Rep: OEB Doc: 13BFN Rev: 0 ONTARIO ENERGY BOARD Volume: EDR ISSUES DAY VOLUME 1 1 NOVEMBER 2004 BEFORE: G. KAISER PRESIDING MEMBER AND VICE CHAIR P. SOMMERVILLE MEMBER C. CHAPLIN MEMBER 1 RP-2004-0188 2 IN THE MATTER OF a hearing held on Monday, 1 November 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 the preparation of a handbook for electricity distribution rate applications 3 RP-2004-0188 4 1 NOVEMBER 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 JENNIFER LEA Board Counsel MIKE LYLE Board Staff MARTIN DAVIES Board Staff KEITH RITCHIE Board Staff MARY ANNE ALDRED Hydro One SUSAN FRANK Hydro One DAVID CURTIS Hydro One CARM ALTOMARE Hydro One MARK RODGER Toronto Hydro, Aurora Hydro, Enwin Powerlines, Niagara Falls Hydro, Brantford Power JAMES SIDLOFSKY Toronto Hydro, Aurora Hydro, Enwin Powerlines, Niagara Falls Hydro, Brantford Power COLIN McLORG Toronto Hydro ANDY HOGGARTH Peterborough Utilities CAMERON McKENZIE Hamilton Hydro TOM ADAMS Energy Probe DAVID POCH Green Energy Coalition RANDY AIKEN London Property Management Association JAY SHEPHERD School Energy Coalition BRIAN WEBER Grimsby Power ELISABETH DeMARCO Rogers Cable JULIE GIRVAN Consumers Council of Canada BILL HARPER VECC IAIN CLINTON Newmarket Hydro JUDY KWIK Power Workers' Union R STEPHENSON Power Workers' Union KEN NELSON AMPCO ROGER WHITE ECMI MORRIS TOCCI EDA 8 TABLE OF CONTENTS 9 GENERAL ISSUE: PROCESS FOR REQUESTING THAT UTILITIES FILE DATA AS PART OF THE 2006 EDR HANDBOOK PROCESS: [24] SUBMISSIONS BY MR. ADAMS: [25] SUBMISSIONS BY MR. SHEPHERD: [37] SUBMISSIONS BY MR. RODGER: [52] FURTHER SUBMISSIONS BY MR. ADAMS: [75] FURTHER SUBMISSIONS BY MR. SHEPHERD: [83] GENERAL ISSUE: TO WHAT EXTENT ARE THE RATEMAKING PRINCIPLES AND FILING RULES IN THE HANDBOOK BINDING ON LDCs: [99] SUBMISSIONS BY MR. LYLE: [100] SUBMISSIONS BY MR. SHEPHERD: [127] SUBMISSIONS BY MR. RODGER: [142] SUBMISSIONS BY MS. ALDRED: [154] FURTHER SUBMISSIONS BY MR. SHEPHERD: [172] REVENUE REQUIREMENT WORKING GROUP - ISSUE A: TEST YEAR AND ADJUSTMENTS; SECTION 3.1: [197] SUBMISSIONS BY MR. McKENZIE: [198] SUBMISSIONS BY MR. WEBER: [260] SUBMISSIONS BY MS. GIRVAN: [268] SUBMISSIONS BY MR. SHEPHERD: [278] REVENUE REQUIREMENT WORKING GROUP - ISSUE B: FINANCIAL PARAMETERS; SECTIONS 3.2 AND 3.6: [313] SUBMISSIONS BY MR. HOGGARTH: [314] SUBMISSIONS BY MR. SHEPHERD: [363] SUBMISSIONS BY MR. HARPER: [380] REVENUE REQUIREMENT WORKING GROUP - ISSUE C: RATE BASE; SECTION 3.3: [400] SUBMISSIONS BY MR. CLINTON: [401] SUBMISSIONS BY MR. SHEPHERD: [463] SUBMISSIONS BY MR. POCH: [477] SUBMISSIONS BY MR. HARPER: [488] SUBMISSIONS BY MR. ADAMS: [494] SUBMISSIONS BY MR. AIKEN: [498] SUBMISSIONS BY MS. FRANK: [508] FURTHER SUBMISSIONS BY MR SHEPHERD: [512] DECISION RE VARIOUS ISSUES: [572] REVENUE REQUIREMENT WORKING GROUP - ISSUE D: DISTRIBUTION EXPENSES; SECTION 3.4: [599] SUBMISSIONS BY MS. KWIK: [600] SUBMISSIONS BY MR. ADAMS: [651] SUBMISSIONS BY MR. SHEPHERD: [659] FURTHER SUBMISSIONS BY MS. KWIK: [665] FURTHER SUBMISSIONS BY MR. ADAMS: [670] SUBMISSIONS BY MR RODGER: [676] REVENUE REQUIREMENT WORKING GROUP - ISSUE D: TAXES/PILs; SECTION 3.5: [714] SUBMISSIONS BY MR. SHEPHERD: [715] REVENUE REQUIREMENT WORKING GROUP - ISSUE E: COMPARATORS AND COHORTS: [856] SUBMISSIONS BY MR. McLORG: [857] SUBMISSIONS BY MR. ADAMS: [900] SUBMISSIONS BY MR. SNELSON: [908] SUBMISSIONS BY MR. ALTOMARE: [953] FURTHER SUBMISSIONS BY MR. ADAMS: [962] PROCEDURAL MATTERS: [975] 10 EXHIBITS 11 EXHIBIT NO. 1: ORIGINAL LICENCE OF HYDRO ONE [108] EXHIBIT NO. 2: CURRENT LICENCE OF FESTIVAL HYDRO INC. [109] EXHIBIT 3: RRR FILING REQUIREMENTS [305] 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:32 a.m. 15 MR. KAISER: Please be seated. 16 Good morning, ladies and gentlemen. This is the Issues Day for the 2006 EDR, Electricity Distribution Rates. I'm going to turn this over to our counsel, but before I do, my name is Gordon Kaiser. I'm a vice-chair of the Board, and serving with me on this Panel is Cynthia Chaplin and Paul Sommerville. 17 Ms. Lea. 18 MS. LEA: Thank you, Mr. Chair and Members of the Panel. You should have before you an Issues Day schedule which sets out the order of events for the next two days. And if you look at that issues schedule, you will see that the first thing we are asking you to consider today are two things that have been labelled general issues. They're more of a legal nature than others on the list. So there are several folks who I think plan to speak to those, Mr. Shepherd, Mr. Adams, Mr. Rodger to the first issue, and Mr. Shepherd, Mr. Rodger, and Ms. Aldred for Hydro One for the second issue. 19 So I'd ask people to just introduce themselves as they begin to speak and indicate who they're representing. And also Mike Lyle is here to speak on behalf of Board Staff at the beginning of the second issue. So can I ask then that, is it Mr. Shepherd that's going first on issue number 1? 20 MR. SHEPHERD: I think Mr. Adams will go first. 21 MS. LEA: Mr. Adams, thank you. Mr. Adams, if you could indicate who you represent. 22 MR. ADAMS: Thank you. Mr. Chair, my name is Tom Adams. I represent Energy Probe, an organization that's been appearing before this Board for over 30 years. 23 MR. KAISER: Thank you. 24 GENERAL ISSUE: PROCESS FOR REQUESTING THAT UTILITIES FILE DATA AS PART OF THE 2006 EDR HANDBOOK PROCESS: 25 SUBMISSIONS BY MR. ADAMS: 26 MR. ADAMS: Mr. Chairman, the matter I wish to address is a proposal from many of the customer groups, I believe, and specifically from Energy Probe requiring the utilities to present certain information to facilitate the process for the development of the 2006 Rate Handbook. The reason I say some customer representatives is because we have not had the opportunity to present our detailed recommendations to all the customer groups. However, we have had a discussion with as many as we have been able to reach, and I think there is a high level of consensus amongst the customer representatives about the general points about which I'm presenting to you. 27 Observe that nowhere in the entire process in so far in getting towards 2006 rates has any quantitative information been introduced into the process. We think that there is a necessity for moving towards more quantitative information to base this process. Before I turn to the specific relief that Energy Probe seeks, I'd ask you to consider the following: 28 I believe that there is a universal desire among customer representative intervenors in this process to move expeditiously and fairly towards improved rates for 2006. Intervenors are not asking for perfect rates and complete due process, as we recognize that the scale of the task and the other responsibilities the Board faces leave perfection out of range. What we are seeking is a workable solution that's workable from the point of view of LDCs, achievable for the Board, and moves rates forward. I will come back to the theme of workability for the LDCs in a minute. 29 Now I'll turn to the specific rate relief that we are seeking. I intend to identify in some detail for you the categories of information that Energy Probe believes would assist this process. The base document I'm working with is the Board's recording and record keeping requirements, the RRR quarterly filing requirements. Energy Probe believes that the items that would facilitate the current review are all of the non-confidential items and the following items that we've identified from the list that's marked as confidential within the RRR. They are: 3.1.2, 3.1.5, 2.1.7, 2.1.8, 2.3.2, 2.3.3, 2.3.5, and 2.3.6. 30 I think it may be useful to identify briefly the substance of some of these items to give you a sense for what we are seeking. 2.1.3 requests information on energy sales by class. 2.1.5, statistics on the results of the PBR program for the LDCs. 2.1.7 requests trial balances in the universal -- following the universal accounting format providing data underpinning the audited financial statements. 2.1.8 provides information recociling the PILs payments of the utilities -- it's a reconciliation of PILs comparing the PILs that are embedded in rates versus the PILs that are actually paid. 31 2.3.2, again, deals with the trial balances under the universal system of accounts. 2.3.5 reports on affiliate transactions between LDCs and affiliates where the transactions are over $100,000 and finally, 2.3.6 is a record of ARC compliance, the Affiliate Relationships Code, where LDCs share information services with affiliates. 32 Now, historically, this Board decided that it was appropriate for these specific clauses of information from the RRR filings that I've identified here to be held in confidence, depriving the public of viewing this information. Energy Probe suggests that this is an appropriate occasion for the Board to reconsider its previous approach to this matter and overturn that decision. 33 The LDCs have expressed a number of concerns throughout the development of this process around the administrative burden and specifically, the administrative burden associated with disclosure. The information we are seeking is information that's already in the possession of the Board, and that's why Energy Probe this morning submitted a formal request under the Ontario Freedom of Information and Protection of Privacy Act to the Board seeking the release of this information. 34 Our first request addresses the information, the aforementioned information items, for the period 2002 to 2003, and it's our submission that the release of this information could materially benefit those of us that are seeking to prepare evidence and looking to review some of the substantive matters that the Board is considering in the preparation of the 2006 Rate Handbook. 35 Those are my submissions. 36 MR. KAISER: Thank you. 37 SUBMISSIONS BY MR. SHEPHERD: 38 MR. SHEPHERD: Mr. Chairman, my name is Jay Shepherd, I represent the School Energy Coalition. Please let me know if you can't hear me. My voice is fading a bit. 39 We're supporting the application of Mr. Adams, and I want to give you three examples of information that we think is necessary for this process. The first relates to an issue which you will see on your issues list under C, rate base, number -- evidence number 1. And there is a question about what the appropriate depreciation rate is for computer software. Now, we're hopeful that, in fact, this will be dealt with in the working group and evidence will not have to be called, but if evidence does have to be called, we're advised by experts in the field that the way to review this is to look at the mix of computer hardware and software that utilities hold in order to determine what the useful life of that -- those assets are. In order to do that, we have to have some utilities provide that information on a sampling basis, and we're asking that the Board order that if an expert is retained. 40 The second example is one that Mr. Adams referred to and you'll see the issue related to that under item E, taxes and PILs, evidence number 1. This is an issue of whether PILs should be trued up after the fact. There is -- this is an issue that will go to hearing, I think. It doesn't look like it will be agreed to, although we hope it will. And in order to review this, we have to be able to determine whether historically, utilities have been collecting more or less than their actual tax amounts in rates. That's going to be a key piece of information in order to assess whether the -- whether a true-up should be in place or not. 41 And the third is, under "Comparators and Cohorts," you'll see an issue -- sorry, evidence number 1, asking about what evidence should be filed. And what we are going to ask the Board to order is that utilities file, prior to the end of this process, their sample bills for particular classes of customers so that we can compare who's charging most and who's charging least for sample customers. And we will be arguing that some method of identifying the outliers on rates, that is, the people who are charging their customers the most, should be identified, and those should be required to file significantly more information in 2006 so that they can be brought back in line with their peers. 42 This whole process really is -- although it's a policy process, you can't really discuss policy in a vacuum. Policy is really just particular ways of looking at facts. And so these are cases and these are some examples where we need facts in order to be in a position to make good policy. Therefore, we support Mr. Adams' request. Thank you. 43 MR. KAISER: Thank you, Mr. Shepherd. 44 Mr. Rodger. 45 MS. LEA: Just before Mr. Rodger, I wonder if I could ask Mr. Adams a question. 46 Mr. Adams, with respect to the freedom of information request that you filed, is the information that you're requesting in that request identical to what you would be requesting in this process? I'm just trying to figure out, if it's given to you in one place -- you know, if it's given in this process, does your specific request ask for more? 47 MR. ADAMS: No, they are identical. 48 MS. LEA: They are identical. Okay. So they're both seeking the same information for the same purpose. 49 MR. ADAMS: Yes. 50 MS. LEA: Thank you. 51 MR. KAISER: Mr. Rodger. 52 SUBMISSIONS BY MR. RODGER: 53 MR. RODGER: Thank you, Mr. Chairman. Mark Rodger, and I'm here today, appearing on behalf of Toronto Hydro Electric System, and also a coalition of four other local distribution companies: Aurora Hydro, Enwin Powerlines, Niagara Falls Hydro, and Brantford Power. 54 Attending with me today is my colleague James Sidlofsky. I will only be appearing before the before the Board today, and Mr. Sidlofsky will be here for the remainder of the days to speak to matters from here on in. 55 The way that this issue has been framed, Mr. Chairman, is the process for requesting that utilities file data as a part of the 2006 EDR Handbook process. But, in our submission, you have to look beyond the process to the rationale that's driving that process, and that is data production. And that is what you should also look at in considering this matter. 56 Up to my friend's providing their submissions a few moments ago, it was entirely unclear to me what the scope of the data request being made is. So I think it's still a question about whether this is an exhaustive list or, presumably, just some illustrative examples. But that was one, certainly, preliminary concern is, what are we being asked to do and what is the extent of the request? 57 In our submission, one of the ways the Board should approach this is that this is a policy process that we're going through as opposed to an application process. There are no individual applicants or individual rate applications to be considered by the Board in this process, and it does sound like the range of information that could be requested may very well be more properly associated with individual applications than a generic process. 58 I'd also focus on Procedural Order No. 1, where the Board described its intent and objective of this process, is to prefer that as many issues as possible be dealt with through the working group consensus-building process. And I would ask, is that goal consistent with the type of data request that's being made here today? Presumably not. Otherwise, Mr. Adams wouldn't have had to file the freedom of information request. So I think we've got, perhaps, an apples-and-oranges view of exactly what it is we're -- each of our respective clients and interests are doing in this process. 59 It's also my understanding that one of the outcomes from the subgroup process is that they have, in fact, identified various areas where empirical data will, at some point, be needed, areas like return on equity, depreciation, working capital allowance and so on. But I don't believe it was anywhere expected that that kind of information, or the kinds of information that have been raised, would be forthcoming from this process. Not that it may never come to light, but not out of this process, at this time. 60 Mr. Shepherd used the example of the expected life of software, and again, it's not clear to me why you'd need data for this process to deal with that. Presumably, the principle that would be in a Rate Handbook, as Mr. Shepherd himself suggests, is the useful life of the assets. But when you've gone to specific applications, presumably, that's when you would see the mix of software and hardware that the various LDCs have, and whether its one year, three year, five year, ten year, presumably, that would be the subject of the individual application. 61 When dealing with the process for this request, we would submit that the LDCs that I represent, their expectation is that by participating in this policy forum, or principles review, the data production that's being requested was not part of our expectation of this process. And we would certainly suggest that we see no basis for the OEB making a decision at this time that would somehow authorize intervenors to make a broad blanket request for such information. 62 On the other hand, I suppose it is possible that there may be specific circumstances where data may be useful to you in establishing the principles. But the process for that, I would suggest, sir, is that it be done on a case-by-case, request-by-request basis, and that the Board may want to consider the following questions when it considers those case-by-case requests. 63 First of all, on what basis does the party requesting data believe that it is relevant to the policy matters before the Board? 64 Secondly, what is the nature of the data request? How easy or difficult or burdensome will it be for all 90-plus LDCs in the province to produce this? 65 And thirdly, would producing the data in this policy forum be prejudicial to a subsequent rate application? And what I'm thinking of there, sir, is that any data produced by an LDC today for policy purposes could ultimately change in an application they did bring forward for 2006 rates as a result of the filing requirements of that time, as a result of changes within their organization. And my concern is that if a Rate Handbook principle is based on data produced today, and that data may be inconsistent with what's ultimately in a subsequent rate application, then I would be very concerned that the LDC would be prejudiced through different data at that time. 66 Those are my submissions, sir. 67 MR. KAISER: Thank you, Mr. Rodger. 68 Ms. Lea. 69 MS. LEA: I have no submissions. 70 I think -- is there anyone else who wished to speak to this issue at this time? 71 Thank you, sir. I think that completes the submissions on issue number 1. 72 MR. ADAMS: Mr. Chairman, I'd like to reply, if I could. 73 MS. LEA: I beg your pardon. 74 MR. KAISER: Go ahead, Mr. Adams. 75 FURTHER SUBMISSIONS BY MR. ADAMS: 76 MR. ADAMS: Mr. Chairman, in considering our request for disclosure of information, I think it's important to keep in mind the historic information vacuum that the public at large and the regulatory process is dealing with here. 77 With the exception of the RAR process, the Board has not had before it in any kind of formal proceeding any substantive information on the operational details of most of the LDCs. That's not true in the case of Hydro One, where Hydro One has been before the Board in some previous cases. But in the main, the electric LDCs have not published their information in the way that we're accustomed to with other regulated utilities, and this leaves the concerned public, the interested public, customers, in a position where relative to, for example, the position of a customer of a gas utilities finds themselves in, the customer of electric utilities finds from a regulatory perspective the utilities are really a black box. We have very little knowledge about them. And so there is a certain amount of basic information that's just, we think, necessary to be able to carry the process forward. 78 Mr. Rodger raised the point about this being a policy-oriented process, and while I agree that that is the scope of this process, I think that the prospect of developing policy based on substantive information is a much more fair prospect than one where we're out in the dark discussing hypothetical numbers. 79 In terms of the scope of the information request that has been presented to you, Energy Probe has made some efforts to refine the scope, make it very specific, as has Mr. Shepherd. But there is one potential gap in the presentation that we provided, and we should provide you notice of this potential gap. It's not clear to us that the information in the RRR filings that we've requested will completely identify the distribution-specific data that may be necessary, and so it is possible that with regard to some distribution rate information, possibly some customer numbers by customer class, that some supplemental requests for information may be required in order for Energy Probe to pursue some of the issues that we will be speaking to later, in terms of potential evidence for presentation to the Board. 80 But we believe that the scope of our request for information has been very clearly defined. So in response to Mr. Rodger's submission, we think that there is some clarity that we were -- we sought to present to the Board this morning. 81 Those are my submissions. 82 MR. KAISER: Mr. Shepherd, did you have some comments? 83 FURTHER SUBMISSIONS BY MR. SHEPHERD: 84 MR. SHEPHERD: Yes, Mr. Chairman, very briefly. Mr. Rodger made two points I'd like to respond to. First, he talked about software being something that happens in the application, the rate for software. In fact, in this process the LDCs have made a proposal to have a three-year fixed depreciation rate for software. That's why the issue arises. And the only way you know whether three years is right, is you look at what software they've got. It's not complicated. 85 The second is Mr. Rodger is concerned that his clients, in their applications next year, would be providing inconsistent data. I'm not sure how that could happen because we're only asking for historical data. In Mr. Adams's case, he's only asking for things that are already filed. So I'm not sure I can figure out a circumstance where the utility would file something different in their application. 86 Those are our submissions. 87 MR. KAISER: Mr. Adams, could you come back to Mr. Rodger's question which is, I understand the RRR accounts you've referred to, and as Mr. Shepherd points out that has been filed, it's there, subject to this confidentiality claim. Is that information likely to change? In other words, when a utility files an application, will the information be different or not, in your view, from the historical? 88 MR. ADAMS: The historical information will not change. The presentation of the information might change if there are -- I mean, because there are many different ways of slicing and dicing these various numbers and categories of accounts, but the RRR filings are based on the U.S. of A. standards that the Board has published. So there should be some consistency in the filings for the -- with respect to the historic filings relative to the potential forward-going filings that might be presented in a cost-of-service application. 89 MR. KAISER: Now, you refer to the black box concept, how would this information help you make submissions as to the principles and the points in the handbook? 90 MR. ADAMS: Well, one specific area that I think is -- where it's -- the position is most clear is with respect to cohorts, benchmarking, some kind of statistical analysis. In order to conduct such an inquiry using statistical tools, it's necessary to have input data and to be able to examine the composition of that data. There's -- there will be presentations coming later in the day, or later in the schedule, with respect to the issues around cohorts and benchmarking, but you will hear on many occasions the presenters and the commentary will likely revolve largely around the questions of usable data. This is an issue that arose in the Board's -- in a previous proceeding before the Board in the regulatory assets review process where the question of the integrity and the quality and the limitations of data as reported by the LDCs was an issue of great concern to all the parties. 91 So this is, I think, the clearest instance where disclosure of this information would facilitate review and development of quantitative tools that could assist in the development of the Rate Handbook. 92 MR. KAISER: Thank you. 93 We're going to reserve on this matter. Thank you for those submissions. We'll give you our answer after lunch, if we can. 94 MS. LEA: Thank you. 95 That takes us then to the second general issue, to what extent are the ratemaking principles and filing rules in the handbook binding on LDCs. I think Mr. Lyle is interested is giving, kind of, an introductory submission with respect to this, and then who is speaking after that? 96 MR. SHEPHERD: I am, Mr. Chairman. 97 MS. LEA: Thank you. 98 MR. KAISER: Mr. Lyle. 99 GENERAL ISSUE: TO WHAT EXTENT ARE THE RATEMAKING PRINCIPLES AND FILING RULES IN THE HANDBOOK BINDING ON LDCs: 100 SUBMISSIONS BY MR. LYLE: 101 MR. LYLE: Thank you Ms. Lea. Thank you, Mr. Chair. 102 Mr. Chair, my comments will be focused on comparing the licence provisions and statutory provisions that existed at the time that the first Rate Handbook was developed to the licence provisions and statutory provisions as they currently stand. And I'm going to refer you to two licence documents, one is described at the top right hand of the page as, "first licence," and it happens to be the licence of Hydro One. The second document is described at the top right hand of the page as, "current licence," and it happens to be the licence of Festival Hydro. 103 If I could turn you first, then, to the first licence and section 19. 104 MR. KAISER: Are we marking these as exhibits? 105 MS. LEA: Sir, we might as well do so for identification purposes only, although they're not a piece of evidence as such. Why don't we simply call them Exhibit 1 will be -- 106 MR. LYLE: The original licence. 107 MS. LEA: Exhibit 1 will be the first one, which is the licence of Hydro One, and the Exhibit 2 will be the current licence, which is the licence of Festival Hydro Inc. Thank you. 108 EXHIBIT NO. 1: ORIGINAL LICENCE OF HYDRO ONE 109 EXHIBIT NO. 2: CURRENT LICENCE OF FESTIVAL HYDRO INC. 110 MR. KAISER: Thank you. 111 MR. LYLE: Turning you then, Panel, to section 19 of the original licence of Hydro One. This provision states that: "The licencees shall not charge for the distribution of electricity or retailing of electricity to meet its obligations under section 29 of the Electricity Act except in accordance with an order of the Board and in accordance with the methods or techniques set out in the Rate Handbook." 112 And if I could turn you then, Panel, to what is the equivalent of this section in the current licence, it's section 11.1. And you'll see in reviewing section 11.1 that there is no reference to the Rate Handbook. 113 There are three other references to the Rate Handbook in the original licence, and they are found at section 12.1, 13.3, and 20.1. 114 If we move to 12.1 of the original licence, it imposes an obligation on the distributors to convey electricity through their system in accordance with the terms of their licence, the distribution system code, the Rate Handbook and the market rules. 115 If we turn, then, to 6.1 of the current licence, you will see that there is no reference there to the Rate Handbook. 116 Similarly, with respect to 13.3 of the original licence, it states that: 117 "The terms of a connection, or offer to connect, to the distributor's system would be made in accordance with the Distribution System Code and the Rate Handbook." 118 And if we move to its equivalent in the current licence, 7.3, you will see that there is no reference to the Rate Handbook. 119 And then, finally, if we turn to 20.1 of the original licence, this addresses instructions or expansions of the system, or making an interconnection, and it provides that these matters are to be undertaken in accordance with the distribution system code and the Rate Handbook. And if you refer to 13.1 of the current licence, you will see that there is no reference to the Rate Handbook. 120 Just one matter with respect to the statute, Mr. Chair. There has been a change in the Act with respect to these matters. Under clause 70(2)(e) of the Act, the Board has the authority to impose licence conditions specifying methods or techniques to be applied in determining the licensees' rates. That provision remains in force; however, the legislation at the time the Rate Handbook was first developed also included a provision which was titled 78(5) of the statute, and I'll quote from that: It provided that: 121 "In approving or fixing just and reasonable rates, the Board shall, unless the applicant consents otherwise, apply the method or technique for fixing the applicant's rates set out in the applicant's licence, if such a method or technique is set out." 122 That provision was revoked by Bill 23 in 2003. 123 Those are my comments, Mr. Chair. 124 MR. KAISER: Thank you. 125 Who is proceeding next on this? 126 MR. SHEPHERD: I am, Mr. Chairman. 127 SUBMISSIONS BY MR. SHEPHERD: 128 Mr. Chair, our concern in this matter is, this process has been carried on on the basis that the Rate Handbook is going to be, in effect, optional. It will be a set of filing guidelines, and then the individual LDCs can elect to follow those filing guidelines, or file in some different way, and the Board will have to decide whether the different approach is appropriate or not. 129 And so, for example, we've heard a number of LDCs say that, if the Rate Handbook adopts the old depreciation rates for assets, which I think is the general agreement consensus, then they will simply file a new depreciation study with their application, showing that they should have different depreciation rates. 130 In general, we don't have a problem with that, but we can think of a number of specific examples where that is a difficulty and, therefore, it's our view that there should be three categories of rules in the Rate Handbook. And let me describe them to you. 131 The first is something that's completely optional. For example, there's a proposal that LDCs be allowed, but not required - allowed - to file for 2006 basically on a shortcut method, in which they use a historical year basis, and they make certain specific adjustments to get to a 2006 projection. But that's intended to be optional. The LDCs don't have to do that, they can come in with a conventional forward test year cost-of-service filing if they wish. And a number will. And we have no problem with that being completely optional. 132 There's a second category which we would call exception-driven, in which the Rate Handbook, in our view, should set a rule and the LDC has the option of filing on a different basis; but, if so, they will be required to demonstrate to the Board that there's a reason why there should be an exception in their case. 133 The example is the depreciation subject I just gave you. If Toronto Hydro, for example, wants to come in and doesn't want to use the depreciation rate in the Rate Handbook, and can show they've done a proper study to get proper depreciation rates for their asset classes, that may convince the Board that that's what should be followed in their case. Again, we have no problem with that, although it appears to us that that's somewhat different than the choice-of-test-year rule. 134 The third is a situation -- and the best example is ROE, return on equity, in which, in our view, the Board should -- if it's going to make a decision in this process, it should tell the utilities, Don't file any other way but the way we've decided. 135 The reason ROE is a good example is, well, several reasons, the most obvious being that last fall we spent a lot of time and effort in the gas side talking about ROE, and I don't think anybody wants to do that again right now. But one of the proposals in this process is that the Board do a mechanistic update of the current rules for ROE and debt, and use that for 2006. That will produce a number that's lower than some of the LDCs want. If the result of that -- if that's optional, the result of that, presumably, will be that some of the LDCs that have the money, the ratepayers' money, by the way, will hire Cathy McShane or somebody like that and come in saying, No, our appropriate ROE should be 11 percent. Then we'll have not one debate over ROE but five or ten in individual rate applications next year. 136 The point of this process, as we understood it, was to try to limit the complexities next year. That's why we're spending so much time and effort on it, so that we can try to get some things dealt with now rather than have them dealt with by everybody, one at a time, next year. 137 For things like ROE, it seems to us that, if you make a decision for 2006 this year, however you make it, the utilities should be told, That's what you use for 2006; don't come in with a whole lot of debates in your individual applications; accept that that's what it's going to be for 2006. 138 Therefore, I would ask the Board, in making its decisions on the issues list, to identify those small number, presumably small number, of issues that it determines will, if decided in this process, be mandatory for all filing utilities. 139 Those are our submissions. 140 MR. KAISER: Thank you, Mr. Shepherd. 141 Mr. Rodger. 142 SUBMISSIONS BY MR. RODGER: 143 MR. RODGER: Thank you, sir. 144 Mr. Lyle's helpful overview at the start, I think, illustrates that there has been a change at this Board as to the status of the handbook from the first initial set of rates, at the time of rebundling and restructuring, to what is proposed on a go-forward basis, and that where we're heading is consistent with the handbook being guidelines only, and not mandatory. 145 One of the other items that, I think, is relevant to signal this change, if you go to section 1.3 of the initial Rate Handbook, that actually said that compliance with the Rate Handbook is a condition of licence for all electricity distribution utilities in Ontario as a licence condition. And, as Mr. Lyle has advised us, that was expressly removed from the licence condition, so I think that does show a change. 146 I think the best example of the position of Board Staff in starting this new process is to look at the 2006 distribution rates discussion paper for the issues conference. And I just wanted to read the first two paragraphs which I think clearly spell out the expectation upon which the LDCs, certainly my clients, are involved in this process. And I'm reading the first two paragraphs of the introduction for the record: 147 "The goal of this process is to prepare a handbook including all the filing requirements and a set of spreadsheets to assist distributors," not to bind them, "to assist distributors in the preparation of their applications for 2006 rates. If consistent filings are made, the Board will be able to review each distributor's application in a timely and efficient manner. 148 "Each distributor is unique and has its own set of conditions and circumstances. If a distributor concludes that there are individual issues and circumstances that are not incorporated in the handbook, and that are truly material to its application, these facts should be reflected in its rate application. However, deviations from the standard approach as outlined in the handbook will add complexity and time to the process of reviewing an application. The distributor will be required to justify its proposal through separate and additional material in its application or in answer to interrogatories." 149 So I think that's a clear statement, in my submission, of the new Rate Handbook, that it recognizes there are vast differences in the LDCs in Ontario, that the handbook is a guide, that it will help distributors, but it recognizes that because of the differences LDCs should remain free to take a different approach, should they so desire, but they're going to have to justify it. So my concern is that what my friend would attempt to do to make this mandatory or binding is to basically try and prejudge at the outset the various options that LDCs may be appropriate for them. 150 So for those reasons, I would suggest that there has been a change from the first handbook, which arguably was mandatory in terms of the licence condition, but as the Board has had experience with LDCs since the time of restructuring, it realizes that the right approach is a more flexible, LDC-driven approach which is more appropriate for those entities, since at the day it will be their rate application. 151 Those are my submissions, sir. 152 MR. KAISER: Thank you, sir. 153 Ms. Aldred. 154 SUBMISSIONS BY MS. ALDRED: 155 MS. ALDRED: Good morning. My name is Mary Anne Aldred and I'm here for Hydro One Networks. 156 Hydro One opposes the proposition that Mr. Shepherd put forward and we support Mr. Rodger's comments. In Hydro One's view, the handbook has been used in the past, and should continue to be used, as a guideline. The handbook should be taken to provide directions that should be taken as the normal filing requirements, and clearly where the handbook deals with a matter that treatment should be accorded great weight. But LDCs should be free to make a case that a certain provision should not apply or apply differently in their particular circumstances. 157 That's so for a number of reasons. The first and most obvious reason is that although all utilities have certain traits in common, there are great differences among the utilities in this province. There are 90 utilities with apparent and vast differences in size and in ownership model. Some are municipally owned, some privately owned, and in Hydro One's case, it is 100 percent owned by the Province of Ontario. These shareholders may have different needs and requirements which cause the need for some flexibility in the application of certain provisions of the handbook. 158 There are also differences in the status of debt. Some have actual, issued, third-party debt with an actual debt rate that should apply rather than a deemed debt rate, some do not have third-party debt, and a deemed debt rate would, therefore, be appropriate. These differences can call for different treatment on different issues. 159 While there is some commonality among the LDCs, there is also no doubt some differences which cannot be foreseen now. Further, some of the treatments in the Rate Handbook would clearly not apply to some utilities. For example, the handbook allows for only a handful of rate classes, whereas some utilities may have more than that. Hydro One, for example, has 12 different rate classes and are attempting to transition from 88 utilities to one utility. Clearly that provision of the handbook, if it were absolutely binding, would cause tremendous dislocation among Hydro One rate classes. 160 In our submission, because of these differences, the Distribution Rate Handbook has always been understood to have some flexibility and this discretion should be carried forward to the new handbook. As a practical matter, in terms of the process that we're undertaking now, various issues have been agreed upon in the working groups. The issue of the binding nature of the handbook has only just been raised. It is entirely possible that parties allowed certain issues to settle, in the interest of efficiency of this process, on the understanding that they could argue for a different treatment if appropriate. If all provisions of the handbook became mandatory or certain provisions became mandatory, then settled issues might have to be revisited. Some of the settled issues might not have been settled had the parties known that they would have no opportunity to argue for different treatment. 161 In terms of the Board's processes, the Board always has and must have discretion in its decision making. Section 78 of the Act requires the Board to set just and reasonable rates, and in our submission, it cannot do so if certain issues are irrevocably determined by one panel and cannot be reconsidered, if appropriate, by another panel at the time that certain LDCs rates are actually being set. If the Rate Handbook is absolutely binding at the outset, then essentially the Board's decision is being fettered. The Board always has the ability to consider a different solution according to the facts before it, and must have the ability to deviate from the handbook where that would be in the public interest. 162 Furthermore, as a matter of natural justice an applicant must always have the ability to determine how to best formulate its application. And finally, as Mr. Lyle noted, it's worth noting that the distribution licences recently issued by the Board have, in fact, removed the provision that requires compliance with the rate distribution handbook. 163 For all of these reasons, Hydro One is of the view that the Distribution Rate Handbook should be viewed as setting out the normal filing requirements, but that the provisions should not be made mandatory. There should be some freedom to deviate where it makes sense to do so, and this will allow the Board to have the best evidence before it in order to make the best rate orders possible. 164 Thank you. 165 MR. KAISER: Thank you, Ms. Aldred. 166 Were there any other parties that wish to make submissions on this point? 167 Mr. Lyle, did you have anything further? 168 MR. LYLE: No, Mr. Chair. 169 MR. KAISER: Sorry, Mr. Shepherd. 170 MR. SHEPHERD: Mr. Chairman, might I briefly reply? 171 MR. KAISER: Yes. 172 FURTHER SUBMISSIONS BY MR. SHEPHERD: 173 MR. SHEPHERD: Three points. The first is my friend, Mr. Rodger, raises various concerns and, I guess, fails to deal with the point which I think is central to this, and that is that we're trying to make the 2006 applications process more efficient. The Board has 84, or whatever the current number is, applications to look at. If everything is open season next year, the Board will have a problem, that's a fact. That's why we're spending our time in this process right now. 174 Ms. Aldred makes a point which I think is actually not in her favour where she says that many of the issues may have been settled precisely because utilities, LDCs, can argue for a different provision if they don't like the settlement. And I guess it's true of ratepayer groups too, although not likely. That creates what my friends in the decision analysis business would call selection bias. If rules are optional, then the utilities will follow them unless they can do better by filing on a different basis. That means the rule is the minimum that the utility can get. 175 Now, if they're set on that basis, if the rules are set on the basis that they're supposed to be a minimum, that's fine, they would tend to be biased in favour of the ratepayer and, on average, you'd get a more balanced result. But if the rules are set at fair levels, which is what we expect and what we've been trying to do in this process, then selection bias moves the net result across the province away from the fair and towards a favouring of the shareholder as opposed to the ratepayer and that's just -- that's math. You're not going to have selection bias -- if you have selection bias it's always going to move in one direction and that's what we have here. 176 The third comment relates to -- that Ms. Aldred made relates to the mandatory nature of the rules. And I guess she's right, you can't fetter the discretion of another panel, and so you can't make rules irrevocable, mandatory in the real sense. I take that point, she's right. But last fall, a panel of this Board did a hearing on ROE and made a decision that was binding for the current year and, technically, is not binding for any future year. The gas utilities, in fact, if they want to come in next year with a different ROE, can do so. They'd have to have rocks for brains, but they could do so. That rule, though, is mandatory, in practical terms, because the Board has made clear that it doesn't want to revisit the issue for a few years. And that's what we're suggesting for ROE, at least, in this proceeding. 177 Those are our submissions. 178 MR. KAISER: Mr. Shepherd, your third category was the must-follow category. 179 MR. SHEPHERD: That's right. 180 MR. KAISER: Sounds to me from your most recent comment that you're moving away from that. 181 MR. SHEPHERD: I probably shouldn't have said mandatory. That's probably too many Advil Cold this morning. What I'm talking about is something where, to make an exception, your arguments would have to be pretty good. 182 MR. KAISER: You have an uphill battle. 183 MR. SHEPHERD: Yeah. 184 MR. KAISER: Thank you. We'll reserve on this matter, as in the case of the previous one, and render our decision after lunch. 185 Ms. Lea? 186 MS. LEA: Thank you, Mr. Chairman. 187 That completes, then, the general issues. And if it's agreeable to the Board, I'd like to turn, then, to the actual presentations by the working groups. 188 The first working group that was established in this process is the revenue requirement working group. And you'll see on your Issues Day schedule that we have six presentations scheduled today from that group, and one tomorrow. 189 I'd like to take the opportunity, then, to introduce Mr. Colin McLorg, who is sitting to your right. He is the chair of the revenue requirement working group executive, and he will be introducing, and assisting, if necessary, as will I, the presenters of the various presentations. 190 If it's agreeable to the Panel, what we would like to do is have the presenters make their presentation to you - you do have hard copies of the presentations in your binders - and then at the conclusion of the presentations, we will, if it's agreeable, argue any questions of scope or evidence that need to be given to you. We hope in this way to give you context, and then argument to follow. 191 So I turn it over to Mr. McLorg, then, to introduce the first presenter. 192 MR. McLORG: Thank you, Ms. Lea. 193 Good morning, Mr. Chair and Panel Members. 194 My duties are relatively light this morning, in the sense that I will simply be introducing the individual chairs of the subgroups that formed part of the overall working group on revenue requirement and rate base. It's certainly been a pleasure and a privilege for me to work with all these people, because I would say that, with no exceptions, the stakeholders involved have been very, very diligent and committed to the process that we've undertaken here. 195 I don't think there's anything further I need to add at this moment, but I would introduce for you Mr. Cameron McKenzie of Hamilton Hydro, and he'll be talking to you about issues relating to the choice of test year and adjustments to historical test year. Thank you. 196 MR. KAISER: Mr. McKenzie. 197 REVENUE REQUIREMENT WORKING GROUP - ISSUE A: TEST YEAR AND ADJUSTMENTS; SECTION 3.1: 198 SUBMISSIONS BY MR. McKENZIE: 199 MR. McKENZIE: Good morning, Mr. Chair and Panel Members. 200 I'd like to take you through a brief presentation on the outcome of the working group on test year, beginning with a summary of work, scope, areas where we find we have consensus and areas where there is not consensus. 201 Summary of work. The work group took in careful consideration of the resources that would be required in filing the 2006 rate applications, both from the LDCs' perspective and the OEB Staff that would be involved. We felt that the Rate Handbook needed to be applicable to the largest number of utilities as possible. 202 We provided for an option to use historic data or forward test year filings as an LDC would feel is required. 203 We weren't sure whether simply using a 2004 year-end would be appropriate, or if we had adjustments that would be applicable for the LDCs. And if adjustments were allowed, should they be prescribed? 204 If adjustments are allowed, they need to be balanced in the whole scheme of the filing, in the sense that, if an LDC made adjustments to customer accounts, there would be appropriate adjustments for revenue, capital, and O&M expenses accordingly. 205 We needed to determine materiality, and also to define what may be one-time or unusual occurrences. We felt the handbook needed to be administratively simple, and balance the interests of the shareholders and the ratepayers. 206 Two questions of scope came out of the group: Will the Board confirm that local distribution companies would be allowed to rebase in 2008? It was felt that using 2004 test year data, even with adjustments, beyond 2008 may not be appropriate for the LDCs, and a retrospective remedy for historical LDC rates of return where the level of return was lower than the prescribed rates that they were permitted. 207 MS. LEA: Mr. McKenzie, I'm just going to interrupt you there for a moment. As at Friday, I got a telephone call from Mr. Rodger, who is the main proponent of that second question of scope, and he has asked that he's no longer seeking this retrospective remedy for historical LDC rate of return underrecovery as a separate scope issue in this proceeding. So with Mr. Rodger's and Mr. Hoggarth's consent, I removed that from the actual Issues Day schedule. Thank you. You didn't, of course, get this, because this was, like, 5:00 on Friday. So, there you go. 208 MR. McKENZIE: Then our work group is down to one question of scope. 209 MS. LEA: And the same with the evidence, sir, when you get to it. 210 MR. McKENZIE: Okay. Thank you. 211 General consensus -- it was felt a standard methodology for fundamental guidelines for 2006 test year should be clearly specified in the Electricity Distribution Rate Handbook. Three options should be available to distributors of 2004 historical audited financial statements with prescribed adjustments that we've labeled tier-1 adjustments. An additional option would be to make further adjustments to the tier-1 adjustments -- be permitted in certain defined circumstances. And then the last option is that the LDC would have the ability to file a full forward test year application, with all the required supporting documentation. 212 We tried to define non-routine, unusual items to be readily known, identifiable, quantifiable, and verifiable occurrences which exceed the materiality levels determined and are not within the control of the distributor. A filing under non-routine, or unusual, would require the completion of a separate schedule with the application. 213 Option 1, adjustments for tier-1, would be to normalize the 2004 year-end into a typical year of capital investments, operations, and revenues. Tier-1 adjustments would be mandatory and mechanical from the perspective that they would be easy for an LDC to implement and the Board to review. Non-routine and unusual items, as defined, would be subject to materiality levels. 214 Adjustments may be, and should be, debits or credits to the 2004 year-end balance. 215 Filing with tier-1 adjustments would require the minimum supporting documentation. 216 We looked at how to establish usage for tier-1 revenue requirement adjustments. The group felt that it was best to take 2003, 2004 and 2002 - sorry, I'm out of order - for averages, to try and normalize a year-end 2004 consumption. Any averaging would be class-specific and customer-specific. The three-year average would be determined per customer and then applied to 2004 year-end customer counts. 217 It was suggested that consideration be taken for those customers that get reclassified between the less-than-50-kilowatt and the greater-than-50-kilowatt general service class threshold. 218 Under a tier-1 adjustment, there would be no load forecasting permitted for 2006. The comment here is, pending the outcome of the C&DM work groups, and their resolutions. 219 The following table is an example of the proposed tier-1 adjustments that all LDCs would be required to file, annual dues adjusted to 2005, and this would be annual OEB dues, but similar regulatory dues, as required. Pensions and insurance both adjusted to 2005. Each of the categories requires adjustments for non-routine or unusual items exceeding a materiality level. In this case, the work group suggested 0.2 percent OM&A before PILs, as an example. Low voltage and wheeling adjustments would be made provided a standard formula is used and the charges are not pass-through items from Hydro One. And we have put in a placeholder for conservation and demand management and smart meters, pending the outcome of those resolutions as well. 220 In rate base there would be new transformer stations, whether its capital spent by the utility or capital contributions, provided the transformer stations have an inservice date of 2005. 221 Wholesale meters, as they come due for reverification and correction, updated to 2005 data. Again, the non-routine items with a level of materiality of 0.2 percent of net fixed assets, placeholders for C&DM and smart meters again, and what we determined to be retirements of capital without replacement, and that both the rate base and PIL be adjusted. And an example would be the retirement of a large building that's in rate base that does not get replaced, that it be removed accordingly. 222 Revenue adjustments would again be non-routine or unusual items exceeding 0.2 percent of base distribution revenue, excluding the riders for recovery of regulatory assets. LV and wheeling charges that have not been billed should be included, and again the placeholder for C&DM and any known gain or loss of a major customer, subject to the materiality level. 223 Tier 2 adjustments are on top of tier 1 adjustments, and definitions that we looked at would be those LDCs would be limited to two circumstances where they began the 1999 RUD model with negative returns that were set to zero with a go-forward basis, or the second one-third market-based rate of return has not been received. Detailed supporting documentation and potential monitoring requirements by Board Staff would be -- may be a requirement. All adjustments would be prospective, we would not recommend any retroactive adjustments at this time. 224 Optional 2 filings would require the distributor to demonstrate that continuing operations at the levels of expenditures on capital operations and maintenance that would be required to maintain the system reliability would actually impede its ability to continue as a viable going concern. The distributor would be required to identify areas of underspending by U.S. of A accounts in OM&A and rate base. 225 The option 3 being a full forward test year with supporting documentation, this option would require the filing of detailed manager's summaries, extensive supporting documentation and evidence in order to support a forward test year application. 226 Unresolved issues at this point is the disclosure and adjustments of material events or occurrences that are expected to occur in 2006 and about which the distributor has some certainty of occurring. The materiality levels need to be defined. Filing requirements for LDCs that have restated financial statements would need to be defined. Filing requirements for LDCs that have made changes in accounting policies. 227 The question as to what would be the prudence level of review to be applied to the 2004 year-end balances as they serve as the basis going forward to the 2006 rate year. Should adjustments be permitted for high customer growth or shrinkage? This issue would consider load forecasting on the weather normalization. 228 Unresolved issues. If an adjustment for growth or shrinkage is available, should this adjustment be mandatory? What is the treatment of other revenues in the revenue requirement design? What would be the treatment of other costs that arise out of further legislative changes? 229 If, within the scope, should an LDC applying for a tier 2 adjustment to compensate for the foregone return -- and I guess, is this the scope issue that is being removed? 230 MS. LEA: Yes, that's right. I understand, and Mr. Rodger can correct me if I'm wrong, that that issue is no longer unresolved in the sense of a retrospective adjustment, but I believe that the fact that an LDC that had a historical underrecovery as you've indicated under the optional tier 2 adjustment, that is where his clients are satisfied they can make their request for some consideration there with the supporting documentation. 231 MR. McKENZIE: On a prospective, going-forward basis? 232 MS. LEA: Yes, thank you. 233 MR. McKENZIE: Thank you. 234 Under what circumstances, if any, would a utility be required to file a full forward test year application? 235 Proposed paths for the resolved issues, what was felt was required from the Board Staff, would be templates for tier 1 adjustments, the schedule for non-routine or unusual occurrences, a schedule to identify required documentation for tier 2 adjustments and consolidated bill and rate comparisons across LDCs. 236 Required from the Board would be confirmation of the distributors being permitted to rebase in 2008 and also what rebasing requirements would be required during times of mergers and acquisitions. 237 Unresolved issues, the path for adjustments that require utilities filing for growth or shrinkage, we're looking for what type of evidence would be required. If within the scope, the historical underrecovery issue -- 238 MS. LEA: That one's been removed as well. Mr. Rodger has indicated he doesn't require calling evidence with respect to that. 239 MR. McKENZIE: Thank you. 240 For other issues that remain unresolved, the subgroup believes that they may be able to work them out and at most, argument may be presented. 241 We have crossovers between test year and the other work groups, one being conservation and demand management from the perspective of the results of their work group, PILs adjustments that may be required for tier 1 and tier 2 adjustments to the 2004 year-end balances, financial parameters work group in assessing LDC risk and working capital, distribution expense overlaps in filing requirements, and what rate base to use as a starting point for tier 1 adjustments. 242 That's the end of the subgroup presentation. 243 MR. KAISER: Thank you. 244 MS. LEA: Thank you very much, Mr. McKenzie. 245 Mr. Chair, I understand, then, that there is one issue of scope that's still on the table as in -- as we can see in the revised schedule, which I hope everyone has, and one issue with regards to evidence. 246 Is Ms. Girvan here? You'll be speaking not Mr. Warren; is that correct? I apologize, Ms. Girvan. I wasn't aware of the change so, sir, and Panel Members, where you see Robert Warren's name referred to, in fact, it will be Julie Girvan, G-i-r-v-a-n who is appearing for the Consumers Council of Canada today. Thank you. 247 I believe Mr. McKenzie will introduce the question for the rebasing for 2008. 248 Mr. Weber -- is it Weber or Weber, sir? 249 MR. WEBER: I answer to anything. 250 MS. LEA: The gentleman who will answer to almost anything from Grimsby Power is in the third row there, and then we'll hear from Julie Girvan as well. Thank you so much. 251 MR. McKENZIE: The question of scope from the subgroup is: Will the Board from LDCs will be permitted to rebase in the 2008 rate-setting process? 252 MS. LEA: Is there any indication, sir, from the subgroup as to why this would be a good thing for the Board to confirm? 253 MR. McKENZIE: The issues that came out from the subgroup using 2004 historical year-end balances, even with adjustments being beyond 2008, may encourage LDCs to file forward test year applications, which now goes beyond the intent of a handbook being applicable to the majority of LDCs. The concern that came out was that with a large number of forward test year applications, there will be delay on Board Staff's ability to be able to handle them on a timely basis. 254 MS. LEA: Thank you. Mr. McKenzie, do I understand correctly that the reason that a group thinks a number of forward test year applications would be filed, if there was no confirmation of rebasing, has to do with the fact that this base was set in 1999; am I correct in that? 255 MR. McKENZIE: That's correct. The last rate base was 1999. 256 MS. LEA: Is the group of the view that a further adjustment after all the work we do this year will be required for rebasing for 2008 rates? 257 MR. McKENZIE: The group would -- consensus from the group was that there would be -- could be potential changes between 2004 and 2008, after 2006 even with adjustments, that should be reflected on a go-forward basis. And to hold a rate base beyond 2008, to 2010 or 2012, as has been indicated, will not capture any additional capital or OM&A, or even revenue changes, that an LDC experiences in that time frame. 258 MS. LEA: Thank you, sir. 259 MR. KAISER: Mr. Weber. 260 SUBMISSIONS BY MR. WEBER: 261 MR. WEBER: Thank you, Mr. Chair and Members of the Panel. 262 I'm not speaking against 2008. What I am speaking against is that we need some certainty and, without that certainty, it causes a number of different issues for us. And, therefore, what I'm proposing is that there needs to be some regularity to the rebasing, whether it be 2008, 2012, however the Board should decide, but I'd like to see some certainty in that, and on a go-forward basis, and more than in just 2008. 263 I think it's vital for us to have financial and economic stability, confidence that we can go to lenders if we need to. We're a small but growing utility, and one of the issues that we have in growth is meeting our requirements under the rules and regulations, paying for new development, ensuring that that cash flow is going to be there for us. 264 Currently, as I understand it, any rate change needs the government's approval. And we feel that it's imperative to seek the government's approval, but ask them once. So that, if we go back to them and ask them once, and the rebasing is in there on a go-forward basis for a regular time frame, to be no more than four years, we feel that that's prudent. 265 Thank you. 266 MR. KAISER: Thank you. 267 Ms. Girvan. 268 SUBMISSIONS BY MS. GIRVAN: 269 MS. GIRVAN: Thank you, Mr. Chair. 270 I just wanted to say, first, that I'm speaking on behalf of the Consumers Council, but a number of other ratepayer groups have also sort of joined with this issue -- joined in on this issue and support, certainly, my submissions. 271 When I look at what it says here now in terms of scope, will the Board confirm LDCs will be permitted to rebase, I was originally going to say I was in support of what Mr. McKenzie was saying, but it seems to me that what we want to be clear is not permitted to rebase in 2008, but that it be mandatory to rebase in 2008. 272 I think, as a number of other parties had said today, including Hydro One, that going through the working group process, we all made concessions and agreements because we felt that we would have this rebasing in 2008, so that we could move forward today with the Rate Handbook. 273 The concern on the part of the ratepayer groups is that we haven't had full cost of service for any of the LDCs. And if you take the 1999 base, move forward to 2004, move forward again to 2008, and have the potential for a PBR in 2008, we think it's essential that the rates are rebased in 2008. And the concern about being permitted to rebase versus having it mandatory is that -- there's a concern that certain utilities might choose not to, if it was in their interest. So we think it's just essential for everyone involved, ratepayers, shareholders alike, that we have rates that reflect the cost of providing that service. So that's why we're in support of mandatory rebasing in 2008. 274 MR. KAISER: Thank you. 275 Any further comments? 276 MS. LEA: No, thank you, sir. 277 There's then the question of evidence. Just to give you some context, I think I understand that this issue relates to -- if a tier-2, an optional adjustment, is contemplated for high growth or shrinkage, then issues relating to load forecasting and, possibly, weather normalization may arise in that process. And I'll ask Mr. Shepherd to speak to his beliefs as to what the evidentiary requirements would be for that. 278 SUBMISSIONS BY MR. SHEPHERD: 279 MR. SHEPHERD: Mr. Chairman, the proposal that was made was that utilities be allowed to file in this sort of shortcut basis with an adjustment, if they had a very high growth in their load or a very -- or shrinkage in their load, because then they would be seen to be deviating significantly from their 2004 actuals. 280 The problem with that is that you can't adjust for load unless you have a load forecast, and you can't do a load forecast without weather normalization. We'd rather not get into weather normalization in this process. But if the utilities that are proposing a load adjustment, if you like, want to persist in that, then I think there's no other choice but to deal with what's the appropriate method of weather normalization. 281 And some people in the room will recall that we had a very joyful time dealing with weather normalization in the Union Gas case last year - I see Mr. Sommerville is smiling; he was one of the joyful people involved - and I, frankly -- we'd rather not do it again this year. But we see no way around filing weather normalization evidence, if there is to be an adjustment for major changes in load. Those are our submissions. 282 MR. KAISER: Thank you. 283 Any comments? 284 MS. LEA: Thank you, sir. 285 That completes, then, the presentation and arguments with respect to issue A, test year and adjustments. 286 Sir, can I ask your guidance as to whether the Board wishes to take a morning break, and if so, at what time we can proceed, or we can take a break at this time. 287 MR. KAISER: Whatever suits you, suits the flow of things. 288 MS. LEA: We do have another presentation coming up with several matters to be argued following it. May I suggest that we take a take a break at this time? And we'll set up for the second presentation on financial parameters in the meantime. 289 MR. KAISER: Thank you. 290 MS. LEA: Thank you. 291 MR. KAISER: We'll take a break for 15 minutes. Is that enough time? 292 MS. LEA: For us it is, so yes, thank you. 293 --- Recess taken at 10:50 a.m. 294 --- On resuming at 11:10 a.m. 295 MR. KAISER: Please be seated. 296 Mr. Adams was referring to certain RRR filings. Can you confirm for the Board whether that material has, in fact, been filed? 297 MS. LEA: I can do that over -- I can't answer you off the top of my head now. I have to look into the question. What I have available for you, though, are the RRR filing requirements, we had copies made over the break. Thank you, Mr. Ritchie, for that. So I'll give that to you now and Mr. Ritchie also will assist me in answering the question that you've asked. 298 I've also provided to you the copy of the taxes and PILs presentation which was not previously in your binders. 299 MR. KAISER: Thank you. 300 MS. LEA: There is one further item. In the next presentation you're about to hear, there are some colour slides, which I'd like to give you now. They are no different than what will be in the presentation, but they are in colour. 301 MR. KAISER: Did you wish to mark this latest document for identification? 302 MS. LEA: The RRR filings? 303 MR. KAISER: Yes. 304 MS. LEA: We'll mark it for identification as Exhibit 3, please, and I think the two pages with the colour can be inserted into the binder with the financial parameters presentation. 305 EXHIBIT 3: RRR FILING REQUIREMENTS 306 MS. LEA: So I turn it back over, then, to Mr. McLorg to introduce our next presenter. Thank you. 307 MR. McLORG: Thank you, Ms. Lea. 308 Mr. Chair, I wonder if I might ask the Board's indulgence just for one brief moment to add what I hope will be a clarifying comment. Mr. McKenzie referred to crossover issues and I just wanted to make clear for the Board and for members in the audience. Crossover issues were issues that the revenue requirement and rate base working group felt might be those that would be examined under one light, for example, in distribution expenses. But a decision on the Board's part in that area might have an impact on another area, like ROE. So there's nothing mysterious about it, but I think that you will see as a common feature of the presentations that you'll hear today, that each of the groups will identify crossover issues. 309 And I guess very briefly, the working group has identified those to the best of our ability so far and is in consensus that they have to be dealt with, but we haven't yet got really to the point of dealing with them. We do recognize that the eventual Rate Handbook is going to have to be internally consistent and so an issue decided in one way and in one area would need to be consistent with that of another. Thank you for that. 310 MR. KAISER: Thank you. 311 MR. McLORG: For the next presentation, Mr. Andy Hoggarth from Peterborough Utilities will be presenting to the Board his working group's presentation on financial parameters. 312 MR. KAISER: Mr. Hoggarth. 313 REVENUE REQUIREMENT WORKING GROUP - ISSUE B: FINANCIAL PARAMETERS; SECTIONS 3.2 AND 3.6: 314 SUBMISSIONS BY MR. HOGGARTH: 315 MR. HOGGARTH: Thank you, Mr. Chair and Board Members. 316 Our group looked at five main items: Return on equity, capital structure, debt rate, working capital allowance, and treatment of financial losses. The treatment of financial losses has been referred to in another working group. I will make one final mention of that at the end of the presentation. 317 One of the things that became obvious during the discussions with the key stakeholders was that of the three main items return on equity, capital structure and debt rate, we could not look at them in isolation. They have to be looked at as a group, and that's because they have commonalities, common data input, common characteristics, which blend from one to the other. And we've done this graph to show pictorially how that occurs and as a result of this, the recommendations that the group is about to make depends on the same treatment for one as for all other three items, or all other two items. 318 The question as to scope is: Will the Board undertake a review of return on equity and associated issues no latter than implementation of the 2008 rates? And again, we have the second question of scope, which is the same as the first presentation you heard, rebasing in 2008. So I will not bring that one up again, that's been dealt with. 319 I have provided a matrix for the Board. The reason we gave you an extra copy or a colour copy for your information was that this matrix will be referred to throughout the presentation, so avoid having you flip back and forth, the matrix is in front of you. 320 The matrix is split out into four alternatives, A, B, C and D, and down the left-hand column is the status quo, mechanistic update, or a full study and hearing for all three of the items, financial items. Although there was no consensus in the group on how these should be treated, there was consensus that these four alternatives appear to derive from the discussions with all the stakeholders. So these are four different options which have been discussed. 321 On the return on equity, the unresolved issue is: What will be the basis for the determination of the ROE for the 2006 rates? The group considered some approaches to dealing with this issue, which are the following: 322 If you go back to your table, you'll see alternative A, and we're just talking about the return on equity now. Alternative A is a mechanistic update for 2006 with a full update no later than 2008. The mechanistic update we are recommending can be done by Board Staff using the same formula that was developed by Dr. Cannon in his 1998 study. This update would be available for utilities in filing their 2006 applications. A full review of the ROE calculation in methodology would be appropriate for 2008. 323 Under alternative B for return on equity, maintain the existing 9.88 percent return on common equity for 2006 and possibly 2007, with a full update no later than 2008. 324 Alternative C, a full 2006 update. The full study would be taken by Dr. Cannon, or someone else as selected by the Board, and would be applied to setting the 2006 rates. The study would encompass the return on common equity, the cost of capital, and debt structure, all three financial items. It would be based upon Dr. Cannon's assessment of the risk levels facing Ontario's electric distributors. It is expected that the stakeholders will have the opportunity to file their own evidence which could not be filed any less than two months after the filing of Dr. Cannon's report. 325 I must indicate that the subgroup had concerns that a full update of the study for 2006, including discussions with the stakeholders by the Board, would cause a very tight time line. And we'd hate to see this process rushed, but we believe that that would be the result of the 2006, alternative C. 326 Alternative D is a full 2008 update. 327 Crossovers. Obviously, the conservation demand management decisions as they relate to potential ROE premium adjustments for LDCs achieving their annual goals. 328 Debt equity. The capital structure impacts risks. It obviously would impact rate of return or return on equity. 329 Rate design. We've identified that the impacts on risks can be significant. If the rate design -- if we move to 100 percent fixed distribution rate, some risks reduce significantly, versus if we go to 100 percent variable rate, risks would increase. So obviously there's a number of other items that are being looked at by the Board and by other subgroups that would impact the ROE. 330 Another crossover is the use of historical test year, future test year, or some combination of the two would obviously impact the risk. 331 Adjustments to the test year being considered by subgroup 3.1 which we heard earlier this morning may impact distributor risk levels, and the regulated pricing plan may affect the risk. Those are the key items that we identified as potentially impacting risk, and there may be others. 332 The recommended path. It was clear from the vast majority of stakeholders there is support for a full review, and I think all stakeholders identified that position. An appropriate amount of time is required to allow for a full study and stakeholder consultation process. The Board decides the scope of the resulting evidentiary requirements. 333 Now we'll turn our attention to the capital structure. What would be the appropriate capital structure for LDCs? These are unresolved items. Should guidelines be issued relating to the use of common versus preferred or other special shares? 334 Which should be used for rate setting, deemed or actual? 335 Again, if we refer to our alternative matrix, you'll find that the status quo for 2006, alternatives A and B, is the status quo for 2006, and a full update no later than 2008. Alternatives C and D, a full update for 2006, and, additionally, under D, another update in 2008, to match the year in which rebasing would occur. 336 We have a number of crossovers with other groups, including ROE, historical test year, and adjustments to the test year, as defined by subgroup 3.1. 337 The recommended path, we're asking for the Board to decide the scope and resulting evidentiary requirements. 338 The debt rate, unresolved issues: What is the appropriate debt rate for the LDCs? What are the appropriate definitions of the deemed and actual debt rate? And which should be used in rate setting, deemed or actual? 339 Again, as with the previous two financial parameter points, we had a lot of stakeholder discussion and input, and there was no clear consensus on these questions. 340 Another unresolved item related to this - it has been raised earlier this morning - was the affiliate relationship related to capitalization. Who originally incurred the debt, the affiliate or the shareholder? What difference does it make whether deemed or actual is used, depending on the source of those funds? And those are questions that need to be decided. 341 Again, referring to the matrix, alternative A is a mechanistic update for 2006, and full update no later than 2008. 342 Again, under the debt-rate scenario, as with return on equity, we feel confident that the Board Staff can do a mechanistic update, using the original methodology developed by Dr. Cannon in his 1998 report. 343 Under alternative B, status quo for 2006, and a full update no later than 2008. 344 Alternative C and D, a full update for 2006, and additionally, under D, another update for 2008. 345 Again, we have similar crossovers, I won't repeat them again, but we have similar crossovers as we did with the two financial parameter items. 346 The recommended path for the debt rate is, the Board decides the scope and resulting evidentiary requirements. 347 Mr. Chair, I'd like to move now to working capital allowance. The LDCs require a working capital allowance that reflects estimated potential changes in major flow-through funds, such as the cost of power, to avoid major cash-flow problems it experienced in the past. If the historical test year is used, LDCs would prefer the option to use a forecast cost of power in the WCA calculation. 348 The inclusion of security deposits was also another issue that was raised, and it remains an unresolved issue. There was argument that security deposits should be removed from the calculation of the allowable working capital amounts, in the fact that it is a source of funds according to the -- those that made that argument. 349 While each LDC has the right to file an individual lead-lag study as part of its 2006 rate application, it was stressed that these are very complicated and costly to complete. It's preferable, therefore, that a generic formula be eventually produced, based upon a cooperative industry-wide study. 350 The question of scope with respect to working capital allowance. Will the Board sponsor a working capital study in time for the implementation of the 2008 rates? 351 The recommended path. For the 2006 rate year, the working capital allowance remain unchanged at 15 percent, but the list of eligible controlled expenses and cost of power be updated to include those accounts added to this category since the 1999 trial balance was set. The subgroup will continue to work on identifying accounts that should be added. 352 Continuing with the recommended path, no later than the 2008 rate year, that the subgroup recommends that an industry-wide lead-lag study be undertaken by the Board, and the results used to establish a new default WCA formula for rate-setting purposes. 353 The major crossover issue, issues number 1, any adjustment to actual billing quantities for 2004 that are made for rate-setting purposes should also apply to the calculation of the cost-of-power components and of working-capital and test-year adjustments. 354 Secondly, the potential impacts of a regulated pricing plan need to be taken into account in a new formula. 355 Mr. Chair, our final item that we looked at was treatment of financial losses. And this issue was considered by our group and was transferred to subgroup 3.1, that looked after it as part of its adjustments. 356 That's it, Mr. Chair. 357 MR. KAISER: Thank you, Mr. Hoggarth. 358 MS. LEA: Mr. Hoggarth, did you have anything further to add -- you've explained it well, about the question of scope, will the Board undertake a review of return on equity and associated issues no later than the implementation of 2008 rates. Apart from what you've said, is there anything else you need to add with respect to that? 359 MR. HOGGARTH: I think the Board needs to be aware that the status quo for the return on equity is not likely to be accepted by all parties. In fact, none of these options are accepted by all parties, but that would encounter some difficulty in getting that agreed to. 360 The return on equity is a -- obviously, a major issue for both the utilities and other stakeholders, and is a driving force behind the investment into the utilities and continued financial well-being of utilities. It's clear from the discussions we've had with stakeholders that most agree that a full study needs to take place. And the preference was initially for 2007, but we understand with the amount of work that the Board has, and other issues that are coming to the forefront in 2007, that it may be 2008. 361 We've made it clear at the stakeholders' meeting that our preference was 2007, although 2008 would be acceptable, provided -- or on the basis that the Board workload was such that it could not happen until then. But there's, I would suggest, unanimous consent or agreement that a full study needs to take place as soon as possible. 362 MR. KAISER: Thank you. 363 SUBMISSIONS BY MR. SHEPHERD: 364 MR. SHEPHERD: Mr. Chairman, Jay Shepherd, School Energy Coalition. We agree, I think all ratepayer groups agree that the sooner we can get a new study done or an update of Dr. Cannon's study done the better. 365 I'm speaking to the issue of scope and also to the issue of, number 1, of evidence, because we've got a little bit of a logical box here that creates a problem. Basically, the options presented by the working group are question one: Do we do the full update in 2006 or 2008? And then if we're doing it in 2008, what do we do in the meantime? Do we do simply a recalculation of Cannon's earlier study, or do we leave the numbers the way they are? 366 The problem with that is we, and I think other ratepayer groups would be happy with what's being called the mechanistic update, that is, we recalculate Dr. Cannon's 1998 numbers, bring them up to date with new long bonds, et cetera, and leave that for 2006 and 2007. And then by 2008, his study will have been redone and will capture all the components properly. 367 We believe that the mechanistic update will reduce both the debt rate and the ROE fairly significantly, which will mean lower rates for 2006. Here's the problem, if the option of staying with the status quo is still on the table in this process, that is option B, staying with the status quo until 2008, then we wish to resist that. How do we resist that? Well, we have to give evidence, ROE needs evidence, it's one of those things. What's the appropriate evidence? Well somebody's got to look at what the appropriate ROE is, which is a full update of Dr. Cannon's study. So then we're kicked directly into option C. It becomes, in effect, a fait accomplis. 368 So I guess what we'd like to see happen is we'd like to see the Board decide in its decision on Issues Day that it's going to adopt the mechanistic update, option A, right away. And then that avoids any issue of evidence in this process and any need to have an ROE debate in this process. However, we understand the Board may not be able to do that, and if that's the case, we would propose a group of ratepayer groups, probably led by VECC, I would guess, will propose to lead evidence on the appropriate ROE, debt rate, and capital structure for the LDCs in this process. 369 Those are our submissions. 370 MR. KAISER: Thank you, Mr. Shepherd. 371 MR. McLORG: Mr. Chair, I wonder if I might ask a clarifying question of Mr. Hoggarth. 372 Mr. Hoggarth, in the subgroup discussions, was there any further definition that you could provide to the Board with respect to what is meant full update? And let me just contrast two scenarios for you that may be helpful. 373 Mr. Shepherd earlier referred to a study hearing undertaken in the gas industry in which full evidence was brought and that, I think, went to the underlying generic ROE methodology, and so anything that took that into its scope would obviously deal with the specifics of ROE, debt rate, capital structure, equity risk premium. I believe that there was a second alternative discussed by the group, but I don't know the consensus status of that. Could you comment on any distinction or what exactly is meant by a full update? 374 MR. HOGGARTH: I'm not sure I completely understand the option 2. 375 MR. McLORG: I'm sorry if the question wasn't clear. 376 MR. HOGGARTH: But I do know that there were a couple of other points that were discussed as being part of the full study, that included short-term rates, interest rates, and how those should be viewed by the Board, set by the Board. The 7.25 percent, for example, for right now for debt as a deemed rate needed to be looked at. In addition to that, the capital structure was also viewed as looking at not only debt to equity but also looking at short-term debt as part of the capital structure. Those were two issues from a short-term perspective that entered the discussions, and I'm not sure if that was the other part that you were referring to. 377 MR. McLORG: Thank you. 378 MR. KAISER: Thank you, Mr. Hoggarth. 379 Mr. Harper, did you have submissions on this? 380 SUBMISSIONS BY MR. HARPER: 381 MR. HARPER: Yes, I did. My name is Bill Harper, I'm here on behalf of VECC, which is the Vulnerable Energy Consumers' Coalition, and my concerns are very similar to Mr. Shepherd's, and if I could outline them. 382 It basically starts off with the fact that the scope issue asks the Board to confirm whether it will undertake a full review of return on equity and associated issues, and we seeing this as being capital structure, the appropriate deemed rates, both long-term and short-term, the role of short-term debt in the capital structure, a wide range of issues, even the role of preferred shares in the capital structure, no later than 2008. 383 VECC believes that such a timing for a full review is appropriate, but only if, and this is a minimum requirement, the values for the debt rates and the ROE in the current handbook are updated using the mechanistic approach as suggested in alternative A. 384 Our concern, and I think Mr. Shepherd has described it very well, is that there's some uncertainty as to whether this mechanistic update will be applied or whether, in fact, coming out of the working group might be a recommendation to use the status quo. The status quo, or alternative B, in our view is totally unacceptable. And to support this would we would require evidence to demonstrate why, and such evidence would be, at a minimum, to include the calculations of the mechanistic update. But however, since we would have an expert on hand, we believe it should also include a review of Mr. Cannon's study in order to clearly demonstrate first, the inappropriateness of alternative B, and also the fact that even alternative A is, in our mind, a compromise. Those are our submissions. 385 MR. KAISER: Thank you, Mr. Harper. 386 Any other comments? 387 MS. ALDRED: I just wanted to indicate from Hydro One's perspective that if other parties are bringing forward evidence on these issues then we would like to indicate that we would be bringing forward an integrated piece of evidence covering ROE, capital structure and debt rate to respond. 388 MR. KAISER: Thank you. 389 Any further comments? 390 MS. LEA: Thank you. 391 Mr. Hoggarth, do you need to add anything to your introduction into the question of whether the Board should sponsor a working capital study in time for implementation into 2008 rates? 392 MR. HOGGARTH: No, I don't think so. 393 MS. LEA: Thank you. 394 I didn't have anyone else listed as wishing to speak to this. My notes indicate that there was no one in opposition to this proposal, but I guess the floor is open if there was someone. 395 The third issue under the scoping was the rebasing issue, which has already been presented to the Panel under 3.1. I should just note that under the rate base section, under evidence number 2, there is a reference to the appropriate interest rate for capitalization of work-in-progress. And I think there is kind of a scope crossover, if I can put it this way, that evidence with respect to that may also relate to these issues. So when we hear from the rate base folk, we may need to think a little bit about that fitting in with the financial parameters arguments and information that you've heard. Thank you. 396 Thank you very much, Mr. Hoggarth. I think Mr. Clinton is going to assist us with the next one. It may take us a moment just to get the technology up. 397 MR. KAISER: Just to clarify, we will attempt to rule on these matters after the lunch break, as I previously indicated. 398 MR. McLORG: Mr. Chair, may I introduce to the Board Panel Mr. Ian Clinton of Newmarket Hydro. Mr. Clinton chaired the subgroup on rate base. 399 MS. LEA: Mr. Clinton, having worked with you in the work groups, can I ask you to speak slowly enough so that the reporter can catch your words, please. Thank you. 400 REVENUE REQUIREMENT WORKING GROUP - ISSUE C: RATE BASE; SECTION 3.3: 401 SUBMISSIONS BY MR. CLINTON: 402 MR. CLINTON: Good morning, Mr. Chair, Board Members, fellow colleagues. 403 The rate base subgroup dealt with issues 9, 13, 14, 16, 17, 18, 19 and 20 from the original OEB issues list. I'd like to take this opportunity to thank the members of the subgroup for their work over the period, also, Board Staff, John Vrantsidis, for all his input, and Duncan Skinner for his preparation of the original OEB strawman. In addition to those above-named people, the Board should be aware of the tremendous efforts and organization put forward by Colin McClorg of Toronto Hydro and Cameron McKenzie of Hamilton Hydro, and your own Jennifer Lea. 404 In summary of our work to date, the group reviewed the original definitions of the rate base sections and the OEB strawman issues assigned to them. The group discussed and determined the relevancy of these issues within the Ontario electricity sector, and identified the issues which impacted or crossed over to other groups. 405 From this, the group has been trying to develop filing guidelines for the 2006 EDR, and has identified areas where the current Accounting Procedures Handbook lacks guidelines or prescriptive treatment for these issues, and has tried to recommend treatment for these issues post 2006. 406 All this was done within the assumption that the group's work was based on the original OEB premise that a historic test year of 2004 will be the basis for setting 2006 distribution rates. 407 Out of this process, several questions of scope arose. I'll touch on them briefly and come back to them later at the end of the presentation. 408 First question of scope was, will the OEB sponsor an amortization study in time for implementation into the next rebasing 2008 rates? 409 Should the amortization rates for the computer hardware and software be adjusted as part of this 2006 EDR process, or in consideration in a depreciation study? 410 And there are various C&DM issues that arose, and we were wondering are these issues part of this process, i.e., the amortization of C&DM capital assets that will not be approved in variance accounts as will be allowed to -- 411 MS. LEA: Start with the first point again, please. 412 MR. CLINTON: The amortization of C&DM capital assets that will not be approved in the C&DM variance accounts, will these be allowed into rate base? 413 Also, amortization rates for new smart meters and the accelerated amortization of existing meters. 414 Depreciation. The starting point for this amortization discussion and the question of scope was, the current amortization rates that LDCs will be using for the 2006 rates have been in place for a number of years. Thus, in some cases, the amortization rates may not be reflected with the current economic useful life of an asset. There is little time for a comprehensive study of the amortization rates for the 2006 process. Therefore, the group had consensus that the current asset categories and amortization rates, as listed in appendix E of the current distribution Rate Handbook, will be used for the 2006 rates purpose. 415 MR. KAISER: Mr. Clinton, can you slow down a bit. 416 MR. CLINTON: Further to this end, the group would request of the Board that they convene a working group to review and analyze the current amortization rates for the next filing period. 417 The group also agreed that organizations that do not follow the amortization rates as listed in current appendix E of the Distribution Rate Handbook should be allowed to file their own amortization schedule, based on their own amortization study, which may be evaluated by the Ontario Energy Board. 418 The group also discussed a number of areas where the current amortization rights are lacking. These include adding a category for computer software, new rates for software and hardware, CDM fixed assets that are not approved within the third tranche, and an amortization for new smart meters and, perhaps, a new rate for the existing old meters. As indicated earlier, these are questions of scope. 419 On the issue of amortization rates for computer software and hardware, and effective implementation dates, the group could not preach consensus. This issue will go back to the working group for further discussion. If agreement cannot be reached then evidence may have to be called. 420 Meters are crossover issues, and with other OEB working groups concentrating on these areas, placeholders will be left until decisions are made. 421 Again, there is a question of scope to the Board of whether the C&DM expenditures and smart meters are part of this 2006 rate process. 422 Issue 13, the definition of rate base. The current definition of rate base and calculation thereof shall be maintained for the 2006 EDR process with the following inclusions: Expenditures for smart meters and C&DM capital projects not recovered through the next phase of MBRR, or otherwise funded, are to be included in the definition of fixed assets. 423 Also, amounts paid to other LDCs for capital projects, namely, Hydro One, for contributions for transformer stations and transformer assets are to be included in the definition. 424 The definition of metering assets is to be clarified to include wholesale metering upgrades and capital leases, as defined by Canadian Generally Accepted Accounting Principles, would also be included as fixed assets. On these above points, the working group had consensus. 425 On the issue, this group had some unresolved issues. One was, it wanted to ensure that joint-use assets included in rate base should have the revenue that these assets generate be applied consistently with other revenues in determining the revenue requirement. 426 And with issues of scope, the Board concern that 2005 MBRR which, when allowed, could these monies fund the C&DM fixed assets which then would be included in their rate base. 427 Again, there was some issues discussed of crossover issues with other groups, and placeholders will be given to them until resolution. 428 Issue 14, rate base measurement date. On this issue, there was not a consensus. 429 The group debated the method that is to be used to determine the measurement date of the fixed asset used for rate base. Discussion ensued about three different valuation approaches: The fixed-asset balances at the end of the year, i.e., December 31st, 2004; an average of the fixed-asset balances from the beginning of the year or the -- sorry, an average of the fixed asset-balances for the year, which is the period from January 1st, add the assets to December 31st and divide by two; or an average monthly balance. 430 And this is the unresolved issue. In determining the alternatives, the monthly average approach was not -- was considered, but there were concerns that this approach may not be practical for all 90 utilities. So then the discussion centered around either the year-end amounts or using average yearly balance. 431 Proponents of the historic year-end balances stated that, as assets purchased or construction in 2004 will be in full use, and in rate base for over a year from the close of fiscal 2004 until the LDC begins earning a rate of return on these assets, using year-end amounts would be easier to calculate and more transparent in an audit function, and also consistent with the original Rate Handbook. Using a yearly average may not be reflective of when the asset was actually placed in service, which, in some cases, benefits some and injures others. Therefore, consistency and fairness could dictate that a year-end balance should be used. 432 Proponents for the yearly average balances -- the argument for using yearly average balances is that, when rates are based on a year when the asset is placed in service, the LDC should not receive rates on those assets since they haven't been in use for the full year. 433 Proposed resolution for this issue will have to be evidence before the Board. 434 This issue is also a crossover issue to the test year group, due to the fact that the rate base year is different from the calendar year, and this timing difference may be an issue; also, in determining the fixed asset value that there needs to be a mechanism in place to perform a prudence review of the value submitted. All values submitted under this 2006 EDR process will undergo some sort of prudence review. 435 Issue 16, the capitalization of expenses. Groups had discussion about the fact there is lack of consistency in this industry in the application of capitalization of overhead. The current definition in the Accounting Procedures Handbook is vague, but applies full-cost accounting. The group agreed that no change in an LDC's capitalization policy is needed for 2006, but LDCs should implement full-cost accounting by the next rebasing period. 436 And the definition currently in the Accounting Procedures Handbook should be further defined by a companion guide produced to provide more guidance and consistency among LDCs in the way they allocate overhead. 437 Again, until there's a more consistent and more prescriptive approach of the capitalization of overhead expenses, the comparison among distribution companies may be difficult. This was a crossover issue forwarded to the comparators and cohorts, distribution expense and test year groups. 438 The groups also agreed that the Accounting Procedures Handbook be amended to disclose the most current Canadian Institute of Chartered Accountant Handbook sections on asset retirements. There was also a consensus on the fact that a description of the LDCs capitalization policy must be filed. However, the type, detail and amount of disclosure is an unresolved issue which is going back to the working group for further discussion and argument. 439 The other unresolved issue is the deemed interest rate for use for interest capitalization on capital project. There is some discussion on three general points: One, that since the capital projects are short-term in nature, the financing obtained to finance them should be at the short-term rate. Generally Accepted Account Principles would argue that only the actual cost of debt incurred should be attributed. Another point of view that debt cost should be incurred at the long-term debt financing rate, because the organization needed to secure a significant amount of capital, had to go to the markets for a long-term debt issue. 440 This issue is unresolved and going back to the working group. If no agreement can be made, it is likely that evidence may need to be called. 441 Issue 17, capital expenditures. The following is a summary of our discussions to date. The practicality regarding an in depth review of capital expenditures was discussed and thought to be too broad due to the resource constraints on the OEB and the 90 electricity contributors. The group thought that capital expenditure review could be approached by way of filing rules, by filing a trend line and brief analysis of the line items and their variances. However, there needs to be the ability to question the trend line or perform a prudence review. 442 All these factors could be within the scope of the materiality limit. And there is a general discussion about the materiality limit that could be used to flag where an LDC would have to provide further evidence, analysis and summaries. 443 Again, all the filing data needs to have -- there needs to be a mechanism in place to perform a prudence review on all the values submitted. And again, it's a crossover issue. 444 There was consensus that three years of capital expenditures should be disclosed. However, the level of detail, type of information disclosed and disclosure requirements are unresolved, as is the concept of materiality threshold in order to trigger greater filing requirements. These items are going back to the working group for discussion. 445 Contributed capital, the general consensus was that the OEB had decided this issue in the past and the current status quo of contributed capital should remain in effect. 446 No-cost capital, issue, 19. Discussion on this issue centered on the definition of no-cost capital and should it be included in the determination of rate base for the 2006 rate design. The general consensus of the group is that no-cost capital is a non-issue in Ontario. 447 Issue 20, treatment of capital gains and losses. This is an unresolved issue. The general discussion was at what percent, if any, of the gains or losses should be split between the ratepayer and the shareholder? If there was to be a split, then there would be a materiality threshold after a certain point. The likely proposed path for this issue is evidenced to the Board. 448 We go back to the questions of scope, just bear with me for a second. 449 MS. LEA: Mr. Clinton, actually I'm going to interrupt you there. You were also, like Mr. McKenzie, your -- the subject matter you're dealing with was subject to a late-breaking change on Friday afternoon. And the rate base measurement date which was originally listed as the second question of evidence here, I understand now that those parties that were seeking to call evidence on it are no longer doing so. So the updated issues list that we all have before us does not include that issue, and if I've got that wrong, let me know, but my understanding was that that question of the rate base measurement date could be decided through discussions in the working group and argument. 450 So that leaves us then with four issues of scope, if you include rebasing, and three issues with respect to evidence. Did you wish to speak to the question of the sponsoring of a depreciation or amortization study in time for implementation into 2008 rates? 451 MR. CLINTON: Yeah. As I said earlier, the LDCs have been using -- the amortization rates that the LDCs will be using for the 2006 rates have been in place for a number of years and derived from by the former regulator. Thus, in some cases, the amortization rates may not be reflective of the current economic useful life of the asset. Therefore, we're asking the Board if they would sponsor an amortization study to be used for the next rebasing period in 2008. 452 MS. LEA: Thank you. 453 I didn't have anyone else speaking to this. I'm not seeing any hands being waved either. 454 Thank you, Mr. Clinton. Could you introduce the question of the hardware and software amortization rates, please. You see, I'm learning. I'm now start to go call it amortization. 455 MR. CLINTON: We are thinking, should the amortization rate the computer software and hardware be adjusted as part of the 2006 rate design or considered in the depreciation study. I think a little background on this issue is, some people thought that hardware and software amortization is not currently reflecting the useful life and others did. This was discussed as part of the working group and there was disagreement. But for a question of scope, we would ask the Board whether this issue should be considered as part of the 2006 EDR or as part of an amortization study. 456 MS. LEA: Mr. Clinton, does the current Rate Handbook give a depreciation or amortization rate for these items? 457 MR. CLINTON: Five years, but if my memory serves me correct, there is not actually a placeholder for a category computer software. It's all lumped into hardware. 458 MS. LEA: It's hardware, and the hardware present rate is five years? 459 MR. CLINTON: Yes. 460 MS. LEA: I think then Mr. Shepherd, at least, wanted to speak to this. 461 MR. SHEPHERD: Yes. 462 MR. KAISER: Mr. Shepherd. 463 SUBMISSIONS BY MR. SHEPHERD: 464 MR. SHEPHERD: Mr. Chairman, the original proposal was that hardware and software both be moved to three years. I think that right now most utilities, somebody can correct me if I'm wrong, put software in with hardware and depreciate it over five years. The ratepayer groups, or School Energy Coalition - I think this is true of all the ratepayer groups - believe that five years is okay for now, that it's -- that that's a reasonable balance between the various types of hardware and software that the utilities have. It's probably not the right number, but it's close enough. However, if the issue of three years is still on the table, if there -- if the utilities are proposing three years, then we would want to do a depreciation study to look at the actual mix of software and hardware in utilities to determine what the average useful life is. 465 Now, I understand that the working group may wish to have another crack at this week before determining that it's irrevocably unresolved, and we would be thrilled if they agreed to leave the status quo for this year, because I think we'd like as many things off the table as possible. However, if that's not the case, and if this Board deems that the issue should be dealt in this process, then we would propose to call evidence. And as I mentioned earlier, he we would ask that the Board order that some utilities, presumably at random, provide us with -- provide our expert with the mix of their software and hardware and other similar data so that that expert can do their job. 466 MR. KAISER: Thank you. Mr. Clinton, are the utilities proposing three years or five years? 467 MR. CLINTON: The original discussion in our working group was three years based on the fact that a lot of utilities cycle all their hardware and software in three years and replace their servers, computers, et cetera. There might are is a compromise position for larger items like billing systems and GIS, but if you allow me a few days to canvass the members of the working group I may be able to come with a more succinct discussion. 468 MR. SOMMERVILLE: Mr. Shepherd, what's the argument for not including the hardware/software question in a generic depreciation study program? 469 MR. SHEPHERD: We absolutely want it included. 470 MR. SOMMERVILLE: But why not wait for that? 471 MR. SHEPHERD: We would like to, which would mean that the status quo would remain in place, five years, that's what we would like. 472 MR. SOMMERVILLE: That's not necessarily what flows. What could flow out is the proposal that others are making with respect to the three years amortization period. 473 MR. SHEPHERD: That's correct. And we believe that three years is the wrong answer and, therefore, to debate it we'd have to bring evidence. 474 MR. KAISER: Thank you. 475 MR. CLINTON: The next areas of scope were the C&DM issues, and we want to know if the C&DM issues are part of the 2006 process, in particular, the amortization of C&DM capital assets that will not be approved, as in the variance accounts. Will those amounts be allowed to be put into rate base and earn a rate of return? And also amortization rates for new smart meters and an accelerated amortization for existing meter assets? 476 MS. LEA: Thank you. I didn't have anyone else -- oh, I see that Mr. Poch is asking to speak to this. I understood that this was not so much an area of disagreement but an area where we were seeking guidance from the Panel as to whether we should be discussing these issues in the working group or not. We didn't know whether we needed to deal with them here or whether they were going to be dealt with elsewhere. But perhaps Mr. Poch can assist us. 477 SUBMISSIONS BY MR. POCH: 478 MR. POCH: David Poch on behalf of the Green Energy Coalition, and I was Chair of the subgroup that worked on C&DM issues. And I rise not to suggest this out, but simply that you suspend judgment for the moment because they're intricately tied to issues you'll hear about tomorrow on C&DM issues and on line losses. For example, and all I'm suggesting is that when the Board ultimately considers the substance of this issue, they consider it in the context of the C&DM issues. 479 For example, if you have a shared savings, an incentive for shareholders to spend money on conservation for those items that are expensed, that is for the customer's side of the meter programs, then it might be entirely appropriate that the -- they be able to earn a return on the third tranche MARR funds that they invest in capital items on the utility side of the meter. In the absence of a shareholder incentive, we might raise a concern that this would tip the balance and a utility would be foolish to do anything but to spend all of their money on the capital items on the utility side of the meter. 480 So all we're looking for is some kind of a balanced framework and so short -- my short submission is, hold off directing your minds to this scope question until you've heard submissions on the scope questions tomorrow. 481 MR. KAISER: Ms. Lea, is it acceptable that we defer this until tomorrow? 482 MS. LEA: Yes, I think that that's a good idea, sir. Thank you. 483 The last scope issue was rebasing, which we've heard about already in section 3.1. Mr. Shepherd wished to speak to the question of the calling of evidence for the reasonable life computer hardware and software, although we have, I think, heard from him on that. Do you have anything to add to that, sir? 484 MR. SHEPHERD: No, I don't. Thank you. 485 MS. LEA: Thank you. 486 The second issue with respect to evidence, and as I've indicated the question of evidence on the rate base measurement dates has been removed. The second question of evidence then is: What is the appropriate interest rate for capitalization of work-in-process and a reference to a deemed, short-term interest rate. And I understand there are two speakers on this, at least. 487 MR. KAISER: Mr. Harper. 488 SUBMISSIONS BY MR. HARPER: 489 MR. HARPER: Yes, thank you. I will endeavour to speak a bit slower this time. 490 We believe that the question of the appropriate interest rate to be used both for capitalizing costs while assets are under construction and for determining the carrying costs on deferral accounts are issues that need to be addressed as part of this process. Currently, for many LDCs, the only debt rate available for regulatory purposes is their deemed long-term debt rate, which we believe is inappropriate to these two applications. 491 Also, we do not see this issue as being so closely linked to the questions of capital structure or overall cost of capital that it cannot be readily addressed as part of this process. Indeed, given the various retail service variance accounts that have been established, and the potential for new deferral accounts associated with conservation and demand management, we see this as an important issue that needs to be addressed sooner as opposed to later. Therefore, to help inform the 2006 EDR process, we see the need to call evidence regarding the appropriate interest rates to be used in these two circumstances and how that deemed rate should be calculated. 492 Those are my submissions. 493 MR. KAISER: Thank you. Mr. Adams. 494 SUBMISSIONS BY MR. ADAMS: 495 MR. ADAMS: Mr. Chairman, there is a high level of cooperation amongst the intervenor groups representing customers, and so I think that in considering this potential for evidence, the intention of the customer groups would be to work cooperatively. I just point out that there are some apparent gaps in the existing rules, for example, with respect to the appropriate interest rates to be used in the calculation of balances for some of the regulatory assets accounts. This is a matter that arose before. We believe that there is some benefit to be had so from comparison to other utilities, particularly from the gas case, that could be brought in in a relatively narrow fashion without expanding into the overall questions of capital structure. But I believe there are other intervenor groups that also wish to speak to this. 496 Those are my submissions. 497 MR. KAISER: Any other comments on this matter? 498 SUBMISSIONS BY MR. AIKEN: 499 MR. AIKEN: My name is Randy Aiken, London Property Management Association. I just want to support Mr. Harper's submissions. We believe that a short-term debt rate needs to be applied to the variance and deferral accounts to make that approach consistent with the gas industry in Ontario. 500 MR. KAISER: Thank you, Mr. Aiken. Any other comments? 501 MS. LEA: I have a question, sir, if I might. 502 Perhaps, Mr. Aiken, since you spoke last, I'll go to you first. Would the evidence that you're proposing or supporting be called necessarily involve an opening up of the financial parameters questions that we heard about in the previous presentation? In other words, if the Board hears evidence on the appropriate interest rate for the capitalization of work-in-progress and the other items that were spoken of and considers a deemed, short-term interest rate, will this open up the entire capital structure debate? If yes, why, and if no, why not? 503 MR. AIKEN: In my opinion, no, it would not. It can be regarded as a separate issue because it's a short-term interest rate, as Mr. Adams has indicated, used for specific purposes beyond the capital structure. 504 MS. LEA: Thank you. 505 MR. KAISER: Thank you. 506 MS. LEA: Then there's the question of evidence number 3, treatment of capital gains and losses, which I understand this evidence would include evidence of practice in other jurisdictions. I understand that someone from Hydro One and also Mr. Shepherd wish to speak to this. 507 MR. KAISER: Ms. Frank. 508 SUBMISSIONS BY MS. FRANK: 509 MS. FRANK: Hello, I'm Susan Frank from Hydro One. 510 Our concern with the capital gains and losses is, first of all, a question of is this something that really needs to be dealt with in the handbook. Is there a sufficient volume of transactions where there are gains and losses that we need to have this item in, so it's a bit of a question of scope. If it is in, however, then the sharing between the shareholder and the ratepayer groups is something Hydro One believes it would need to bring evidence on, because the circumstances are such that a uniform answer may not be even available. So we'd want to have a variety of answers in the circumstances, and believe evidence would be necessary to support those answers. 511 MR. KAISER: Thank you. Mr. Shepherd. 512 FURTHER SUBMISSIONS BY MR SHEPHERD: 513 MR. SHEPHERD: Mr. Chairman, as you'll have figured out by now, the ratepayer groups met on Friday and for almost all day, that's why there was so many changes late in the day. And what we agreed was that if this item goes forward in this proceeding, that the ratepayer groups will jointly retain an expert to deal with it, and we don't know who will lead that coalition, but we're going to work that out this week. 514 Ms. Frank has now suggested that maybe this could be taken out of scope for this proceeding, which we haven't talked about as a group. But what I can tell from you the School Energy Coalition's point of view is that we would want to know what the default position is going to be if this is taken out of scope. Is the default that 100 percent continues to go to the shareholder, as has been the case recently, or is the default something akin to what we have in the gas industry which is 50/50? 515 Unless we know what the default is, and the default could also be that any capital gains and losses have to be brought before the Board in a separate application, that would also be fine. But we'd have to know that in order to know whether we would agree that it should be taken out of scope. 516 Those are our submissions. 517 MR. KAISER: Thank you, Mr. Shepherd. 518 MS. LEA: I have a couple of questions for Ms. Frank. 519 If a treatment of capital gains and losses in the sharing mechanism was not part of the handbook, how would these matters be determined? Would they come before the Board each individual one or would it be an individual utility coming forward at the time of its rate filing? How would they be treated? 520 MS. FRANK: Well, in the 3.1, the test year and adjustments group that we heard from earlier, the thinking was if there were unusual items, and they had to meet a materiality threshold, I would think that this would be such an unusual item. So if it's material, then indeed it would have to be brought forward as a particular item for individual attention and at that time, I would suggest that that utility would have to make its proposal and justification as to the treatment. Items that would be immaterial, I would say that the current treatment, which I agree with Mr. Shepherd, tends to be 100 percent to the shareholder, would carry on, but that would be for immaterial small amounts and therefore, I thought unnecessary to proceed. 521 MS. LEA: Thank you. In the -- I don't think the test year and adjustments group, and Mr. McKenzie can correct me if I'm wrong, has considered in its tier 1 adjustments, which I think is the unusual occurrences section that you're thinking of, has considered the treatment of these things. They were merely considering the adjustment of the base where ever that base falls. Are you proposing, then, that the test year and adjustments group consider the treatment of these capital gains and losses as part of its consideration of unusual occurrences? 522 MS. FRANK: No, I was suggesting that when the party, the utility that had such a gain or a loss and it was material, wanted to have an adjustment to their base year for this item, they would bring it forward. They would have to say, We sold a significant asset or we purchased a significant asset. And at that point in time it was material, they want a change in their rate base accordingly, and you'd worry about the gains or losses based on the evidence that the utility would bring forward. So we'd handle them individually rather than a standard rule. 523 I don't imagine we're going to see hardly any of them. We're not talking about needing a rule for the masses, because there will be very few that you'd have to deal with. 524 MS. LEA: I don't mean to disagree with you, but on what basis would you believe there are very few? Could you help us with that, so that we understand whether this process that you're proposing is practical? 525 MS. FRANK: It's just what I see for Hydro One's case and Brampton, and other utilities that I'm familiar with. We have not done serious acquisitions in '04. There have been minor lines here and there had a have moved, but they're not material in nature at all. And I'm not aware of many. There are a few utilities that are doing major acquisitions, but we're talking about less than 10. So I didn't think it was a big deal. 526 MS. LEA: Thank you for your answers. I don't know if anyone else -- 527 MR. KAISER: Mr. Shepherd, did you have a response to Ms. Frank's compromise, if I can call it that? 528 MR. SHEPHERD: I'm not sure I understand why acquisitions are relevant to the question of capital gains and losses, it's dispositions that are relevant, not acquisitions. And I think the problem with Ms. Frank's suggestion is that if we're going on a historical year basis then we would be looking at 2004 capital gains and losses, not the capital gains and losses anticipated in the test year. And that, of course, creates a problem. If somebody is going to sell a significant piece of land in 2006, the suggestion of Ms. Frank would be, in effect, that the shareholder gets all of that, it doesn't matter how material it is, and that doesn't make sense to us. 529 MR. KAISER: She wants them dealt with on a case-by-case basis, you don't think that's possible? 530 MR. SHEPHERD: No, I have no problem with dealing with them on a case-by-case basis. The specific way she proposed to do it, I don't think works. But I don't think, and maybe other ratepayer groups would like to comment, but certainly from our point of view we don't have a problem with utilities being required to make an application for what to do with any capital gains that arise at any time. 531 MR. KAISER: Her position, as I understand it, is the individual utility would do that if it was above a material amount. 532 MR. SHEPHERD: I don't think I have a problem with that either, depending on how big the materiality number is and whether it applies across the board or to individual dispositions. 533 MR. KAISER: Ms. Frank, do you have a materiality number? 534 MS. FRANK: I was going to use the same materiality that was reached under agreement in 3.1, because that deals with adjustments to rate base. Right now, I think the suggestion is 0.2 percent. 535 MR. KAISER: Yes. 536 MS. FRANK: And I would suggest you use that number, or whatever the group in the end resolves upon. 537 MR. KAISER: Mr. Shepherd. 538 MR. SHEPHERD: I think that's $3 million per incident for Hydro One; isn't it? 539 MS. FRANK: Less than that. It would be two, maybe two and a half. 540 MR. SHEPHERD: So Hydro One could have 20 sales and get $50 million of capital gains and not share them with the ratepayers. That's our concern. 541 MR. KAISER: Right now we're at the point where we're calling evidence. I'm just wondering, is there any point in having a discussion now that we've narrowed it down to the materiality issue? 542 MS. LEA: It could be, sir, that perhaps Mr. Shepherd's concerns, in part, could be answered by a materiality limit that includes a percentage and possibly an upper dollar limit as well. It sounds to me as if it might be something that we can work out. That's just what I'm hearing. Let me be sure, though, that I understand the proposal. The proposal is that this issue be removed from the scope of this process, except for discussion of the materiality limit, and that this process recommend to the Board a rule that where a capital gain or a loss exceeds the materiality threshold, which we will establish as part of the working group, that that utility must bring forward an individual application for the treatment of that capital gain or loss. Am I understanding that Ms. -- that is Ms. Frank's proposal and that Mr. Shepherd, subject to the materiality question, doesn't have a problem with that, and anyone else for that matter. 543 MR. SHEPHERD: I would have said that it has to stay within this process because otherwise there's no process within which the Board can make the ruling, but aside from that -- so it would be within scope but the question would be: Should it be a separate application in each case? 544 MR. KAISER: It's dealt with on a case-by-case basis. 545 MS. LEA: Thank you for that clarification. 546 MR. KAISER: Any other comments on that? 547 Ms. Girvan. 548 MS. GIRVAN: Just one sort of clarification is that it becomes a question of whether we're talking about 2004 or projected 2005 or 2006. 549 MR. KAISER: If it's a case-by-case basis it's going to be pretty hard to project. The event is going to have to have taken place. 550 MS. LEA: Probably the test years and adjustments working group has been adjusting things to the end of 2005 at present as their standard measure. I would imagine, Ms. Girvan, if it's acceptable to you, that we could have a try at working out how far forward you can go or what year we are talking about in the working group. This would not mean that nobody would be making applications, this would merely be that we'd try and work it out in the working group. 551 MR. SHEPHERD: Mr. Chairman, sorry I'm now confused. I had understood the suggestion to be, particularly from your last comments, that when a utility has an actual capital gain, they -- forget the rate-making process they have an actual capital gain. They come to the Board and say, I have this money, tell me what to do with it. 552 MR. KAISER: That's how I understood Ms. Frank's proposal. Do I have it correct? 553 MS. FRANK: Yes, that would have be way we would have to do it. What we're dealing with here in terms of the handbook and the rates for 2006, I believe we could only at that point in time capture something that was either in '04 or'05. There just wouldn't be time to capture anything for '06. So items that happen beyond that would have to be considered as part of either a separate request or the next rate application. 554 MR. KAISER: Mr. Shepherd, any comment? 555 MR. SHEPHERD: Yes, I think I agree with Ms. Frank. 556 MR. KAISER: Ms. Girvan, any comments? Thank you. 557 Let's leave this on this basis. I haven't talked to my fellow Members, but it sounds like we can leave to this to the afternoon and possibly have a discussion on the materiality level. 558 MS. LEA: We wouldn't need to work out the materiality level today, sir, if you were willing to return it to the working group for that discussion. 559 MR. KAISER: That's fine. 560 MS. LEA: We can talk about it, perhaps, and come up with instructions. Thank you. 561 I think that concludes the items under the rate base section. Thank you very much to Mr. Clinton. 562 Sir, it's now 12:20. We've dealt with two general issues and three presentations. We have left on our agenda for today three presentations. Would it be acceptable that lunch be taken at this time? 563 MR. KAISER: Yes, that would be fine. We'll come back at what time, 1:00 or later? 564 MS. LEA: I think, sir, that perhaps we should consider 2:00 to enable -- if the Panel was planning to have discussions over lunch. 565 MR. KAISER: Will that leave us enough time to deal with the rest of today's issues? 566 MS. LEA: I can never say for sure, but there doesn't appear to be as much to argue about this afternoon. I'm in your hands, sir. It's whatever you think. 567 MR. KAISER: We'll come back at 2:00. 568 --- Luncheon recess taken at 12:20 p.m. 569 --- On resuming at 2:25 p.m. 570 MR. KAISER: Please be seated. 571 As indicated before the luncheon break, the Board intends to rule on a number of the issues that were discussed this morning. There are some of them that we are deferring on, which I'll mention as we come to them. 572 DECISION RE VARIOUS ISSUES: 573 At the outset, the Board would like to thank various parties in these Working Groups. We are aware that there has been a great deal of effort over the past number of weeks, as well as a willingness to cooperate and negotiate and find common resolution, and we certainly understand, as you do, that this will assist this rate-making process as it moves on. And so we thank you for that, and we encourage you to continue in that spirit. 574 Dealing first with the General Issues. Issue number 2, which I believe was raised by Mr. Shepherd, was the extent to which the rate-making principles and filing rules and the handbook are binding on the LDCs. In the Board's view, the Rate Handbook does not represent a mandatory set of rules for LDCs. The handbook is a guideline which represents the Board's best judgment on the principles of rate-making for electricity distribution companies. Companies are permitted to deviate from the approaches in the handbook, but you are cautioned that, in doing so, they accept a significantly higher burden in terms of providing evidence and justifying, to the satisfaction of the Board, that the deviation sought is more than appropriate. 575 The minimum filing requirements in the handbook do, however, represent a requirement, and the Board requires the applicant to file in its application those mandatory filing requirements. Adherence to the approaches codified in the handbook should provide applicants with an efficient and direct method for the establishment of their rates. Deviations, on the other hand, are more likely to trigger intense scrutiny. 576 I believe, Ms. Lea, that General Issue number 1 has been deferred; is that correct? 577 MS. LEA: My understanding, sir, is that the Board is still considering that issue, and may be in a position to render a decision either tomorrow or at a later time. 578 MR. KAISER: All right. This was Mr. Adams's RRR requirements, which we will deal with tomorrow. 579 Turning to category A, Test Year and Adjustments. The Board was asked to confirm that LDCs will be permitted to rebase for 2008 rates. With respect to rebasing, the Board confirms that the setting of 2008 rates will involve rebasing for all utilities. 580 With respect to the evidentiary side of that question, the Board is not prepared to enter into a study of generic load-forecasting or weather-normalization methodologies as part of the 2006 EDR process. It may be necessary to undertake such a study in the future, although the Board does not have any specific plans for such a study at this time. The Board encourages parties to attempt to determine in the working groups whether a proposal for a Tier-2 adjustment for high growth or shrinkage can be developed in the absence of the generic methodology. We understand, however, that if agreement is not reached, there may be one or more utilities that may need to determine whether their specific situation would justify a forward test-year application. 581 Turning to heading B, "Financial Parameters," and dealing with scope and evidence related to that. The Board will initiate an industry-wide process to study return on equity and associated issues in time for implementation into 2008 rates. Having considered carefully the logical conundrum that has been presented to the Board with respect to return on equity and associated issues, the Board finds that the most practical approach for the 2006 EDR process is to require the Board Staff to perform a mechanistic update, as proposed in option A from the working groups. The Board recognizes that this approach may lead to a change in the debt rate and the rate of return on equity. 582 Turning to Working Capital; the Board will initiate an industry-wide process to study the issues surrounding working capital in time for implementation in 2008 rates. 583 With respect to heading C, "Rate Base," the Board was asked if it would sponsor a depreciation study in time for implementation in the 2008 rates. The Board will initiate an industry-wide process to study the issue surrounding depreciation in time for implementation of those rates. 584 With respect to depreciation of hardware and software, the Board is of the view that changes in the amortization rates should, in general, await the full depreciation study. It appears from the discussions this morning that there may be potential for an agreement on this issue. The Board prefers that this issue be settled in the working groups rather than requiring the calling of evidence. If no agreement is reached, however, the Board expects that the current approach will continue, and that any party who wishes to change the rate currently in use would be required to call evidence. If consensus is reached, the Board would appreciate early information from the parties as to whether an agreement has been reached, or, if not, if agreement for the calling of evidence has to be made. 585 As part of this section, there was a subsection 3 with respect to conservation and demand management issues. As requested by Mr. Poch, we will defer this until tomorrow, when that issue will be dealt with more fully. 586 With respect to the evidence, I've indicated that a depreciation study will be undertaken. 587 With respect to item number 2 and deferral accounts, the Board will hear evidence on this item, the appropriate interest rate for work in progress and deferral accounts. But we do caution the parties that the Board does not anticipate that this evidence will open up the larger questions in the financial parameters section. 588 As is the Board's usual practice, reasonable costs incurred in the production of this evidence will be allowed, provided that the parties cooperate to the greatest extent possible. 589 With respect to the subitem 3, treatment of capital gains and losses, we heard from Susan Frank and Jay Shepherd on this. It appears, based on the discussion this morning, that the parties have agreed that evidence does not need to be called on this issue as part of the main proceeding. 590 As the Board understands the process going forward, the working groups will continue to try and develop a materiality threshold for consideration of the Board with respect to the actual sharing of the proceeds with respect to either costs, losses, or on the dispositions or gains, as the case may be, and those applications will come before the Board on a case-by-case basis. 591 That completes the Board's rulings on these matters. As I indicated, there are some issues that have been deferred until tomorrow. 592 Ms. Lea? 593 MS. LEA: Thank you. 594 If the parties have any questions arising, perhaps they can speak to me at the break, unless they're leaping to mind right now. 595 In any event, I think, then, I'd turn it back over to Mr. McLorg to introduce the next presenter for distribution expenses. 596 MR. McLORG: Thanks, Ms. Lea. 597 Good afternoon, Mr. Chair and Board Panel. Our next presenter is Judy Kwik, who may be familiar to some of you, formerly being with the Board and presently with Elenchus Consultants, and acting on behalf of the Power Workers' Union. Judy has kindly agreed to represent the subgroup chair, Laurie Stickwood, in making the presentation on distribution expenses today. 598 Ms. Kwik? 599 REVENUE REQUIREMENT WORKING GROUP - ISSUE D: DISTRIBUTION EXPENSES; SECTION 3.4: 600 SUBMISSIONS BY MS. KWIK: 601 MS. KWIK: Thank you, Mr. McLorg. 602 Mr. Chair, Ms. Chaplin, Mr. Sommerville, I would like to echo this morning's speaker's sentiment of expressing appreciation of the phenomenal job that Mr. McLorg, Mr. McKenzie and Board Staff have done in keeping this process moving and most of all the extraordinary leadership that Ms. Lea has provided us that has kept the working groups focused. 603 MS. LEA: Shucks. 604 MS. KWIK: I'd like to start off with one of the two issues of scope which is a general issue related to distribution expenses. There are gaps in the accounting treatment for some distribution expenses in the Accounting Procedures Handbook that were identified. Some expenses do not currently have a prescribed accounting treatment, and there is a wide range of accounting treatment of these expenses between the LDCs. 605 The issue of scope for the Board's consideration is whether the development of prescriptive accounting treatment for expenses incurred in 2006 and beyond should be developed as part of the 2006 EDR process for implementation in 2008 rates. 606 There are nine issues on distribution expenses. The first is issue 10, affiliate transactions and shared services, and was identified as an issue based on the Board's experience with the gas distributors in determining reasonableness of costs. The discussions on affiliate transactions and shared services included the level of information to be filed for regulatory review that would maintain the confidentiality of the affiliate's competitively sensitive information, and whether an LDC's compliance with the Affiliate Relationships Code should be part of the 2006 rate approval process. The discussions indicate that there is a wide range of types and amounts of affiliate transactions and shared services that are currently used by the LDCs. 607 There was proportioned consensus on the minimum filing requirements for affiliate transactions as follows: The disclosure of each of the LDCs affiliates; a high-level summary of the nature of activities provided by each affiliate; the annual dollar value in aggregate of services provided by each affiliate; a summary of the evaluation process that the LDC used to determine the basis on which transfer pricing would be made, that is, whether it would be cost-based or market-based; a description of the general methodology followed in determining price, including such things as subscription of tendering processes. 608 The two last points speak to the filing requirements in the section on transfer pricing in the Affiliate Relationships Code. The proposed consensus on minimum filing required for shared services are: Descriptions of the type of shared services - examples are finance services, IT services, office space; the annual value of each shared service; the rationale and summary of the costs allocators use for each service - examples are by number of FTE, by number of computers or according to square footage; and, LDCs should reference the Accounting Procedure Handbook, article 3.14 for the allocators. 609 The unresolved issue on affiliate transactions and shared services is, what should the additional filing requirements be for the review of affiliate transactions and shared services; that is, should LDCs be required to file their affiliate transactions and shared services service agreements and contracts? The proposed path for this unresolved issue are submissions and/or argument before the Board. 610 The second of the two issues of scope for distribution expenses is related to affiliate transactions and shared services and is as follows: To what extent must affiliate relationship compliance be determined as one of the part of the 2006 rate-setting process to determine reasonableness of expenses? 611 Issue 11 is on low voltage and wheeling costs and was a crossover from the rates group who identified the going forward need for reporting of distribution expenses relate to shared distribution station, specific distribution station, shared-line and specific-line charges, as well as reporting of expenses related to embedded LDCs recouping of assets from their host LDCs. The rates group also suggested that these expenses be included in account 5017. 612 Now, this issue is listed as unresolved not for lack of consensus, but because the subgroup is going to have to take into account any rules or guidelines that might be coming out of the proceeding on regulatory assets. In the meantime, the following filing requirements are proposed as placeholders. Amounts billed to an embedded LDC by its host LDC for shared DS, specific DS, shared-line, specific-line charges are to be included in account 5017. Such amounts shall include amounts for the recouping of regulatory assets from host LDCs and the amounts for rates to be charged in the future by a host LDC for shared DS, specific DS, shared-line, and specific-line. 613 So the proposed path, therefore, is that the working groups need to consider rules resulting from the proceeding on regulatory assets and any future government directives that there might be. 614 Issue 21 is on the definition of distribution expenses. The following were discussed: Updates that might be required to the current definitions of activities and list of distribution activities in the uniform system of accounts; changes to distribution expenses that might be required that are related to changes in the rate-base definitions; and, minimum filing requirements for distribution expenses. 615 The proposed consensus on definition of distribution expenses is as follows: Continue with the definitions in appendix D, part 1, of the current Rate Handbook entitled, "Guidelines for Determining Distribution or Wires Only Activities and Assets"; to discontinue appendix D, part 2, of the current Rate Handbook entitled, "Rate Base Calculation - Initial Filing," initial filing referring to the filings back in 2000 and 2001; and to update appendix D, part 3, table B.2 of the current Rate Handbook with addition of accounts 5014 and 5015 on transformer equipment. 616 The proposed consensus on recommended filing requirements for distribution expenses for which unique filing requirements have not been identified are: For utilities to file three years of historical data for 2004, 2003, and 2002 for high level groupings of distribution and distribution expenses. And the unresolved issue is on the level of these account groupings. 617 The proposed path is for the unresolved issue is for further discussions in the working groups and possible argument before the Board. 618 On issue 22, which is benefits and pension matters, the discussions included whether the regulatory review should be on period expenses only or for also on the choice and performance of pension plans. Some utilities administer their own pension plans and may have unique expenses or associated risks. A key issue discussed was the cash versus accrual basis for accounting treatment of these expenses. 619 The following is the proposed consensus on filing requirements for pensions: Three years of historical information, 2004, 2003, and 2002, on amounts paid for pension premiums and adjustments. LDCs who do not use OMERS must provide key policy information; for example, cash versus accrual valuation, smoothing methods, summary of performance. An unresolved issue is whether there ought to be filing requirements on non-OMERS plans that are not available to all employees. The proposed path is for further discussion in the working groups. 620 And the proposed consensus on filing requirements for post-retirement benefits are for information on the current accounting treatment of these benefits, i.e. cash versus accrual, review of period frequencies, as well as on the treatment of one-time expenses and information on past changes in accounting policies, such as a change from cash to accrual; and for information on changes in treatment of actuarial value and post-retirement benefits. 621 The discussions on issue 24, insurance expenses, were on third-party insurance premiums and the utility's reserve related to self insurance. The proposed consensus on filing requirements are for LDCs using third-party insurance to provide three years of historical costs, high-level information on number of insurers, types of insurance purchased, and premium costs by insurer. 622 LDCs that self-insure should provide high-level information on their evaluation plan that resulted in the decision to self-insure, and for information on the accounting treatment of reserves, for LDCs that have reserves for self-insurance. 623 An unresolved issue is whether reserves can be treated as a distribution expense, and a proposed path for this issue is for further discussion in the working group. 624 The next issue, this is 25, is on bad-debt expenses, and discussions included the separate reporting of bankruptcy from bad-debt expenses, and that bankruptcies are an ongoing component of bad debt. 625 The proposed consensus on bad debt is for filing requirements as follows: Bad debt recorded for three historical years, 2004, 2003, and 2002, including bankruptcies, to be reported segregated by customer class; and disclosure of single bankruptcies that exceed the current materiality for Z-factors in the current Rate Handbook, and that is 0.25 percent of net assets. 626 An issue that the working group still needs to address is the timing used to write off bad debt, that is, is it the year it is provided for or the year that it is written off in? 627 Issue 26 is on total compensation, and the discussions were on the level of disclosure for meaningful regulatory review versus privacy of individuals' wages; the difficulty establishing filing categories that fit all LDCs, given varying levels of employees, as well as classifications used by LDCs; and the use of disclosure thresholds, for example, the disclosure of all individuals earning in excess of $100,000 per year. 628 The proposed consensus on total compensation is that compensation issues related to affiliate transactions are adequately reviewed under the filing requirements for affiliate transactions, and that LDCs need to confirm the existence of and adherence to documented LDC compensation policy in their rate filing. 629 The following are the proposed consensus on filing requirements for total compensation. For each of the categories, or similar categories, executives, management, non-unionized and unionized, the following should be filed: The average yearly wage, the average yearly incentive, the average yearly benefits, and the number of FTEs in each category. Where there are three or less FTEs per category, aggregate the staff with the most closely related category, and continue to aggregate to ensure that no category contains three or less FTEs per category. 630 The following are the definitions that apply to the guidelines: Wages are the earnings, including overtime, excluding incentives and benefits. Incentive is the amount paid as the prescribed corporate incentive or bonus. The benefits are the employee benefits related to compensation. The executives are the likes of the CEO, the COO, VPs and directors. The management are those that are in the operational-, middle- and supervisory-level management. Non-unionized staff are those in positions that are not part of a bargaining unit. And unionized staff are staff in positions included in bargaining units. 631 The unresolved issues related to total compensation are as follows: Whether overtime amounts should be included in wages; filing requirements for LDCs with less than three employees; whether the unionized category should be broken down by bargaining unit; whether there should be disclosure of compensation for staff earning in excess of $100,000 per year; the disclosure of performance plans, and the criteria of performance-plan eligibility for rate recovery; whether there needs to be filing of information on contract staff; a definition of contract staff; and, for LDCs with affiliates, whether total compensation, or only the portion paid by the LDC, should be reported. And the proposed path for these issues is further discussion in the working group. 632 Issue 27 on IT expenses, this was raised as a result of IT project overruns in the gas distribution industry, and the discussions indicated a wide variety of treatment of IT expenses by the LDCs. 633 The proposed consensus on IT expenses is that the most useful review of IT expenditures is the capital investment rather than expenses, and therefore it should be undertaken in the review of rate-base considerations. 634 In addition, the lack of a formal account definition in the uniform system of accounts makes a separate filing of IT expenses difficult, and likely of no comparative value across LDCs. 635 A prescriptive accounting treatment should be developed for future years. Whether this is done as part of the 2006 EDR process depends on the Board's decision on the issue of scope put forth at the start of this presentation, that is, on the development of prescriptive accounting treatment for distribution expenses for implementation in 2008 rates. 636 The final issue, issue 28 on advertising, entertainment and travel, charitable and political contributions, employee dues and research and development, included the allocation of these expenses between the ratepayers and the shareholders; the uniqueness of these various categories that precludes a generic treatment of all categories; the expectation of public utilities as community supporters through charitable contributions; the current recording of entertainment/travel expenses across many accounts; and the use of general principles for LDCs to follow in allocating these expenses in the absence of values that might be filed. 637 So the following, then, are the implementation of policies: 638 For advertisement, advertising expenses incurred for the sole purpose of promoting corporate branding, or image, are not recoverable in distribution rates, and are a cost to be borne by the shareholder. 639 For entertainment and travel, staff entertainment and travel expenses, i.e., employee business expenses, must be approved by LDC management, and must be based on a documented and consistently applied corporate policy. 640 What remains unresolved in terms of entertainment and travel expenses are whether the disallowed portion of entertainment expenses filed in an LDC's tax return could be used as a proxy of one-half of the level of this expense in the absence of having a distinct account, whether LDCs should file their policies on entertainment and travel, including policy on staff development and training, and whether LDCs should be required to file information on excluded items, possibly as statements in a manager's summary. The proposed path for these unresolved issues are for further discussions in the working group. 641 For political contributions, the policy is, political contributions are cash donations to political parties, and are a cost to be borne by the shareholder and not recoverable in distribution rates. 642 In terms of employee dues, fees or dues for annual recreational or social club memberships are not recoverable in distribution rates; examples are golfing, tennis, and sailing clubs. This policy is not intended to exclude incentives for staff participation in health programs. 643 For research and development, prudently-incurred distribution-related research and development expenditures intended to benefit the ratepayers are recoverable in distribution rates. 644 And finally, charitable contributions. With regard to charitable contributions, it is unresolved whether charitable contributions should be recoverable in rates, and the proposed path on this issue is for further discussions in the working group. 645 MS. LEA: Thank you very much. 646 That takes us, then, to the issues of scope. And the first one, Ms. Kwik, I don't think you've dealt with yet as part of your presentation, I wonder if you could describe for us the issue -- the first issue of scope, please. 647 MS. KWIK: Actually, it was the very first slide that I started off with, gaps in accounting treatment, okay? And it's -- we're seeking guidance from the Board on this. I'll go through it again. 648 There are gaps in the accounting treatment for some distribution expenses in the Accounting Procedures Handbook, and some expenses do not currently have a prescribed accounting treatment, and there is a wide range of accounting treatments of these expenses currently used by the LDCs. 649 The issue of scope for the Board's consideration is whether the development of prescriptive accounting treatment for expenses incurred in 2006 and beyond should be developed as part of the 2006 EDR process for implementation in 2008 rates. This development then would allow parties to review specific costs that currently we're not able to do because the accounting treatment varies between LDCs. 650 MR. KAISER: Mr. Adams. 651 SUBMISSIONS BY MR. ADAMS: 652 MR. ADAMS: Thank you, Mr. Chair. 653 There may be other intervenors that wish to speak up as well. My name is on the list, I think, mostly because Mr. Shepherd didn't want to have himself reappearing on the list too many times. 654 MS. LEA: Good strategy. 655 MR. ADAMS: But the issue here is, I think, mostly allowing the scope of this process to provide a better foundation for going forward rates for 2008, not limiting -- the question of whether the scope is limited just to 2006 or whether we're going to spend some time now to invest in building a foundation for better rates in 2008. Those of us that have been enthusiasts for the cohorts and benchmarking work really have an interest in seeing further work done maturing the accounting standards to improve the transparency and ease of comparability amongst costs, but that's not just the -- that's not the limit of the advantage to be gained by this investment at this time. 656 I think I'll just add attention to one of Judy's comments, specifically in the area of IT costs where there are a variety of potential ways that these can be accounted for, and it seems that there is some innovation amongst the utilities in how they're doing it. Less innovation is really the point of having further review of the uniform system of accounts in these particular identified areas. Perhaps there are others. 657 MR. KAISER: Thank you. 658 Mr. Shepherd. 659 SUBMISSIONS BY MR. SHEPHERD: 660 MR. SHEPHERD: I wasn't actually going to say anything, but I will if you want. The only point I would make is we have the group together already working on these things, they've already identified some areas where there are problems in the consistency of accounting treatment, it seems to me that whatever the working group can do to assist the Board in identifying where a consistency can be achieved would be useful to the Board. 661 MR. KAISER: Thank you. Any other comments on this issue? 662 Ms. Lea, any questions? 663 MS. LEA: No, thank you. 664 The next issue has to do with, to what extent must Affiliate Relationships Code compliance be determined as part of the 2006 rate-setting process. Ms. Kwik, do you have any further comments on that? 665 FURTHER SUBMISSIONS BY MS. KWIK: 666 MS. KWIK: Yes, I did, actually. I'd like to make several points. 667 The review of prudence of cost is the main issue in the 2006 EDR process, regardless of whether these costs are in-house costs or costs for an affiliate transaction. Given that any review of affiliate rate -- the ARC compliance in the 2006 EDR process will likely be the first of such reviews since the implementation of the ARC. There is a high likelihood that it will result in unreasonable delays in the rate-setting process as issues on the interpretation of the ARC arise. Therefore, the review of Affiliate Relationships Code compliance will result in unreasonable delays in the 2006 electricity distribution rate-setting process. 668 Current electricity rate-setting distribution rates are based on 1999 revenue requirement, and by 2006 it will have been at least seven years since the rates were rebased. The review of Affiliate Relationships Code compliance as part of the 2006 EDR process will potentially push the time line past 7 years. 669 MR. KAISER: Mr. Adams. 670 FURTHER SUBMISSIONS BY MR. ADAMS: 671 MR. ADAMS: Well, we take a somewhat different approach to this question, but keep in mind that there is very little on the public record as to the extent of these kinds of transactions. So it's hard to speculate, in my view, on the impact on the timing of the procedure by including the ARC compliance within scope. In our submission, the ARC compliance should be within scope. The utilities have been filing on ARC compliance subject the provisions of the reporting and record-keeping requirements, specifically in the areas in clauses 2.3.5 and 2.3.6, so there is information there. My suggestion is that the matter be left in scope so that the prudence review can take account of ARC compliance, and once additional information is available, assuming that additional information will be available, then at some early stage after the review much that information, it might be -- the Board might be in a better position to make some assessment as to the potential impact on timing, the extensiveness. 672 It's my understanding that amongst the intervenor community, there is no expectation of parties bringing evidence on this matter, it's just simply an input for the consideration of the prudence review. 673 So in conclusion, it is my belief that at an appropriate time early in the process, if it is necessary for the Board to limit the scope of an inquiry into ARC compliance, that that decision can be taken at the time. It's not necessary for the Board to guide its decision now in terms of the inclusion of ARC compliance with a concern that it will expand the time horizon. 674 MR. KAISER: Thank you. 675 Mr. Rodger. 676 SUBMISSIONS BY MR RODGER: 677 MR. RODGER: Thank you, Mr. Chairman. I would support the comments of Ms. Kwik, and I wanted to speak to three matters under this issue. 678 First of all, ARC compliance is always an issue for LDCs in any event. Our compliance is a condition of all LDCs' licence, so it isn't just a matter that arises in the context of a rate application or a principles hearing about rate handbooks, in any event. So my submission here is that there really is no need to duplicate the tools that are already available to the Board to carry out this function. You do have a compliance division, and if it is concerned at any time that a particular LDC, whether it's compliance or not, then the compliance branch can look into that. 679 So we would have a real concern about the process being expanded, and it's not at all clear to me Mr. Adams's submission that there is no expectation of evidence, that this is somehow an input. I'm not sure how it's an input without it being evidence. And then we get into the questions of what evidence. 680 The second matter is that we do believe that it is relevant for the 2006 rate process that LDCs do develop and present their allocation policies for shared services so that they separately account for costs in relation to distribution activities and assets that are non-utility related. And here's the linkage between those kind of shared functions within an LDC and how that goes to reduce the revenue requirement. So to that extent, there is a link between revenue requirement and ARC issues. 681 So presumably, the consensus that has been described already captures that in terms of services that occur within an LDC, but that may extend to non-distribution activities. And in our submission, sir, that's what the context of this question should be limited to, the extent to which that cost allocation policy is reflected in terms of being deducted from the revenue requirement. 682 There is a side issue, but it's one of increasing importance which should be clarified from this proceeding, and that goes to the issue that the range of activities that LDCs can be involved in is expanding. As an example, the original sunset provision for LDCs managing and operating water/waste-water systems on behalf of a municipality, for example, is now gone, and LDCs can do that. 683 So I believe the issue has been captured in Mr. Cameron's earlier submission about the treatment of other revenue. But the issue here is let's say, for example, within an LDC, they have their electricity distribution business and they have, to use the same example, management of water and waste water. And let's assume that that fair market value contract yielded a 12 percent return on the water business. The question is whether that net income from the water management, that profit, also has to be deducted from the revenue requirement of the LDC for 2006 rate-making purposes. And I suggest that that is an important question because, as I say, as LDCs can do more, this becomes a central issue about where to site that business, whether it stays in the wires company, in the LDC, or whether it's moved over to an affiliate. 684 And, as mentioned, I think this issue is captured already in the earlier working group. So my submission would be that the extent to which ARC compliance must be determined, really, is already captured in the consensus position, that you don't need to duplicate the compliance branch function. But there are some legitimate questions around sharing of services, and the broader issue of revenues from other LDC -- non-LDC activities within the LDC, that really has to be clarified as part of this process. 685 Those are my submissions, sir. 686 MR. KAISER: Thank you. 687 Mr. Shepherd, do you have some comments? 688 MR. SHEPHERD: Yes, Mr. Chairman. 689 I'm a little bit confused here, because I'm not sure whether we're talking about whether this is in scope for this process of setting policy, or whether it's in scope for the 2006 rate applications when they come down. If it's the former we're talking about, if we're asking whether we need to talk about this anymore, in this process, I think the simple answer is we probably don't. There's an unresolved issue as to what utilities have to file relating to ARC compliance, but that's a matter of degree, that's not a matter of whether they have to file anything. 690 If the question is whether, in the 2006 rate applications, ARC compliance is within scope of those applications, it seems to me relatively straightforward. If an expense is claimed in those applications, it has to comply with ARC; otherwise, you can't recover it from ratepayers. It's straightforward. 691 So the opposing view would have to be that, if an expense set out -- or a category of expenses, or whatever, set out in the 2006 rate application of an LDC is not compliant with ARC, the Board must ignore that and -- in the process of setting rates. And that seems to me to be an absurd result. Therefore, what -- if the result is that, having found that something is non-compliant you have to deal with it in the rate application, it follows that asking questions about whether something is non-compliant is also within scope for the rate application. That's just straight logic. Therefore, as I say, I'm confused with what the problem is. 692 Those are our submissions. 693 MR. KAISER: Thank you. 694 Mr. Rodger, did you have any response to that? 695 MR. RODGER: Yeah, I think the scope of the issue, as I understand it, is there are some aspects of our compliance which I don't think you need to deal with in this process at all. For example, on governance, the ARC requires that you have, by a certain date, one-third of your board of directors being independent from any affiliate. I don't think we need that kind of governance discussion, or board-structure discussion, as part of this principled process. However, when it gets to the issue of -- my last example, of the related ARC issue of the water management net income going to revenue requirement, I think that is within the scope. But my point is it's already dealt with within another working group. So I think this issue can, in my view, be dealt away because the relevant areas of review are already captured in the consensus. 696 MR. KAISER: Mr. Shepherd, do you agree with that? It's already covered in the other working group? 697 MR. SHEPHERD: Well, I guess the simple answer is, I still don't know whether it's intended to talk about this as being in scope in this process, or in scope in the applications. I still don't know which is the question being asked. 698 MR. KAISER: Ms. Lea. 699 MS. LEA: My understanding was that we needed to figure out if, in this generic process here, the one that is going forward to write the Rate Handbook, we needed some additional things about ARC compliance, more than what's in the work group's contemplation right now. So I don't see any problem -- and, you know, I'm not making some ruling, but I didn't see a problem with asking questions about whether a certain expense was ARC-compliant when it's sought to be recovered from ratepayers, when you're assessing a rate application. 700 What I had understood was there was still some debate as to the breadth of the working group's consideration of ARC compliance in this generic process. Maybe Mr. Adams can help us with that, as well, or maybe we don't have an issue, and that's fine, too. 701 MR. ADAMS: I think your gloss of the issue helps to clarify it, certainly, for us, and if there is a common understanding around the description you just provided, it seems to me that that is sufficient. 702 MS. LEA: But, Mr. Adams, are the things that Ms. Kwik talked about sufficient for your purposes for the generic process, aside from -- I understand you have a request in for evidence. But aside from that request, it sounds as if the things being discussed in the working group will cover the belief you believe belongs in the generic process. 703 MR. ADAMS: Yes, I was concentrating on the generic side of the process, not the rate application and following. 704 MS. LEA: I understand. Now, perhaps -- I don't know if Mr. Rodger was in agreement with what I said about the ability to ask questions on the individual applications. 705 MR. RODGER: I guess that was my concern, Ms. Lea, that the way the decision was expressed, the intervenors had an expectation that there would be an additional level of review, beyond the consensus we heard about today and we heard earlier last week. 706 MS. LEA: I understood that the level of review was still an unresolved issue to be worked on by the working group. But I don't know. 707 Sounds like we're in a bit of a mix-up, Mr. Chairman, in terms of how broad the treatment is here. It appears that we can continue working on this matter in the working group and, if we need further guidance on scope, perhaps we can come to you at another time. But right now, it sounds like I'd like to take this back to the working group and have another bash at it, without asking for a ruling from you on scope at this time. 708 MR. KAISER: All right. We'll defer it until later. 709 MS. LEA: Then that completes the questions, I believe, that are before you out of the distribution expenses group, where rebasing has been covered. We have no questions of evidence. Thank you very much, Ms. Kwik, for the presentation. 710 MR. KWIK: You're welcome. 711 MS. LEA: Mr. McLorg. 712 MR. McLORG: Mr. Chair and Panel Members, the next presentation will be with respect to taxes, or PILs, as they are known in our industry, and Mr. Jay Shepherd, who undoubtedly requires no introduction, will nevertheless suffer mine. 713 Mr. Shepherd is with Shibley Righton, and represents the School Energy Coalition in this process. And I think that his presentation will be available momentarily. 714 REVENUE REQUIREMENT WORKING GROUP - ISSUE D: TAXES/PILs; SECTION 3.5: 715 SUBMISSIONS BY MR. SHEPHERD: 716 MR. SHEPHERD: Mr. Chairman, the taxes and PILs group was a group of 17, largely accountants and tax specialists; in fact, I think all accountants and tax specialists. 717 MS. LEA: You had the most exciting meetings, then. 718 MR. SHEPHERD: We absolutely had the most exciting meetings. 719 And the reason I raise that is because, if this presentation devolves into something that is not clear, please feel free to stop me. Sometimes we get into details that are unreasonably technical. 720 What we did in this group is, we started by developing a more detailed list of the subissues to be addressed. We considered the strawman, and we considered some other conceptual frameworks for both forecasting and tracking the PILs component of 2006 rates. 721 We identified some initial filing requirements, and we established a process within the working group to develop a better - and by that I mean simpler - spreadsheet for the calculation of PILs for filing purposes. This says we reached complete consensus on seven issues but, in fact, at the executive group, two lost their consensus, and we have five issues that -- so we have five that have a consensus and we have five that do not have a consensus, of which two are important issues, and the other three are more minor. 722 So we didn't have any issues of scope except, of course, the generic one that you've already ruled on, 2008 rebasing. 723 The first issue we had to address was whether taxes should be calculated on the basis of accounting rules or on the basis of the taxes that would actually have to be paid. And there's a substantial difference between the two. Accounting rules assume a number of things. And the tax rules, in fact, adjust some things in calculating the actual taxes. 724 So what we concluded was, the basic principle is that the LDCs shouldn't recover from ratepayers more taxes than they actually have to pay. But that -- and so, therefore, charging taxes on an accounting basis would be inappropriate. 725 Some group members were concerned with whether the differences between accounting taxes and real taxes would affect the rate of return on their income statement and they are investigating that separately, but I don't think anything turns on that. 726 The second issue we had to address was whether the taxes should be calculated on the historical year or on the test year. We were aware of the fact that the basic principle being used in this rate-setting process is to start with a historical year and make adjustments. What we concluded was that we could construct something in which we used the historical taxes, and then they did a series of parallel adjustments related to the adjustments that you've heard in 3.1 discussion to get to the projected taxes for the test year. What we realized, though, was taxes are basically just math, and the more elegant solution is let the calculation be made of what the appropriate revenue requirement and its components are for the forecast year and then gross it back up to get to what the tax amount is implied by those numbers. It produces the same result, but it produces it in a simpler and more straightforward way. 727 Now, one of the results of that is you may recall that Mr. McKenzie referred to a crossover issue, or maybe it was -- it was a crossover issue dealing with taxes PILs adjustments related to the adjustments that his group talked about. That wasn't required because we simply are going to the forecast numbers and calculating the taxes. 728 Then the fourth issue we came to is -- this is actually wrong, Mr. Chairman. This presentation is not the final presentation. My apologies, I sent it to you. 729 MS. LEA: Yeah, you did send it but this is -- 730 MR. SHEPHERD: This is not the final presentation. 731 MS. LEA: We were all working in a hurry on Friday afternoon. 732 MR. SHEPHERD: If it's all right with you, I will just ignore this. I will get the proper presentation and I will continue from my own notes. The presentation was changed last week. 733 The third issue was whether future changes in tax rules or tax rates should be included in the calculation, and how do you determine whether a future change is actually going to happen or not. What we concluded is, Generally Accepted Accounting Principles have a rule as to when you assume a future tax change is going to happen. So we concluded that we should just follow that rule for calculating the taxes for the forecast year with one exception, that is, sometimes the taxing authorities legislate by press release. They'll issue a press release saying we're going to make this change and that has a greater or lesser level of reliability, depending on the circumstances. So we leave -- we're proposing to leave it open to the Board to determine when the LDCs file that they should or should not take into account any change that has been announced but is not in a ways and means motion, which is the GAAP test. 734 The fourth issue that we resolved was the issue of tax planning. A number of LDCs do tax planning to reduce their taxes and what we concluded was that tax is an expense like any other, and LDCs should be minimizing that for the benefit of the ratepayers. We are proposing to include a general statement of principle in the handbook saying, "All distributors are allowed and expected to take prudent steps to minimize their tax costs with the same diligence as they seek to minimize other expenses." 735 However, we concluded that the standard filing should not require any formal documentation on that, but that the tax calculation spreadsheet should, for the smaller utilities or the ones without the resources to do sophisticated tax planning, have suggestions as to the most common ways that they can minimize their taxes as part of that exercise. 736 The fifth and final issue that we agreed to was that the minimum information to be filed on taxes for the 2006 rate filing should be: The tax calculation spreadsheet that we're currently working on; the audited financial statements for the years 2002, 2003, 2004; and, the taxes actually paid for 2002, 2003, and 2004, including a narrative description of any material variances between those years and the rate year forecast. There is an unresolved issue about whether more should be filed. 737 The two big issues that are unresolved are first -- and I'll read it to you because I want to be precise -- to what extent, if any, should differences between forecast taxes/PILs included in 2006 rates and actual taxes/PILs paid in respect of 2006 be trued up after the fact with excess refunded to ratepayers and shortfalls charged to ratepayers. That is, is it treated as a pass-through or is it a forecast expense like any other? 738 We identified four alternatives. The first is 100 percent pass-through. This is basically equivalent to the straw man in the Board Staff's proposal. After 2006, you would determine what the real taxes were, whatever difference there was would either be refunded to the ratepayers or charged back to the ratepayers, it would be a variance account. The primary rationale behind that is the perception by some that in the past several years the actual taxes for many utilities have been much lower than the taxes included in rates. 739 The second possibility is an asymmetrical pass-through or true-up. And this is the same as the first one except that there would only be a true-up if the LDC collected more in rates than the actual taxes. So we've solved the problem that had originally been addressed, but it would not make the utilities hold if they paid much more in taxes. 740 The third possibility is a partial true-up that would be limited to changes in tax rates and rules. In effect, you would say if the rates went up or down in the forecast year and you didn't know it in advance, when you set your rates, that would -- that difference would go in a variance account and would be adjusted at the end of the year, both ways. 741 The fourth is no true-up. This is the model use the in the gas distribution utilities. It's forecast like any other expense and any variation between forecast and actual is either enjoyed or borne by the shareholder. The primary rationale that we identified for that was that there's no fair way of truing up taxes if the underlying drivers of the variance, for example, variations in revenue or expense, are not themselves trued up. The proposed path for this issue is evidence, and I'll explain that in a second. 742 The second issue on which there's a dispute is the question -- there will be expenses of utilities that will not be allowed to be recovered from ratepayers but will still be expended in the utility. So therefore, they will be deductible for tax purposes by the utility as a corporation, as an entity, and they will reduce taxes. The question is, that tax reduction, who enjoys the benefit of that? Is it the shareholder because they paid the cost, they bore that expense, or do the ratepayers get some of that because the shareholders typically are not taxable and therefore, would not be able to get a benefit from it were it not for the taxable utility? The proposed path for this is evidence, and again I'll speak to that in just a second. 743 The third issue that is unresolved is, should the tax calculation be done on a standalone basis. Standalone basis means that you pretend the utility does not have any affiliates or related companies, and so where the tax rules provide that a tax credit or a deduction or a threshold or something like that has to be shared between related entities, the utility gets the full benefit of it as if there were no affiliates. 744 So the two options identified for that are the sort of standard solution, which is the standalone principle, which is used in most places, and some form of allocation amongst affiliate companies, for example, the large corporations tax exemption, which allows you to reduce large corporations tax and, on a standalone basis, the entire reduction would be enjoyed by the utility, and none of it would be enjoyed by any of the affiliates. 745 Two other issues that -- smaller issues that were raised, one is the definition of materiality, that is, if an LDC has to report on material variances and taxes, what is the level of materiality that's used? And that we propose to take back to the working group. 746 And finally, should there be additional minimum filing requirements, in addition to the ones we've identified? And that we also suggest should go back to the working group. 747 Turning to the -- I had the same reaction around the room when we presented this last Monday. The two -- there are no issues of scope. 748 The issue of evidence, there were two that I indicated. And I understand that, on the first one, the pass-through or true-up question, that Ontario Hydro and Toronto Hydro may also wish to speak to this, although we didn't know. 749 MS. LEA: That's okay. I think Toronto Hydro had spoken to it. It might be of assistance if Board Staff also spoke to this issue, as we have a proposal, as well. 750 MR. SHEPHERD: Okay. And the evidence that we would propose to bring is not a tax specialist, but, probably, a regulatory specialist, to look at the balancing of risks as between shareholders and ratepayers, if there is a true-up. We're concerned that the risk is actually asymmetrical, and we would want a regulatory specialist to come and look at that, and do an analysis of whether that's, in fact, the case, and what has happened in other jurisdictions. 751 MS. LEA: Thank you. 752 With respect to this first evidence issue, I wanted to have an opportunity to put this on the record now so that, in fact, my friends could speak to it. And if there are people who have something to add to this, I'd invite them to do so. 753 Board Staff had an idea about one possible tax expert that we could retain, partly to testify, if necessary, but also to assist the working group, if the working group believed it would be of use, and to assist getting the handbook into a shape that would be useful for small utilities, as well as the larger. 754 So we were contemplating hiring a tax expert to answer the following question: What is the best method to forecast the actual taxes to be paid by the Ontario electric utilities in 2006? 755 Now, I'd appreciate it if Mr. Shepherd, and others, if they choose to, indicate whether they think that would be useful. Because if it's a purely mathematical and simplistic calculation that doesn't require judgment and assessment and that kind of thing, then maybe it's not necessary. But that was the first question we thought about. 756 The second question: How robust can such estimates be, given the rapidly changing environment faced by electricity distributors in Ontario? And what we were talking about there is the tax or regulatory and income uncertainty that is faced. I understand there may be some distributors that are not fully-taxable. There may be other factors that keep changing, and that -- it might be interesting to have an assessment of whether estimates can be robust in this environment. That was the second question. 757 The third question: Are there any aspects of estimating taxes that are particularly susceptible to forecast error? And, if there are, how material are these? 758 And lastly, and importantly for the handbook, what information should the utilities file by June 2005 - in their rate applications, that is - to allow the Board to assess the reasonableness and robustness of the tax amount required to be incorporated into 2006 distribution rates? 759 Again, that is, what should the utilities file to allow the Board to assess the reasonableness and robustness of the tax amount required to be incorporated in 2006 distribution rates? 760 So those that are speaking to this issue, if you have a view as to whether that's useful at all - unnecessary/very useful - please let us know. Of course, we're seeking the guidance of the Board Panel, ultimately, on these questions, but if my friends have anything to suggest in regard to that, I'd appreciate that, as well. 761 MR. SHEPHERD: Would you like me to respond to that first? 762 MS. LEA: As you wish, Mr. Shepherd. 763 MR. SHEPHERD: I'll be happy to. We've struck a group of four people out of the subgroup to identify the best method of calculating the taxes. It's all math, so it's just a question of -- it's complicated, but it's not full of judgment. 764 MS. LEA: Does that group intend to provide a solution which is workable for those utilities that don't have the wherewithal to either calculate their own taxes, or hire someone to do it? 765 MR. SHEPHERD: Yes, that's precisely what we're planning. 766 MS. LEA: And is it your view, then -- that the first question, then, the best method to forecast or calculate the taxes, you probably don't need help with that? 767 MR. SHEPHERD: We don't need help. 768 MS. LEA: That's your view? Okay. 769 MR. SHEPHERD: And other members of the group can comment, as well, but I don't -- it seems straightforward. 770 MR. KAISER: Who are the members of the group, Mr. Shepherd? 771 MR. SHEPHERD: Well there are 17 people in the group and -- 772 MS. LEA: But the four people, I think. 773 MR. KAISER: The four. 774 MR. SHEPHERD: The four are a couple of people from small utilities, a couple of people from larger utilities. 775 MS. LEA: Mr. Clinton, I think you're one of them? 776 MR. CLINTON: I sit on a subgroup. I was just going to agree with what he had said. 777 MR. SHEPHERD: The second issue, how robust is it? The answer is it's exactly as robust as the underlying drivers. If the income changes, if the components of the income or the components of the rate base change, then the tax will change. But again, it will change mathematically. So, if you get the underlying numbers right, you get the tax right. 778 The third is, what are the things that will create forecast error? Same answer. 779 And the fourth is, what information should be provided? And, as we've indicated, we are identifying information that needs to be provided, and one of the unresolved issues is how much more should be provided to make it easier for the Board to see that the tax number is right. 780 MS. LEA: Is that something that you're seeking to resolve in the working group rather than call an expert on? 781 MR. SHEPHERD: Yes. 782 MS. LEA: So, Mr. Shepherd, it may be blindingly obvious to everyone else, but can you outline what your expert, the one you were proposing to call, what questions would he deal with? 783 MR. SHEPHERD: Our concern is that if you true-up for taxes, then the tax number -- the tax number is a budget, in effect. All expenses are a budget, for the utility. And the scenarios in which you true-up are going to be things like the company -- the LDC overearns. It seems inappropriate for an overearning utility to be able to go back to its ratepayers and say, Because we overearned, we want some more money for taxes, because we had to pay more taxes on our overearnings. 784 We are concerned that utilities will tend to overearn rather than underearn, given the level playing field, because management is held to accountability for meeting their earnings targets. And therefore, if -- there should be a forecast bias, if you have a true-up, in which the true-up will tend to be more the ratepayers paying the LDC, rather than vice versa. And we would like to get a regulatory specialist to look at whether that's the case in other jurisdictions, and how other jurisdictions have dealt with it. 785 MS. LEA: So this person -- okay, thank you. Maybe other people should speak to it. 786 MR. KAISER: Mr. Rodger. 787 MR. RODGER: There's one matter, sir, that -- it doesn't fit neatly in the issues Mr. Shepherd responded to at the end, but it does, as I think you'll see, permeate throughout this discussion. And it isn't just a math question, but it's a policy question that has been raised at various times in this process, but there hasn't been an answer, so I thought I'd raise it here. 788 And that is that it's one of the implications of having LDCs being what I call virtual taxpayers. They are levied a certain amount of so-called tax, PILs, but, of course, this isn't real tax in the sense that part goes to the federal government, part goes to provincial government. This all goes to Queen's Park. 789 And there is an issue that has come up, right, since the restructuring began - and when I say this, I'm speaking not only on behalf of Toronto Hydro, but just generally, in the sector - and that has to do with, really, to what extent should LDCs and their management be permitted to minimize tax, one of the goals that Mr. Shepherd raised. And the issue here is -- there is a concern that the Ministry of Finance should clarify for the sector what is its expectation around PILs to be generated from the sector. 790 MS. LEA: Could you repeat that? 791 MR. RODGER: It would be helpful to clarify whether the Ministry of Finance has an expectation of the amount of PILs to be generated from this sector, because on the one hand you have the Ontario Energy Board, through instruments like the Rate Handbook, setting out deemed debt and equity levels. So the issue is, you have a set of books for that that reflect those two. But then you may have an LDC that, to pick up Mr. Shepherd's lead, wants to minimize tax so they have a very different arrangement for their true financing arrangements, higher debt, therefore, higher interest charges, more interest deductible, lower PILs. 792 It would be very helpful for the sector to have that clarified. Is it -- we're all -- do we all agree that, on a go-forward basis, 2006 to beyond, LDCs will be permitted to have these two very different set of books? And it has posed a lot of practical difficulties when LDCs look about trying to rearrange or restructure from a financial point of view. It impacts everything from whether, for example, a municipal shareholder who's currently holding its LDC's promissory note who may want to monetize that note, and the issue is how big can the debt be. Can you have 50/50 for OEB purposes and maybe 70/30 for real-life financing; to the other extreme of utilities who may want to explore other options such as income trusts for the second. 793 So it's a dilemma that hasn't been clarified since the restructuring, it's a real concern, and it may not fit neatly in the specific issues raised here today. But that would be very helpful, if that could be clarified through this process somehow. 794 MR. KAISER: Thank you. 795 Mr. Shepherd, do you have any comment on that? 796 MR. SHEPHERD: Well, we came to a consensus on tax planning in the working group and the executive group, including representatives of Toronto Hydro, actually. I mean, I take Mr. Rodger's point, but I would have thought that wasn't really a tax issue, that was really a risk issue. You want to maintain the financial health of the utilities and therefore you don't want them going 95 percent into debt. But that's about how much their debt is, not with their tax planning, I would have thought. But those are my only comments. 797 MR. KAISER: Any other comments? 798 Mr. Adams? 799 MR. ADAMS: I hesitate to wade into this. It's a technical area. The Board does have -- it might be useful to invite the Ministry of Finance to participate in this process. We haven't heard from them very much so we haven't got clarity on some of these issues, and it may have impacts on the approach that's taken for 2006 rates. It just occurred to -- I think Mr. Rodger has identified some important concerns that may well reach beyond this room. So it seems to me potentially useful for all if we had greater clarity around this, but it's not something that I'm -- I think the parties here that have been participating so far, who have been active in the process have much to add. 800 MR. KAISER: Thank you. 801 Mr. Shepherd, do I understand that as far as the Board is concerned, you are content that the working group will be able to resolve the outstanding issues or not? And where are we left in terms of what you're asking the Board to rule on at this point? 802 MR. SHEPHERD: On the question that Mr. Rodger raised, that's a resolved issue. So unless he's advising us now that there is no longer a consensus, as far as I am concerned, we still have a consensus on that. 803 MR. KAISER: Is there any issue that, in your mind, you're asking the Board to rule on? 804 MR. SHEPHERD: Those two issues today. 805 MR. KAISER: Still those two issues. 806 MR. SHEPHERD: Just those two issues; that's right. 807 MS. LEA: I think Hydro One had a comment, sir. 808 MS. FRANK: Yes. We have, first of all, a question, Ms. Lea. The expert witness that you're going to bring in, would they speak to any of the scope issues about the true-up or about the sharing of tax savings? Would they speak to either of those two? They weren't on your list. 809 MS. LEA: We hadn't contemplated the expert speaking to the tax savings on disallowed expenses, although that could be possible, but we wouldn't retain the expert just for that, I think was the idea, unless the Board so directs. But in our contemplation, we hadn't contemplated that. 810 We had also not contemplated getting a direct opinion from this expert on the precise question that Mr. Shepherd is talking about, that is, what's the best regulatory principle or regulatory approach based on regulatory principles, as to whether it should be a pass-through or some sort of true-up, some sort of pass-through estimates, whatever. 811 We were trying to get the practicabilities done. How do you estimate it? What are going to be the problems with that estimate? Mr. Shepherd seems to be indicating that that's fairly simple, and so we don't need an expert to do that; his group of four is going to take care of that. So we had not thought of going farther and putting the main question to the expert, but I would, of course, accept the Board's direction on that if they thought it would be useful. 812 MS. FRANK: Just to understand, then, the only evidence we'd have on the issues of true-up or sharing of expenses would come from Mr. Shepherd's witness; is that what we're -- 813 MS. LEA: Yes, what's on the table, what has been discussed so far in this room. Before we hear from the Board's ruling, of course, is that the fundamental issue would be addressed by Mr. Shepherd's witness, and then, of course, people could respond to it. And you may be saying that Hydro One would want the opportunity to respond to that evidence, I don't know. 814 MS. FRANK: We definitely want the opportunity to respond. But the other thing, certainly on the tax-sharing issue, the presumption that a utility can't use the tax savings, I think, is not a presumption that applies to all utilities. If you have other tax-paying entities, as certainly Hydro One does, you can use the tax savings that you would get for a disallowed expense within the distribution company. So I think we'd have to get the record straight as to what the assumption is for that particular issue. 815 MR. SHEPHERD: I want to clarify that the issue that I've -- the expert that I've described is an expert only on the first evidentiary issue. The second one, the issue of whether the tax savings from disallowed expenses should be shared, needs a tax expert. The tax expert has to be familiar with how tax shelters work, because the essence of this is you have a non-taxable entity and a taxable entity and they cross expenses and revenues to create a tax saving. 816 Now, I take Ms. Frank's point, if the utility is not in a non-taxable position, if they are able to use their own disallowed expenses elsewhere, then as far as I'm concerned, they should. Why would they have to share it with the ratepayers? They're not using the ratepayers' revenue to shelter tax. 817 MS. LEA: But you're proposing to call two witnesses, one on the regulatory principles and the second one as a tax expert on issue 2. 818 MR. SHEPHERD: Yes. 819 MR. KAISER: Any other comments? 820 MS. LEA: I had one question. 821 Mr. Shepherd, in the Board's consideration of the second one, which we didn't really give you a chance to speak to yet, frankly, what would be the magnitude? Is this a big issue in terms of either big dollars or a frequent occurrence, or is it a not very common or not very material aspect? 822 MR. SHEPHERD: Well, I think the dollars, in terms of all the LDCs, are quite substantial. We don't have any information, but my guess is, and Mr. Rodger correctly pointed it out, that there are utilities that are using a different debt-equity ratio in order to shelter tax, and I think the total dollars are probably a lot. And also I should add that the cost of the expert is not very much because the expert would simply be giving evidence as to fairly well-known principles of how tax shelters work. 823 MR. KAISER: If I can just follow up. Ms. Lea, I think your question was, and I'm not sure you answered it, Mr. Shepherd, in this process, you're going to call evidence which you've described. Will we hear how large the problem is? Will your expert address that, or is he just going to give us the theory that yes, indeed, people can alter their capital structures to minimize taxes? 824 MR. SHEPHERD: I think that when you decide on general issue number 1, that will give us the information on how large the problem is. It will be straightforward. 825 MS. LEA: I had one other question. 826 Mr. Shepherd, for either or both of these experts, will you be requesting that utilities, any or all of them, file certain information with you, or is that part of the request you're making to have information filed with the Board made available to you? 827 MR. SHEPHERD: On the issue of the pass-through, as I indicated in my comments this morning, we would want to have some information filed by the utilities for the expert, or provided by the utilities to the expert to show the difference between taxes collected in rates and taxes actually paid. I believe that's all in the RRR stuff. 828 MS. LEA: And for the second issue, sir? 829 MR. SHEPHERD: The second issue doesn't require any information from the utilities. 830 MS. LEA: Thank you. 831 MR. SOMMERVILLE: Mr. Shepherd, the evidence for issue number 1, the pass-through true-up approach, did I understand you to say that this would essentially be a regulatory expert who would canvass practice in other jurisdictions? 832 MR. SHEPHERD: I think what we'd like the person to do is to look at what other jurisdictions have done with this, but, also, what has happened in those cases where there have been true-ups, if there are some. I'd like to know, and I think the key to us and the key for the Board's point of view is, if you have a true-up, does that mean the ratepayers get cheques, or they have to pay? And if there are enough jurisdictions that have done a true-up, we should be able to tell. 833 MR. SOMMERVILLE: All of which is predicated on some material diversity between the forecast tax to be paid and what is actually paid; is that right? 834 MR. SHEPHERD: Yes. But I think it's fair to say that there will be substantial differences between taxes actually paid and taxes forecast, the reason being that the income of the utilities will be different than they forecast. 835 MR. SOMMERVILLE: I understand that, certainly, in terms of historic -- you know, what's happened over the last couple of years, there were influences on that subject that would have created significant diversity. But I'm wondering about going forward. As I understood you to describe the process of creating the forecast, that that's not a rocket-science exercise, that one can build into that certain contingencies, certainly. And I guess I'm wondering about the ultimate materiality of that dichotomy between true-ups and pass-throughs. Are we talking about something that's, barring extraordinary events, likely to cause us much heartburn? 836 MR. SHEPHERD: I think the best way to look at it is to look at the two gas utilities, which have a no true-up situation. And they routinely, almost every year, not every year but almost every year, earn more than their allowed rate of return, and, as a result, pay more in taxes than they recover from the ratepayers. But because there's no true-up, the ratepayers are whole on that. When the utility overearns, it pays taxes on the overearnings. 837 MR. SOMMERVILLE: There is a certain symmetry in that, isn't there? 838 MR. SHEPHERD: Well, there would be a symmetry if one year they overearn and one year they underearn. But the psychology of it being what it is, the executives of utilities are pushed very hard to overearn. And so, in practice -- and if you look at either of the gas utilities over the last 20 years, you will see that, in practice, they overearn a lot more than they underearn. And that would be the case with electric utilities as well, I believe. 839 MR. SOMMERVILLE: Thank you. 840 MS. LEA: I have one other question, Mr. Shepherd. I'd invite you to address this, because I suspect my staff will be asked it. 841 Given the recent history in Ontario, and the rather unique circumstances of the utilities in Ontario over the last five or more years, is there any other jurisdiction whose experiences will, in fact, be relevant to assessing what we've got here? In other words, is there value in an expert to speak about evidence from other jurisdictions? 842 MR. SHEPHERD: If what we were talking about is what happened over the last five years, I'd agree with you: There is no other jurisdiction that has anything close to that, that I know of. I think most of the LDCs in this room would agree with that, too. But, on a going-forward basis, we're trying to get to cost of service. The 2006 proposal is a sort of an inelegant cost of service, but it's getting there. And, therefore, any true-up for 2006 should be similar to other jurisdictions that have a more stable environment. 843 MS. LEA: Thank you. 844 MR. SOMMERVILLE: Thank you. 845 MR. KAISER: Thank you, Mr. Shepherd. 846 MS. LEA: Thank you very much, Mr. Shepherd. 847 We have one other presentation, Mr. Chair, which involves a discussion of, one, issue of scope and, two, of evidence. I did not know whether you wished to take a short afternoon break or continue straight through. 848 MR. KAISER: Well, I'm in your hands. What's your recommendation? 849 MS. LEA: I think we would prefer a break, please. It shouldn't have to be long. 850 MR. KAISER: Fifteen minutes. 851 MS. LEA: Thank you. 852 --- Recess taken at 3:50 p.m. 853 --- On resuming at 4:12 p.m. 854 MR. KAISER: Please be seated. 855 MS. LEA: Thank you, Mr. Chairman. We have one more presentation today, it's going to be presented by Colin McLorg who has been acting as our Chair for the other groups as well. He's going to talk about to us about the comparators and cohorts working group, which is not actually a subworking group of revenue requirement, it's a separate group on its own with no subgroups. And they're considering, of course, the use and methodology for comparators and cohorts in 2006 rates. Thank you. 856 REVENUE REQUIREMENT WORKING GROUP - ISSUE E: COMPARATORS AND COHORTS: 857 SUBMISSIONS BY MR. McLORG: 858 MR. McLORG: Mr. Chair and Panel Members, good afternoon. 859 I'd like to start just by noting that my presentation will pose certain questions of scope for the Panel, but generally speaking, other than that, is more in the nature of an update for the Board rather than a dissection of individual, specified issues. Just in terms of a brief outline, these are the areas that I'd like to cover for you. I'll go over questions of scope and function, our mandate, some of the assumptions and definitions that we used in our work, a summary statement of progress to date -- and for the court reporter, I don't want to go too quickly, so let me know, please -- the conceptual approach, in other words, the type of model that we have devised that would apply to comparators and cohorts, some limitations and concerns of the methodology and the data, alternatives to comparators and cohorts, and a brief summary. 860 The question of scope that the group poses to the Board is as I'll read it right here: "Will the use of comparators and cohorts in the 2006 rates process be limited to screening applications to determine what further information is needed rather than for directly setting rates?" 861 To clarify briefly, the concept of directly setting rates with comparators and cohorts would refer to a system in which the Board might adopt a quantitative rule along the lines of specifying a threshold percentage-of-cost levels that utilities might experience, and then saying if you are above the 75th percentile, for example, on O&M per customer, then you can get up to that amount but not beyond that amount. So the direct setting of rates means to use comparators and cohorts in a very direct and quantitative way to make direct judgements or decisions about allowed costs. 862 We also considered several other questions, but the questions of function that -- as I characterized them here, that I think are of a matter of keen interest for Board Staff and for all stakeholders really can be set as two. The first: Can comparators and cohorts help to identify applications that require filing of further information? And secondly, can comparators and cohorts assist in rationalizing apparent differences in cost levels between utilities? 863 So these were some of the underlying questions that we wanted to address, and in terms of a mandate, we took as our mandate the production of a report for the Board, in due course, if I may borrow a phrase, that would propose an approach to establishing comparators and cohorts to assist in the consideration of 2006 rate applications, and also to propose filing requirements and possibly some textual material for the revised distribution Rate Handbook. In addition, a part of the process that we haven't yet reached is to provide input and information for the use of the consultant in this area that's been retained by Board Staff. 864 I think it's important to go over our working assumptions just to provide a context for you, and this is a topic to which we may return. Our assumption was, in fact, really the answer to the scope question that's been put to you, and that is that the group assumed that the use of comparators and cohorts is, in 2006, to be limited to the screening of applications rather than the direct setting of rates. And by posing the question of scope, I think we have conveyed our request for an answer on that issue. 865 We did not start out assuming that comparators and cohorts would be workable, but I think it's fair to say that everyone has come into the process with an open mind and we're attempting to find out how it could be and whether it could be. 866 Lastly, we made no assumption as to the future use of comparators and cohorts. 867 I'll apologize at this point, because in order to get too much farther with my presentation, I really feel I must put out some working definitions, but I'll try to keep this as brief as possible. In the group, as a framework for our model, we identified some concepts that I'll just go through quickly here. A cost driver, it doesn't depart from the normal definition very much, an external condition, requirement, or environmental characteristic that has a material and direct influence on utility cost levels. 868 And within the class of cost drivers, we distinguished input cost drivers, which tend to describe external conditions and other factors which affect the cost levels that you incur to produce service, and they would be, for example, the train you deal with and the age of your plant. 869 We also identified output cost drivers, because it's equally true that these will influence the costs that you incur. And the output cost drivers really refer to the service that you're producing for your customers and, in particular, it would go to things like reliability and service quality. So there we have it for cost drivers. 870 A comparator is simply a measurable indicator of utility costs or operations, like a reliability measurement or a figure for O&M per customer, that can be compared across utilities. They're measurable and observable. 871 And finally, a cohort is a grouping of utilities based on the similar values that those utilities share for the cost drivers in question when the cohort is formed. I want to underline they're not similarities in respect of comparators but rather of the cost-driver values themselves. 872 In terms of our progress to date, I mentioned that we have developed a conceptual framework for comparators and cohorts, and as part of that we have developed preliminary lists of both cost drivers and comparators that they would be associated with. We have done an initial assessment of data availability and quality and we have identified some concerns regarding both the data and the methodology as we have it so far. I would like, again, to emphasize the fact that in the group, and of course I'm speaking on behalf of the group at this point, we have not reached any final conclusions. 873 Moving on then to the conceptual model itself, I really restate here that our basic purpose is to try and find a valid, meaningful method of comparing results across utilities. And part of the need to go through this process rigorously derives from the fact that simple comparisons of results across utilities can be very, very misleading, and we've identified at least three reasons why they might be. 874 First of all, a simple comparison of end result numbers could ignore differences in important cost drivers. 875 It could also ignore differences in the way that the costs are reported, and by this I mean not the level of costs incurred, but just what category they happen to fall into. And I can try to make that more explicit in a minute, but, generally speaking, that's not a question of levels; it's just a question of what buckets the costs fall into. And if one makes a naive assumption that the buckets are comparable you might get some skewed results by doing that. 876 Finally, we identified that differences in output cost drivers, in other words, service quality and reliability, may also not be accounted for in a simple, one-dimensional comparison of utility results. 877 The conceptual model can really be broken down into four steps, more or less. And, if it's convenient for you, you may want to set this page aside, because I will be referring back to it. 878 The first is to identify the cost drivers, the input cost drivers and link them to comparators. 879 The second is to define cohorts, based on cost driver similarities. And you could think of this as clusters of utilities that have similar values for their cost drivers. 880 The third step, although this could be really undertaken at any time prior to the fourth step, is to validate the reported comparator values, in other words, the information that the utilities file with you on costs, and that kind of thing, to ensure that the same reporting basis applies to all the information that you have. That goes back to the question of differences in buckets, and so on, that I was referring to just a moment ago. 881 And finally, having completed the first three steps, the Board Staff, for example, would be in a position to analyze the validated comparator values, to see whether or not it's necessary to ask a utility for further information. 882 Some concerns that we've identified -- and I thought it might be helpful here to relate these back to one of the four steps that I've identified. 883 Step one concerns are several. One of the first ones that we grappled with was, what level of granularity, in terms of the comparators, is appropriate for your analysis? High level comparators - and I could suggest, for example, that overall cost per customer would be a very high-level comparator - would certainly give you the big picture. But they have drawbacks, in the sense that they could be influenced by several different cost drivers, so it would be hard to isolate one or more. And they may be too general to address a specific concern that a stakeholder or the Board may have. 884 Low-level comparators, conversely - and I would identify, as an example, something like billing and collection costs per customer, where they, the comparator, in this instance, is more focused on a well-defined, specific, functional area - may be quite useful theoretically in addressing specific concerns that you may have in an area. But there may be data and comparability problems associated with those type of low-level comparators, in part because of the reporting problem, and the categorization of cost problem, that I mentioned previously. 885 In addition, there are some inherent concerns that can't be readily addressed with changes in reporting requirements. And they would, for example, be, how would one deal with the inherent trade-off between capital expenditures and operating expenditures that a utility may face? A utility might, for example, be able to drive down its operating costs for O&M, or billing and collection, or some other identified area, by investing more heavily in capital. So there's a relationship between investments or expenses in these -- in this area. But it's hard to see how we could capture those comprehensively with one comparator. 886 Concerns respecting step 2 - and this was the definition of cohort groups based on similar cost-driver values - is that there really is a relative lack of data on cost drivers, per se. The Board has a lot of data on comparators, and it has some data on cost drivers, things like total area of your service area in square kilometres, or whatever, the number of customers that you have, and voltage levels, and things like that, but generally speaking, relatively, there's a lack of data on cost drivers. 887 Secondly, across a spectrum of cost-driver values - and you might think, for example, of customer numbers, or some indicator like that - the definitions of the cohort ranges themselves, or what you're going to define as cohorts, may become arbitrary, because there really isn't any guidance that we've discovered yet in this area. If we had customer numbers ranging from 10,000 to 1.5 million, it's not obvious how best to divide that spectrum, or that range, up into cohort groupings. 888 A related concern has to do with the fact that, presumably, to form a cohort, you'd like to have at least a minimum number of utilities populating that cohort. But again, it's not obvious, and we have no guidance yet as to the number of utilities that would, as a minimum, need to be in a cohort. I think that you could imagine that defining a cohort of one utility is a kind of a meaningless exercise, in this sense, if comparisons are to be made. So the question then becomes: Is it going to be 2 or 6 or 10? We don't know that answer. 889 We have reached consensus, I believe, that utilities without outlier cost-driver values, in other words, cost-driver values that are way at one end of the spectrum, in either direction, should probably not be forced into a cohort, being more or less a cluster of the next nearest utilities in that range. 890 When we move to step 3, this is where we really get into the question of cost classification. And, again, I'd like to emphasize that this is not a matter of differences in real cost levels between utilities, but just a matter of differences in accounting and, to some extent, business practices, that would have the effect of changing the reported values that appear in each category of costs. To give a quick example: If utility A did billing and collection in-house, and experienced a certain cost level, and utility B outsourced that same function and experienced an equal cost level, just as a matter of reporting, it could be that utility A would report its costs in the category of billing and collection, but utility B, the one that had outsourced, might report those same functional costs in something like administration. And you can see that that would distort a simple comparison of the results you'd get if you were looking at billing and collection as a discrete cost category. 891 Step 4 really gets to the meat of the analysis as far as, maybe, Board Staff may be concerned. And that's where you would be looking at the validated comparator values that you have from utilities within a given cohort, defined on cost drivers that, hopefully, are fairly clustered, themselves. And then you get to observe whether or not the reported costs -- in other words, the comparators have levels that are, themselves, similarly clustered, or do you find a wide dispersion, or an outlier here and there. An outlier here and there would initially attract Board attention, and at that point you start -- you have to start asking questions like: For the comparator that we've defined, and for the cohort that we've defined, have we included all the important cost drivers that actually influence that cost level or could there be cost drivers that have been omitted from the analysis? One possible example would be if you defined cohorts based on customer numbers and found that one utility had, say, a higher cost for customer care than another. You might ask yourself, Well, does the second utility have a higher level of customer churn, move in and move out, than the first utility? And so you might be able to ask yourself, Is that an important input cost driver that's been omitted so far from our analysis? 892 In addition, are there important differences on the output cost driver side, in other words, the level of service and reliability that's being provided by the two different utilities? I think there is broad consensus among the stakeholders that there is a certainly a link between cost levels and service levels, and the higher are your service levels, the higher are your cost levels. We haven't yet been able to quantify that relationship, we just feel that directionally it exists. 893 One concern here for all the stakeholders is what additional filing requirements upon finding an outlier, let's say, after going through the first three steps, would be necessary. That's posed here as kind of a rhetorical question and we don't expect a specific answer. 894 Turning now to alternatives to comparators and cohorts, we felt that an alternative would need to be available if it were the case that reliable data, particularly I would say on cost drivers, could not be assembled in time. That would be a fairly large undertaking and we really haven't, as a group, yet started that, although, of course, you're aware that Board Staff has a database of some considerable size that consists of the data that's been filed by utilities. 895 A second reason why an alternative would be required is to deal with one or more utilities that might find themselves outside of a defined cohort by virtue of the fact that its cost driver values for that cohort were outliers themselves. In this regard, that is, in developing an alternative to comparators and cohorts, the only alternative that has been identified by the group is the historical examination of a utility's own cost and service levels. And we don't mean to suggest that that's the only alternative that is available, but it's the only one that we've identified, and we continue to seek out further alternatives in that way. 896 Finally, in summary, broadly speaking, there appears to me to be acceptance of this conceptual model. And I don't think that anyone pretends that it's going to be a panacea, but at the same time, I think that we've made a lot of progress in the sense that sometimes laying out an explicit framework like this does help to assuage a lot of concerns that the various stakeholders had. Nevertheless, there are serious concerns about the quality, availability, and comparability of the existing data. 897 so overall, I would say that I'm very aware of the amount of work that the comparators and cohorts group has done, and I thank them for that and to be associated with the work. Having said that, there still really is lots left to do. And finally, at this stage, quite frankly, views differ on how helpful comparators and cohorts could be to Board Staff, and ultimately the Board, in assessing the 2006 rate applications. Thank you. 898 MR. KAISER: Thank you, Mr. McLorg. 899 Mr. Adams. 900 SUBMISSIONS BY MR. ADAMS: 901 MR. ADAMS: Well, I'll preface my remarks. The first thing I want to address is the scope question, what application will comparators and cohorts be used for the Board. And I'll preface my remarks by just saying that Energy Probe is an unvowed enthusiast for this concept, so you may want to take that into account when you're considering my -- the thrust of my remarks. 902 But the point that I want to leave you with is that defining exactly what will be the regulatory uptake, the role in the Board's decision-making process for comparators and cohorts, is something that I think is premature. I don't think the Board needs to rule on this at this stage. I know there are LDCs that would like to have clarity from the Board, some declaration as to what this is all going to be used for. My own view is that when the Board is faced with making decisions in future when it receives applications from the LDCs, it ought to leave itself open to take into account all sources of information that it considers of quality, and it ought to leave itself the scope to weigh the information as it's received. 903 I think it's too early in the process for us to come to a recommendation to the Board as to exactly what the disposition of comparators and cohorts will be, but the -- when you're considering the question of whether or not comparators and cohorts might be used directly in the setting of rates, I want you to concentrate your mind on the question of what the alternative would be. There may be instances where a blunt instrument like comparators and cohorts is the right instrument to use. If you have an extreme outlier, very, very low costs, it may be appropriate. You might want to leave that option open for yourself just because the other alternatives available are difficult to contemplate. I think you have to take into account the possibility that the real alternative to quantitative, comparative analysis, in some instances, may be a cost-of-service review, beyond the scope of the Board's available resources. 904 I'll leave off my comments now on the scope with the conclusion that I don't think this is something that the Board needs to rule on. I think the comparators and cohorts working group can proceed with its work to refine the data issues and to assist the Board Staff's expert that's coming forward and to move the ball along without a declaration from the Board directly on this question of how comparators and cohorts will be used. 905 If there are no other submissions from other parties, I'll stand down for a minute to -- until it's appropriate to address evidence questions. 906 MR. KAISER: Are there any other comments on this issue? 907 MS. LEA: I believe Mr. Snelson had a comment, and I saw Mr. Shepherd's hand up. 908 SUBMISSIONS BY MR. SNELSON: 909 MR. SNELSON: Ken Snelson, consultant representing AMPCO. AMPCO has also had a long history of recommending to this Board the use of benchmarking and other such processes which Mr. Adams outlined in great detail in his evidence to the recent regulatory asset hearing of the Board. I wanted to point out the importance of this issue to the Board and the importance that AMPCO and other intervenors, I believe, also place on this issue. 910 The use of comparators to benchmark the utilities, we believe, is vital to the cost-effective regulation of more than 80 distribution utilities. The alternative, which is detailed reviews of cost of service for every LDC in the province, is really a nightmare scenario for the Board in terms of its use for resources, it's a nightmare scenario for intervenors in being able to effectively intervene and take part in those proceedings. 911 I think we need to recognize that the use of comparators and benchmarking is either not in the interest of the LDCs or is of no interest to the LDCs. It's a process whose purpose is to identify higher cost utilities and to do something effective about it. And as such, then I understand fully why they are being quite cautious in this regard, and they should be. I don't doubt at all the importance of the issues raised by the working group and that they are real issues. But they are issues which -- it's in the interests of the Board and the intervenors, in particular, that they be addressed effectively and as soon as possible. 912 At the information session -- the stakeholder sessions last week, we understood that the Board is going to hire an expert in this area and that's something we strongly support. We don't know who the expert will be or what his instructions will be. I would recommend that his instructions be to tell us how we can make it work, and as soon as possible. 913 So this is an area where there are obstacles, but they are obstacles that must be addressed and dealt with. Perfection is not possible in this area. It's quite -- it's an area where you can easily get into the paralysis by analysis and then end up doing nothing. It's something where we need to start the process, we need to start it as soon as possible, and we need to learn as we go. 914 We also need to use the information in a way that is commensurate with its degree of reliability. Initially when we start this process, then the use of the information may well be for screening purposes to identify areas that might require further filings and further explanation, and we should go down that path initially. And that, I believe, is generally supportive of the approach taken. But the Board needs to be proactive in this area to support -- for its own interest, and also in the interest of intervenors. Those are my submissions. 915 MR. KAISER: Thank you. 916 MS. LEA: I think there's a Mr. Stephenson that wishes to speak to this, and I saw Mr. Shepherd's hand in the air also. 917 MR. STEPHENSON: Thank you, if I could. 918 This is a question that goes to both scope and perhaps clarification on the presentation. In Mr. McLorg's presentation, on a couple of instances, there was reference to output cost drivers and service quality reliability issues generally, and an issue which is certainly of interest to my client is the issue of the inclusion in the 2006 Rate Handbook of service quality and reliability chapter as it exists in the present Rate Handbook. And I understood that issue had been referred to this working group to some degree, in any event. And I just perhaps was going to ask Mr. McLorg a question of scope in the sense of what the status of that issue is and whether, in fact, presently the intention is for the continued inclusion of that chapter in the 2006 Rate Handbook. 919 MR. KAISER: Mr. McLorg, can you answer that? 920 MR. McLORG: Yes, I can, sir, although I think I would be speaking on behalf of Board Staff. Our understanding, at the present time, is that Board Staff is proposing that the existing Rate Handbook chapter on service quality measures would be taken holus-bolus into the new Rate Handbook. And I'm not aware of any objections on the part of any stakeholders to that proposal. 921 The comparators and cohorts group itself has not made such a proposal, but we don't object to that at all. 922 MR. KAISER: Is that correct, Ms. Lea? 923 MS. LEA: Yes, it is, sir. And I think also that if there's going to be any discussion on that topic, we thought that that discussion would take place in the comparators and cohorts working group, although it may not be necessary to specifically deal with the details of that chapter in order to complete the work of that group. So that's its place if there is a place needed for it. We don't necessarily anticipate any changes, however, to the chapter. 924 MR. KAISER: Thank you. 925 Mr. White? 926 MR. WHITE: Yes, I'm Roger White, representing the ECMI coalition of nine distributors, smaller and medium-sized utilities. 927 One of the things that is of concern in the rush to blunt instruments is the apparent lack of realization that, if blunt instruments get used, it's often the customer who ends up being punished. So when you consider the nine distributors which I am representing today, the second smallest has the lowest rates in virtually every category. 928 The alternative to that utility remaining and thriving to serve its community is to merge with Hydro One who surrounds it rather extensively and has a service centre almost an hour away from the utility's service area. 929 So the point that I am trying to make is, when you are considering cohorts and comparators, and I'm working hard with the group in that regard, we should also always consider the alternative if we intend to use them as a -- and the word I'm going to use, again, is a blunt regulatory instrument. 930 Thank you. 931 MR. KAISER: Thank you. 932 Other comments? 933 MR. SHEPHERD: Mr. Chairman, I'm going to disagree with my friend, Mr. Adams, on this point, although we are big fans of benchmarking. 934 Our concern here is that, for the 2006 process, we will not have a sufficiently disciplined comparison methodology to be able to use comparisons for anything more than raising intelligent questions, which we can then -- the Board can then answer by getting more information. It's possible, and I agree with Mr. Snelson, it's possible in the future that we will be able to design something for 2008, or some other year, in which we have sufficient quality of information and sufficient discipline in the structure to be able to apply it directly to capping rates, for example, or capping certain costs. But I don't think there's any possibility that we'll have that for 2006. 935 However, having said that, in our view, limiting the use of comparators to screening applications can be, still, very thorough. We will be proposing in this process, and have a number of times proposed to people, that the utilities with the highest rates be forced -- be required to full more detailed applications, perhaps full cost-of-service applications, so that we can -- the Board can look at why they're charging so much and try to get them back into line. 936 And yes, you don't know what the cost drivers are, and all the details aren't worked out. But the fact is, if they're charging the highest rates, you should want to know about that. And that is a screening process, in our view. We're not suggesting that they be forced to reduce their rates because they're high, but we are suggesting that they be required to file much more information because we need to know the answer as to why their rates are high. And that's just one example. 937 So, in our view, the answer to the scope question should be yes, it should be limited to screening applications, but we should do that as thoroughly as possible. 938 Those are our submissions. 939 MR. KAISER: And do you agree with the representative from AMPCO that ultimately it might be possible to use this data in directly setting rates? 940 MR. SHEPHERD: I'm really reluctant on that, because I'm more trusting in the Board using its discretion. And sometimes my trust is justified and sometimes it isn't. But we can get pretty close. I think we can get to a point where there is sufficient information that the Board can say, If we don't have a really good answer to this, we're going to get you back into line on this particular point. But actually backing off from the Board's jurisdiction and just letting the math do it, I don't think is a good idea, no. 941 MR. KAISER: Were there any other comments? 942 Yes, sir. 943 MR. TUCCI: Yes, Morris Tucci from EDA. 944 I would like to echo what Jay just said. I agree with him in this case. The work group, when we started working on this, we were told it was going to be for screening purposes. And that led to a lot of cooperation and sharing of ideas, confident that we were going through a learning process. We pointed out that we don't know all the cost drivers, and we don't expect to know all the cost drivers, going forward, just initially. And we thought this process of identifying outliers would help us identify other cost drivers that we are not aware of. 945 So we saw it all as a learning process, first step in adapting and using benchmarking and to prematurely jump the gun and use the numbers that are filed today, I think, it would -- utilities would be very concerned and prepared, probably, to file counter-evidence and really raise the stakes. If that's the intention, we would have to take a much greater effort and do a lot of work up front in terms of identifying all the cost drivers, doing all the analysis. I think if, you know, if that's the path we're going and we're not going to be a little bit more -- take our time on this and we're going to rush it through, it's going to raise -- it's going to dominate the hearing process going forward, I think. Put it that way. 946 MR. KAISER: Thank you. Any other comments? 947 Ms. Lea. 948 MS. LEA: Thank you, sir. 949 That leads us then to the two questions of evidence. I can speak to the first one to begin with. Board Staff proposes to retain an expert to give certain evidence with respect to comparators and cohorts. The evidence we are proposing to call is largely set out in this question: What are the appropriate comparators and cohorts, if any, to be used in the 2006 EDR process? And I should indicate that in the retainer for the expert, the retention said to identify and defend. So we're hoping that our expert does come up with some comparators and cohorts, while leaving open the question for others to argue, at least, that it's not an appropriate method of screening the application. So the question isn't closed as far as the Board is concerned, but we have been asked to -- we are asking our expert to identify comparators and cohorts. 950 So identify the appropriate comparators and cohorts, to also talk about what evidence should be filed in the rate filings and how the information should be used. It's very critical for Board Staff not merely to have the cohorts and comparators identified, but to know what to do with the information when it comes in. Because we'll get, if there are filing requirements set out, we'll get an amount of material. What do we then do with it and what do we do with problems that may arise in our analysis? So we're hoping our expert would help us with this. 951 Also, as several people have mentioned, there are problems with the data that is currently available to the Board and to the utilities and to the intervenors. There are -- people filed the same cost information in a variety of different ways, as if large inconsistencies and many inconsistencies with the data, and these need to be addressed also by this expert. In other words, are certain cost drivers available to be used, given the state of the data that we have and the way that data has been reported? So these are the sorts of problems that we're asking the expert that we're retaining to address. 952 I think that for Hydro One by the way, Carm Altomare is here to speak to that. 953 SUBMISSIONS BY MR. ALTOMARE: 954 MR. ALTOMARE: Thank you. 955 Mr. Chair and Board Members, we at Hydro One Networks support what the working committee has put forward, but we think that Hydro One Networks is not in a cohort group. We feel that we're apart, and Colin touched on that as well. And like the working committee, there are grave concerns with data being used for any benchmarking or rate setting. And what Colin has touched on was the costs. There is also similar concerns with the service quality data, reliability and customer service. So the data is suspect, regardless of what we have in place or what we've collected. 956 But keeping in mind that we have made improvements since we started, and this is now the fourth year, Hydro One Networks will monitor the work of the comparator and cohort working group and share that progress with our expert. Then, depending on the progress made, we want to reserve the right to file evidence. 957 So we are participating on the working committee and there is some good progress that's been made, there is some issues on the table, our colleagues have touched on this tool, this blunt tool to be used. I think we should exercise caution. I think in being fair to our customers, let's put a methodology forward that is fair to the utilities and the customers, more importantly, the customers. So having experienced other benchmarking exercises in the utilities, I ask that we continue along this path, but not rush it, and be slow and fair to everyone. 958 MR. KAISER: Thank you. 959 Mr. Adams. 960 MR. ADAMS: Mr. Chair, I don't propose to reply to any of the comments on the question of scope. If this is an appropriate time for me to make some comments with regard to future evidence -- 961 MR. KAISER: Yes, please go ahead. 962 FURTHER SUBMISSIONS BY MR. ADAMS: 963 MR. ADAMS: I think if you've gathered anything from the discussion so far, this is a contentious area and is likely to remain a contentious area. I think the Board can anticipate that those utilities that find themselves in high-cost categories are going to be particularly active in pursuing these matters and advocating their positions before the Board. 964 And another issue that I think the Board needs to keep in mind to some extent, because of the complexity of this area, the whole area is prone to being a battle zone of the experts. From a customer perspective, the utilities have very extensive resources that they can deploy, and because of the, kind of, selection bias that we anticipate where the high-cost utilities will be deploying significant resources to defend themselves, we think that it is appropriate for customer representatives to have some counterweight to throw against. So we believe that there is a necessity for some level of independent review on behalf of ratepayer groups working with ratepayer groups to advise us on the appropriate approach. 965 Speaking for Energy Probe, the two areas that we intend to concentrate on are the areas that might be identified as best practices and efficiency frontiers. We think that these are two conceptual areas of potential greatest value to the Board going forward for 2006, for Rate Handbook purposes and beyond. So the issues list that was developed here identified two separate areas, but in some ways they can be conflated. The question of evidence and how the evidence should be processed and the question of how the findings of the benchmarking process might be utilized in the regulatory process, these are substantive questions that are partly policy related and partly quantitative. But they, I think, are parts of a single puzzle, one group of questions that ought appropriately to be addressed in a coherent fashion. 966 So what I'm here requesting is the opportunity to retain an appropriate expert to participate and support the work of Board Staff and to be in a position to advise the customer representatives as to an appropriate approach to take when we receive what we expect to be a fulsome intervention by some in the utility community. 967 MR. KAISER: Thank you. Any other comments? 968 Ms. Lea. 969 MS. LEA: Thank you. 970 Mr. Adams, did you wish to specifically address the evidence request under number 2, which is an expert who will give advice on, among other things, what evidence, if any, should be filed by the utilities before the rate filings, because our expert was going to give evidence on what should be filed in the rate applications. 971 MR. ADAMS: We believe that the time requirements are quite pressing here. In order to get rates in place for 2006, there's a whole lot of things that have to take place before that happens. If we get high quality information on the table early, we believe that that can facilitate the Board's processes towards 2006 rates. So that, in our minds, raises the question of what evidence at this stage could be of most use. 972 We think that this goes beyond the scope that the Board Staff has identified for its expert in the sense that the focus there is on establishing rules on a going-forward basis that end up in the handbook. What we're interested in doing is producing -- our hope is that we could, with the assistance of an expert, identify some preliminary findings in the area of evidentiary requirements that could guide the process of actually developing the handbook itself. So the purpose of having this or the thought behind this item number 2 on the issues list is an optimistic view of the potential for comparative work. We think that comparative work could be of assistance to the Board in the early going here. 973 MR. KAISER: Thank you. 974 Any further comments? Ms. Lea. 975 PROCEDURAL MATTERS: 976 MS. LEA: Thank you, sir. 977 I have two matters, two updates to bring to you before I turn to the question of what's going on tomorrow. 978 The first is Mr. Clinton spoke to me earlier today and he's -- when we returned from lunch, and he's indicated that he believes that with respect to the depreciation of hardware and software matter which you gave a ruling on today, your ruling included that the Board would appreciate early information from the parties as to whether an agreement has been reached or whether provision for it's calling of evidence has to be made. 979 Mr. Clinton tells me that it seems very likely that an agreement will be reached within the working group. So we would ask that we will let -- speak up only if evidence is needed, and otherwise you can proceed on the basis that an agreement, discussions in the working group and an agreement will solve this, with possible argument, I suppose. Is that correct, Mr. Clinton? Thank you. 980 And then I think Mr. Shepherd wanted to speak to the question of evidence on taxes and PILs. I wasn't exactly sure, I think it was a combination of evidence with another witness or something. 981 MR. SHEPHERD: Yes. Mr. Chairman, you asked a number of questions with respect to evidence on true-up that we propose to call. Mr. Harper at the break, on behalf of VECC, spoke to me and suggested that the evidence that -- the witness that he would be calling to deal with appropriate interest rate for capitalization, which you have approved, it might be appropriate to expand that person's mandate, because it would probably be the same person or similar set of skills to deal with the pass-through of taxes. And we've accepted his offer to do that, if the Board approves it. 982 MS. LEA: So I think, sir, we will be waiting for your ruling with respect to whether evidence should be called on the pass-through or true-up issue, but if the Board does rule on that that evidence could be called. I understand Mr. Shepherd says it could be combined with the one witness with the interest-rate witness. 983 MR. HARPER: Mr. Harper's witness? 984 MS. LEA: Mr. Harper's witness. 985 MR. HARPER: Yes. I think we see some efficiencies and economies in having one person do it. 986 MR. KAISER: And as indicated, sir, we do appreciate that. 987 MS. LEA: Well, I'm pleased to report that we are on schedule. We'll proceed into tomorrow then -- I beg your pardon, sorry. Mr. Weber. 988 MR. WEBER: I apologize for taking you back. I just want to -- some things have gone through my head in the last few minutes, and I just want to point out from Mr. Adams's comments it appears more that he's looking at the larger LDCs in the province. As a smaller LDC, I don't have a whole lot of customers' money to throw at providing evidence and bringing stuff forward from a cohort's perspective. So I'm not certain if we were gathered into one of those things because, after all, the rates were a snapshot in time, and whether we would be able to amend the rate filing to include any cost for consultants or legal fees for defending our position, and whether there could be some streamlined process for some of us that are smaller and the types of evidence that Mr. Adams and others might be interested in. 989 MR. KAISER: Ms. Lea, can you respond to that? 990 MS. LEA: I'm not sure. Perhaps it will be a good idea if I spoke to Mr. Weber about his concerns. Sir, do I understand that there's two things: First, you are interested in a streamlined process for the filing of your own evidence in your application, if additional evidence is required for filing on comparators and cohorts? 991 MR. WEBER: Yes, I think it would be prudent because of the time and dollars that would be spent defending a potential position, depending on what was in the application and where they felt they needed to -- and this wouldn't just be for myself, this would be for others that may have to go through a similar type process that doesn't have an awful lot of reserves to throw at these kinds of applications. 992 MS. LEA: Or, sir, were you talking about retaining an expert for the generic process, this process where Board Staff is calling an expert? 993 MR. WEBER: No, I'm talking about, once I've made my application and it's decided at that point in time that additional information is required. 994 MS. LEA: I understand. Okay. Thank you very much. I think that that is something that should be discussed in the comparators and cohorts working group. My attendance at those sessions suggests that we do have those sorts of things in mind; that the burdens on utilities, particularly on the smaller ones, are in our minds as we proceed forward in this. There's no question about that. About perhaps you can keep giving input to the working group and we'll keep that in mind as well. 995 MR. WEBER: Thank you. 996 MR. KAISER: I think, Mr. Weber, you also had a concern about legal costs. 997 MR. WEBER: The legal costs was after I've put in my application and if I had to retain legal counsel as to whether the application or revenue-generating requirements would be able to be amended to include coverage on that. 998 MR. KAISER: Right, whether you could recover your legal costs as part of your application. 999 MR. WEBER: That is correct. 1000 MR. KAISER: Ms. Lea, could you answer that? 1001 MS. LEA: Well, the difficulty is that those legal costs, when we look at the distribution expense items and so on, would not be necessarily be trued up in time to get into your 2006 rates. I think that this is a discussion that we need to have in the working group as opposed to having it here in the hearing, sir, and we could bring a recommendation forward to you if we need to. I think it's something that can be resolved in the working group. 1002 MR. KAISER: Thank you. 1003 MS. LEA: Turning, then, to the schedule. We'll begin tomorrow with the last presentation from the revenue requirement group, conservation and demand management, and then proceed into the rate design and cost allocation working group with three presentations there. 1004 Thank you very much to all the presenters today. 1005 MR. KAISER: We'll resume at 9:30. 1006 MS. LEA: Thank you, sir. 1007 --- Whereupon the hearing adjourned at 5:10 p.m.