Rep: OEB Doc: 13DS1 Rev: 0 ONTARIO ENERGY BOARD Volume: MOTIONS DAY 6 DECEMBER 2004 BEFORE: G. KAISER PRESIDING MEMBER AND VICE CHAIR G. DOMINY MEMBER C. SPOEL MEMBER 1 RP-2004-0203 2 IN THE MATTER OF a hearing held on Monday, 6 December 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 Applications by distributors under the Ontario Energy Board Act, 1998 for approval of Conservation and Demand Management Plans. 3 RP-2004-0203 4 6 DECEMBER 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 MIKE LYLE Board Staff AL FOGWELL Board Staff ZORA CRNOJACKI Board Staff MURRAY KLIPPENSTEIN Pollution Probe MORRIS TUCCI Electricity Distribution Association DAVID POCH Green Energy Coalition ROBERT WARREN Consumers' Council of Canada & Association of Major Power Consumers of Ontario JERRY FARRELL Coalition of Large Distributors DAVE MATTHEWS Enbridge Gas Distribution NORM RYCKMAN Enbridge Gas Distribution JUDY SIMON Canadian Energy Efficiency Alliance ROGER WHITE ECMI JAMES SIDLOFSKY Brantford Power Inc. & Enwin Powerlines Ltd. JAY SHEPHERD School Energy Coalition BRIAN DINGWALL CME KEN QUESNELLE Woodstock Hydro BRUCE BACON Woodstock Hydro TOM ADAMS Energy Probe 8 TABLE OF CONTENTS 9 APPEARANCES: [17] PROCEDURAL MATTERS: [41] MOTION BY POLLUTION PROBE: [59] SUBMISSION BY MR. KLIPPENSTEIN: [65] SUBMISSIONS BY MR. POCH: [145] SUBMISSIONS BY MR. FARRELL: [190] SUBMISSIONS BY MS. SIMON: [226] SUBMISSIONS BY MR. QUESNELLE: [238] SUBMISSIONS BY MR. WHITE: [268] SUBMISSIONS BY MR. WARREN: [277] SUBMISSIONS BY MR. POCH: [359] SUBMISSIONS BY MR. SHEPHERD: [363] SUBMISSIONS BY MR. DINGWALL: [372] REPLY SUBMISSIONS BY MR. KLIPPENSTEIN: [382] DECISION: [391] SUBMISSIONS BY MR. SIDLOFSKY: [402] SUBMISSIONS BY MR. SHEPHERD: [411] SUBMISSIONS BY MR. DINGWALL: [458] SUBMISSIONS BY MR. ADAMS: [474] REPLY SUBMISSIONS BY MR. KLIPPENSTEIN: [517] 10 EXHIBITS 11 EXHIBIT NO. A.1.1: GEC SUMMARY OF C&DM BUDGETS [200] 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:45 a.m. 15 MR. KAISER: Please be seated. 16 The Board is sitting this morning to hear the motion filed by Pollution Probe on November 12th with respect to LRAM and SSM for fiscal 2005. Can we have the appearances, please. 17 APPEARANCES: 18 MR. KLIPPENSTEIN: Good morning, Mr. Chair and members of the Panel. My name is Murray Klippenstein representing Pollution Probe who has brought the motion this morning. 19 MR. KAISER: Thank you. 20 MR. TUCCI: Hello, it's Morris Tucci from the Electricity Distribution Association. 21 MR. POCH: Good morning, my name is David Poch on behalf of the Green Energy Coalition. 22 MR. WARREN: Robert Warren for the Consumers' Council of Canada and I've been asked to address these issues as well this morning on behalf of the Association of Major Power Consumers of Ontario. 23 MR. KAISER: That's an unlikely combination. 24 MR. WARREN: But I think you'll discover, sir, a happy one. 25 MR. FARRELL: Good morning, Mr. Chair, my name is Jerry Farrell, I represent the coalition of large distributors. Would you like me to list them for the record? 26 MR. KAISER: No, I think we know who they are, Mr. Farrell, thank you. 27 MR. FARRELL: Thank you, sir. 28 MR. MATTHEWS: Dave Matthews from Enbridge Gas Distribution, and with me today are Norm Ryckman and Mike Brofy. 29 MS. SIMON: Judy Simon representing the Canadian Energy Efficiency Alliance. 30 MR. WHITE: Roger white, the ECMI coalition. 31 MR. SIDLOFSKY: James Sidlofsky, Brantford Power Inc. and Enwin Powerlines Limited. 32 MR. SHEPHERD: Jay Shepherd, School Energy Coalition. 33 MR. DINGWALL: Brian Dingwall, CME. 34 MR. QUESNELLE: Ken Quesnelle Woodstock Hydro with Bruce Bacon as well. 35 MR. KAISER: Anyone else? 36 MR. ADAMS: Tom Adams on behalf of Energy Probe. 37 MR. LYLE: And Mike Lyle, Board staff. 38 MR. KAISER: Thank you, Mr. Lyle. Before we proceed to hear Mr. Klippenstein's motion, are there any procedural matters that anyone wants to raise. Mr. Lyle, do you have any? 39 MR. LYLE: Mr. Chair, I believe Mr. Shepherd has a suggestion as to how argument may proceed, the order. 40 MR. KAISER: Mr. Shepherd, go ahead. 41 PROCEDURAL MATTERS: 42 MR. SHEPHERD: Well, Mr. Chairman, we've discussed among ourselves an order and, subject to the Board's comments, we have agreed that certain comments that are supporting the motion would go first in a particular order and then the rest of us who are opposing it would follow. Do you wish me to list them or should we just go ahead. 43 MR. KAISER: I think it would be helpful if we knew who was on which side. 44 MR. SHEPHERD: I believe the order is Mr. Klippenstein, who is proposing the motion, Mr. Poch, Mr. Farrell, Mr. White, and then opposing, Mr. Warren, myself, Mr. Dingwall, Mr. MacIntosh for Energy Probe, and Mr. Quesnelle. If I've left anybody out, I'm sorry. 45 MS. SIMON: Yes, you've left out the Canadian Energy Efficiency Alliance and we're supporting the motion. 46 MR. KAISER: You're supporting the motion. 47 MS. SIMON: Yes, sir. 48 MR. KAISER: Thank you. 49 MR. MATTHEWS: And Enbridge Gas Distribution supports the motion but we do not intend to make submissions. 50 MR. KAISER: Thank you. 51 MR. DINGWALL: One other procedural matter, sir. CME's submission came in the form of an affidavit from Mr. Rowan. In the event that no parties have an intention to cross-examine Mr. Rowan on his affidavit or if the Board has no questions for him, Mr. Rowan would like the opportunity to take leave of this proceeding and move on to some of the other matters that are concerning CME. 52 MR. KAISER: All right. Well, let me address that right now. Does anyone wish to put questions to Mr. Rowan? 53 MR. KLIPPENSTEIN: Not Pollution Probe. 54 MR. POCH: Mr. Chairman, on the understanding that Mr. Rowan's affidavit -- in previous cases there's been a situation where Mr. Rowan filed an affidavit and there was some question as to whether it was being put forward as expert evidence or not, and my recollection is that it was agreed that, on technical matters, Mr. Rowan was not holding himself out as an expert, rather he was giving the observations on behalf of his client. If it's filed on that basis, we have no objection to it not being tested in evidence. 55 MR. KAISER: Thank you, Mr. Poch. Is that acceptable, Mr. Dingwall? 56 MR. DINGWALL: There's nothing in Mr. Rowan's affidavit which smacks of expertise, sir. They are effectively submissions, so I'm content with that. 57 MR. KAISER: So Mr. Rowan can be excused. 58 Mr. Klippenstein, you're up to bat. 59 MOTION BY POLLUTION PROBE: 60 MR. KLIPPENSTEIN: Thank you, Mr. Chairman. My suggestions for how to proceed, subject to the Board or any other ideas, would be that I make an opening statement and where normally I might propose to put evidence forward, it seems to me that in this situation that might not be necessary. There is an affidavit from Mr. Jack Gibbons that all parties have had quite some opportunity to review, and I hadn't had any sense that anybody wishes to have him on the stand for cross-examination. Obviously, I don't suggest that if he's not put forward that that means people can't argue that his evidence should be given less weight on this point or disagree with it, but procedurally, my sense, anyway, is that no one is asking to cross-examine him. 61 If that is correct, then I'll just proceed with my argument. And furthermore, we've had some very good reply submissions from various parties and I may, subject to the direction of the Board, in my argument make a few comments on those reply submissions from other parties as well, if that might be helpful. So that may take anywhere from 10 to 15 to 20 minutes to cover all that, if that's an appropriate plan. 62 MR. KAISER: And I take it, sir, nobody has sought to cross-examine Mr. Gibbons to this point; is that correct? 63 MR. KLIPPENSTEIN: I'm sorry, nobody's sought as far as I know, and I haven't heard before today or today that anyone wishes to. 64 MR. KAISER: Fine, we'll proceed on that basis. 65 SUBMISSION BY MR. KLIPPENSTEIN: 66 MR. KLIPPENSTEIN: Thank you, Mr. Chair. 67 As you have taken note of, I'm sure, this motion by Pollution Probe is requesting an order of the Board establishing guidelines for a lost-revenue adjustment mechanism or an LRAM and a shared-savings mechanism for Ontario's electrical utilities that would permit such utilities to apply in a subsequent rate year for financial allowances in support of their fiscal 2005 energy conservation programs. That's, of course, stated in the motion of record. I won't go through the motion record in detail on the assumption that the Board has had a chance to look at it. 68 In my submissions, I would suggest about five touchstones or concepts that the Board might want to consider. And the first is that the proposal by Pollution Probe for an LRAM and an SSM in the local distribution company sector for electricity for 2005 is, first of all, that it's financially good for customers and secondly, that it's consistent with and supports clearly stated government policy. 69 Thirdly, and I know this may address some of the concerns that other parties have, it's voluntary, it's only voluntary for LDCs. And fourthly, that the proposal by Pollution Probe is not an attempt to preempt the process already in motion for the 2006 fiscal year. It's an interim or even, as one party mentioned, a temporary measure that's proposed here. Fifthly, it's really ambitious, in the best sense of the word, in a way that Pollution Probe believes just about -- would benefit just about everyone. 70 The proposal for the LRAM and the SSM for 2005 maybe bears just a comment about the basic principle as is I think well known. The LRAM is a mechanism which removes a financial disincentive that inhibits conservation; in other words, it removes a penalty. The SSM, on the other hand, creates a positive incentive towards conservation and so they are distinct, but, in my submission, complementary. 71 In its first question in the procedural order, in setting out this process, the Board identified the question of whether the Board should implement an LRAM and an SSM for 2005. On that question, and on the first part of that question which is, should the Board adopt or propose or facilitate an LRAM and an SSM, I get back to the point I made earlier that, I submit, those are good for customers. The essence of these financial allowances and incentives is that they promote cost-effective and sensible conservation measures that would reduce the overall bills of customers. And built into the proposal is a test that it would be only the cost-effective measures that would move forward. And so the overall bills of -- on a net basis, of customers, would go down. And that's a good thing for customers, obviously. 72 Secondly, it implements government policy. And, in our materials, we have included statements from both the Minister of Energy and the Premier of Ontario that, first of all, make it clear that this government's policy makes conservation not only a priority, but a very high priority. The Premier has said: 73 "Our government's goal is ambitious -- to reduce electricity use by 5 percent across the province by 2007. Our government is taking bold action to help make Ontario a North American leader in conservation. I am talking about nothing less than creating a profound shift in the culture of this province, about moving from a culture of waste to a culture of conservation." 74 So that, in my submission, is a fairly useful guide for the Board in considering these proposals. 75 Thirdly, a feature of Pollution Probe's LRAM and SSM proposal is that it maximizes bill savings. It works through incentives, so it's not a top down command in micro-management system for the Board. Instead it puts in a powerful incentive towards conservation. And Pollution Probe suggests that that idea of maximizing good conservation is very important. 76 Not all conservation programs are equal; some are more effective than others. The government policy on conservation is ambitious, to use the Premier's word, and the proposal by Pollution Probe says that, sort of, pro forma and formulaic conservation programs are not enough. With the incentive that's built in, there will be maximization and genuinely ambitious attempts by the LDCs. We want to reward the smart ones, the hard-working once, the efficient ones that come up with the best programs, and they can be leaders to the rest. So that, perhaps, the smaller LDCs, or the LDCs who are preoccupied with other things, can see the first-class conservation programs and adopt them. So this is ambitious in the best sense of the word. And since the benefit of these savings will flow back to the customers in financial terms, that's good for pretty much everybody. 77 Fourthly, the -- there is an example in the use of LRAMs and SSMs in the context of Enbridge. Where, in my submission, the evidence suggests that they have been very effective. So it's not a new thing. It has worked for years in the Enbridge context. The results are dramatic. They come about because of beneficial rule-setting by the OEB and have made Enbridge one of the leaders in conservation in North America. 78 Those are, in general, the reasons why an LRAM and an SSM would be beneficial. 79 Part two of the first question is, well, if that's the case, why in 2005; why -- what's the rush? In my submission, the very high probability of financial savings to customers raises the question of why wait? Why not get financial savings to the customers as soon as possible? 80 Secondly, the government's goals on conservation are very ambitious. Again that's the Premier's words. In my submission, we have to get going, we have to get going very soon, and we have to get going very soon with ambitious programs. 81 Thirdly, why in 2005? Because it assists with learning by doing. The programs that come out soon won't be perfect, but that's one more year for experimentation and finding the ones that are best, and improving it for the following years. 82 Fourthly, why in 2005? Frankly there's no reason not to. The program, as suggested by Pollution Probe, is voluntary. Nobody has to do it, and that's one of the important and beneficial things. So there's nobody who can say I'm being forced to do this program when it's still a little vague, and I'm not ready, and I've got other things to do. So that voluntary feature, I think, might address some of the concerns that would otherwise exist. 83 MR. KAISER: Let me stop you there. 84 MR. KLIPPENSTEIN: Yes. 85 MR. KAISER: Was this voluntary aspect in your original material? 86 MR. KLIPPENSTEIN: Yes, it occurs, I think, repeatedly, and I know that some parties, in their submissions, have identified concerns around that. The voluntary aspect is slightly novel, because it's often the case that the Energy Board sends directives and that's the more common model. But -- so some parties have requested clarification on that. But what we're requesting is guidelines from the Board that would show how an LRAM and an SSM would and should work for 2005. And then those LDCs that wish to sign on can do so. Those that don't want to wouldn't be required to. 87 MR. KAISER: But if your client really believes in this, why would they say it's voluntary? They want to know who will implement it or who won't implement it, it will just be up to chance. What's the rationale in making this voluntary, whatever the plan is? 88 MR. KLIPPENSTEIN: Pollution Probe is convinced enough of the basic soundness of the idea that it's convinced that the good idea will -- the merits of this good idea will gradually and quickly become apparent. The basic idea is, of course, that there are conservation opportunities out there that aren't being taken care of, or taken advantage of, now, and that, if an LDC with a smart program and a cost-effectiveness test in the TRC test can implement those, then there will be very large savings to the customers on a total net-bill-saving basis. And built into this is that a very small share of those savings will be shared with the utility and the shareholders. And I hate to use the cliche, but everybody wins. 89 So the idea makes sense, because we believe that there are good opportunities out there. We don't say that people have to be forced to implement them, because they are good ideas, and that can be discovered. So that's what I meant when I said at the beginning that it's voluntary, that it's aimed for maximization, and that it's based on the incentive. 90 So Pollution Probe is convinced that if this proposal -- carefully thought-out proposal, is implemented, then there will be a significant number of LDCs who will say, we can, if we do a good job, make an extra buck for our shareholder, and there will be most customers who, on a moment's reflection, say, I have no problem with the utility getting an extra 5 cents of profit if, by doing so, they've, through a program, saved me 95 cents. And we've taken care in our materials to show opinion to -- to include opinion polls, both of Toronto and of the whole province, which suggest there is a very high degree of popular support for the concept that it's okay for utilities to get an extra boost in profit if that is based on a large pie of savings going back into the customer's pocket. 91 MR. KAISER: All right. So just to get your position, you're not asking for an order of the Board ordering the LDCs to implement your plan. 92 MR. KLIPPENSTEIN: Absolutely not. 93 MR. KAISER: You're looking for some kind of decision to say, If you were going to do it and that's entirely up to you, Mr. LDC, this is how you should do it. 94 MR. KLIPPENSTEIN: That's correct. 95 MR. KAISER: Or are you just saying, Come up with a plan that looks something like this. How definitive of a ruling are you looking for here? I understand it's voluntary so you're not looking for an order of the Board directing utilities to do anything. 96 MR. KLIPPENSTEIN: Right. 97 MR. KAISER: But I take it you're asking the Board to render some kind of decision that if they do something, they should do it according to your proposed plan; is that right? 98 MR. KLIPPENSTEIN: Generally, yes, it should be according to the guidelines that we're seeking of the Board, and the guidelines of the Board would be a policy statement or direction that would indicate that, as any policy direction, if the LDC implemented an LRAM or an SSM according to these guidelines and applied for it, the Board would likely approve that. So the mechanism would be that an LDC would, in the future, come forward with a specific application that would be in accordance with the Board's guidelines and the LDC would seek approval for the LRAM and SSM, and of course the Board isn't bound by its own guidelines coming out of this hearing if the Board decided to. 99 MR. KAISER: The procedure, Mr. Klippenstein, as you see it, is that before anything gets implemented, each LDC would bring an application on their own for their specific form of LRAM? 100 MR. KLIPPENSTEIN: That's correct, although one of the purposes of Pollution Probe's motion is to not result in everybody making a whole bunch of applications that vary a great deal but to channel them into certain principles that have been considered and approved by the Board, and those would be in the guidelines. But then that's correct, this order of the Board today, if the Board saw fit to grant Pollution Probe's motion, would not be an approval of a particular application. That would come later. 101 That has two implications. One is, and this was raised in the Board's procedural order, quite properly, is the question of jurisdiction in the Board in the context of an existing rate freeze. This motion and what it asks for it does not raise rates for 2005, or within the freeze period, so it is not affected by the rate freeze, in my submission. This is a beginning of the process that allows LDCs to apply for an LRAM and SSM. 102 That application, if it would be granted by the Board, would then permit them to proceed with their conservation plans and it's inherent in the nature of an LRAM and an SSM that the final evaluation of whether they get the benefit wouldn't occur until the end of the fiscal year, generally speaking, and it would only be after the 2005 fiscal year that the determination would be made whether or not a lost revenue adjustment were granted or a shared savings were granted for the company. So that's the process. 103 It's possible, of course, to say that it's a little difficult to be specific in this motion about the exact details of an LRAM and an SSM for 2005. That, in my submission, doesn't prevent it from being moved forward by the adoption of guidelines immediately by the Board. The general principles are there and there's experience in the gas sector, with one significant difference that I'll come back to. But one of the proposals, or parts of our proposal, is that a company could apply for pre-approval of some of the input assumptions, and those input assumptions are part of the equation that sets out whether the LRAM mechanism or an SSM will result in an incentive or adjustment. In other words, in some of these situations there has to be a calculation of free riders, which means a calculation of how many people would have adopted these conservation programs if the LDC's program didn't exist. And of course, we would want to avoid rewarding utilities for conservation adoptions which would have happened anyway. 104 Now, that free rider calculation isn't an absolutely exact science, so Pollution Probe is suggesting that it would be appropriate for utilities, singularly or in groups, to ask that certain free ridership figure for their plan be fixed beforehand by the Board on a reasonable basis, and this -- this can be done which would reduce the uncertainty in the risk for the LDC. 105 So those kinds of input assumptions that are critical would be able to come forward to the Board in an application by the LDC, and it's not a particularly complex issue or calculation by any means and so some of those -- in fact, many of the key inputs could be determined beforehand and the result would be assistance to the LDCs in this voluntary issue. They could say, We want to come before the Board and we want to put these input assumptions before the Board. If the Board approves them, then we can move forward and do a program for 2005. 106 MR. KAISER: And would those assumptions be different for each utility or would they be common for all the utilities in the province, in your view? 107 MR. KLIPPENSTEIN: There would likely be a high degree of commonality. One distinction that would be made would be likely between residential or mass-market programs, conservation, because those involve very high numbers of households or individuals and they would tend to have common assumptions for most or if not -- or perhaps all of the programs. What's sometimes referred to as custom conservation programs, which might be very large-scale conservation proposals for a commercial or industrial situations, are often very specifically designed for that application and those probably would require separate calculations. But we don't foresee a huge number of very different applications on those input assumptions. 108 There's already been experience in the Enbridge context about these and it's been audited, there's a field of expertise in these methodologies, and we suggest, probably, there's going to be a high degree of commonality and that won't be a big issue. 109 MR. KAISER: What's the main difference between what you're proposing and what Enbridge is currently doing? 110 MR. KLIPPENSTEIN: The main difference is that Enbridge's LRAM and SSM mechanisms usually include a load forecast or -- excuse me, usually include a conservation forecast in each fiscal year. In other words, a forecast is made before each fiscal year of how much will be saved through the conservation programs. That forecast or assumption of savings is then built into the load forecast, and through the load forecast is built into rates. So the test year or the upcoming fiscal year has built in a conservation forecast. 111 That's not present here and that's not a big issue, in my submission. The reason that process has been followed in the gas side, basically, is that by the time the LRAM and SSM came forward for consideration at the Energy Board a few years ago, the gas companies and Enbridge were already doing conservation programs. So they were already making forecasts as part of the rate-setting process. So it just made sense to include those existing forecast procedures as part of the LRAM and SSM. Since that's not the case in the electricity sector, in other words, there's not conservation forecasts built into the load forecasts, that wouldn't be part of these. And they work fine, nevertheless, you don't have to forecast conservation to operate an LRAM or to operate an SSM, all the other calculations are just the same. It's basically an end-of-the-year evaluation of how much revenue was lost because of conservation programs, and how much savings there were as a result of conservation programs. So that's a difference that's not a problem. 112 Other than that, as I mentioned, I hope that the track record with Enbridge wouldn't be a difference but would be a harbinger of the good things to come. There's now been years of experience, and the affidavit of Mr. Gibbons shows the progression of savings in volumes over the years as the LRAM and the SSM have taken hold, in my submission. And that shows a very real actual-world suggestion that there's good results from these incentive programs. But some parties have been concerned that the forecast aspect of the gas side is a problem in what Pollution Probe is suggesting. But it's not really logically necessary to have it, and it's not a problem. 113 When I mentioned several of the reasons why it would be a good idea, in my submission, for 2005, and I suggested that there's no downside, it's part of Pollution Probe's evidence and proposal that there is unlikely to be any undue rate impact, or any undue or excessive return on equity impact, from this proposal, so that there isn't reason to worry about what would otherwise potentially concern the Board from these incentive mechanisms, namely, that they'll increase rates unduly or that they'll increase the return on equity unduly. 114 Finally, a reason, in my submission, for considering it for 2005, is that the Energy Board obviously is an absolutely key player in the LDC sector, and, in my submission, there would be a strong intangible effect from the Board sending a signal to the LDCs, by adopting this for 2005, that the province is serious about this, that the Energy Board is serious about this, that this is the best way to move forward. And it would be an affirmation, a reaffirmation, through the Energy Board, of what the government has already said, a positive reinforcement signal to the LDCs. 115 The procedural order identified as another issue the jurisdictional issue - and I've, perhaps, said almost all I need to say on that - and by that I mean the specific question of whether the existing rate freeze would cause a problem for Pollution Probe's proposal. And my suggestion is, A, this proposal doesn't affect 2005 rates, so that is the end of it. The reason for that is the rates would only be adjusted in 2006, or later. And that's inherent in an LRAM and an SSM which look towards the past year, and performance in the past year, and it's only if the conservation performance in the past year is very good that there is some adjustment. And so the rates -- the benefits that would flow from 2005 performance would be collected in 2006 rates, or later. 116 Furthermore - and Mr. Chair, you identified this - there is nothing about today's requested order that actually forces anybody to do anything, and it doesn't affect rates. It's a request for guidelines. And it's later on, subject -- or in the context of those guidelines, that there would be an actual application by an LDC. 117 Now, that's a bit of a legalistic or technical argument directed at the words of the statute, but there isn't actually an application today, and there is nothing here that affects rates. And, as I said, if there is any rate effect, it won't occur until 2006, or thereafter, and, of course, Pollution Probe believes that any rate impact is likely to be far offset by the net-billed financial benefits to customers. 118 MR. KAISER: Well, there are a couple of issues that arise out of that, that I'd like you to think about. One is, we are here today to talk about LRAM and SSM for 2005. As you pointed out, there's a separate proceeding dealing with that issue for 2006, and only 2006. There's nothing underway that deals with 2007. And so we don't want, number one, to be thinking that these proceedings are going to have any impact on anything outside of 2005. 119 But, coming the to the jurisdictional point, if I now understand your position, there's no jurisdictional issue because we're not deciding anything, and there's no application before us. Well, this would all be an academic exercise if there is a jurisdictional issue, once one of these LDCs brings an application for an LRAM. So what's your position on that, if one of these LDC shows up next week, and they want an LRAM, which is what we're here for, however we get there, however -- through however many steps -- do we have jurisdiction to deal with that at that time? 120 MR. KLIPPENSTEIN: Yes. And it derives from the nature of the beast here, which is that there's simply no 2005 rate impact. So the reason that I just mentioned earlier and -- let me take a step backwards. There's two reasons. They're separate reasons, and both of them are sufficient to alleviate the terms for today's motion, I say. In addition that there's no application here, and no actual rate order being made today, it's also true that if an LDC appears next week and says, I want an LRAM and an SSM following the guidelines you ordered last week, that will not affect 2005 rates at all. It can't, it's inherent in what an LRAM and an SSM does. An LRAM and an SSM look at the company's performance the previous year, so that an LRAM and an SSM for 2005 would not, and could not, be evaluated financially until, basically, the end -- after the end of fiscal 2005. Because it's only after the end of 2005 that you can get from the company the numbers on conservation - and, presumably, have them audited in the same way that they're audited in the Enbridge process - and say, You have done extremely well on your conservation programs, therefore, you should, in fairness, get some lost-revenue adjustment, and your shareholders should get some shareholder savings, because we can see you have created this very large financial benefit for the customers. 121 That, then, would need to be built into rates but it would not be built into the 2005 rates. It wouldn't be retroactive rate-making; it would be built into 2006 rates, or even 2007 rates. So implementing the LRAM and SSM in 2005 has no impact on 2005 rates. And that's not mere semantics. It's not playing a game, either. It's entirely fair and consistent, in my submission, to say, We can put in place 2005 LRAM and SSM, and the rate impact of that won't come for a year or two, because that's inherent in the way these things work. The performance in 2005 would be rewarded after 2005. 122 In my submission, the result of that is that, both in spirit and in the letter of the law, there is no conflict with the existing legislation or the intention of the existing rate freeze. 123 MR. KAISER: Thank you. 124 MR. KLIPPENSTEIN: The next issue raised in the Procedural Order is the question of what the amount of the SSM financial incentive should be. And the key reminder to ourselves there, in my submission, is that the whole point here is that this is only a good thing because it creates a very large financial bill saving to the customers, that's why there is a small share of that flowing back to the utilities. And it's true that rates may have to rise a little bit, but the overall total customer bills on a net basis will be reduced. 125 And so in my submission, that's something that customers, real-world customers could understand in a moment's reflection, because it's kind of like what everybody deals with in their gas bills, purchases for their cars. If the price of a litre of gas goes up five percent but the engine in your car is 10 percent more efficient, most people realize that they will have lower gasoline bills for the month, because although individual units are going up in price, you are using less of them. So the logic is there. 126 And as I said, in my submission, there's obviously a concern that a shared-saving percentage not be set too high. It, in my submission, should also not be set too low because a key part of this proposal is that it really is an incentive, that it really will catch the attention of the shareholders and managers of the LDCs and say, Here is an opportunity to make a little bit of an honest earned buck, and to get them working very, very hard, and using their smarting. And Pollution Probe suggests that giving a very small share, I hate to use that word when the LDCs are in the room because then they might not be encouraged to do it, but we submit there might now be what there could be called a very small share, in other words, 5 percent of the demonstrated TRC net savings, might well be enough. 127 And I won't go through the evidence in Mr. Gibbons' affidavit which sets out the various scenarios to suggest that a 5 percent share for the SSM is both not unreasonable in terms of the return on equity impact and will, quite possibly, have a very beneficial effect. Again, the goal, in my submission, is to distribute just enough of the savings to genuinely engage the diligent attention of the LDCs and to really maximize conservation, because that is what the government's ambitious program requires, in my submission. 128 There's no magic exact formula as yet that can identify that, and it's part of Pollution Probe's motion that although we recommend that it be set at 5 percent, it may be that as part of the more detailed process for 2006, that rate may have to be revisited. It may be, possibly on the detailed evidence in that case, need to be lowered or it might even need to be raised and that can certainly be considered. But my submission is it would be a mistake to lower it from the 5 percent if the Board granted the motion today because that risks providing not enough incentive, and the potential savings are so large and the importance of the government's policy is so clear that it would be unnecessarily risky to give too small an incentive. 129 Finally, and I apologize for the length of my submissions, on the final issue identified in the Procedural Order which is how would the 2005 LRAM and SSM relate to the 2006. The LRAM and SSM proposed in Pollution Probe's motion, as I said, are interim or you could use the word temporary. I think my friend, Mr. Farrell, was concerned that they not be considered permanent in any way, then certainly temporary is a good word for them. But Pollution Probe would proceed that, in general, the LRAM as proposed would be a good candidate for proceeding forward into 2006 and beyond simply because it makes sense, and that the only major difference might well be the inclusion of a conservation forecast. 130 And that's not a problem, if it's -- was decided in the 2006 process that this LRAM was basically a good idea, it would be easy to add on a conservation forecast. But as we would perceive, quite possibly, no major change to the LRAM and, therefore, it would be an adjustment process or a fine-tuning process or a tweaking process. And because what we're proposing is open to that merging in the 2006 process, it makes it easier to adopt it this year, in my submission. 131 The same basically applies to the SSM, the general framework and the basic principles, in my submission, could move forward into 2006, but don't bind that process and would and could be conveniently tweaked and adjusted. 132 If I could just pick up on a number of points that my friends have made in their very helpful and thoughtful suggestions from various parties, and perhaps that might be useful because they may then be able to more specifically address to the Board in their comments what their concerns, if any, are. 133 As I said, some intervenors have expressed concern about conservation forecasts in the LRAM and the SSM. We're not proposing the Enbridge model in that respect. Our proposal doesn't require them, although they can be added on later. So that's not a problem. 134 Some intervenors were concerned about the suggestion that inputs could be pre-approved. That's a benefit of our proposal but it's not unnecessarily assumed in our proposal for everybody. In other words, an LDC doesn't have to get inputs pre-approved, that's just an option. Again, there's an element of voluntariness and flexibility here. An LDC that wants to apply to have its input assumptions pre-approved could do so, and an LDC that says, We are confident about judgment and we want to move fast, could proceed and simply get those assumptions hopefully approved after the year. 135 Some intervenors have raised the idea that the LRAM and the SSM are not particularly needed at this time because it can -- because conservation capital expenditures can be put into rate base and that's already enough of a motivator. A couple of difficulties with that idea, namely that conservation expenditures can be rate-based and, therefore, there's already a financial benefit, is that conservation spending that's directed to customers, in other words, on the customer side of the meter, is usually operating dollars. It's not capital dollars. So that, without an LRAM and an SSM, that rate-base incentive isn't there as much. 136 The second issue is that rate-basing a conservation expenditure doesn't have as nicely-tuned incentives as the proposal we're putting forward. Pollution Probe's proposal is more effective at getting the best conservation efforts, because you have to show that it's cost effective, and you have an incentive to do as much as is good. So it's a much better incentive than merely allowing rate-basing, in my respectful submission. 137 The Schools, I believe, has mentioned that the Minister has already given LDCs incentive to spend 225 million on conservation. The difference from Pollution Probe's proposal is that it gives an incentive to maximize the conservation impact of that money. And so it's not just spending the money on conservation; it's spending the money on the best, most effective and most creative conservation efforts that can be considered. 138 One party was concerned that the Minister had not specifically directed that an LRAM and an SSM should be in place, and that that somehow suggested that it wasn't appropriate. First of all, I think it's commonly recognized that the Minister can't do the details of regulation. The minister generally sets the policy. And, in my submission, there's nothing inconsistent at all with this Board moving forward on LRAMs and SSMs, although the Minister has not used those acronyms. But in addition, I would point out one of the comments of the Minister in a speech - and this is included as Exhibit E to our materials, and I'll just read a couple of sentences, so it might not be necessary to turn it up - but the Minister, in his notes for a presentation on April 15th, 2004, said that "LDCs would benefit from empowering their customers to conserve electricity." So the concept of LDCs actually benefitting from conservation is very, very consistent with, and is implemented by, an LRAM and SSM. 139 Furthermore, the Minister said: 140 "We believe that LDCs can and should be agents of change, at the local level, to promote conservation. LDCs are extremely well-placed to encourage conservation and energy efficiency in the communities they serve, and we will need all their expertise, ingenuity and leadership to help build that conservation culture in Ontario." 141 The reference to needing all their expertise, ingenuity and leadership is very consistent with Pollution Probe's proposal, because it is exactly the incentive structure of the LRAM and the SSM which says to the LDCs, Go get 'em; if you're so smart, show us, and you will benefit from being the best-in-show on conservation programs. And that's very much in tune with these comments, and I note the Minister says: "The Premier and I had the opportunity to review this speech earlier," so I don't know what that means, but I suppose it means the Premier approves it. 142 One party, Woodstock Hydro, has proposed in some detail an alternative solution for the lost revenue problem. I don't propose to either compliment or critique that alternative proposal. We do see some difficulties with it, but the point is, since our proposal is voluntary, there's no conflict with their proposal. If Woodstock Hydro wished to come forward and say, We wish to do this instead, We don't want to do the LRAM and the SSM, that's fine, since we wouldn't be, in this motion, requesting an order that Woodstock Hydro do it this way. They are entirely free to not apply for this type of LRAM or SSM, if the Board were to put it in the guidelines, and they would certainly be open to coming forward with some other proposal at some other time. So there's no conflict, and it arises from the fact that this is voluntary. 143 I will leave it at that, for now, Mr. Chair and members of the Panel. Thank you very much for your patience, and I've tried to clarify some of the issues that some of the parties identified but, no doubt, I haven't fully grasped some of their points. But if I have to a chance to reply later on, that would be appreciated. So, subject to questions from the Board, that's my submissions. 144 MR. KAISER: Thank you, sir. Mr. Poch. 145 SUBMISSIONS BY MR. POCH: 146 MR. POCH: Thank you, Mr. Chairman. I'll try not to repeat the submissions Mr. Klippenstein has made. 147 I think it's worth starting with a comment on how we see this mechanism working today. We agree you're not being asked to make an order today. You're simply being asked to enunciate the Board's preference, or willingness, to subsequently receive applications which might take more form. Analogous to what the Board did with the deferral accounts for early spending of the third tranche, once the Minister had indicated acceptance of the one application before him, the Board generalized that, and put out a template for utilities to use, analogous to the rate hand book mechanism. It's not the application itself. It's simply the Board indicating its likelihood of acceptance, and offering utilities a template, a streamlined way, where they have some greater assurance of achieving approval, if they subsequently approve. 148 And I should say, of course, that we are strong supporters of both the LRAM and the SSM, because we believe that's the only way that we're going to see ratepayer and societal value maximized, if we align the incentives to the utility with the interests of customers and society as a whole. 149 And our concern is that, absent these accounts, utilities will tend to place undue emphasis on capital investments -- capitalized investments, which means utility-side investments for the most part, things like smart meters, and will tend to lean more towards softer public education efforts on the customer side rather than hard customer-side measures which -- which will quite simply erode the utility's income. 150 And I won't go into any detail because we will have lots of chance for that tomorrow, but I did provide my friends and the Board with a -- just to ease reference, a listing of the spending that is proposed in the first six applications that will be before you tomorrow. And, before you, you have a four-page document to that effect. 151 And I do this simply to point out that these utilities are doing what is rational right now for them to do, absent revenue protection and absent an incentive to maximize cost-effectiveness and TRC. These are, for the most part, publicly-spirited organizations, but they have shareholders and the shareholders are -- you know, going to say, Don't compromise our profit, either at all, or very much, if you can avoid it. 152 If you look at what they're doing, it's quite consistent with what -- with the concern we raise. These utilities are spending anywhere from 72 to -- between 57 and 72 percent of their proposal are capitalized items. A large proportion on the smart meter effort, which we argue they're going to have to fund anyway but we'll argue that tomorrow, but the minority of spending is being spent on the customer side of the meter because that is money that would, if it's effective, erode their profit. And we don't think that is consistent with the government policy of a conservation culture. We don't think that's a balanced approach, and we think that the utilities are responding quite rationally to the situation they find themself in, which is a skewed playing field where if they diligently and effectively help customers, if they achieve savings, if they make heroic efforts in that regard, they're slitting their own throats. 153 So in answer to the concern that some have raised, Why do we need an incentive, there's the third tranche spending is assured, the utilities can only have that money if they spend it on conservation and demand management? Our response is, Well, it's assured but it's not assured that it's going to be spent particularly well. Today, at least, we're talking about roughly a third and setting a pattern for all of that close to a quarter of a billion dollars. And that's -- we want to see these utilities get off on the right footing. 154 So as I say, without an LRAM we're concerned they're going to avoid investments that would erode income or revenue for the utility, even though they would be optimal for society and customers. Without the SSM they won't go after the most cost-effective C&DM. And without an TRC-based estimate, in particular we're concerned they won't even take the time to screen their expenditures. And again we can debate at what point they should be doing that and to what extent they should be doing that tomorrow, but thus far we haven't seen anything about screening, and I think that's the kind of response you get if the utilities aren't anticipating the need to do so to optimize and to demonstrate the optimization of savings. 155 We are saying all the arguments in favour of PBR, all the arguments in favour of prospective rate making apply here. Give the utilities an incentive to do a good job. And I think it's worth stressing that there's -- who knows how much of that third tranche will actually result in savings in the 2005 fiscal year for which, ultimately, incentives and revenue protection may be sought. Presumably there is a ramp up, and you are going to see a lesser in 2005 than you will in subsequent periods, but it's important that the Board signal to these utilities that they have to put in place the appropriate analytical capability, they need to avoid wasting expenditures, they need to -- the Board should be encouraging transparency and accountabilty, which these mechanisms would do. And it's appropriate for the Board to give that signal early on so the utilities understand where the Board is ultimately headed in this regard and start to gear up in that respect. 156 A few comments that arise from the positions filed by others. I notice CME argued that it rejects TRC-based incentives generally and opposes conservation that will raise rates, apparently, even if the conservation will lower total customer bills. Now, I think CME's concerns are really with conservation per se, although they pledge they support conservation, but virtually all conservation raises rates, even though it lowers bills or may lower bills, because it reduces the throughput of the utilities. So I think you have to treat that submission in quite a separate category, and I think the Board has already -- the Minister has already made clear where we're headed here. We are into a conservation culture, so I'm not sure that those submissions really matter for us today. 157 As far as TRC goes and the rigour that is required ultimately for utilities to have to screen via TRC, and that's another concern that CME raises, we as a society are going to invest in supply or demand reduction. Whatever we invest in somewhere, someone is going to be making a forecast of what is the cost-effective thing to do. Now, there is a question of who's bearing the risk, but the risk will be borne by somebody, and as a society we will bear that risk. And the purpose -- so we're going to be making a forecast somewhere, and we say let that forecast be made with good analytic tools, let it be tested and let's go -- let's find the cheapest alternative, the one that lowers the risk and gives us the cheapest option with the best information available, and that's what a TRC test does. It says, if it's less expensive than supply, go for it, and the SSM says, go for the ones that are best in the bunch, optimize that and, therefore, reduce the risk of making a bad decision. 158 Now, a number of parties raised concerns about implementation difficulties pre-empting the 2006 case, doing this today when the Board as of tomorrow is hearing applications for plan approvals. Our proposal is that the Board proceed to hear those applications, and that if the Board is persuaded today that it should enable these mechanisms, any approvals be made in a permissive manner that allows those utilities to subsequently come forward and seek the benefit of those mechanisms layered onto their plans. And you will hear us tomorrow argue that these utilities should have some flexibility in terms of their plans so they can react to the incentives. 159 And you heard Mr. Klippenstein remark that there is nothing requiring utilities to go through the screening and forecasting up front. The way these mechanisms are designed, in contrast to the gas mechanism, we don't need to set a target, we don't need to make a forecast, we don't need weather-normalized forecasts, we don't need base marks, we don't need any of that right now. If the utility ultimately wants to get its reward, it needs to satisfy the Board at that point that it achieved something. And if the utility wants to lower its risk, know where it's headed, then it has the option of coming forward earlier and saying here is some of the inputs we're using for free riders, for what have you, would the Board pre-approve these. 160 And the benefit of that approach is that the Board will -- that information should -- in a rational world, will all be publicly available, other utilities will be able to ride on the coat tails of the lead utilities, there will be a reduced -- reduction in duplication for the regulatory process, and we'll get shared learning. 161 Now, ECMI makes the novel point that an LRAM could increase financing costs because of the risk inherent in it and I only -- can only respond that surely the possibility of being recompensed for lost revenue is better than the certainty that any effect of conservation is killing revenue. So I can't see how that can be more risky. 162 Now, more to the point I think ECMI and CME have both, and others, may well raise the concern that we should take our time, use the 2006 EDR process to weigh this matter and develop and implement any LRAM and SSM that may be ultimately approved, and that this is some how pre-empting that. We would respond as follows: 163 First of all, the amount at stake in 2005 is likely less than what it will be in any subsequent year for some time. So we do not need absolute precision. The right number may be 4 percent, it may be 6 percent, we may want to have a complex reward curve that tapers or accelerates in the future. But to get going, given how much likely is at stake in 2005, a simple mechanism that's in the ballpark is all we need. Mr. Gibbons' analysis shows that even in extreme cases we're not going to go off the rails, we're not going to be unduly enriching anybody. We're not going to do any great harm here, we can refine this later. 164 And the Board should simply indicate that, I think, as the Board already did this morning, this is what we're dealing with today is 2005, full stop. These mechanisms can be replaced, refined, withdrawn, what have you, in 2006 and beyond. But I think it is fair to say that sure, the Board would be sending a signal that it's inclined to offering some form of incentive if it chooses to offer it in 2005, and to that extent, this Panel is in no different situation than any other Panel. By and large, you don't bind future panels, but you're giving an indication of where the Board's leanings are, and I think that's quite appropriate. 165 A word about the scope of the SSM. Just to be clear, GEC's position is that the SSM should be available for spending on efficiency and load-displacement programs on the customer side of the meter. We agree that for spending on capitalized utility-distribution investments -- loss-reduction efforts on the utility-site side of the meter that involve capital, the utility will earn its return on that, if it's added to rate base. That's likely sufficient incentive. Those are the kinds of investments utilities are used to making, although they've stepped away from them, because they haven't had any rate-making mechanism to get compensated. But once -- if the Board addresses those problems that have existed because of the rate freeze, they'll have their incentive with their capital return. It's in the nature of that corporate culture to do those things in any event. It's not eroding revenue when they reduce losses on the system, because it doesn't reduce sales. 166 And that's why the loss-reduction issue is, if I understand Mr. Klippenstein's position, they're not -- although it's discussed in Mr. Gibbons' materials, they're not seeking any particular mechanism for an incentive for utilities to engage in loss reduction, and nor are we, today. 167 We believe that the SSM should not be available for investments and smart-meter technology. That is something that will proceed in any event. The government has mandated that. That is something that will be funded and, presumably, rate-based in any event, so there is no reason to eat up this conservation pie with expenditures on that. That's separately -- that's being separately dealt with by the Board. 168 I won't repeat the arguments on jurisdiction. I would just offer that there is an argument that this is an application, or could result in an application before you, that affects rates, and the application could be stopped by Section 79.6 and would require Ministerial approval which I can't get. 169 Two thoughts there. First of all, fine. The first utility that does so will go to the Minister -- if that's the case, will go to the Minister and the Minister will pronounce, and the Minister will have the benefit of your reasons, if you are supportive of these mechanisms today, in coming to his conclusion. And then that, as we saw with the early directions on the third tranche, the Minister's decision can be generalized and nobody has to go through that complicated process again, assuming the Minister agrees -- or even if he doesn't agree. 170 But I think the argument that there's no jurisdiction resides in an overly-technical read of the statute. If you read the statute perfectly, literally, then no utility can come forward with an application for a change in its 2006 rates before that fiscal period has already begun. It can't even file an application before you, which would, I think, wreak chaos if that's how -- if the Board were to interpret that section of the Act. But the point is rates -- I think the clear intent of the legislature was that rates -- the rate level should not change until May of 2006. But the Board is currently in the 2006 EDR process, doing what we're asking it to do here, that is, hearing the arguments for how things should go in that period, and beyond, potentially, and pronouncing its views. And I think that's just being practical. And the Minister has not objected and the Minister should not be, and the government should not be taken to object to that interpretation of the legislation. 171 I noted that the power workers have suggested that the incentive should not be based on overall benefits, should only be based on the benefits that are seen in the distribution sector, because the distributors are not vertically-integrated. We would simply say that the primary rationale for C&DM is the avoidance of generation of costs, and it would be folly not to consider that in determining and weighing the benefits, and determining where to go with C&DM. And I think it would be contrary to government policy to take the -- to adopt the approach that the power workers have, in their written submission, placed before you. 172 Similarly, they suggest that the SSM be tied somehow to spending levels. Our concern with that is it would be an incentive to gold plate, which might be attractive to the power workers but isn't attractive to customers, certainly. 173 In any event, refinements are always possible in the future. If someone comes up with a model that's more elegant, by all means, let's discuss that, let's discuss in 2006, or in some future period. 174 Now, Woodstock's alternative, I would, first of all, adopt my friend's comments that, given that the proposal here is not for the Board to make a mandatory order at this time, but simply to indicate, through guidelines that -- its willingness to receive such applications, Woodstock has the alternative, as would any utility under the rate hand book proceedings, to come forward with its own view of what should apply to it, and will face some greater burden, presumably, as a practical matter, if it does so. But I would say, because the Board may be -- if the Board were persuaded that Woodstock's alternative was truly better, then it wouldn't want to give its indication today that it would welcome LRAM and SSM applications, so I would say this about the Woodstock alternative: That alternative would divide customers into groups based on how much they use, and then recover all distribution costs in fixed charge rather than a variable charge. 175 Our position is, if you divide those groups -- if you divide the customers finely into groups, then you don't answer the problem that the LRAM is intended to do. The utility will still see, at the margin defining the limits between groups, customers changing categories if they can serve. And so the utility will still see revenue erosion, if you have many such categories. 176 On the other hand, if you try to resolve that problem by having just a few categories of customer use - very large, intermediate, very small, for example - then you have a problem of unfairness in rates, because surely the long-run costs of distributors are based on how much power they are distributing -- are based on the variable component, not short-term but long-term variations in how much their through-put is. And so it's either -- you have an impossible trade-off between picking on fairness or picking on ineffectual response to the problem that LRAM seeks to solve. 177 More importantly, moving to 100 percent fixed charge would remove -- erode the incentive to customers to conserve, and we think that's entirely contrary to the government policy. It's certainly contrary to the policy that has favoured smart meters and a move to time-of-use rates. It's contrary to the whole direction of regulation. And it would not obtain the ancillary benefits of the LRAM, such as increased cost-effectiveness of the -- rather, of the SSM, of the expenditures, but of the LRAM we would -- from the LRAM, we would get increased accountability. And to those who say, LRAM is going to be complicated, when people come to clear it, they're going to have to show -- demonstrate what they've done, we say, Exactly, That's good. That's not wasted regulatory effort. That's very productive regulatory effort. It can be streamlined; we will have lead utilities, others will be able to tag along. This will enhance accountability, it will enhance benefits. 178 And, as we've seen on the gas side, the experience on the gas side has been there has been considerable effort expended on evaluation, and monitoring, and auditing. A lot of that complication - because with the gas companies you're dealing with a target, and a variation of the target, and you have complicated rules about retroactively changing the target, none of which would apply here, because we won't base this on a target - but the experience with that monitoring and evaluation effort has been it has improved programs. The utilities have taken that information and then, on a forward-going basis, have used it to better target their programs, to refine their programs, to better understand the marginal cost-effectiveness of programs, all of which is a good thing, and, we would argue, has improved the return to customers, and more than outweighed the regulatory costs involved. 179 I think you've already dealt with how the 2005 and 2006 mechanisms relate. Simply put, the possibility of refining SSM in subsequent years is not a reason to delay implementation now. We have a government policy target of 5 percent by 2007, the clock is running. The Board should simply indicate, if it is inclined to accept this proposal, that it applies in 2005 and the subsequent periods are for the other panels of the Board to determine in future. 180 Thank you, Mr. Chairman. 181 MR. KAISER: Mr. Poch, one question: Are you suggesting, as I understand it, that really what the Board should be doing is establishing a template? Do you think it would be useful as part of that template to define the inputs? 182 MR. POCH: I think it would unduly delay the -- potentially unduly delay the template, although the Board could indicate that it going to be issuing such a template, and that would, presumably, be a good start for the utilities. 183 I think what the process that we envisaged, those of us who support an SSM in the 2006 EDR rate handbook process, was that utilities be able to come forward as they refine their programs and have inputs that they feel they can support, bring them forward to an officer of the Board, we're suggesting the Board retain an external consultant or auditor for this purpose, who can vet those and obtain comments from stakeholders, and the Board can choose to put its imprimatur on those or not. And once that occurs, that approved input for that type of program is available for other utilities to say, Me too. And there's some streamlined filing process where utilities advise the Board that its tagging along and indicate that there are no extenuating circumstances which would make the application of that input in their program any different. 184 I think, realistically, as we see with the six large utilities cooperating, we can anticipate that there will be lead utilities that will cooperate, like the six or lead utilities like Hydro One, because it's simply large enough on its own, that will be early filers, will file -- here's the six programs we're going to roll out initially, here is the inputs we propose to use, here is how we've supported them. It can go through this process, be posted on the website, other utilities can thereafter simply say, Me too, or Yes, but we in Markham have a transmission line potentially coming through, we think our avoided costs are slightly higher for that reason, if we can demonstrate that we can avoid that, for example. 185 So it would be a growing process, so the Board could enunciate this process. That would be, in effect, the template. 186 MR. KAISER: Thank you. We'll take the morning break now, 15 minutes, please. 187 --- Recess taken at 11:10 a.m. 188 --- On resuming at 11:25 a.m. 189 MR. KAISER: Mr. Farrell, are you next? 190 SUBMISSIONS BY MR. FARRELL: 191 MR. FARRELL: Yes, I am, sir. 192 I filed copies of the written response of the Coalition of large distributors and served them on the parties whose name appeared on a service list. Unfortunately, I didn't serve everyone here in the room, I have hard copies of the written submission if anyone requires one. I have one clerical error to correct for the record in the written submission, it's on page 5, paragraph 19, second bullet point, first line near the end of the line. It reads, "for commencing," it should read "from commencing." 193 I won't be long in my -- 194 MR. KAISER: Before you start, Mr. Farrell, Mr. Lyle, the document that Mr. Poch referred to, his chart, can we give that a number? 195 MR. LYLE: Certainly, Mr. Chair. Have you received a copy, Ms. Crnojacki. 196 MS. CRNOJACKI: No. 197 MR. FARRELL: I have two spares if you wish. 198 MR. KAISER: Mr. Farrell will give you one. What exhibit number is this, please? This is Mr. Poch's. That's a different document. 199 MR. LYLE: We'll mark it as Exhibit A.1.1. 200 EXHIBIT NO. A.1.1: GEC SUMMARY OF C&DM BUDGETS 201 MR. KAISER: Mr. Lyle, are we talking about the same document? 202 MR. FARRELL: Just for the record, my copy was the e-mail transmittal sheet as well as the attachment. 203 MR. KAISER: Sorry, Mr. Farrell, please proceed. 204 MR. FARRELL: Thank you, Mr. Chair. The submissions of the coalition of large distributors, including the position on Pollution Probe's motion, is set out in the written response. And I don't propose to go through that in detail, I'll just touch on the highlights. 205 Our position on the motion, per se, is set out in paragraph 14 on page 4, and in summary, it's a conditional approval for support for Pollution Probe's motion, based on the support of an LRAM and an SSM in principle. There were two conditions attached to our support, one was that the guidelines, if the Board is going to issue guidelines for 2005, are both voluntary and temporary. Mr. Klippenstein mentioned Pollution Probe's motion was just that or satisfied that condition. 206 The second condition was that the guidelines for 2005 should not include a line loss factor incentive. Mr. Klippenstein didn't mention that in his submissions, but he has subsequently advised me that that condition is also acceptable to Pollution Probe. He also advises that the example of a line loss factor incentive was contained in Mr. Gibbons' affidavit to comment on the distinction between the customer side of the meter on the one hand and the utility side of the meter on the other. And I would hope he would confirm my understanding in the course of his reply comments. 207 Our principal concern with voluntary and temporary guidelines is that whatever you may decide the issue here, not compromise or adversely affect the 2006 EDR process in regards to both of those types of measures. 208 The written response of the coalition of large distributors also dealt with the four matters or questions posed in the Board's amended Procedural Order No. 2. The first one was, Should the Board develop mechanisms to provide revenue protection and/or incentive for the purpose of 2005 rates? 209 Again, the coalition of large distributors supports mechanisms to provide both revenue protection and an incentive. And I would draw your attention to paragraph 17 on page 5 of the written response of these utilities where they express the desire to have an opportunity to establish, on a voluntary basis, an LRAM for 2005 that would be based on the design approved by the Board in the 2006 EDR process. 210 The second question posed by the Board dealt with the Board's jurisdiction to adjust rates to address revenue protection or incentives compared to a Ministerial approval to take that action. Again, we made submissions on this point in the document we filed. I'll just summarize it. 211 There was the uncertainty that arises from the scope of Section 79.6. The uncertainty, in our view, pertains to the phraseology or the terminology used in Section 79.6 which is, "an application that relates to rates." It doesn't say, "of increased rates," "affect rates," it says "relates to rates," and I note in this regard Mr. Poch's submission that read literally, this section would preclude an application for 2006 rates in advance of May 1, 2006 or such earlier date, as Section 79.6 expires or is repealed. 212 So we take some comfort from the logic or the rationale behind Mr. Poch's remarks, but nevertheless we feel the Board has to address the precise terms of the section in order to determine whether the guidelines that are being requested lie solely within your purvue. And I also note in this regard, Mr. Klippenstein's reference, I think it was his or if it wasn't, Mr. Poch's reference, to the use of a technique like the accounting procedures hand book, and the uniform system of accounts, as a means of providing a generic template, or guidelines, as opposed to a strict application under Section 78. 213 The third question posed by the Board was: How would the amount of a revenue protection or incentive mechanism be determined? 214 Dealing with the LRAM, for the purposes of my submissions now, we answered that question in paragraph 20, on page 5, and, just to clarify what the utilities were saying there, we weren't suggesting that a conservation forecast was needed. What we were trying to say is that, whatever mechanism is developed, it must contain some means of measuring the impact of C&DM programs or other measures. So you need to have a base, and you need to have something to measure against the base, whether it's a conservation forecast, or otherwise, and we just want to point out that no one, including the Board, should underestimate the issues that will be -- that may arise in relation to quantifying the impact of C&DM measures, and the benefits that flow from them. 215 The last of the Board's four questions was: How would the mechanisms for 2005 relate to the mechanisms for 2006 and following years? 216 In paragraph 22, on page 6, the utilities point out that they favour continuity in regulatory mechanisms. We are anticipating, and, indeed, hoping, that the process for LRAM, SSM, and similar measures that is developed in the context of the 2006 EDR process will have regulatory continuity. And that is one reason why we expressed concern that whatever is approved for 2005 be temporary in the sense of it pertains only to 2005. 217 Those are my submissions. Thank you, Mr. Chair. 218 MR. KAISER: Thank you, Mr. Farrell. I have a question. It's been suggested by one of the -- from the other counsel, I can't remember which one, that your group might be the first one in the door on this. And so I'm interested in a practical side as to how much guidance -- if the Board issues what's been described as a template, and accepting what everyone agrees that this is for 2005 alone: How detailed does that need to be, in your view, to be of assistance? 219 MR. FARRELL: Can I just ask my advisor that question? And I can provide a better answer that I can provide on my own. 220 MR. KAISER: Mr. Farrell, I'm happy to come back to this. Take your time over the lunch hour to speak to your colleagues. I mean, it's an important issue and -- 221 MR. FARRELL: I would appreciate the time, Mr. Chair, because what we were discussing was not only the aspect of a parameter, but also the question that you raised, should the guidelines include input parameters, or not. And so I would be pleased to provide you with a better response after the lunch break than I'm able to do now. Thank you. 222 MR. KAISER: That would be great. Thank you. 223 Mr. Tucci, are you for or against? My score card -- I lost my score card. 224 MR. TUCCI: I'm leaning on the for side. I'm pretty consistent with just you've just heard from the coalition. The EDA has the same position. We're fairly consistent across the utilities, that we're supportive, in principle. We would like a mechanism for 2005. We like the incentives that have been discussed to date, and that we don't want to lock in -- whatever we come up with in 2005, won't necessarily affect 2006, but we're hoping that there is going to be some consistency. I think -- knowing that the 2005 proposal that Pollution Probe has submitted is based on the working group that has been working on the 2006 rate handbook -- so there's a hope that there's going to be some consistency between them. 225 MR. KAISER: Ms. Simon, did you have a position. 226 SUBMISSIONS BY MS. SIMON: 227 MS. SIMON: Yes, Mr. Chair, the Canadian Energy Efficiency Alliance supports approaches and mechanisms that will facilitate the implementation of aggressive, effective conservation and demand management, i.e., DSM, by local distribution utilities in Ontario. These include approaches and mechanisms that remove any disincentives, and that provide incentives to the achievement of this DSM goal. As a result, the alliance supports a lost-revenue recapture mechanism for 2005, to ensure that the utilities are kept whole by any conservation activities that they carry out, and an incentive mechanism for 2005 that sends the right financial and business signals to the utilities to carry out successful, aggressive DSM. 228 The alliance is grateful to Pollution Probe for bringing forward this motion we are discussing today, as these are important issues to discuss for the 2005 electric distribution rates. 229 Various members of the alliance have different positions on the exact nature of what the lost-revenue recapture mechanism and the incentive ought to be for 2005. Therefore, the alliance is not taking a position on what the mechanisms should be, but instead, is recommending some principles that it has agreed to, for consideration by the Board. These are: The mechanism should be straightforward, transparent, easy to implement by the LDC and to regulate by the OEB. The alliance urges the Board to adopt a simple and straightforward approach to verification of savings, with as many input assumptions such as free ridership, fixed up-front by the Board, in the Board's guideline, and with electricity-consumption savings based on approved engineering calculations in the guideline, for both mass-market and custom-market programs, to the extent possible. 230 Any changes made to the assumptions by the Board should be implemented on a going-forward basis. 231 Finally, any mechanisms adopted by the Board should take into account, encourage and not jeopardize the opportunity for LDCs to use their third tranche dollars for experimentation and learning about what DSM programs will result in the highest level of electricity savings in the most cost-effective manner for their customers. 232 The alliance is concerned that DSM plans for the spending of the third tranche have already been filed by the Board, without the opportunity to plan for and take into account any of these mechanisms. Therefore, any mechanisms approved by the Board should take this limitation into account. 233 As well, any requirements IP imposed by the Board on those utilities that would use these mechanisms should not result in any additional regulatory burden on those utilities that are unable or do not wish to take advantage of these mechanisms for 2005. 234 The most important priority for the alliance regarding regulated DSM in Ontario is to see a long-term stable and effective regulatory framework in place for DSM in 2006, and these are the matters before the Board in the 2006 EDR. Any effort spent by the parties and the Board on the 2005 incentive and lost-revenue recapture mechanism should not detract in any significant way from the necessary level of effort required to ensure an appropriate framework for 2006. 235 Those are my submissions, Mr. Chair. Thank you. 236 MR. KAISER: Thank you, Ms. Simon. 237 MR. KAISER: Mr. Quesnelle, do you have a position on this? 238 SUBMISSIONS BY MR. QUESNELLE: 239 MR. QUESNELLE: Yes, thank you, Mr. Chair. My name is Ken Quesnelle. I'm the Vice-President, Assistant General Manager of Woodstock Hydro. And with me today is Bruce Bacon, a senior consultant with Elenchus Research Associates. We're here today representing Woodstock Hydro. 240 As an interested party in this proceeding, Woodstock Hydro has prepared a response to Pollution Probe's proposal for the lost-revenue adjustment mechanism. I'd just like to mention that we are not in opposition to the notion of the need for an LRAM. We are offering -- what we're offering here today is an alternative one that we see as simplified, and, actually, more effective, more based on a true economy of the exact -- what are the causation elements of the distribution requirement for revenue. 241 Our concern with the various issues that arise from Pollution Probe's LRAM proposal are such as the recovery of the lost distribution revenue in a subsequent year after the revenue has been foregone, the need to substantiate the incremental reductions in kilowatt-hour and kilowatt, and the need to quantify the impact of free riders. And I think this is a growing concern and this is, in looking at the current environment, and when -- I mean social environment of the need to build a conservation culture, I think we're going to have a host of agencies and bodies such as the OEB, the OPA, Ministry of Environment and Energy, and also the independent electrical system operator all involved in attempts to change that culture. To be able to calculate exactly what had impacts and what didn't, I think, is going to be very problematic going forward, more problematic than it has been in the past. 242 There's also the need to support an audit process and the additional costs associated with justifying the LRAM before the OEB and other stakeholders. There's obviously the risk, and I think that's been mentioned in other submissions, of not being able to recover the full expected cost of lost revenue. And I'd also like to make it clear that, in our submission, it is certainly not out of sync with the notion of a shared-savings mechanism, you could certainly have an incentive program ride on top of a fixed rate. Our biggest concern is that the current situation is a false economy, that the notion of having the split between the fixed and the variable is one of a legacy rate set up and it comes from our heritage. I think we have to recognize the core function of the LDC and its requirement to maintain the assets and those -- in our submission, clearly defines what we consider fixed costs and, basically, that's all of our costs. 243 As I said, we've proposed another approach that addresses the LRAM which would be relatively simple to implement, would not need to be supported by additional calculations, would not need any ongoing regulatory approval and would be more cost effective than the Pollution Probe proposal. 244 Woodstock Hydro proposes LDC distribution charges move to a full 100 percent fixed charge, or full fixed charge rate structure, and with the volumetric distribution charge being eliminated. 245 A full fixed charge would eliminate the need for the LRAM as the LDC would be indifferent to the reductions in kilowatt hours and kilowatts. The full fixed charge would be designed to be revenue neutral within each rate class and there would be a provision made to have a full fixed charge for various levels of consumption. I just point out that our paper goes into detail as to how the starting point of that would be, but I'd like to emphasize that we're looking at transitional issue. We see, at the end of the day, that a customer's charge would be based on their ability to draw power, and that is what our cost causality is, not on the volumetric. And that a move towards that frees up the LDC to engage in demand-side and conservation programs without the fear of the LRAM regulatory burden. 246 Something that we've had difficulty with as a transitional issue, and I'll speak strictly for Woodstock here, obviously each one of our companies has gone through a transition from our pre-commercialization state, and the regulatory framework in which we have worked has changed dramatically. One of the constant issues I have with my own board of director who are board of directors brought on with business backgrounds to look at this regulatory entity that they now are responsible for, and I think we've gone a fairly good job taking them through a learning curve of what a regulatory company is and the OEB's role, our role in providing a service which is a monopoly service within a franchise area. 247 The one thing I cannot get my board to come on side with is that we are at risk for things we do not control. We have a definite risk to the bottom line based on things that are without a correlation to our costs. When we do the cost analysis and we look at our profit analysis it always comes up that there's a disconnect, and I think to do anything now and build on that false economic is we're heading down the wrong road. I think we really have to take serious look at exactly what the distribution sector relies on for its revenues and transition it in that direction. 248 I think the -- based on the causality principles, we're also supported by the government's policy to have one line item on the bill. I think there are other things that, I think, are recognized. The OEB themselves recognize, I think, that we have to get it right going forward. And I think this is our opportunity that we should, at least, bookmark this as something that has to be considered as we move forward, recognizing that Pollution Probe's plan is one of voluntary basis. We felt that it would be prudent at this time to bring this to the Board's attention, that this is something that we would certainly be interested in applying in a rates application format using a fixed-only revenue requirement, or based on a our fixed costs, and would certainly approach the Minister, if need, be for approval to do that. 249 I think the Board recognizes that the landscape is changing. In your draft business plan, I'll just quote a small segment, looking at the fundamental redesign issues: "We will consider whether a fundamental redesign of electricity distribution rates is warranted in light of developments in metering, smart metering, and net metering, conservation and demand management." 250 I think that this is something that has to be recognized at this point. I think to truly build a conservation culture we have to start with a foundation that is based on real costs. And the slight reductions -- or sorry slight alterations to that from a customer impact view, I think, are very small and negligible considering the benefits that we would have of having the true business cases for LDC activities going forward. And again, I will re-emphasize that we can have an incentive plan layered on top of our proposal. 251 Thank you. 252 MR. KAISER: Just a matter of fixed versus volumetric, is this something that you're raising in the 2006 rates proceeding? 253 MR. QUESNELLE: It hasn't been raised to date. We were looking at this from a point of view of -- from an LRAM perspective. We thought that that would be the time to raise this, because it is basically the avoidance of a customary LRAM and we thought in that context we could bring out our evidence that what are the cost causes in that respect, and we're using this opportunity to do that. There's a lot of things happening in parallel and there's a lot of things that should happen sequentially going forward. Whether or not this is something that is of appealing to a large group of LDCs, I don't have evidence that it is, but what I would suggest is that we allow this some discussion time. 254 And like I say, Woodstock would certainly be prepared to put in this forward in a rate application in 2005. Obviously, if we need Minister's approval we would do that, but that would flush out, I think, a lot of the idiosyncracies or even the minutia of things that people can then look at and see where are the problems in this. But again, it's our contention that the benefits far outweigh the problems in this going forward. 255 MR. KAISER: Does the EDA have a position on this? I know you wear two hats sometimes. 256 MR. QUESNELLE: Well, I think it's -- Morris has, I think, spoken to what the current EDA position on this. I don't think they're at loggerheads. This is a position that Woodstock, as a business, like all LDCs have their individual business they bring forward, would look for as something that can be used industry-wide. But I think if, and I'm not going to wear the -- suggest that Woodstock wants to show anything in a leadership role here. What we want to do is seek out the Board's guidance on this, and I think others are looking for that guidance as well, and also a sense of acceptance that this is something that could be brought forward in a rates submission. 257 I think the other jurisdictions have looked at this. I would caution that other jurisdictions do not have exactly the same regulatory framework that we have in existence here today with the LDCs in Ontario, and I think that the overriding public policy, I think the lens through which we have to look through that is most important, is the need to build a conservation culture. And I think this is something that is truly worth a closer look at, and Woodstock is putting forward the concept that they would like to try this. And we already know that there's great interest across the industry on this, but quite frankly, I think that we're locked into a situation where there is a parallel that is worth looking at, and that is certainly the mechanisms that have worked in the gas industry. 258 But at the same time, I would like to bring forward in a rate application for further debate on this where the differences are and how we can, perhaps, incent LDCs to do all the good things in DSM and conservation that they want to, from a business planning perspective. And I think as we drill down through this I think it will get wider and wider industry support for it. And I think, again, all we're seeking is some notion from the Board that this is something that they would be interested in pursuing further and Woodstock would certainly be interested in looking at this further and bringing more evidence in a rate application. 259 MR. KAISER: Thank you. 260 MR. QUESNELLE: Thank you. 261 MR. KAISER: Mr. Warren, did you want to lead off for the opposition? 262 MR. WARREN: Thank you, sir. 263 MR. KAISER: Mr. White, I don't know which camp you're in. 264 MR. WHITE: And I think, if you hear my comments, you may find that I'm a little duplicitous about that as well, so I may be long in the middle. 265 MR. KAISER: Maybe this is appropriate time for you to go, in between the two. 266 MR. WHITE: Thank you. 267 MR. KAISER: Please proceed. 268 SUBMISSIONS BY MR. WHITE: 269 MR. WHITE: ECMI generally supports LRAMs and SSMs for LDCs, just not now. And my comments this morning are an effort to, sort of, amplify the written submission we made on December 1st. 270 Mr. Gibbons' affidavit demonstrates a possible imperfect understanding of the electrical distribution market in Ontario. RPP, the regulated price plan, is intended to provide stable pricing only to a portion of the Ontario market. Mr. Gibbons' affidavit appears to cast a lower status on loss-reduction programs and smart meter initiative. ECMI finds it interesting that Mr. Gibbons, an economist, apparently finds that a lower value in the real -- places -- finds a lower value in the real-time pricing of the commodity through the smart meter initiative. Also, Mr. Gibbons' proposal to lose, or hide, losses in a specific annual value, and rolling that value over all kilowatt-hours, likewise separates in a material way both the value and the time from the commodity price, and the government-stated objective that customers should pay the true cost of electricity. 271 Simplistic portability of the natural gas model LRAM, including riders and SSM initiatives, understate the level and the importance of these issues. Is 5 percent a good number for the sharing of benefit? We don't know what a good number is for the electricity market. In conclusion, the OEB has already demonstrated that it considers the C&DM programs to be important, and has allocated a significant component of the 2006 EDR process hearing to deal with these matters. The quick and simple answer to adopt the natural gas models may be an attractive proposal, but I understand that the gas industry did not develop these initiatives in a day. 272 Applicability of the natural gas rules to the electricity market may be valid, or may not be valid. Doing a good job launching C&DM initiatives in the electricity market, with a solid base set of reliable assumptions - which may be better-described as inputs, as I heard mentioned earlier - may create an environment where all parties, including customers, LDCs, generators, and government, can rely on a credible process. The downside risk of jumping too quickly is to sour the process. 273 While I enjoy sailing in other people's boats, what this marketplace needs from C&DM programs is the confidence that we, as an industry, and regulator, know where we're going. The allocation side for the recovery of C&DM costs may be the single most significant and contestable item. ECMI believes that a more appropriate time for consideration of the type of initiatives is part of the 2006 EDR handbook process. 274 Thank you, those are my submission. 275 MR. KAISER: Thank you, Mr. White. 276 Mr. Warren? 277 SUBMISSIONS BY MR. WARREN: 278 MR. WARREN: Thank you, Mr. Chairman. 279 As the members of the panel will be aware, in the order course, when an applicant seeks relief from a regulatory agency or from the Superior Court, the applicant is required to indicate the jurisdiction of the tribal or the court to issue the relief. I'm struck by the fact that Mr. Gibbons's Notice of Motion doesn't contain any reference to any statutory authority for the Board to issue this authority, nor any reference to the Board's rules. In the ordinary course, the Notice of Motion would indicate that the relief is being sought pursuant to section x, y or z of the Ontario Energy Board Act, or the Statutory Powers and Procedure Act or, indeed, the Board's Rules of Practice and Procedure. 280 I cannot, with the greatest of respect to Mr. Klippenstein, either understand the nature of the relief he's seeking for, or, more importantly, find any jurisdiction within the Board's Act to grant whatever relief he's seeking. 281 This isn't an academic issue, Mr. Chairman. The Board's -- one of the Board's questions, to which I will return later, is whether or not the Board has the jurisdiction to grant the substantive relief which an applicant would receive if the applicant subsequently, down the road, applied for approval of an SSM or LRAM. 282 But mine is a threshold question: What is the nature of the relief that the Board is being asked to grant in this proceeding? Where is the authority, to put it more bluntly, for the Board to issue guidelines - and what is the nature of the guidelines - what is the authority of the Board to issue guidelines in respect of applications for approval of rates in respect of -- sorry, not even approval of rates, applications for approval of -- I'm sorry for my hesitation, I'm really not quite sure, frankly, what it is you're being asked to do this morning. And I say, with respect, that's not academic issue, because no regulatory agency, nor the Superior Court, can issue an order without being clear of the nature of the jurisdiction that they're exercising. 283 The clients for whom I am speaking here this morning oppose the granting of the relief requested, assuming we can get our heads around whatever that relief is. 284 I want to make it clear, as a preliminary matter, Mr. Chairman, that my clients are not opposed, in principle, to the idea of an LRAM or the idea of an SSM. However, I should add that it was our understanding that one of the issues to be considered in the 2006 EDR process, and one of the reasons why the Board recently ordered that there be -- directed that there be an independent report on C&DM produced for that, was that the issue of whether or not LRAMs and SSMs were necessary and appropriate in the electricity issue, as a fundamental issue, was being -- was going to be considered in that process. Which raises the question of -- whatever relief you feel you may have authority to issue in respect to this motion -- whether or not it would prejudice, or, indeed, bias, the deliberations in the 2006 C&DM process. 285 Let me set out, as briefly as I can, the principal reasons why my clients are opposed to the granting of the relief asked for. 286 First, members of the panel, has to do with the nature of the materials that have been placed before the Board in respect of the C&DM applications for 2005. The programs have not been subject to the fundamental question of whether or not they are cost-effective. There have been no estimates of the amount of savings that will be achieved and, in the absence of any cost-benefit analysis, the risk is that super-adding to it, at this or any stage down the road, something as complex and difficult as the calculation of LRAM and SSM, is trying to build a foundation in the absence of fundamental information -- information which, as either Mr. Quesnelle or Mr. White just a moment ago pointed out, took ten years in the gas sector to develop the kind of base information you need before you can begin to consider this. And this base information, in particular, cost-effectiveness, is simply absent from the materials which have been filed. I say those things not with any criticism of the LDCs. They are doing what they can in the short term. But to now try and super-add to this as complex a calculation as those required for SSM and LRAMs would be fundamentally, in my respectful submission, impossible. 287 And if the Board considers this, the Board is, again, I come back to the question of the murky and imprecise nature of what you're being asked to do. You're being asked to, in effect, authorize. You're being asked to authorize 80 LDCs to apply for the right to have, and indeed the details of LRAM and SSM programs for 2005, the end process of which would require somebody within Board Staff to analyze the LRAM and SSM calculations for 80 separate LDCs and then bring those forward ultimately for approval of the Board which raises the second question, second issue, of whether or not, as a practical matter, this adds an intolerable burden, regulatory burden to the Board's already overburdened schedule. 288 My second point, Mr. Chairman, to which I have alluded already is the relationship between the relief that's being asked for today and the 2006 EDR process. Again, it was my client's assumptions, perhaps ill-founded, that one of the threshold issues in the 2006 EDR process is whether or not SSMs and LRAMs were necessary and appropriate in the electricity sector. I don't believe it would be appropriate for the Board in any relief it grants in respect of this motion to presuppose the answers to those questions. There is a process which is already in place with a hearing set for relatively early in the new year, a hearing, a schedule set for the delivery of evidence that will touch on, among other things, the use of these kinds of incentive programs in LRAM programs in other jurisdictions. 289 And when a process is in place to consider these issues, as it were an issue, and with the solid foundation in evidence, anything which the Board says now about LRAMs and SSMs for 2005 risks falling into one of two categories; it is so general in nature as to be effectively meaningless because you don't want to risk prejudicing the 2006 process. In the alternative, it is sufficiently detailed, that it effectively biases the considerations for 2006. It would be very difficult going forward, I say with respect, for the Board to say in respect of this motion that, in effect, LRAMs and SSMs are perfectly valid things for us to consider and here are the input assumptions, and then six weeks from now consider with an open mind whether or not they are, in fact, appropriate in the electricity sector. The safer, the more prudent course would be for the Board to defer these considerations to the 2006 EDR process. 290 The third point, Mr. Chairman, really relates to the first one. It is that, as I understand the materials which the LDCs have filed in respect of C&DM, is that they are, and I don't mean this in any derogatory sense, they are experimental in nature. The LDCs are for the first time trying to decide what are the appropriate C&DM measures in the electricity sector. And it has always been my understanding, from far too many years considering DSM issues in the gas sector, is that there are not LRAM and SSM measures applied to what amount to pilot projects. 291 The fourth point, Mr. Chairman, is that the LDCs have no mechanisms in place to monitor and evaluate the programs and that's a critical concern. There's no framework in place to consider the input assumptions for evaluation of free riders, savings per measurement, and so on so forth. 292 I would ask if the Board would please turn up two of the prefiled submissions in this case. One was that was filed by Mr. Farrell on behalf of the coalition of large distributors. On page 3 of that submission, Mr. Chairman, to page 5, at paragraph 16, Mr. Farrell on behalf of his client makes the following observations: 293 "The actual operation of both an LRAM and an SSM is entirely dependent on verifiable quantification of the load impacts of any distributor's C&DM programs. For many distributors, however, the development of the infrastructure required to quantify these impacts will occur in 2005 as a result of implementing their C&DM programs. It is unclear at this point, therefore, whether many distributors would have the information required for LRAM and SSM purposes." 294 Now, in the submission filed by Mr. Tucci on behalf of the EDA, on the second page of that at the top, Mr. Tucci, really among the most-experienced people in this province with the operations of LDCs makes the following observation at the top of the page: 295 "At issue is whether an LRAM and SSM could be practically implemented for the 2005 conservation program. Although the EDA supports, in principle, the implementation of an LRAM and SSM as soon as possible, the EDA understands that having an LRAM and SSM implemented for 2005 conservation programs may be difficult. Implementing an LRAM and SSM requires a determination of the energy reductions achieved and the associated long-term savings, total resource costs, of each conservation program implemented. Electric utilities have not been required to determine savings estimates nor implemented a system to measure energy reduction results for 2005 programs." 296 Now, those two folks and their clients know a lot more about this business than I do, and both of them, or all of them collectively, Mr. Farrell's clients, have expressed clear concerns about not having the mechanisms in place in order to account for and measure the LRAM and SSM programs. In those circumstances, Mr. Chairman, why would this Board invite or allow the LDCs to come forward with applications knowing first, that it's very difficult for them to do the calculations, and secondly, knowing that the Board itself has to go through the painstaking process of assuring that the calculations are accurate. 297 Now, Mr. Chairman, the reference has been made to the wonders of the natural gas programs. Well, one of the dark side, if you wish, the crazy uncle in the attic in the natural gas industry, has been the extraordinarily complex, time-consuming, divisive and expensive process that's required ex post facto to make sure that everybody, including the dissenters and the grumpy ones, are happy with the LRAM and SSM calculations. And in fairness, if that model is going to be used, there's going to be a trailer on these 2005 LRAM and SSM programs that will go on in perpetuity. 298 For example, the LRAM calculations for Union's 2003 LRAM have not yet been completed and are not likely to be completed until sometime in 2005. So if there is a one set of rules that applies to be determined to 2005, another set of rules for EDR in 2006, perhaps another set of rules for 2007 and then overlapping all of that will be the ex post facto calculations of the LRAM and SSM for 2005 for a number of utilities that don't have the resources to properly measure them in the first place. I say, with respect, this is an invitation to chaos. 299 Now, I want to turn finally, Mr. Chairman, to the Board's questions. The first question was whether or not the Board should develop mechanisms to provide revenue protection for the reasons which I've tried to articulate. My clients believe you should not. 300 On the question of the Board's jurisdiction my friend, Mr. Farrell, for whom I have immense respect, and I must say, I will say, a man scrupulous in his attention to jurisdiction, a man who never does anything or never urges the Board to do anything unless he is absolutely certain that you have the jurisdiction to do so, was as soft day as a four-day year old pancake in the rain on the issue of jurisdiction. The best he said was, Well, there may be some merit, and it's one of the things that Mr. Poch said, but he doesn't say unequivocally that you have the jurisdiction to do this. And may I say, might I offer, try after the fact to put a little steel in Mr. Farrell's spine, clearly, Mr. Chairman, clearly beyond question, this is applications for approval of SSMs and LRAMs would have rate-making implications. And they would be in respect of 2005, and so there would be a fundamental threshold question of whether or not they could be approved without the Minister saying so first. 301 None of us should here urge the Board to issue an order unless it is clear beyond doubt that there is the jurisdiction to approve, I guess to amend the applications for -- what would have to happen is that if an application is filed for recovery of certain funds, they went forward with the approval of the Minister. After the fact, after the Minister has granted the approval, the Board is going to say, Yes, we're going to modify that which you can apply for. Now, when you put it in that context you're modifying, in effect, what the Minister has approved going forward, and surely when it's seen in that light, the answer unequivocally is, you don't have the jurisdiction to do it. 302 The larger question, Mr. Chairman, and the third question, is: How would the amount of revenue protection incentive mechanism pay-out be determined? Well, I don't know how that should be determined, but the one thing I would urge on you is, you shouldn't say that now. At the highest, whatever relief you can grant, you cannot say how it is to be calculated, because each case has to be determined on its merits and the circumstances of its own case, on the capacity of the individual applicants to make these calculations. To set out a set of rules, again, one of two things happen: Either you set out a set of rules that are fixed, in which case it's bias, or, in the alternative, you set out a set of rules that are so vague and so imprecise as to be meaningless and not warrant your attention in doing so. Hobson's choice. 303 The fourth question is: How would the mechanisms for 2005 relate to the mechanisms for 2006 and beyond? What are the options? 304 While the 2006 EDR process is going forward, this would be the timing: Woodstock Hydro and Mr. Farrell's clients may decide, sometime between now and the beginning of the new year, that they'd like to take advantage of the opportunity to apply for LRAMs and SSMs for 2005. They would file those applications, which would be heard, in effect, concurrently with the 2006 EDR process. The opportunity for conflict, questions of fairness in the process, are clear. 305 There is a straightforward solution, Mr. Chairman, and members of the panel, and the straightforward solution is to say, questions of SSM and LRAM are clearly important as a matter of public policy. They should be considered, and, indeed, they will be considered, some six weeks hence or eight weeks hence in the 2006 EDR process. To complicate everyone's life for uncertain benefits in a circumstance where it's not clear we have the jurisdiction to do any of this, where there's a risk of conflict in the 2006 EDR process, is something which, as rational decision-makers, I say, with respect, you should avoid. 306 Dismissing a motion that is so vague in the relief that it asks you to grant is something that is entirely appropriate. In my respectful submission, Mr. Chairman, you should avoid the temptation so mellifluously put to you by my friend, Mr. Klippenstein, to do something in the public good. Believe me, in my respectful submission, any order that you would issue in respect of this would cause far more complexity, far more difficulty that it would generate any benefit. 307 Those are my submissions. Thank you. 308 MR. KAISER: Mr. Warren, two questions. 309 On this jurisdictional issue, as I understand the way Mr. Klippenstein and Mr. Poch side-stepped that was to say, We're not asking you for an order today, we're asking you to establish guidelines, or a template, and then individual utilities would make an application, and if there was Ministerial approval required for the Board to hear that application, then they would run off and get it. 310 Do you see anything wrong with that process? Do you think there's a jurisdictional issue as to whether we can issue guidelines as to how an applicant might be guided, should they choose to apply? 311 MR. WARREN: I, frankly, sir, cannot find any authority in the Act for you to do that. 312 MR. KAISER: Alright. 313 Mr. Lyle, could you have a look at this over the lunch hour, and, possibly, be in a position to make submissions on this? 314 MR. LYLE: Certainly, Mr. Chair. 315 MR. KAISER: And then there's Mr. Farrell's -- 316 MR. WARREN: May I also respond to that, sir. I apologize. The tag end, and, indeed, the tail that may wag the dog on that, is for you to consider -- let's assume that you were satisfied that you could, in some sense, step back and analyze what you're being asked to do, because we have to find some jurisdictional hole within which to stick this square peg. There are applications which are before you, and those applications, as I understand the process, are one's which the Minister has authorized to go forward. The Minister has said, You may apply. Now you're being asked, as I understand it, to authorize amendments to that application. So -- 317 MR. KAISER: Amendments to what application? 318 MR. WARREN: Applications for recovery, I guess, of the C&DM funds for 2005. 319 MR. KAISER: You mean third tranche? 320 MR. WARREN: I don't know what else it is, sir. 321 MR. KAISER: Well, there is no application. I mean, you're quite correct -- I mean, it's not your garden-variety motion that asks for an order. It doesn't ask for an order, and that was the trouble we had at the outset. But as we now understand the applicant's position, and the other parties supporting it, they say, No, we're just seeking the Board to establish guidelines, or a template, for an application, should that be brought by the individual utilities. So the jurisdictional question, as I now understand it, is: Would we even have jurisdiction to issue guidelines, or a template, to guide applicants in the future? That's the jurisdictional issue that's before us now. There is no application, we all know that. In fact, they take the position that it's entirely voluntary if these LDCs decide to bring an application. They may or they may not. 322 MR. WARREN: I was making a somewhat different point, Mr. Chairman. The point is: If the LDCs were to bring applications, what would the applications be? Would it be to modify existing applications which are before you? The ones that the Minister has authorized -- 323 MR. KAISER: Not necessarily. I mean, they could bring an application, I presume, as I understood the applicant this morning, to apply for an LRAM, an SSM, and if they needed Ministerial approval -- if they were so guided by their counsel, they would run off to the Minister, and he would either say, You can bring the application, or you can't. They've shuffled that issue off to another day. And whether we agree with that approach or not, that's their position. 324 MR. WARREN: I understand the position they've taken, Mr. Chairman, and I'm saying, with respect, I don't believe that you have the authority to issue those kinds of guidelines. 325 MR. KAISER: Alright. 326 The other point that I wanted you to address, because you referred to Mr. Farrell, and you made the point that, as I understand it - you tell me if I am wrong - that it would be folly, and it would lead to chaos, if we were to try and fast-track this 205 thing, because 206 is in the works anyway, and anything we might do might compromise 2006, or be premature. Mr. Farrell, at paragraph 176 of his submission, has this interesting concept that says, "The CLD utilities would like to have the opportunity, on a voluntary basis, an LRAM for 2005 that would be based on the design approved by the Board in 2006." 327 Any comment on that? 328 MR. WARREN: I think it would be open to the utilities to follow whatever application process Mr. Farrell decides the Board has the jurisdiction to follow, to say, ex post facto in respect of 2005, We want an LRAM or SSM following on the basis of whatever was decided in the 2006 EDR. I don't have any difficulty with that. The virtue of that approach is that there would have been one unified decision about whether or not LRAMs and SSM were appropriate, as a matter of -- appropriate and necessary for the LDCs, and what form they should take. That would have been considered. I don't see any limitation on the LDCs after-the-fact applying to have that apply to 2005. 329 MR. KAISER: And Mr. Farrell, you can think about this over the lunch hour, as well, I just want you -- if we look at it from a policy perspective, some of the LDCs, I think, are saying, We'd like to have it for 2005 - they all more or less say that - But we don't want to define it now, because we're going to consider it in 2006 anyway; but it will give us some comfort if you at least tell us now that whatever is decided for in part of the EDR 2006 will apply to 2005; that might remove some of the hesitancy we have in investing in these conservation programs, because we know we won't be penalized, et cetera, et cetera. And I just want to understand after the lunch break whether that is your position, bearing in mind Mr. Warren's position that chaos and havoc are going to befall us if we try and establish a separate procedure and rule-making for 2005 -- leaving aside the jurisdictional question, whether we can even do it or not. 330 MR. FARRELL: Yes, we will respond. Thank you, Mr. Chairman. 331 MR. KAISER: Thank you, Mr. Farrell. 332 With that, I think we'll break for the lunch hour now and we will -- I don't know what order counsel wish to proceed in following, Mr. Warren, but you can advise us when we reconvene. 333 And Mr. Lyle, at the start of the afternoon session, if we could have your views on this jurisdictional issue, as we've tried to define it -- including, if I may add, the Farrell wrinkle, which is if we can let it be decided in 2006, but it will apply to 2005 as well as 2006. 334 MR. WARREN: Mr. Chair, just before we break -- in the ordinary course, my having shot what limited bolt I have, burning the candle on that -- necessarily -- I would leave now, however -- would the Board require me to respond to any questions you may have, depending on what Mr. Lyle says, and what Mr. Farrell says when he sorts out his wrinkle -- 335 MR. KAISER: I think it would be helpful if you could stay, if you could accommodate us. 336 MR. WARREN: Thank you, sir. 337 MR. SIDLOFSKY: Sir, just before we break. I wasn't on Mr. Shepherd's list of speaking parties earlier today. I may have a brief comment after the lunch break, and I think on the spectrum of things I would probably be better going before we get more negative. 338 MR. KAISER: All right. We always like positive. Thank you. We'll reconvene at 1:30. 339 --- Luncheon recess taken at 12:25 p.m. 340 --- On resuming at 1:35 p.m. 341 MR. KAISER: Please be seated. 342 Mr. Lyle. 343 MR. LYLE: Thank you, Mr. Chair. As I understood Mr. Warren's jurisdictional concern as he stated it before the break, it appeared to be that the Board did not have the statutory authority to establish guidelines in this matter. It is an established principle of administrative law that the tribunals do have the authority to establish guidelines to guide parties in understanding how the tribunal would generally approach a particular matter. The guidelines are not to be treated as binding rules, and the tribunal must be open to not following those guidelines in the specific circumstances of a particular case. Guidelines do not require explicit statutory authority, Mr. Chair. 344 Now, I did speak to Mr. Warren on the break and his concern seemed to be more focused on the idea that an application for LRAM or SSM by a utility would affect an application to amend the utility's C&DM plan to seek something beyond what the Minister's approval of third tranche spending specifically contemplated. It's my understanding that if the Board was to grant this motion, distributors who wished to might possibly apply for pre-approval of their input assumptions in 2005, or might, in fact, seek -- not, in fact, apply in 2005 but wait in the end of the 2005 before applying in 2006 with respect to LRAM and SSM. It's arguable that any application, if such application was made before the rate freeze came off, would require a separate Ministerial approval. But I don't, myself, see it as being tied to the Minister's approval related to the third tranche money. I would certainly be interested in hearing Mr. Warren's views. 345 MR. KAISER: Thank you. 346 Any comment, Mr. Warren? 347 MR. WARREN: Sir, I don't quarrel with the general proposition that the tribunal has the authority to issue guidelines. The proposition was expressed by the Supreme Court of Canada in the Capital Cities Communications case. And it's a principle that has been followed by superior courts ever since. 348 In my respectful submission, that is not the circumstance that applies here. Section 79.6, subsection 1, Mr. Chairman, provides that: "An application for an order under Section 78 may be made only with written approval of the Minister if the application relates to a) rates for the distributing of electricity." 349 Now, I may well not understand what it is that's going on in these applications, but it is certainly has been my understanding that what is before the Board that has, if I can call them CDM aspects to it, are two things. Number one is the 2006 EDR process, which is a process designed to come up with a rate handbook which, when approved, will guide utilities in making applications for their 2006 rates. The other matter is an application for the recovery of the third tranche of the MBRR, whatever it is, market based rate of return, the third tranche applications. Now, those applications are applications which have been approved by the Minister under Section 79.6. So the Minister has said you can apply to recover your portion of the $225 million, you can apply to get your market-based rate of return, subject to certain conditions. 350 Now, what the Board is -- and there are subtle arguments about whether that has a rate-making impact, but at its crudest level, the utilities are applying to recover something that they would have been entitled to under the market-based rate of return rules. In my respectful submission, building an LRAM or an SSM into the application has or has the risk of rate-making implications, and there is an argument about whether or not that applies in 2005 or whether it applies retroactively. But in my respectful submission, it has rate-making implications for the applications which the Minister has already approved. 351 If utilities want to apply for an LRAM or SSM, I take it it's common ground among everyone here, both sides of these issues or all sides of these issues that the applicant would almost certainly have to go back to the Minister for approval. But in the meantime, what the Board would -- the best the Board could do, on my theory of jurisdiction, would be issue guidelines in respect of an application that the Minister has not approved going forward. This is different from a general set of rules that would apply guidelines to any application that comes before the Board. 79.6 changes the playing field. It provides that the Board can only consider applications that the Minister has approved. The Minister has approved these applications. 352 If the Board issues guidelines, I say with respect, the Board is, in effect, prejudicing the Minister's decision by saying that these are, by necessary implication, an appropriate thing to do. So, in my respectful submission, the Board doesn't have the authority to say anything of any nature, whether it's dressed up as a guideline or otherwise, in respect of applications that the Minister has not approved. And it's that, I say with respect, which makes this different from the Capital Cities Communications line of cases. That's my response, sir. 353 MR. KAISER: Thank you. Mr. Klippenstein. 354 MR. KLIPPENSTEIN: Yes, thank you, Mr. Chair. 355 I confess I have a little trouble understanding my friend's argument, but I think at least partly what it comes down to is his suggestion that Section 79.6 changes things and that in it, in effect -- let me back up. If the Board were to approve or put in place the guidelines that are requested by Pollution Probe in this motion, it would be, in effect, prejudicing the Minister's decision. I don't see how that follows. The Board is not telling the Minister what to do. Somebody made the submission that that may be quite useful information for the Minister coming from the expert, on-the-ground regulator to help the Minister decide what, in this case, he wants to do. The Minister doesn't have to follow the Board's position on the guidelines, I don't think, and so it doesn't prejudge the Minister's decision. The Minister retains all his power and the decision on the guidelines may be very useful to him. 356 For example, it may suggest to the Minister, We think this is workable and good. So I don't, in my submission, see that what Mr. Warren is suggesting follows from any part of this statute. 357 He's quite correct in suggesting that what we're putting forward here today in a motion are guidelines which are bread and butter standard fare for administrative tribunals, and we put them forward precisely for the logic that those guidelines usually have, which is they give guidance, they're not prejudging, they're not saying this is what we will decide. But what they do do, as I said, is send a signal to the distributors which is if you want to do this, you don't have to, and if you think this is too complicated, you don't have to, but it's worth while giving it a try. And that signal, in my submission, is very much in line with what the Minister has asked all of us to do. So not only is -- I see just simply no conflict with statute, I think it's very much in line with the Minister's position. 358 MR. KAISER: Thank you. Any other parties. Mr. Poch. 359 SUBMISSIONS BY MR. POCH: 360 MR. POCH: Mr. Chairman, just on the jurisdictional part, I think we go a little farther than that and say that it's not clear that you need to apply to the Minister here as a utility. What is being contemplated here is part of 2006 rate making or part of 2007 rate making, the Board adjusting rates in 2006 or 2007 to compensate the utilities for revenues foregone in 2005 and for achievements achieved in 2005. And that the application with respect to rates that is -- that is the subject matter of 79.6, that this would not fall within that, because any application that will be made will be with respect to rates in 2006 or 2007. And as I've already indicated, it may be that the utilities will ask at this time, they'll start lining up at this time, getting their ducks in order and the Board will be issuing guidelines. That's no different than the situation now with respect to 2006 rates. We're in an EDR process. The Board is contemplating publishing a handbook, guidelines in advance of the magic date, but the point is, it can't effect rates until after the magic date. And that's exactly the situation here. 361 MR. KAISER: Thank you. 362 Mr. Shepherd? 363 SUBMISSIONS BY MR. SHEPHERD: 364 MR. SHEPHERD: Mr. Chairman, let me first dispose of Mr. Poch's argument. Common sense should tell us that the LDCs and the Board can't do indirectly what they're not allowed to do directly. If -- let's say an LDC wanted to spend an extra million dollars on maintenance staff, for example, and they knew the Minister would say no if they asked for that rate increase to do that, but they come to the Board instead, and they say, Board, we're not asking you to give us an increase in 2005; we'll spend the money, and we'll put it in a deferral account, as long as you'll tell us that in 2006 we can have it. We'll just -- we'll finance it for a year. Would that be okay? Obviously it wouldn't be. That application requires the approval of the Minister. So it seems to us that it's relatively straightforward that these applications, which are directly analogous, would require the approval of the Minister, if we're going to spend ratepayers' money on an LRAM or an SSM. 365 Now, with respect to the second point, which is more difficult: What about guide lines? And I'm not sure whether this is a legal argument or a practical argument. Our submission is that what happened is -- the Minister in their May 31st letter, and in their public pronouncements, a number of them, have already decided how they think LDCs should be incented to promote immediate conservation programs. They thought about what the right thing to do was, and they've told you what they're going to allow. They've said, We're going to allow you to get your third tranche and spend it on conservation. 366 Now, you could, I suppose, assume that the Minister and his staff are not aware of the concepts of LRAMs or SSMs, but I think that's unlikely. What's more likely is they've made a decision. They've said, Our answer to this problem - which we, the Minister's office have the authority to do on behalf of the government - our answer to this problem is, instead of giving you incentives, we're going to say, Here's some additional money, go spend it on conservation. That's what they decided. 367 Furthermore, when they gave that approval, they didn't say to the OEB, By the way, OEB, can you give us some advice on whether we should do anything else? Have we missed something here? So jurisdiction has two components to it, Mr. Chairman. The first part is: Are you legally allowed to exercise your jurisdiction? And the second is: Should you, in the appropriate case, exercise your jurisdiction? And then there's a third issue, which is: How should you exercise it, if you decide to do so? 368 The second point - should you exercise your jurisdiction here - I think it is tantamount to saying to the Minister, We don't like your decision; we think it doesn't go far enough, and we're proposing to you that you take it this step further, and we're telling the LDCs to go ask you to do that. And that, in our view, is inappropriate. 369 Those are our submissions. 370 MR. KAISER: Thank you. 371 Mr. Dingwall. 372 SUBMISSIONS BY MR. DINGWALL: 373 MR. DINGWALL: I believe, sir, that there are a number of subsections of Section 78 which become dispositive of the whole question of jurisdiction in the context of the proposed C&DM modifications. 374 In order to establish an LRAM or an SSM, or any account of that type, it would be necessary for the Board to put in place some form of deferral account. Deferral accounts are time-specific. They would be established at one time. They would cover another time. In the absence of a deferral account, the Board would be effectively asked to retroactively adjust rates for a previous year, in this context, 2005, if they were to address it through any other matter. 375 Section 6.2 -- or, subsection 6.2 of Section 78 of the Act describes the process under which a Board may address a deferral account. And it describes annual review or such other shorter period as prescribed by regulations. 376 Section 6.6 of Section 78 of the Act indicates that the Board's review of deferral accounts can't take place until 79.6 has been repealed. So I don't believe there's a mechanism in place which would enable the Board to put in place deferral accounts in the absence of the repeal of 79.6. 377 On the basis of that, as well as some of the previous submissions made by my friends, I don't believe that this matter can come before the Board and be implemented effectively without an order of the Minister. 378 MR. KAISER: Thank you. 379 Anyone else? 380 MR. KLIPPENSTEIN: Mr. Chairman, if I might have a quick comment in reply to the subsequent arguments? 381 MR. KAISER: Certainly. 382 REPLY SUBMISSIONS BY MR. KLIPPENSTEIN: 383 MR. KLIPPENSTEIN: My friend, Mr. Dingwall, says that it would be necessary to establish an LRAM to put in place a deferral account. Pollution Probe doesn't see deferral accounts as necessary for this motion. They are an optional tool, but it can happen perfectly well without deferral accounts. So, if there are issues that arise from deferral accounts, that, in my submission, shouldn't stop the Board from putting these guidelines in place. 384 The -- some LDCs may wish to have a deferral account before they're willing to go ahead, others may not. The Board shouldn't preclude those options and those choices for the LDCs. 385 Secondly, Mr. Dingwall said that the Board is basically being asked in that case to retroactively change rates for 2005. In my respectful submission, that's not an implication of Pollution Probe's proposal. The fund doesn't come from 2005. It's a future rate change and so there's no problem, in my respectful submission. 386 With respect to Mr. Shepherd's statement that adopting these guidelines is tantamount to saying to the Minister, We don't like your decision and we don't think it goes far enough; quite the contrary, in my submission. Both the Minister and the Premier have emphasized we need to fully engage the LDCs. We have very ambitious government goals. We need ingenuity, in some of the statements that I read. And so this is implementing, rather than criticizing, or rejecting, or undermining in any way, what the Minister said, in my respectful submission. 387 MR. KAISER: Thank you. 388 We'll take 10 minutes and we'll come back with our decision on this matter. 389 --- Recess taken at 1:50 p.m. 390 --- Upon commencing at 1:58 p.m. 391 DECISION: 392 MR. KAISER: Please be seated. 393 The Board has had an opportunity to consider the submissions of counsel with respect to the jurisdiction of the Board to hear the application or motion brought by Pollution Probe on November 12th. We are of the view, as clarified, that we do have the necessary jurisdiction. At this point, we are not hearing an application for any particular LRAM or SSM program. The motion here, as we now understand it, is that the Board establish a guideline or a template that might govern that type of application. 394 As the Board counsel has pointed out, we believe we do have the jurisdiction to issue such guidelines, and we would point out that the 2006 EDR process is very much in that vein. The Board does not have the jurisdiction to set those rates, and yet it has contemplated that it may have that jurisdiction and has set up a planning procedure to deal with it and establish a rate hadnbook. Indeed, one of the sections of which would parallel, or resemble very much, what's being sought after today insofar as it relates to LRAM and SSM. 395 Now, whether a utility bringing such an application, and the applicant here has described that these guidelines are voluntary as they contemplate them, it's up to the utilities whether they decide to bring an application, those utilities can be guided by their own counsel at that time whether they need Minister's approval or not. But we do not think in making this decision today to establish guidelines that we are in any way compromising the Minister's decision. We may, in fact, be clarifying what is sought after, and at least establishing some guidance for the Minister as to what the Board would see as the appropriate procedure and plan that might be at issue. 396 So with in mind, we'll proceed with the application. 397 Now, I think Mr. Sidlofsky, did I understand that you were next? 398 MR. SIDLOFSKY: Just very briefly, sir. 399 MR. WARREN: Mr. Chairman, just before Mr. Sidlofsky begins, do you require my presence any longer or may I now be excused? 400 MR. KAISER: No. 401 MR. WARREN: Thank you very much. 402 SUBMISSIONS BY MR. SIDLOFSKY: 403 MR. SIDLOFSKY: If I could just impose on Mr. Klippenstein to move to the right a little bit I'd appreciate that. 404 Sir, just a brief comment. I mentioned this morning this morning that I'm here today for Enwin Powerlines and Brantford Power Inc. Both of those utilities largely support the position of counsel to the large six utilities, Mr. Farrell's comments earlier. I would simply want to add to those comments that it's important for our clients that if there is an opportunity to recover lost revenues for 2005, then that opportunity is certainly worth pursuing, whether that's through an approach suggested by Mr. Klippenstein or the alternative approach suggested by Mr. Farrell, which would be dealing with the LRAM and SSM mechanisms in the 2006 rate process, but allowing for their application to the 2005 lost revenues. 405 So I would simply add our client's support for the large six utilities and stress the importance of the Board's consideration of utilities' ability to recover those lost revenues for initiatives in 2005. 406 MR. KAISER: Thank you, sir. 407 MR. SIDLOFSKY: Thank you, sir. I should also point out I didn't make it on to the list this morning, because I had indicated to my friend, Mr. Shepherd, that I wouldn't be speaking. So no problem with his list-making, that's on my end, sir. 408 MR. KAISER: Thank you. 409 MR. KLIPPENSTEIN: I'll go back to the centre now. 410 MR. KAISER: You have to leave some room for Mr. Shepherd to come up the middle. 411 SUBMISSIONS BY MR. SHEPHERD: 412 MR. SHEPHERD: Mr. Chairman, the Schools are probably amongst the ratepayer groups who are probably the strongest supporters of conservation measures. We're considered to be in the environmentalist camp, as it were, so we're big fans of LRAMs and SSMs. We think they are a very good idea, and in 2006 we think they should be implemented and are pressing for that in the 2006 EDR process. 413 In the unusual case of 2005, however, we feel that they're not a good idea. I've dealt with the jurisdiction question so I'm just going to deal with whether it's a good idea, but let me first make one general comment. Nobody yet has talked about what is the real point here, and that is Mr. Klippenstein and Mr. Gibbons are proposing that the Board approve, approve subject to the Minister's approval if you like, sending the ratepayers a bill, a bill for $50 million, perhaps, or it's actually unlimited amount but Mr. Gibbons accepts that it might be in the range of $50 million. This discussion is about spending ratepayer's money, and the question the Board has to ask, it appears to us, is: Is this wise spending of that money? Because if it isn't, you shouldn't do it. 414 I'm just scrolling through my jurisdictional arguments. 415 In our view, there are two reasons why it's not a good idea to implement these in 2005. First, there is an incentive mechanism already in place. If you're already incenting people to do something and it's working, which it is, we're seeing the applications come in, then why would you incent them further? Why would you spend more money to incent them to do the same thing? And I'll talk about some of the details in a second. The second reason why it's not a good idea is it's impractical. My friends from Pollution Probe are asking us to rush through an LRAM and an SSM without doing it properly on insufficient information. 416 So let's first ask the question: Can you compare the third tranche incentive, which is what we would call it, with an LRAM and SSM? And my friends have argued and will argue, I'm sure, that they're not comparable at all. First, because the utilities have to spend the third tranche on C&DM initiatives, they don't get to keep it, so how could that be an incentive. They aren't allowed to pay it over to the shareholders. This is in contrast with an SSM which is an incremental payment to the shareholder. 417 In our view, the Minister's approach in the May 31st letter is more directive. He's saying: Here's the money, this is what we want you to do with it. You can argue that that's not an incentive but an instruction, but let's look at it from a practical point of view. And I'll use the numbers from Toronto Hydro because those happen to be the ones that are in front of me. Their 2005 C&DM plan has about 5 million in 2005 O&M expenses. If you use the Enbridge model they would get authority to increase rates by $5 million to cover those costs, so it would be ratepayers' money that they were spending, plus they would bet get the right to earn another $2 to $4 million in combined LRAM and SSM payments if the budget, that money, $5 million, produced savings in excess of a pre-determined target. In other words, if they perform better than expected, they'd get an incentive. 418 The Minister has said instead, instead of doing that, we're just going to give you $40 million, go spend it on conservation and demand management. That's how we want to deal with the problem. Now, if I were Toronto Hydro, I'd rather the latter than the former. Yes, it's true that the LRAM SSM means there's money to the shareholder, but it's not a very large amount of money, as my friend Mr. Poch has already indicated, it's a minimal amount in 2005. The alternative is you get a big pot of money, you get to move your rate of return right up to the level you've wanted for a couple of years and you get to do something in big dollars for the benefit of your ratepayers. If I were the utility, that's what would motivate me and I believe that's what the Minister has said as well. 419 Now, this, of course, assumes that it's actually the third tranche money that's actually spent on C&DM. As the Board will be aware, tomorrow or -- whether it's tomorrow or -- next month or whatever, we're going to hear my friends, particularly the utilities, argue that it's not the actually the third tranche money they have to spend on C&DM, they get to spend ratepayer money on that, incremental ratepayer money on that, because they get to take the money they spend, put it into rate base and collect it from the ratepayers later. They get to spend it in 2006 and 2007, where it's part of their O&M budget and, therefore, it's part of their incremental rates for those years. It's only a small amount, the O&M for 2005, that they don't get to recover from ratepayers. All the rest of it they get to recover. And for that, the Minister has said, We're going to give them $225 million. 420 That's a lot more than $50 million. 421 Now, we're going to argue that that particular interpretation of what the Minister is doing is wrong; but nonetheless, the people who are arguing in favour of this, the LRAM and SSM, are actually asking you to let them have their cake and eat it, too. Use the ratepayers' money -- take the ratepayers' money, give it to the shareholder; use more ratepayer money to spend on conservation, and get an LRAM. 422 So, in our respectful submission, the first component of this is that the third tranche is already a huge incentive. If the utilities aren't going to do this for $225 million, they're not going to do it for another 50. 423 Now, the second issue, which has been raised by both Mr. Klippenstein and Mr. Poch, is the third tranche mechanism doesn't incent the right things. It incents a whole broad range of things, including the utility-side activity, smart meters, perhaps - there's a debate about that - distributes certain types of distributed generation, but doesn't target customer-side conservation measures, and an LRAM and SSM would do that. 424 In our view, there's two reasons why that shouldn't concern the Board. First of all - and I note that my friends at CME have made a similar argument - electricity LDCs, with a couple of exceptions, are public sector rather than private sector entities. And that means that they have to answer to a public-sector shareholder, typically a municipality, as well as to their ratepayers. Those LDCs will be increasing their rates 10 to 15 percent in 2005 for C&DM initiatives for this third tranche. If they don't give the ratepayers sufficient opportunity to reduce their bills through customer-side conservation programs, they will have a backlash from their customers and from their owners, at least, at least, as bad as the backlash that Union Gas got with retroactive rates a couple of years ago. 425 We also think, frankly, that the fact that the LDCs are owned by the public generally makes them more socially responsible and more attuned to this sort of issue. We don't think that they're going to focus on utility-side activities. We think they will focus on customer-side activities precisely for the reason this Board would, and that is, they want to benefit their ratepayers. 426 The second reason why we don't think you need to be concerned about that particular thing is that the Board has to approve the C&DM plans. The Board's already told the utilities we want to see a balance in these plans. We want to see a balance that includes both customer-side and utility-side activities. If utilities come to the Board tomorrow, or Friday, or next week, with plans that are all spent on upgrading lines and transformer stations, this Board has an opportunity, directly rather than indirectly, directly, to say to those utilities, This is not appropriate, this is not what we had in mind, go fix this. And that's a better way of doing that than trying to create a mechanism that generally tries to do that. 427 So now I want to turn to the practical question: Can we design an appropriate LRAM and SSM for 2005? In our view, it is not realistic to expect that. The utilities lack the information that should form the basis of a proper incentive design, and there's nothing that can be done in a time available to fix that. 428 I'd like to -- if I can find it here, Mr. Chairman, I'd like to quote from the evidence of the coalition of large distributors which has been filed today, in the proceeding that's starting tomorrow. They say, "The C&DM plans of each CLD utility represent first generation C&DM plans developed under unique circumstances." They go on -- and I'll just skip a little bit, "Many of the programs comprising the CDM plans are pilot programs in the sense that they are new to the CLD utilities and, in consequence, there's no historical quantitative or experiential results data on which to draw." 429 Further they go on to say, "Screening input assumptions that influence the calculation of energy savings per measure, avoided cost, discount rates, customer and utility costs and program measure lives, have yet to be determined, either by individual utilities or by the government agency charged with this responsibility." 430 My point, Mr. Chairman, is the utilities not only don't have this information - these by the way are the largest utilities that have the most resources - they not only do not have this information, they're not even sure that it's their job to have it. The position that they've indicated there is, it may well be a government agency that will have the job of doing that. 431 I just want to give one example of how difficult it is to implement this in practice. The -- I'm going to use the SSM an example. The classic SSM, such as that used by Enbridge, says, You get no incentive for the projected benefits from the spending that the ratepayers are paying for. There's a performance target. You're using the ratepayers' money. If all you do is achieve that target, or less, you're not going to be incented for that. That's like, when you have employees, you don't give them incentive for doing the things they're supposed to do in order to earn their salary. What you do is you incent them for performing above the normal standard. That's where incentive money is well-used. 432 And so Enbridge, for example, has an SSM that has a threshold. And if they don't meet target, they get zero. In fact, it used to be they actually had to pay back money. But it is only if they do better than expected that they get an incentive, and that makes common sense. That's why you incent people: So that they will perform well. 433 What my friends have proposed here -- by the way, we don't have the information available. It's clear the utilities don't have the information available to set those targets today. And if, as has been suggested, the Board ask the utilities to come in with proposals for what their targets are, the Board doesn't have the time or the resources to deal with those applications. 434 So what's been proposed by Pollution Probe is that there be no threshold, that the first dollar of net benefit be incented. This is like saying to an employee, You get an incentive every day you come into work, in addition to your salary, you get an incentive every day you come into work. That's not sensible. In this case, my friends are proposing -- for example, the Toronto Hydro could spend $20 million on customer-side C&DM, achieve $1 of benefits which would be about as bad performance as you could possibly imagine, and get a share of that dollar. 435 Mr. Chairman, the Board will be hearing extensive evidence on many of these issues in January, in order to establish appropriate mechanisms for 2006. The reason the evidence is being required in that hearing -- four days are being set aside for that evidence, after an extensive working group process - the reason is that the issues and sub-issues in this area are quite complex, they have nuances and technical constraints that make it difficult to deal with. It's not something you can do on the back of an envelope. 436 And there's a point here. The point is we're big fans of conservation: We want more conservation. The government also wants to move us to a conservation culture. Well, if you want to find a way of developing a good strong barrier to getting to a conservation culture, take $50 million of the ratepayers' money, spend it on -- or $20 million of ratepayers' money, whatever, spend it on conservation programs that don't work, that were ill-conceived because you didn't have time, that don't work properly, turn out to be a waste of the ratepayers' money, and find out whether the ratepayers really like conservation anymore. That's absolutely the worst thing you can do if you want to promote a conservation culture, rush willy nilly into something that is not well-conceived. And so our submission is the better thing to do is let the process develop as it's going to, the plans are coming in anyway, the utilities are going to spend the money, we already know that, so you don't need to convince them. And in January, we will look at -- properly, at how to do it for 2006. 437 Those are our submissions. 438 MR. KAISER: Thank you, Mr. Shepherd. 439 Mr. Shepherd, given that you're a big fan of conservation and a big fan, apparently, of 2006 EDR, what do you think of Mr. Farrell's proposal that the plan get established as part of 2006 EDR but it apply to 2005 as well as 2006? 440 MR. SHEPHERD: Well, I guess, in theory, you could do that because the hearing will be in January and the decision will be end of March. It would mean that the evidence led in -- in that hearing would have to take into account both years, because the years are different. One year is intended to be, sort of, more a cost-of-service year, the other has legacy rates. So you'd have to take into account how an LRAM or SSM would be used differently in those two years but, yes, of course you could do that. And add a couple more days to that hearing and you could probably do it fine. 441 MR. KAISER: Do you think that's a meaningful approach? 442 MR. SHEPHERD: Well, as we've said, we don't think we need to incent the utilities in 2005 to do this, they're doing it anyway. 443 MR. KAISER: That's because of the third tranche. 444 MR. SHEPHERD: Because of the third tranche. 445 MR. KAISER: Now, given -- let's stay with that. Let's suppose, accept your argument that third tranche is mandated, it's going to happen whether we like it or not, whatever the consequences they are following the government's mandate. Is there a role for incentive mechanisms and LRAM for expenditures outside a third tranche; in other words, what about the possibility that the LRAM, or for that matter the incentives, would not relate to third tranche money? Have you considered that? 446 MR. SHEPHERD: That's the first that's been raised I guess, and I think that's a great idea. The -- 447 MR. KAISER: In other words, an incentive for expenditures beyond the third tranche. 448 MR. SHEPHERD: Well, but then you still have the same problem, you have to have some performance target for those expenditures. But let's assume that you could design that in the January hearing, let's say. 449 MR. KAISER: But the 2006 problem or the rush to devise a plan is one issue and third tranche is a separate issue, i.e., the money is already -- it's already happening, we don't need an extra incentive plan to encourage third tranche because it's going to happen regardless. Those are separate issues, aren't they? 450 MR. SHEPHERD: Well, they're separate, but for LRAM and an SSM to be in place in 2005 both hurdles should be overcome. So you should find a way to design them properly, which may be the hearing in January, and you should then apply them only to incremental expenses not to expenditures that have already been incented. But in general, the proposal that it be to only incremental expenditures I think is a great idea. 451 MR. KAISER: The other question I wanted to put to you, or Mr. Dominy wants to put to you, is do you see a role for incentive plans distinct from LRAM or are they necessarily linked? Do you have to have both? For 2005 could we have an incentive plan but not an LRAM or vice versa? 452 MR. SHEPHERD: I think they have completely different roles. The LRAM is intended to make the utility whole, it really isn't intended to be an incentive. Now, in this particular case, because in 2005 they have ample scope to have utility-side programs as well where, generally speaking, the shareholder will get to keep the benefit, and customer-side in which the customer gets the -- in which the utility loses revenue, they probably balance out. You may not need an LRAM in 2005 anyway, and as my friend says, it's probably a very small impact. 453 But an SSM is completely different. An SSM is like a performance -- like a performance bonus from your employer, very similar. Do a good job, here's some money. 454 MR. KAISER: So you're in favour of that? 455 MR. SHEPHERD: Yes. 456 MR. KAISER: Thank you. 457 Mr. Dingwall. 458 SUBMISSIONS BY MR. DINGWALL: 459 MR. DINGWALL: Thank you, sir. I'll avoid the jurisdictional arguments and respond in context to the questions asked in the Board's second Procedural Order. So with respect to the first question: Should the Board develop mechanisms to provide revenue protection and/or incentive for the purpose of 2005 rates, the answer is no. CME submits that the third tranche is sufficient to provide spending incentives to the LDCs. 460 Of interest is that of the applications to date that were filed seeking approval of C&DM programs for 2005 and subsequent years, none of them thought of including a request for an LRAM or an SSM. After the fact, of course, if they have the ability to obtain these benefits voluntarily, meaning in a fashion to which their access to them is solely one sided and they have control over whether or not they gain these benefits, then of course they'd be interested, that's free money. But in the absence of that, there appeared to be no market interest from the LDCs in having any form of revenue protection and/or incentive for 2005 rates. 461 CME also has additional concerns that the regulatory landscape has not taken shape fully, that the role of the conservation bureau of the OPA could complicate the delivery and responsibility for such programs in the future, including 2005. 462 CME submits that approval of the mechanisms put forward in the motion would amount to ratepayers paying three times for the C&DM measures, firstly in rates, secondly in compensation for lost revenue, and thirdly through the shared savings mechanisms. 463 And I believe other intervenors have touched on this, but it does seem like it would be somewhat duplicative, if not complicating, for the Board in the context of this motion to consider matters which are under further and more fulsome discussion in the context of the 2006 electricity distribution rates process. 464 In looking at the question about shared shavings mechanism particularly, CME believes that it's inappropriate to tie an SSM to TRC net benefits as those are notional, at best. 465 and moving to the third question, How should the amount of a revenue incentive or protection be determined. In the event that an SSM is put in place, which CME is opposed to, CME is opposed to the notion that LDCs recover 100 percent of the benefits of jointly sponsored programs, and instead should only recover an amount of benefit in proportion to their actual investment in the programs. 466 With respect to the fourth question, How would the mechanisms for 2005 relate to the mechanisms for 2006 and following years? CME comes back to the simple submission that for 2005, they do not believe those mechanisms are appropriate. 467 And in some general context, when you look at the portability of the terminology, the nomenclature and the mechanisms that are currently in use on the gas side and then try and take a look at what, if anything, they can mean or where there are similarities on the electric side, we're faced with a fundamentally different set of goals surrounding conservation and demand management for the electrical sector. On gas, the program goal is to reduce consumption, it's accomplished through either improving facilities, using more efficient equipment, or making other changes to the end-use customers load that reduce that load. 468 On the electricity side, however, our challenges are significantly different. It's not all about reducing demand, it's about managing load as well. So, for example, if all of the air-conditioners in the province are going in the afternoon on a peak day in July, we'll have a significant demand. If it's possible to shift some of that demand away from the peak period, then that would leave the province more in a position to rely on its existing generation facilities without bringing in coal peaking plants, without importing power from wherever there might be power coming into the province at whatever high rate there might be. 469 So part of the challenge associated with C&DM on the electric side is not simply reducing demand. The goal is to manage when one consumes, so it's conceivable that if programs are in place which effectively accomplish that, there wouldn't be a loss in revenue, there would be a shift at the time in which the demand takes place, and that that would accomplish a significant amount of the goals that would come out of that. 470 In looking at that, does that mean that we can then import all the concepts, all the accountabilities, all the structures from the gas side? And we submit, No. There are too many complexities that are unique to the electric market, that are unique to the way in which they are trying to influence behaviour within the electric market, that need to be considered on their own. And we believe that the only appropriate way to do so is in the context of a more fulsome process for the 2006 rates, which should anticipate and respond to all the questions that come out. 471 Those are CME's submissions, sir. 472 MR. KAISER: Thank you, sir. 473 Mr. Adams, did you have any submissions? 474 SUBMISSIONS BY MR. ADAMS: 475 MR. ADAMS: Thank you, Mr. Chairman. I want to, on behalf of Energy Probe, endorse the comments, generally, of Mr. Warren and Mr. Shepherd and Mr. Dingwall in the main. We've got just a couple of notes that I'll add to the record for the purposes of completeness in endorsing their comments. 476 Mr. Shepherd made a comment about the SSM incentive being potentially double-sided, that was a penalty or a benefit. Energy Probe is involved in litigating that issue with one of the gas utilities, and there was a decision adopted by the Board that it would not be a double-sided incentive mechanism. 477 But with that caveat, there's substantial agreement on all the other major points. 478 The thrust of my argument today is that Energy Probe does not endorse the necessity or desirability of introducing an LRAM or SSM for 2005. There are, I think, given the submissions of the previous arguments, again, there's only a couple of things that I want to add. One is a note of context as to how this matter came before the Board. I think it's important to appreciate that what we're really doing here in implementing the Minister's directive is going backward in time to complete the implementation of the rate instructions contained in the decision of the Board in RP-2000-0069. That's a case that was previously based on RP-2000-0034. These are the cases that gave rise to the calculation of the MBRR into the rate structure for the first time for the electric distribution utilities. 479 Now, those were controversial decisions of the Board, but they created the separation of the MAR amounts into three tranches arising out of the decision in RP-2000-0069, where they would be introduced successfully one year at a time, each tranche. That was interrupted by the decision of the government, in November of 2002, to introduce the rate freeze. Now, under the Minister's directive, what we're asked to do is go back and complete the original implementation, albeit without -- with -- not following the time schedule that was originally anticipated by the Board in its decision, back in September of 2000, in the 0069 case. 480 The directive of the Minister that gave rise to the Board's inquiry into how to implement the MBRR was brought down to the Board by a directive of June 7th of 2000. And one key piece of that instruction to the Board, in that directive, was that the Board was to give primacy to customer protection with respect to prices. I think that context adds emphasis to the comments, particularly of Mr. Shepherd, when he was talking about the rate implications of potential incentive mechanisms that would be brought forward. 481 So I think that's significant to this debate. It is important that the question of privacy of customer protection enter into this, because that was where the origin of the third tranche of the MBRR originated. 482 Another element of the discussion that I have not heard broached here, or seen here in the written submissions of the parties, is just the full scope of the incentive that we're really talking about here, that's built in without any SSM or LRAM. The Minister's directive in this case immediately gives rise to the 2005 applications of the LDCs, for the C&DM programs we're going to hear more about tomorrow, is based on a quid pro quo. And that quid pro quo is that you spend this MAR amount that would normally have been to the shareholder's account, and, for one year alone, that amount becomes attributable to the C&DM spending. Thereafter, having satisfied that requirement, the MAR amount goes to where it was originally intended, pursuant to the Board's decisions in RP-2000-0034 and RP-2000-0069, and that is, the shareholder account. 483 Some of us disagreed with those approaches and argued against them, but that's the decision of the Board in those cases, previously. So the incentive to comply, even if they were not so moved as to be affected by the direction from the Minister, which I'm not at all suggesting -- there is a powerful financial self-interest for the utilities to ensure that they comply with every letter or intention of the Minister's directive in this case, because this is -- what the Minister's talking about is $225 million that goes on forever. It's not just a one-year amount. Having satisfied the requirements then they would have complied with the requirements to get themselves back on track with the 2000-0069 case. So then they would be up to full MARR return, and the PILs implications, all that flowing forward in perpetuity: It becomes part of the calculation of basic rates. 484 So, just to kind of draw my argument here to closure on this point, the utilities have a very, very profound incentive to spend this money, far beyond anything that we've ever seen with any other DSM program in the history of DSM anywhere in Ontario, certainly. With the gas utilities, the LRAM and SSM are a few percentage points -- take the SSM, a few percentage points of their TRC benefits. We have one gas utility that doesn't even have an SSM, just uses LRAM. And in that case, the amount of potential gains are usually a relatively small fraction of the overall DSM budget. That's what we have in gas. 485 In electricity, the financial implications of non-compliance are vastly, vastly greater. 486 So I think we can be abundantly confident - I think the Board can be abundantly confident - that there will be enthusiastic participation of the electric utilities in ensuring that they comply with the requirements of the Minister. 487 With regard to Mr. Farrell's comments -- his proposal for using the 2006 -- the outcome of the Board's decisions with regards to 2006 C&DM, and applying that to 2005, I see a major, potential problem with that approach, specifically with regard to SSM. With regard to LRAM, I don't see a problem, but for SSM I think it's completely unworkable. And the reason for that is that SSM needs a pivot point, and the whole concept of SSM is that some kind of either pivot point, or target, or achievement ratio is understood in advance, it's calculated into the way the programs are managed. The utilities -- and then the utilities pursue their business plans in the ordinary course. 488 After the fact, there's some kind of monitoring and auditing process, often involving some level of public review in the case of gas utilities, and a determination is eventually made by the Board as to the achievement results. And then the -- that becomes the basis upon which the SSM flows back, of course, recovered in rates of subsequent years. 489 But we're not in a position to set in place -- if Mr. Farrell's proposal was undertaken with regard to SSM, we wouldn't have the necessary preliminary ingredients to make it happen. 490 So in conclusion, my comments are that the C&DM programs that you will be reviewing this upcoming week and subsequent periods of time are a non-routine DSM activity. This is not the type of -- it's not arising from the orderly process of regulatory business that we've seen with the gas utilities with regard to their DSM programs where there's been an evolution and maturation of these processes as they go along. This is starting something new, starting from scratch. This is an approach that is heading us in various policy directions that are not yet fully articulated by the government or by the wider regulatory context. 491 So just simply carrying into the electric LDCs some concepts that were arrived at some mid-point of the maturity of the gas DSM programs and just simply grafting them onto what we have here is, in our view, inappropriate. 492 If the Panel has any questions, I would be delighted to entertain them. 493 MR. KAISER: Thank you, Mr. Adams. 494 Do any other parties wish to comment? 495 MR. KAISER: Mr. Klippenstein, do you have any reply? 496 MR. KLIPPENSTEIN: Yes, I do. This might be a bit unusual, but I would also perhaps suggest that if it's appropriate, that since some comments were directed specifically at Mr. Farrell's ideas -- 497 MR. KAISER: Yes. 498 MR. KLIPPENSTEIN: -- that it might be useful to go to him for a quasi-response from him. 499 MR. KAISER: Mr. Farrell, before Mr. Klippenstein responds, can you address the questions that we put to you before the lunch break? 500 MR. FARRELL: Yes, I can, Mr. Chairman. 501 The first question, in chronological sequence, was what type of guidelines could the large distributors live with, in particular, the degree of detail or specificity. The response is the following: These utilities would prefer to have -- that the guidelines provide general guidance on methodology, and I'll use an example in connection with LRAM, that they provide for customer take-up by program on a monthly basis, the results accumulated annually. That's the type of general guidelines on methodology. 502 The utilities would prefer more detailed guidance on the parameters or the inputs, and again I'll use LRAM and provide two examples which, in the past, on the gas side have been very contentious. One is for the Board to set an amount of -- to calculate avoided costs due to load savings. And this could be a dollar-per-kilowatt or a dollar figure per kilowatt hour either in a range or on an LDC-specific basis. 503 The second contentious issue that I'm using for illustrative purposes is the approach to calculate and determine the free riders on any program. That too has been quite contentious on the gas side, and so some more detail from the Board as to how one backs out, if you will, the load savings due to free riders would be welcome and, indeed, probably required. 504 The purpose of this detailed guidance on parameters or input is to avoid controversy at the time the distributors then bring forward a claim under the LRAM or the SSM mechanism. With these guidelines, Mr. Chair, each of the large distributors feel they can develop the detailed statement of load savings and consequential value of the load savings for each C&DM program that would then be brought forward the Board approval at, what I'm calling, the claims stage. And for practical purposes, the distributors are looking to the outcome of the 2006 EDR process for more specific guidance in terms of developing this detailed statement of load savings and the consequential value of each program. 505 So that is our response to the first question you asked. 506 MR. KAISER: Thank you. 507 MR. FARRELL: I think the second question, and I'll pose it because I'm not confident that my note took in exactly what you're asking for, and it had to do, I think, -- my note says from a policy perspective, what are the implications of any distributor using a 2006-based LRAM SSM, and by based I mean the detail of the design for 2005, and it arose, as I recall, in the context of Mr. Warren's submissions that if they went down parallel and concurrent paths, there would be, to use his word, chaos. Am I in the right area, Mr. Chair, in terms of addressing? 508 MR. KAISER: Yes, and also address Mr. Adams' point, at least with respect to SSM, he doesn't think it will work. 509 MR. FARRELL: Just a moment, please. 510 The response to Mr. Adams' point can be found in paragraph 21 on page 6 of the written response of the large utilities, and I'll just read you for the purpose of the record: 511 "In principal, the SSM amount would be derived using a simple linear formula at the outset because more information is required on the performance of the various C&DM programs before adopting a more complex formulation." And then it reads on, but I won't quote the whole thing. 512 So that proposal, if I can call it a proposal, or perhaps that observation was made in order to address the lack, at least of at the outset, of a pivot point of the type Mr. Adams was referring to. 513 The other point, Mr. Chair, about using in my shorthand 2006 for 2005, is one, I think, that -- is one that, I think, has to await the outcome of the 2006 process. The proposal was made in paragraph 17 on page 5 of the written response and again, was to be not mandatory but rather to give the LDCs the opportunity to establish a LRAM that would be based on the design approved by the Board for 2006. So our concern was that the design in 2005 wouldn't have the same degree of rigor due to time constraints that the 2006 design might have, and the utilities wanted to avail themselves of the opportunity to adopt, if I can put it that way, the 2006 design and bring it forward for 2005 if they saw fit and if the 2006 design could, indeed, suit the circumstances of 2005. So we see merit in having that opportunity without it being mandatory. I hope that was responsive to your question. 514 MR. KAISER: One of the other issues that you were speaking about earlier was this third tranche issue, which is that we don't need incentive mechanisms or LRAM for third tranche because it's going to happen regardless. And I had a discussion with Mr. Shepherd about whether there was merit in having these incentive programs or incremental amounts above the third tranche. Do your clients have any position on that? 515 MR. FARRELL: The simple response, Mr. Chair, is -- I've been advised on each side of me that the utilities, or the six large distributors, don't anticipate spending beyond the third tranche. So we dispute the argument that the recovery of the third tranche is all the incentive we'd need for various reasons having to do with history, et cetera, and the -- but if -- well, if the incremental expenditures are simply not applicable as we now see it to the six utilities that I represent. The plan is to spend the amount of the third tranche and no more. 516 MR. KAISER: Mr. Klippenstein. 517 REPLY SUBMISSIONS BY MR. KLIPPENSTEIN: 518 MR. KLIPPENSTEIN: Thank you, Mr. Chairman, members of the Panel. 519 I'd like to start with the issue just addressed by Mr. Farrell which is about amounts potentially spent on conservation beyond the third tranche of the 225 million. As I understood Mr. Farrell, he said that they don't agree that the authority to spend that is all the incentive utilities need. That makes sense, with respect, and I guess I disagree with Mr. Adams on that point. 520 The whole issue here is the spending of -- not the whole issue but a big chunk of the issue is exactly the 225 million. And the nub of Pollution Probe's proposal and why we came here today was to say that we would propose and suggest these guidelines because that money should be spent for the best possible benefit to the customers and for conservation. It shouldn't just be spent in some sort of generally well-intentioned but proforma formulaic way. The whole point that Pollution Probe is here today is that we are saying it's really important for the government-stated goals to have an incentive so that all the utilities, whether big or small, have a strong motivation to do the very best. 521 I think Mr. Adams referred to -- used the term "utilities have a profound incentive to spend this money," I think, was the word-for-word quote. And other people putting the same argument have talked about spending incentives and incenting expenditures. That's our whole point. That's incenting the wrong thing. It's easy to spend money. The question is how big a bang do you get for your buck in terms of savings for the customers. That's what it's all about. The difference between simply spending the money and spending it with great ingenuity and shrewdness and determination to get the best possible conservation measures, maximizing the benefit. That's what it's all about. 522 And so it's precisely beyond the stage that Mr. Adams has mentioned, and others have mentioned, and Mr. Shepherd has mentioned that we are here today. We are suggesting that the LRAM, which removes the negative incentive, and the SSM which puts in a positive incentive, -- and we are suggesting with 5 percent level for the SSM - would allow the LDCs to say, We can, with that 225 million, do this kind of program or we can do this kind of program. If we do program B, which we've just thought up, we think we can get savings that are three times larger than the other programs and we can make a buck off that. Now, the buck we make is going to be matched with $19 of savings, total billed savings, that the customers are going to make. And that, in our submission, is much better than plan A. That's what it's all about. 523 And it's not about the Board micromanaging that. Some of my friends talked about coming before the Board with the plan and the Board can be sure to oversee whether that money is spent wisely, whether it's spent on the right side of the meter, the proper balance. Well, we're getting to the bottom line, which is how much is this saving for customers? How much conservation is happening, not how much spending happening, that's what it's all about. And I say that very respectfully to the intentions of the LDCs, but it's interesting. 524 a number of my friends have talked about the uncertainty, they don't have the base figures they need, lack of infrastructure in the LDCs. Well, there is a lot of truth in that, but I started out this morning by saying this is voluntary and I also referred to the quote from the Minister that talks about leadership and ingenuity from the LDCs. We're saying let them try, if they want to and they think they can do it. And I think one of my friends referred to the EDA brief that talks about the difficult infrastructure, and yet we have the EDA saying here we generally support this because it allows us, if we want to, to try. 525 Similarly for Mr. Farrell's client group. So the irony is that the parties who are supposedly hampered, according to my friends, are also the parties here who are saying that within certain limits, this is worth a try. It's voluntary, not all their clients have to. 526 So it's voluntary and the key difference is the incentive. And Mr. Adams, I don't mean to pick on Mr. Adams, but just as an example, he mentioned that because of the uncertainties, because of the upcoming 2006 procedure, to do this now for 2005 would be heading us in a policy direction that is not fully articulated. And my submission is, it is articulated. The Premier has said we are going being very ambitious, they have specific goals, a reduction of 5 percent by 2007. That is extremely ambitious and, in my submission, that is a clear goal and it is a signal that the leadership of the LDC should be called in to this effort and given an incentive not just to spend money, but to spend money in the best possible way they can think of. 527 and it's not a case where -- I think Mr. Shepherd talked about wasting money. It's central to the proposal that the TRC test will only allow credit for programs that genuinely produce results. That TRC test is the leading North American test for electricity energy conservation and it will work. The concept that there must be some target that first must be met is not a necessary part of an SSM plan at all, I respectfully suggest, because what runs through this proposal from beginning to end is that in order to make a buck, the utilities have to make $19 in savings for the customer. That is the central point that will be inherent in everything, and so the uncertainty, the -- some of the LDCs are here to say, Let us try within certain circumstances, and we say, Way to go. There are safeguards in place, there is not wasting, it's not micromanaging, it's fully consistent with the government's stated and very clearly articulated specific goals, and it's not prejudicing the 2006 procedure because the Board couldn't bind its hands on anything even if it wanted to. So in my submission, there's no reason not to. 528 A few other specific issues arose. One is this specter of possibly 80 separate applications coming in specifically for LRAM and SSM. I would submit the more likely scenario is that these applications would be part of the 2006 or 2007 applications and would be part of those. So it's likely, in most cases, not to be a separate application. So that is probably not a procedural burden but -- or major in size. 529 I think there was a question pertaining to the -- or several questions pertaining to the level of incentive. Pollution Probe's suggestion is that the level for the SSM be specifically set at 5 percent, and there's significant amount of evidence in the materials that supports the specific 5 percent level. 530 With a moment's indulgence, I will see whether there is any other reply points. 531 I do want to confirm Mr. Farrell's understanding of Pollution Probe's position about the line loss example that appears in the evidence. That was an example, it wasn't intended to form part of the guidance Pollution Probe is seeking. 532 In terms of the potential specifics of the guidance or guidelines sought, there are a number of paragraphs in Mr. Gibbons' affidavit which contain the essence of the principles sought, and those are with respect to the LRAM paragraphs 34 to 41, and with respect to the SSM, paragraph 17 to 18 and 42 to 43. And those are the essence of what Pollution Probe would suggest as being part of the guidelines. 533 Secondly, if there is a desire to approach the guideline specifics in a different way, should the Board wish to proceed as Pollution Probe suggests, another procedure would be to have the Board Staff draft very tentative guidelines and circulate them for comment to the parties. And I should add that Pollution Probe is perhaps somewhat boldly suggesting that if the Board sees its way to a decision, the sooner the better, even potentially today if I stop talking soon, or as soon as possible, because it's inherent in Pollution Probe's motion that time is of the essence and the LDCs can benefit from an earlier indication. 534 But if the Board wished to have a smaller process, one option would be to have the Board Staff circulate to all the intervenors draft wording for the details of a -- or not the details or the general principles of an LRAM and/or the SSM, for example, by December 10th, and then invite intervenors to file written responses by, for example, December 17th, and then the Board would be able to issue guidelines based both on the full written submissions received to date and the oral arguments today and further comments on the fine -- more finely focused guidelines. 535 I'm sorry I haven't taken up the rest of the afternoon, but those are my submissions and thank you very much for the careful attention the Board has given to this matter. 536 MR. KAISER: Thank you, sir. 537 Two questions. If, as you just said, these applications could come in as part of the 2006 applications, do you recall saying that? 538 MR. KLIPPENSTEIN: Yes, or 2007, yes. 539 MR. KAISER: Well, if they came in as part of 2006, aren't we just in Mr. Farrell's problem? We might as well just be using the 2006 test? If the applications are going to come in for LRAM and SSM for 2005 as part of 2006 applications, and if there's going to be a test or plan developed as part of EDR 2006, what's the point of having two tests for two years and one application? 540 MR. KLIPPENSTEIN: I'm sorry, Mr. Chair, I think I misspoke myself on that point and I think you've identified a problem, perhaps the only problem in my proposal. They would not be able to make their LRAM and SSM applications with their 2006 applications and they would have to do it before that, that's correct. 541 MR. KAISER: And if all of the LDCs are thinking like Mr. Farrell's clients, that they're not going to do anything more than third tranche, thank you very much, you would agree it wouldn't matter very much if we had SSM or LRAM, would it? 542 MR. KLIPPENSTEIN: I would submit that it would matter quite a bit, in fact, a great deal. $225 million is a lot of money and it's precisely that money that should, in our submission, be used to the greatest possible benefit. 543 MR. KAISER: That argument would be that they might restructure their programs in a fashion that you would regard as more productive compared to what was laid out in Mr. Poch's exhibit where 73 percent of it was capital expenditures. 544 MR. KLIPPENSTEIN: That's precisely it. It's not meant to criticize the present efforts. It's simply to say that if there is a possibility of significant reward for excellence in results, there is a likelihood of better program design, a likelihood of better program implementation, a likelihood of more creative thinking when it comes to programs, and the whole point about ingenuity and incentive is you can't specify beforehand what the results will be. That's the whole point. And it is precisely that $225 million that should be maximized. 545 Now, there's a very large down-the-road benefit as well, because everything that would be implemented with the $225 million would be usable in the future, if it's good, there would be learning by doing. So there would be a large benefit to getting this in place now and the 225. So it's well beyond the 225 in that sense, but we don't assume there will be spending now for more than the 225 million. 546 MR. KAISER: Those arguments, in any event, you could make tomorrow or the next day; correct? We don't need to devise an LRAM and SSM for you to take a position that the third tranche proposals are not wisely spent. 547 MR. KLIPPENSTEIN: That's true, but it's also precisely what we don't think we want to do because we don't have the knowledge that the LDC management does. We don't see the opportunities, we don't think like them, so we think that they can do a much better job of this than we could do because they're the experts. And by giving them an incentive, and putting in safeguards, we think the result is likely to be significantly better. 548 One hears the term micro-managing - and I'm not sure that's the right term here, but it's the same concept - and whether -- they can come forward with a plan that looks fair and reasonable, but if there was a built-in incentive from beginning to end, in my submission, there is a high likelihood that they could do much better. The evidence that I pointed to in Mr. Gibbons' affidavit shows that the actual conservation results obtained by Enbridge Gas, over the course of a number of years since the SSM was put in place, is stunning. The savings go through the roof. And there's a pretty strong correlation that the incentive effect of the SSM may have opened up and unleashed something that wasn't there before. And it's -- in the words of the Premier and the Minister, it's innovation, it's ingenuity. 549 So that's the core of what Pollution Probe is suggesting. So it's about the 225 million, it's about as soon as possible. It's not being critical of present efforts, it's simply saying it's quite likely that much better can be done. And that's clearly what the government wants. They've set very ambitious targets, and they've linked it to a culture of innovation as well. 550 So that's -- and I suppose it, in a way, is not an onerous burden on the Board, because it's saying, We won't do all the work of micro-managing you LDCs, we'll put the rules in place and you see what you can do with them. That's what was done with Enbridge. The Board put in place the rules for SSM, and Enbridge ran with it. And the results are now on the record, and the savings, you know, went up fourfold in a few years. And that's the principle we're suggesting be utilized here. 551 MR. KAISER: Mr. Poch, did you have something you wanted to add? 552 MR. POCH: I was just going to say, sir, as a point of information, the way the Enbridge proposal works -- we're not advocating a target, and so on, but some of the aspects are, I think, informative. And they come forward -- they could do come forward with a plan, and the Board approves the planning, in the very general sense, that there's a plan in place to support the proposed spending. But the utility reserves the right to shift its emphasis during the year, to run harder and farther with programs that are performing well, to tweak programs and fine-tune them as they go, to shift staff around and so on, and they do that to chase the incentive. And that's, in our view, what's worked here. And they've even stopped programs part way through, where they felt they were not justified. 553 In the current proposal, the 225 million, they'll get the 225 million as long as they walk through the plan. And we think that's a bad incentive structure. And so it's not that we're saying you shouldn't have a glance at the plans before they begin, but you should have a glance, leave them with flexibility, and give them an incentive to implement the plans, and adjust the plans and the limitation, as they go, in a way that maximizes the impact. 554 MR. KAISER: Thank you. 555 [The Board confers] 556 MR. KAISER: Thank you very much for the submissions. They're very helpful. Thank you Mr. Klippenstein for this motion. I know it's been a long day. We're going to reserve on this overnight, with a view to providing a decision in the morning. I imagine most of you will be here in that proceeding. Those that aren't can pick it up in the transcript. 557 MR. POCH: Mr. Chairman, I won't ask for the opportunity to make submissions on this, but simply ask the Board that some of the parties here have been found eligible for costs. I'm not sure how you want to deal with that. I just ask that the Board put its mind to it at some point. 558 MR. KAISER: Mr. Lyle, do you have any comment on that? 559 MR. LYLE: Mr. Chair, yes, Mr. Poch is correct that a number of parties have traditionally been eligible for costs. In the normal course it's an application by a utility, but it may be appropriate for those costs to be passed on to utilities, subject to the comments of any of the distributors that are -- that I see here. 560 MR. KAISER: We can receive submissions on it. We can address this tomorrow, if you want a ruling by the Board, if there are any parties that have anything they want to address to costs, any matters they want to address. 561 MR. MATTHEWS: Can we have a point of clarification on Mr. Lyle's use of the term utilities: Is that electrical utilities? 562 MR. LYLE: I apologize. I was speaking about electricity distributors, Mr. Chair. 563 MR. MATTHEWS: Thank you. 564 MR. FARRELL: Mr. Chairman, before you rise -- I would just like to put on the record that I -- that the large utilities -- the large distributors, rather, have filed written evidence and filed certain revised pages of their evidence. They've been filed with the Board both physically and electronically. Intervenors have been served electronically, and I have copies of each here in the room, and I'm happy to distribute after you've concluded this proceeding for the day. 565 MR. KAISER: Thank you, Mr. Farrell. 566 Alright, we will adjourn, and then tomorrow we're back -- what is it, 9:30, Mr. Lyle? 567 MR. LYLE: Yes, Mr. Chair. 568 --- Whereupon the hearing adjourned at 3:15 p.m.