somewhere. 359 MR. VOGEL: All right. Fine. We'll start here. But you will acknowledge, then, that it's fair to say that there are a number of other variables, some of which may be in this list, that may very well influence the incurring of transition costs that have to be identified and evaluated and be subject to the econometric analysis that Dr. Yatchew Dr. Yatchew is talking about in his paper. That's Dr. Yatchew's proposal that you've adopted, isn't it? 360 MR. ADAMS: As a general proposition, I don't disagree. 361 MR. VOGEL: Okay, that's fine. 362 Now, in paragraph -- I'm moving on to another area. I don't know what you want to do about the morning break. 363 MR. VLAHOS: This may be a good time, Mr. Vogel. It is twenty to 11:00, and we'll return at 11:00. 364 MR. VOGEL: Thank you, Mr. Chair. 365 --- Recess taken at 10:40 a.m. 366 --- On resuming at 11:08 a.m. 367 MR. VLAHOS: Please be seated. 368 Mr. Vogel. 369 MR. WARREN: Mr. Chairman, before Mr. Vogel begins, I wonder whether I can ask this about the Board's intention for the balance of the day. I have come here today principally, if not exclusively, for the purposes of hearing the testimony of Mr. Lowry and cross-examining him on that, and I've canvassed my friends on the likely time it will take them to complete the cross-examination of Mr. Adams, and a combination of Messrs. Lyle and Vogel indicate that they will be somewhere in the order of an hour and fifteen minutes, as they say, depending on the answers. I'm wondering if, in light of that, Mr. Chairman, it's the Board's intention to begin Mr. Lowry before the lunch break. If not, then perhaps I would excuse myself and return at, perhaps, 1:30 or something like that and do other things in the meantime rather than sitting here churning up time and money. 370 MR. VLAHOS: Well, you may want to do that at your own risk, Mr. Warren. You don't have to be the first to cross-examine. I do realize you want to be here at the commencement of cross-examination of Dr. Lowry. 371 MR. WARREN: But if there's a possibility, then I will excuse myself for the next hour and fifteen minutes and do other things. But if there's a possibility that we may get to -- I apologize if it's Dr. Lowry, I mean no disrespect, Dr. Lowry, if there's a possibility that we will get to him before lunch, then I will remain in the vicinity, sir. 372 MR. VLAHOS: Mr. Vogel, how much time do you have left? 373 MR. VOGEL: Well, as Mr. Warren has indicated, it depends, to some extent, on the length of the answers, but I would estimate about an hour. 374 MR. VLAHOS: I think it's probably safe, Mr. Warren, that you can be excused now and return -- you just have to check with someone for staff as to when to return. But I suspect that we'll probably break at about 12:30 or so for about an hour. So you can guide yourself. 375 MR. WARREN: I'll make a point of being back for 1:30, sir. 376 MR. VLAHOS: Thank you. 377 MR. WARREN: Thank you. 378 MR. VLAHOS: Mr. Vogel. 379 MR. VOGEL: Thank you, Mr. Chairman. 380 Mr. Adams, I think you told me that you didn't do the econometric analysis that was discussed by Dr. Yatchew, and you haven't considered some of these other variables that you agree may affect costs. When I look at your evidence in paragraph 22, it appears that you relied, as the basis for your proposed benchmarking approach, on the four assumptions outlined there; that all the utilities started from a similar starting point, all subject to the same filing requirements, all the LDCs had to comply with the same timelines, and they all were subject to the same market rules. So basically what you've done is you've relied on those four assumptions which you say yield this homogenous population of utilities; is that correct? 381 MR. ADAMS: Yes. 382 MR. VOGEL: And looking at those assumptions, then, with respect to this one, the first assumption, that all these utilities started from the same place, if I look at Energy Probe's response to London Hydro No. 8B, I take it, Mr. Adams, that you agree that different utilities started from different technological and operating starting points; correct? 383 MR. ADAMS: From the perspective of inside the utility, they started from a different technological starting point. From the -- 384 MR. VOGEL: They had different technology, they had different systems, they all started at different points; correct? 385 MR. ADAMS: Yes. But from the perspective of a consumer, the consumer was receiving a bill beforehand and they received a bill after the market reforms, so from the perspective of a consumer outside the utility, the approach is very similar. Inside, the mechanics are very different between utilities, yes. 386 MR. VOGEL: Fair enough. So if we're addressing ourselves, then, to utility-specific circumstances, you'd agree that these different utilities started from different technological and operating starting points. 387 MR. ADAMS: Yes. 388 MR. VOGEL: And looking at your response to OEB Staff Interrogatory No. 6, I take it you'd also agree that the different CIS systems that different utilities had in place had different cost flexibility and output characteristics, as you've said there; correct? 389 MR. ADAMS: I assume that to be the case. I have not reviewed them all personally. I'm not aware that that information is a matter of public record. 390 MR. VOGEL: All right. That's fair enough. And what you've said there, then, is that the LDCs that happen to have more flexible CIS systems had some advantage in responding to the requirements of the new market compared to LDCs who started from -- with more primitive systems, and they would be, as you've said, penalized under your proposed benchmarking approach; correct? 391 MR. ADAMS: Yes. They would be, in some ways, accountable for the legacy decisions. Yes. 392 MR. VOGEL: All right. But if we were going to apply benchmarking the way you've proposed, then the ones who happen to have the more flexible CISs compared to these older legacy, more primitive legacy systems, they would have some advantage in the process you're proposing; correct? 393 MR. ADAMS: That's correct. 394 MR. VOGEL: All right. And that's even though you acknowledge, I think in your undertaking responses, that management of these utilities at this time was, I think you've expressed it, handicapped in its ability to make optimal decisions with respect to the cost of replacement of those decisions; correct? 395 MR. ADAMS: Yes. 396 MR. VOGEL: Because of the factors that you've outlined in your IR responses, the accelerated schedule, the lack of preparation, the extensiveness of the regulatory requirements being imposed on them, they had very limited flexibility. 397 MR. ADAMS: All of the utilities were subject to some substantial uncertainty, as were all market participants with respect to the requirements of the new market. 398 MR. VOGEL: Yes. And in terms of management's ability to make decisions relative to these costs, they were somewhat handicapped because of those various factors that you've discussed in your IR response; correct? 399 MR. ADAMS: Yes. I think it's fair to describe the market transition process for the LDCs as an extremely strenuous process. 400 MR. VOGEL: All right. Now, with respect to the second assumption about all of them being subject to the same filing requirements, I take it from your response to London Hydro's Interrogatory No. 6B, which addresses the disaggregated costs of the different utilities under APH 480 filings, I take it that you do agree, then, that in fact the costs filed by different utilities in these different categories of APH 480, in fact, represent different business processes and technologies which were implemented by different utilities? 401 MR. ADAMS: Yes. 402 MR. VOGEL: And as far as same timelines go, I take it in response to London Hydro Interrogatory 8C that you didn't give any consideration at all to the fact that at least some of these utilities did not incur costs associated with compliance and with the various filing requirements and timelines as other utilities did. You haven't considered that here. 403 MR. ADAMS: No. It's my understanding that the -- any penalties associated with non-compliance have not been applied for in this case. If they were, we would object. 404 MR. VOGEL: All right. But the fact of the matter is, and I take it you agree, then, that different utilities complied at different times, and some were not in compliance with the timelines and requirements imposed. 405 MR. ADAMS: Yes. I referred to 21 utilities that were not ready for market opening, as identified by the Board. And some had very high costs and some of those utilities show up in the below $10 category as well. 406 MR. VOGEL: If we look at, for example, paragraph 39 in the London Hydro prefiled reply evidence, which makes reference to the market-readiness report, there were only 25 LDCs who were, in fact, ready on April 1st, 2002, according to that report; is that your understanding? 407 MR. ADAMS: Yes. I believe that evidence is referring to maybe a January report -- 408 MR. VOGEL: That's correct. 409 MR. ADAMS: -- of market-readiness. I was referring to a April 25th, 2002 notice published by the Energy Board, but they're similar reports. 410 MR. VOGEL: All right. After the self-certification date, then, and looking at this January 16th report, it appears that at least at that time, there were only 25 of the LDCs who would be ready on April the 1st, 2002, there was another 29 who would be ready within a couple of months thereafter, and the balance were going to achieve readiness sometime thereafter. So it appears clear then, you'd agree, that different LDCs were achieving market-readiness on different timelines and not necessarily in accordance with the ones that were prescribed; correct? 411 MR. ADAMS: That is correct. However, I do note that on that list in January there were some utilities that were achieving all of the deadlines, as reported through the self-certification, who appear in quite low cost categories, in the $20 to $30 per customer range for their claimed costs for transition. So some were able to do the transition on a timely basis with very low costs. 412 MR. VOGEL: But certainly others on that list, then, that achieved market-readinessness in accordance with the timelines, you'd agree they may well have incurred costs that were not incurred by many of these other utilities that were not market-ready. 413 MR. ADAMS: Yes. To supplement my previous answer, I should state Milton Hydro as an example of the utility that's in the low costgroup, and it's a specific instance that I remember. 414 MR. VOGEL: But I think you just agreed, then, that the LDCs who did comply with requirements and were market-ready may well have incurred additional costs that other LDCs who didn't comply with those timelines didn't incur; correct? 415 MR. ADAMS: In anticipation of your question, that's why I went and tried to look at some of these things. 416 MR. VOGEL: Yes. 417 MR. ADAMS: And it turns out to be a mixed bag. Some of the utilities in the very high cost category, you know, above the 25 percentile, complied, and yet we find that many did not comply. And the same in the other categories of costs as well. Utilities that had modest -- are making modest cost claims, there's a mixed bag of their market-readiness. 418 MR. VOGEL: Fair enough. It appears that another situation where you simply don't have enough information about -- about which utilities incurred which costs in order to comply with which timelines and which didn't. We don't have that information, do we? 419 MR. ADAMS: Well, we do have enough information that we can look at it from the perspective of not econometrics but best practices, certainly. If some utilities were able to achieve the timelines at very low cost, that raises the obvious question, you know, for those utilities that had high costs or were not successful in meeting the timelines, they have some explaining to do. 420 MR. VOGEL: But we don't have the data that would be required for the econometrics analysis that Dr. Yatchew talks about to assess that variable. 421 MR. ADAMS: I think it's more anecdotal which is why I suggested that a best-practice approach is more appropriate. 422 MR. VOGEL: All right. As far as the same market requirements goes, in your response to London Hydro Interrogatory No. 9A, I take it that you'd agree that there is a minimum fixed cost for computer technology which some utilities were required to incur in order to meet market requirements. There is a minimum threshold that doesn't depend on customer number. 423 MR. ADAMS: This one's got me a bit flummoxed, actually, because you would normally expect high fixed, low variable, right, like a setup charge and then relatively low marginal cost for customer numbers. But it turns out that that's not a reliable assumption. And we attempted to address that with a graphical presentation that's included in Board Staff 10. And I could have -- maybe I should have added a few more graphs here to -- particularly to disaggregate the big population of relatively small utilities that are kind of clumped together and it's hard to she what's going on. 424 MR. VOGEL: Yes. 425 MR. ADAMS: But we got -- this presentation suggests to me, just looking at the numbers or the dots as they're displayed on the page, that the relationship between the size of the utility and its cost claim, its cost efficiency, is not a simple relationship. 426 MR. VOGEL: No. 427 MR. ADAMS: There's lots of things going on here. The big -- some of the big utilities in terms of customer numbers had indices -- you know, efficiency indices that are quite a bit higher than many smaller utilities. It suggests to me that there may be some kind of U-shaped curve here. 428 MR. VOGEL: Yes. 429 MR. ADAMS: So there's some fixed charge, and then there's an optimal efficiency size which may be in the range of 100,000 to 500,000 customers, or perhaps less. 430 MR. VOGEL: All right. So we agree that here is a minimum fixed charge, and we agree that there are levels of scale which you say are somewhere in the range of 100,000 to 500,000? 431 MR. ADAMS: This is one of those questions that needs to be addressed more systematically. 432 MR. VOGEL: Fair enough. All right. 433 Let me just ask you this question, Mr. Adams. With respect to the proposed development in your evidence of benchmarking to assess transition costs after those costs have already been incurred, in response to Great Lakes Power Interrogatory No. 1, I think you've agreed and acknowledged that this proposed use of benchmarking set out in your evidence can't create any incentive for these utilities to reduce the 2002/2003 transition costs that they've already incurred; correct? 434 MR. ADAMS: Right. We're not talking here about retroactive incentives. 435 MR. VOGEL: All right. And in terms of -- if I can just take you back to Dr. Yatchew's article, then. In terms of -- which is your response to Hydro One No. 3 -- sorry, Hydro One No. -- no, it's OEB No. 3. If we go back to that article and look at the first paragraph there in Dr. Yatchew's article as to the purpose of PBR and the possible use of such mechanisms. He says there that you would use them to create strong incentives for cost minimization, or to promote efficient capital investment expenditures. 436 You'd agree with me, Mr. Adams, that the proposed use of benchmarking in your evidence on this application provides absolutely no efficiency incentive to these utilities who've already incurred -- to reduce the costs they've already incurred? 437 MR. ADAMS: I would agree that they're not going to change history by virtue of this review. 438 MR. VOGEL: All right. And this review is about the assessment of those costs; correct? 439 MR. ADAMS: This review is about the assessment of those costs, but it's also about the --I mean, this is the first time there's been a prudence review of a utility, of LDC costs before this Board. So I think in the scheme of things there may be more at stake here. 440 MR. VOGEL: Thank you, Mr. Adams. 441 Those are my questions, Mr. Chair. 442 MR. VLAHOS: Thank you, Mr. Vogel. 443 Mr. Lyle. 444 MR. LYLE: Thank you, Mr. Chair. 445 CROSS-EXAMINATION BY MR. LYLE: 446 MR. LYLE: Mr. Adams, if I could turn you to your response to Great Lakes Power Interrogatory No. 2. 447 MR. ADAMS: Yes. 448 MR. LYLE: I'm looking at paragraph 3 of your response in which you state that: 449 "Benchmarking is recommended as a guide for prioritizing the scope and detail of prudence review so that a more analytical effort can be applied to high-cost claims and less effort applied to more reasonable claims." 450 Is it fair to characterize your approach to benchmarking in the regulatory assets proceedings as a screening tool? 451 MR. ADAMS: Yes. 452 MR. LYLE: So what you're looking to do is assess those claims that fall outside higher than an average so the Board or intervenors can apply more resources to scrutinizing those claims; is that true? 453 MR. ADAMS: Yes. 454 MR. LYLE: And I don't know whether you're familiar with the Board's letter of May 5, 2004? That's the letter in which the Board established that it would hold an oral hearing with respect to these five distributors, including EnWin which, of course, has dropped out. 455 MR. ADAMS: Yes. 456 MR. LYLE: And at paragraph 3 of that letter, the Board stated: 457 "The five distributors have been selected on the following criteria: Being among the ten largest by customer count, and their relative level of total regulatory assets and transition costs claimed." 458 Hasn't the Board effectively already applied a benchmarking to determine that we should be looking at these four utilities that are currently before us? 459 MR. ADAMS: That appears to be the case. 460 MR. LYLE: And isn't this hearing the greater scrutiny and analytical effort that's going into looking at these particular four utilities that you were calling for? 461 MR. ADAMS: Yes, it is. 462 MR. LYLE: So turning, then, to the other 90 distributors, what would you recommend to the Board on how the Board should use benchmarking to look at those 90 distributors? 463 MR. ADAMS: The Board needs to, I think, address data quality issues to facilitate further review, and there may be some kind of audit process that can be undertaken in a streamlined fashion to get those -- to get some stability in -- some level of comfort around the basic information. I think this review has also identified some categories, general categories, of information that are useful to ensure that further reviews are not bogged down by an extensive discovery process. Ideally, we'd have a list of identified items so that we could -- so that the LDCs knew what they needed to produce, and once it was produced, there was little further effort for extraction of information. 464 MR. LYLE: So if I could turn you to your response to Hydro One -- 465 MR. VLAHOS: Sorry, Mr. Lyle, I thought you wanted to add something. Mr. Adams. 466 MR. ADAMS: Then once we got some stable information, some more stable information -- we've got information, it has some quality, we can use it to -- knowledgable about its defects, but still make some decisions on the basis of what we've got now. As the information improves, then I would suggest that some ranking system be established, and that utilities with claims that are in the -- you know, a range that appears to the Board to be acceptable, once they've gone through the audit process and their claims look, on their face, acceptable, they would go through. But the outlier cases, it might be appropriate to seek further explanation, a more detailed review. 467 I would, of course, suggest that the high-cost utilities get some of that scrutiny, but the low-cost cases need to get some level of examination as well. The very -- like, the claims under $10 don't seem credible to me. 468 MR. LYLE: What would the nature of the more detailed review be? 469 MR. ADAMS: Perhaps I could provide a more thoughtful reply to your question in our final argument, but -- 470 MR. LYLE: Perhaps I could suggest that it would be more interrogatories from Board Staff? Would that be one point of view? 471 MR. ADAMS: Yeah. There is a menu of options that are available, and the Board many other commitments that it has to balance these various priorities against. So what I would like to provide you with is an answer that gives some weighting to the various options, but I hesitate to attempt something thoughtful like this on one -- standing on one foot. 472 MR. LYLE: Could I turn you, then, to your response to Hydro One No. 4, and it's the updated appendix A that you provided. 473 MR. ADAMS: Yes. 474 MR. LYLE: So as I understood your answer, you believe that more work needs to be done on refining the information that has been filed to date, and assuming that work can be done relatively quickly, you would then propose that a table similar to this be developed? 475 MR. ADAMS: I would recommend that, yes. 476 MR. LYLE: And you'd recommend, then, that that table be made public? 477 MR. ADAMS: Oh, definitely. 478 MR. LYLE: So this table would then, in your view, assist the Board and intervenors in determining which cases they should apply more scrutiny to? 479 MR. ADAMS: Yes. 480 MR. LYLE: Can I just turn you to a couple of examples that are on this table, and I don't want to particularly focus on these utilities but it's merely for purposes of illustration. In the case of Terrace Bay, which I believe is one up from the 25th percentile cutoff, they have transition costs of $65,000, and because of their number of customers, they fit within the category of being above the 25th percentile. 481 MR. ADAMS: Yes. That's an example of a utility that was also not ready for market opening. That's a worrying combination; high costs, not ready, not good. 482 MR. LYLE: Well, let me turn you to Peterborough Distribution, which is five lines down from the cutoff, and they have approximately $1.6 million in transition costs. Given their customer base, that means that their costs per customer are below the 25th percentile. You'd agree with me that the Board has limited resources, and certainly you'd degree with me that intervenors have limited resources. 483 MR. ADAMS: Yes. But there's something arbitrary about this line, right, and that arbitrary character is kind of annoying. But you have to make decisions. I mean, we have to move on. These utilities have a legitimate concern about having these regulatory assets sitting around on their books for so long, and Energy Probe wholly endorses and supports the need to efficiently move these things off the agenda, clean them up and move on. That -- and some level of arbitration is just going to be necessary to do that, I believe. 484 MR. LYLE: But would you agree with me, though, that this is intended to be a screening tool, so we should have some flexibility in how we choose to apply it. 485 MR. ADAMS: Definitely. I mean, you identified specifically Peterborough. They happen to be on the good list in terms of market-readiness. So their costs are a little on the high side, but they were ready so they've got, you know, one checkmark at least, and that ought to be a consideration in deciding which ones to scrutinize in further detail. 486 MR. LYLE: Now, there's been a lot of talk in Mr. Lowry's paper, Pacific Economics Group, and London Hydro's reply evidence about the need for accuracy when we do benchmarking. Given that you're not proposing a mechanistic and, your word, Procrustean approach to benchmarking where, I guess, if you're above a certain cost you get nothing above that particular cost, for instance, given that all you're proposing to use this is as a screening tool and applicants would have ample opportunity to justify their costs, do you see the same need for that high level of accuracy and thoroughness that you would if you were using it as a mechanistic tool? 487 MR. ADAMS: Accuracy is a relative term. There's always inaccuracy in any measurement. So -- but practicalities enter into this. It's because we don't have confidence in the numbers that we're recommending that this ranking system be weighted somewhat less than it would otherwise be. 488 But I endorse the gist of the point you're making. 489 MR. LYLE: I just had one final question, and it's with respect to some of these very small utilities who have a customer base of 1,000 to 4,000 customers and consequently have high per-customer costs. What would you say to the utility that argues that those costs should be passed through to ratepayers because they are too small to be able to benefit from economies of scale? 490 MR. ADAMS: Well, this economies of scale question is, you know, something that economists spend lots of time dealing with. They're very interested in it. It's a quantitative question. But there's a kind of regulatory policy question that arises from this. Who should take responsibility for inefficient scale economy? Is it the customer -- should the customer be penalized because they happen to be served by a utility that chooses to, for whatever reason, organize itself in an inefficient manner? And I would suggest that that should not be the outcome of the regulatory decision. 491 My recommendation is that the rules should be established. Ideally we should have some kind of efficiency frontier that identifies an efficient level of delivery service for an efficient quantum of costs. And utilities that can't achieve it because their economies of scale are insufficient would, until they reorganize themselves, be penalized under that structure. 492 I don't think it's the customer's fault that their utility happens to organize themselves in an inefficient fashion. 493 MR. LYLE: Thank you, Mr. Chair. Those are all my questions. 494 MR. VLAHOS: Thank you, Mr. Lyle. 495 Mr. Adams, the Board has some questions. 496 Ms. Chaplin. 497 MS. CHAPLIN: Thank you. 498 QUESTIONS FROM THE BOARD: 499 MS. CHAPLIN: In response to Mr. Lyle when he asked you how benchmarking or how your approach could be used to look at the 90, you made a comment that, coming out of this particular process, there might be general categories of information that should be specified in advance. Do you want to comment at this point as to what you think those general categories of information might be? 500 MR. ADAMS: Reports of internal and external audits is an example. We had lots of debates in here about that subject. I think that should be a routine filing requirement. And then everybody can see it, no debates. And I expect that those reports would help to inform the decisions. 501 MS. CHAPLIN: And are there any other categories of information, or is that... 502 MR. ADAMS: That's the one that jumps out at me. I may have something more useful to say but reserve for argument. 503 MS. CHAPLIN: Thank you. 504 MR. VLAHOS: Mr. Carr? 505 MR. CARR: Thank you. 506 Turn to page 22 in your evidence, page 9 of this, and this is the listing of the four points which you've used to justify why this particular proceeding is a good candidate for the use of benchmarking, and, as you've discussed in an exchange with Mr. Lyle, as a screening tool. 507 Now, you had some fairly extensive exchange on this with Mr. Vogel. The one area I wanted to get your thoughts on was that these are not -- these are not separate considerations. I mean, they're listed as four things, but, for example, some of the differences that result in, for example, timing, in other words, they had the same filing requirements but they got -- they weren't able to meet them all, is a result of the starting point. In other words, the real difference is the starting point, perhaps, in that example. 508 I'm wondering if you can shed any light, or have any thoughts on how you could clean this up a little bit, for example, by factoring out one or other of the categories; which is the more critical one, which is the one that causes the greatest corruption of data. In other words, if working with this list, where would we start in terms of the filing guidelines with a list like this? 509 MR. ADAMS: Although it's not on the list, one simple thing to start with, and I discuss it in other places, is just making sure we've got common accounting standards for reporting. So, for example, just a routine matter, but any interim recoveries be sifted out so you can see, like, the base number of the claim. In the phase 1 filing guidelines, that requirement was not specified, which is one of the things that makes me a little bit uncertain about relying on the phase 1 filings. So that's an easy one. 510 There are a couple of others that might be fairly easy. If a utility participated in the IMO's operational dry-runs, uncoupled and coupled operational dry-runs, and had significant costs associated with that that I think legitimately should be considered as a benefit to the wider electricity market, the customers of those utilities that participated in those procedures, really, have provided some benefit to other customers of utilities that were not participants. So if we can identify some specific areas where utilities may have had extraordinary costs that were beneficial beyond their borders, like participation in coupled and uncoupled operation dry-run, there's another candidate for some kind of declaration from the utility, and sift that out from the claimed amounts. 511 MR. CARR: If we took the first one, a similar starting point, and you had a exchange -- your evidence states that from the customer perspective, but indeed from an internal perspective, then they're quite dissimilar. Is that another similar situation? 512 MR. ADAMS: I understand your question. That is not one that I would recommend adjustment for. On taking the approach that utility management is responsible for the capacities of its system and therefore the owners are the ones that ought to be accountable for the consequences, if they have invested in systems that have flexibility, there are benefits from that, and I would suggest it's appropriate for the utilities that have made those investments to have returns commensurate with it. But utilities that have not made those investments don't have that business capability when that capability is called upon and they can't -- their costs don't compare well with others, I don't think their costs should be adjusted to reflect the fact -- 513 MR. CARR: It does occur to me, though, and I'd seek your agreement or disagreement on this, but we're talking about costs incurred in basically a relatively short slice of time here in the whole lifetime of the type of systems we're talking about, so there is an element of luck here in terms of whether the expenditures actually occurred in that period of time or not. 514 MR. ADAMS: The extent to which luck applies is one that we ought to think about. We don't want to expose utilities to -- I would not recommend randomness as a regulatory principle. But keep in mind that from the point of view of market transition, there have been extensive discussions in Ontario about fundamental reforms to the electricity market. In 1997, the government declared -- the government of the day declared its intentions. Legislation was passed in 1998. Many of the utilities participated in the initial development of the market rules through 1997 and 1998. Also we had the Y2K experience, so many of the utilities were upgrading, they had the motivation to upgrade their computer systems, CIS systems, in any event. 515 So the arrival of the transition requirements imposed upon them by institutional reform was something that they had quite a bit of lead time. And so I don't think this is -- it's not a random event that they became exposed to the requirement of making fundamental changes to CIS. 516 MR. CARR: Can I just ask you one other question, and this relates to, again, the quality of data or the quality of the tabulation results from which you might do some screening, and that involves the inclusion of Hydro One. 517 You do have, and in fact it's paragraph 35 of your evidence, some discussion of the differences of Hydro One compared to other utilities, and it does seem that, on a quick reading of it, they are very significant differences. What are your views on the inclusion or exclusion of Hydro One from the population, I guess? 518 MR. ADAMS: As much as I'm an advocate for the approach of keeping the LDCs to be less unique, Hydro One is just necessarily going to be unique, and so that means that the rules for the disposition of costs have to take that into account. A mechanistic approach to Hydro One is just not going to cut it. Hydro One has a level of complexity in terms of horizontal diversity, I mean, it is just a wires company but it's a very complicated wires company, and it's going to be necessary to scrutinize. 519 One concrete example. Some of the categories of costs applied for in this case by Hydro One are categories of costs shared by its transmission utility -- element, and the transfer -- the appropriate allocation of costs between those entities necessarily arises from the point of view of disposition of costs. 520 MR. CARR: Okay, thank you. 521 MR. VLAHOS: Thank you, Mr. Carr. 522 Mr. Adams, two or three areas, no particular order. 523 Going back to this concept of a screening tool. You spoke about, you know, looking at the data and coming up with categories or buckets. Now, which data are you referring to? Are you thinking what has already been filed by the other LDCs, or is it information to be filed based on the Board's enhanced knowledge after this forum? 524 MR. ADAMS: I think it's the latter. I hope, as a result of this forum, the knowledge gained can inform the going-forward process, the second part of phase 2, whatever shape it will take. So, for example, these phase 1 filings for 1570 can be updated in light of the new knowledge. 525 MR. VLAHOS: Okay, thanks for that. 526 And you also spoke about the forum, the public forum. We have to be practical. And I guess, yes, we have to be practical, but what about the legality part of it or the legal part of it? To what extent can the Board do this work on its own without the participation by intervenors? Just to personalize this, what's the expectation of Energy Probe to be involved in that subsequent phase? 527 MR. ADAMS: This process has been a tremendous grind on my institution, and I do not relish the thought of procedural orders being issued for all of these cases. I just shudder at that thought. So I'm not here pleading for more of this. 528 I think that the audit process is something where the Board is already empowered. It has substantial capacity in this area that it can apply. So I would start with that, all right, using the Board's audit capacities, and it may be necessary to augment them in order to get over the hump, right, to get past the complexities of these many applicants. But do some internal review until you've got the numbers, publish the numbers, explain the approach, and that will just really help. 529 MR. VLAHOS: But I guess you do recognize there may be some legal issues to come to grips with. It's probably unfair for you to comment on this. 530 MR. ADAMS: Well, there's moving legislation so the timing becomes an issue. It's over my head. 531 MR. VLAHOS: Do you know, are there any LDCs that are not market-ready still? 532 MR. ADAMS: No, I don't know. 533 MR. VLAHOS: You don't know that. But I guess to the extent that there are some LDCs that may not be market-ready, they never were, and we have to know which ones they are in case they have any claims. 534 MR. ADAMS: Yeah. I notice that in the list of the 21 that were identified as not market-ready, three of them fall in this below $10 category, and one of them is in the zero category. We had a hard time figuring out what the zero meant. And in this instance, it's Thunder Bay, they're making zero cost claims, and it may be a decision of their management possibly. I'm speculating. But we've seen the applicants here. Many of them have made management judgments as to what are appropriate claims and decided to discount their claims. Thunder Bay may have done the same. 535 MR. VLAHOS: Are you suggesting that we should know the circumstances that have led to the under $10, but not necessarily with skepticism. It could be a management decision to write off or simply not wishing to recover those costs at all. I'm sorry, I'm saying the same thing. 536 MR. ADAMS: I think that's exactly right. If the utilities are -- the approach I've taken here is based on the proposed disposition, the claims of the applicants. If an applicant had even possibly much higher costs but then they wrote down their claim before they made the phase 1 or phase 2 submissions, to me, that is not a concern of this tribunal so I have not addressed it. 537 MR. VLAHOS: All right. And lastly, Mr. Adams, so far we've spoken, or you've spoken about the transition cost account. You were here in the last -- part of some days in the last two weeks. Based on what you heard about the non-1570 accounts, were you at all surprised in terms of the -- sort of the interpretation differences by the different utilities, of the inaccuracies? Any thoughts on that? 538 MR. ADAMS: I am surprised and concerned. For example, 1571, an example, RSVA account where there was quite different interpretations of how the time-of-use/non-time-of-use cost impacts should be calculated. That's something that -- it's just simply an example of something that should be cleared up. I think we've learned enough in this process how to properly calculate 1571. That direction should -- I would recommend it be issued to all the utilities, and they may be provided an opportunity to revise their claim accordingly. So there's a standard procedure -- we've had, of the four applicants, I think three significantly different variations on how you do 1571, and that's just not reasonable. 539 I'm not blaming the LDCs in that respect. I think there was some uncertainty as to how to apply the rules. But a hearing room is just a bad place to do these accounting clean-up projects. 540 MR. VLAHOS: Thank you, sir. 541 Mr. Dingwall, these are the Board's questions. Any redirect? 542 MR. DINGWALL: I don't have any questions on redirect, sir. 543 MR. VLAHOS: Okay. 544 Mr. Adams, thanks very much. You're excused. 545 MR. ADAMS: If I could, I'd just like to make a comment about my institution in closing. It's only with the support of two of our analysts that it was possible for us make a presentation, Alfredo Bertolotti and David MacIntosh, and they were of great assistance to me in making this presentation today. Thank you. 546 MR. VLAHOS: Thank you, Mr. Adams. 547 Okay. It is 12:00. I see Mr. Warren is back, has returned. 548 MR. WARREN: For the exciting few moments, sir. 549 MR. VLAHOS: Well, that gives us a half hour to continue with the next witness. Can we do that? That's Dr. Lowry. Who is going to lead on -- lead counsel? 550 MS. ALDRED: I will take him through it, Mr. Chairman. 551 MR. VLAHOS: Okay, Ms. Aldred. Perhaps, then, we could use the next half hour? 552 MS. ALDRED: Yes. 553 MR. VLAHOS: Dr. Lowry, would you come forward to be sworn, please. 554 HYDRO ONE NETWORKS INC. PANEL 2 - LOWRY: 555 M.LOWRY; Sworn. 556 EXAMINATION BY MS. ALDRED: 557 MS. ALDRED: Dr. Lowry, would you please outline for the Board your education, experience and qualifications. 558 DR. LOWRY: Yes. I am managing partner in the Madison, Wisconsin office of Pacific Economics Group, and for the last 13 years, I've been devoting most of my time to research and testimony on performance-based rate-making and statistical benchmarking. I think the first time I gave testimony on our benchmarking research was back in 1995, and since then we've done just about every kind of utility function that you could think of, including power distribution and the customer care component of that and other components of power distribution. I've probably done dozens of benchmarking studies, and we do it all over the world. Really, now, I think we're up to 11 countries that we've been active. For example, we're very active right now in the proceeding before OFGEM in England on the use of statistical benchmarking there for power distributors. We also do a lot of work on the other side of the Pacific. 559 With regard to my education, I have a Ph.D. in applied economics from the University of Wisconsin, and I might also mention that I was previously an assistant professor at Penn State University and also was a visiting professor at EHEC in Montreal. 560 MS. ALDRED: Dr. Lowry, have you been accepted as an expert in statistical benchmarking and performance-based rate-making here in Ontario and elsewhere? 561 DR. LOWRY: Yes, I have testified numerous times on my benchmarking work, including here in Ontario. 562 MS. ALDRED: Thank you, Dr. Lowry. 563 I would like to qualify Dr. Lowry as an expert in the area of statistical benchmarking and performance-based rate-making for the purpose of giving opinion evidence. 564 MR. VLAHOS: Thank you, Ms. Aldred. 565 Any objections? Dr. Lowry is acceptable to us, Ms. Aldred. 566 MS. ALDRED: Thank you. 567 Dr. Lowry, can you just explain to us all what the purpose of your testimony is today? 568 DR. LOWRY: Well, I was asked by three of the LDCs to give some remarks about the general role of benchmarking in regulation, what's a proper use of benchmarking in the regulatory arena, and then also to take the principles -- the general principles that I developed and apply them to the particular topic of the benchmarking of these transition costs, and also to look at the specific proposal of Mr. Adams as to how to do benchmarking. 569 MS. ALDRED: Dr. Lowry, throughout the hearing, we have heard a few different definitions of the term "benchmarking." Could you tell us by defining the term? 570 DR. LOWRY: Well, in my testimony I say that benchmarking is the evaluation of performance using numbers that embody external performance standards. Very often these benchmarks are calculated using data from the activities of agents that are involved in this same type of activity. And when you do that, that's an approach to benchmarking called statistical benchmarking. 571 MS. ALDRED: Can you provide us with some insights regarding the proper use of benchmarking in the regulatory arena? 572 DR. LOWRY: Well, I've said that there are a number of potential advantages to benchmarking in the regulatory arena, and one of them is if you're in a situation where prudence is difficult to review; another is where there is a legitimate concern about prudence; another would be where the cost of doing accurate benchmarking is relatively low; and another issue is can you somehow bolster performance incentives by doing a benchmarking exercise. 573 MS. ALDRED: And in your opinion, can the transition costs, which are the subject of this hearing, be properly benchmarked? 574 DR. LOWRY: Well, I think that they can be properly benchmarked with a great deal of effort, and I think the better question is, is it a worthwhile exercise. Let's just go through that very list of criteria that I just mentioned. 575 Is there a concern about prudence in this case? Well, I think yes, there is. Not for all categories, however. There are categories such as the RSVAs where there really is no concern about prudence, or sometimes it's just the recoveries of some previously approved costs by the Board, and that's not an issue of prudence. So there are some legitimate concerns about prudence. 576 It's also the case that it is not that easy to appraise the prudence of some of these activities. We plunge into some complicated and occasionally mind-numbing issues of different types of software systems and the like. So it is a tough nut to crack. 577 On the downside, the cost of doing accurate benchmarking is particularly high in this case. I enumerate in my testimony some of the things that need to be controlled in an accurate benchmarking exercise, and I mention, for example, that there are multiple categories -- you know, usually the amount of work done is a very complicated issue that cannot possibly be measured by simply one variable. There usually are multiple dimensions of workload that have to be considered simultaneously. Then, additionally, there are usually a slough of extra variables that come into play that can affect the costs. 578 In the case of a very, very partial cost category like transition costs, you run into a whole bunch of additional problems. For example, you have to consider essentially all of the other inputs that the utility is using in addition to the ones that are subject to examination, and the one that is talked about most frequently is the so-called legacy system. In other words, at the start of the period, what was the type of software system, customer information system, that the utility was using. 579 But then there are two other categories that are also very relevant, and one is the general operating efficiency of the company at the time that they were asked to do a transition to competition. Some companies were leaner than others and therefore would have to go to new hires or to outside consultants more frequently than others in an effort to get the job done. 580 And on top of that, there is the issue of Well, what are the ongoing incremental costs of market-readiness, because very often utilities will spend more money today in an effort to reduce costs tomorrow. 581 So those are three types of additional complications that are not always encountered. For example, if you just look at total costs, you won't get into all of those issues, but they are very problematic in this case. 582 I might just also say briefly that there is not the issue of performance incentives here that there sometimes is, in that these are costs that have already been incurred. The companies know that there could very well be some benchmarking prospectively for their distribution costs, but this just happens to be a category that was a one-time affair. It's not like you announced in advance that you'd be doing benchmarking. So the deed is done and so there's not the same incentive there to go down this road that there could be if you were looking at power distribution costs. 583 MS. ALDRED: Dr. Lowry, are you aware of any jurisdiction where this type of transition cost has been subject to a benchmarking analysis? 584 DR. LOWRY: No, I've never heard that. It's usually a category like -- well, in England, for example, they will use benchmarking to look at operation and maintenance expenses of the companies. In American jurisdictions or in some other jurisdictions, they might look at total cost. But I've never heard of a transition cost as being a subject of benchmarking. 585 MS. ALDRED: Is the method that was proposed by Mr. Adams in his testimony commonly used by regulators? 586 DR. LOWRY: No, it's not. A simple unit cost measure of this sort would generally not be of a high enough standard to be used in the regulatory arena. I might just take as one example the very simple treatment of the amount of work that's been done. 587 Mr. Adams acknowledges that there are various dimensions of the workload, but he then goes on to say that since one of them is probably more important than others, that it would be okay to just have this simple unit cost, the ratio of one to the other, and that's simply not an acceptable level of sophistication in the regulatory arena. 588 The example of England, again, is germane. In England, they don't do -- in OFGEM's work, they don't do what I would consider a really great job of benchmarking there. But certainly in this area of output quantity measurement, they have -- both times they have tried to use benchmarking, they have come up with some sort of index that included multiple output measures. And in power distribution, the measures that they happen to use are the delivery volume, the number of customers, and the length of the lines of the system. And then there's just a question as to how you weight that up, and they've been haggling over that recently, you know, in a proceeding in England. 589 But that's just an example of how a simple unit cost such as this has not, to my knowledge, been used by regulators. 590 MS. ALDRED: Mr. Adams referred to economies of scale in his evidence. Can you comment on what is meant by that idea and what implications the notion of economies of scale has for this proceeding? 591 DR. LOWRY: Yes. Economies of scale are savings in costs that may or may not be available to companies operating at a larger level of output. And a very important reason that scale economies exist is that a larger company can cost effectively employ specialized inputs. 592 For example, in the case of customer care services, a larger company can cost effectively have a customer information system. And another issue that could come up is, Well, should they have a middleware product in their software suite? And it could be that at a certain size it becomes rational to have middleware and a smaller size, it would not be. 593 So typically you will find that because of this, the unit costs of these inputs that become rational as a result of specialization do not have the sort of clear economies of scale behaviour that you expect for total costs. You would find, for example, that companies don't use any of certain of these specialized inputs, and then at a certain size, they'll start using them. 594 So when you look at the unit cost of a subset of inputs, you may find a very funny relationship as output grows. And I think this showed up in the figure that Mr. Adams referred to in his oral testimony today. He talked about how there is this funny relationship, and he found himself to be perplexed by it. I think it is actually somewhat explicable as the result of this, what I'm talking about, that as the scale gross, that there's certain type of inputs that become rationale to use. 595 MS. ALDRED: Are there any aspects of Mr. Adams' evidence which are nonetheless useful? 596 DR. LOWRY: Yes, actually several. I think, for example, that Mr. Adams is right to start talking about the potential use of benchmarking in the regulation of power distributors in Ontario. You've got more than 80 of them, apparently, although I see different numbers, but somewhere north of 80, and some of them are very small. And for the Board to use an equal degree of scrutiny of the costs of all these companies is rather unworkable. And so it's understandable for the Board to start thinking about where benchmarking is used. I just don't happen to think that this is the place to start. I think you're going to find that it's going to be a very challenging thing to do for power distribution. The more I do power distribution and benchmarking, I know the harder it seems to me. 597 I think as well that he showed a fair degree of prudence in how he proposed to use benchmarking; that in light of how many problems there were with the data, that he did not advocate a mechanistic use of it in the rate-setting process but rather just to use it as a screening tool to simplify the regulatory burden. 598 Now, there are various ways to acknowledge uncertainty in benchmarking, and this isn't necessarily the very best way, but it's certainly one way. And so I think he showed good instincts there. 599 MS. ALDRED: And finally, Dr. Lowry, does the proposed use of benchmarking in this proceeding have implications which extend beyond just the numbers attached to these particular accounts? 600 DR. LOWRY: I believe so, and I say this both as a benchmarking practitioner and as a performance-based rate-making practitioner. The investment community, looking at the riskiness of the power distribution business in Ontario, has to be aware of the fact that the Board is going to be hard-pressed to use traditional cost-of-service regulation to regulate all these companies. And so there will be a legitimate concern as to how they do things like statistical benchmarking and PBR. These are areas where the rules have not matured as they have in cost-of-service regulation, and arbitrary decisions are possible. 601 And so there are two areas where I think the investment community would be well advised to be looking closely at this proceeding, and one is the whole area of Z-factoring. Under a multiyear plan, such as is practical for 80 utilities, that there is a risk of the government either opportunistically or simply recklessly changing rules that cause companies to incur costs where the costs don't get passed on to the ratepayer. And so in these cases, certainly the regulators are entitled to verify that cost resulting from changes in government policy are prudently incurred, but to the extent that they are perceived by the investment community as not doing this -- doing their level best effort to give the company all the costs they're entitled to, this could raise concerns about the future of PBR and its riskiness in Ontario. 602 The other area is benchmarking, because benchmarking, even if it's done well, is going to increase operating risk of companies and therefore their cost of obtaining funds in the marketplace. So that may be an unnecessary evil in getting the benefits of benchmarking. But you certainly don't want to do needlessly risky benchmarking, benchmarking that's done so sloppily as to needlessly increase the operating risk of the companies. I think for this reason too, the investment community will be keeping an eye on this proceeding, or should be. 603 MS. ALDRED: Thank you very much, Dr. Lowry. 604 Those are my questions, Mr. Chairman. 605 MR. VLAHOS: Thank you, Ms. Aldred. This brings us to the lunch break. 606 Can I ask intervenors whether there's an order of cross-examiners? 607 MR. WARREN: I think I'm going first, sir, as I understand it. 608 MR. VLAHOS: Perhaps you can advise us when we come back. 609 Any matters before we stand down for the break? 610 MR. LYLE: No, sir. 611 MR. VLAHOS: Except there is the CV of Dr. Lowry in front of us. Perhaps we can give that an exhibit number, Mr. Lyle? 612 MR. LYLE: Certainly, Mr. Chair. We'll mark that as I.7.1. 613 MR. VLAHOS: Thank you. 614 EXHIBIT NO. I.7.1: CURRICULUM VITAE OF DR. LOWRY 615 MR. VLAHOS: We'll resume, then, at 1:30. 616 --- Luncheon recess taken at 12:25 p.m. 617 --- On resuming at 1:37 p.m. 618 MR. VLAHOS: Please be seated. 619 Any preliminary matters, Mr. Lyle, or anybody else? 620 MR. LYLE: I don't have any, Mr. Chair. 621 MR. VOGEL: Mr. Chair, one preliminary matter. 622 PRELIMINARY MATTERS: 623 MR. VOGEL: We've distributed the responses to London Hydro's undertakings given yesterday, that's Undertaking J.6.1, 6.2, 6.3, and 6.4, and I'd ask that that be filed as an exhibit. 624 MR. VLAHOS: Thank you. They do have an exhibit number already, so we'll simply receive them. 625 MR. VOGEL: Okay, thank you. What exhibit number is that? 626 MR. LYLE: It's given an undertaking response number. 627 MR. VOGEL: Oh, just given an undertaking response number? 628 MR. LYLE: That's right. 629 MR. VOGEL: Okay, thank you. 630 MR. VLAHOS: You know the Board is always trying to be helpful, and so for the benefit of those people that are going to read the transcript, Mr. Adams did not want to be a Procrustean, so for the benefit of the people who don't know who that is, Procrustes was a giant from Attica who seized travellers, tied them to a bedstead and either stretched them or cut off their legs to make them fit it. 631 I think what Mr. Adams meant -- his statement was not designed or acting to secure conformity at any costs, which is another explanation for it. Right, Mr. Adams? 632 MR. ADAMS: Spoken with a Greek accent. 633 MR. VLAHOS: Thank you for that. 634 We have the order of Mr. Warren -- sorry, was it Ms. Street who was going to cross-examine as well? 635 MS. STREET: I'm sorry. Yes, I've indicated to Mr. Dingwall I'll go after everyone else. 636 MR. VLAHOS: Mr. Warren, Mr. Dingwall, and Ms. Street. Could I ask who plans to cross-examine Mr. Adamson, the next panel, the next witness? 637 MR. WARREN: I do not, sir. 638 MR. VLAHOS: Anyone? 639 MR. DINGWALL: We're considering it. We'll wait to, of course, hear what's said. 640 MR. VLAHOS: Okay. It may happen today, Mr. Dingwall. 641 MR. DINGWALL: We're ready for that eventuality, sir. 642 MR. VLAHOS: Okay. 643 MR. LYLE: I'll have a brief cross-examination of both panels, Mr. Chair. 644 MR. VLAHOS: Thank you, Mr. Lyle. 645 Mr. Warren. 646 HYDRO ONE NETWORKS INC. PANEL 2 - LOWRY: 647 M.LOWRY; Previously Sworn. 648 CROSS-EXAMINATION BY MR. WARREN: 649 MR. WARREN: Dr. Lowry, my name is Robert Warren, and in this matter I act for the Consumers' Counsel of Canada. Thier constituents, broadly speaking, are residential consumers of electricity. 650 By way of preface to my cross-examination, Dr. Lowry, let me assure you something that will become immediately apparent which is that I know absolutely nothing about benchmarking, and that my interest in these questions or the direction of my questions is really an attempt to understand benchmarking in comparative analysis as a tool that might be used and the ways it can be fairly used given the very difficult task that all of us have in this room of assessing both these four applicants and the 80 or 85 that are clustered down the road. 651 Against that general background, I'd like to begin, though, with a specific follow-up matter, and it's this: 652 One of the utilities that retained you, Hydro One Networks, caused to be created a report by Deloitte Consulting, which describes its phase -- it's in two phases, and it describes phase 1 as a benchmarking analysis in which it compared, roughly speaking, total costs of transition of Hydro One Networks to a number of other utilities in various jurisdictions. 653 When the witness panel from Hydro One Networks was here, I asked Ms. Frank whether or not, as part of your retainer, you had been asked to take a look at the Deloitte Consulting report and she said that you had but that she had not, as I recollect her testimony, had not received any comments back from you. 654 Against that general background, are you familiar with the Deloitte Consulting report? 655 DR. LOWRY: I've read it. 656 MR. WARREN: Okay. It doesn't appear, and please correct me, Dr. Lowry, if I'm wrong, it does not appear to have followed the approach which you outlined as an appropriate approach to benchmarking in your evidence. And let me give you some specific points of reference for that. Do you have the document with you, by any chance? 657 DR. LOWRY: Yes, I do. 658 MR. WARREN: Okay. If you could turn up, please -- regrettably it is not -- it is paginated. If you turn to the Deloitte Consulting report which is an attachment to, for the record, Exhibit H, tab 2, schedule 6. About seven pages in, there is a page which looks just like this, Dr. Lowry, it's got in bold letters "phase 1" on it? 659 DR. LOWRY: Yes. 660 MR. WARREN: And if you turn to the page after that, there is under the broad heading "Approach" the second bold bullet item called "Researched Transition Costs Incurred by Other LDCs," and it lists three criteria that were used by Deloitte's in its research. Do you see those? 661 DR. LOWRY: Yes. 662 MR. WARREN: Okay. Now, I'd like to, in fairness, compare those to some of the, I don't know whether I'm fairly describing this or not, some of the qualifications or conditions, if you wish, that you said were necessary in a benchmarking assessment of transition costs, and they appear at page 15 of your own report. 663 DR. LOWRY: Okay. 664 MR. WARREN: In looking at those, you said that there were differences -- looking in the first paragraph -- in the extent of the billing and other open-access services provided. You talked about different customer mixes, different rates offered. Turning over the page, you talk about differences in the starting positions of the utilities in terms of different billing systems, strategy of hire, upfront costs, so on and so forth. It doesn't appear to me, Dr. Lowry, that those factors which you've listed in your report have been used in the Deloitte report; is that a fair conclusion on my part? 665 DR. LOWRY: Well, one of them, at least, has been, and that is -- well, there obviously is some control for scale of operation, and actually they do it, in my view, better than in the Adams' study in the sense that there would be an improvement -- the Adams' study would have been improved if he had broken up the companies into peer groups by the size of -- by the number of customers served. Because of this highly non-linear relationship that exists between cost per customer and the number of customers, it would be better to compare Hydro One to companies that are of approximately the same size. So in that sense, it's an improvement. In other respects though, plainly, there are other issues that are not addressed here as they are not addressed in the Adams' methodology. 666 MR. WARREN: Does that, sir, vitiate a value of the conclusions that they reach when they compare the total transition costs of Hydro One Networks to those of other companies? 667 DR. LOWRY: To some degree it does, yes. As I say, this is, if anything, more germane than the work that has been done thus far by Mr. Adams. Of course, Mr. Adams never said that that was anything other than an illustrative study. But plainly this could be improved upon in various ways. 668 MR. WARREN: Let me reduce it to the crude level at which I'm comfortable operating, sir. Should the Board place any reliance on the conclusions about the comparisons between Hydro One Networks' costs and other utilities' costs or not? 669 DR. LOWRY: I think that it is of some interest. Of course, you'll recall that Mr. Adams was proposing to use his methodology as a screening tool in the case of identifying companies to look at more closely, and similarly here, we know that there are many issues that are not addressed as carefully as they could be. So once you have this peer group and you look at the dispersion of it, you can well imagine that some of that dispersion is due to uncontrolled events, yet it is not irrelevant that Hydro One is somewhere in the middle of the pack. I wouldn't put much stock in the fact that it is below the other companies, necessarily. I think given the level of uncertainty here, that you could say that the study is consistent with hypothesis that they are -- they have a similar cost performance, but that it's certainly not the definitive -- the definitive report on this. So I would say it's germane; it's worth giving some weight to. 670 MR. WARREN: Would you characterize it, in light of what you've said, characterize it as a benchmark in your own study, would you characterize it fairly as a benchmark study or, if I might posit the concept, simply a comparative study? 671 DR. LOWRY: I would call it a benchmark study. That's what it calls itself. It says "Benchmark and Cost Performance Review." 672 MR. WARREN: Now, can we agree that it would appear to be driven by, if I can say, the same instinct by Mr. Adams in preparing his report in that it seeks to compare utilities which appear, at least on the surface, to be in similar circumstances? It's the same driver, if you wish, at that crude level; is that fair? 673 DR. LOWRY: Yes, although as I say, in the sense, they've taken it a step further by taking the wisdom of the sort of U-shaped average cost curve that Mr. Adams reports in his interrogatory response to say that, Well, let's just look at companies of similar size. 674 MR. WARREN: Moving from that, then -- thank you for those answers, sir. Moving from that to the notion of benchmarking generally, the definition which seems to have currency among a number of people in the proceeding is that benchmarking is performance measured against a standard of some kind; is that fair? 675 DR. LOWRY: An external standard. 676 MR. WARREN: An external standard. And am I correct that the external standard is, in a true benchmarking analysis, it's not just one other company, it's a group of companies or utilities, group of comparators, that has -- and the data from those comparators have to be normalized in some way using the varius factors that you and Mr. Adams talked about; is that fair? 677 DR. LOWRY: It principle, you could use one company, but to the extent that you do, it's a highly inaccurate exercise, excepting in this sense that there is the econometric approach to standardization, and there is another approach that would be a peer-group approach in which you try to get companies that are as similarly situated and then look at those. I mean, in the second grouping of companies that is in this Deloitte study where they say the most similarly situated, now, I believe you're down to two, and at least there is some rationale for a smaller number when you have -- in theory, if you have controlled for all the possible external differences. 678 MR. WARREN: Let's deal, then, if we could, Dr. Lowry, with the notion of peer-group comparison. And if we could begin, please, by turning up page 12 of your prefiled evidence, and you say in the second paragraph: 679 "We find that the transition costs incurred by LDCs through 2002 were influenced by numerous external business conditions that varied substantially across the companies. These included the number and mix of customers served and the software on hand at the start of the transition." 680 Let me deal first with the first of those two and that is the number and mix of customers. Would it be possible, Dr. Lowry, to take -- let's take among the universe of LDCs in Ontario, would it be possible to assess or to find, if you wish, LDCs that had a similar mix of customers in terms of the number and mix; is that possible? 681 DR. LOWRY: Well, I would say for which company? I mean, plainly there are very few companies the size of Toronto Hydro or Hydro One in Ontario, so that's always going to be a problem. In terms of the mix, I don't know for sure how many companies have had, let's say, quite a few interval metered customers, and I also don't know, but I believe it's the case that there aren't many companies that have a lot of embedded LDCs that they serve. 682 MR. WARREN: Have you, for example, taken a look at whether or not the number and mix of customers would be roughly the same for, let's say, two of your clients, Hydro Mississauga and Toronto Hydro? Have you looked at that? 683 DR. LOWRY: No, I haven't looked at that and I haven't looked at a lot of these types of issues because it wasn't within my scope of work to consider how benchmarking could be made better. 684 MR. WARREN: Fair enough, Dr. Lowry. My question, really, is: Would it be possible, for example, for the Board or anyone else, to take a look at two utilities, let's say Mississauga and Toronto, and control for the difference in the number and mix of customers so as to allow a valid comparison; is that possible? 685 DR. LOWRY: That would improve -- that would improve the comparison just as I've asserted that the Deloitte study is an improvement over the Adams illustrative methodology. That would be a step in the right direction. 686 MR. WARREN: And the second of the two factors in that sentence, software onhand at the start of the transition, would I be right in assuming that it would be possible for someone with a high level of technical knowledge to compare the level of software onhand either between two utilities or a group of utilities to say they are roughly similar or to control for the differences in some way; is that possible? 687 DR. LOWRY: It's possible. 688 MR. WARREN: Now, a third factor you mention in the same paragraph, I'm quoting from the next sentence: "Transition costs also vary with each company's success at fulfilling market-ready requirements." 689 I assume that a company's success of fulfilling market-ready requirements is something that can be assessed and measured and compared; is that fair? 690 DR. LOWRY: Could be. 691 MR. WARREN: And that the next clause, "Its general level of operating efficiency." I presume that's a little more difficult to get at in a shorthand way, but I assume that can be assessed and measured; is that fair? 692 DR. LOWRY: Could be. 693 MR. WARREN: And also finally the last clause in the sentence, "Its ongoing incremental cost to provide open access services." 694 I presume that those can be calculated, measured and compared; is that fair? 695 DR. LOWRY: They could, but you're really getting to the frontiers of benchmarking science when you try to do that, because it involves -- let's say you were doing it econometrically, it involves special estimation procedures. I've never seen it done, and that's one of the -- as I said, one of the challenges of this proceeding. It would be that you're dealing with -- without getting too much into the econometric details, when you're dealing with, say, the ongoing level of operating efficiency, there happens to be a variable that's chosen simultaneously with this variable of how large the transition costs are, and so it happens to complicate the analysis, the statistical research. 696 MR. WARREN: The idea that something is complicated is a theme we've heard repeatedly, particularly from three of the four applicants, and to be slightly facetious for a moment, being complicated doesn't help us at all in this room very much. What I'd like to get at is whether or not that factor, for example, the one that you and I have just been talking about, the ongoing incremental costs to provide open access services, is it so complicated that we cannot do, I mean collectively cannot do an effective benchmarking analysis of transition costs? 697 DR. LOWRY: It's hard for me to say with any certainty about that. It would be a challenging study to do. 698 MR. WARREN: Would it be -- I want to go, then, to the other alternative, which is the peer-group comparison of one company to a peer group. Would it make it impossible to do a comparison of one company either to one other company or to a peer group? 699 DR. LOWRY: It's hard for me to say in this case impossible. As we discussed with Hydro One, there may be no peers for them, and there may be very, very few peers, if any, for Toronto either, so it's a little harder to say in that case. An econometric study, you know, you can sort of imagine pie in the sky, yeah. Sure, in theory you can have a really fabulous model with eight variables, but with the case of peer groups, they are not always peers. 700 MR. WARREN: If I could ask you to turn, then, over the next page, pages 13 and 14 of your prefiled evidence, looking at the last full paragraph, beginning at the bottom of page 13, you say: 701 "Policymakers, accordingly, established a set of market-ready requirements for these companies that included the following," and you've got six or seven bullet items there. 702 I take it that we can agree that the policymakers, God bless their benighted souls, set the same task for everybody across the province. Everybody had the same requirements. Do we agree on that? 703 DR. LOWRY: Yes, I believe that's the case. 704 MR. WARREN: And then if I look at the bottom page 14, you indicate in the last full paragraph: 705 "Compliance with the market-ready requirements involved diverse and costly transition tasks for LDCs that included the following," and you list five of them there. 706 Can you and I agree that each of the LDCs, in varying degrees, had the same tasks? 707 DR. LOWRY: They were requested to perform the same tasks, yes. 708 MR. WARREN: Now, turning over the page, you talk about, under the heading "Transition Costs," you talk about the reported -- "the reported transition costs of LDCs varied substantially. One fundamental reason for this was differences in the extent of billing and other open-access services provided." 709 I assume, Dr. Lowry, that you can do a comparison between any two utilities or a group of utilities to determine whether or not, in fact, there were material differences in the extent of billing and other open-access services provided. It's possible to do that; correct? 710 DR. LOWRY: It's possible to do that. And in a formal -- you know, whether this was done -- it might be germane for me to point out that whether you were doing a traditional prudence review or a statistical test, the same issues, really, must be grappled with. 711 MR. WARREN: But it would be possible to take two utilities -- let's take, for example, two of your clients, Hydro Mississauga and Toronto Hydro, and assess whether or not there were differences in the extent billing and open-access services provided; correct? 712 DR. LOWRY: Yes. 713 MR. WARREN: Likewise, going to some of the three bullet items that are -- 714 [Audio feedback] 715 MR. VLAHOS: I'm going to try it on, reporter, okay? Go ahead, Mr. Warren. 716 MR. WARREN: The different customer mixes, difference in the number of rates offered, and the difference of the number of settlement points of the IMO, those are all things which can be analyzed and compared; is that not fair? 717 DR. LOWRY: Yes. 718 MR. WARREN: Okay. Now, you say in the second full paragraph on that page: 719 "A second fundamental reason for differences in the amount of open-access services provided was flexibility in the market-ready requirements," and this is, if I can translate it, a certain discretion that was left to the utilities as to how they went about fulfilling the market-ready requirements. Is that a fair translation of what you're saying there? 720 DR. LOWRY: Yes. 721 MR. WARREN: But I assume that we could, if we wished, drill down through the exercise of discretion by any two or more utilities and assess whether there were material differences in the way they exercised their discretion; is that not fair? 722 DR. LOWRY: Well, yes, but I think what I mean here is that there was, actually, a little bit of flexibility in how the deliverable, the actual deliverable, and that some were more costly than others and may also have had more value to the customer than others. This is what I was meaning here. 723 MR. WARREN: But even with that qualification, sir, we can assess how did they exercise their discretion to arrive at the points where they actually arrived at; is that not fair? We could assess them and compare them. 724 DR. LOWRY: That one might be hard because you'd have to have a fair bit of data on the cost of doing it the different ways, and in a few of the cases, I'm not sure there are enough companies on each side of the -- you know, approach A and approach B to actually get a quantification. 725 MR. WARREN: Fair enough. Last full paragraph on the page, first sentence: 726 "A third consideration is that LDCs seem to have varied in their success in meeting the market opening requirements." 727 I assume that we can collectively take a look at the success or failure and make comparisons; is that not fair? 728 DR. LOWRY: Yes. 729 MR. WARREN: Okay. We've dealt with -- looking at page 16, you've got three other factors which I've highlighted. First of all: "In addition to these known instances of variance in compliance, it is quite possible that there were other variations in the quality of open-access services that LDCs offered." 730 First of all, can you tell me why it is quality of open access services is relevant in the comparison? 731 DR. LOWRY: Well, first of all, quality is costly. If you go to the auto stores in Toronto, you'll find that BMWs cost more than some less well-made cars. And I believe that the market opening requirements, I'm not quite an expert on that, but I would doubt that they were very specific in terms of the precise level of quality with regards to some of these quality indicators. And so you'd have to go out and gather data on these quality indicators -- quality indicators like these. It could be quite an undertaking. 732 MR. WARREN: It would be an undertaking, but I presume it can be done. You've got quality indicators that are used, for example, as a standard part of PBR regimes, are they not? 733 DR. LOWRY: They are. 734 MR. WARREN: So you can identify what are the appropriate quality indicators and measure the differences, one utility to another. 735 DR. LOWRY: Easier is some case than others. For example, the adequacy of EBT systems would be something that would take a while to figure out the appropriate indicators. 736 MR. WARREN: We've dealt with the other two factors on the page, namely, starting with billing systems of varying capability and also the strategy with higher upfront costs. This latter one -- this last one, I'm sorry, the strategy with higher upfront costs, is that something that can be measured and compared one utility to another, or from one group of utilities to another? 737 DR. LOWRY: I'm sorry, where on the page is that? 738 MR. WARREN: I apologize, sir. It's the second last full paragraph, about four lines down. The sentence reads, third sentence: 739 "Those that chose a strategy with higher upfront costs may have adversely affected their ranking in overly simple transition cost appraisal, even if it was a cost minimizing strategy." 740 And my question about that was: Is it possible to identify and compare the strategy or the effect of a different strategy for higher upfront costs? 741 DR. LOWRY: Well, yes, but in this instance I think one could also just look at their ongoing operating costs as relevant for that purpose, their ongoing incremental operating costs resulting from market-ready. 742 MR. WARREN: Turning to the page 17 under the heading, "Transition Cost Accounting," you indicate that there may be problems. You refer to the category of accounting inconsistency, and you talk about problems arising from different choices made about how to characterize an account for costs. Can those be identified and, if you wish, normalized and compared, those choices in how to account for matters? 743 DR. LOWRY: They can be tightened up somewhat compared to what they are, and that alone would be quite a major undertaking, just to try to standardize the reporting of those. But, you know, you're still, in these cases of these subcategories of costs, you're getting into an issue of a somewhat arbitrary classification common -- truly common costs. I mean if a cost is truly common, there is -- you know, the decision about the allocation is inherently arbitrary, so that is a complicating factor. 744 MR. WARREN: Am I, then, to conclude, and is the Board to conclude from the exchange we've had over the last few minutes, that it's effectively impossible for it, faced with the task it has, to engage in comparisons of utilities, not benchmarking but just comparisons of utilities, that are fair to the utilities, accurate, and produce meaningful results? 745 DR. LOWRY: No, not -- I wouldn't go quite that far. I think when you're into these really detailed categories that you're getting -- I'd just like to observe that you're -- I was trying to explain how complicated it is to do transmission benchmarking in general. If you go to the further subaggregation, you're opening up a whole new can of worms. If you take a step back and look at the whole transition costs, I'm not saying it's impossible to do fairly. It's a costly undertaking. There would be a lot of controversy. There would be a lot of additional data collection. And once you even had a model that tried to take account of these things, you would still be well advised to use the results carefully and use techniques such as hypothesis tests -- tests of efficiency hypotheses as part of the benchmarking reconing. For example, it's important to test the hypothesis that a -- let's put it this way: You would have a statistical test in which you would try to reject the hypothesis that a given utility has not, indeed, attained in the performance standard. In other words, the nul hypothesis is that the utility has exactly obtained the performance standard. 746 That is the sort of use of benchmarking in regulation that I would consider appropriate. And if you look around the world, you'll find that people are more and more recognizing the need for this. A good case in point is in water utility regulation in Britain. There was discussion of this in the Natural Gas Forum, a report on regulation. It didn't talk about the very latest developments with OFWAT, but when OFWAT, they have econometric models they use to look at operating expenses. And even when a company is assessed as being deviant from the standard, they still give a buffer of between 10 and 20 percent before any adjustments to rates is deemed to be appropriate in recognition of the inevitable imprecision of their modelling. 747 MR. WARREN: Let me ask, then, this: Dr. Adamson, who will be testifying after you, at page 17 of his report, made an effort for which I congratulate him to express some suggestions about how the Board might wrestle with the difficulty that it faces in dealing with these cases and others, and he said at numbered paragraph 54: 748 "Some form of activity-specific comparisons could still be useful for evaluating the transition costs of the other LDCs." 749 Do you agree with that? 750 DR. LOWRY: I think that a more refined analysis, which would take quite a bit of time and money, could do a better job. I don't know that I agree with the specific recommendations that Mr. Adamson has submitted. And I think that if you do do that, that you should still use the results very cautiously, because you'd be -- you'd be doing, you know, a very, very customized piece of work for a type of activity for which there is not numerous other precedents in other regulatory jurisdictions and there are not five or ten published studies available to give you comfort that you're doing the right thing. 751 MR. WARREN: Finally, sir, just one last category of questions, and it's this: You have referred first to Mr. Adams' testimony and then to the Deloitte's study as -- I want to put a fair gloss on how you've described it. They are, if you wish, indicators or perhaps warning lights that further analysis might be warranted based on some comparative data that's been thrown up. Is that a fair way of characterize it? 752 Mr. Adams said, I think, in response to questions this morning, that if you've got -- if you're comparing data and there seems to be significant differences, that -- I took it that you agreed that you might -- that that might be a caution to you that you'd want to do further analysis to see if there's any significance to it; is that fair? 753 DR. LOWRY: As I said this morning, I like the modest use of the benchmarking that Mr. Adams proposed, that you have to be -- you'd have to use it cautiously, perhaps as a screening advice. Viewing the matter professionally, I don't know that I'd just do it just by looking at the bottom quarter. A more statistically rigorous approach would be to suppose that -- let's suppose that you divide, and I'm not recommending this approach specifically, let's suppose that you divided the customers up -- the utilities up into four or five different groups or size, and then you suppose that the cost per customer is an estimate of the true mean of a certain distribution. Sort of like when they go out and they're trying to figure out who's ahead, George Bush or John Kerry, in the polls, they talk about the statistical margin of error around the true number, and in that case, if you take that approach, you can come up with a confidence interval at, say, the 90 percent confidence level or something else, and then look for outliers from that. To me that would be a more statistically rigorous approach. 754 MR. WARREN: If you had data that suggested, for example, that one utility's transition costs per customer were significantly higher than another, would that warrant a further or deeper analysis, in your view, to see whether -- what the reason for that was? 755 DR. LOWRY: It would be one pragmatic way to simplify the Board's very daunting task, but I would hope that it would be based on a considerably better methodology than anything that's been described here. 756 MR. WARREN: Well, then, with that introduction, sir, let me ask you the easiest question of the day before you leave the room. What recommendations do you make to the Board for going about its task for these four utilities and the other 80 using some kind of comparative analysis? 757 DR. LOWRY: Well, it's hard to draw conclusions about the larger companies because of inadequacy of sample to make comparisons. As you go down the size scale, it becomes somewhat easier because there are larger groups of companies. As I said, I haven't really thought through the best way of doing this and so I -- I can't -- I guess I'm hesitant to say, in the absence of thinking about the quite a bit, how I would proceed. There would be ways to improve on what's been done here to simplify the task. I've thrown out some things here about a size grouping, and then confidence intervals that are driven by these little mini samples as one step in the right direction. How far you'd have to go in the direction of improving accuracy before it rises to the standard appropriate for regulation is the hard thing to say without a lot of thinking. But that's the risk that the Board runs, is that it will -- it would settle, in the name of expediency, on an inexact and unfair approach that would unnecessarily raise operating risk and thereby the cost of funds for these distributors. 758 MR. WARREN: And I suppose, to be fair, Dr. Lowry, the corresponding risk on the other side of that is that, in the exercise of caution for that reason, it may end up approving costs that were imprudently incurred; fair? 759 DR. LOWRY: There is a risk there, yes. But at least in this case, it's not -- the risk does not also include the weakening of performance incentives because this is something that has already transpired and will not be repeated. Ordinarily, you worry about prudence, in part, because if you're lax on it now, what will they do down the road. In this case, that's not really germane. 760 MR. WARREN: Thank you very much, Dr. Lowry. 761 Those are my questions, Panel. 762 MR. VLAHOS: Thank you, Mr. Warren. 763 Mr. Dingwall? 764 CROSS-EXAMINATION BY MR. DINGWALL: 765 MR. DINGWALL: Thank you, sir. 766 My questions are going to be over the map a little bit, Dr. Lowry, as certainly we've had quite a few to date. 767 With respect to your efforts on benchmarking, how would you categorize your clients for whom you perform these services? Would they be mostly utilities? 768 DR. LOWRY: They are mostly utilities, but we do occasionally work for regulatory commissions. 769 MR. DINGWALL: There was some discussion earlier with Mr. Warren of the requirements of article 480 of the Board's Accounting Procedures Handbook, and you comment on that briefly on page 17 of your evidence. Are you familiar, sir, with the subcategories of account 1570? 770 DR. LOWRY: I have some familiarity with them, yes. 771 MR. DINGWALL: And in your view, do any of these subcategories themselves present more of an opportune presentation for accurate comparisons between utilities? 772 DR. LOWRY: If I may, I'll just take a look at them for a second. 773 Well, my main concern is the difficulty in divvying up costs between billing activities and the retailer customer requirements. I think that you'll see that if you look at the results for the individual companies, that it's quite common for a company that's good in some of those to be bad in others -- in the other. And I think that's not a coincidence, because this is where it's probably harder -- is especially hard to decide where to put certain costs. 774 For example, I believe that Hydro One took the cost of their WFIS software and put it all in the retailer customer requirements, I might be wrong, but that's my understanding, when plainly it could have been divided between several categories. But any such decision would have been almost as arbitrary as putting it in one. 775 MR. DINGWALL: If the filing guidelines were improved to the point where there was less of a blurring between the subaccounts, do you believe that that would improve the ability of the subaccounts to inform on what the relative performance of the companies would be? 776 DR. LOWRY: I suppose it would improve it. It's only a question of whether it's worth trying to grapple at this level of specificity. As I've said already, transition costs already, as a very, very partial category, that doesn't even include all of the incremental costs of the market-readiness requirements, and so to get into these even further -- even more detailed breakdowns could be raising more problems than it solves. 777 MR. DINGWALL: In your prefiled evidence, at page 28, you make the contention that consumers can reasonably expect LDCs to carefully manage the cost of the open access initiative. 778 DR. LOWRY: Certainly. 779 MR. DINGWALL: Does that mean that, in your view, there should not be a prudential review of these costs? 780 DR. LOWRY: No. As I said at the -- 781 [Audio feedback] 782 MR. VLAHOS: I want to try it now, reporter. 783 DR. LOWRY: As I said in my introductory remarks, I think it is a legitimate prudent issue -- prudence issue. 784 MR. DINGWALL: And at page 16 of your evidence, you make reference to the term "slackness in management" as being a potential impact on the accuracy of some of the numbers. Are you aware that since 1999, Ontario LDCs have been operating with a very strict -- within a very strict form of performance-based rate-making? 785 DR. LOWRY: Yes, I'm aware of that. 786 MR. DINGWALL: Do you not think that that would have gone substantially to reduce any slackness in management? 787 DR. LOWRY: Well, I guess I could turn my answer into a question. Are you confident enough about the incentive property of the regime not to review the prudence of their power distribution costs in the next two years? I would guess the answer is no, that over a three-year period, that there might be some convergence towards a certain deficiency standard, but you can only go so far in three or four years. 788 And not only that, but even when companies are incented to perform well, they don't always perform equally well. You can look in other industries. Let's say you jumped in your car and you drove towards Detroit looking at all the dairy farms. They all have strong cost-performance incentives, but are they all equally successful? I would say, probably not. 789 MR. DINGWALL: Thank you, Dr. Lowry. Those are my questions. 790 MR. VLAHOS: Thank you, Mr. Dingwall. 791 Ms. Street? 792 MS. STREET: Thank you, Mr. Chair. In fact, my questions have been covered by my colleagues, and I have no questions. 793 MR. VLAHOS: Thank you. 794 Mr. Lyle. 795 MR. LYLE: Thank you, Mr. Chair. 796 CROSS-EXAMINATION BY MR. LYLE: 797 MR. LYLE: Dr. Lowry, I want to turn you back to your testimony before lunch. I believe at that time you noted that there's a large number of distributors in Ontario, and you said there were more than 80. In fact, there are more than 90. Are you aware of any other jurisdiction that has that number of distributors? 798 DR. LOWRY: Well, I mean, off the top of my head, I would say no. But there might be some country -- I mean, Germany might have that many. They have quite a few, I know. 799 MR. LYLE: But that level of fragmentation in the distribution sector is quite unusual; is that fair? 800 DR. LOWRY: Germany and Norway have a fair bit of fragmentation, but I'm not sure it reaches 90. 801 MR. LYLE: And I believe you expressed, perhaps, some sympathy to the Board in the task it has in having to deal with the claims of over 90 utilities. 802 DR. LOWRY: Yes, of course. 803 MR. LYLE: And you also indicated that Mr. Adams, in proposing that benchmarking be used as a screening tool, was showing good instincts, I believe were your words. 804 DR. LOWRY: Well, I think I meant by that that he's showing an appreciation of the imprecision of benchmarking so not to propose a mechanistic, dare I say, Procrustean -- 805 MR. VLAHOS: Procrustean. 806 DR. LOWRY: -- approach to benchmarking. 807 MR. LYLE: And Mr. Adams' screening tool isn't going to determine any utility's rates, is it? 808 DR. LOWRY: No, not in and of itself. 809 MR. LYLE: And distributors will have an opportunity to -- if they're chosen by the screening tool, to have greater scrutiny. They'll have an opportunity to explain their costs. 810 DR. LOWRY: Well, now, Mr. Adams said that he thought it shouldn't end there, but who's to say exactly what the Board would do and what the level of a hearing would actually follow from that. I think Mr. Adams was vague about that. And it's a little reckless for me to say that I'm sure they would all get a fair hearing. 811 MR. LYLE: Okay. Assume for a moment that they all would have an opportunity to provide a justification for their costs. Presumably, then, if an applicant had higher costs because they built an entirely new CIS system, or because they built a high capital cost system that would have low operating costs in the future, they would tell the Board that, would they not? 812 DR. LOWRY: Yes. 813 MR. LYLE: So in that case, what I'm having difficulty with is, what is the harm in using a relatively simple method of benchmarking as a screening tool? 814 DR. LOWRY: Well, if you're going to do that, wouldn't you want to get the -- haul the right bunch of suspects into the room to talk to? I would think that you'd want to do what you could to get that right. 815 MR. LYLE: But aren't we dealing with trying to make the best of a bad situation? 816 DR. LOWRY: Well, remember the expression that I've used, "needlessly inaccurate." If we were to make due here with a specific method that Mr. Adams proposes, that would be very much an example of needless inaccuracy, because you would certainly improve this method considerably without too much cost. 817 MR. LYLE: So you believe it's possible, then, with some improvement, for the Board to use a screening tool with respect to these other 90 distributors? 818 DR. LOWRY: Well, I wouldn't go quite that far, but it's legitimate to think about. As I've said before, whether or not the Board would be prudent to stick with benchmarking and somehow try to strike a balance between the accuracy and the cost is something that would take a lot of thought. But that's what you're dealing with is the possibility of a needlessly inaccurate regulatory method. 819 MR. LYLE: So the harm, then, is really that some utilities who, in fact, perhaps were not prudent may not receive the scrutiny, the level of scrutiny that they ought to. 820 DR. LOWRY: That's part of it, and partly, too, that it's possible that those that are the focus that don't get fair redress either. It's possible, because it's hard for me to say exactly how they would be handled. 821 MR. LYLE: But assuming they get a full hearing in some form or another, that wouldn't be an issue? 822 DR. LOWRY: That would not be an issue then. 823 MR. LYLE: I just want to turn you briefly, then, to page 26 of your paper. 824 DR. LOWRY: Just to reinforce what I was saying a moment ago. For example, in terms of needless inaccuracy, there's no reason why you couldn't first sort companies with regard to size. There's no reason why you couldn't go to a confidence interval instead of a 25th percentile approach to getting a short list of companies to look at. 825 MR. LYLE: Can you explain why companies should be sorted in accordance with size? 826 DR. LOWRY: Well, for the reasons we've discussed here, that in the very nature of economies of scale, that as companies get larger, they might elect to purchase inputs that smaller companies wouldn't be rationale purchasing -- 827 [Audio feedback] 828 MR. VLAHOS: I'll try again, reporter. 829 DR. LOWRY: -- if the focus of the inquiry is on essentially those very inputs, as is the case here, then you have a problem of putting a company on a suspect list that shouldn't be on the list. So, for example, companies -- the largest companies should probably be -- would be viewed separately from the smaller ones, and then a confidence interval constructed. But since there are so few of them, it would be hard to conclude that any of them were actually outliers. 830 MR. LYLE: Looking from the opposite perspective, Dr. Lowry, would you also believe that where small utilities had high per-customer costs because of diseconomies of scale, and that those should be passed through to ratepayers? 831 DR. LOWRY: Well, certainly for now I don't feel it's appropriate to be penalizing companies for having an inefficient scale. They would -- they should be -- I mean, that's a fairly controversial thing to do. That's a fairly controversial thing to do anyway, to hold companies to their economies of scale. I'm not sure I've actually heard of it ever being done. But even if you were, you would want to do it with considerable notice to give them a chance to aggregate it in an appropriate fashion. 832 And I might say, in that regard, that it's very hard to know -- I do a lot of research in this area and I don't think anyone has ever gotten to the bottom of the kind of scale economies that are actually achievable from the merger of side-by-side distribution operations. I mean, it's one thing to think about Toronto growing by 15 percent and how that might affect the average cost of service and, it's another thing to merge two distribution systems that are separated by a hundred miles and assume that there would be substantial economies from their merger. 833 MR. LYLE: Thank you. I want to turn you, then, to page 26 of your report. And at the bottom of that page, you are addressing whether there are any other accounts that are being reviewed as part of this proceeding that would be appropriate for benchmarking, and you're discussing Bill 210 costs. I believe the concern you expressed with respect to this is that some utilities are only claiming with respect to the costs of processing the $75 rebate cheques, whereas other utilities are claiming other incremental Bill 210-related costs. 834 DR. LOWRY: That's right. I think that's true because I've seen, in looking amongst our clients, that some of them -- the clients I'm representing here, that some of them just reported the cost of outsourcing the cheque and others thought, Well, let's see what other costs were relevant here. And when you go and look at all these little utilities that some had high costs and some had low costs, these companies that only serve 1,000 and 2,000 customers, you can well imagine that some of the managers were industrious and got out their pencil and tried to estimate those things accurately and others didn't. 835 MR. LYLE: If the Board were to decide in this proceeding that only the costs of the $75 rebate cheques was recoverable in rates, would that eliminate this problem? 836 DR. LOWRY: Well, it would certainly simplify it. It would simplify it and make it less of a problem. 837 MR. LYLE: In that case, then, you would have no objection to using benchmarking for -- 838 DR. LOWRY: No, I'm not saying that. It would be more straightforward then. 839 MR. LYLE: Thank you. Those are all my questions, Mr. Chair. 840 MR. VLAHOS: Thank you, Mr. Lyle. 841 Dr. Lowry, the Board has some questions. 842 Mr. Carr. 843 QUESTIONS FROM THE BOARD: 844 MR. CARR: Thank you. I just wanted to get some -- perhaps just a little more certainty on one item that you mentioned about your experience of benchmarking not having been used, and I believe you said with regard to transition costs. I think that's what you said? 845 DR. LOWRY: That's my understanding. I can't recall an example of that. 846 MR. CARR: Is it -- are you aware of any time it has been used with respect to one-time events? In other words, let's leave aside transition costs as a particular type of event. 847 DR. LOWRY: I'm not aware of it. It's possible, of course, that someone has done that, but I'm not aware of it. 848 MR. CARR: And you're comfortable with the definition of the word "benchmarking"? You seem to accept that the Deloitte report was a benchmarking report. So benchmarking comes in all shapes and sizes in terms of its accuracy and the granularity and everything else. 849 DR. LOWRY: That's right. 850 MR. CARR: One other question to clarify. I don't have the reference, but I believe somewhere in your evidence you indicate that a use -- a better place to start with benchmarking in the Ontario context would be in power distribution. 851 DR. LOWRY: Yes. 852 MR. CARR: Is that correct? 853 DR. LOWRY: Yes, because that's an area where a lot of work has been done. You can pull down off the Internet 15 econometric models of power distribution costs and regulators in a number of countries that have tried their hand at that, and that all -- makes it easier to do a good job. 854 MR. CARR: What I really wanted to find out was when what you meant by power distribution. You mean the run-of-the-mill rates, the distribution rates. 855 DR. LOWRY: Right, the delivery service, the voltage transformation, and perhaps the customer care services. 856 MR. CARR: This is power distribution, distribution costs related to power distribution services. 857 DR. LOWRY: Right, and I'm just talking about your ordinary costs, including the wires-type costs. 858 MR. CARR: All right. Thank you. 859 MR. VLAHOS: Ms. Chaplin? 860 MS. CHAPLIN: Thank you. 861 Just, I guess, following on a little bit from what Mr. Carr was asking you about. Would I be correct if I was to make an overall summary that your conclusion is that benchmarking is difficult and costly in any event, and that to do it for a particular subcategory of costs, for example, transition costs, becomes both more complicated and therefore more costly than the potential benefit? Would that be a fair summary? 862 DR. LOWRY: Yes. Well, it's certainly more costly, and it's hard for me to assess exactly relative to the benefits. But I suspect that in view of the accuracy problem, and I assume the fact that you don't want to be spending a year doing this, that it might be best just to get ready to consider this in the context of regular power distribution costs. 863 MR. VLAHOS: I'm sorry, would you repeat that last part, Dr. Lowry? 864 DR. LOWRY: Well, that in view of the uncertainty about the cost-benefit balance, in doing benchmarking here, that you might well -- I suspect that you would be well advised to get ready to consider this in the context of power distribution as opposed to this narrow category of transition costs. 865 MS. CHAPLIN: And you mentioned in your direct testimony, and I believe you did discuss it in your evidence but I have not been able to find it which is why I'm asking you about that now, you made the comment that benchmarking does increase operating risk. Could you perhaps just explain that. 866 DR. LOWRY: Well, any externalization of the regulatory system, by which I mean any system where prices are insensitive to a company's own operation, is going to increase operating risk and move it in the direction of the operating risks in a competitive market and even potentially beyond that point. 867 So let's say that a rate is based 20 percent on the company's own cost and 20 percent on the benchmarking study. Well, that would be an externalization of the regulatory system right there that will increase their risk. Now, what worries -- that's the part about benchmarking that I think we all should try to live with, because the same is true of performance-based rate-making. I mean, there are certain benefits of it, and one of the costs is higher operating risk. 868 But what I'm worried about is the further increase in operating risk that would result from a needlessly inaccurate benchmarking study, and the signals that could send to the financial community. 869 MS. CHAPLIN: But in the event it's not formal benchmarking but perhaps, albeit less accurate, but some sort of screening tool which perhaps doesn't involve that same externalization factor, would you say the use of a screening tool would increase the risk as well? 870 DR. LOWRY: Well, it would certainly make it less of a concern to the investment community. If it was using as a screening tool, then each company was subsequently given a fair hearing of their situation. As I say, though, there are certainly -- if you were going to use it as a screening tool, you could certainly do better than the simple method that Mr. Adams proposes, and that's what I mean by needlessly inaccurate. 871 MS. CHAPLIN: And you did advance sort of at least two suggestions in that regard, the grouping utilities into peer groups, perhaps based on size or customer mix, and then constructing a confidence interval. Can you offer any further suggestions as to ways to improve the accuracy? 872 DR. LOWRY: Well, I think that in a sense the -- my testimony kind of does imply steps you could take, and Mr. Warren kind of walked me through, Well, couldn't you try to fix this and couldn't you fix that. In theory, all the things Mr. Warren talked about are further enhancements of the accuracy of such an exercise. 873 MS. CHAPLIN: Okay. And I think one of those -- one of those steps had to do with looking at what the sort of starting point in terms of sophistication, perhaps, of the customer billing software, and Mr. Adams, in his testimony, suggested that that -- you probably -- you don't necessarily need to adjust for that, that that perhaps is appropriately a variability that the utility should bear. Do you have a comment on that? 874 DR. LOWRY: Well, I'm inclined to disagree with that. I think that it's -- that's something that should be taken as a given and how -- and then the idea is how they went forward from there and how they adjusted to the circumstances. Otherwise, you're going to be rewarding the companies that had the more fancy systems compared to those who thought they were running a lean ship by having a simpler system and making due with it. 875 MS. CHAPLIN: Okay. Thank you very much, Dr. Lowry. 876 MR. VLAHOS: Thank you, Ms. Chaplin. 877 Dr. Lowry, just one clarification question. You discussed or you termed power distribution a couple of times with Mr. Lyle specifically, and I don't understand what you're referring about. Are you talking about a distribution company? 878 DR. LOWRY: Well, you know, the typical power distribution company is responsible for voltage step-down and local delivery of power, and they'll typically also have a customer care unit that includes the revenue cycle and a call-centre. That's what I mean by a power -- the typical power distribution functions are those types of functions. 879 Now, this is -- what we're talking about here is a subcategory of customer care services, namely, the transition to market-readiness in the customer care unit, primarily. So I'm saying that, you know, the usual application of benchmarking is in those larger functions that a power distributor is typically responsible for. 880 MR. VLAHOS: Okay. Thank you for that. 881 Those are all the Board's questions. Ms. Aldred, any redirect? 882 MS. ALDRED: No, Mr. Chairman. 883 MR. VLAHOS: Thank you. 884 Dr. Lowry, thank you very much for being here, and have a safe trip back. 885 DR. LOWRY: Thank you, sir. 886 MR. VLAHOS: You're excused. Okay. 887 [The Board confers] 888 MR. VLAHOS: Mr. Vogel, I guess, back to you. We would like to use a few minutes. Perhaps you can introduce your panel -- 889 MR. VOGEL: Yes. 890 MR. VLAHOS: -- and go through any direct that you may have, and at that point we'll take a break. Can you give us an idea of how long you'll be? Do you have any direct of your witnesses? 891 MR. VOGEL: I propose to qualify Mr. Adamson as an expert, so that may take five or ten minutes, and then the direct examination of Mr. Adamson and the two London Hydro witnesses who will be recalled as part of this panel, I would think would take about 20 minutes, 15, 20 minutes. 892 MR. VLAHOS: Well, why don't we empanel, then, the witnesses now and let's begin. Have Mr. Adamson come forward to be sworn. 893 MR. VOGEL: Mr. Adamson. 894 MR. VLAHOS: And I understand it's Dr. Sharma and Mr. Stephenson that were coming forward? 895 MR. VOGEL: Mr. Stephenson as well, yes. 896 MR. VLAHOS: They're still considered under oath so they don't have to be resworn. 897 MR. VOGEL: Thank you, Mr. Chairman. 898 LONDON HYDRO INC. PANEL 2 - ADAMSON, STEPHENSON, SHARMA: 899 S.ADAMSON; Sworn 900 J.STEPHENSON; Previously Sworn. 901 V.SHARMA; Previously Sworn. 902 EXAMINATION BY MR. VOGEL: 903 MR. VOGEL: As I indicated, Mr. Chairman, I propose to qualify Mr. Adamson an expert witness in benchmarking and comparative regulation methodology. 904 MR. VLAHOS: Mr. Vogel, I'd just like to note, are there any objections to Mr. Adamson being accepted as an expert witness in benchmarking? There being no objections, Mr. Vogel, I'm just trying to save you and the Board some time. 905 MR. VOGEL: Thank you, Mr. Chairman. 906 Mr. Adamson, then, you were retained by London Hydro to provide reply evidence in response to the evidence filed by Energy Probe, Mr. Adams' report; is that correct? 907 MR. ADAMSON: Yes. 908 MR. VOGEL: And that report is attached as appendix A to London Hydro's prefiled evidence? 909 MR. ADAMSON: Yes. 910 MR. VOGEL: And your report, then, deals with, "The Use of Benchmarking Techniques and Prudence Reviews of Competitive Transition Costs," is the title of your report; correct? 911 MR. ADAMSON: Yes. 912 MR. VOGEL: And at -- 913 [Audio feedback] 914 MR. VLAHOS: Okay. 915 MR. VOGEL: Starting at page 3 of your report where you're dealing with the objectives of your evidence, could you describe for the Board briefly the purpose of your evidence. 916 MR. ADAMSON: Well, it's really several-fold. I really tackled four things. 917 First, is to review the economic fundamentals of benchmarking and comparative efficiency analysis to really see what's the theoretical basis for those and what assumptions are necessary for that to be sound. 918 I then really considered the particular problem we have at hand here, which is the question of transition cost reviews in Ontario, to determine how useful benchmarking-type techniques are likely to be in that context. 919 I then make a -- had a quick look at some of the specific questions and issues that I've raised regarding the analysis of Mr. Adams and the Energy Probe evidence. 920 And then finally, I made some recommendations with respect to potential ways to go forward with respect to this particular issue. 921 MR. VOGEL: Starting at page 5 of your report, and onwards, you deal with the use of benchmarking as a tool of comparative regulation, and page 6, you deal with a number of conditions that must exist for benchmarking to be appropriate. What conditions, in your view, must exist for benchmarking to be appropriate? 922 MR. ADAMSON: Well, before I -- before I list these conditions, let me give a slight motivation for why we have to think about this. 923 Benchmarking, very loosely speaking, in an operational form as we're talking about here, is making systematic comparisons, and to make comparisons, we have to compares apples with apples, as the old saying goes -- 924 MR. VLAHOS: Okay. We're off the record. 925 Let's try it now. 926 MR. VOGEL: Mr. Adamson, you were going to describe for us the conditions that must exist in order for benchmarking to be appropriate, and I think you were trying to provide some context for that. 927 MR. ADAMSON: Yes, I was. Plainly speaking, in relatively simple terms, usually what we're talking about here is creating metrics for comparison against an external standard or against a set of comparator firms, but calculating metrics one way or another which are simply defined on the basis of inputs and outputs. 928 It's fairly self-evident, I believe, that if you do that, then the inputs and outputs, for example, have to be of the same quality. In my evidence, to outline some of these issues, I use a very simple analogy. What if we were sitting here trying to benchmark the efficiency of house-building firms in Ontario? And it's based on the dollars cost per house built, or number of man-hours per house built. It's pretty clear we have to adjust what's being built. Houses aren't homogenous, and to use a very simple kind of dollars-per-house-built standard is very misleading if, for example, the houses vary from a small lakeside cottage in the wood to a very large mansion. Necessarily, the costs of being a mansion are going to be substantially higher, so that's really telling us nothing about the comparative efficiency of firms if one firm only builds mansions and one firm only builds cottages. 929 So homogeneity of inputs and outputs is important, and you can also think of that in terms of quality, quality used, quality of the output. 930 A second assumption that, in effect, is built into these types of techniques is that if we're making comparisons across firms in terms of a process, in terms of a product, it very much depends on what we're -- what stage they start with and what stage they reach. If some people only build houses on top of foundations that another firm has started and others really start by clearing the site, then it's pretty clear that the dollar cost per house built is going to vary, and that would have to be corrected. 931 Third, every time we talk about costs and kind of aggregate costs, we have to be thinking about prices. If the costs will -- if the prices of the inputs are going to vary among firms for natural reasons, such as geography, then you'd have to correct for that. Again, by way of my extended analogy, you know, if you're building some properties in the Greater Toronto area and some in a very rural area, you might think that labour rates and land costs and stuff would vary there. 932 And then finally there's kind of environmental costs, so to speak, that may be really very peculiar to very specific situations. You know, if you're only building houses in places where the soil is very rocky, then the costs of an efficient firm may be higher than the costs of an inefficient firm elsewhere. So any time you have kind of environmental characteristics that are going to affect the cost structure of even an efficient firm, then that's something that one, in general, has to consider correcting. 933 MR. VOGEL: So, Mr. Adamson, if you were going to apply benchmarking, then, you'd want to ensure that you had outputs of the same quality and that the firms had started from the same position, or, as you go on to discuss page 7, that you've corrected for the differences. 934 You talk about two possible methods for correcting for differences. Could you review that with us. 935 MR. ADAMSON: Yes, we've heard something of those earlier today. In very broad terms, you can either try to make things more similar by putting them in subsets, by grouping them in cohorts. So I group all of the firms who are -- fit into a certain category in group A and I fit the next set into group B, and make comparisons within those firms. The other possibility is to correct for differences econometrically using any number of, you know, regression-style techniques. Those are really the two basic methods and variance on those. 936 MR. VOGEL: Turning to page 9 of your report, then, and following where you discuss that benchmarking is likely to be appropriate in the assessment of transition costs, and taking you to your conclusions starting at paragraph 36, what did you conclude about the potential use of benchmarking as being appropriate for the assessment of transition costs? 937 MR. ADAMSON: Well, as I laid out, I tried to lay out the kind of inherent assumptions in this type of analysis which either have to be met naturally by the data or which one has to correct for. It strikes me that, while benchmarking is a very useful tool -- it's a really good hammer for some types of -- for some types of problems. That, of course, does not make everything a nail. This seems a tool, to me, which is not naturally suited to the particular question we have at hand here. We have a set of problems which, you know, I think we can all agree, do not naturally meet the economic assumptions inherent in this type of analysis, and that correcting for these differences is actually going to be extremely difficult. 938 So as a first conclusion, I think that my first recommendation would be that benchmarking is an extremely useful tool in the regulatory tool kit. This is not necessarily -- this is not necessarily the place I would seek to apply it. 939 MR. VOGEL: All right. And you talk about, in paragraph 36, about transition costs -- one of the reasons being transition costs are fundamentally idiosyncratic in nature. What do you mean by that? 940 MR. ADAMSON: Well, idiosyncratic -- we seem to be having a vocabulary lesson today, although not as good as Procrustean. Idiosyncratic in the fact that they are one-offs, they're going to be relatively unique. They are going to be determined by individual circumstance. They are not necessarily going to follow an obvious pattern, maybe some patterns, but it's not very clear that -- it's not going to be obvious to say, Gosh, you know, the transition costs even should have been all the same. Not when you really think about what the underlying process we're discussing here was. 941 Given the fact -- given this uniqueness, given this idiosyncratic nature, again, this seems like not the most appropriate place to start using this tool. 942 MR. VOGEL: All right. With respect to paragraph 37 then and the promulgation of rules for all LDCs and outputs achieved, what's the significance of all that to the potential application of benchmarking to these costs? 943 MR. ADAMSON: Well, again, returning -- returning to the fundamental kind of concept here, we're talking about calculation of metrics, outputs, outputs divided by inputs or some type of metric. It matters how you define the output. A house that's half completed and without the roof on isn't a house in the same sense that a house that has been completed is, and to compare those two would be, A, grossly unfair to the builders, and, B, it would really provide a misleading view of the comparative efficiency of the firms. Of course, a firm that never finishes any of the houses it builds is going to save money in labour costs, as I can tell you from practical experience with builders. 944 So if it is true, which I believe it's true and I believe, you know, that we've heard significant discussion of that today, that not everyone met the same standard, certainly not everyone met the same standard at the same time, as it appears clear, then, you know, that's a very significant output characteristic that would make a simple comparison meaningless and would require a quite difficult conceptual approach to correct for. 945 MR. VOGEL: All right. And similarly, in paragraph 38, what's the significance of different starting points of utilities, then, with respect to potential application of benchmarking? 946 MR. ADAMSON: Well, again, to bring it back to our practical question here, we've heard -- we've heard evidence today regarding where people started, focusing on one particular element, the customer information systems. Some people had systems that were probably much more modern; some people had some that were bare bones and had kind of been patched together. By looking at a narrow piece of the costs instead of looking potentially over some full life-cycle of costs, if you look only at people who basically had to build new systems to meet the new requirements that had been promulgated by policy, you're disadvantaging those, in effect, who had actually been very prudent and had saved customers money in the past by -- you know, we had something that worked well, we had something that worked well enough for the requirements that were put upon it, and maybe it was very cheap and a cost-effective solution to keep that working even if it wasn't the sexiest technology that Oracle or IBM could dream up. 947 MR. VOGEL: All right. In paragraph 39, you talk about the primary reason for techniques such as benchmarking being to create efficiency improvements. How does that apply to this assessment of benchmarking to transition costs? 948 MR. ADAMSON: Well, right. By way of a slight bit of background, the essence of incentive regulation is, as the name suggests, to create incentives. And a very significant application of benchmarking and comparative efficiency measurement type techniques in the regulatory context has been to try to create incentives to reduce costs for the benefited customers that traditional cost-of-service regulation are unable to deliver. That, I think, is quite apparent. 949 What I think that does show is that economically, in terms of everyone's, kind of, benefit over time, you know, this may -- this can deliver economic benefits where decisions are yet still to be made. Do I invest in cost-saving technology or do I not? That's really the essence of the discussion, for example, of yardstick competition that's mentioned in Dr. Yatchew's paper or in the paper that he, in turn, quotes which is one of the seminal papers in this area by Andrei Schleifer at Harvard. How do you create incentives to cut costs which benefit customers over time? 950 Well, here, these costs are well and truly sunk. I mean, the money has been spent. It's not coming back. We do have a specific regulatory question in front of us, but there's no question that incentives are going to, kind of, create overall economic benefits at this point. By now it's really just a question of divvying up who pays. 951 MR. VOGEL: Turning up to page 14 and following in your report, you deal with certain deficiencies in the Energy Probe analysis, which resulted in their benchmarking proposal. Could you briefly review those for the Panel. 952 MR. ADAMSON: Yes, I'll try to make this very quick because I think we've heard quite a lot on this today. 953 We really have a very simple measure in terms of above-line transition costs per customer. That measure doesn't appear to have been corrected for any of the innumerable quality starting point, ending point factors that I've already mentioned. As Mr. Adams has noted, there's some kind of outliers in the data. We're not quite sure what to make of those. I kind of agree with his assessment that the fact that they didn't seem to have any transition costs, or some of them seemed to have extremely low transition costs, didn't seem to be credible. Clearly something is going wrong here and we don't know what that is. 954 Another criticism, maybe less profound, is he seems to have adopted the 25th percentile standard based, presumably, on the example given by Professor Yatchew. Dr. Lowry has already, kind of, described how one might go about trying to determine what an appropriate standard is. You know, he hasn't provided any evidence to support that recommendation anyway. 955 I mean, all these are just symptomatic of a quite overreaching problem, which is, you know, the tool -- the tool that's being applied here seems to be very blunt for the sophistication of the problem. And given that, I don't think I certainly would ascribe great weight to the results as they currently stand. 956 MR. VOGEL: Thank you, Mr. Adamson. 957 Dealing with the balance of the reply evidence, then, turning to you, Mr. Stephenson, section 2 of the reply evidence deals with regulatory directives that were provided with respect to the incurring and review of transition costs in the DRH, the APH, and the January 15th guidelines. Can you just briefly describe for the Board, what was London Hydro's understanding with respect to the incurring and review of these costs? 958 MR. STEPHENSON: It was our understanding, as outlined in this first section of our reply evidence here, that the prudency review would be on a utility-specific basis. The sections that we have provided which we relied upon were page 6 of section 5 of the Distribution Rate Handbook, and the quote that we have provided here in the evidence is that: "The reasonableness of the costs will be relative to other options that the utility may have had." We took that to be specific to the utility. 959 As well as the section 5.5.1 of the Distribution Rate Handbook: "The option selected must represent the cost-effective option, not necessarily the least cost for ratepayers." Again, we took that to be a utility-specific reference. 960 With respect to article 480 of the APH, Accounting Procedures Handbook, in the last paragraph on page 5 of that article, it was noted that: "Cost eligibility is based on utility-specific circumstances and shall be determined in accordance with the eligibility criteria established in the rate handbook." Again, we took that to be utility-specific. 961 And finally, the guidelines as issued on January 15th, 2003 for reporting of LDC transition costs, the definition of prudence was defined as the two conditions that were necessary to meet the criterion were, one, the cost could not be avoided by doing without or in other ways, and secondly, the utility reviewed different alternatives to solve the issue and adopted the most cost-efficient. Again, we took that to be utility-specific. 962 MR. VOGEL: Thank you. 963 And, Dr. Sharma, starting at paragraph 25 in the reply evidence, you deal with certain mistakes or fallacies in the assumptions underlying the Energy Probe analysis, and particularly as it relates to London Hydro. Can you just briefly review those? 964 DR. SHARMA: Yes, please. 965 What we refer to here is really a starting point difference, and the starting point difference in terms of technology infrastructure that might exist. I think Mr. Adamson gave a very simple example of a building house where the foundation does already exist and where a foundation does not exist. In the case of London Hydro, particularly as we have spoken in our evidence, we were faced with archaic technology which could not enable us to meet the market compliance. So basically we were in a mold where we had to lay the foundation and acquire enabling technology for our system. 966 And I suspect that could be a unique situation among many utilities and hence that variable lends to difficulty in comparing cost of various utilities on a simple metric such as cost per customer. And that is the intent. 967 MR. VOGEL: All right. 968 In paragraph 28, there's some discussion about electing capital -- the incurring of capital costs as opposed to future operating costs. What's the significance of this? 969 DR. SHARMA: I think it was also mentioned in this morning's testimony about life-cycle cost versus one-time cost. Our view is that life-cycle costs are more important, which includes not only the investment but the impact of those investments on operating costs, as Mr. Adamson has already indicated, and Dr. Lowry has spoken to this afternoon. In our case, we have a very strong example of overperformance and investment that we have made. Only disadvantage that we may have is that we are a medium-sized utility. 970 The result of our performance is our investment, among a peer group of utilities, have been quite minimum because we worked hard to achieve those results. We, in the first year of market operation, were cited by IMO as an example utility. We have shown our proof in the pudding, and that is the retailers who interact with us, how comfortable and happy they are with our service. One retailer, namely EPCOR, has actually stated in a written document which we have in our office that we hope other utilities will use London Hydro as a role example. So we have achieved so much to facilitate the objectives of the OEB and the government in opening the market. Mere size of our customers should not result in any penalty or disadvantage position for London Hydro. 971 MR. VOGEL: And, Dr. Sharma, just can you tell us, how does London Hydro's overall operating costs per customer compare to other LDCs? 972 DR. SHARMA: As Dr. Lowry has referred to a study about using benchmarking in cost-of-power distribution, which, through discussion, I understood to be overall operating and maintenance costs of an LDC. In doing so, a comparison that we have participated among the peer group, we have always come out to be the lowest, and more so since the market opening that has been the result of overachievement in implementing the technology that we implemented. 973 MR. VOGEL: And starting, then, at paragraph 29 and onwards, you go through various factors as to why London Hydro is not homogenous with other utilities. With respect to the minimum fixed cost for the CIS technology that you discuss in paragraph 31, what's the significance of that? 974 DR. SHARMA: There are various factors, which I think Dr. Lowry in his paper and Mr. Adamson also alluded to, which should be considered as cost drivers for capital investment in technologies, and we, in this paragraph and the following paragraphs, cite ones which are specifically unique to the Ontario market, such as customer size, which I think Mr. Tom Adams has recognized as well. But in addition to that, retailer and how much of a market share you've got in your territory, what is your metre cycles and billing cycles, meter-reading cycle, I'm sorry, as well as how efficient and effective technology you have implemented. 975 But more than that, more than that, there was testimony this morning that there is a 97 percent correlation between capital cost and customer size. That does not indicate it is a linear relationship which you could use by using a straight-line benchmarking which indicates a slope of that function, and apply that across all the industries. That just indicates there is a relationship. It could be non-linear. 976 In our experience, which of course is limited, but nevertheless, in that limited experience, we have learned that the investment in computer technologies are very non-linear with your scale and scope. Scale helps. Scope also helps. But it is not a linear relationship. 977 MR. VOGEL: All right. Finally, in paragraph 44, then, there's an example that you provided there comparing two utilities of similar size but different characteristics. Could you just review that for the Board. 978 DR. SHARMA: Mr. Adamson gave an example of building houses. I'm more simple and I like to give an example of utilities only how operation can affect. 979 For example, we are a moderate-sized utility and we have, even though -- experienced a large growth in interval meters, we have a relatively small number of meters in comparison to Toronto or Hydro One, perhaps. So we, although we have invested some money, but we did have to procure unique software that those utilities might have to procure because they have a large number of interval meters. 980 And that is the example here. A utility with similar number of customers but one having all interval meters and one having no interval meters will implement different software techniques to do the billing because of complexity, demand charges, as well as frequency of reading. And that is the example to show that, within a similar customer base utility, you could have unique differences. 981 MR. VOGEL: All right. So with respect to the non-linear relationship that you described, you could have a moderate-sized utility and a larger utility both with the same cost because of the threshold cost that has to be incurred for this technology in order to meet market requirements. 982 DR. SHARMA: Yes, and that's partly the factor. Also, I think, non-linear function speaks to another conclusion, if we wish to consider that as somewhat of a consideration in benchmarking, and that is you can only compare among peer groups, because non-linear function need to be linearized around a point to apply some kind of analysis. 983 MR. VOGEL: Okay. And you're now discussing with respect to the example in paragraph 44, you can also have two utilities with a similar sized customer base but different technology requirements because of the market they serve. 984 DR. SHARMA: That is exactly true. And I can speak of retailers, for example. You could have very similar customer size, very similar mix of interval and non-interval meters, but if there is a high activity by retailers in one jurisdiction over another, that jurisdiction where retailers are taking more of a market share will require an LDC to have a much higher performing system in order to serve the retailers and the customers of those retailers, and that would impose different software requirements on the different utilities. 985 MR. VOGEL: Thank you. 986 Mr. Chairman, those are my questions. The panel is available for cross-examination. 987 MR. VLAHOS: Thank you, Mr. Vogel. 988 Mr. Dingwall, what's your intent? 989 MR. DINGWALL: We're estimating about 15 minutes' worth of cross-examination after the break. 990 MR. VLAHOS: Okay. And then we'll have Mr. Lyle, and nobody else, I understand. 991 MR. SHEPHERD: Mr. Chair, I'm going to have one question. 992 MR. VLAHOS: Okay. 993 MS. STREET: And, Mr. Chair, I have just a couple of questions as well. 994 MR. VLAHOS: All right. 995 MR. DINGWALL: I wonder what it's set to detect. 996 MR. VLAHOS: Sorry, I didn't hear that. 997 Okay. Let's break. It is 20 minutes after 3:00, and we'll return at a quarter to 4:00. 998 --- Recess taken at 3:20 p.m. 999 --- On resuming at 3:48 p.m. 1000 MR. VLAHOS: Please be seated. 1001 Mr. Dingwall? 1002 MR. DINGWALL: Thank you, sir. 1003 CROSS-EXAMINATION BY MR. DINGWALL: 1004 MR. DINGWALL: This first series of questions is for the London Hydro witnesses. Gentlemen, at page 11 of your evidence, you indicate that you're generally supportive of a best-in-class determination of benchmarking. Is it not inherent that in determining the best in class you also determine the worst in class? 1005 DR. SHARMA: Best in class by the way of -- by virtue of measuring that will show all of the classes as well, but remember, the best in class and the worst in class is a statistical distribution that Dr. Lowry referred to. Even though I'm not an economist, but I understand that if you compare peer groups with proper cost drivers and normalize those cost drivers with coefficient -- and I'm not speaking for him, but this is what I understand, then you will reach a distribution -- some normalized distribution that may look like with a mean and some best sum average. The idea of benchmarking often, at least, in PBR, is to drive those that are the low-performing to the high-performing regime. That is it. 1006 MR. DINGWALL: Which leads me to my next question, Dr. Sharma: Which utilities in Ontario does London Hydro believe are good comparators for London Hydro? 1007 DR. SHARMA: It is a very broad question. We have to sit down and do a study. We haven't done a study. On customer size, you can certainly sort of put in order of higher to lower, but that doesn't mean those are comparable utilities. I haven't done personally any study, and I don't think London Hydro, any folks in London Hydro has done, so we cannot say which group is a comparator at this time. A study has to be undertaken. 1008 MR. DINGWALL: But we've heard the word "unique" used a number of times in this hearing. It's not been unique in its distribution within this hearing. Are there any factors that London Hydro identifies about itself which you believe set it aside from other utilities that may have a similar sized customer base? 1009 DR. SHARMA: I'm trying to think, and discussing here what's the underlying assumption in that question, because the fact is I have already spoken, and expert witnesses also have spoken, that cost-of-power distribution, and that is the operation and maintenance cost of a utility, if done properly and there exists enough study to use a statistical analysis of comparing those costs, we fully support such a study. But transition costs, in the context of that, you have to ask questions at the time when you embark upon the project, what are your given guidelines under which you were operating? And those guidelines, firstly, did not include a plan whereby any benchmarking-driven incentive would be created. 1010 Secondly, there was a discussion on various penalties that would be imposed. Those penalties may have not been applied. That is the prerogative of the Board. However, when we received the letter, that meant business for us. So we had to deliver on those compliance. And London Hydro is a moderate-sized utility. We worked hard to deliver on those because we were very much instrumental in ensuring the opening of the market. 1011 So given that contextual background, I don't know whether a simple answer would suffice to that question. One may have to undertake an extensive study. 1012 MR. DINGWALL: I'm not going to ask you to undertake that today. 1013 Dr. Sharma, one of the -- one of the facts that all of us in this room have to deal with is that, while we are looking at historical transition costs with respect to an event called market opening, we are also going to be looking at market redesign in the near future. One of the items which might relate to that market redesign is something called a regulated price plan, which may, of course, require additional efforts towards customer education; it may, of course, require additional functionality built into a CIS or into the way that LDCs interact with the wholesale markets or other market participants. 1014 You made the comment earlier, sir, that one of the historical uses of benchmarking is to drive improvements in the future. Given the scenario that there may be additional transition costs coming up, do you not see the experience that we're gaining with respect to the historical transition costs as providing some guidance for where there might be improvements to be made in the next round of transition activities? 1015 DR. SHARMA: It's a rather extended question, and I'll try to parse as much as I can. 1016 You mentioned that I said something to the effect that the future -- in future, we should use benchmarking as an incentive to drive efficiency into the system, but you also forgot that other half which I said, that such a benchmarking study lends itself for easy use in cost-of-power distribution which experts have referred to, because those are a recurring costs on a year-to-year basis. 1017 Transition is a one-time phenomena which we went through regarding Bill 35 and, to some extent, with Bill 210, which we, at least, haven't found there such a benchmarking study have been applied, and more so in retrospective rather than future. 1018 Now, coming forward to the future transition which may arise out of Bill 100 which is in front of us and 2006, et cetera, I cannot speculate as to what will happen. We will debate, I'm sure, regarding those issues when time will come, but my -- I mean, my colleague will agree that London Hydro will look to the Board for its direction as to what that future will be. 1019 I'm not here as an expert advising the Board that the Board should adopt one policy or another. Our objective here is to illustrate that the transition costs that we have incurred are not so easily adaptable for a simplistic study of benchmarking on the basis of which you determine prudence. And that is the extent. 1020 MR. DINGWALL: My next set of questions are to be referred to Mr. Adamson. 1021 Mr. Adamson, I understand from -- well, I don't understand from reading your resume that's provided here where in the past you've given evidence with respect to benchmarking. 1022 MR. ADAMSON: Well, with question of specific evidence, in a series of cases in the Commonwealth of Massachusetts where I was retained to work for the Attorney General's Office of the Commonwealth of Massachusetts with respect to mergers of gas and electric distribution companies under incentive regulation schemes, effectively price-cap regulation schemes, where the attorney General's Office was interested in trying to determine how well these price caps might fit the future costs of the combined entities, because their interest was ensuring that the rate was set as low as possible, so to protect consumer interest after the mergers were consummated. That was for a series of gas and electric distribution cases in the Commonwealth, so there's really more than one company there and more than one set of studies in there. That's with respect to specific testifying with regard to these issues. 1023 The other one that is relevant, and obviously specifically relevant within this jurisdiction, was with regards to the PBR process for the distribution wires function here in Ontario in 1999. I believe that was docket RP-1999-0034 regarding the Distribution Rate Handbook, where we advised on both the structure of -- the structure of the incentive regulation scheme, and managed to do some preliminary benchmarking comparative efficiency analysis at that time, although, as everyone recognized at that time, the data was very limited in that proceeding as well. 1024 Those are specific testifying assignments. With respect to kind of non-testifying assignments, my sort of initial exposure to this process, as probably many people's was, was in the UK. Right after the UK restructuring, the British regulator OFFER had adopted a price-cap regulation system, called RPI minus X, for the regional electricity companies in England and Wales. My firm advised a series of those companies on a near-continuous basis where we were conducting comparative efficiency studies, benchmarking-type studies, for those companies on a -- as part of their periodic review process in England and Wales. Given the regulatory system there, that doesn't involve testifying, per se, so much as providing reports that may be used by the regulator. 1025 I also was one of the co-authors of a major study on international benchmarking comparisons of distribution utilities that originated in Australia for an organization called the Electricity Supply Association of Australia that looked primarily at distribution transmission benchmarking and comparative efficiency, but included utilities in Australia, the United States, in the UK, and in a few other jurisdictions around the world. 1026 MR. DINGWALL: And were the purposes of those studies to simply compare costs, or were the purposes of those studies to drive efficiencies? 1027 MR. ADAMSON: Well, there were some of both. It depends, obviously, on the purpose of the study at hand. For example, with respect to the Massachusetts studies, where you were setting targets with respect to a merger, you know, there's obviously a very strong incentive mechanism there in terms of forcing the companies to drive down costs which would benefit customers. That's what the Attorney General's Office for the Commonwealth was interested in. 1028 You know, the same, basically, could be said broadly about the Ontario process we had here in 1999 in terms of development of the PBR scheme. 1029 With the Australian study, that was one that I would say was more of a cost-comparator type of study. 1030 MR. DINGWALL: One of the criticisms that you mentioned of Mr. Adams' evidence is the significant, and I am paraphrasing, sir, the significant prospect of data not being comparable between the companies because of the differences between the companies and their operations. Would you see any improvement to benchmarking of transition costs if the costs were broken out into the nine subcategories mentioned in article 480 of the uniform system of accounts? 1031 MR. ADAMSON: I'm not completely familiar with the 480 system of accounts. In terms of the breakout, it raises -- it has pluses and minuses. I think we have to be honest about that. Pluses in the -- hopefully we can say, Okay, I'm sort of matching this against this and I'm getting a better understanding of where these cost drivers lie. Minuses are the kind of cost allocation questions, for example, that Dr. Lowry brought up, either right before or right after lunch, where, you know, the categories can be very similar. You know, did you put in category A versus category B; does it really make any difference? That's probably a relatively mixed bag. It could be helpful in some circumstances; could be actually quite arbitrary in others. And I think it would take probably quite a lot of work to ensure that you got the benefits of the understanding through more detailed analysis without, you know, creating more -- even more allocation problems. 1032 MR. DINGWALL: As with any set of statistics, the numbers that Mr. Adams has used for his report, for his evidence, were the initial filed numbers provided by the utilities. Is it conceivable that, as we go through the process of looking at transition costs, the exercise itself may normalize the data in that amounts may be moved to the proper accounts in a consistent and homogenous fashion? Is it conceivable that under those circumstances, the end product may well be useful benchmarking information that could be used to assess any further transition costs incurred in the future? 1033 MR. ADAMSON: I think I've understood your question. If I don't speak to your question, I suspect you'll correct me. 1034 With respect to kind of refinement of the data with respect to these cost allocation questions, that may be true. I mean, maybe, you know, a detailed examination, and I think it would have to be a quite detailed examination, might get things into slots a little more accurately, you know, find the inevitable problems of mislabelling or something. I think that part's probably true. You know, we can -- a focus on the accounting might correct some problems there. 1035 I don't think it's probably going to address the really systematic problems which are far more difficult to even quantify, about starting point, end point, stuff like that. Those, I think, will still be out there, and those, you know, either are going to defy categorization or be extremely difficult to categorize. 1036 MR. DINGWALL: Would you agree with me, sir, that if the marketplace led to the utilities being less unique, that that would benefit any future process of benchmarking? 1037 MR. ADAMSON: If -- sorry, you're hypothesizing that, through changes in whatever structure, regulatory structure or, I don't know, something, the companies will become more alike in the way they operate? Is that your hypothetical question? 1038 MR. DINGWALL: More in the way they report. A number of your criticisms of what's before us today are based on inconsistent reporting tendencies. 1039 MR. ADAMSON: More consistent reporting will, at least, deal with part of the reporting questions. I throw out some caveats that even where there are quite developed system of accounts in looking at comparative efficiency data, we've often found, for example, that there may be subtle misallocations that can continue for a long time. Particularly with allocation of, say, certain types of administrative costs or something. But as a trend, the things that bring accounting together will make accounting-type comparisons easier. 1040 MR. DINGWALL: Thank you, Mr. Adamson. Thank you, Dr. Sharma and Mr. Stephenson. Those are my questions. 1041 MR. VLAHOS: Thank you, Mr. Dingwall. 1042 Ms. Street -- I'm sorry, Mr. Shepherd first. 1043 CROSS-EXAMINATION BY MR. SHEPHERD: 1044 MR. SHEPHERD: These questions are for you, Dr. Sharma. Did I understand you to say in your direct evidence that some study or comparison of costs among your peer group has been done and you're the lowest? 1045 DR. SHARMA: Yes. And that was cited in our evidence, as a matter of fact. 1046 MR. SHEPHERD: Okay. And who was the peer group in that; do you know? 1047 DR. SHARMA: Now, as I recall, the report was done on a confidential basis among the peer group. I do not have the authority or the clearance from the members of that survey group to release the names of the utilities. 1048 MR. SHEPHERD: Do you know how many utilities were in the group? 1049 DR. SHARMA: If my -- I think there were a total of about a dozen, but not all of them answered every question, so some parties participated in some questions and some in others. 1050 MR. SHEPHERD: And did I understand you to say that after market opening, your performance relative to the peer group improved? 1051 DR. SHARMA: That comment actually was in the context of the fact that this group of utilities started surveying themselves only after the market opening, so -- and that is where I mentioned after the market opening. I did not mean to imply a delta improvement of any kind before or after. 1052 MR. SHEPHERD: Those are my questions, Mr. Chairman. 1053 MR. VLAHOS: Thank you, Mr. Shepherd. 1054 Ms. Street. 1055 MS. STREET: Thank you, Mr. Chair. 1056 CROSS-EXAMINATION BY MS. STREET: 1057 MS. STREET: I have a couple questions for Mr. Adamson, if I could. 1058 Mr. Adamson, I take it you heard Dr. Lowry earlier today say that Mr. Adams' report was useful as a starting point, and because Mr. Adams was not proposing a -- what Dr. Lowry called a "mechanistic application" of his thoughts or his proposal. 1059 Do you agree with that statement? That to the extent that there's not a mechanistic application here, that Mr. Adams' report is more acceptable to you? 1060 MR. ADAMSON: Well, certainly, given its limitations, I would -- I would be against its Procrustean application in the sense that, you know, if I understand your question, you're saying effectively, you know, that the Board shouldn't be placing great weight on it, it's kind of indicative, it's kind of a kick-off idea. You know, the more qualifications put on it, I guess in that sense, the better. 1061 MS. STREET: So -- 1062 MR. ADAMSON: Is that following the thrust of your question? 1063 MS. STREET: I think I've heard different phrases from all three of you, a starting point, you've just said a kick-off idea; Dr. Lowry had a similar phrase. So you all, I take it, agree that as a starting point, that kind of comparison has some value? 1064 MR. ADAMSON: Well, I personally wouldn't ascribe any weight to the result of Mr. Adams' analysis. I mean, I guess you could argue, would you say it kicked off the ball rolling to do it again and do it in -- do it differently? Yeah, I guess. I mean, you know, I think Mr. Adams deserves credit for, you know, bringing benchmarking ideas to the Board's attention, you know, throwing out some concepts, certainly, for discussion. I think even he would say that -- he seemed to be backing off the idea that the specific results were to be relied upon for anything. You know, he certainly raised -- he certainly raised the concept of benchmarking here which I think is valuable. I personally think it's probably more valuable in other contexts than this one. But he certainly deserves credit for, you know, conceptually, you know, getting it out there. 1065 MS. STREET: Well, do I understand you to say that one of the reasons why, using Dr. Lowry's phrase, a mechanistic application wouldn't be appropriate is because what you've called the idiosyncracies of the various utilities, that they have too many differences, is that -- am I correct in my understanding? 1066 MR. ADAMSON: Yes, and one of the shortfalls of Mr. Adams' approach, and I believe, without putting words in him, Dr. Lowry's views of the shortfalls of that approach, is there's been no attempt to correct for those differences and therefore, again, to rely on his line, not mine, it's "needlessly inaccurate". 1067 There is a question of -- this is getting to the question of is something better than nothing. Maybe something is better than nothing. I would argue, in a sense, specifically with the companies for the application that are on here, we actually do have something which is that there is the basis for effectively a traditional cost regulatory review. So I don't really think the choice is between Mr. Adams' numbers and nothing. Maybe the emphasis should be on perhaps that was a contribution and got thinking started. But, you know, there has been -- there is a proper traditional prudence process underway here. Information has been corrected on that. 1068 In my view, given that that amount of time and cost by the company has been incurred, and that amount of time and cost has been incurred by the Board using its resources, that that's probably the best way to go, especially for these four companies where the work has been done on a standard basis. 1069 MS. STREET: I understand that. Looking into the future, would it not be -- would it be of concern to you -- 1070 [Audio feedback] 1071 MS. STREET: -- to see some sort of -- Mr. Adams' type proposal. Let's say we took Mr. Adams' proposal of the cost-per-customer comparison and the Board were to use it strictly as a screening device, not as a determined but only as a method of deciding which companies to scrutinize further, and those affected companies that were scrutinized further would have an opportunity to explain their idiosyncracies and the costs related to those idiosyncracies, what concerns would you have in that situation? 1072 MR. ADAMSON: I can think of a couple. As I've indicated, it's not that the comparisons could be of some use in some indicative form. And I sympathize with the Board and the Board Staff's situation of having so many firms in this particular jurisdiction to regulate. 1073 I think the differences between doing an appropriate, even, screening level analysis and some level of more prudence review, we may be trying to make them more stark than, in fact, they are. By the time we kind of determine who started where and what was actually achieved, we're probably getting quite a bit of the information that would be necessary to review the prudence of the decisions made on the individual merits. 1074 You know, at some point, the data collection and analysis process, especially given so many of the things aren't easily quantified, it is going to start to turn into a kind of standard regulatory process in the first place. One can't completely shut the door and dismiss out of hand the potential for comparative regulation here. It's not impossible. 1075 I suspect in this particular case, and given the nature of the transition costs under discussion, the difference here is not going to be that one's a magic bullet and one is, you know, an incredibly complicated regulatory process for which, you know, half the people in the OEB will spend the next few years of their lives. I suspect that by the time the data is gathered to make a reasonable screening analysis, you know, that the differences will start to become apparent, and you, at that point, may be able to take it either way. 1076 MS. STREET: Thank you. I have no further questions. 1077 MR. VLAHOS: Thank you, Ms. Street. 1078 Mr. Lyle? 1079 MR. LYLE: Thank you, Mr. Chair. I'll be very brief. 1080 CROSS-EXAMINATION BY MR. LYLE: 1081 MR. LYLE: This morning, gentlemen, I referred Mr. Adams to the Board's letter of May 5, 2004, and that was the letter in which the Board informed parties that it was going to hold a combined oral hearing with respect to the four utilities that are here today. And in paragraph 3, the Board indicated that the five distributors had been selected on the following criteria: "Being along the ten largest by customer account and their relative level of total regulatory assets and transition costs claimed." 1082 The question for you, gentlemen, is: Hasn't the Board already applied a form of benchmarking and used it as a screening tool, decided that, therefore, it was going to give greater scrutiny to these five, at one time, now four utilities, and isn't that why you're here before the Board today? 1083 MR. STEPHENSON: I think that we're really here before the Board today because we had an invitation to come, which we welcomed. We didn't necessarily spend a substantial amount of time looking at the methodology, nor did we think that we had an opportunity to argue the methodology by which we were selected. When we were selected and received the procedural order, we obliged and came here prepared to discuss the details of our process that we had been through. 1084 MR. LYLE: But the Board did impose a primitive form of screening tool to select you for your participation in this process; is that not fair? 1085 MR. STEPHENSON: I think if it's -- as outlined in the paragraph that you cited, to call it a primitive form of screening would be appropriate and maybe better than labelling it as benchmarking. 1086 MR. LYLE: And you've had the opportunity in this process to discuss the reasonableness of your costs in light of your own specific fact situation; is that not fair? 1087 MR. STEPHENSON: Absolutely. 1088 MR. LYLE: Thank you. 1089 Those are all my questions, Mr. Chair. 1090 MR. VLAHOS: Thank you, Mr. Lyle. 1091 QUESTIONS FROM THE BOARD: 1092 MR. CARR: I just have one question for Mr. Adamson. 1093 Without the benefit of the written transcript, I believe you said at the very beginning that this is a very blunt tool given the complexity of the problem. Am I close? Would you accept that you said something like that? 1094 MR. ADAMSON: Yes, sir, I believe that perfectly captures it. 1095 MR. CARR: I guess I would like to ask you what you think the problem is and, sort of, drill down a little bit in terms of how complex that problem is. 1096 Let me help you a little. It seems to me we're talking -- there's been several levels of discussion here. It's almost like hearing two conversations. On the one hand, this benchmarking is taken to a very precise extreme where essentially a decision is made, kind of, by formula. At the other extreme, one can conceive of benchmarking as used as a screening tool. In fact, backing away even from that, simply as the Board has so far used it, as Mr. Lyle pointed out, really a prioritizing tool. I mean, we have not yet made a decision what we're going to do with the other 90 utilities. It may simply be that these are the first ones and they were chosen on the basis of benchmarking. 1097 So I wonder how complex the problem really is, and therefore is it appropriate to say it's a very blunt tool? 1098 MR. ADAMSON: Well, I think it is quite a blunt tool if you mean to apply it in a fairly deterministic fashion. If you want to establish the basis of prudent costs on the basis of it, which was my reading of, you know, one or two paragraphs in Mr. Adams' initial evidence, then I do think it is a very blunt tool for a very delicate job. 1099 In response to your question regarding the characterization of it, I certainly think if these techniques have a use in this current context, it is sort of prioritization. I mean, there is a question here, there's a legitimate question. You have to allocate resources. You can't look at everything in infinite detail, and there's an awful lot of them to look at. You do have to do that. 1100 With respect to the complexity of the problem, I think there will be quite a number of qualitative judgements with respect to any particular cost item, because, remember, at least from my perspective, I mean, what we are here about is looking at the prudency of decisions, decisions taken at the time by utility management that had a certain set of options and put certain plans in place and undertook certain activities and, you know, did they do the right thing? Did they have a plan going forward, or did they spend money willy-nilly? Did they make, you know, reasonable choices given the set of options available to them at the time, and given what they knew with regards to, you know, what was happening in the province? Have they delivered? I mean, has it been spent for naught and there's still not a system, or is there something that works that and that actually delivers benefits for customers? 1101 So I think those decisions, actually, are really quite complicated because they go really not just to kinds of costs and calculations of costs that people like I can talk about, but they really go to the Board's role of, you know, did you do what you were meant to do. 1102 So I think a benchmarking and cost-type analysis of someone like myself can prepare or someone like Dr. Lowry can prepare, you know, has a prioritization role. I think with respect to the final question, as I understand it, that really what's at stake here is that, you know, that is necessarily going to be qualitative in some ways. You know, what was achieved? It's going to have to represent the state of play at the time, you know. What were the choices? And there, I think, the much more precise tool of human judgment on the basis of the Board is actually probably going to be much more relevant than quantitative wizardry that economists might produce. 1103 MR. CARR: Thank you. 1104 I just wanted to also ask the people from London Hydro, I don't know who particularly and I'll throw it out for either of you to respond to, could you tell me, does the Electricity Distributors Association continue an earlier practice which I'm familiar with of the Municipal Electric Association of gathering performance data and all sorts of metrics on utilities on a confidential basis? 1105 DR. SHARMA: I had the luxury of sitting on the EDA board for a year. Unfortunately, London Hydro is not a member of EDA this year. Nevertheless, to my knowledge, that service has now been transferred as a competitive business to another affiliate called MMI. And I do not know what it stands for, I'm sorry. They do it for a fee now for those that want to participate. 1106 MR. CARR: Do you participate? 1107 DR. SHARMA: No. 1108 MR. CARR: Are you aware of any body that does? 1109 DR. SHARMA: My knowledge was that that study was actually very disjointed and not a completed objective, but I cannot speak for the authority. 1110 MR. CARR: Thank you. 1111 MR. VLAHOS: Thank you, Mr. Carr. 1112 Ms. Chaplin? 1113 MS. CHAPLIN: Thank you. 1114 I have just one question for you, Mr. Adamson. I guess it might even help if you turn to page 17 of your evidence. It's where you have your conclusions and your recommendations. 1115 MR. ADAMSON: Mm-hm. 1116 MS. CHAPLIN: And this is following on, I think, from some of the discussions you've been having regarding how the Board might proceed with some sort of screening tool or prioritization tool, however you may wish to characterize it. 1117 I'd just like to ask you to perhaps elaborate. In paragraph 55, you comment that the Board could group the remaining LDCs into a number of cohorts reflecting scale and perhaps a few other factors. I'm wondering if perhaps you could elaborate on what you think the other appropriate factors would be for putting them into cohorts. 1118 MR. ADAMSON: Well, I mean, scale is mentioned, and I think we've already had a discussion of that. The question here is what would be naturally driving transitional costs. You could -- some of the groupings, therefore, may not be quite as obvious as you would think with regard to pure customer mix, and it may be, you know, which LDCs started with the same basic starting point with respect to CIS architecture. I'm not a system software consultant, so I'm looking to Dr. Sharma here for help on that. It might look at, you know, what was achieved, who was in the -- who were in the categories of, you know, meeting readiness by certain dates. 1119 It may be that, you know, customer mix is important. I would guess, and again I'm not a software expert, per se, but that a lot of these costs, from my limited experience with these types of -- with these kind of software systems, are driven by the fact that LDCs end up having to interact with a lot more people in data terms than they used to. It was used to be where you had a rate, figured out how many kilowatt-hours Mr. Stephenson used and you billed him for that rate. In a competitive retail market, as was instituted in Ontario, a whole lot information has to change hands in terms of number of -- with retailers in settling out the problems with retailers and stuff. 1120 So a very important measure may be which locales expected to have more competitive retail activity and less was going to be covered under, kind of, standard supply arrangements. That may vary tremendously over the province. I have not actually looked at that. But in experience from other jurisdictions, if I'm familiar with what holds true, you might see different patterns in rural and urban LDCs in that regard. 1121 So I would focus it on how would I get the minimum number that captured the factors which kind of ex-ante, I believe, would be a big driver of transition costs. Hopefully I could keep that down to a reasonable level so my cohorts would have enough members to keep that comparison with. That would be my selection choice. It wouldn't be just scale. It would be driving on what perhaps those who have more experience in the details of the hardware and the software systems would know as what really should drive the costs. 1122 MS. CHAPLIN: Okay. Thank you for that. 1123 MR. VLAHOS: Panel, just a couple of questions. Actually, it's for either Mr. Stephenson or Dr. Sharma. 1124 Was there any consideration or attempts to join forces with the other three utilities in terms of the expert witness, and why did you end up with the different individuals? 1125 MR. STEPHENSON: We did give it some consideration. We actually had some discussions with them on that. Our position really was that we found benchmarking has been in the arena for some time. I think there was some discussion of it back in 1999. There clearly is different interpretations even of the label itself, benchmarking, yardstick, et cetera. We've also seen -- observed that in even the other proceedings that are under way, the EDR discussions. So clearly it's a complex area. And we just felt that an additional viewpoint, whether it is slightly similar or different, would be of benefit to not only the Board but everybody who is -- all the market participants that are struggling with it. 1126 MR. VLAHOS: Thanks for that answer. 1127 Lastly, Mr. Stephenson, did I hear you say you were glad you were here? 1128 MR. STEPHENSON: We welcomed -- 1129 MR. VLAHOS: The record will speak for itself. 1130 MR. STEPHENSON: I believe we welcomed the opportunity to be here. 1131 MR. VLAHOS: You're welcome to be one of the four as opposed to being the 91st of the other 91? 1132 MR. STEPHENSON: We'll gladly do what we're asked to do. 1133 MR. VLAHOS: But if you were not on the first four, if you were part of the 90, then there would be a consideration for you, you would be worried as to when your turn would come up; is that fair? 1134 MR. STEPHENSON: I'm not so sure I would be worried about when my turn would come up, but maybe what the process would be to deliberate on the costs that we have. 1135 MR. VLAHOS: Okay. So you would not be worried because you're already recovering at 25 percent of the regulatory assets and therefore timing is not important? 1136 MR. STEPHENSON: I think timing would be very important. All the LDCs, I think, have patiently waited for some resolution of the assets, the recovery of the regulatory assets, and so timing is an issue. 1137 MR. VLAHOS: But it's not a cash-flow issue any more, is it? 1138 MR. STEPHENSON: No, it's not a cash-flow issue. 1139 MR. VLAHOS: It's a, what, an audit, investment -- 1140 MR. STEPHENSON: I think it's an investment certainty issue, dealing with uncertainty, resolution of those assets from financial aspect as investment and our stakeholders. 1141 MR. VLAHOS: Thank you. You were going to add something before and I cut you off? 1142 MR. STEPHENSON: No. 1143 MR. VLAHOS: All right. Thank you, gentlemen. Those are the Board's questions. 1144 Mr. Vogel, any redirect? 1145 MR. VOGEL: I have no questions. 1146 MR. VLAHOS: Thank you. 1147 Gentlemen, you're excused with our thanks. You have been here before, Mr. Adamson, haven't you? I do recall seeing you. 1148 MR. ADAMSON: Yes, sir, I have. 1149 MR. VLAHOS: That was on the rate handbook? 1150 MR. ADAMSON: Yes, sir, that was the PBR rate handbook process in '99 was one of the opportunities I had to be up here. 1151 MR. VLAHOS: Thanks for coming again, and have a safe trip home. 1152 MR. ADAMSON: Thank you. 1153 MR. VLAHOS: The panel is excused with our thanks again. 1154 There's a couple of outstanding matters that the Board wishes to deal with. One is the -- Mr. Shepherd's request in terms of production of certain documents. 1155 DECISION ON MOTION BY SCHOOL ENERGY COALITION: 1156 MR. VLAHOS: The Panel had an opportunity to meet on this and was able to come to a conclusion. We wish to note that in exercising its statutory obligations, the Board is not reluctant to exercise its authority with require production of documents dealing with affiliate arrangements if the Board deems that the documents pursued are relevant, likely to be of probative value, and concern material issues. In such circumstances, if there are any -- indeed, any genuine issues around confidentiality, the Board has the means of dealing with such matters. 1157 With respect to the specific request in this case, and in light of the record that has already been adduced, the Panel is not convinced that these documents, if disclosed, are likely to be of sufficient probative value for the Board to order production. 1158 The request is therefore denied. 1159 PROCEDURAL MATTERS: 1160 MR. VLAHOS: Moving on to undertaking responses. I have noted, according to my record here, that all undertaking responses have been met, except for Enersource. We have received none. 1161 Mr. Sidlofsky, can you provide a commitment to the Board as to when they may be available? 1162 MR. SIDLOFSKY: Sir, I have been in contact on a couple of occasions by e-mail and by phone with Enersource representatives. They are working on their undertakings diligently, I'm told. I am hopeful that we can -- I'd like to say we would have them all in by Friday of this week. I don't think I'm in a position to guarantee that to the Board, though. However, I will provide them as they are provided to me, once I've had a chance to take a brief look at them. I have received a number of them just actually not that many moments ago already. I will try to get as many as I can into the Board by Friday, if that would be acceptable. I'm hoping to get all of them in. 1163 MR. VLAHOS: The Panel would expect them to be in by Friday, Mr. Sidlofsky. 1164 MR. SIDLOFSKY: I'll work towards that, sir. Thank you. 1165 MR. VLAHOS: Thank you for that. 1166 With this, then, the evidentiary portion of this proceeding is now completed, and then we can turn to argument. 1167 Mr. Vogel, you have heard my concerns the other day about delaying the argument in chief deadline by -- from the 4th to the 8th, and in light of the fact that we have finished this oral part two days early, is there anything you can do to accommodate the Board? 1168 MR. VOGEL: I think as I indicated yesterday is my difficulty is another commitment which will take me out of town, so I won't be able to address this at all in the next week. I would simply request that, I guess, it's an additional four days from the 4th to the 8th, and my submission would be that that delay of four days would not prejudice anybody significantly. And I'm not in a position where I can really -- I will certainly do whatever I can do to accelerate it, but it's just that there's a week that I'm unable to do anything. 1169 MR. VLAHOS: Not to diminish the importance of argument in chief, Mr. Vogel, but it is not -- the relative importance, it's not as important as reply argument. In fact, it's quite optional. In that light, I still remain concerned, but I will confer with my Panel at this moment. 1170 [The Board confers] 1171 MR. VLAHOS: Okay. The Board will set the argument phase as follows: 1172 The argument in chief is due to the Board by Wednesday, October the 6th; intervenors' argument is due by Thursday, October -- I'm sorry, I'll step back. Intervenors' argument is due by Friday, October 15th; and reply argument is due by Monday, October 25th. So that is the argument schedule. 1173 Before I leave the area of argument, just some guidance that the Panel wishes to provide to the parties. Needless to say that "the parties" would include more than the parties that were active in cross-examination in this oral hearing; it includes all the intervenors that have status. 1174 The Board, in its letter of May 5th, 2004, indicated that, in addition to a specific decision for each of the distributors in this proceeding, it will use this proceeding to assist it, the Board, that is, in assessing, among other things, what would constitute the best evidence, forum, and process to determine the reasonableness of the regulatory assets claimed by other distributors. The Board would be assisted if parties included in their argument submissions on these matters. 1175 Moving on from argument to nothing, I guess. It just remains for me to thank all the participants for being here and assisting the Board in expediting this oral proceeding. We will, on our part, endeavour to issue the decision as soon as possible after we receive the reply argument. 1176 On behalf of the Panel, I also wish to thank the reporter for her endurance over the last two weeks. 1177 We're going to stand down, and I'm looking forward to receipt of the argument. Bye-bye 1178 --- Whereupon the hearing concluded at 4:43 p.m.