Rep: OEB Doc: 13BF8 Rev: 0 ONTARIO ENERGY BOARD Volume: NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON SYSTEM GAS - VOLUME 1 27 SEPTEMBER 2004 BEFORE: R. BETTS PRESIDING MEMBER C. CHAPLIN MEMBER 1 RP-2004-0213 2 IN THE MATTER OF a hearing held on Monday, 27 September 2004, in Toronto, Ontario; IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15, Schedule B; AND IN THE MATTER OF an Application by Hydro One Networks Inc., Toronto Hydro Electric System Limited, Enersource Hydro Mississauga Inc., London Hydro Inc., for an order or orders approving or fixing just and reasonable rates. 3 RP-2004-0213 4 27 SEPTEMBER 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 GEORGE VEGH Board Counsel BEVERLEY JAFFREY Board Staff LAURIE KLEIN Board Staff MIKE BERMON ICF Consulting Canada Inc. LEONARD CROOK ICF Consulting Canada Inc. CHRIS HAUSMANN Hausmann Consulting DAVE CHARLESON Enbridge Gas Distribution DAVE MATTHEWS Enbridge Gas Distribution IAN MONDROW Direct Energy GORDON POTTER Ontario Energy Savings Corp. CHRISTOPHER GAFFNEY Ontario Energy Savings Corp. MARK ISHERWOOD Union Gas Limited BRUCE HENNING Union Gas Limited TOM ADAMS Energy Probe PETER SCULLY Federation of Northern Ontario Municipalities JIM McPHERSON TransCanada Gas Transmission East FRANK BRENNAN Aegent Energy Advisors Inc. PETER FOURNIER Industrial Gas Users Association FRANK BASHAM Talisman Energy Inc., Canadian Association of Petroleum Producers JEFF MAIER MX Energy ROLAND GEORGE Pervin & Gertz BRYAN GORMLEY Canadian Gas Association JIM GRUENBAUER City of Kitchener JULIE GIRVAN Consumers' Council of Canada JASON STACEY Sithe Energy JUDY ALLAN Self-represented 8 TABLE OF CONTENTS 9 PROCEDURAL MATTERS: [15] NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON SYSTEM GAS: [66] SUBMISSIONS BY MR. MONDROW: [67] SUBMISSIONS BY MR. HAGGARTY: [168] SUBMISSIONS BY MR. SCULLY: [194] SUBMISSIONS BY MR. CHARLESON: [597] SUBMISSIONS BY MR. McPHERSON: [647] SUBMISSIONS BY MR. ISHERWOOD: [676] SUBMISSIONS BY MR. HENNING: [711] DISCUSSION PERIOD: [739] 10 EXHIBITS 11 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:00 a.m. 15 PROCEDURAL MATTERS: 16 MR. BETTS: Welcome to the Natural Gas Forum technical consultations. My name is Bob Betts, I'm a Board member and will be your chair through this process, and sitting with me and representing the Board is fellow Board member Cynthia Chaplin. 17 The Board has many initiatives underway this fall, I think as most of you know in addition to this Natural Gas Forum, the Board is developing rates for the electricity distributors for the year 2006, a new regulated electricity price plan, a smart metering initiative and several other programs. They're making a lot of demands on our stakeholders, staff and for that matter the Board ourself. We appreciate your willingness to commit your time to these sessions and your efforts to support the process of review and change for the Board. 18 Can everybody hear me okay at the back first of all? Yeah, I'm getting nods so we have connections. 19 Supporting Cynthia and I in this process and the people that have really delivered the program to date are staff people that are with us today, and that's Laurie Klein and Beverley Jaffrey, and perhaps you can just raise your hands there ladies. If you need help during the day, they're probably the people that can provide that assistance to you. 20 By way of background, the Board initiated a review of the natural gas market in 1996, recommended legislative changes for governing natural gas in 1997, and recommended the establishment of a task force to develop a market structure for full retail competition in 1997. Since that time, some progress has been made to advance regulatory policy, but the Board recognizes the need to accelerate that process by which it reaches its conclusion on some of these outstanding issues. 21 As a result, the Board has decided to examine the natural gas market to assess whether the current framework and policies support an efficient gas market. If not, the forum will provide an opportunity to reconsider that framework and those policies. 22 Our first Natural Gas Forum meeting took place on November 12, 2003 and you identified a number of issues that the Board needed to consider. As a result, these consultations will be considering three broad areas; system supply, gas storage, and rate regulation, focussing on PBR. 23 As you know, ICF Consulting Canada Inc. is the Board's technical expert in this Natural Gas Forum, and their three discussion papers have been posted on our website. I'd like to introduce those people and I believe they're all -- at least first of all we have Leonard Crook. Maybe Leonard -- thank you. And I'm meeting them for the first time as well, and Mike Bermon. Welcome. 24 MR. BERMON: Bermon, actually. 25 MR. BETTS: Bermon was it? Thank you for that clarification. And Larry Kaufman. Larry is not here at this point but will be. Thank you. 26 Based on these consultations and your submissions, the policy papers will be developed by the end of the year and will be used to inform regulation in the sector in Ontario. 27 The objectives of the Natural Gas Forum and, in fact, the technical consultations are several. Primarily, and perhaps the most important, is to analyze the different pricing and regulatory mechanisms that would best suit a competitive market and facilitate investment in the Ontario energy sector. 28 Secondly, to examine the roles of utilities in gas supply, one of our primary discussion areas, to review gas storage regulation, and to review, as I said before, rate-making regulation focussing on PBR. 29 The objectives of these technical consultations are for all participants, including us, to benefit from the opportunity to have an interactive exchange of ideas. There is a lot of work to be done in a very short time. You've all come with varying view points. As well as representing your own interests and constituencies, I trust that will all be prepared to look beyond those entrenched views and assist us in analyzing new and challenging ideas. 30 In terms of the next steps in this process, the Board requires stakeholders to submit their final submissions by October 27th, 2004. The Board will then consider those submissions and the information gathered through this consultation process to develop policy papers on the three broad topics being considered here. 31 The Board expects to be able to publish the resulting papers in December of this year, which will be the first step to implementation. 32 Policy will ultimately be implemented through the various regulatory instruments that the Board has at its disposal. These instruments include such things as Board orders, Board rules and guidelines. If necessary, instruments will be developed in accordance with a Board process. Board orders resulting from these decisions will be in a quasi judicial hearing, format and rules resulting from the notices and comments and processes. Guidelines are non-binding and the Board develops them through an open and transparent process. 33 The important point is that stakeholders will have an opportunity to participate in the implementation of Board policy through its various regulatory practices and proceedings. 34 To help you all understand what we will be doing today, and over the next few days, let's talk a little bit about the rules of this consultation session. 35 First of all, this is not a formal Board proceeding. Cynthia and I have started off at the front here only so that we would be heard and catch your attention. We will be taking a seat over towards the side of the room. This is for information gathering and an exchange of views and to debate -- to inform the Board for policy development. 36 Cynthia and I are not sitting today as adjudicators. We are here to guide the process, observe presentations, represent Board interests and concerns, and sponsor the policy papers as they go into and through the Board processes from this point forward. 37 Our facilitator has been charged with the responsibility to keep this process on track. In fact, I'm surprised he hasn't been cutting me off already to ensure a fair opportunity for all participants to contribute and express their views to the Board. 38 This is, as I said before, not a hearing and therefore, no cross-examination of witnesses is contemplated. We simply do not have enough time for that. We welcome parties to challenge the views of others, but we want that by offering strong counterviews in opposition to points that you find unacceptable. 39 That being said, are there any initial questions? 40 Thank you, I would now like to introduce our facilitator. 41 Thank you. I have just had another instruction and a wise one. Our microphone system is very sensitive here. Many of you who appear here know that so I'll just give you some simple instructions. The mikes are all directionally sensitive, so always try to have them pointed towards your mouth. If you point them up in the air in order that your sounds won't be picked up, the problem is they will pick up the speaker sounds from the ceiling and that creates feedback. So try to point them towards yourself, or perhaps down, but not so much up in the air. 42 There is one seat that has been left available and that has a microphone and that will allow any parties that want to ask questions or express their views through the day to that seat and do so. Thank you very much, it's been indicated right over on that seat so that will be the seat that you can move to when the opportunity arises. 43 And again as I was beginning to do, I'd like to now introduce Chris Hausmann of Hausmann Consulting and Chris's job is to keep us on track today. With that, Cynthia and I will take our seats over to the side. 44 Thank you very much for participating. 45 MR. HAUSMANN: Thank you, Mr. Chair. Good morning all. You're right on time. I think with that extra bit I was going to say about mikes, I'd ask that you not overstep your time, so thank you very much for that. 46 We have quite a busy time ahead of us and -- cell phones are on somewhere, so please turn them all off. 47 With respect to the mikes, yes, I did see some turned up and if you wish to take part in the proceedings and be heard and also webcast, then you will need to speak into the mike. 48 This is being -- we have a court reporter here today doing a live transcription, so if you want to get on the record please speak into a mike and please speak clearly and one at a time. She can only do this so quickly and only get one person on the record at a time. Also, please use your last name -- introduce yourself each time that you speak. There are many people here, and the faces may change from day to day, so please introduce yourself each time with your last name so that the webcast and the reporter can pick it up. And I will have to do the same. 49 As was noted, if you don't have a mike at your seat, just come to the one space at the front row, my right, your left -- that mike is kept empty for those who wish to be on the record. Also, please feel free to move about, come and go as you will - there's coffee outside - obviously, with some respect for the people who may be speaking, and make sure everybody can see and hear. 50 Now, the washrooms, for those of you who may not have been in this room before, are straight outside, just down the hall. You really can't miss them. 51 I imagine that most of you have an agenda. If you are -- there's a different one for each day so be sure to bring the right one. They all look the same, but they are different. If you are scheduled to make a presentation, and have already submitted that presentation to Laurie or Bev, it will be on file in the computer and ready to go. 52 If you have not yet submitted your presentation, please do so at your earliest convenience; or, failing that, I guess you'll have to bring it on a CD yourself. But if you have it in, then it can easily be loaded onto the computer and ready to go, and they work much better from a hard drive than from a disc. 53 I'll just take a moment to tell you how these proceedings are going to run through the agenda. They're pretty much a standard format. We will start with presentations. There will be 15-minute presentations followed by a five-minute Q and A period. And those questions should really be focused on questions of clarification, so that if there's something you didn't understand, that would be the best time to ask and make sure everybody is working from the same page with respect to the presentation that was made. And then we move on to the next presentation. 54 Each panel of presentations -- sometimes there are four people, sometimes there are two or three presentations. We'll go through that and then we'll have a break. Following the break, we will engage in a dialogue. And we have the consultants to the Board, ICF, that may kick off with a couple of questions just to get everybody started. But it will be my job to try and make sure that everybody in the room has an opportunity to speak, and we get a good hearing, and nobody is monopolizing the time, but everybody gets an opportunity to get their views heard. 55 Any questions? 56 Well, with that, then, could we begin with the presentations this morning. We've got four people slated for presentation: the Federation of Northern Municipalities, Direct Energy, Ontario Energy Savings Corp. and Superior Energy. Are these people all here? 57 MR. MONDROW: Where would you like us to -- I'll come up here? 58 MR. HAUSMANN: This is the place to come for your presentation, yes. 59 MR. MONDROW: Do you want all four, in our case four, presenters up -- 60 MR. HAUSMANN: You may as well because you will be sitting up here later on, anyway, in answering the questions and so on, and everybody can see you. 61 I'm going to try to hold you to your 15 minutes, if at all possible. I'll give you a sign if you -- 62 MR. MONDROW: I don't have slides. We're second on the list. 63 MR. HAUSMANN: We're going to be going in a slightly different order than what's on the list. So who is going to be first? 64 MR. MONDROW: Direct Energy. 65 MR. HAUSMANN: Direct Energy is going to be first, so please give your name. 66 NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON SYSTEM GAS: 67 SUBMISSIONS BY MR. MONDROW: 68 MR. MONDROW: Ian Mondrow from Direct Energy. We each have 15 minutes, as I understand, so I'll try to come in a little bit under that. 69 We have a written presentation which we filed which -- I'm going to try to do a review of the points in that presentation this morning without slides, and see how that works, try various formats. So there's nothing to look at. You'll have to listen to me and look at me for those of you who can see me. Sorry, it's not as flashy as slides. Very genuine. 70 I guess the first point that we'd like to make is a bit about us, and that "us" being Direct Energy and our parent company, Centrica, and that's not so much a plug as to allow people interested to understand the basis upon which we're making the assertions that we have made in the written submissions and that I will repeat briefly this morning. 71 So if I could just kind of talk a little bit about our business. In both the U.K., where our parent company is based, and in North America, the core of our business is retailing of energy, natural gas and electricity. 72 Wrapped around that core business are offerings of related home services. So we sell and service heating and cooling equipment, we offer protection plans for an annual fee for that equipment, we have a protection plan for plumbing systems, and we offer energy-related home renovations and retrofits. 73 We are active in all jurisdictions in which we have a retail customer base in wholesale energy markets in support of our retail obligations, and, so far, that's true of most retailers. 74 Perhaps distinguishing us somewhat from some other retailers, and particularly mass-market retailers, is that we actually hold assets upstream of our retail supply obligations. So in the U.K., our parent company, Centrica, owns LNG facilities. They own an extensive storage facility, which they operate for the benefit not only of themselves, but the rest of the market. They have extensive pipeline contracts and they own electrical generation plants. 75 In North America, Direct Energy owns about 3,000 producing and non-producing gas wells in Alberta. We are a shipper on various North American pipelines under multi-year contracts for that pipeline capacity. And we have just, in the last number of months, completed our first electrical-generation-facility acquisition, with the purchase of a 550-megawatt combined-cycle power plant in Texas, to support our retail customer base in Texas. 76 All of these investments in North America and the U.K. were entered into with a full assumption of investment risk by us, either Direct Energy in North America or Centrica in the United Kingdom, and on the strength of functioning retail energy markets in those jurisdictions. These investments demonstrate the basic principle that we espouse which is robust retail competition is an integral component of energy markets in which investment risk is borne by shareholders rather than ratepayers. 77 And that is the core of the theme of our presentations both to this forum and other forums where the future of energy investments is being debated in North America and in Ontario. 78 In our view, robust retail competition is a necessary component of an energy sector structure in which investment, both upstream and downstream, is made at the risk of shareholders rather than at the risk of ratepayers. This is true for some pretty fundamental reasons, investors need access to forward contracting to manage their investment risks or to a captive customer base, i.e., ratepayers. And there is a basic policy decision to be made in all of these discussions: Do we want ratepayers to bear the risk of these investments or do we want shareholders to bear the risk of these investments? And if the latter, we have to provide shareholders with markets in which they can manage those risks, forward contracting markets. 79 A functional retail sector in turn is an essential component of forward contracting markets. Very basically, retailers aggregate load over time across customer classes, and in order to supply that load, act as counterparties or upstream investors. They enter into contracts for preparement of energy in order to support their supply obligations, providing counterparties to investors who are seeking counterparties in order to manage their investment risks. 80 Now in addition to providing forward contracting liquidity and thereby supporting investment and the private assumption of risk, that is the assumption by shareholders rather than ratepayers, there are other benefits to competition which have been commonly recounted over the years. In my view, they are worth reiterating, because I don't think that unlike perhaps 10 years ago, people would simply agree as a matter of course that competition, per se, is a good thing. But in our view, it is a good thing, and in addition to the market forces that I've just spent a couple minutes describing, there are a number of other commonly-cited benefits. 81 Those include the efficient allocation of capital resources. So not only do you get an assumption of risk by investors, but market forces lead to economic efficiency in the allocation of that risk cap. Efficient allocation of expertise, a different kind of capital so whether it's production, trading risk management, delivery services, retailing and customer care, the different participants in a market naturally tend to make investments and carry on activities in line with their particular expertise, and you get efficient allocation of that expertise. 82 Competitive markets provide clear incentives for responsiveness to consumer needs and preferences. There is no stronger force to respond to customer needs than retailers competing for market share. Our business is all about trying to figure out what customers want and providing that to them. And if we don't do that effectively then we lose business and we're out of the market, we don't have a captive customer base. 83 Competition drives, by the same token, product innovation and differentiation. We have to be different from OESC, we have to be better than Superior if we want to keep market share, and similarly they're trying to compete against us very successfully. 84 Enhanced customer choice, which is essentially a product of all of that customer responsiveness, customer care, product innovation and differentiation, and investment in customer service and satisfaction, all slightly different iterations of the same basic theme. It's our main submission that private entities acting under ordinary commercial incentives are better placed than either central government or regulated institutions to deliver these benefits of innovation and efficiency while assuming and managing risk. And again, that's a component of the mix that under a vertically integrated and regulated system you don't get. You don't get private investors assuming and managing the risk. Full and effective competition should substitute for regulation wherever possible. 85 In our view, there is no economic rationale for continuing to regulate retail natural gas prices in Ontario. Natural gas supply is a contestable function. Regulated natural gas distributors should exit the retail function. Until then, however, and during the transition, system supply should be designed, costed, and priced in such a way as to facilitate entry by competitive retailers. We admit that we have a ways to go to get to a market that can set retail natural gas prices for all consumers on a purely competitive basis, but if we don't start designing or continue designing to pick up from the Natural Gas Forum completed several years ago towards that, sort of, contestable truly competitive market, we're not going to get there. Some very express policy decisions have to be made again to facilitate. 86 Steps should include, in our view, separation of the supply function from the delivery function. This will accomplish a number of evolutionary steps. 87 First it will reduce, perhaps eliminate, the potential for cross subsidization. Secondly, it will, therefore, decrease the need for and the degree of regulatory oversight. It will also reduce the risks borne by regulated delivery service suppliers, thereby lower delivery rates, better reflecting the risk associated with various activities. So delivery -- regulated delivery service will be priced to reflect the risk associated with that activity, and the supply function will be priced to reflect the risk associated with that activity, and those risks will be cleanly distinguished and the proper allocation of costs underlying those risks will be placed on each of those functions to send proper signals to the market. 88 Separation will allow regulated distributors to focus on their core competencies and on facilitating access to the distribution system. This should be their role in a properly competing retail market. 89 And such separation will also facilitate and present options for further evolution of the market. For example, conversion of a system supply provider ultimately to a competitive supplier through some sort of well thought out and milestoned, demarcated transition model, as stated by ICF, the consultants, in their report, ultimately the LDC exit of the gas merchant function represents the most efficient regulatory solution to facilitating a properly competitive market in the interests of consumers. 90 And it's in the interests of consumers for all the reasons that I pointed out a few minutes ago, the competition, but admittedly people have to believe that those benefits exist and will be realized in order to embrace this sort of a model. 91 It is our view that they do exist and they will be realized and that other jurisdictions have demonstrated that, and in Ontario we've seen some of that, although perhaps not enough. I'd like to turn to why that is in Ontario. 92 It's our view that the current form of regulated system supply presents barriers to further development of retail choice. We've had some development -- I'm sorry. It seems to have stalled of late, and in our view there are a number of fundamental reasons for that. 93 First, is the costing of system gas. It's currently costed on an incremental basis. There are many examples of reasons why that produces inequity, as it were, or a non-level playing field between system supply and competitive options. I'm just going to name a few. 94 For example, retailers pay a billing and collection fee, and of course that fee has to be recovered in the cost of our product. System supply prices do not include billing and collection services. Retailers operate call centres, engage in customer communications and other customer care activities. We have customer records and databases which we have to keep and work with. We have enrollment costs, switching costs. System supply prices do not include any elements of these customer care costs. 95 There are other examples, but in short, given the time I have, incremental costing simply does not reflect the cost of the activities, in fact, undertaken in support of providing retail natural gas supply. The result is a cross-subsidy system supply prices by delivery service ratepayers, including our own retailer customers. 96 The second major factor currently presenting the barrier to the further development of retail choice is the fact that system supply is not properly understood by customers, or more accurately customers don't properly understand their various supply choices. In our view, consumer information and protection would be enhanced if system supply were treated as one among the retail options available to consumers in the marketplace. So just as with retailer supply consumers, system supply consumers should make a positive election of their gas supply. They should be required to reaffirm that choice as long as our customers have to reaffirm their choices. They should be provided with a copy of the terms and conditions of system supply, just as our customers are. And just as is the case with retailer customers, system supply customers should face periodic renewal of the choice of their supplier using the same protocols of general application in the market. 97 I just invite everyone in the room to think of the -- about the clarity that that would necessarily bring to people who will have to turn their minds to and make a choice as to who their supplier is. These people make the choice in any event, many of them make it without thinking inadvertently, probably without realizing it, but they nonetheless make that choice. And if what we're after is properly informing consumers about their choices, then they should be informed about those choices regardless of which way they choose. That's probably the quickest way to reach a truly transparent retail market in Ontario. 98 MR. HAUSMANN: You're at your time. 99 MR. MONDROW: Let me finish up. 100 Just very quickly. It's argued that the current form of regulated system supply presents -- sorry, I did that already. 101 I guess one more point I'll make, if I could, and then I'll cede the mike, and that is in response to some of the suggestions made in the submissions, and certainly an option flagged in the discussion papers, the consultant's papers. It's our view that regulated distributors should not be mandated to offer fixed-price supply. Retailer fixed-price contracts provide price stability to consumers, and retailers assume the risks associated with those fixed prices. The proposal that the LDCs should provide fixed-price supply options would provide stability to consumers, but at system-supply customers' own risks. 102 The viability of continuation of the market for retail choice in Ontario would be seriously undermined if system supply were able to be offered at a fixed price, and the risks associated with fixing that price would simply be circled back to system-supply customers. 103 If LDC shareholders want to offer fixed-price retail supply options, they should do so with separate subsidiaries which have the same access to ratepayer-supported systems and services as competitive retailers. There are other issues dealt with in our written submissions -- I think my time is up, so I'll stop there. I appreciate your attention. 104 MR. HAUSMANN: Thank you. Again, if you have questions, please be sure you find a mike, and please identify yourself and speak clearly and -- 105 MR. BETTS: I'm going to interject here. I think what we'd like to do here, Cynthia and I would like to concentrate questions after each of the 15-minute presentations from this table, so Board Panel and Staff. And anybody that has questions arising from the presentation, if you could hold that until the panel comes up, that would be the opportunity for you to ask those questions. 106 MR. HAUSMANN: That's fine. 107 MR. BETTS: And we'll concentrate our questions on questions of clarification and then the panel discussion will be where we'll get into details of the issues. 108 So perhaps if I could just ask those at this table if there are any questions? 109 MS. CHAPLIN: I'm Cynthia Chaplin, Mr. Mondrow. I just have one question. You've explained that your position is that the LDCs should stop providing system supply, but that, in the interim, there should be some other steps taken. 110 You've indicated that the first step is that there should be a separation of supply and delivery. Could you just clarify what you contemplate in terms of the level of that separation. Are you speaking just internal organization, cost allocation, corporate -- what did you have in mind? 111 MR. MONDROW: All of the above. I think the point of a separation is to -- it accomplishes a number of objectives. I think it provides some clarity to costing and the allocation of those costs. It provides clarity to the market about what that supply represents. But, if properly structured, it also essentially isolates the supply function in a -- in an entity that is then available to be further evolved. 112 So whether that's to simply lift regulatory control from that entity and it becomes a competitive supplier ultimately, to put it on the auction block so that another interested party can come in and acquire it, having that function properly separated in terms of systems, in terms of costs, will present options for that -- for further evolutionary steps which have to be considered as a matter of policy. But, in our view, that's the first step to set up that sort of a structure, that will admit further evolution. 113 MS. CHAPLIN: So corporate structure along the lines of the U.K. model, is that -- 114 MR. MONDROW: It's just -- that's right, along the lines of the U.K. model. So when, in Ontario, Enbridge had an affiliate that was offering competitive supply, that would be the model that we have. And that supply, in the case of the evolution, would be regulated for some amount of time in some fashion. 115 MS. CHAPLIN: Thanks. 116 MR. BETTS: I have one question, too. It relates to the concept of making the consumer make a conscious choice about their supply arrangements, in other words, to consciously choose system supply. And I assume that would be by writing or signing some form of contract, which you alluded to. 117 What would you see happening in the event that some of those people, and there are many of them out there, simply deposited that form in the garbage? What happens? Would it not become system supply anyway? Is it not necessary to have a default, one way or the other? 118 MR. MONDROW: It certainly is, during a transition period. And I guess what would happen is that those customers would nonetheless be served under system supply, but additional steps would be required of the system supplier to provide those customers with as much appropriate information and notice as we can reasonably achieve in this market. So perhaps there would have to be an additional mailing and communication, an additional urging of people to confirm their choice. 119 But, ultimately, we wouldn't advocate that those customers simply be shut off from supply. We're going to have to get people, people that don't already realize what's been happening in the last several years, to realize that, and we'll have to do that as fairly as possible. 120 MR. BETTS: Thank you Mr. Mondrow. 121 Any other questions? 122 Mr. Hausmann, thank you. 123 MR. HAUSMANN: Thank you. Who would like to go next on our list here? Because we've changed the order. Ontario Energy, are you going to go next? Gordon Potter. 124 MR. POTTER: Potter, yes. Thank you. 125 MR. HAUSMANN: Dim the lights. 126 MR. POTTER: Good morning, Panel, and good morning, participants. I wanted to put together some of our thoughts, just a summary of our submission that we put in two weeks ago, in kind of a summary high-level version. 127 The first few points are about Energy Savings Corp., for those that are not familiar with our company. It's a subsidiary of the Energy Savings Income Fund, which trades on the TSE, and a member of the Energy Savings group of companies. We're an independent natural gas and electricity marketing company committed to stabilizing energy costs for consumers. 128 Since 1997, our inception, the Energy Savings Corp. has grown to become one of the largest independent energy marketers in North America. We have operations in Canada and the U.S. We serve over 1 million customer equivalents, and we currently have a market cap of just over $1.7 billion. 129 We work closely with our industry partners to build value for each organization, continually improve satisfaction for our mutual customers, and provide long-term energy solutions for our North American consumers. 130 We provide an attractive alternative to consumers when purchasing their natural gas supply. Our natural gas and electricity programs provide our household and business consumers with peace of mind and protection from increasingly volatile energy prices. 131 Just relative to the Ontario market, we employ just over 270 people and we provide long-term products to over 500,000 customers. 132 What I wanted to go over is just the highlights of our paper. I wanted to talk about choice for consumers in Ontario. I was surprised at some of the perspectives that were shared over some of the submissions last week. 133 System-supply policy issues, which have kind of followed the consultants in the discussion papers as far as how they've been laid things out, I wanted to talk about billing and customer communication, a very important piece of the market design and framework, I think, and then just summarize our comments at the end. 134 With respect to choice in Ontario, we believe marketers have established a permanent presence in the market. We have more than two marketers offering products and service. You'll find, over time, in any healthy competitive market, there are always swings in the number of marketers that serve the market, and that's just reflective of natural market factors and choices. 135 The changing economy, ability to raise capital, creditworthiness, cost of acquisitions, et cetera, and other external factors influence the number of parties that remain or emerge in a market. Changing -- consolidations naturally occur in a market where there is an opportunity to realize efficiencies, and for -- to position companies for future growth. 136 Just currently, for those that haven't viewed, we have about 35 licensed marketers in Ontario for natural gas. We have parties that serve all customer classes in the province, so, unlike some other jurisdictions where marketers focus in on one particular customer group, we actually have various marketers serving all different classes. In addition to that, we also have energy management companies, advisor companies, that work with large consumers or large customers to help them manage their energy needs. 137 In Ontario, as you probably read through the papers, there are -- over 40 percent of the customer accounts in the market are on a direct-purchase arrangement currently today, and that represents about 65 percent of the volume of gas in the province. So again, it shows, at least in our perspective, that customers are exercising and want choice, and they exercise their choice with respect to where it fits their particular needs. 138 In one of the presentations I looked at there was a graph that identified the change in percentage of customers that are on direct-purchase customer versus system gas, implying that customers -- there is a constant change or a trend towards whether customers choose system gas for supply or retail offerings. I would submit that that is reticent of any healthy market. Changing economies, customer sentiment, price of gas, things like that are all factors that customers take into account, I think, when they decide whether or not it's more beneficial or better for them to stay on a system supply versus to take a fixed-price contract. 139 And again I submit those are healthy representations in the market. 140 So I guess kind of in summary our role, I think, our collective role for this forum and beyond is to review the current framework with a view, from our perspective, to mitigating an existing barrier for continued growth and choice in the market. 141 With respect to the framework, we support option 1 as it was outlined in the discussion paper. We did see that the LDCs should have the supplier of last resort role. 142 We feel that customers have retail supply options through marketers and through direct purchase directly with the utilities that they want, and the offering of system gas is just another choice for customers to make. And we see that the LDC is poised and positioned to manage that responsibility, whether through an affiliate, a separate divisional group within the company, or directly themselves, which I guess is a point for further discussion. 143 The role of the SOLR is very simply to provide a default basic service for essential service to consumers who either wish that service or choose not to choose a retail offering. So further to some of the discussion during the last presentation or oral reading, some customers don't want to choose, they'll just go on whatever the default is, but the underlying point or purpose of the service is to ensure that everybody has reasonable access to what is an essential service. 144 LDCs should remain neutral to consumer choice. The LDC provides distribution services, that's their core business. They do not and should not reap or return a rate of return on the supply of natural gas. And as far as their actions, they should be neutral with respect to whether it's the supply offering in their communications or actions with the consumers. 145 There should be no impediments to consumer choice in the market imposed on or as a result of the system supply function or requirement for the LDCs to provide that function. Market pricing should prevail. The LDC should not be providing long-term fixed-price contracts. We feel that there are various reasons why it's -- we feel it's definitely a competitive advantage over marketers, in the fact that they have a captive customer base where customers are going for supply. They should be neutral to that, and if customers want a fixed term price or variations on a system supply, then there's a lot of choice in the market and marketers provide those options for consumers. 146 Pricing mechanisms should definitely remain fully allocated or, excuse me, should be fully allocated. And that we feel there is a need to review that throughout the next six days and beyond. And that the mechanisms -- and that implies both the system supply and direct purchase, and system supply customers should be subject to balancing charges. For example, there should be parity with direct-purchase and system supply. And as viewed, I guess, in some other jurisdictions, the LDC as a distribution company should look at direct marketers and the system supply function as equal parties, and whether it is the system supply or direct marketer they should treat those entities the same way and in the same manner. 147 On transportation, similar to what was discussed in the paper, we believe the LDCs should have prudent contract and relative to the changing market dynamic. The papers and some folks' submissions made reference to the fact that over the coming years there are going to be alternate sources of supply, new sources of supply from different areas or from different geographical areas in the continent and beyond, and those factors, I guess, have to be taken into account when managing long-term commitments for supply or for transportation. 148 In order to do that, they can certainly include provisions in their contracts with respect to the ability to turn back capacity over the period of the contract, forecast based on what they will need going forward. We want to suggest also that they could also have contracts that include commitments for supply on index which would help to mitigate any risks of overruns. 149 Various to choice -- to support choice are definitely not needed. We don't feel, I mean specifically, that there is requirement to have a critical mass of volume on the system at any given time in order to make those commitments. From our perspective, economists clearly forecast what they see the growths in a given jurisdiction are. And whether that supply remains with system gas or is served through a marketer or through a direct-purchase arrangement, the demand exists and the demand needs pipe, and such options as we have today where capacity for transportation is assigned or taken over by the marketer relative to the consumer's load that's migrating. Those kinds of things can remain in place and they mitigate the risk of any -- or they mitigate, I guess, any risk to the ratepayers and make sure that the transportation commitments made by the utilities, they're kept whole on those. 150 We also think there could be an opportunity to provide that as an optional service as opposed to a mandatory service where it is today. 151 Services, we see that there's definitely efficiencies in economies of scale with the distribution company maintaining that role of balancing for both direct purchase and system supply. From a resource and cost perspective, we think generally it's sufficient. It's an efficient allocation of resources, and we feel that it should be offered going forward in addition to unbundled options for direct-purchase customers who wish to take control of that costs and that management function themselves. 152 Billing and customer communication, we basically feel that the bill envelope and the bill is one of the most effective and efficient means of accessing and providing consumer information. Currently today, the LDCs, as you know, under a rate-ready billing method have access and complete control over that bill envelope, and we feel strongly that marketers need access to that envelope. We need access to the bill, we need to be able to provide our information, our own information and messaging to the consumers. We need to have access to that, whether it be just general information or education regarding the choice programs. I think there are enough studies from marketing firms that clearly identify that consumers do not want multiple bills, they do not want one in most cases for their commodity and one for the LDC distribution charges. And we feel strongly that through this conference we look to hope to see that there's some kind of a -- I guess an expansion of the access that we have to those bills. 153 The other thing which I wanted to point out is, you know, with respect to a natural maturity of the market, we need to perhaps review the billing methods. Rate-ready billing is very constrictive to innovation and product offerings, which is a very large reason why there are very -- we generally all offer a simple fixed-price product, because we can't bill anything else. And I think that's an important piece of that discussion. 154 Chris, I'll just wrap up quickly. 155 Just to close, I guess, LDCs should be able to provide a basic SOLR service reflective of short-term market prices being trued up frequently. Pricing should be based on fully allocated costing for both system gas and direct purchase. It should include all the costs relative to the service. There should not be any subsidization with distribution service, and system gas customer pricing and costing should be at parity with what is being charged to the direct-purchase marketers. 156 LDCs do not need to retain a critical mass of customers or put constraints in competition to support contract commitments. Assignment of capacity for transportation mechanisms in place are adequate and could be made optional. 157 Billing services must be enhanced to facilitate our access to our customers and to remove barriers to product and service innovation. 158 And with that we just wanted to close to say we support mechanisms that are efficient, fair and facilitate choice and continued choice in the market, and just wanted to thank you for the opportunity to present our views. 159 MR. HAUSMANN: Thank you, Mr. Potter. Any questions from the Board? 160 MR. BETTS: Just one question. The practical issue, I think, associated with making the billing envelope available for the types of uses you described, I assume you're talking about system-supply customers or billing to system-supply customers specifically in that matter? 161 MR. POTTER: No, just for -- pardon me, Mr. Betts, it's billing to my own customers. 162 MR. BETTS: Okay. 163 MR. POTTER: Because I don't need access and I don't think it would be, in our view, prudent that we're allowed access to -- maybe we could on further discussion, but just with respect to my own customer base, I don't have the ability to communicate to them, or to offer different pricing or products. 164 MR. BETTS: Thank you. I just needed that clarification. 165 Thank you, Mr. Hausmann. 166 MR. HAUSMANN: Any other questions? I think we can have the lights -- I don't think we have any more computer presentations or slide presentations this morning. 167 Are we moving on to Superior Energy? 168 SUBMISSIONS BY MR. HAGGARTY: 169 MR. HAGGARTY: Good morning, Panel, and all participants. My name is Gerry Haggarty, and I'm with Superior Energy Management. Superior Energy Management is part of Superior Plus Income group of companies, and we are a natural gas supplier, primarily to the commercial and small industrial markets, although we do supply to the residential market as well. 170 We're a very interested participant in the natural gas sector of Ontario, and we believe that the structure of system gas is very important to the health of the Ontario natural gas market. 171 Superior believes that there are a number of challenges that we have in the natural gas market in Ontario, and that solutions to those challenges must be made in order to have a healthy and successful competitive market in Ontario. We believe that the competitive market is the most efficient way for customers to achieve the choice that they have, and also that they get the best price available to them. 172 Some of the challenges that we believe are in the marketplace right now, in system gas, is that there's a lack of transparency of the price for system gas, and there is not uniformity in the process and procedures in setting system gas rates. We also believe that there is restricted access to the bill, as Mr. Potter earlier said. And one of the benefits of going last in the presentation is that my colleagues have already dealt with a lot of the views that Superior shares with them in the issues that are dealing with the natural gas market. 173 We also believe that there are inequities in cross-subsidies, some of which are arising from the different ways in which system gas and direct-purchase gas are priced and put into effect. One of those is in load balancing, that system gas customers are dealt with load balancing in a much different way than direct-purchase customers are dealt with in load balancing, and that is problematic. 174 There's also that the utility has had some discretion in implementing the way system gas is structured. Frequently, there have been applications by the utilities to request that their system gas be implemented on a quarterly basis, something different than what is set out in a rate schedule. And we believe that that should not be the case, that it should be based on a formula, and that formula should be followed. 175 In general, Superior supports option 3 of the -- in the presentations that the LDCs exit system gas. We believe that the separation of those two functions, of the distribution function and the provision of the commodity, should be separated; however, we believe that that is a longer-term process, and that, in the short term, option 2 is not what we would agree with. Therefore, we would support the status quo option, with some changes. 176 The first refinement, I guess, to the natural gas system gas market would be that, we believe that the QRAM should be set and defined in a formula, and that formula should be followed. Currently, we have applications by the utilities on a quarterly basis, and we believe that it should be at least quarterly, more frequently, as is the experience in other jurisdictions. Many of them change their system gas price monthly. And we believe that quarterly or monthly is important so that customers understand what the market price of natural gas is. 177 It should also be based on a formula so that there -- when that formula is set and applied for by the utility, it is not subject to change, so that the customers can make an informed choice based on one set of rules that is consistent, and then they can weigh that against their other options for direct purchase, whether this be a fixed pricing or an index pricing, whatever best suits the customer. 178 One of the issues that we believe needs to be dealt with is in the load balancing between system gas and direct-purchase customers. 179 Currently, we have two different sets of rules for load balancing, and that load balancing, because of the volatility that we've experienced in the natural gas markets over the last couple of years, has become a very important issue. It has caused customers, all customers, both system gas and direct-purchase customers, to be subjected to retroactive load-balancing charges. And they are charges that they did not understand or expect that they would have levied against them, because they believed that they had made an option for the purchase of their gas, and paid for that gas. And to have a retroactive charge that they did not understand is a problem for all customers, and we hear that from our customers on a regular basis; that the load-balancing issue is one of the most important issues facing natural gas purchasing today. 180 The utilities, through system gas, have their load balancing rolled into their system-gas price, and it can be applied either to system-gas customers or it can be applied to all customers, and the rules are not clear. 181 For that, we support more frequent balancing that would make all customers subject to load balancing on an equal basis, so that customers that are on direct purchase would know that they have to balance three times a year, if that is the rule, and that system-gas customers would also have to balance on the same formula. 182 The last point that I would like to make is that we believe that it is important that system gas be applied in exactly the same way in which the Board has ordered it to be, and that there are no changes from the way system gas is offered to customers. And so the applications by the utilities for their system gas should follow that formula and be implemented in that way. Therefore, customers will not have any surprises, and they will have a clear choice as to what choice they made. They may not like it, but they made the choice and they will not have surprises. 183 Thank you very much. Those are our submissions. 184 MR. HAUSMANN: Thank you, Mr. Haggarty. We're right back on time. Any questions from the Board? 185 MS. CHAPLIN: Thanks. 186 Mr. Haggarty, you indicated that you don't -- 187 MR. HAUSMANN: Cynthia Chapman. 188 MS. CHAPLIN: You indicated that you don't support option 2. Could you just briefly tell us why that is? 189 MR. HAGGARTY: Our first choice would be to have a default supplier be something outside of the utility, so have the utilities exit the supply function altogether. Their core business is in the distribution, and we don't believe that there is a necessity to have the commodity supplied by a distribution company. In many other industries, there's no correlation between the different services that have to be delivered in the same way. So that would be our first option. 190 The hybrid, I think, would add more confusion to the marketplace rather than more clarity to the marketplace, and we think that that is one of the big issues that customers have; that they believe that all services are interconnected within natural gas, where they don't necessarily have to be. And so I think a hybrid would make that even more confusing to customers. 191 MS. CHAPLIN: Okay. Thanks for that. Sorry, I think that's it. 192 MR. BETTS: No further questions. Thank you. 193 MR. HAUSMANN: Okay. That takes us -- thank you. That takes us to the Federation of Northern Ontario Municipalities. 194 SUBMISSIONS BY MR. SCULLY: 195 MR. SCULLY: My name is Peter Scully and I am representing the Federation of Northern Ontario Municipalities, sometimes known as FONOM, and also I have also a retainer to represent the interests of the cities of Timmins and Sudbury. 196 I did ask -- told Judy that I had a problem appearing on Tuesday and she graciously switched me to Monday, but she didn't tell me about it so the result is I'm going to come in under 15 minutes for sure. 197 Right now we see the involvement of the LDCs in gas supply as a problem and that includes all areas in which they're involved, load balancing, supplier of last resort and so on. And our current position is that to the extent possible, they should be taken entirely out of that position. I'd say just by way of a summary, we largely agree with what was said by the three preceding panelists in that area, and I would say, generally in all of the areas that they've spoken to. 198 We do see the question of customer communication as being very important. As I talk to my clients and try to explain to them what's happening even in this forum, let alone on QRAMs, I'm made very conscious of the fact that there's still a steep learning curve for all of the consumers in this province. And one of the things that I have in that area, excuse me, is that I don't like to hear the utilities' gas called system gas. I think that that, sort of, lends it an inherent atmosphere of respectability. I like to have it called something like private utility supply. I think we have to think in terms of those kinds of uses of language in our business to really start telling the consumer in the province out there what's happening with his natural gas supply. 199 Specifically, in the interim period, while we're dealing with the utilities supplying gas, we applaud the recommendation that for the QRAM process that Union and Consumer's QRAM processes be made identical and more frequent. As somebody said earlier, it seems possible to move up to a monthly adjustment, and I think that that should be looked at. I remember Consumers Gas at one point had a very extensive submission on that, and maybe we can dig back in the archives and find out just what they had to say at the time. As I recall, they were in favour of it at the time and had worked down to very fine detail about how it could be done. 200 We also, in that area, recommend the -- applaud the recommendation in the discussion paper that Union following Enbridge's example, separate the PGVA and commodity costs in their gas supply approach. 201 I don't know if this just happens to me, but in the QRAM presentations where the cost of gas is supposed to be clear and trackable and leap off the page, I've never been able to sort of work through it myself. Maybe it's laziness and I haven't gone to the differential cost tables or something, but I think it needs to contain an example that shows you exactly how you can begin in the morning, pick up The Globe, look at the futures contract and track right through to the price of gas that's being recommended in a QRAM. 202 I guess as a final point, so that you all know, we have a peculiarity as Federation of Northern Ontario Municipalities and Timmins and greater Sudbury. Our system gas, it's hard to avoid use that word but I'll come up with something, our system gas is different from the system gas in the southern delivery area of Union Gas, their southern zone. And we don't like that and we think it's totally inappropriate, and you'll hear us coming back to that in many forums in the future. 203 There, that's well under 15 minutes and I thank you very much. 204 MR. HAUSMANN: Thank you, Mr. Scully. You made my job easier. 205 Any questions from the Board? While we're looking I notice some mikes are still pointing up. Could you please be sure they point down so we don't run into any problems. 206 Any questions from the Board? 207 MS. CHAPLIN: Yes, thanks. Cynthia Chaplin. 208 Mr. Scully, you indicated that you broadly agree with the prior three presenters. Are there any areas in which you would distinguish your position from theirs or could we conclude that -- 209 MR. SCULLY: Well, I guess in broad terms we're aggressive. We'd like to see the LDCs out of the gas supply business. If that's a possibility, we'd like to see it achieved. I heard some of the other panelists backing off a bit, I believe that Savings was saying, Okay supplier of last resort, we can see that. We'd like to see that auctioned off somewhere, so that would be one way we are different. 210 MS. CHAPLIN: Okay. 211 And impress, for my benefit, because others may be aware of this but I'm not, you made the comment towards the end that you believe that system gas, the term that we're using right now, is different for your constituents in the north and is unfair. Could you just briefly explain to me why you take that view. 212 MR. SCULLY: Just because it is different. Union's one system -- and doesn't it sound logical that their gas supply should be their gas supply, that there shouldn't be a different supply for the people that are in northern Ontario and one in southern Ontario? Maybe if we were always getting cheaper gas we'd have a different attitude, but by and large it tends to be more expensive. We are picking up UDC charges and the south isn't and there are a number of differences along those lines. 213 MS. CHAPLIN: Okay. Thank you. 214 MR. BETTS: Thank you, Mr. Scully. No other questions. 215 MR. HAUSMANN: Mr. Chair, we have about 20 minutes until the break time, and I wonder if this might be an opportune time for -- we could ask if ICG has any questions of clarification or if anybody else has questions of clarification. And we'll try to stick to questions of clarification, if there's something you weren't quite clear on the positions that were presented here this morning, and then we can get into the substantive exchange of views after the break. 216 Does ICG have any questions? Sorry, ICF. 217 MR. CROOK: I don't have any clarifications. 218 MR. HAUSMANN: No questions. Anybody else have any questions of clarification? 219 MR. BERMON: I may just ask one. It's Mike Bermon from ICF. To Mr. Scully, I guess. 220 As I understand from your statements, the municipalities in northern Ontario favour the removal of system supply offering from the utilities. Is this rather unique from other centres in Ontario? We've seen some survey information that would seem to substantiate that system supply should be an offering, I guess these are communities across the province. Is there any reason why the northern communities would be opposed to that? 221 MR. SCULLY: No particular reason. I guess it's a market call. It's hard to have a good functioning commodity market when you've got an entrenched traditional supplier still mixed in there. It skews the market, I guess, is the concept that we have. 222 MR. BERMON: Okay. Thank you. 223 MR. BETTS: Mr. Hausmann, maybe I'll ask one question, and I direct it to almost anybody, because I think everybody took a similar position. 224 I sense that everyone was trying to or hoping that at some point the LDC would exit the supply role, and yet I think they acknowledge, by choosing the current arrangements with changes, that that may be difficult. 225 Had any of your -- would any of you like to comment about the transition from the current position to the eventual position of the LDC exiting that role? How do you see that happening? How long does it take? What are the problems? You've got 15 minutes to answer that. 226 MR. HAGGARTY: I won't take 15 minutes, but I'll take the first shot at it. 227 MR. HAUSMANN: Would you identify yourself. 228 MR. HAGGARTY: Gerry Haggarty. 229 One of the areas of transition would be how is -- if the utility gets out of system gas, someone is going to have to pick up the default mechanism, and what would be the structure of how the default gas supply is priced? And, if we corrected the way that system gas is offered within a utility, that would make an easier transition, that would be a model for an unrelated party to be able to provide it. And if that were to be on a monthly basis - and it would be based on a very defined formula to determine that system gas is priced based on price at Empress, for example, and that is what it is going to be for the month, and next month then it would follow the same formula - it would make it much easier to have an unrelated default supplier, or suppliers, to be able to pick up that formula and know what it's going to be. And it would be a certain price, plus a cost for delivering the service, and so on. 230 If we had a very strict and transparent way of doing that, it would make it much easier to be able to say that the utility doesn't have to provide this any more, the marketplace could provide it and, therefore, provide a way in which they could exit. 231 MR. MONDROW: I wonder if I might comment. Sir, thank you. Ian Mondrow from Direct Energy. 232 I think there are probably three basic steps on the road to getting, to borrow a term that was well-used sometime ago, from here to the end-state, that would have the LDCs no longer providing system or default supply. And, in our view, as I've said already, the first is to separate the supply function from the delivery function, which accomplishes a number of things, I think. 233 As I responded to Ms. Chaplin earlier, it isolates costs properly. It provides that system supply, or default supply, accesses the systems and the delivery system, and the other related systems paid for by ratepayers, on an equal footing to all other suppliers. It ensures all of those things with minimum required regulatory oversight. 234 The second thing, then, would be to price that supply, the default supply, in such a way as to allow, if not to facilitate, retail entry and, therefore, switching by customer. So you have to set up system supply or default supply pricing on a basis in which its competitors, retailers, can make a reasonable margin. And if retailers are always, you know, in today's world, 3 or 4 cents out of the market relative to system-supply prices, in part for cost-allocation reasons, in part because it's a cost pass-through model without any headroom, as it were, or margin room, built in, then it is going to be very difficult to facilitate additional retail entry. 235 I take OESC's point that there are retailers active, there are wholesalers active in the market. But I think the Board and stakeholders need to consider whether we're kind of stalled, and what we need to do if we want to truly kick-start the balance of this transition. 236 So pricing is crucial, and the pricing has to be looked at in terms of the competitive retail alternatives, and whether there is an opportunity to provide products to customers in competition to the default supply. 237 And then the third element would be to have a very well-defined plan, with timelines for lifting the regulation from that new form of default supply mechanism. So, in two jurisdictions, other than in the U.K., in which we're active in North America, in Texas and Alberta, both offer different models for that. And, indeed, most North American jurisdictions where retail competition has been introduced, or is scheduled to be introduced, there are timelines for attempting to reshape default supply and then change its pricing in such a way that, within a pre-defined time of 5 years or 7 years, regulated default supply will no longer be necessary. 238 One of the benchmarks commonly used is to have the timelines, but then to revisit and determine what percentage of customers have switched. And once you get to a certain critical mass, the determination is made that there is sufficient competition to protect consumers, and the regulator forebears or pulls back. And, indeed, all over North America right now there are -- in various jurisdictions, there is a revisiting of whether the initial timelines were, perhaps, too aggressive or too optimistic, and whether an additional transition period, or a revised sunsetting period is required. But in all of those jurisdictions there were plans and milestones, and to the extent those plans are to be adjusted, presumably there will be no plans and no milestones. And clarity on that is very important, in our view. 239 I hope that addresses your question. 240 MR. BETTS: Thank you. 241 MR. SCULLY: If I could follow up on that. Peter Scully from FONOM. 242 I may have missed this in my presentation, but we wanted to say that we very much applaud moving to equitable costing of the utility's gas while it's still around. We were very pleased to see that in the study papers, and remind everybody that in Union Gas's rate case, as I recall it, there is an administration charge that has been split out. So in actual practice, there's some step towards that desirable and future end-state. 243 We certainly would support there being a complete separation in gas from the supply and the delivery functions. That seems to us to be elementary. You've got to do that if you're going to go anywhere. 244 Again, I'd remind parties that in the very beginning of this, there was no hesitation, at least on the part of one utility, to say "Gas supply? We're out of here. We're not going to do that anymore." If you look back in Union's past presentations, they had a very forceful approach initially during deregulation, where they avowed that, I think, within a year or two, they were going to be out of the supply business, and they welcomed the opportunity. So when we're thinking about this, we shouldn't think about it as something that's extremely hard to do. It's quite doable. Maybe it takes a bit of legislation, but it could be done, in my submission, in a few years, as long as you make the resolve and take action. Thank you. 245 MR. POTTER: It's Gord Potter, OESC. 246 For clarity, we were not advocating option 3, although we're certainly interested in listening over the coming days to the submissions with respect to some of the arguments that support that. But if we were to transition to an end-state, I think, from our perspective, regardless of currently whether it's the LDC or through the transition it is, and in the end-state it's not the LDC, there will always be a requirement in our view that someone will have to provide that SOLR service. You will always have to have somebody providing the default. For people that don't choose -- people in a totally competitive market where retailers won't serve them or can't serve them, there needs to be somebody that's responsible to provide that back-up essential service. 247 And I think, in the market structure, we agree wholeheartedly with Direct Energy's comments with respect to the fact that there needs to be milestones. Because a lot of the functions and services -- as you split out from distribution and system supply, there are interdependencies or linkages along the way, and there needs to be clear milestones with respect to the separation of those functions, and the ongoing change to those functions, to make the transition to that end-state. 248 So we -- I guess from our perspective, the SOLR function is still required, and will always be, and I think, in a totally open market, no company is going to provide that service unless they are making a profit or margin on it. So -- because they'll separate distribution from system supply, system supply is not going to be provided by somebody for free. So I think that's another consideration that has to be kept in mind. Thanks. 249 MR. BETTS: Thank you. 250 MR. HAUSMANN: Any other questions up here? Any questions of clarification from the floor? Yes, sir, could you identify yourself. 251 MR. BASHAM: My name is Frank Basham, with Talisman Energy Inc., and also with the Canadian Association of Petroleum Producers. 252 I wanted to ask Ian a question. Could you tell me what natural gas as a "contestable function" refers to? I presume you're talking about either certification of a retailer or some sort of franchising arrangement, and I presume you're also not talking about an upstream supplier or suppliers. 253 MR. MONDROW: When I use the term "contestable," at least when I used it today, I meant that there is no economic reason why you need to have regulated retail supply for end users, that end users are -- essentially the customers contestable, that is end users can go out and find supply options and competitors can buy to supply those customers. So I'm perhaps using contestable in a kind of a non-term of art way. My sense is that you're using or thought I was using the term in a more specific way and I wasn't. 254 MR. BASHAM: Thank you. 255 MR. MONDROW: Does that help? 256 MR. BASHAM: Yes. 257 MR. HAUSMANN: Any other questions of clarification? 258 MR. BRENNAN: Frank Brennan. I have a question for you. You mentioned earlier about splitting the role of system supply from delivery services. My question is, where do you see load balancing going between those two areas, those two functions? 259 MR. MONDROW: I think operating the system and the extent to which that requires balancing is properly a delivery function. I think balancing deliveries with supply on other than, kind of, an hourly basis is properly a function of the retail service provider. 260 Does that help? 261 MR. HAUSMANN: Yes, sir? 262 MR. FOURNIER: Peter Fournier, Industrial Gas Users'. A question for Peter Scully. 263 Peter, can you tell me the percentage of the market in the northern Ontario communities represented by your client is residential/commercial and what percentage is industrial, and can you tell me if you have any evidence, apart from the larger cities such as Sudbury if the -- if Union was out of the system-supply game, that there would be marketers willing to go to Cochrane and Kapuskasing and other urban centres of great magnitude in northern Ontario to take over the system supply gas marketing function? 264 MR. SCULLY: I haven't got a split between industrial and residential at my fingertips. 265 MR. FOURNIER: If I told you it was about 20 percent, at the very most was residential, would you accept that? 266 MR. SCULLY: Sounds good. I don't think there's any shortage of marketers in northern Ontario. I don't think they are discriminating against that. If there's gas to be sold, they're showing up, particularly for the industrials. 267 MR. FOURNIER: But you're talking about system supply, and system supply is for the residential and commercial market. So I'm asking if you think there are marketers prepared to go door to door in downtown Kapuskasing to market gas. 268 MR. SCULLY: Yes. 269 MR. FOURNIER: Thank you. 270 MR. MONDROW: Speaking as a door-to-door marketer, I'd agree with that, if I could. I'd agree with that answer, but with a qualification. It's obviously more difficult to go door to door in some of those communities, which I think, Mr. Fournier, is your point, but there may well be other more liberal, without compromising consumer protection mechanisms for selling that need to be looked at in conjunction with that sort of a move to address the lack of density in some of those communities if we're going to rely on a model under which competitive suppliers step in to fill that gap, and thus the importance of the transition period, I think. 271 MR. HAUSMANN: Anybody else out there? 272 All right. Well, we're almost at the break time so this might be an opportune time to take our break and we will reconvene at 10:45. Thank you. 273 --- Recess taken at 10:25 a.m. 274 --- On resuming at 10:45 a.m. 275 MR. HAUSMANN: If I could have your attention, please. Could we reconvene. 276 We're moving into the second part of this presentation discussion, and at this point what we're looking for is not just questions of clarification, if you have some that's fine, but it's really your opportunity to engage in a discussion and bring your views forward. As you see, there are a number of chairs with mikes, there are even a couple that are empty, but if you want to speak, please then come to the designated mike at the front, your front left or ask somebody else to share their mike with you and be sure to give us your name every time you come, even if we know you, because people on the webcast don't recognize your voices. And speak directly into the mike if you could, please. Some people at the back of the room were having a little difficulty picking up the discussion. 277 ICF, anybody from ICF have anything that they would like to start with. 278 MR. CROOK: Yes, Leonard Crook with ICF. 279 I would like to echo Mr. Betts' earlier question. I guess in looking over all of other panels in the next two days in this issue that if there was ever one that should come out more vigorously for option 3, having the LDCs exit the supply function, that this should be the panel that would do it, but we really don't hear that from this panel. And so I want to ask you then: What do you see are the major barriers or the problems with moving more expeditiously towards the policy that would have the LDCs exit the supply function completely? And just take your turns. 280 MR. MONDROW: It's an interesting observation, and you would have thought that this panel would come out guns blazing on that, and I wonder, just based on some internal comments, internal at Direct Energy, that I saw as we were developing. 281 MR. HAUSMANN: I'm sorry, Ian -- 282 MR. MONDROW: Sorry, Ian Mondrow, for the webcast. I apologize. I forgot. Ian Mondrow from Direct Energy. 283 Internally, we often saw comments like that as a non-starter or you're never going to get that or there's no appetite for that. And I think that's the major barrier. 284 MR. CROOK: Political will. 285 MR. MONDROW: Political will? I hesitate to say regulatory will, because I don't think that's fair. I'm not sure wether it's the government or the regulator or the stakeholders that just -- the sense, I think, certainly on -- from our part and perhaps on this side of this particular panel is the tremendous inertia against that sort of solution. But if there were an acceptance of the value of moving towards really a truly competitive market without a default supply that erects barriers to that, in terms of mechanics or process design or steps, I don't think it's that complicated. We see them all around us in other jurisdictions, and there's certainly a solution that, in my view, can be fashioned for Ontario, it's just a question of acceptance of that as the road that we want to proceed down. 286 MR. HAUSMANN: Anybody else on the panel like to address that? 287 MR. POTTER: Yes. Gord Potter, OESC. 288 Just for clarification, it definitely seems reasonable or practical that as a natural evolution that the market would go or should go to a completely open market and remove the LDCs from that role in the long-term, but I think maybe some of the factors that mitigate that is, further to Ian's points, that there is -- you know we had the same sentiment, it seems like a huge undertaking and is the benefit of that undertaking, at this point anyway or in the near term, going to provide enhanced choice that consumers have today? 289 We all operate under the current rules, and as we mentioned there's some things that we'd like to see changed, but generally speaking we're able to manage and operate successfully in that market. Consumers have choice currently, and I guess the question that needs to be, I guess, debated or reviewed or realized through this, the course of this hearing or this consultation is what are the pieces of that -- what is I guess the sentiment towards needing that open and what are all the impacts or the costs or the benefits that will be achieved by going to that extent? 290 So it's not in our view or as you've heard from my peers that we wouldn't want to see the market totally open, but it's the -- where is the assessment, I guess, of the size of that? What is the magnitude of changing that and what are the benefits over and above what people have today? I mean would it, you know, enhance or increase the number of competitive offerings in the market, would people benefit more, those kind of things. 291 MR. HAUSMANN: Anybody else? Peter or Gerry? 292 MR. HAGGARTY: Gerry Haggarty from Superior Energy. 293 As I stated earlier, we are in favour of having the LDCs exit the system supply but we believe that it's not an easy road to go down and it's going to take a long time. And as I look around the room, I see a lot of people that were involved in 1995 and 1996 in the ten-year market review in which this was brought up at that point, and here we are eight years later and we're still debating the issue. And it's more important to us as commercial participants in the marketplace to make sure that until we get there that we have a workable system gas supply arrangement, and that if we do have that, then the probability of being able to make the next step to having the LDCs exit that function is going to be a lot easier because, as Ian said, the political issues are very large and to drop everything and leave things as they are to go down that road, that road alone, I think would be not good for the industry. And so for that reason, we support that we fix the existing situation and use that as a platform to going to the exit route in an end-state. 294 MR. SCULLY: I guess, strangely enough -- Peter Scully for FONOM. Strangely enough we're the advocates of position number three, and I'm a little disappointed to hear that sort of, Well, we're making money, things are working, let's just coast along and fix a few things coming from the major marketers. I think unless you set some early objectives and make them fairly large and moving towards eliminating the LDC from supply, we'll coast along and ten years from now we'll still be talking about the same thing and we'll still be an inefficient market. I think that the market could be much better and the only area that I see a complication in moving the LDCs out of supply is tied to something that we're going to get into later in this forum, and that is their dominance of storage in the province. 295 That's the key to the load-balancing question and that's a big thing that we all sort of worry about. How are we ever going to get by if we don't have those great big pools to suck on when we run into difficulties? So I think we should return to this question when we get into the question of storage and market dominance and how efficient the storage works, because that's the only sort of concrete sticking point that I see to an early exit of the LDCs from the sales market. 296 MR. MONDROW: It's Ian Mondrow. If I could add a comment, just to be clear, I've heard the characterizations of my fellow panel members on the retailer position on this. Just to be clear, and we'll make sure this is crystal clear in our final submissions, we do primarily endorse exit of the LDCs from the supply function. I think the question is how to get there and it's the transition model that, you know, perhaps I spent a little more time addressing in terms of changing the costing and so on. But I just want to be clear, we do not feel that there is any need to retaining system supply, and I unfortunately used the term contestable, which -- I'll find a better term for in our final submissions. But I don't want there to be any lack of clarity on our final position. I hoped I had made that clear, obviously I hadn't, but we will certainly do so. 297 MR. CROOK: Well, Mr. Scully has identified, I guess, storage as a major question or barrier to -- 298 MR. HAUSMANN: Please identify yourself again. 299 MR. CROOK: I'm Leonard Crook, I'm sorry, with ICF. 300 Mr. Scully has identified storage as being a major barrier to implementing an LDC exit from the system -- from system supply. Do you see storage as one of the principal barriers? I want to talk about just the operational and technical issues a bit, leaving aside all the other. I mean what are the major barriers you see to implementing something like this? 301 MR. POTTER: It's Gord Potter, OESC. 302 Storage, definitely, because it's pretty much completely owned and operated by the LDCs. And in order to manage, if you were to view, you know, 10 years in the future, and if we had, I guess, an environment where the LDC has exited, then people need to manage their own supply, which would include their own balancing functions or som degree of that, which means that you'd need access to storage, competitive storage, in order to manage your own supplies for your own customer base. So ... 303 MR. CROOK: Meaning you, the marketer. 304 MR. POTTER: Me the marketer or, you know, me the large industrial customer. So that's definitely one key component that has to be reviewed and determined. 305 And then that leads into the discussions which I guess people will get into in a couple of days during storage, about, you know, whether it's being subsidized or at cost-of-service rates or whether it should be at market-based rates, those kinds of things which would lead into opening storage or attracting new storage, if that's needed, looking forward. 306 So storage is definitely a big one. And I think, as I mentioned earlier, you know, we firmly believe there needs to be a SOLR-type position or a provider-of-last-resort position in any market, because you have people that will not choose, or will choose not to choose, or won't be certified, some market participants existing, for whatever reasons, whether it's credit reasons or other reasons. So you need to have, in any kind of a framework, some means for which those people can have access to a basic service. And in order to do that, then you have storage, and you also need the ability, I guess, to balance your own supply, you need some function of, I guess -- sorry, I just lost my chain of thought. But you definitely need your storage. People need to be able to balance. They need to provide that. 307 A distribution company can provide a system supply, whether it's through an affiliate, because there's nothing stopping that currently today, of opening an affiliate and providing a competitive offering, let alone a system-supply offering. And I guess there is a necessity for discussion as to whether an LDC has to, I guess, remove themselves in that role, or whether they can continue to do that role but do it as a stand-alone unit within the company. 308 And I guess there's some healthy discussion that could be had there, because so long as -- you know, as Ian had mentioned earlier, reference to the fact that everything is divisionally separated and it's clear, whether it's in a different building or a different subsidiary or division, that everything is fully costed, then they -- you know, I'm not sure where there's an issue with respect to whether they provide the function or it has to be somebody else in the market. 309 MR. FOURNIER: Can I raise a question of procedure? Peter Fournier, Industrial Gas Users. 310 I'm concerned that there's too much emphasis on the consultants at this stage. They've written their report. They've interviewed everybody; they've written their discussion papers. They had an opportunity this morning to ask some questions. There's an awful lot of different interests in this room, with many different positions. And if you're going to take up all your time on the consultants, then I might as well get up and leave because clearly you're not interested in listening to the other parties in this room. You should be asking the other parties first, then if there's some time left for the consultants, fine. But I think you've got the cart before the horse. 311 MR. HAUSMANN: Well, as a matter of fact, I was about to turn to the room and say, Does anybody in the room have some views that they would like to express on the question that's under discussion at the moment, barriers to an open market and the transition phase? 312 MR. FOURNIER: And I have a -- 313 MR. HAUSMANN: Please go ahead. 314 MR. FOURNIER: -- question. 315 MR. HAUSMANN: I gathered you probably did. 316 MR. FOURNIER: And I'd hope there's a lot of others, too, because I think the views, they're very diverse views in this room, and I think the OEB should have the opportunity to listen to those diverse views and not listen to their paid consultants, who, I consider, on their supply report being extremely bias to the marketer interest. 317 My question is this, and I commend Ian for stating what is the obvious: But marketers are -- their principal interest is in their shareholders, their profit, they want to make a profit in the business. We started off, when we started unbundling the market, we had a number of marketers who attempted to get into the retail sector, and, in effect, we are down to two. Superior, I'll add you to the list, but principally in Ontario now, we're down to two marketers. 318 My first question, and I'll give you all my questions, but my first question is are you suggesting, then, in order to attract -- if the LDCs get out of the supply system, to attract more marketers, we've got to make it more profitable for marketers to be interested in coming into the play, and that suggests, then, that the price of supply has to increase. 319 I have trouble seeing how the Ontario Energy Board, which is supposed to act in the public interest, would think that an increase in price for the vast majority of ratepayers is in the public interest. 320 Secondly, the commodity price of natural gas is set by the North American market, and if I want to go and buy gas or you want to go and buy gas, you go to a producer or a marketer and you're going to pay, depending on the type of contract you're looking for, but you're going to be paying the going price for gas. So the only way that marketers can add profit is they have to add a charge on top of that commodity price. Bringing a whole bunch of marketers into the play increases competition amongst themselves, but it doesn't lower the price of gas, because the commodity price is fixed by the North American market. 321 So given all of that, to summarize, why do you think, if you've got the LDCs out of the supply game, that there would be enhanced competition? Do you think that the increased price which is necessary to attract those additional marketers is in the public -- is in the public interest? And do you think the OEB should endorse a program which its end result is higher prices for, particularly, the residential and commercial consumers of this province. 322 MR. MONDROW: If I could maybe -- it's Ian Mondrow. Thank you, Peter Fournier. If I could maybe take a first crack at the response. 323 I think my first comment is, first, let's get the cross-subsidies out. The delivery rates should go down; the system supply rates should go up, once costs are properly allocated around. I do, however, believe that after that, there is a major component of pricing that system supply or default supply does not have to recover and that's profit. 324 MR. FOURNIER: Excuse me? 325 MR. MONDROW: Profit. I don't think "profit" is a dirty word. 326 Gas supply price for customers currently on default supply who are forced to or need to move to retail supply if the LDCs' supply function is removed will see a price increase. The question, I think, that needs to be considered is, what do you get in return for that? And if people believe that you get more robust and innovative products, is it worth paying the extra cost? I think that's the essential question. 327 In our view, obviously, we think it is, and some of my presentation was focused on enumerating again, because I think people lose sight of it, what precisely the alleged benefits of competition are. Competition in and of itself is no longer accepted as a good thing. And customers, quite rightly, want to know, Well, what am I going to get for my money? And I think, you know, there are benefits that customers will get for their money. But their prices will go up, or at least the prices of those currently on default supply. 328 MR. HAUSMANN: We had-- sorry, this other gentleman here had a question or comment? 329 MR. BETTS: I'm sorry, I think Mr. Haggarty wanted to answer that question. 330 MR. HAUSMANN: Oh, I'm sorry. 331 MR. HAGGARTY: Yes, Gerry Haggarty from Superior. 332 Thank you, Peter, for the recognition of Superior as being a marketer. 333 I disagree somewhat with your characterization that the price has to go up to attract more marketers. I think one of the reasons that we don't have more marketers in the Ontario marketplace is because we don't have a level playing field and it is too restrictive to come into the market and there's too much risk. You have to lower the risk and give the availability of someone to come in and have the opportunity to make money, and possibly to lose money, and that is what we need to do to attract more people into the marketplace, not to add to the profit margins that are available. In fact, the profit margins could come down if there was less risk in the marketplace, because you wouldn't have to put a price increase in effect in order to cover that risk. And so if we get a better open market, then you'll see more people, you'll see lower prices. 334 MR. HAUSMANN: Anybody else? Question up here? Carry on. 335 MR. GEORGE: My name is Roland George with Pervin & Gertz. This question is specifically for Peter Scully, simply because I was a bit surprised by the position you took coming from northern communities because I have worked in other industries where small communities have lost rail service or can't get cable service, and basically if system gas is not available to smaller communities like that, I have a few questions. 336 First of all, what are you hoping what the results of all this will be and how it will benefit your communities, and who will take the role of ensuring the infrastructure of your communities if the LDCs are taken out of the system gas role, and the third question is, how do you see that transition period occurring? 337 MR. SCULLY: As far as maintaining the physical system and extending it in the northern Ontario communities, certainly that's the role of the utility and we would expect that to continue, that's their business and that's where they make their money. Just because they aren't supplying gas as they, themselves, have told us in the past, has very little to do with that. So I'm not at all concerned with that. 338 Are there going to be marketers knocking on everybody's door up north? They've already done it in at least three waves, I'm sure they'll be back, particularly, as Ian says, if we see the fair pricing scenario. Right now any marketer has got to look at a situation and say utilities selling system gas it's got hidden costs of storage, load balancing, gas purchase, administration, contract disputes, who knows how many things that are dumped over on distribution side and they don't show up in the cost of gas where they should be. I think when we correct that then we're starting down the road to a much better system and, in our minds, there would be no danger in terms of security of supply if the utilities were out of the business of selling gas. 339 MR. GEORGE: I guess I must have misspoke, I was thinking -- this is Roland George with Pervin & Gertz, again. I was thinking more specifically as to who would take the contracts for long-haul transportation to get that natural gas to the small northern communities. 340 MR. SCULLY: I have no worries about that. Direct Energy, Superior, entities we haven't even thought about yet will step up to the base and take those contracts, I think, or we'll have another business of people providing those transportation services to the end-use marketers. 341 MR. GEORGE: Thank you. 342 MR. HAUSMANN: Anybody else here want to speak to that? 343 MR. MONDROW: I may not agree on the contracting point. Ian Mondrow, sorry. 344 I just want to -- I think it's important, this has come up a couple of times now in passing, to distinguish between the provider of last resort and the supplier functions. There are ways to structure a provider of last resort function, whether that resides with the utility, the distribution utility, or the market. In the U.K. there is no, kind of, regulated supplier-of-last-resort entity, there are licensed positions on suppliers who bid for the right or the obligation to step into that function if it's required, and they're required to demonstrate certain upstream arrangements that ensure the regulator and customers that in the event of a supply failure there will be gas flow. And the system, as far as I know, has never been called on but it's in place. So this notion that you need utility supply in order to protect people if they're competitive supplier fails is, you know, with all due respect, I think, misplaced. We really have to isolate that issue and then address ways to deal with it, separate that in particular from this question of whether the utilities should be in the supply business. It's a completely different question. 345 MR. HAUSMANN: Tom, I guess you're next. 346 MR. BETTS: It's Bob Betts here. I noticed there are some seats available with microphones available. So if someone wants to move to one of those in advance, they certainly can. 347 MR. ADAMS: Tom Adams on behalf of Energy Probe. 348 Two questions, and I'll pull them on the record and then retire from the mike. One specifically directed at Gerry Haggarty, the question is as a relatively new entrant to the marketer community in Ontario, I wonder if you have any comments on barriers to entry for new marketers, things that specifically bear on the ability of new businesses to get into this area that may not prevail for the more established marketers. Any comments in that area would be appreciated. 349 Secondly, for any member of the panel which wishes to comment, I'm interested in their views on any regulatory barriers that impede the ability of marketers to offer to the small general service firm market service offerings that have price flexibility components in them that are not part of a structured, previously contracted price arrangement, like, for example, the Direct Energy stepdown model. I'm thinking of price models that may have spot pass-through for some component of the service, and my specific concern there is whether there are any comments from the panel with regard to the Code of Conduct for gas marketers, specifically the clauses 2.51 and 2.52 that establish, I think, in my reading of it, some limitations on the ability of marketers to offer these more flexible arrangements. If there are any comments from the panel on that, I'd appreciate it. 350 MR. HAUSMANN: Gerry? 351 MR. HAGGARTY: Gerry Haggarty, Superior. 352 Superior Energy Management has been in the natural gas market in Ontario for approximately two and a half years, so we are a relatively new entrant into the marketplace and are quite aware of and have experienced some of the barriers to entry that there are for a new market participant. A lot of the barriers that are there are not going to be just for new entrants, they are the same barriers that incumbent suppliers also have to deal with. 353 Credit is the most difficult part of this business. The credit required in order to purchase natural gas and all energy commodities in North America is very, very large. If you're going to establish yourself to be of a size that gives you the critical mass to be effective in the marketplace, the credit that you require is not in the millions, it's in the hundreds of millions of dollars, and so it makes it very difficult for a small participant to start up and to grow to the necessary size to be a true participant in this competitive marketplace. That is probably the largest. 354 The other barriers to entry that are non-financial are really around, can you get a proper rate of return for the risk that you are actually undertaking, and that is something that I think that this forum is trying to address. That we can get a level playing field, that we can get a marketplace that actually has a reasonable probability of a rate of return commensurate with the risk that you're taking, and if we do that you will see other large entities that will come into the marketplace because they have to be large because the credit requirements. 355 It's our understanding of the marketplace that we are starting to see some new entrants come into the marketplace, and I think in the next few months you're going to see more players coming into the natural gas market. That's sort of what our intelligence tells us, that there are some people coming into the marketplace at the wholesale level, at the retail level. And so they must be seeing that there is a possibility that they can make a go of this business or they wouldn't be spending the money and taking on the risk that is necessary in order to play in this marketplace. 356 So I think that the most important is to have a level playing field that people see an opportunity and they will come into the marketplace. 357 MR. HAUSMANN: Gordon? 358 MR. POTTER: Gord Potter, OESC. 359 Just to the second question. Two or three points to make to those. I guess one of the main barriers which I mentioned earlier is it's very difficult to provide innovation and different types of solutions because of the constraint that's put through how you bill for that service. So one of the main constraints which we see to providing more innovative solutions is the fact that we don't have a mechanism or, I guess, a consumer-accepted mechanism, for billing it. We could possibly bill ourselves, but as we mentioned, most people do not want to receive two bills, they want to receive one consolidated bill. So we're looking for improvements in that area to allow us the ability to come out of the box of the standard fixed-price-type offerings that most of us offer. 360 With respect to the code of conduct, the references -- I apologize I should know them but I'm not sure what those clauses state, but I assume it's somewhere. I think 2.5 had something to do with the record-keeping requirements, the regulatory requirements of keeping copies of materials in contracts, and for how long, and I guess some of the requirements around record-keeping. And those are, I guess, to some degree, a little onerous, in our view. 361 But I guess what the Board and what the industry has to do is balance those with what we feel, you know -- what level of consumer protection has to be in place. So definitely there is a requirement -- we certainly support consumer protection measures, to a degree. And we also feel that, as the industry has kind of matured and grown, we should, as an industry, be able to provide some of that regulation ourselves, self-regulation, to ensure that we have good business ethics, that we operate with consumer protection in mind for the small-volume-type customers. 362 To Gerry's earlier point -- and I apologize, in my slide presentation earlier, I guess I got caught up in the moment and missed a page. There are -- just to his point, in the last eight months, we've had three new entrants to this market, two of which are selling and three -- the third, which is just about to hit the streets, have done all their back-office stuff. So, you know, it will be interesting as we go through this, possibly, to hear from them as well as to what made their decision to come to the market, or what may have -- they saw as impediments to the market. 363 MR. HAUSMANN: Ian? 364 MR. MONDROW: Ian Mondrow, Direct Energy. 365 I also don't have the sections off the top of my head, Tom, I apologize. But I had assumed you were referring to -- and there is a provision in Ontario 200-02, as amended, the requirement to state a price per cubic metre in a contract. I don't think that provision has ever actually been put to the interpretive test, although there's currently a product that's recently been introduced that gives a variable price. So I guess we'll see shortly, not by Direct Energy, by another entrant, and I guess we'll see shortly whether that provision means you need a unit rate or not. It's not clear to me. 366 Gord has already addressed the billing issue, so I won't repeat. I guess I have one observation in respect of the new entrants, and we've heard and seen a few new entrants, as well. And this comment is meant not at all to cast any disparagement or, you know, kind of question the integrity of the particular new entrants that are entering now. But I think we need a market here with open and honest selling, where there's real value to be provided by retailers. 367 Now retailers currently provide price stability over a long term, five years, and that is obviously valued by customers. We have a lot of them. 368 To get beyond that, to provide more innovative products and services, and maybe appeal to the other customers who are still not interested in fixed prices, I think we need a system, a default supply regime, that admits of the development of those additional products, so there are other things that we can provide to customers. So, even if there are some new entrants now, I wouldn't assume that that doesn't mean that there are barriers. And we'll have to see how these new entrants do, and in what manner they approach the market. I think we have to be careful in our assumptions. We just have to wait and see what happens with those new entrants. 369 MR. HAUSMANN: Thank you. 370 I have two people on my list. If there's anybody else who wants to come up and express their views, please come up to one of the chairs with mikes, unless you're already there, and put your hand up. That's fine. So the first, I think, is this gentleman here who's just come up to the open mike here. 371 MR. GORMLEY: Bryan Gormley with the Canadian Gas Association. 372 I think -- I guess my questions, there are probably two, they could be characterized as consumer choice questions, and I'd like to hear the panel's views on this. 373 My first question is, if the LDCs exit the supply function, how are the consumers who have already chosen system supply as their option best served? I'm not quite sure why is it that those -- how do you envisage those consumers' choices being adjusted for? 374 And my second question is -- speaks similarly to consumer choice. If there's -- in the event that there is a third-party marketer in the system, or offering gas, and they, as an entity, fail or leave the market, without a system supply option -- you've mentioned, one of the panelists mentioned that there are options for covering off those customers, and making sure that they still get gas. I'd like a further explanation of what those options are. 375 MR. MONDROW: Ian Mondrow. 376 I think we have to be very careful about this assumption that system-supply customers have chosen system supply. I'm not at all persuaded that's true. I'm not at all persuaded that those customers really understand their choices; in fact, I'm fairly persuaded that they don't. And that comes from the experience of the questions that we get from, and the complaints we get from, people who have been marketed to, who really don't understand. So I think we have to address consumer education. Without information, you can't really make a choice. 377 Secondly, I'd like to refer to -- and there was a reference this morning to survey data that indicates that, and Enbridge and Union refer to this quite often, that indicates that customers want system supply as an option. I don't think if you asked anyone they'd say, No, I don't want an option; remove an option from me. The real question is what do they give up, if anything, by having that option retained. I think that's the question that we're here to talk about. So I don't think anyone can suggest fewer options is better than more options. The real question is does the default supply option, as it's currently designed, in fact present barriers to development of other options; and, if it does, what are the trade-offs? And that's the choice that we have to look at. 378 To your question, I guess, more informational in respect of what happens if a marketer or retailer fails, and how do you deal with that, well, there are a couple of obvious ways that spring to my mind. One way is to have the regulated distributor retain a backstopping function for that purpose, recover the costs of that, that -- well, let me back up -- so that the distributor retains that function. That the failing party should, at first instance, be responsible for any incremental costs incurred because of their failure, security postings deal with part of that. 379 To the extent that that failing party goes out of business or becomes bankrupt, obviously there's a collection problem, and there may well be incremental costs borne by the utility, if the utility's in that role. Who pays for that? Well, to my mind, users as a whole pay for that, delivery rates pay for that, and that's simply a cost of running a system where no one will be left stranded. It's a social cost, and there's no reason why that shouldn't be, as a matter of policy, recovered, to the extent they're incurred in delivery rates. After all, steps are taken to try to fix the failing supplier with responsibility. 380 Another option, which has been adopted in the U.K., is to put that service out to tender, and suppliers obligate themselves and demonstrate their ability to fulfill those obligations with their upstream arrangements, to step in in the event of a supply failure, and they recover whatever the costs of that are. 381 Again, the question becomes who pays for those costs? And is that service at a premium? Well, probably it is. You know, if there are people affected that can't afford that premium, then the system as a whole, consumers as a whole, should bear those costs. But there are ready mechanisms for doing that, and those are the two examples that spring to my mind. I'm sure there are others. 382 MR. SCULLY: Could I just add a few comments to that? Peter Scully from FONOM. 383 Presumably, we've got a few consumers out there listening to us today, and people are really concerned about, all right, my supplier fails and I'm going to run out of gas and freeze in the dark in Kapuskasing. I think -- I think we should all be intent on educating people that that physically just isn't going to happen; that the system is extremely fluid, that people can make gas supply contracts within minutes, that the gas is flowing and it will continue to flow. 384 What we're talking about is a contractual dispute, not the physical supply problem. If that was part of your question, we, on this end of the system, don't ever see it as a real problem, anybody in the industry. 385 MR. HAGGARTY: Gerry Haggarty from Superior. 386 Commenting further to Peter's comments is that, we believe that there has to be a default supplier, and currently the default supplier is system gas. But system gas is backed by a variety of contracts from producers. Enbridge and Union don't have their own gas supply, they get it from producers and that wouldn't change if you had a default supplier. There are still going to be the producer, you're still going to have the physical gas, it's just going to be who's going to administer it and what is the pricing of it? 387 MR. HAUSMANN: Julie? If you could identify yourself. 388 MS. GIRVAN: Julie Girvan for the Consumers' Counsel. 389 Ian, I'm just trying to better understand your position and especially the issues you've raised under the transition. And having been a part of the working groups in the late '90s, that was a big issue and it was an issue important to customers from all -- for all sorts of reasons but it was also a significant political issue. I'm just looking at, sort of, the market where we are today and envisioning that the LDCs would exit from system supply. And I'm just wondering what your position is in terms of allocating customers or how customers would be allocated to different marketers. And it's especially interesting in light of where we are in Ontario with two dominant suppliers, so I just wondered what -- if you can help me better understand Direct Energy's position as to how they would see customers moving off the system supply? 390 MR. MONDROW: Sure. Ian Mondrow speaking now. 391 You know, I think that's why the transition is important, and just again taking instruction from other jurisdictions with which I'm familiar and I'm sure there are many with which I'm not familiar. The first step is to get the supply function to an entity whose business it is to supply and put the appropriate regulatory controls around that supply including the supply price for the transition period. At the end of that period, that regulated price then is lifted and the customers that haven't switched from that supplier are served at a market-based price. 392 So, Julie, I think your question is really how do you determine who assumes that function? One model is to auction not the supply contracts but the customers. And it sounds a bit crass to say it that way. But the model is to auction the customers to suppliers who are willing to guarantee that those customers will get a regulated rate, and one model is the best regulated rate bid wins. Another model is to simply take in, I guess, a franchise area. So let's use Enbridge as an example just to pick on Dave Charleson and Dave Matthews for a minute. If you separate that function and essentially hope someone's going to come along and buy that company, that new shareholder then becomes the regulated rate provider, and so the regulation is lifted. So either way what you get is a change of ownership of the supplier. 393 MS. GIRVAN: Sorry, isn't that a medium step? I'm talking about the ultimate step. 394 MR. MONDROW: Well, I think the ultimate step is that supplier is not a regulated distributor whose costs aren't regulated, just their price. When that price regulation is lifted, they become essentially another competitive supplier. Once enough people have switched off what was the default supplier, and the regulator or the government or whoever is going to make the decision is convinced that there are enough supply options in the market to take care of customers through the forces of competition, then you don't need to regulate anyone's price anymore, and everyone becomes a competitive supplier. And you can do that cold turkey, which forces a bunch of people who are on default supply to all of a sudden make a choice, or you can do it through a transition mechanism where there is a regulated supply option in place for a time and that price is adjusted over time and those customers ultimately see, Well I can actually go over here and get a lower price even though it's not a regulated price and I'm going to do that. 395 MS. GIRVAN: When you say price is adjusted, you mean incrementally increased? 396 MR. MONDROW: Yes. One model is to increase that price. 397 MR. HAUSMANN: Anybody else up here want to speak to that? 398 MR. POTTER: If I could. Gord Potter from OESC. 399 Just further to Ian's points, I think -- I guess if you were looking also for -- at the last minute how it actually all happens, some other jurisdictions actually in cooperation with a very long consumer education program will determine some of those steps as Ian has mentioned as to who can provide that default rate, and then there is a very long period of time, 8 to 12 months where consumers -- there is an education program saying that as of this date, if you haven't chosen to make a choice, then you will be defaulted to whoever that supplier is that's agreed to serve that territory or that jurisdiction under that formula or that basic default supply structure. 400 So people, I mean to your point, you can't say you've got a month and a half to decide and take those customers and without their consent just force them over to somebody. But again we kind of overlook consumer education and communication, and that needs to go hand in hand with anything that happens. And there needs to be an a adequate time period in place and adequate information so that people have enough time to understand what's happening in the market. 401 And at the end that transition when the cut over happens, those folks that chose not to choose, go with that default rate because it replaces what's currently in place today. 402 MR. HAUSMANN: Okay. I have several other people. Yes, you're next. 403 MR. HENNING: Yes, thank you. I'm Bruce Henning with Energy and Environmental Analysis on behalf of Union Gas. 404 There are two things I want to bring up to this panel, one specifically for Mr. Mondrow in his statement regarding no economic rationale for the continued regulation. In one sense that presupposes that the end-state doesn't wind up being highly concentrated in the relevant marketplace, and in fact if you look at what's happening in many of these jurisdictions, what you see is a reconcentration within utility service territories of the marketing function. So what you wind up doing is substituting an unregulated entity that has economies of scope and scale for the marketing function for a regulated entity that has economies of scale and scope for the marketing function. 405 So I guess I'm wondering if, in fact, you have a concentrated market with barriers to entry, isn't that an economic rationale for continuing? 406 The other thing I just want to say, and I'll let you get to that, just while I have it here, with respect to the discussion that occurred regarding QRAM and making it almost monthly, there were comments made that there are lots of jurisdictions that have monthly movements of those prices. Those jurisdictions with which I'm familiar, in working in the United States on, are running away from those so fast it's rather amazing. The reason is that the customers in those jurisdictions got on the phone to the Governors, got on the phone to the public service commissioners and were absolutely irate when price volatility hit. 407 So I guess the question for those who are arguing to move to monthly movements on that is: Why would you force customers to do something that they don't want to do and are going to call the Ontario Energy Board and the provincial government if, in fact, they are subjected to that price volatility? 408 MR. HAUSMANN: Who's going to start? Peter? 409 MR. SCULLY: Peter Scully for FONOM. 410 I'm sorry, I didn't' quite understand the connection there. You're representing Union Gas in its -- 411 MR. HENNING: Energy and Environmental Analysis. We've provided submissions and are retained by Union Gas. 412 MR. SCULLY: Okay. I guess switching to a monthly determination of what the price really is, and that's what we're talking about, can create some political pressures if there was an extraordinary run-up in prices. But somewhere along the way we've got to tell the consumer this is the price, this is the market. In my opinion, he should, painful as it might be, or beneficial as it might be, some months, should be told: Here's where the prices are going, keep your head up. Positing and bowing to political pressure I don't think is too helpful in that sort of situation. 413 And as far as market concentration goes, if we move to some of the things that have been recommended here, I think we'll see a dilution of market dominance and that's why we should do it. Saying this is what exists now so let's not change is not an adequate answer. 414 MR. MONDROW: Ian Mondrow. 415 On the market concentration question or points, I guess, first, I mean it seems to me that if markets do, -- if markets are allowed to try to work, and they do in fact become more concentrated rather than less concentrated then we've got a problem, because now we've not an unregulated monopoly. In other industries when there is an unregulated monopoly, the laws of general application that pertain to competition step in and we have regulators. Indeed, in the U.S. you have probably the strongest such regulator in the free market world to deal with that, and we've all seen very publicly how that happens. So that's replacement of, kind of, dedicated rate regulation with regulating competitive issues, which is really what you're raising. So I don't see -- I mean, there's a mechanism for doing that. 416 Ultimately, if we have a market experiment or a market inertia and it fails and we have to return to cost-of-service regulation that's energy specific, then that's what will have to happen, but I'm not persuaded that that is what is going to happen. And I venture to say that you're not necessarily persuaded that's what's going to have to happen either, although I don't want to put words in your mouth. 417 I guess my point is it's a legitimate question: Let's see what happens. And if, you know, the U.S. anti-trust department can't deal with market concentrations in energy for some reason, then obviously we'll need a dedicated regulator, but that's not where we are right now. But it's certainly an issue that we all have to watch, absolutely. 418 In respect of monthly pricing, Alberta does, in fact, do monthly pricing. And I'd agree, I think, with what Peter Scully said, that the first thing you have to do is educate customers. 419 I wonder how many of those irate American callers are calling because they don't understand why their gas company is now changing their price so often. Do they really understand who their gas is from, and why the price is now changing? If they want stability, are there not people from whom they can buy stability and pay the cost associated with the risk of providing that stability? Isn't that what the competitive market that we are talking about here is all about? So might they not like it that their incumbent utility, Consumers' Gas, as Enbridge is still referred to in Ontario, changed their price? Yes, they might not like it. But do they really understand why that happened? And I venture to suggest that they don't. 420 I guess the last point on monthly pricing and price stability is, I wonder how many of those customers realize that, under a regulated cost-of-service model, they pay those costs anyway; it's just that they get them all later on, in a rate rider, as we call it. I mean, is that any better for them, that they actually don't see the price change, to Peter's point, Peter Scully's point, and they just get the charges later on, and, Oh, my rates went up again. And I would suggest that is not better. In fact, it is inimical to educating customers enough so they can understand what their true choices are. And, if they come with Direct Energy for five years, they're not going to get an adjustment later on. If we're out of the market, we eat that risk. I think that's the point. 421 MR. HAUSMANN: Gordon? 422 MR. POTTER: I did, but Ian covered my two points. 423 MR. HAUSMANN: I have several people on my list. 424 MR. HAGGARTY: A quick comment. Gerry Haggarty from Superior. 425 And Ian touched a bit on the point that customers don't like when their prices go up on a monthly basis, and I'm sure that all the calls come in when the price goes up, not when it goes down, and if the price isn't going down for three months you have irate customers as well. 426 We have in this industry dealt with -- on numerous occasions over the years, dealt with retroactive pricing, and customers and the OEB and the utilities and the marketers all get a lot of calls when retroactive pricing comes into effect. And that is just as much of an evil as having prices on a monthly basis go up or down. And you're never going to have customers happy when prices are going up, but at least they should know they're going up. 427 Under the mechanisms that we have now, if a customer wants to switch from system gas over to a direct-purchase plan, it takes two to three months in order to effect that change of your supplier. And you would have a customer that sees the QRAM currently at one price and says, Well I'm going to stay where I am, only to find out that a week later, a new QRAM comes in and their price goes up dramatically. And they say, Well, I'd like to switch, now, and we say, Sorry, we can do that for you, but it's going to take three months. That's a problem. 428 So if there are more frequent price changes, and transparency of that price, then people would be assisted a lot more in making their decisions. 429 MR. MONDROW: Ian Mondrow. 430 In the U.K., when the customer's price goes up and they don't like it, they go find another supplier. 431 MR. HAUSMANN: We have a gentleman here, and then behind you, and then Mr. Fournier after that. 432 MR. CHARLESON: Dave Charleson, Enbridge Gas Distribution. I actually have two questions for Ian and then two questions for the panel. I'll start just with the two for you, Ian. 433 This is a kind of a bit of a follow-up to your presentation earlier this morning, and some points that you've alluded to, as well, and some of the responses that you have given as part of the panel. 434 This morning you talked about, if customers elected system supply, that there should be some sort of positive election for that choice of system supply. Just -- I guess the question is, how long would you see that election being for? Would you see it being fixed contracts, similar to what the marketers offer? And then how often would you go about having that affirmation of the election for system supply? 435 The second question I had for you made reference to contracting for transportation, and how Direct Energy enters into multiyear contracts. I'm just wondering what the duration of those contracts typically are. 436 MR. MONDROW: Sure, Dave. It's Ian Mondrow. 437 First, I think we have to distinguish between electing a supplier and fixed pricing. I appreciate your comment, but lest there be any doubt, I'm certainly not, and we're certainly not, proposing that along with the election comes a fixed-price contract. I think what a customer would elect is to stay on default supply, and under default supply rules, which they would then be fully advised of by a follow-up letter providing them with the terms and conditions of service in the same way that we have to provide our terms and conditions of service, but they are not the same terms and conditions of service. 438 How frequently, then, if there's no fixed term, would customers essentially have to renew, which is what we have to do? And I throw out "annually," but I guess you'd want to look at, you know, maybe what a market norm was, what the average duration of retail contracts was, if what we're trying to do is get default supply on parity with retail pricing. But, I guess, our preference would be annually, given the number of customers that are now coming up for renewal on an annual basis. 439 In respect to the duration of our own supply contracts, you know that's commercially-sensitive information, but they are multiyear contracts. Are they 30-year contracts? No, they are not. 440 MR. CHARLESON: Dave Charleson again. Would they be 10 years? 441 MR. MONDROW: More granular than that, I can't get. 442 MR. CHARLESON: So then I had two questions for the panel as a whole. 443 As Will mentioned this afternoon, we do believe that we have a well-functioning market in Ontario today, and other than Georgia, where basically migration to direct purchase was legislated, are you aware of any other jurisdictions where direct purchase has been adopted as -- to the extent that it has been within Ontario? 444 And then the second question I put to the panel: Have your organizations done any research on the cost consequences to consumers in Ontario of the positions that you've taken? 445 MR. HAUSMANN: Cost consequences of your positions? 446 MR. MONDROW: Have we done any analysis; is that your question? 447 MR. HAUSMANN: Who wants to start with that? Gerry, start with that. 448 MR. HAGGARTY: On your first point, I'm going to defer to Ian and Gord, because they deal in more jurisdictions than we do, so I'll let them comment on that. 449 On the second point, we have not done any surveys or analysis on the cost consequences. But what I can tell you is that our customers right now have -- are all enjoying lower-than-current market prices because prices are very high. And as recently as two years ago, we have customers that are paying 22, 23 cents per cubic metre, as compared to utility prices that are 28, 29 cents right now. So they are enjoying the benefits of that. 450 Equally as important is that our customers have not experienced volatility over the term of those contracts, over the last two, three, five years, because they know what they're paying, they are on a fixed price, and they don't have retroactive charges. So there is a benefit that they're getting currently enjoying lower prices, but also they have price stability. 451 MR. CHARLESON: I guess perhaps -- it's Dave Charleson again. A point of clarification. 452 I'm talking about cost consequences. It's not so much the differential in the fixed-price offering versus the QRAM price, it's more the cost consequences of basically segregating out all the functions that are currently provided by the utility and any incremental costs that may be driven by having multiple providers doing something that's currently managed in a -- by a single entity. 453 MR. HAUSMANN: Ian? 454 MR. MONDROW: Ian Mondrow. 455 Dave, I assume if you asked questions about other jurisdictions and switching rate, you know -- I don't -- but I'm assuming, then, that you know that the answer is we've got one of the highest switching rates anywhere. And that's great to know. I'm not sure that means we don't have to do any more to get to the end-state that we want, because we're not there yet. But that's good to know. That's the honest answer I'll give you. 456 In respect of cost consequences, no, we don't have any studies that Direct Energy has prepared that we can share at this point, but if we were -- we have some -- we do survey other jurisdictions. I mean, OFGEM in the U.K. says that their system, which is probably the most liberalized energy market in the world, has resulted in customer savings, and they've actually quantified that and do so on an annualized basis, as I understand it. And I'm happy to try to dig some of those up and share them with whoever is interested. 457 Gerry made the point that our customers have saved over the last number of years, and our customers who are currently expiring are coming off 16-cent rates, and that's the commodity portion. 458 Now, I think you are really addressing, as you've clarified, efficiency. I guess that's the point I'm trying to get to. A true market is supposed to be the most efficient way of pricing services, not only the commodity, but the services wrapped around that commodity. You know, I don't think anyone's advocating -- to the extent that you allocate costs between delivery and supply, if supply costs go up, delivery costs go down so you know there's no net change if you do proper cost allocation. 459 If the market determines that it is efficient to have services centralized, that's how it will develop. So, for example, if we need to try to save -- as a market we need to try to save some of the efficiencies that currently result from a utility bill to all delivery customers, which retailers want to piggyback on because duplicate bills raise costs overall. Then if you recognize that billing itself doesn't need to be a regulated service and the utility goes out and finds a service provider then we go out and find the same service provider and make our own arrangement and their fixed costs are spread across all their clients, it's not clear to me why we'd have less efficiency in a proper functioning market. 460 MR. HAUSMANN: Gord, did you want to speak to that? 461 MR. POTTER: Gord Potter, OESC. 462 I can assure you that other than some of the information that's passed, especially over the last couple of months, the studies and the information that most of us have access to, we haven't done any of our own surveys or our own analysis of which markets do what. So I can't provide that, Dave. But again, I think with respect to the cost consequences, I mirror my peers comments, I think that one of the things which I mentioned earlier today is that part of the exercise here is to determine what needs to change and what the magnitude of that is going to cost. Or if there is a magnitude of cost versus what the benefit will be or what net benefit will be gained by the consumer and the decisions that we make through here. 463 MR. HAUSMANN: Okay. I've got several people still on the list here. We've got 10 minutes left, so let's try to be efficient in our questions and answers. 464 The first lady here. 465 MS. ALLAN: Yes, Judy Allan. A-l-l-a-n. 466 Question for the panel: We keep coming back to the issue of cost allocation. 467 MR. HAUSMANN: Can you tell us who you represent. 468 MS. ALLAN: I represent myself. I am a veteran of these wars. 469 MR. HAUSMANN: Oh. Fair enough. 470 MS. ALLAN: Coming back to the cost allocation issues, what I hear you saying particularly around the discussion of subsidies is that if we had somehow resolved the cost allocation issue, we could really get a market-based rate for natural gas, and I think that that's never going to happen. The cost allocation process is a regulatory process and if it matches what really needs to be in the market, and Ian I think you've touched on this with your comments about margin, but -- why are we not having a discussion on the system-supply side of market-based rates for gas the way we are on the storage side? I think particularly of the amount of resources that would go into discussions of cost allocation when it comes to trade-offs. I don't see consumers getting much benefit of having 20 lawyers in this room talking about cost allocation. 471 MR. MONDROW: Ian Mondrow. 472 I'd agree with you, Judy. I think that's a good point. I think certainly when I've been talking about getting the right cost to the delivery function and the right cost to the supply function, I've been kind of addressing this interim state, and to some of the comments earlier this morning -- you know, I think there is a bit of a sense of we've got a shot here. If you go too far, no one's going to accept it, so we have an alternative position, effectively, and so the more detailed cost allocation questions are the alternative. But to your point I agree that that really begs, perhaps, the bigger and more interesting questions. 473 In that respect, getting costs right includes things like having the retailing protocols that apply to competitive suppliers apply to utility supplies. So I talked for the need for customers to elect, the need for customers to get their terms and conditions of supply, the need for customers to reaffirm and then re-elect or renew their choice, all of which bear a cost, in exchange for which you get clarity and consumer education. So those are cost elements that aren't in the current pie to be sliced up and allocated, and I think talking about those is important. 474 But ultimately, in going to a market-based rate as opposed to trying to tease out the costs is the most efficient way to go. And ultimately, if you eliminate default supply, that's what you're going to get, you're going to get a market-based rate by definition. So how do you have to cost default supply in the interim to get there more quickly? Market-based rates, absolutely. 475 Just to be clear, to the extent that there is a profit component in there and you don't want the utility to make a profit on gas, there are other ways to allocate that portion of the revenues. You put it back in delivery rates and give it back to the market -- 476 MS. ALLAN: That's the debate that's going on around storage. 477 MR. MONDROW: Yes, exactly. Exactly the same debate. 478 MR. HAUSMANN: Anybody else here or does that cover it? 479 Mr. Fournier, I think you were next. 480 MR. FOURNNIER: Just a quick question. It follows up on what Dave Charleson was after. I appreciate you don't have -- you haven't quantified what the impact would be of establishing this level playing field, in other words, adding more administration, contract management and so on costs to a system supply price to bring it up to near what you have to absorb and pay. But my question is: Am I correct that if that process is done, segregating these costs and putting them on the system supply customer's bill, does that not mean that the allocation of the balance of the distribution rates to customers would result in lower rates, for example, for my members, the industrial sector, who currently are paying some of those administrative costs today in their bills? Would that be the result? 481 MR. HAGGARTY: Gerry Haggarty from Superior. 482 Certainly we would support that if costs are properly allocated, and that costs that are reflective of providing the service for the commodity for system gas, if they come out of the distribution rates, the distribution rates should go down for everyone. 483 MR. HAUSMANN: Anybody else? 484 MR. HAGGARTY: I think that's the correct answer. 485 MR. HAUSMANN: Okay. The person beside you at the open mike there. 486 MR. GRUENBAUER: Jim Gruenbauer for the City of Kitchener. 487 I have a question about the evaluation criteria for the panel that I see presented in their paper. Do you agree with them, is there anything missing, and if you were the members of the Board, how would you weight those criteria in evaluating either the three options that are in front of us or any other options? 488 MR. HAUSMANN: Who would like to start. They're looking for what those evaluation criteria were. 489 MR. GRUENBAUER: There are seven of them. 490 MR. HAUSMANN: What page were they on? 491 MR. GRUENBAUER: Page 41, I think, on the discussion paper. I don't have it in front of me. 492 MR. BETTS: While they are looking for that, would you care to make any comments - this is Bob Betts - would you care to make any comments about those assessment criteria? 493 MR. GRUENBAUER: Well certainly the issue of price, I think, is a subset of the second criteria, but I'm kind of looking at this from a perspective of the customer. Surely we've all got to be here to serve the customer and perhaps the question boils down to can we develop a model or a structure that we can give customers what they want at the lowest possible price, recognizing that not all customers want the same thing. That's how, from 10,000 feet, I try and look at these things and I -- I'm like most of the people in this room, I've been here from 10 to 15 years, and in its simplest terms perhaps that's the benchmark that I, myself, would use. If it doesn't start with the customer, I think you're looking at it from the wrong perspective. 494 MR. SCULLY: Can I just - Peter Scully from FONOM. When I looked at the discussion paper and that table on page 41, I did my own rescoring. And looking at option 1, the status quo, my comment to myself was that four of those pluses, the first three and the one in line 5, should disappear. So my scoring when it came down to that, was status quo, 2; hybrid, 5; exit gas system 7. I left the other ones the same. So I see some clear indications -- I can't see how leaving things the way they are enhances the transparency. We're dealing with the transparency problem now. Staying the same doesn't do anything for it. 495 MR. POTTER: Gord Potter, OESC. Just some general comments. 496 I agree with the fact that we need to certainly keep the consumer foremost in our mind in what we do, because that's why we're doing it. But I also wanted to just respond in respect to some of the criteria. 497 I think that some of the key aspects is that we keep the consumer in mind, but the consumer has to pay for what it is they consume, and that artificially subsidizing, or providing them lower rates at the subsidization of other customers who are not using the service, or the service is the same, bears discussion. 498 With respect to some of the criteria, number 6, the proposed changes are capable of being implemented without undue disruption. I think that goes back to our earlier discussions, and most of the discussion this morning. Whether we can make the change easily or not shouldn't be a criterion for whether or not we do it. It should be whether it's right or not, and if the benefits of making the change outweigh the costs of it, on that basis. So I think that's the best I can provide to you. 499 MR. HAUSMANN: Ian? 500 MR. MONDROW: Ian Mondrow. I think it's implicit in a number of these, but maybe one that can be made more express is the objective of shifting the investment risk from ratepayers to investors. I think there is a little bit about risk management in here, but maybe not as clear as that. That would be shifting investment risks from ratepayers to investors. 501 Gerry? 502 MR. HAGGARTY: Gerry Haggarty, Superior. I guess my first observation is that the exit system gas got the most pluses, and so that means that there has to be a lot of merit behind looking at that as a viable option. 503 And option 1, the two question marks that are there, number 4, the ability to manage risk, some of the proposals that we made that have the utilities do more frequent balancing and have -- be on the same level playing field with respect to balancing as the direct-purchase customers would reduce that risk, and make that risk more transparent to everyone. So I think that would move that -- if we did that, then that would make option 1 even a better option than it is today. 504 MR. HAUSMANN: Thank you. 505 We're out of time, but we do have -- I have one other person on my list, if you're willing to bear with us for another five minutes. Let's hear from him, I think, just behind Mr. Fournier. I don't know who that is but... 506 MR. MAIER: I'm Jeff Maier with MX Energy. We are one of the new entrants in the marketplace, unmentioned earlier, but I do appreciate your acknowledging there are some other marketers here. 507 While we are in general agreement with some of the comments made earlier, there are a number of areas where I think we would reserve judgment, and we will definitely submit some comments in this process, which is very refreshing and welcome. I'd like to address three brief areas, though, where we may differ from some of our marketing colleagues. 508 A question was raised earlier about concentration. I think it's a very legitimate question about the risks of concentration, particularly from an auction process. In fact, I think an auction process could be quite regressive, depending upon how it's structured. It could just recreate regulation under another name, since, of course, to auction something you have to auction a product, to determine what that product is, and if it is, in effect, to squelch competition, and possibly creativity and development of new products. 509 So I would say that I think we'll amplify on these remarks, but concentration is a legitimate concern. I think the only way in which concentration can be avoided is to move to a truly open-access, open-switching format, something that doesn't exist now, as you know, but which does exist south of the border in many of the jurisdictions in which we're active. 510 I should note for the record that MX Energy is active in 25 utility territories in the United States, as well as in Ontario, which I think is somewhere up -- close to the largest number of any marketing companies. So we do have quite a bit of experience in area. 511 The second point I'd like to respond to is a question that was raised earlier by Mr. Fournier regarding profits. I don't think you really got a straight answer, and I think it's important that he do so. The question was, I think, a fair one. 512 If, suddenly, we have a profit element introduced into the pricing equation which didn't exist in the past when utilities were simply passing through prices, how can this be of benefit to the consumers? After all, that is presumably what we're all here to do, to look after consumers' interests. 513 I think the reason the question has to be addressed straight on is that it's important to recognize that we're really mixing apples and oranges here; that while the utilities historically have simply been on a pass-through pricing basis - and it's true that, if marketers were to offer the same volatile commodity product, it would be on a cost-plus basis - in fact, marketers have been offering something unique and different from the utilities and that is a fixed-price, flat-price product, which is designed to avoid volatility. It's quite different. 514 I think the best analogy is between floating-rate mortgages and fixed-rate mortgages, and I hope in your further deliberations, you bear that in mind. Imagine a world in which there were only floating-rate mortgages. Well, it would be very difficult for new entrants to come in and offer a better pass-through floating-rate interest-rate product than the utilities themselves; however, banks, fortunately for our economy, years ago, developed fixed-rate mortgages. And that's what marketing companies are doing here. It eliminates volatility. It may not always be the best price, there may not always be savings, but there is definitely -- it definitely serves a purpose. 515 That brings me to my third point, which is this question of savings which keeps surfacing here. It comes up in all of our discussions among regulators and utilities in the States. The question -- and among consumer groups. The question is always, have there been savings? Well, there have been savings, there's no doubt about it. But the only reason there have been savings is because we've been in a rising-price environment. Had the price been going down, as it has been in interest rates, for example, over the last 10 years, the answer would have been no, that there haven't been savings. But that doesn't mean that there still isn't a legitimate price for the product. 516 Businessmen like to have price security; they like to be able to budget their energy costs. Consumers like to avoid having this volatility in their lives. They all experience it at the gas pump. There's no reason they have to experience it in their energy bills at home. So I think it's important, when we talk about savings, that we realize that savings may not be the objective, and that the objective may be to reduce volatility, and that may be a far more important objective than savings. 517 In that regard, and I'll conclude here, my own preliminary assessment of this, and I caution, it is preliminary, I would like to ponder this a little further, but my own preliminary assessment is that I would welcome it if the utilities were to offer a fixed-rate product. In a world of competition, I don't see how one can possibly argue that utilities should not be able to offer exactly what competitive marketers can; however, if the utilities are going to offer a competitive price product, then I think it's imperative that they deal with some of the cost-allocation issues we're talking about. It wouldn't be fair, for example, for marketers to have to price a competitive-price product, including all sorts of things like billing costs and storage allocations and costs of volatility and costs of credit, which is one of the earlier -- one of the panelists mentioned, are extremely serious, and for the utilities to have all of these things subsidized to be able to avoid including credit costs, the costs of capitol, to be able to avoid include billing costs and other things in your models. I think if the models are truly valid and reflect the actual costs of doing business, I, for one, would welcome the competition presented by a utility-fixed-rate product. 518 Again, we're amplifying these remarks. Thanks for listening. 519 MR. HAUSMANN: Thank you very much. 520 Mr. Betts, Mr. Chair? 521 MR. BETTS: Thank you. 522 We did have a couple of questions, but we are aware of the time, which I know you'll remind us of anyway, but I think Ms. Chaplin would like to at least ask the questions and perhaps we could ask the panelists to reply in their final submissions to those questions. 523 MS. CHAPLIN: Thanks. Cynthia Chaplin. 524 There have just been a few issues that have come up through the questions and in this morning's presentations that I think we'd be interested in making sure -- I mean, I'm sure you were intending to address these, but just to put it on the record. 525 One is to sort of respond to an issue that was raised in the discussion paper and that's regarding not just infrastructure and transportation contracts but actually sort of long-term security of supply of the underlying commodity, and whether or not marketers, who, you've acknowledged, may come from the market, whether or not they are really best placed to provide that long-term security of supply of this essential service. 526 Another question, this was something that was asked -- I believe, Mr. Mondrow spoke to in the clarification question stage but I think bears further examination, and that's where exactly load balancing sits in this model of separation, and sort of a clear exposition of what sort of load balancing might be done by the distribution entity, to what extent load balancing is the responsibility of retailers, and how they may interact. 527 And then maybe a final point. This may actually be a more minor point. But in the model where the LDC exits from the system-supply function, would you see an appropriate evolution be that the supplier takes over the billing responsibility? 528 Thank you. Those are my questions. 529 MR. BETTS: Thank you. 530 MR. HAUSMANN: Thank you, Mr. Chair. 531 Yes, we have a question back here. 532 MR. STACEY: Yes. Jason Stacey, and I'm representing Sythe Canadian Holdings. Just one question. 533 I don't think it was touched on, but regarding default supply, I'm wondering, if there was a maximum volume or size eligible for default supply, would that help the Panel in a transition? And if we're out of time, I can just leave that. We sort of see that in the electricity market, where the smaller use customers have fixed rates available in a transition period. 534 MR. HAUSMANN: Something to consider. 535 MR. STACEY: Yes. 536 MR. HAUSMANN: Thank you. 537 All right. We're going to break for lunch, reconvening at 1:30. There is a lunch being served out the foyer out here. And we will we will reconvene here at 1:30 sharp. Thank you very much. 538 --- Luncheon recess taken at 12:20 p.m. 539 --- On resuming at 1:30 p.m. 540 MR. HAUSMANN: Good afternoon, ladies and gentlemen. 541 While people are getting seated, two reminders. For those of you who perhaps have not seen, or at least ticked off your name against the sign-in sheet - it was next to the name tags in the north room, it is now out here in the foyer, it's a blue sheet - if you would please be sure to tick off your name before you leave today. 542 Secondly, there was a plan to get transcripts, electronic transcripts, to everybody, except we can't do that if we don't have your e-mail address. So if you could be sure to give either the Board Staff, or the court reporter, here, your e-mail address, if it is not on the listing. If you have not provided it already, if there's any doubt in your mind, please check. Thank you. 543 So, we have a cast of thousands at the presentation table here this afternoon, so we may as well roll right into it. Who's going to begin this morning -- this afternoon? Please go ahead. 544 For those of you who, perhaps, were not here this morning, we have presentations, we have -- after each presentation, brief questions of clarification from the Board, and then after the break we get into a discussion. 545 MR. GEORGE: My name is Roland George. I'm with Pervin & Gertz Inc. Just to situate myself in the business, Pervin & Gertz Inc. is an international energy consulting firm with offices worldwide, and basically, without going into our long mission statement, we provide advice to the energy sector. 546 Now, the importance of this is that we provide advice to every segment of the energy sector, and all those parties interested, so we like to think of ourselves as independent and objective. 547 Now, the Conference Board of Canada, which is a think tank, has commissioned us to do two papers in their series on regulation in Canada, more specifically, two reports on understanding natural gas regulation. And that program has been funded, I believe, by the Canadian Gas Association. 548 The reports have been provided to the OEB. They're entitled "System Gas in Regulated Markets" and "Infrastructure Investments and Capital Renewal". 549 Now, the Conference Board, even though these papers are preliminary -- we haven't talked to everybody we've been wanting to talk to on these topics -- they have given us permission to present the preliminary results in draft format. 550 I know it's a long kind of disclaimer there, but the Conference Board did want us to indicate that it was an independent assessment. 551 When I say bundled services, or unbundled services, it's strictly in the context of the natural gas commodity, within the regulated services, or not. I know we can have different definitions of what bundling or unbundling means, but I'm just separating those regulated services from the natural gas commodity, in this context here. And it's interesting to note that most of the small customers, when we reviewed all the jurisdictions, or most of the jurisdictions in Canada and the U.S., are still on what we've been calling system gas, while most of the large-volume customers buy directly from suppliers. That's basically across -- not consistent, there are jurisdictional differences, but big picture, I'd say that's the case. 552 Also, what I'd like to mention is that, I think, at this stage in the game in the structuring of the natural gas industry in North America, there's absolutely no question whether or not the -- what I call the large-volume customers will be buying direct. That seems to be what their preferences are. That seems to be where their expertise lies, especially in those companies that have large components that are energy costs. 553 Most of my comments here are more focused on what I would describe as small-volume customers, what used to be called core markets or residential -- small commercial, institutional and those types of clients. 554 Part of what we looked at in these papers was the societal role of the utility with respect to gas supply, and I'll elaborate on that a bit later, but basically, the natural gas industry is an integrated industry continental-wide, and the molecules coming from the well-head have to be delivered in a continuous stream, through a continuous, unbroken stream of infrastructure, to the burner-tips of the end-users. So that final link in the chain is quite important, and that's on the infrastructure side, that's met by the LDCs. 555 Now, there's been a lot of debate in North America since the mid-'80s as to what constitutes appropriate services that would be regulated and others that wouldn't be. The forum here is exactly in line with the discussion that we've been having for nearly 20 years in this industry. And also what's important is that the various jurisdictions are different. In time, where the industry is at is different, so one size cannot fit all. 556 And also, you need continuous monitoring of this industry, as it goes through rapid change. I'm thinking more specifically right now of that very strongly-changing portfolio gas supply at a continental basis. There are many basins, not just western Canada, but most of the conventional basins in the U.S. are in decline. That doesn't mean we're running out. Quite the contrary. There is a large resource base on the continent. We have unconventional sources of gas, we have frontier gas, such as the arctic, and also, if we look broader yet, we have a whole planet to draw on and that's through the link of LNG. 557 The point I'm trying to get across here is that the industry is changing continuously, and so what applies 20 years ago, 10 years ago, even 5 years ago, might not be an appropriate structure for the industry. So continual monitoring is required. 558 Now, we have reviewed many of the various jurisdictions in terms of current practices and trends, and what we've noticed is just about every jurisdiction in North America definitely has system gas. It's considered an important part. It doesn't matter which jurisdictions in the past have viewed this to try and see if they could get the distributor out of that role. But, basically, most of the legislators and most of the regulators have kept the LDCs in their roles. So looking at the past, and trying to project into the future here, basically, we come to the conclusion that utilities will mostly continue to provide system gas. 559 Now, the process that the Conference Board had is not exactly the same as the one that we have here in the Natural Gas Forum, so I was asked specifically to look at certain questions, some right in line with some of the questions being debated here, some that were -- are considered important but might not have been touched upon. 560 The first issue is what's the value of system gas in the markets? Well, basically, I think the end-users -- and again, most of my comments are for the small-volume customers, core market, not the large end-users, because I think that's a given that they will get their gas directly, or most of them will, anyways. I think the end-users have voted with their feet; most of them have either chosen or have remained on system gas. Now, many of them have gone to direct purchase off the retail markets. We see that in the U.S.; we see that in Canada. And in Canada, we have a much higher proportion than most of the jurisdictions in the U.S. So here, the customers are speaking, they're saying, System gas we like. They're also saying, Direct gas, the gas provided by marketers, we like, also. 561 So I think in terms of a competitive market, we should be listening to the customers, because if we're putting the customer at the focus -- at the center of the decision, well, I think they're sending a very loud and clear message. 562 So what's the impact of system gas on the competitive marketplace? Basically, it comes down to competition. Now, the workings of the marketplace can produce all kinds of different results. It's not necessarily a competitive market result. And theoretically, economists will say competitive market will maximize benefits to society. But the workings of the market will also give you monopoly, will also give you oligopoly or monopsony, all terms economists like to use to indicate somebody out there has market power, and that's the antithesis of the benefits that a competitive market can give. 563 So depending which industry you are in, even though there's this nice theory out there, you have to look at the real world, see what the constraints are and deal with those on a case-by-case basis. 564 Now, what's happened in many of the jurisdictions that I examined, there was a very, very high concentration in terms of direct gas sales by marketers. One or two marketers will dominate in a particular jurisdiction. Are these heaping problems? Maybe, maybe not, but I think what is required here is analysis. What's required is to look at the facts, analyze the situation to explain why we have such a concentration, why most jurisdictions have one or two dominant marketers in that franchise area or in that market, and if there are barriers that prevent others from entering to have new products provided by new providers, those should -- those barriers, and should be looked at with a view of maybe bringing them down. But the workings of the market basically is producing what could potentially be market power. In that type of situation, having a regulated source of supply, such as system gas, can provide a competitive check. 565 Is it necessary? Theoretically, it could be not, but in the workings of most of the jurisdictions it seems as if it's required to provide that competitive check. 566 Now, what happens if we don't have system gas and we have very high concentration, we even have marketers saying that that's not necessarily a good thing, having this concentration, because there's market power involved. If you have market power involved, then that company or that group can exercise -- maybe increase the price, limit the offerings, and that is not necessarily in the best interests of consumers. 567 So providing a regulated source of supply can provide some type of competitive check on unregulated entities. And if you're a marketer and you're looking and concentration and you're looking at public policy, well, public policy won't look at very favorably having a group of consumers, these are voters in our democracies, that market power can be exercised -- in other words we have them pay more than would be the result in the competitive marketplace. 568 So at the end of the line, maybe the end game is re-regulation of the marketers this time. So I don't think that would be in the interests of any of the players out there. I think an efficient way, in terms of providing a competitive check that is regulated, where there is oversight, that gives confidence to the marketplace that there is nobody out there exercising undue market power, system gas is one of those methods that can be used. 569 So what's the role of the utility in all this? Well, we can debate what constitutes bundled services, what constitutes unbundled services, but I think from my previous remarks, system gas role is definitely one of the roles that a utility can provide. It has provided successfully in the past, it is continuing to provide currently, and for no other reason than it is being used successfully, if it's not broken, why fix it? 570 Clients' understanding of supply choice, that's another key issue here to regulators that the marketplace has struggled throughout the regulation process in terms of the natural gas commodity in North America. And basically it comes down to the role of people is not to buy natural gas. The interest is not there. They've got other things to do like living their lives. So when natural gas becomes very pricey and they have to take note and look at it, then they'll -- there will be an education process that they'll willingly go into, but even there, the component of natural gas in the overall budget of a family, in some of the low-income families that can hurt quite a bit, but in many of the families, it's simply -- they don't want to look at it. They just want it as a given. Water comes out of the faucet, their furnace comes on in winter. 571 So the understanding of supply choice is not great in the small-volume sector of this industry. And this, despite an educational process that in some jurisdictions has been mandated by the regulator that the utilities have gone into, that the marketers have tried to push and say, Hey you've got an alternative here, you don't have to buy your natural gas commodity from a utility. And despite all those efforts, the understanding of supply choice is not all that great. 572 What that means though is I don't think we should interpret that as being an argument for supply choice or against supply choice. I think it's just the way this segment of the market lives its life. 573 Now, system gas and utility gas acquisition. Basically, if you don't have a system gas rule, you have your pipes in the ground, you have your compressors, you have that physical infrastructure and you have, basically, no incentive to go out there and ensure for your franchise area the supply of natural gas, except that the only way that you make money in this industry in the regulated utilities is if natural gas molecules come through. 574 Now, if you're far from supply sources, who is going to take responsibility for the long-haul contracts required to bring the natural gas to your franchise? We've seen, since the Enron collapse, what we used to call the mega marketers, they are not there. They're not willing to take -- they're not creditworthy, they can't sign long-term contracts in those cases. The smaller regional marketers or retail marketers, I learned today that some of them do take infrastructure positions, I'm not sure for how long. But if we're looking at a rapidly changing supply portfolio on the continent, you do need major investments, depending on the studies that we've looked at, INGAA or the NPC we're talking about over $100 billion dollars in the reasonable long-term horizon that will be required in investments in infrastructure. 575 And those infrastructures have to be subordinated by long-term contracts or strong equity positions, more likely long-term contracts. Why? Because you wouldn't be able to finance them. If you can assure the market, and in this case it's the shippers that sign the long-term contracts, then you can get it financed, then you can build it, then you can get it through the regulatory processes because the market is indicating that there is a need here. 576 So who can sign those long-term contracts? Basically, not very many people can. Creditworthiness is king in this industry. If you don't have it, you can basically -- can't do business. 577 Producers have been signing, they don't particularly like signing long-term contracts on long-haul pipelines, but they had to step up to the plate because nobody else would. What happened in the late '80s and the '90s in the various jurisdictions, regulators and legislators did not see the need for the utilities to sign for long-haul pipelines or long -- or large capacity additions to the franchise area because we were in a supply glut. We are -- we were in a supply glut for a quite a while, but now we're not in that situation. The supply/demand balance is much tighter and you need somebody to sign a long-term contract. 578 So producers signed on Alliance Pipeline out of western Canada, signed on the Northern Border pipeline expansion out of western Canada, they signed on Maritimes and Northeast Pipeline out of Atlantic Canada. So when we look at all of the various large pipeline capacity additions, we needed long-term supply contracts to be signed and the producers came up to the plate. 579 Where were the LDCs in here? Basically, because of that short-term focus in the natural gas industry in North America, they were basically discouraged from signing long-term contracts because of fears of stranded assets and such but -- and then the electricity -- electric companies were seen as being creditworthy and able to sign for the long-haul pipeline capacity, but we've seen what happened to them in the last few years. Basically, a lot of banks or owners have [inaudible] gas-fired electricity generation. 580 When we go through down the entire list of who could potentially support long-haul or large-capacity additions, LDCs are definitely one of them. And if they don't have the system gas rule, there's much less of an incentive to be able to sign those long-term contracts to guarantee or to help bring supply into their franchise areas. 581 I'll jump over the next -- we can go over it in the discussion, and you do have my papers in the record here. So in terms of potential policy considerations, definitely it's our opinion that system gas has a role in this industry and the most important thing here is to have a fair and efficient level, playing-field, providing customer choice. This is direct gas, system gas, that should be ... 582 And of course, as with everything else, the devil is in the details. We have to look at cost accounting, billing, load balancing to see if there are barriers. That would prevent this fair and efficient, level playing-field from occurring. I've mentioned that the utility role in promoting infrastructure is important, and one of the disincentives to getting LDCs from signing on the dotted line for long-term contracts is basically that, after the fact, disallowances that can occur in the regulatory proceedings. And one way to reduce that would have -- in various jurisdictions, the regulators set the guidelines, the parameters, something like that, that would give comfort to the LDCs to be able to plan for the future. 583 I think I've run out of time, so I'll leave the other infrastructure comments. 584 MR. HAUSMANN: Thanks, any questions for clarification from the Board? 585 MR. BETTS: I have one, and it relates to the point that you made, and I think it came up earlier with the previous panel, that we, here in Ontario, anyway, perhaps in Canada, seem to have been more successful in terms of the migration from the system gas supply to direct marketers. Did your survey come up with anything that would indicate what caused the difference between us and what's been noted in the United States? 586 MR. GEORGE: Well, I think one of the factors has been noted by the previous panel, and that would be political will. The other one that didn't quite come out, I think, is regional differences; for example, in Alberta, we have -- the distributor, ATCO Gas, went in front of the Alberta Energy Utilities Board and said, "Look we're not making any money on this pass-through, there is a risk of disallowance, and we have a willing buyer for our regulated system gas", and that was Direct Energy. Now, that's a special circumstance, in the sense that you're right in the middle of the largest producing basin in North America, so security of supply is not a concern, you had a willing buyer, in this case, Direct Energy, and you also had a situation where prices were being flowed through directly. 587 I was in a situation, as a consumer on the ATCO Gas system, of paying higher prices for my natural gas commodity than in Quebec or in Ontario, which is thousands of kilometres away, because we did not -- the regulator wanted direct pass-through of the market signal. So we were jumping up and down and all over the place and I must admit, at that point in time, I considered maybe buying or signing for a longer-term contract. So that's one special circumstance where you don't have a utility with a regulated system gas role. 588 Did I answer your question? 589 MR. BETTS: I think, in that example, you were saying the price signal is maybe a significant factor. 590 MR. GEORGE: In the Alberta example that I just gave, security of supply was not an issue at all. And, also, the price signal going up and down basically gave no advantage to the gas supply procurement; in fact, gas supply procurement for ATCO was very small, because they did not engage in financial derivatives, they did not engage in a diversified portfolio supply. It was basically buying spot, so they did not need a large gas procurement function. But somebody that's several thousands of kilometres away -- you have to ensure that there's long-haul transportation, storage, so security of supply might become an issue in that case. And also, in those jurisdictions where the prices were not going up and down and sideways, as my markets gyrated, then there is more of a role for a body such as a distributor that can engage in financial derivatives, that can have a diversified portfolio of supply, to minimize that -- or reduce somewhat that volatility. 591 MR. HAUSMANN: Just checking, can everybody hear at the back? Not very well, so we have to speak up, speak into the mikes and speak up. 592 MR. BETTS: One more question. 593 MS. CHAPLIN: Cynthia Chaplin. You commented that producers have been signing long-term contracts to underpin infrastructure, and commented that the LDCs stepped away from that. Do you see a difficulty with that development? Is that something you feel is not in the best interests of consumers, for example? Or ... 594 MR. GEORGE: Well, if you only have one type of market participant that will sign up, you will get what happened in many of the producing basins. Now I'm shifting over to the producing basins, because there is an analogy with the consuming regions here. In the mid-1990s, western Canada did not have enough capacity to get to its market, and yet it had this huge overhang of supply. The producers left on the table, or lost, billions of dollars, because their basin price was very low, because they could not get to market. So that indicates that you have inadequate infrastructure, somebody's going to suffer. 595 The same thing occurs in the consuming region. We see that in New York city every winter. When it gets very, very cold, the price just goes crazy, $60 per gJ, and that's in U.S. dollars. So having different market participants, with different priorities, to sign up for infrastructure is important, because we will get that situation where the producer didn't step up to the plate, and nobody else did, and they lost billions of dollars. 596 MR. HAUSMANN: Thank you. Who is presenting for Enbridge? 597 SUBMISSIONS BY MR. CHARLESON: 598 MR. CHARLESON: I'm Dave Charleson, I will be presenting on behalf of Enbridge Gas Distribution. 599 Enbridge Gas Distribution is pleased to have the opportunity to provide input to the OEB's Natural Gas Forum. The company looks forward to continued opportunities to represent the needs of its customers as the process moves forward. We believe the input of stakeholders is a critical consideration to any policy-setting process. 600 In this presentation, I will be highlighting some of the key areas from our September 20th submission on system gas. I won't be able to address all of the submission, as there are far too many aspects to cover fully in a 15-minute time period. I will also not be looking to address any of the presentations that were made by this morning's panel, or comments of the other parties. I will be doing this in the more formal submissions during October, but I am more than happy to address questions on these areas, as part of the panel discussion later this afternoon. 601 The areas that I'm go to focus on in this presentation are, first, to give a perspective on the current market environment within Ontario; then I'll talk a bit about the role that system gas plays in the market; I'll then summarize the merits or shortcomings of the options proposed in the consultant's papers; and then I'll provide Enbridge's recommendations regarding the appropriate option to consider. 602 Overall, the gas market in Ontario is functioning fairly well, with system supply operating as a component of that market. Direct purchase has had a great deal of success, when we compare it to other jurisdictions. 40 percent of customers have elected to make their own supply arrangements. However, there are also 60 percent of customers who have chosen to use system supply for their commodity. Today, there are limited options available to customers. System supply provides another alternative for these customers. 603 The QRAM processes being used by Enbridge and Union have evolved over the past few years. They now use a highly formulaic and mechanistic approach that provides appropriate price signals to all Ontario gas consumers. It also takes into consideration a means of recovering historic variances, that limits the impact to ratepayers, while also avoiding retroactive charges. Both companies continue to work towards harmonizing these approaches, to the extent feasible. 604 Enbridge currently requires its bundled direct-purchase customers to balance their contracts at the end of the contract term, not at multiple points during the year. This provides a great deal of flexibility to direct purchasers, or their marketer, to optimize the cost of their delivers. The utility does not have the same flexibility for its system gas customers as it must balance overall demand on a daily basis. 605 The market has seen a shift toward a short-term focus over the past few years. With a large supply overhang, there was no sense of urgency to look towards the more distant future. We are now in a situation of tight supply and higher, more volatile prices. This demonstrates the need for someone to systematically take a medium- and longer-term focus on supply and the infrastructure to move that supply. 606 The energy market in Ontario faces significant challenges today. The government's plans to replace its coal-fired generation capacity by 2007 will require a marketplace that can move quickly to accommodate the changes that will be necessary to support this objective. Natural gas can and should be in a position to be responsive to these needs. Disrupting a well-functioning market by dramatically changing the roles played by the various parties in the industry is not in the best interest of the province at this time. 607 In looking at system supply, system supply by the LDCs involves both the acquisition of supply for customers that have elected to rely on supply from the utility and supply to manage the overall demand of the distribution system on a daily basis. Load balancing is an important service provided by the utility and is one that is best served by the continuation of a system gas as an alternative for customers. The removal of system gas as an option would limit the volumes of gas required for load balancing and make load balancing more difficult, and likely more expensive to perform. 608 As indicated earlier, the LDCs must balance the total load of the system, including the requirements of its system gas customers on a daily basis. 609 The ongoing availability of system supply provides the LDCs with the ability to make commitments that underpin the development of new infrastructure. The LDCs have a vested interest in the long-term viability of gas markets in North America by nature of the investment they have made in their distribution systems. 610 System supply is an alternative that Ontario consumers want. Surveys of residential customers, both on system gas and direct purchase, show an overwhelming desire for this alternative to be available. In the most recent survey conducted on behalf of Enbridge, 75 percent of customers indicated they would oppose any change that eliminated the system gas option. 611 System gas provides a regulated benchmark for customers in Ontario to compare retail offerings to. Having an option available that is approved by the OEB provides transparency to the market on pricing, and gives customers the degree of confidence in making retailer choices. 612 In the consultant report, three options have been identified for system gas. I'll now take about each of these in a little more detail. 613 Option 1 or the status quo system gas, as it was labelled, is closest to the current environment in place today but suggests some changes. This option appears to recognize that the market is working quite well. Providing certainty regarding the continuation of system gas will allow the LDCs to effectively conduct long-term planning and contracting for the development of new supply and infrastructure. This will assist the market as a whole. 614 The recommendations to work towards a harmonized QRAM process and ensuring the appropriate costing of system gas have a great deal of merit. The LDCs have already been working with stakeholders towards greater harmonization of the QRAM process. With regards to the allocation of costs to system gas, it's important that only appropriate costs are allocated so that customers receive proper price signals and it is not artificially inflated. The manner in which balancing is addressed also needs to carefully assess the benefits of any change to the current practices against the impact to customers. 615 Option 2 appears to recommend the continuation of the QRAM system gas offering for a finite period of time. After that time this would no longer be available. It also makes similar recommendations to option 1 regarding the QRAM process, allocation of costs, and balancing. Option 2 also recommends the introduction of alternative gas offerings, including fixed-price offerings by the LDC. 616 Enbridge believes the introduction of these fixed-price offerings may help to enhance competition within Ontario. It provides more choice for consumers; consumers have indicated a desire for an LDC fixed price; an LDC fixed-price offering can also be designed and implemented without disrupting the market; it also provides a regulated rate comparison to other fixed-price offerings; and encourages innovative by marketers to structure and position their offerings. 617 Similar comments that I made that for option 1 would apply to the other aspects of option 2 that were mentioned. 618 Option 3, a complete exit from system gas by the LDCs does not seem to be a realistic alternative. Enbridge is opposed to this option. 619 This option does not take into consideration some critical aspects of the gas market in Ontario. It does not address the desire of customers, whether direct purchase or system gas to have system gas as a supply alternative that is available to them. It does nothing to addressed need for long-term planning within the gas industry. LDCs have a long history of playing this role, and given the limited number of LDCs in Ontario, it makes sense for them to continue to perform this function. The removal of system gas would create the need for someone else to assume this function, likely introducing higher costs to consumers. The security and reliability of supply would be continually at risk in the absence of the LDC providing this function as it does today. Load loss and market penetration losses would result which would increase overall system costs. 620 There is no evidence that sufficient benefits would exist to offset these and other impacts. 621 In assessing the options being considered, the use of evaluation criteria provides an important means of making an objective assessment, and we applaud the consultants on taking this approach. In applying evaluation criteria to any assessment, it is necessary to determine the relative weighting that should be given to each criteria as it is unlikely that they are all equally important. It is also important to ensure that the evaluation criteria is complete. 622 In the case of the criteria used in this report, there are three key criteria that have not been included in the evaluation. The preferences and desires of consumers should be a critical factor to any evaluation of public policy. The need for long-term planning has been recognized by the consultants in the report. The ability for options to support this activity must be considered when evaluating them. And the impact of the gas industry must be considered when evaluating alternatives. The ability to operate in a secure and reliable manner should be key. 623 By including the missing evaluation criteria and adjusting some of the assessments from this report, Enbridge believes that this chart provides a more representative assessment of the three options. 624 Given the relative merit of the three options, Enbridge recommends that an option that combines elements of option 1 and option 2 is the best option for Ontario and Ontario ratepayers. 625 The OEB should make the continuation of system supply using the QRAM process a permanent alternative for customers. There should be a further examination of the manner in which fixed-price offerings can be provided to enhance the competitive market. Harmonization of the QRAM processes and ensuring that system gas contains appropriate costs should also be worked on. The appropriate allocation of costs to system gas needs to allow for the input of all stakeholders. 626 This model would support the long-term planning required to ensure the ongoing viability of the gas industry in Ontario. It also meets the expectations of Ontario consumers to have system gas available as a choice. The introduction of new alternative offerings also provides the opportunity to enhance competition within the province, which is to the benefit of all market participants. 627 As I stated at the outset, the market is functioning well today. Consumers have choices available to them that they desire. The market may be enhanced by introducing additional alternatives like fixed-price offerings. There are also benefits to continuing to evolve the market and all participants need to continue to work together to achieve this. 628 Current market conditions highlight the need to ensure that long-term planning is being done for the gas industry in Ontario. The LDCs are best positioned to perform these functions. This cannot be done without system gas. 629 Disrupting the market by removing system gas, especially given the challenges facing the energy industry in Ontario in the months and years ahead, is not in the best interests of the residents of the province. We need to work together to ensure effective planning and coordination of new power markets, and continued growth of the gas market, so the necessary infrastructure can be in place on time and so fair market prices will result. 630 I look forward to addressing any questions you may have during the panel discussions, or now. 631 MS. CHAPLIN: Thank you. Cynthia Chaplin. 632 Mr. Charleson, I'm just picking up on a couple of points. This is not meant to be exhaustive, but just a couple of areas where I think we could benefit from some further explanation. You've commented that under option 3 you see a risk that security and reliability of supply would be reduced. Could you explain sort of how that would result, if the LDCs exited system gas, and there were a variety of marketers offering the commodity in the marketplace? 633 MR. CHARLESON: First, I think you said security and reliability would be reduced -- 634 MS. CHAPLIN: I had understood that to be your position. 635 MR. CHARLESON: That it would be reduced. 636 MS. CHAPLIN: That it would be reduced under option 3, and I'm asking you to explain why that would be the case. 637 MR. CHARLESON: Under option 3, because you no longer have someone in the position that's able to do more of a long-term planning, and look towards the development of new sources of supply and infrastructure, it increases the risk in terms of, one, the volatility of prices, and also, the development of new infrastructure that may be required to bring in the capacity that's needed to meet the growing requirements within the province. So I think it's more the loss of that long-term planning focus. There's somebody in the position to take that long-term planning focus, increases risks to kind of the security of supply and reliability. 638 MS. CHAPLIN: So it's your position that the LDC is the best placed -- is best placed to do -- to make those long-term commitments, both to infrastructure and the commodity. 639 MR. CHARLESON: Yes, given the long history of the LDCs performing that function. There is a great deal of experience in doing that. I think the practice of the LDCs over the past 150 years for us has helped to develop the -- kind of the effective market that we have today, and we see continued use of that experience as being in the best interest of the province. 640 MS. CHAPLIN: Thank you. 641 MR. BETTS: I can't help but ask this question: First of all, I can certainly recognize the position that Enbridge is taking with respect to what it believes to be the benefits to the ratepayers in choosing to do this. Let me ask you a little more tricky question: What's in it for the shareholders? Or can you describe how the shareholder benefits by continuing to provide this service? Or perhaps there's even the other side of the same coin, which is, is the shareholder providing this benefit and, in fact, in some ways, at its own cost, or in some other detrimental way? 642 MR. CHARLESON: I think what's in it for the shareholder is the shareholder has made a significant investment in the infrastructure that we've got in place in our distribution system. Having a natural gas market that's viable, and is viable for the long-term, helps to ensure that they retain the value in those distribution assets. I would say that's the principal focus behind it. We want to see the gas market remain viable. We want to see natural gas as an effective source of energy for consumers in the province, which keeps our pipes full. By keeping our pipes full, it helps to ensure that the shareholder is able to earn its allowed return on those assets. 643 MR. BETTS: Thank you. 644 Anybody else? That's fine. 645 MR. HAUSMANN: Thank you. 646 TransCanada is next. Who is going to be speaking? Is it Jim? 647 SUBMISSIONS BY MR. McPHERSON: 648 MR. McPHERSON: Thank you very much. 649 First of all, my name is Jim McPherson. I'm with TransCanada. I've just been in Ontario for one year, so a fair amount of this process is new, but I thank you very much for including TransCanada in the forum, and we look forward to being a participant here. 650 With Roland talking about -- a few minutes ago, he mentioned consumers just want to know that water comes on when they turn the tap and the furnace comes on in the winter. Well, having lived in Alberta my whole life, with the exception of the last year in Ontario, I can ensure that we would like it on in July and August, as well. 651 Because I am new to Ontario, I talked to a whole bunch of new people, and a fair amount of people that I talked to do not know TransCanada. So the first few slides here -- and I will be ever so quick because I know a fair amount of people have seen these ad nauseam, but I'll go through that. Just to let you know that TransCanada has a significant interest here in Ontario. 652 The interest today with the Natural Gas Forum is, new infrastructure requires long-term contractual commitments, including system gas that we're talking about here today. That infrastructure has to be supported by somebody taking out a contract. All natural gas options for Ontario should be looked at, and I'll get into that in a few minutes, the different supply choices that people from Ontario can have. And finally, TransCanada does provide a significant, reliable, low-cost gas transportation to the good people of Ontario. 653 I promise to be very quick. TransCanada has 41,000 kilometres of wholly-owned pipelines that stretch all the way from the gas-gathering fields of western Canada all the way to Boston, through our Iroquois pipeline, Quebec City, through our partially-owned pipeline, TQM, partially-owned pipeline going to New York City, Iroquois, and recently, we have announced that we are acquiring gas transmission north, which is on the west -- western part of North America there. And finally, TransCanada is very excited about the provision of LNG into the Ontario market via a joint venture we have with friends at Petro-Canada in Quebec, as well. 654 Our power assets are fairly significant; 4,700 megawatts is what TransCanada owns, and that's the equivalent of meeting the needs of 5 million average households in Canada. Interestingly, in Ontario, we have 1,698 megawatts, which is 7 percent of the total peak demand here in Ontario, so it's not just natural gas pipes but certainly power that TransCanada supplies to Ontario. 655 Currently, TransCanada's integrated system, and that would include our main line and service that we take from Mr. Isherwood on Union, as well as Great Lakes, has the capacity to deliver about 5.2 Bcf of gas here into Ontario. TransCanada also, as I mentioned earlier, transports about 650 million a day into TQM, and again, gas flows down into New York City and the Boston market area from here. 656 The TransCanada impact in Ontario, I won't go through all of this, but significant would be that our 8,000 kilometres of pipeline are all basically big-inch pipe, delivering these very large amounts of gas to Ontario, as well as some $64 million worth of property tax, spread out throughout all those communities that I had shown before. 657 So that's the end of the advertising campaign for TransCanada. Now we'll get into the serious stuff. 658 Gas supply. So TransCanada spends a significant amount of effort looking constantly at natural gas supply, and where it's coming from, where it's going and the demand for that natural gas. So as you see on our prediction here that goes out to 2015, the western Canadian sedimentary basin, I'll get into that in maybe just a minute, but you sort of understand from this slide that the north and LNG are two very significant new areas of natural gas supply that will be available to the market from the period now until 2015. There is certainly enough gas. 659 The traditional North America supply basins are now mature. This isn't just western Canadian, it is all the basins. However, western Canada will continue to be a very stable supply of natural gas as we move forward, but as I said in the earlier slide we're going to need additional new supply for North America infrastructure. And the three key issues that we would focus in on that new supply, of course, would be, first of all, the McKenzie Delta supplies, Alaska supplies, and finally LNG supplies. 660 And LNG, of course, struggles with -- putting the infrastructure in place because of people's perception that they don't want LNG facilities near them. There's some 40 LNG proposals out there in the market today, I've worked on some myself and it is a struggle. However they will come to fruition, and in Canada we have a good likelihood in Quebec or St. John, New Brunswick or Nova Scotia in adding this. And this will add to our supply here in Ontario. 661 Now, our friends from CAPP and Brian from BP I believe are talking tomorrow and they're probably in a much better position to delve into the real supply issue, but this talks about new supply and new infrastructure. So these long-term contracts required for this future infrastructure will be made. As Dave has mentioned, the producers have done it previously, marketers were in a position previously, perhaps they will come back into play, industrials or power generators will also be able to sign contracts to get this infrastructure in place. 662 So as an example, a power plant that needs 100 million a day of natural gas and the pipeline infrastructure isn't there, you have a 20- or 25-year horizon and deep pockets, so those people will be able to do that as well. And finally the LDC system gas providers, which Dave and Roland have both talked about, will play a significant role in helping with that infrastructure commitment. 663 So as we look at Ontario in a little bit more detail, it's obvious to everybody in this room that there's significant gas demand in Ontario today and there will be continued demand as we go into the future, the off coal being just one of those scenarios. So Ontario is in the lucky position to have a number of supply choices, certainly TransCanada's northern Ontario line provides a significant amount of natural gas into the region, and we currently have some 230 million a day of excess capacity into what we call the central delivery area, or Toronto, that can be provided without any new infrastructure. 664 I had mentioned LNG the slide before, and I think what is significant when we think about infrastructure in the Ontario market area is to recognize that should LNG come in from Quebec -- and there are two proposals, one is our friends at Enbridge and Gaz Metro and Gas LeFrance, and alternatively is the TransCanada/Petro-Canada combination. Both in Quebec, both on the St. Lawrence seaway, both proposing approximately 500 million a day of new gas supply, which is not insignificant. We would both believe that those projects have a very strong chance of coming forward. 665 Now, once those facilities, the LNG facilities are in place, they will -- the gas will flow back into Ontario and be available in Ontario, and it will change the way that we look at infrastructure in Ontario and where the gas flows back and forth. So it's not an insignificant item that we should be thinking about. 666 So we're going to assume that the LDCs continue to provide system gas service, so we are supportive of that, that the LDCs have that and the role specifically is about the infrastructure issue because of the long-term horizon and the planning. But it is important when they obtain upstream transportation, they consider all three of these potentials that we had talked about, and really key from our standpoint is the evaluation process for these -- these options should, in fact, be extremely transparent so people know how the choices are made and what the outcome would be to the average consumer, that these aren't taken lightly. 667 They should include the factors such as minimum contract term, care of provisions for subsequent renewal of the capacity. And it could very well be that one of the things that the Ontario Energy Board might want to consider when it thinks about the -- if system gas is backing up facility expansion and long-term contracts, the OEB may want to give some consideration to establishment of some sort of the process that is transparent where the guidelines are recognized by everybody and you can do this evaluation and understand why the need for incremental infrastructure. 668 This may assist Ontario consumers also to get the best bang for their buck, if you will. 669 So on this slide here, it's just a very quick example. So the example here says, right today, if something was to happen, there's 230 million a day on TransCanada so if the -- if that is contracted up for something brand new, versus contracting on Vector-Union, it could mean $23 million one way or the other to consumers. So I don't want to dwell on this because there's many other examples that we could use, but it just shows that depending upon which way transportation is contracted for, it can have a significant impact on the consumers in Ontario, thus we need to have a transparent process. 670 So in conclusion, TransCanada has a significant commitment to Ontario with our assets that we've committed to this marketplace in both power and electricity. We believe the LDCs should also consider play options when they're looking at new long-term infrastructure. Western sedimentary basin, there's no doubt about it, it's a strong basin, it will get northern gas connected to it to McKenzie, it will get Alaska gas connected through it, and the infrastructure that now is in place in TransCanada's world as the basins start to mature will be refilled with frontier gas. 671 The LNG coming the other way will also ensure that Ontario has a very stable supply of natural gas. Evaluation processes, as I've said before, must be transparent. We should utilize existing pipelines before we build new pipelines, although us pipeline people like to build pipes for any particular reason. And TransCanada is certainly here long-term and we're here to help and assist as best we can and again. 672 We thank you for allowing us to be part of this process. 673 MR. HAUSMANN: Any questions? 674 MR. BETTS: No questions, thank you. 675 MR. HAUSMANN: So our last presenter is Mr. Isherwood. 676 SUBMISSIONS BY MR. ISHERWOOD: 677 MR. ISHERWOOD: Good afternoon. I'll get started here. My name is Mark Isherwood, my title is Director of Acquisitions for Union Gas. I'm responsible for upstream commodity, upstream transportation and, unfortunately, upstream regulation as well. My purpose today is really to share Union's views of system supply in Ontario. I'm going to take the first ten minutes and Union has retained Bruce Henning from EEA to speak a bit on a few issues as well. 678 I'm going to stick to my presentation which I filed about a week ago. Given the ten minutes, I will only talk to you about a few slides. I'm going to leave this slide up on the overhead. It summarizes and is a good capture of Union's overall position. 679 Now, Union believes that LDCs should continue to offer in supply, and it's really supported by, really, four different planks. 680 The first is customer choice. Customers want Union Gas to provide system supply. 681 The second, and we already had some discussion about this this morning and this afternoon, the future North American supply/demand balance is going to be tight, both currently and in the future. We believe LDCs have and can continue to play a very key role. 682 The third point is Union Gas has very significant infrastructure investments in Ontario, close to $4 billion. System supply provides LDCs with a means of influencing customers' choice towards gas. 683 And our fourth point is Union -- sorry, the Ontario core market does not currently have the depth, I guess, to see the total exit of LDCs at this point in time. 684 Our view, subject to a couple of caveats, is most closely aligned with option 2, as presented by ICF. 685 If everyone has the presentation in front of them, I'll just give you the slide number, but otherwise I'll just talk to a few things that were in the presentation. 686 Slide 6, we had two graphs. The first graph showed total volume -- sorry, shows a distribution of customers by volume from direct purchase and system. It shows clearly 80 percent of the volume is now direct purchase in our franchise and 20 percent is system supply. That's heavily weighted, obviously, by Mr. Fournier's industrial customers, large industrials. 687 The second graph shows the profile by number of customers, showing about 40 percent on direct purchase and a little over 60 percent on direct purchase -- sorry, on system gas. 688 On slide 7, I recently did some customer research in August, and I was pleased to see the closeness in the Enbridge results and our results. Two different surveys. When asked if customers would agree that Union Gas should continue supplying natural gas, clearly 75 percent said they would agree or strongly agree. When asked if Union should offer a one-year fixed price, 62 percent agreed or strongly agreed. And what was interesting was, when offered the two choices, which option would you take, 53 percent chose the current QRAM process and 37 percent went to the one-year fixed price; and for those with a calculator, 10 percent didn't know. 689 In terms of slide 9, I want to now address the policy areas. The ICF report talked about six different policies, and I'm just going to talk to a couple of them this afternoon. 690 In terms of Union Gas's QRAM, it went through a fairly major overall as part of our last rate case. It's currently less than a year old; it was implemented in January of this year. 691 In that revamping, we actually made some significant changes. First and foremost, we eliminated all triggers. So every quarter, we automatically change both the price, as well as the deferral account gets cleared as well. And there are no triggers. Our old methodology had triggers; our new methodology does not. It happens automatically. 692 In terms of retroactive charges, we went through a fairly key point in our history a couple of years ago where we had significant retroactive charges. Our new methodology is all prospective recovery over the following 12 months, and that was to align with customer comments on our former policy. 693 We also took the opportunity to align with Enbridge in some areas, and the one most noted is we adopted the 21-day market strip which puts both the Enbridge model and the Union model on the same footing. And it's our belief that there's probably more alignment as possible, if that's the direction the party wants to go. 694 The fourth thing that we did, actually, is we asked for Board approval and received Board approval to develop a rate rider. Our existing billing mechanism would not allow us to have rate-rider flexibility. We expect that to be ready by spring of 2005, and that will allow us to have a cost-of-gas line that is different than the line that would be used to recover any deferral balances, plus or minus, so that would be available in 2005. 695 Overall conclusion: Our QRAM is state of the art, it represents industry best-practice, and is definitely automated and mechanical. 696 In terms of cost accounting, slide 13, Union's gas supply admin. charge recovers the appropriate costs associated with providing the service. It's allocated the costs that represent our costs in providing that service. And a good test that we always go back to is, to the extent that we stopped providing gas-supply service, would those costs go away. So it definitely captures those costs and is both proportional to the amount of system gas we provide. 697 The danger we see in adding fictitious costs, or costs that are not directly linked to our costs of providing the service, is two-fold. Two things could happen. 698 The first is that, to the extent we add a bunch of costs and divide by number of customers to get a new, higher admin. charge, there could be an incentive for the utility to try to maintain market share or even grow market share just to get cost recovery; or alternatively, there would need to be a mechanism to be able to try to retroactivity true-up any imbalances, either plus or minus, from those in the forecast. We think both of those approaches are not founded. 699 Page 16, in terms of load balancing, again, in our last rate case, Union proposed and received OEB approval introducing a load-balancing service. We may not have communicated that as well as, perhaps, we should have. The intent of that, really, was to align system-supply load balancing and direct-purchase load balancing. It applies to Union's southern customers, both bundled-T and ABC-T. And we've gone away from the once-a-year balancing to a three-point balancing process. 700 Then we'll come into full play, starting November 1 of this year. What we were trying to implement through the service is a recognition that Union Gas really has three key control points to balance our system; it's March 1, March 31, and, in the fall, October 31. The new load-balancing proposal has the direct-purchase customers and system customers balancing both to the March 1 proposal, or a control point, and also to the October 31 or September 30 control point. 701 The third control point is really the end of March, and that's a point where we want to make sure that enough gas is still inventoried to take care of a late winter, whether it's March or early April. 702 Union Gas had proposed a March park proposal, which was really an insurance-type mechanism, that was not supported by intervenors and was ultimately not approved by the Board. But Union Gas will continue to provide the load balancing for both the direct-purchase and system customers for March and early April, and that will be done primarily through spot gas, if we have colder-than-normal weather. 703 Moving on to the end-states, page 19, option 1, the status quo, the ICF consultants actually describe the three scenarios relative to the policy statements. Our view in terms of QRAM as it relates to option 1 is a new and improved QRAM that's certainly formulaic and certainly automatic. We do agree that we have a deficiency by not having a rate-rider capability, but we'll have that by spring 2005. We are supportive of the finding that more uniformity between Union and Enbridge may be desirable as well. 704 We also believe that option 1 is supported by customer choice where customers support the utility role. In terms of load balancing, it is our view that the new load-balancing service that's just being implemented definitely aligns system and direct purchase in terms of activity and costing. 705 In terms of option 2, I said earlier that it's Union's view that we are mostly aligned around option 2, subject to one caveat. 706 On page 38 of the ICF report, the statement that QRAM would be standardized and system gas would be guaranteed for some finite period, if not permanently, I think Dave had mentioned Enbridge read that as being finite; we sort of took the opposite approach and read it as being permanent. 707 So to the extent that option 2 involves a permanent adoption of system gas, then we are definitely aligned with option 2. We would be interested in looking into a one-year fixed-price offering, provided it's consistent with Board policy. 708 In terms of option 3, Union Gas does not support the LDC exiting system gas at all. We would consider it to be inconsistent with customer choice. It's inconsistent with the market structure in terms that the market structure would not support the LDC exiting at this point in time. It's not consistent with the need to develop further infrastructure and overall natural gas supply, and would not allow Union Gas the opportunity to influence customer choice. 709 Just to conclude, page 24, our view is there is a role for the utility in system supply supported by customer choice, infrastructure requirements, our investment in the province, and the core market having limited depth at the current time. 710 I'll turn it over to Bruce Henning to make a few final concluding remarks. 711 SUBMISSIONS BY MR. HENNING: 712 MR. HENNING: Thank you, Mark. 713 I promised Chris that I would do this in less than three minutes, so I can name that tune in three minutes. 714 My name is Bruce Henning, and I'm with Energy and Environmental Analysis Incorporated, sometimes referred to as EEA in the trade press. We provide analytical services to producers, pipelines, sulphur distribution companies, power generators, energy marketers, infrastructure developers, hedge funds, and the whole variety. We also have done a number of studies on the natural gas market, some of which you may be familiar with. We were the chief analytical contractor for the National Petroleum Council's study on natural gas. We authored the INGAA Foundation study on North America and pipeline storage infrastructure requirements and issues of delay; the AGA Foundation study on natural gas and energy price volatility that was provided to the Department of Energy and the impact of growing power generation demand on gas and local distribution companies. 715 So with that perspective, then, I just wanted to highlight a few points that are in the submissions which were posted on the Board's website. 716 One, as we said before, we are a tight supply/demand balance. Technology means that it's going to stay that way, we are going to continue to have a tight supply/demand balance. There is gas resource out there that can be developed and is economic to develop, but it's going to require infrastructure to access that. When we go through and look at the balance by the time we get to 2020, what we call "frontier gas supplies," which includes deep water gas, Arctic gas, coal bed methane development, as well as, and very importantly, LNG, we're going to need more than 50 percent of our gas supply from those areas and not from the traditional, so to speak, declining and mature basins. 717 Now the problem is that the development of those supplies is the timing of that is fairly uncertain. The location is going to be a little bit uncertain. So it's very important for Ontario to be able to have a diversified portfolio looking at those gas supplies. In TransCanada PipeLines' own through-put forecast says that they're going to be declining by 1.5 Bcf a day between '03, '04 and '08, '09. So you're going to have to supplement western Canadian sedimentary basin from these other sources. 718 And the LDCs are in the position to do the kinds of contracting that's going to be needed to have that diversified portfolio. I'm going to follow up briefly on Ms. Chaplin's comment when asking about producers. Yes, producers do sign contracts, but their objectives are going to look a little bit different. They're going to be looking to try to minimize the total cost of bringing gas into a market area. As a result they may not be optimizing the development of infrastructure in the market area that will facilitate liquid trading and will allow for the kinds of operations in a marketplace. 719 In other words, I agree with the discussions that, in fact, having a little extra capacity in market areas is probably a good thing for the operation of a market, and if you're relying on producers, you're probably not going to get that. As a result, we do think that you need to continue to have the LDCs and they're going to be very well suited to sign those contracts. 720 The other point I wanted to make is regarding the status of competition. We touched on this briefly. Right now, in order to even consider eliminating the regulated market function, one would have to be able to conclude that a workably competitive market either exists or will exist in the future. And right now the evidence is really kind of sketchy. If you look at the other jurisdictions and recognize Ontario has done very well, second only to Georgia and to Ohio in terms of participation in the marketplace by residential and commercial customers, in all of the other areas you've got higher participation, but when you look at those areas you find that, in fact, it is growingly concentrated in terms of the marketers. 721 So as a result, if you don't have a workably competitive market it's appropriate to continue to have cost-based regulation. In fact, the existence of that cost-based recourse service, if you will, to use the pipeline model in the United States, there we have a recourse service that's regulated that allows for innovative service offerings in negotiated rates to be offered to other customers. It's the recourse service that prevents the exercise of market power by the unregulated market participants, and so it's a good thing to have that out there and then you can still have all the innovation and other things going forward provided that the viable recourse service still exists. 722 I guess that's my three minutes. 723 MR. HAUSMANN: Any questions? 724 MR. BETTS: No, thank you. No questions. Oh, we do have a question. 725 MS. CHAPLIN: Cynthia Chaplin. 726 My question is for you, Mr. Henning, following up again on this contracting issue. If I could just get you to give me maybe a little more than your three minutes. You said that of course -- or you've said that the producer's objective would be to get access to the market at minimum cost, which sounds like a good thing. And you you've made the comment that that might not result in the most efficient level of infrastructure within the market area; did I get that correct? Now, by within the market area do you mean Ontario, within Ontario? 727 MR. HENNING: Well, certainly when we, as economists, start looking at a relevant geographic product market, we're looking at how the market is connected. And when you're talking market areas, Ontario or potentially even the broader northeast market, one's got to look at the ability to move gas around and the existence of liquid trading centres in those locations. Obviously Dawn is a very liquid trading centre and its ability to reach out into other markets is going to be dependent upon the existence of pipeline capacity. 728 When you have sufficient pipeline capacity, prices in market stay highly correlated and they move together. When you have pipeline constraints, you get price divergence, and those things separate out. When you're talking in market area, if you have a little bit extra pipeline capacity, for more days of the year you have those markets together and you have the ability to trade natural gas efficiently around in that market area. 729 MS. CHAPLIN: So would it be your position that if, for example, Union was not in the commodity supply business it would no longer have any incentive to ensure that infrastructure was of a suitable level within their area to facilitate, for example, their transportation business? 730 MR. HENNING: Well, certainly they wouldn't have the same kind of direct access to the market in order to try to develop and promote natural gas as a preferred fuel, so they wouldn't have the same kind of client interaction, if you will, with the customers themselves. Certainly they would want to have a way to utilize their facilities associated with it, but it would be reduced to a certain degree. 731 The other thing is that if you think about what are the different options for natural gas, and these kinds of issues have been discussed widely, the options of contracting solely back through the western Canadian sedimentary basin through Alberta and then maybe reaching the Arctic supplies as opposed to looking at all of the other alternatives. It's the LDC in that system role that's going to be looking for the lowest delivered gas option in order to get the most through-put in their service territory. So it's an issue that the LDCs are probably best suited for, with the client interaction, with the resources they have, with the fact that they're tied to the marketplace and are not going to exit the marketplace if it doesn't become profitable there or if, in fact, they see an opportunity to move elsewhere. 732 MR. BETTS: One question has occurred to me as well, and I'd like to direct it to Mark. It's Bob Betts, for the record. 733 The there are several people that have spoken earlier about their preference to see the QRAM done on a more frequent basis, would you care to address that? Union is currently on a quarterly basis. Would you care to give us your opinion on that? 734 MR. ISHERWOOD: I think from the point of view of the QRAM being a quarterly process, we view that as being really a balance between the need for transparency for the customers well as customers wanting to have less volatility. It seems a little odd to me, I guess, that some parties looking for a monthly version -- it won't be QRAM any more, it will be MRAM I guess. If you go to a monthly version of that to get customer's view on more transparency, when the alternative is really a five-year contract. So it seems to be inconsistent for me that some people are calling out for more transparency when at the same time offering three- and five-year deals. So in my view, it's transparency versus volatility. 735 MR. BETTS: Thank you. 736 MR. HAUSMANN: Thank you to all the presenters. You did very well, the five of you, and you got pretty much in on time. We have a break coming up now so if we could reconvene in 15 minutes please at five after 3:00, and then we'll carry on with our discussions. Thank you. 737 --- Recess taken at 2:50 p.m. 738 --- On resuming at 3:07 p.m. 739 DISCUSSION PERIOD: 740 MR. BETTS: We'll everybody please be seated. 741 Can we get everyone to please be seated. Just a couple of short announcements. First of all -- actually, I see that many of you have already reacted to that. This room gets warm in the afternoons as the sun comes around. Feel free to take your jackets off, and be as comfortable as you can. 742 The other quick note was with respect to lunch. First of all, we do have a timing problem on most days where we're going to have to be out of that lunch room no later than 1:15 and, ideally, closer to 1:00. But a few parties have indicated their preference to maybe have -- since lunch is being provided here, a shorter lunch period, which might allow us to finish the day a little bit earlier. And I think probably the easiest way to get a reaction to that is to just have a show of hands if I could: Who would prefer to have, let's say, a one-hour's lunch, with the objective of finishing a half an hour earlier? Yeas have it. So -- I wonder how that would have gone if I had said we could have more time to talk in the afternoon. So, anyway, we'll reschedule to have a one-hour lunch, from noon to one, or as close to that as we can. Thank you very much and I'll turn to back to Chris. 743 MR. HAUSMANN: Thanks, Mr. Chair. We're heading into our discussion afternoon now, discussion period. Based on the presentations that you've just heard, we'll give the first question to ICF, and then we'll open it to the floor. Do you have any questions? 744 MR. CROOK: Yes, Leonard Crook with ICF. In keeping with my earlier question to the other panel, I'd like to explore a little bit about options 1 and 2, and how -- since you seem to favour those options, exactly what do you favour, and why, and where this all might lead. 745 We were proposing these, or suggested these, certainly we -- one of the things to do was to make the system supply -- or remove the ambiguity about system supply, which is to make it more or less permanent, but there are some quid pro quos with that, those being that affirmative steps would have to be taken to insure that the system supply was on the level playing-field with the supply of other potential providers of supply. And that goes to the question of cost allocation, balancing, and all the other matters. 746 So to put this question to you: What would be the characteristics -- if you were allowed to have a one-year fixed-price offer, what would be the characteristics, or the terms and conditions associated with that sort of an offer, that would distinguish it from, say, a QRAM offering? What sorts of costs ought to be in a fixed-price offering like that, that are not now presently taken care of in, say, the QRAM? And just -- whoever wants to go first. 747 MR. McPHERSON: I'll start by saying I don't have an opinion. Jim McPherson does not have an opinion. If -- this is clearly a utility question, not a main line, pipeline interest. 748 MR. CHARLESON: Dave Charleson on behalf of Enbridge? Looking at the one-year fixed-price offer, there's some difficulty, I guess, in terms of getting into specifics around what you would look at, or what terms and conditions would be used to distinguish, because it's something that we haven't given a great deal of focus to. It's something that we see as being an interesting alternative, that we see potentially adding value to the market. 749 Looking at it in terms of how you could distinguish -- how this could be distinguished, though, from a -- from, say, a QRAM process, that's just done on a 12-month basis, would be where the fixed-price offering makes that commitment, in terms of that's the price you're paying for the 12 months. The utility would have to undertake to acquire the supply, likely trying to get it on a no-risk basis, where you lock-up the supply for that 12-month period, and the price that you offer is the price they pay. There's no, say, perspective recovery of a variance in the PGVA. We would see that as being, probably, the key distinguishing factor from that -- between that and the QRAM. 750 In terms of the costs to be included in that fixed price, again I think it's similar to when you look at the QRAM, as well. What are the fair costs that need to be included? What are the costs that are truly incurred within the utility providing that service? And ensuring that they're assigned to that offering in a fair manner, and that they're not artificial or assigned in any way to inflate the cost unnecessarily. 751 MR. ISHERWOOD: I have similar comments as Mr. Charleson, it's Mark Isherwood speaking from Union. We really have not done that much work on the fixed-price offering, so in terms of detail around how it works, we haven't gone that far into it. I would view it, though, as something offered outside of the QRAM process. There would not be deferral accounts attached to it, ideally. Again, I haven't done enough work to conclude that but, as the name implies, you want it to be a fixed price for the term of one year, and to be outside of the deferral mechanism entirely, if at all possible. 752 MR. CROOK: Any risks associated with that would be borne by the shareholders, presumably. 753 MR. ISHERWOOD: The fixed-price offering -- I think Mr. Charleson alluded to one way that you'd actually go out and tender to the market, for example, a volume of gas, and that volume of gas would have a weather-risk associated with it, that potentially a producer or marketer would charge you a higher price, obviously, to reflect that risk. But you would just take that price that one at tender, and you would pass that on to the people that subscribe to the one-year fixed-price offering, with a gas price admin charge added to it, obviously. So, you could potentially structure it so the utility has neither reward nor risk, just sort of another pass-through. That's one option, and there's many, many options which still need more work. 754 MR. CHARLESON: I'll just -- Dave Charleson, I'll echo Mark's comments on that. 755 MR. HAUSMANN: Anybody else in the audience like to speak to that? 756 MR. GAFFNEY: It's Christopher Gaffney from Energy Savings. I have two questions for Mark and Dave, Enbridge and Union. One is related to the fixed prices and one is related to long-term planning and development. 757 I think as a marketer we welcome, you know, competitive offerings in the marketplace as long as we're competing on a level playing-field. My concerns, I guess, would be with this type of offering through the utility, we have a potential for cross-subsidies or information-sharing issues, you know, preferential access to the bill, this -- this whole issue about how the risk-passer is going to work. Balancing treatment: Is that going to be different from how we balance? Regulatory treatment: Are you guys going to reaffirm renewal requirements? And I guess, given all those things, why would you not want to offer that just through an unregulated affiliate, I guess, is the first question? 758 The second question is with respect to infrastructure development. I guess I understand why there are good arguments why the utilities would need to get transportation or capacity, long-term contracts, but I guess I need to -- if I can just open it up to say, if you could explain a little bit better why you need long-term gas supply contracts. Because I guess the downside we see, and I guess part of it is, you know, self-interest, is that I don't want to see the utilities go out and have 90 percent of their portfolio termed up in 20-year gas because if that's -- goes into pricing system gas, now my five-year offer is -- I'm offering against a 20-year offer, and there is no competition. 759 I think most people, or most of our customers, have switched from system gas, which they think is kind of a short-term offering reflective of market rates, to something stable. By entering into those long-term fixed-price contracts, to my mind, you're taking choice away from the customers. They look to system gas as something short-term, reflective of market prices. And I guess the second part of that is, if there's a really good reason why you need those long-term gas contracts, can they be indexed gas contracts and not fixed-price contracts, such that, you know, you don't have a -- as negative an impact on system-gas pricing, and also you don't have this sort of stranded, I guess, cost-risk issue with respect to the contracts. 760 MR. ISHERWOOD: Mark Isherwood speaking, Union Gas. Maybe I'll address the second question first, and I may have to by the time I'm done ask you to restate the first question. 761 In terms of infrastructure development, I guess you have to really look at the future market differently than you have the past market. I think because of the gas supply bubble that we've had, people have become quite comfortable contracting short-term, whether it's daily, monthly or even annually. Going forward, I think most people would agree that the supply and demand balance is going to be tighter, and you definitely need, especially in a province like Ontario where you're only primarily a consuming market with no local or not a significant amount of local production, you really need to ensure the future through a security of supply. And if nobody did anything, I would hate to think the position this province would be in 5, 10, 15, 20 years down the road. So my first conclusion is that somebody has to do something to ensure infrastructure is built, both in terms of developing supply, whether it's Alaska or northern gas or LNG in Quebec, and somebody also has to ensure that the infrastructure is in place to bring that gas back to Ontario. 762 From that perspective I agree with your comment about, Well, somebody has to do that, we should really ensure that the contracts are flexible. So I think indexed contracts may be a way to go, and that is something we would certainly look at. Obviously, whenever you do a fixed-price contract you are inherently adding some risk, so to the extent you can you would want to be able index if that's possible. 763 Secondly what we've done more recently is built in, in terms of infrastructure contracts, the ability to have annual decontracting rates to allow the marketers to take -- get out of those contracts essentially. We did that with our last Vector contract. Those are things we can certainly look at to make sure we have as much flexibility as possible. You can't always guarantee you can do that, depending on what the project is, but we would certainly look at that. 764 I think your first question was more around fixed-price offering and why that wouldn't be done around an affiliated company. 765 UNIDENTIFIED SPEAKER: Right. 766 UNIDENTIFIED SPEAKER - SAME GUY THAT WAS JUST TALKING: From our perspective, we strongly believe system supply should continue to come out of the utility. The regulated function before the OEB on a quarterly basis to have costs reviewed and approved, and from a point of view of fixed price it would be no different from that. 767 MR. CHARLESON: Dave Charleson for Enbridge. 768 Just adding to Mark's comments, and I definitely agree with the comments that he's made, some of the -- and I'll deal with the second question first as well, although I don't think I can use the request for restating. 769 In terms of the -- again the contract units, I think, is important. Within the report, we've identified the need for both a mix of long-term and short-term contracts and that's something we're definitely supportive of. We don't see moving an entire portfolio to long-term contracts. That would limit the flexibility, limit the ability to kind of manage moves in the market. So definitely a mix is important. 770 The pricing -- the pricing again if we're looking at supply contracts, definitely there's a lot of risk to the utility of going into a long-term fixed-price contract. From a regulatory perspective, if it's out of the money, there may be a risk of exposure there. So index pricing on gas supply contracts is probably something that would leave us the lesser risk, but again we'd have to look at how that would balance against the overall interests of ratepayers as a whole. But definitely indexing is something that would have to be considered. 771 The one area where I have some concern is the discussion around decontracting rates. I think this morning Mr. Potter indicated that you should try to build into any long-term contracts provisions for releasing capacity, releasing the commitments. And the concern I would express around that is the reason that these developers of infrastructure or these suppliers are looking for the long-term contracts is because they need that commitment of supply for the full term. So to build in provisions where you're able to turn back or release capacity part way through would, in essence, remove kind of the certainty that they're seeking within those long-term contracts. So I think on that aspect, you have to be fairly careful in making those types of provisions. 772 In turning to your first question in terms of why we wouldn't offer that through an unregulated affiliate, I think what we're looking at here is, in terms of the fixed-price offering, the advantage we see of it introducing a new competitive offering is in its form of being a regulated offering where it provides a regulated benchmark for comparison for consumers. So to put it into an unregulated affiliate would, in essence, remove that benefit. 773 MR. HAUSMANN: Thank you. I have two on my list. Sorry, Bob, did you want to -- Tom. 774 MR. ADAMS: Thank you. Tom Adams on behalf of Energy Probe. 775 I have a few questions for Mr. George and Mr. McPherson and two policy questions for the LDC representatives. 776 Maybe I'll just read out my questions and retire from the mike. 777 For Mr. McPherson, with regard to TCPL's interest in developing LNG, if in the hypothetical case that LNG goes sour, will Ontario ratepayer be on the hook? 778 For Mr. George, you criticized the process that ATCO uses flowing through gas on unhedged basis by noting that there was an occasion where you were paying higher prices for gas in Alberta as a consumer than a similarly-placed consumer in Ontario. I suspect that that observation was cherry-picked from one of the brief periods of price excursions. Have you undertaken any systematic review of the overall cost over time from a consumer's perspective of the unhedged ATCO portfolio of supply versus the portfolios of supply that we have here in Ontario and if so, how do the price experiences over time stack up? 779 My two policy questions for the utility presenters are: First of all, if an affiliate of either of your firms is a participant in some way with -- in long-term commodity contracts that the utility is involved in, how would you propose that the Board review the financial interests of the affiliated firms when considering the prudence of those contracts? 780 And my final question, assuming that long-term commodity contracts are entered into by your utilities, would you propose that customers be allowed to jump in and out of system supply without limitations on their mobility as is currently the case? 781 MR. McPHERSON: Jim McPherson with TransCanada. 782 The question related, as best I understand it, is if TransCanada's LNG project in Quebec was to go bad, would the customers on TransCanada suffer the consequences of that? The very quick answer is no. The LNG project is owned 50 percent by TransCanada, 50 percent by Petro-Canada, it is an unregulated project or asset, if you would. They will -- it's not affecting the pipeline at all. 783 I would, though, say that to get that gas away from the particular site in question, we'll need pipeline infrastructure, and that pipeline infrastructure would be contracted by those wanting to move gas on the pipeline system. So the answer is, no, to the question, that there would be no pain suffered by TransCanada shippers. 784 MR. GEORGE: Roland George, Pervin & Gertz. 785 If it sounded like I was criticizing ATCO gas, I apologize, that wasn't the intent. It was just to highlight, basically competing claims. Here we are in the largest producing basin in North America and I'm paying more than somebody with the same molecules of gas coming from the same place, 3,000 miles away. After having said that though, when I put my comments hat on, yes, I do want consumers to get the market signal. When I put my consumer hat on, I don't want to see this price fluctuating daily or monthly or whatever. It's not important enough for me. And to spend all that attention to follow that price. So here you have on the one hand, market signal which is a good thing, and on the other hand, some type of stability for somebody that really doesn't want to spend a lot of time looking at this. Even though this is my -- as a consumer, as somebody that works in the natural gas industry, of course I'll look at it every day. 786 How does it stack up with long-term fixed having monthly variation -- oh, and coming back to the first answer, I don't think there is one good answer there. It's, as I said, a balancing of competing factors here that has to be decided upon. 787 Now, stacking up with long-term fixed, the analogy that was used earlier with fixed mortgage rates and variable mortgage rates, I know I'm somebody that will always be on variable, unless I think that I'm at the bottom, and unless I think it will be going up. Same with gas supply. Right now, we're at historic highs in terms of natural gas. I voted with my feet. I'm on the regulated gas supply, because I think it will be going down. So the answer is it depends how I look at it, and it depends where the market situation is, and it depends how confident I am that it could take an upswing in terms of prices on the unregulated. 788 How it stacks up? Most of the studies that look at these things in different industries say riding the wave is probably, over the long term, better, and this was ATCO's position. I haven't undertaken a study on this particular item in the last few years. 789 MR. CHARLESON: Dave Charleson, for Enbridge. My turn to go first on the LDC responses. 790 So dealing with the first question about if there was affiliate participation in the long-term commodity contract and how should, say, the financial interest of the affiliate be reviewed, with any long-term contract the utility may enter into, we would expect there to be a prudence review to occur with the Board. And, at the present time, the Board has a separate process going on, looking at the Affiliate Relationships Code, and we would expect the rules in place within that code to be used -- to form part of the text of that contract. 791 Turning to the second question, where the assumption is that long-term contracts have been entered into, and it was -- would there be any limitation in terms of consumers moving in or out of system supply, we do not see there being any limitation that way. That's one of the reasons for having a mix between a long-term and a short-term portfolio, so that you can manage some of those swings, and you're not in a position where you need to limit mobility. 792 MR. ISHERWOOD: Mark Isherwood speaking, Union Gas. Just a couple of points to add. 793 In terms of the affiliate involvement, a recent example of that, not too recent, a few years back, was the whole Alliance pipeline both Enbridge and Union went into. I believe the Board had a very effective review of that contract, so I don't view that as being a problem going forward. 794 In terms of mobility between system supply with long-term contracts, I think the most important thing to remember here is that we will always have a diversified portfolio. We will always look to diversify between counterparties, between term and between basins, so the fact that we have one long-term contract -- it will only be a part of the overall portfolio, so I, as well, would not see that inhibiting mobility. 795 MR. HAUSMANN: Thanks. I have four people on my list. The first one is Ian. 796 MR. MONDROW: Ian Mondrow, Direct Energy. Thank you. 797 I'm going to table two questions. The first was a bit of an observation, at the outset. I noted with interest Mr. McPherson's comments, and during those, he actually enumerated a number of different kind of classes of infrastructure investors, including power plant investors, industrial customers, marketers, wholesalers, with a bit of a question mark there, I think, and then the utilities. 798 So I guess one question is whether the utilities are the only game in town. I think the view expressed a few minutes ago is that they are. But, even assuming that they are, in respect of contracting to support investment and infrastructure, I wonder if the panel could help me, and perhaps others, to understand what is different in this industry from other capital-intensive industries where 30-year off-take agreements are not required to support investment and infrastructure. I'm thinking of industries like mining, shipping, building toll roads, where the investors don't lock up 30-year off-take agreements in order to justify their investments. Somehow the market manages to finance and develop these very long-term capital-intensive projects without that sort of absolute de-risking and guarantee. 799 So I wonder what's different about this industry that the panel is to view the requirement to have long-term supply commitments in order for these investors to build the pipe and drill the wells. 800 My second question is a bit more narrow, I guess. We heard a couple of times from the utility representatives that, without the supply function, it would be difficult for the utilities to promote through-put on their systems in order to protect their investments. And I wonder if someone could help me understand why, given the continuation of the delivery service, the supply service component is necessary in order to maintain that connection with the customers. Is this about delivery, or is it about the billing relationship? If it's the latter, it really seems to me to be a different question than whether the supply function needs to be maintained. So I'd appreciate your comments on that. 801 MR. HENNING: This is Bruce Henning from EEA. 802 You pose a very interesting question in terms of what is different about this particular industry. If you go back and you look at the history of public utility regulation, and you start to recognize that one of the very interesting aspects about some of the things that are going on throughout the entire world is an exporting of the North American concept of public-service industries and the regulatory structure for them, if you go back and you start to think about what's going on now with eastern Europe and their adoption of this particular kind of concept, utility regulation, as being in a core development for human-needs infrastructure, you think about the way that the industry has developed over time. 803 Now, there are gives and takes associated with that. One of the things that you get with that is the basic precepts of utility regulation for similarly-situated customers, and for utility tariff services that don't require a whole series of other contractings associated with them. 804 Now, in some industries you can have fluctuations and you can have shorter-term monopoly rents being captured, or rents associated -- scarcity rents associated with that. We don't get that in utility regulation. In fact, the structure of the utility regulation has been different. 805 So part of what is different is the history, the evolution, the nature of public service and public needs for these particular products. And I think it is served well. We're in a situation right now where it's very hard to say who could step in, into the shoes of the developers of those particular contracts. And what you see is a whole variety of free-rider problems; you see a whole variety of elements that caused people to delay contracting for that infrastructure. 806 Part of the studies that we've done says that that costs consumers money, and it costs consumers, residential and commercial consumers, money. So we look at it from that perspective, that there are elements that differentiate it, including both the history of the development of the industry and the nature of the services themselves. 807 MR. HAUSMANN: Anybody else? 808 MR. McPHERSON: Well, I'll just say a few words. Jim McPherson from TransCanada. 809 Just a few words I would add to that. First of all, in the presentation, I would not be saying, and I don't think I did, that it's just LDCs that can contract for infrastructure. It's just that the nature of our business has changed dramatically over the last while so that there are fewer and fewer people that are capable of making those long-term commitments. So it's just not LDCs. Our own company, with a power project in Quebec, would be backstopping, if you will, with contracts, new infrastructure build-up. 810 I think one of the key things with new infrastructure, certainly in the pipeline business, is return. So the return we get on our investment is commensurate with a long-term contract, and we can't move that asset if something goes wrong; like an airplane, although that's probably not a great business to be in either. So it's really the utility returns that we get when we go to the bank. We need counterparties that are significant enough to underpin those contracts, to get the pipeline going. 811 Now, of course, as the pipeline gets depreciated and gets older, et cetera, the book value goes down. But I think those are sort of the key aspects that I would like to say. But definitely the LDCs could play a role in building that infrastructure. 812 MR. GEORGE: Roland George, Pervin & Gertz. 813 I'd have to echo the same comments there. Looking at the different types of investors that could invest right now, the electric generation went through a bad period there when there was an overbuild, and so as I believe I mentioned earlier, banks are now owning some of those assets. So they're not in a position to sign up for long-term contracts although in the future, when the economy's growing you need that electricity, yes, they will come back to be a player. 814 Producers, I've mentioned as a possibility, the mega marketers are gone. Anyway, going through the entire value chain, there are not that many people with the commercial interest and the creditworthiness to be able to backstop that infrastructure. So that's where I was coming from on that. 815 In terms of what's different in this industry, I think the fact that it is a public service, seen as such, part of the infrastructure of an economy like our public road system here in Toronto, that is not a private undertaking. It was -- it is basically a government undertaking. Toll roads are more the exception in North America and otherwise, whether it's the interstates in the U.S. or the autoroutes in Quebec or the city roads, and that requires something that has another component to it, the public interest. It's part of the infrastructure, the economy of that has to be there. The timing of the infrastructure. If a petrochemical plant makes a mistake in bills, basically it's too bad for them. 816 When they are a large capital-intensive industry, it seems as if every time somebody sees an opportunity, everybody sees it at the same time. Why? Because prices are high, everybody bills and that's what happens. The prices go down, everybody suffers for a while. But when the getting is good, they're making incredible profits, and you can't do that in a regulated industry. 817 Planning aspect, I don't know if that came across strongly but I think that's one of the very important roles that an LDC, for example, can have for its regional natural gas market. It's not only the operations but also the planning to ensure that molecules will come into the franchise area, and it doesn't matter from which seller or for which buyer, but you have to, when you're far from producing areas, get those molecules into that franchise area. The LDCs are one of the people that can backstop that type of investment, although they are not the only ones. It's just that why take them out of the picture when they do have the commercial interest and they do have the creditworthiness? Keep them in there. 818 MR. CHARLESON: Dave Charleson, Enbridge. 819 I'm not really going to add much more to what's been said on your first question, as that was my general sense as well, that the utility return is a limiting factor and it's kind of a matching up of that risk versus return, the risk/reward picture. So I think that's been adequately covered. 820 So looking at your second question around the lack of the supply function having an impact on through-put or the maintaining of through-put, the concern would be that the lack of system supply if there's nobody there developing the market, developing the supply and infrastructure, doing the long-term planning role to ensure the adequacy and reliability of supply, it can put the price of the commodity at risk. It could lead to increases in the price, it could lead to lack of competitive advantage, say, in natural gas versus other forms of energy and that, in itself, can then lead to a loss of load. Similarly increased prices could lead to a loss of load, in say, in the industrial sector. 821 So again, taking steps to manage, kind of, supply from the long-term perspective, trying to address volatility on an ongoing basis are actions that we see being supported by the continuation of system supply, and the lack of those steps being in place could lead to the ultimate loss of load. 822 MR. HENNING: One quick comment on that as well. I'm sorry. Bruce Henning again. 823 One of the issues that you run into when you're talking about developing the market is that frankly it costs more to -- in terms of marketing to a customer to get them to go to natural gas than it does to market to an existing customer and steal them away in terms of market share. So in essence, the marketing function, in the experience that we've seen in the United States, is that most of the monies spent to market by unregulated market shares -- by marketers is capturing an existing customer and bringing them over rather than developing. Part of that has to do with the role in nature associated with marketing, and if the utility is not interested in trying to grow the market what we have is more dollars spent by the unregulated marketers to shuffle the customers around. 824 MR. HAUSMANN: Okay, thanks. Our next comment or question comes from the gentleman in the front. 825 MR. BRENNAN: Thank you. Frank Brennan for Aegent Energy Advisors. 826 A question for the panel. Can you tell me, from your point of view, what it is that is preventing other parties other than the LDCs from making long-term commitments for upstream transportation? Are there things there that -- well, certainly you mentioned risk, not risk but credit as one big issue, but is that the only issue or are there other things, such as the commitments that the customers would have to make in terms of delivery in MDV each and every day, or the lack of unbundling of the distribution rates? 827 MR. McPHERSON: Jim McPherson, TransCanada? 828 Frank, I would say that from TransCanada's standpoint, we are not concerned with whoever wants to sign up for transportation with TransCanada, whether it be current or incremental pipeline, come and visit me, I'll gladly to talk to you. As long as you are creditworthy and have the backstopping arrangements for the size of contracts you're going to sign, we'll accept anybody that wants to come over. 829 MR. BRENNAN: That wasn't necessarily my question. I guess I was just trying to look, going back, on an historic basis, what has been preventing other people, other than utilities from making long-term commitments? Has it been just credit? That's what I was looking for? I'm trying to understand what's happened in the past or why are we in a situation where it is only the utilities today that are contracting for the long-term transportation. 830 MR. McPHERSON: Jim McPherson, TransCanada. 831 Certainly, Frank, the removal of the mega marketers took a fair amount of people out of the game that were in that's previously, so that's certainly the historical standpoint. My suspicion is that over time, that will come back. 832 MR. ISHERWOOD: Mark Isherwood, Union Gas. 833 I'll just a few points and I'm sure Mr. Charleson will add some here as well. I believe credit is obviously the number one issue and that's been well discussed, don't need to add any more to that. The other, I think, unique factor of the utilities is that they do have a significant investment either buried in the ground or bolted to the ground. In Union's case, $4 billion, so we have a very strong interest in maintaining a viable market and viable infrastructure in Ontario to ensure that those assets are used and useful. So from that perspective I think we have a much longer term outlook in terms of the natural gas market, and to the extent that we see supply infrastructure or supply itself being in a shortage we have perhaps more incentive to look longer term and bringing that infrastructure or supply back to Ontario. 834 I think for the most part the marketers don't necessarily have that same long-term outlook from the point of view that a lot of their contracts are 1, 3, 5 years in length, and may have difficulty signing a 10- 15- or 20-year contract. 835 MR. BRENNAN: Actually, just if I could say one more thing, Mark, I wasn't necessarily focussing on the marketers I was thinking of other large-volume customers as well. 836 MR. ISHERWOOD: In terms of industrials and -- 837 MR. BRENNAN: Yes. 838 MR. ISHERWOOD: Well, I think Mr. McPherson pointed out that power plants typically have shown a lot of ability to contract long term. It's not uncommon for power plants to contract for 10 or 15 years. It's typically done at the very start a plant when the plant is being built, and as part of the bank financing the whole deal is looked in terms of the security of supply, cost of gas, and the product they're selling. So I think power plants are unique, and they have been, historically, a good counterparty to support infrastructure. 839 Industrials, on the other hand, have a much shorter time horizon and have business cycles that are again quite a bit shorter as well than a utility cycle of looking out 10 or 15 years. 840 MR. CHARLESON: Dave Charleson from Enbridge. 841 I would just add to Mark's, when you look to the industrial sector -- when you're talking about long-term commitments it's basically a commitment for an extended period of time, say, whether it be 10, 15, 20 years, they're going to use, at minimum, the same load of gas, that there's the same requirement that's going to be in place. And that's a difficult commitment for an industrial to make, looking forward that far -- that far forward in their business planning cycle. 842 That's where a power producer is in a different position, where they may have a long-term, basically, power-purchase agreement that helps them to know with certainty that there is a certain amount of demand that's going to be driven off their generation assets for a period of time so they can make a matching contractual commitment. 843 But if you're a General Motors or, you know, a Domtard, you know what your production is going to be 15, 20 years from now; you know what technologies you're going to be using to support that production. So, as a result, you want to enter into a long-term contract that's going to commit you to taking a certain amount of capacity for that period of time. 844 MR. HAUSMANN: Thank you. 845 You're next. 846 MS. DEMARCO: Elisabeth DeMarco with Macleod Dixon here on behalf of Superior Energy. 847 Just a point of clarification, and if I can put it in context, this morning we heard a lot of discussion about the critical inefficiencies that need to be addressed regardless of what end-state we pursue, and one of those was load balancing. 848 Mr. Charleson, in your responses, I believe you made a statement to the effect that load balancing would be more challenging for the LDCs if they were to exit from the market. Can you clarify whether you were talking about daily load balancing for system operations purposes, as would be included in distribution rates, or annual load balancing for system supply purposes as part of your obligation to balance gas consumption and supply for your system-gas customers. 849 And then the second question would be, could you highlight the differences and expand upon the distinctions between the two. 850 MR. CHARLESON: Dave Charleson from Enbridge. 851 Obviously, if we exited the market, we would no longer be doing load balancing on an annual basis for, say, the system-gas market. But if we look at load balancing to support, say, the daily balancing requirements of the system, that would become an increased challenge because, in essence, you're having to work with a much smaller portfolio of supply. You're now -- you don't have a base load of demand that's coming in or -- that you can then deal with the variances and fluctuations. You're having to use just kind of this -- the excess demand on a given day and going and purchasing, basically, the swings that are happening in your demand as opposed to kind of dealing with a larger portfolio. 852 So if you're out of the system-gas function completely, and just strictly doing load balancing in the system on a daily basis, it's the reduced size of portfolio that really makes it more challenging and, as I indicated earlier, likely more expensive as well. 853 And I don't know that that covered enough to get your second part, but maybe you could restate that. 854 MS. DEMARCO: The second part was highlighting the distinctions between the two types of load balancing, and particularly what your comments referred to, I think, based on your first answer, would it be fair to characterize your answer more particularly in relation to one type of load balancing than the other? Is that right? 855 MR. CHARLESON: Just to be clear, I guess. So the two types of load balancing, you're talking about kind of the current annual balancing that a marketer or direct-purchase customer does today in comparison to the type of load balancing that Enbridge does for its system gas customers today? 856 MS. DEMARCO: Sorry, just to clarify. One would be daily load balancing for system operations purposes and the second would be annual load balancing that you, as the utility, would do for your system-gas customers, balancing consumption and supply. 857 MR. CHARLESON: So you're presuming the change in the balancing that we do today for system-gas customers? 858 MS. DEMARCO: Simply in relation to your statement that load balancing would be a challenge if there were to be an exit from the system-gas function. So it's which type of load balancing would be challenged, I guess, is the clarification. 859 MR. CHARLESON: I guess the reason I'm struggling, I'm sorry, with this is, because we don't do annual balancing today, it's difficult. We do daily balancing today for all of our customers, whether it be for just the system gas -- for, say, the balancing for the total distribution system plus our system-gas customers. It's all done on a daily-balancing basis today, so we don't have annual balancing. 860 Annual balancing is only applicable to direct-purchase customers who have the ability to, on an annual basis, bring in the -- bring the discrepancy between their deliveries and consumption in line. So they have the opportunity to identify periods where, subject to operational constraints of the utility, it is optimal for them to either purchase incremental supplies or to sell excess supplies that they may have. So they have the ability to optimize their portfolio as they do their balancing. 861 When you look at a daily-balancing perspective, the requirements are that, on any given day, we have to bring in enough gas to meet total system demand. So in February, when the utility -- say, the system-gas customers are consuming at a peak day because it's cold, well, we have -- and the prices are over $10, we have to go and buy that $10 gas on that day for system-gas customers. We can't wait until August to deliver that gas that's brought in. 862 So that's kind of the differentiation between kind of the daily balancing and the annual balancing. Hopefully that's helped. 863 MR. HAUSMANN: Julie? 864 MS. GIRVAN: This is for Dave and Mark. Just two quick areas. One is, I think as everybody -- a lot of people in this room remember, Union, in particular, was one of the strongest advocates from an LDC exit from system supply, and we talked a little bit -- I think I'm gaining a better understanding of why Union had a turnaround in its position a couple years ago. And I just wondered if, particularly Mark, you wanted to elaborate on that. 865 And then the second question is just a clarification. I'm struggling with the idea of LDC fixed-price standard-supply offering, and one of the things, I guess, I'd like you to sort of think about is, wouldn't you agree that if -- that the pricing -- when the pricing of an option like that happened, could it do one of two things? It would either severely impact -- negatively impact the competitive market or significantly help the competitive market. And I just wondered if you had any thoughts on that. 866 MR. ISHERWOOD: Mark Isherwood speaking. 867 Let me start by answering the first question. I believe Union's position of wanting to exit the merchant function probably ties back to the 10-year market review and the market design task force, both of which, I believe, occurred mid- to late '90s. I think back then, the vision for the market, both going forward as well as at the current time, was quite a bit different. 868 If you go back to the mid- to late '90s, we still were in the era of the supply bubble, so a supply and demand balance was not an issue at all. The sense was there was lots of gas for the generations to come. It really has crashed around us, I guess, beginning about 2000, 2001, with that first cold winter we had. 869 As well, the vision around how the market was going to develop has changed a lot. We're down to essentially two players in the core market, whereas back in the mid- to late '90s, there were multiple players and the expectation of more to come. 870 So I think those were probably the two, main reasons the market has changed substantially since then. 871 In terms of the LDC and the fixed price, I'm not sure that that would necessarily negatively impact the competitiveness of the market. I think Union Gas would view that as being an option, primarily, for system customers, and in terms of taking the option, it wouldn't necessarily be actively marketing it to the broader market. It's really just an option for system-supply customers to look at. That would be our primary focus, at least. 872 MS. GIRVAN: But do you agree with my proposition that, in fact, when you would set that price would have a significant impact, either positively or negatively, on the market? Regardless if it's your intent to market that option, the very fact that it's priced in a certain way at a certain given time could either basically create an incentive for customers to go to marketers or the other way around. It's just a tricky issue. 873 MR. ISHERWOOD: I definitely agree it's a tricky issue. 874 I think from the point of view of how that would get priced, it would be based on the next 12-month current market, obviously. So if you compared that back to the utility QRAM offering, the one-year fixed price would be a more expensive offering, because it has to have built into it a weather risk to accommodate both warmer and colder winters, so the comparison that the consumer would have would be the QRAM price which would be the quarterly QRAM. The second option would be the one-year fixed price, which would be more expensive, and then the third option would be the marketer offerings whether that would be 1-year, 3-year, or 5-year. 875 MR. CHARLESON: It's Dave Charleson for Enbridge. 876 With regards to your first question, I'd echo Mark's comments on that. The market has changed significantly since the late '90s and as a result, you know, it's caused us to relook at the way that we see the market working and what's required to keep a viable market for the long-term. 877 In terms of the second, around the LDC fixed-price offering, there is the potential that as the -- when the price is set, and again you would assume that prices would be set regularly because you'd have an offering in each month. You may have a new offering that's put out there and the price would be set based on the prices seen at that time for the next 12-month period. Now, if there's a fair reflection of costs included in that price, then that should provide a reasonable competitive benchmark. 878 So if that price is significantly below marketer offerings, then that means one of either two things; either the LDC is has done a much better job than marketers in terms of securing its commodity and identifying a price, or that there's an opportunity for marketers to revisit their offerings to something that may be more competitive, may eat a little bit into the margin of the profit that's there but it provides a competitive benchmark at least. If the LDC price is higher than the market offering, well then it's demonstrating that the offerings available to it in the marketplace are very good from a competitive standpoint and, you know, perhaps something customers should take advantage of. 879 MR. HAUSMANN: A question? 880 MR. VEGH: Hi, panel. George Vegh from the Ontario Energy Board. I just have a question. 881 There was a lot of discussion about the role of the LDC in contracting for upstream transportation into Ontario and I'd like the panel's view, and in particular the independent experts's view, on what is the current and future adequacy of transportation capacity serving Ontario? 882 MR. McPHERSON: Jim McPherson, TransCanada. 883 Currently, the TransCanada system has approximately 250 million a day of spare capacity that comes into, basically, the Toronto area. That is two days' situation. As we look forward, we could see additional infrastructure as I had mentioned before, bringing LNG from Quebec into the market, and that's approximately 2009, that time frame. 884 MR. HENNING: This is Bruce Henning from EEA. 885 We look at growing peak-day requirements in the Ontario market over time. The timing of it is going to depend upon elements in the economy, the behaviour of weather, the issues in terms of the timing of power generation, and the potential to displace coal generation with natural gas. 886 All of those things are going to require additional infrastructure development. Earlier I was trying to make the point that the LDCs have a historic role in terms of trying to contract for that. I want to make sure that I didn't -- wouldn't take it say that no one else will ever contract for capacity, but there are elements associated with that. 887 I think it's particularly important in the market areas and so I think the issues of some need for additional infrastructure to move natural gas around and into the market areas in Ontario and through the broader market are going to be there, and someone's going to have to wind up contracting and taking on the risk of 10-year contracts for the new capacity. 888 MR. ISHERWOOD: I was going to just add to that - Mark Isherwood speaking - that the important thing to keep in mind, I guess, is there's quite a bit of pipeline capacity coming to Ontario. What's still unknown, I guess, is what new sources of supply will be developed to replace the conventional supplies that are declining. And those conventional supplies, the Gulf, Mexico has some decline in it, western Canadian sedimentary basin has some decline in its forecast as well. So even though we have significant pipeline assets coming to Ontario, we have to be very careful in going forward that we connect to the new supply coming on. And obviously we're very hopeful of Alaska, but to the extent that Alaska gas is a development that happens, we do already have the TransCanada pipeline connecting us back to Alberta, but there may need to be a contract between Alberta and Alaska, for example, or Alberta and McKenzie just to use TransCanada assets. 889 We also heard of LNG plants in Quebec. There also may be a need to contract for supply and pipeline there as well. You have to really be very conscious of the fact that you just can't look at the traditional existing basins and be content. We have to look forward to where the new basins, new supply is being developed and make sure we have the infrastructure connected to that, and not to connect the old supplies. 890 MR. McPHERSON: Jim McPherson again. 891 So I would just echo part of what Mark was saying. If you look at the slide that TransCanada had used earlier about the supply/demand, to keep up with the demand, we, as Mark had pointed out, have to connect to these new frontiers, McKenzie, Alaska, LNG and others. So those are things that are in the future for Ontario to think about. How do they get connected to that new infrastructure? 892 MR. GEORGE: If I believe my own forecasts the conventional production - oh, Roland George, Pervin & Gertz. It's taking me time too here. 893 The conventional production out of Alberta, we believe, is in decline, but we also have a fairly bullish outlook in terms of unconventional sources of gas in Alberta which don't make up for the loss of conventional but don't count Alberta out. We do have large increases in B.C., we are looking at Arctic gas, we are looking at increasing flows from the Rocky Mountain areas. Now the Rocky Mountain areas have been looking at California, but they're starting to look at the midwest. Midwest means that you could hit the Chicago hub, and if you hit the Chicago hub it means you could get to Dawn. So if you're looking at diversifying your sources of supply, that might be a possibility. LNG coming in on the St. Lawrence River would be another source of supply. 894 Now, what does that mean for infrastructure? Right now we've seen at Empress, that's the point on the Alberta border on the TransCanada main line, it's deliveries or receipts have been going down considerably. And basically part of that is because it's been going on other pipelines, so there is some capacity there, and Jim can probably tell us how much, at the border if it's not a competitive number. Maybe we won't ask Jim. 895 If you look at the Alliance-Vector route, there's probably a good half a Bcf of compression expansion there which is typically the least expensive type of long-haul transportation capacity addition, but that's on the supply side. You have the changing portfolio supply, so you might want to diversify where your gas is coming from, but also you have to look at increases in Ontario itself to make that supply/demand balance. And in our supply/demand balances we, basically, have not increased to the extent that's probably required to wipe out coal in this province and replace it with natural gas, or conservation, or renewables, but natural gas would figure highly in there. And then you really have to consider with this strongly increasing demand in the province that you would need to get those molecules into the market area, and that's where you consider the LNG gas facility, that's where you consider maybe expansion of existing pipeline corridors. 896 MR. BETTS: I have a question, if I could. It's probably best directed at Union and Enbridge. We've heard the fact that in Ontario there's a substantial portion of the natural gas consumer base that has chosen to stay with system supply. Have your companies made an effort to determine why that's happening? What causes a consumer to make that choice? Could you give us your opinion on that? 897 MR. CHARLESON: Dave Charleson for Enbridge. 898 For the most part, it will be an opinion. I think when we look at what consumers have chosen, we have seen a large number of customers that have gone to direct purchase over the years and we've seen migration back and now we see fluctuating back and forth. There is a group of consumers that probably have never and, unless forced, would never move off system supply. Some of it is because of the nature of the -- it's a contract they're looking to enter into. When you assess the overall value of the contract on an annual basis and, say, the risk, it's something that people don't want to necessarily turn their attention to. They look at, Well, I may gain or lose $30 a year. I'm not going to -- there's other things I want to focus my attention to. 899 For consumers that have, say, elected direct purchase and, say, now have moved back or are moving back and forth, what we're seeing is that consumers really are looking at price. Some of the market research that we've done has shown one of the principal drivers that will lead to the decision for -- and this is primarily our direct-purchase customers, that will drive their decision with regards to whether they renew or enter into a new direct-purchase agreement is the price of the offering and kind of what's available in the market at that point in time, which is encouraging, because that means that a competitive market is working. If consumers are looking towards price signals as an indicator for their choice, then that's really the end-state you're hoping for. 900 So you've got that balance of some consumers that are just satisfied it's not a big enough decision for them to focus their attention and enter into a contract that may have risks or costs associated to it in comparison to all the other decisions they're having to make in their daily lives, and then there are those that are just making assessments based on costs and risks that they see in the market. 901 MR. ISHERWOOD: Mark Isherwood speaking. 902 I don't really have anything more to add to that, really. Again, this is more personal opinion than founded science. But I think system supply does provide the reasonable balance I talked earlier between transparency to the market price compared to volatility. It also provides reasonable value. And, as Mr. Charleson pointed out, I think the analogy earlier today was around, turn the tap on and the water comes out; turn the furnace on and the heat comes out. I think it's just ease of transaction as well. 903 UNIDENTIFIED SPEAKER: Just -- I mean, this may have been clarified, but, Dave Charleson, you were talking -- Julie Girvan asked you a question about the potential competitive impacts of fixed-price supply, and right now we've got essentially a variable utility rate up against a fixed rate offered by retailers. And what you're proposing, one of the options at least in the ICF paper, is a fixed-rate utility supply up against a fixed-rate retailer offering, obviously a much more comparable type of product. And we've just heard that, you know, consumers are very sensitive to price. And, you know, I take the point that, given the weather risk, a one-year fixed price might be more expensive than a QRAM-based price. 904 But I gather that no part of your proposal is to build in any sort of margin or headroom into this. This would be a cost-pass-through product, in which case we would have a fixed-price utility at cost -- a fixed-price utility product at cost competing against a fixed-price retailer product that has to recover a margin because that's how we make our money. Is that what you're proposing? 905 MR. CHARLESON: Dave Charleson for Enbridge. 906 I think what we're looking at, in terms of the fixed-price offering, I think the comments that we've made indicate that it's something that we see there being potential, that there may be -- it's something that's worthy further investigation. But I think there are a number of issues that have to be looked at. How do you ensure that its costs are appropriate? How do you ensure that it's fair in providing an appropriate benchmark to the markets? 907 So I don't think we have the answers to it. We're reviewing the ICF paper, we're looking at the options that have been presented there, and we see that the option includes a potential for a fixed-price offering as being something that may be advantageous to the market in Ontario; that it may provide -- that it would help to provide a competitive benchmark, say, on a closer apples-to-apples basis to what's available in the market. So, again, it's helping with end-use consumers' selection, and being able to do that competitive price check. 908 I still think there's a fair amount of detail that has to be looked at to ensure that it doesn't impede the competitive market. 909 MR. ISHERWOOD: If I can just add to that. Sorry, Mark Isherwood. 910 Certainly the one option to provide the service would be to do a complete pass-through of the costs with the gas supply admin. charge added to it. That's one of many, many, many options. And I think before we came back to the Board with a proposal, we need to do a lot more work on it. 911 To the extent that between here and the end-state of having a fixed-price offering we would need to go through a full OEB review, I think we gave parties comfort that what we came forward with was appropriate. But that option that we talked about was only one of many, I'm sure, that we could think of. 912 MR. CROOK: Leonard Crook with ICF. 913 It's a question for both Enbridge and Union. Given that you're balancing your own system on a daily basis, I think your upstream pipelines probably have this balancing, why do you only balance the marketers on an annual basis in the case of Enbridge and on a three-point basis in the case of Union? It seems to me like you're giving gas away during much of the year if you're not handling that imbalancing more frequently. 914 MR. ISHERWOOD: Perhaps I can -- Mark Isherwood speaking. 915 I'll take a first crack here. I think in terms of the bundled option, the ABC-T and the bundled-T in the Union south, we adopted just recently the two extra points, and those are two critical points on our system in terms of system operation. We also provide day-to-day load balancing and month to month. We have approximately 30 Bcf of inventory set aside to provide the load balancing to direct-purchase customers, and it's inventory that they essentially use during the winter and repay to us during the summer. And I refer to that as sort of the core load balancing, and that's load balancing that's provided to meet a very normal, projected winter operation. 916 When we added the two additional control points, what we're really trying to do is ensure that the DP customer now balances as well any anomalies to forecast, whether it's a warmer-than-normal winter or a colder-than-normal winter. 917 But those two balance points really do address the anomalies to the overall system operation. There is a core load-balancing service built into rates that covers off day to day, month to month, and, as I mentioned, sort of the forecasted variance throughout the year. 918 MR. CHARLESON: Dave Charleson for Enbridge. 919 From an Enbridge perspective, when we look at this, I think part of it is some of the effort around administration and managing those aspects, both from the respect of Enbridge and the direct purchasers. By allowing for annual balancing, it probably helps to facilitate the market better for direct-purchase customers. It simplifies the market for them compared to, say, a daily balancing or a monthly balancing. It would make it more onerous on a lot of direct-purchase customers to be able to kind of manage their loads, which could create barriers to entry. 920 Is it perfect? Does it necessarily keep everything balanced accordingly? Probably not. But it's something that is meeting the requirements now. It's been functioning for a number of years. And as we've looked at potential alternatives, we've tried to work with the marketplace to look at some alternatives to moving to more frequent balancing. And when the interests of both, say, the utility and managing the overall supply portfolio are looked at with the direct-purchase shippers as well, and mechanisms to try to make changes to balance those interests, where we end up landing, and this is a few years ago we were looking at it, and where we ended up landing at was that this is probably the best mechanism right now for both parties to be able to manage each of their needs. 921 MR. HAUSMANN: Okay, thank you. It seems that's about it from the floor. We have about ten minutes to go, and I think Cynthia, I guess, wanted to make some wrap-up comments. 922 MS. CHAPLIN: Yes, there were, sort of, two things I wanted to do. One is - sorry, Cynthia Chaplin - again to pose in this case sort of one, I guess, potentially lengthy question. It's for this panel but given our time I'm not going to suggest that you answer today but rather it's -- I'm posing it in the context of hoping it can be addressed in your final submissions and indeed by the other participants as well. 923 And you'll have to forgive me, I'm going to try and paraphrase some of the things that you've said, and please feel free, if I'm doing it inaccurately, please address that if you need to. 924 I guess what I'm hearing is that the basic LDC position is that you want to continue to be able to provide system gas, and that system gas is something that would be priced at the current market price, by and large, and not be something that you would earn a profit on. But you seem to be wanting to do that in order to fulfil some much broader objectives, that objective being to ensure that Ontario's market is, in a sense, liquid, and by that I mean has the necessary long-term supply and necessary long-term capacity to serve that market. 925 And it seems to me that to some extent the benefits that would flow from that -- I guess I question whether or not the benefits that are related to that are really related to what system gas supply is. And I guess I would suggest that this longer-term planning functions that you characterize, it seems to me that there's at least potential benefits to the LDC shareholders in terms of protecting your investment and your ability to earn a return on that on an ongoing basis. Maybe there are benefits to the current core, I'll call them the core customers, the current system supply customers, but presumably it's more about benefits to future consumers. And indeed it's not only future small-volume consumers it's also -- I think you even identified, it might have been Mr. Charleson, the impact of price volatility for industrial loads. So presumably in your sort of scheme, that there are, sort of, benefits for industrial consumers over the long-term. 926 So my question is: Who do those benefits flow to and given that, where is risk appropriately apportioned? And then therefore, how -- should -- can that be reflected in pricing and how should it be? 927 So that's my wrap-up question for lack of a better term. 928 Now, stepping into slightly separate consideration, what the Board -- what Board and Board Staff are going to try and do is develop a list of key questions, and I guess I'm calling it key questions because I'm distinguishing it from an issues list per se. What we'd want to do is have this list of key questions and would encourage all the stakeholders to address these in their final submissions. Our intent isn't to limit your submissions, rather we want to try to suggest a way to structure them to ensure that we have the benefit of your views on what we view as the key issues or the key questions. 929 What I'm going to try to do today, and at this point I don't have hard copies so this is going to be done into the record for now, is we worked up a preliminary list and what I'm suggesting is we welcome feedback to me, to Bob to Laurie or to Bev. And what we'd hope to do is present a final list at the end of tomorrow's session. 930 So this is the preliminary list. So system gas, I guess we're thinking of it that the overarching question is: What should the LDC's role be in the provision of the commodity? And then, sort of, some of the specific questions for that are: What are the discrete services contained within the umbrella known as system gas? Number 2: To the extent that LDCs provide some or all of these services, what should the pricing structure be and what should the supply acquisition policy be? 931 And I guess in those two areas, pricing structure first of all, we'd be interested in knowing what you think the objective should be of that pricing structure and I guess some examples, and this is not designed to be a limiting number of examples, but just to get you thinking about what we're on to is things like transparency, timeliness, fairness, facilitating competition, and precluding cross-subsidy. So first of all, what the objectives are, and second of all how are those objectives best achieved. 932 On the gas acquisition policy side, again what should the objectives be of the gas acquisition policy, and here some examples might include, again facilitating competition, security of supply, consumer protection, underpinning infrastructure. And again, how can those objectives be best achieved? 933 Then a third broad question is: How will the services be developed in the market which aren't provided by the LDC? So I'll leave that at that. 934 Number four: How should the transition to the preferred LDC role be implemented? In other words, what are the steps in the transition, what timelines, milestones, that sort of thing. 935 I'm sorry if I could just go back to number 3, how will the services be developed in the market which aren't provided by the LDC, some subquestions for that. What would the OEB's role be in monitoring? And how could some of the key objectives be achieved, things like, again, consumer protection, security of supply, infrastructure, and that sort of thing? 936 And then the final question: How should the options for the LDC role be evaluated? And I guess there we're suggesting the starting point might be the criteria in the ICF paper, but we're quite interested in knowing whether or not there's different criteria that should be used and also particularly if those criteria can be ranked. 937 So that's our first start at it. As I say, we'd certainly like very much to feedback on that if possible and we'll be working on that in the course of tomorrow. So hopefully we will produce a final list tomorrow at the end of the day. 938 MR. BETTS: Thank you. And just to expand on that again, the point that Cynthia made was that we don't want to limit your submissions. We want them to include any points that you want to make and we would like you to address these questions that we'll end up listing, but we are not necessarily expecting everybody to address every question as well. 939 The point that was made, we'd like your input. If you have thought of a question that you feel we would benefit by having addressed, we would like to have that question and we'll add that to the list as well. So that's the kind of contribution we'd appreciate. 940 I think we're pretty well ready to wrap up, you wanted to make -- I'll just make a couple of -- you go first, I'll finish. 941 MR. HAUSMANN: I just want to give our hardest working person in the room, the reporter, Kim, here the opportunity to ask if she missed anything or needs anything from anybody in terms of spellings or -- no you're fine, thank you. 942 MR. BETTS: Thanks. I was going to talk about transcripts a little bit as well. First of all, the Board is very proud of the service that we get from these folks. They are outstanding. Those of you who have sat through hearings will be able to attest to that and I think the objective is that they will be able to send out an electronic version of this tonight. So again if we have your e-mail address you could have it on your computer on time tonight. 943 I'd encourage all of you to, as much as possible, have a look at it, particularly the remarks that are attributed to each of you to make certain that the record is correct and we'll be happy to make corrections if you feel that there was something incorrect in the record. 944 I think that was it. I was, I know in talking to Cynthia and Board Staff and to many of you, I was very, very pleased with today's results. Tomorrow we'll spend some more time on the same subject from a different perspective. Once again I know we are looking forward to hearing those views, as I believe most of you are as well. So to the group that participated today, both actively and those of you that are here to contribute at the next stage, thank you all very much for a very productive day. 945 We look forward to seeing you tomorrow morning at 9:00. Thank you very much. 946 --- Whereupon the hearing adjourned at 4:30 p.m.