Rep: OEB Doc: 13BF9 Rev: 0 ONTARIO ENERGY BOARD Volume: NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON SYSTEM GAS - VOLUME 2 28 SEPTEMBER 2004 BEFORE: R. BETTS PRESIDING MEMBER C. CHAPLIN MEMBER 1 RP-2004-0213 2 IN THE MATTER OF a hearing held on Tuesday, 28 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 28 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 TOM LADANYI Enbridge Gas Distribution FRED HASSAN 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 GERRY HAGGERTY Superior Energy DAVID POCH Green Energy Coalition ROGER HIGGIN Vulnerable Energy Consumers Coalition JOYCE POON Vulnerable Energy Consumers Coalition JACK GIBBONS Pollution 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 GREG STRINGHAM Canadian Association of Petroleum Producers BOB FRASER Canadian Association of Petroleum Producers, EnCana JEFFREY MAYER MxEnergy Inc. ROLAND GEORGE Purvin & Gertz BRYAN GORMLEY Canadian Gas Association JIM GRUENBAUER City of Kitchener DWAYNE QUINN City of Kitchener JULIE GIRVAN Consumers' Council of Canada JASON STACEY Sithe Energy JUDY ALLAN Self-represented 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [15] NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON SYSTEM GAS: [44] SUBMISSIONS BY MR. HIGGIN AND MS. POON: [45] SUBMISSIONS BY MR. GIBBONS: [114] SUBMISSIONS BY MR. ADAMS: [154] DISCUSSION PERIOD: [212] PROCEDURAL MATTERS: [387] NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON SYSTEM GAS: [412] SUBMISSIONS BY MR. BASHAM: [413] SUBMISSIONS BY MR. STRINGHAM: [419] SUBMISSIONS BY MR. FOURNIER: [474] DISCUSSION PERIOD: [502] PROCEDURAL MATTERS: [695] 10 EXHIBITS 11 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:00 a.m. 15 PRELIMINARY MATTERS: 16 MR. BETTS: I see that most of the faces in here are familiar from yesterday and that's great, but there are a few new faces so forgive me if I repeat a few things for those new participants. But first of all, welcome, this is day two of the Natural Gas Forum. I know that Cynthia and I and Board Staff were quite pleased with how yesterday went. I hope you all benefited, as we did, and I hope it all leads to some very interesting submissions later this month. 17 My name again is Bob Betts, I'm a Board Member, and Cynthia Chapman is sitting beside me, she too is a Board Member, and we are sponsors of this Natural Gas Forum and will continue to sponsor the process as it goes through the Board. 18 This is not a formal Board hearing. We are not sitting as adjudicators, we're sitting here simply to guide the process, to listen, and to present the interests, I guess, of the Board in terms of the questions we might ask and hopefully to gather from you the information that we will require to go forward. 19 With us today also are our key staff people in this initiative and they are Laurie Klein and Beverley Jaffrey, and also if you haven't met them already, I'd like to introduce our consultants from ICF and that's Leonard Crook and Mike Bermon. 20 I'll shortly be introducing or turning this over to Chris Hausmann so that he can continue to lead us through this as our facilitator. I will remind everybody of a few things, particularly those that are, again, new to the activities here today. 21 We are -- this is not a formal hearing. Despite the fact that people will be presenting views, the Board does not expect that they will be dealt with in a cross-examination type of forum, and that's kind of directed to the counsellors, the lawyers who generally appear in this room. We would hope that all of the views that are presented here are challenged in some way or other, but the best way to challenge that, I believe, is to present a counterview that's positive and well presented. So I think that's about it. 22 Just one housekeeping item if I could, and I'll ask this question every morning. Last night, the electronic transcript went out to everybody. I'm not sure that everybody has had a chance to read it, it wouldn't surprise me if you haven't. I leave it up to all of the parties to review those transcripts for errors and omissions, and I will invite everybody as we start in the morning to tell us in this Forum if there are any recommended changes to the transcript. The purpose for doing that is that everybody then can change -- it's on the record, everybody can change their transcripts and recognize that there was a correction made. 23 So I'll ask that at this point, are there any errors or omissions in the transcripts? You'll have to yell out for us. 24 MR. HAUSMANN: If you would come to the mike, then we could get it on the record. There's one open mike. 25 MR. DINGWALL: Open mike day at the OEB, we could sell tickets. 26 There are a number of transcript spelling and typographical errors related to the testimony yesterday of Jeffrey Mayer of MxEnergy and we've sent that forward to the Board in an e-mail response to the court reporter. So we're actually ahead of the game in that respect, we've already provided that so we won't take up your time in going through them at this point. 27 MR. BETTS: Thank you, that's fine. Perhaps we will undertake to circulate that same e-mail, with your permission, to all of the parties here. 28 MR. DINGWALL: Certainly, and just to clarify the record it's Brian Dingwall speaking on behalf of MxEnergy as counsel. Thank you. 29 MR. BETTS: Thank you. So we'll circulate that to everybody so everyone is aware of those changes. Yes. 30 MR. POTTER: Good morning. Gord Potter, Ontario Energy Savings. 31 First of all, an excellent job, especially turned around very quickly. Two points. One, I did a presentation yesterday and sat on the panel but I'm absent from the list of the presenters in the beginning of the document and people are making fun of me this morning, so I was hoping you would be able to add me in. And also with respect to -- although it captures very well the views that I expressed there are some typos and some words that have been substituted in various different positions so I'm not sure, I'm not familiar with the process but if I did pass them to you, would you revise the transcript and resend it or should it only be if they're really significant changes? 32 MR. BETTS: The final transcripts will reflect any changes, but we can't guarantee that we'll -- in fact we don't generally recirculate them. So the best arrangement would be to do as Mr. Dingwall has, which is to identify a lot of changes on an e-mail or some other document and then we can be certain that it gets circulated and we will be certain that the transcripts are changed to reflect them. 33 MR. POTTER: That's great. Thank you. 34 MR. BETTS: Thank you. Anything else at this point? And you don't have to -- you can correct the first day's transcripts at any point and the second day and so on, so don't feel that anyone's lost the opportunity to make a correction. We'd encourage you to read it when you have the chance. And thank you and that's about all I have to do, I finished early, and I'll turn the mike over to Mr. Hausmann. Thank you. 35 MR. HAUSMANN: Thank you, Mr. Chair. 36 Again, for the benefit of those who perhaps weren't here yesterday, I'm just very quickly going to run through some housekeeping matters. Please be sure, because of the transcribing and because of the webcast, be sure every time you speak that you speak into a mike so people can hear you in the room as well as it can be picked up on the webcast, and identify yourself at the outset by name and if you can, who you represent. Be sure to speak directly in the mike and do not leave your mike pointing up to the ceiling because that can generate feedback on the electronic system. 37 If you don't have a mike at your seat, there are chairs that are empty where there are microphones and there is one designated seat next to Julie Girvan that's designated for those who don't have a mike at their tables. Feel free to come and go obviously with respect so other people aren't interrupted. There is a new agenda for the day. There are copies at the back of the room. The only change really from yesterday is that the lunch hour has been changed to one hour instead of an hour and a half, so we have lunch from 11:45 to 12:45. It's generally served in the north room beside us here. On two days in any event, today and tomorrow, other people will be using that room so we have to be out of there well before 1:00. 38 Finally, if you are making a presentation and if you have not submitted it to the Board, it would be helpful for the transcriber if you can provide a copy. If you are just doing written copy, if it's on the slides it's not as much of a problem, but if there are any changes to your presentation which you have submitted to the Board please provide an updated version for the Board and for the transcriber. Thank you very much. 39 For those of you -- 40 MR. BETTS: If I could just add a couple of things to your list that I just thought of. First of all, in response to Mr. -- this is Bob Betts. In response to Mr. Potter's question about the transcripts, it has dawned on me that we will publish on the website the final version. So when this is all done, that is the one way of getting an accurate and complete transcription, is just take it off the website at the end of all of this. And the other thing that I think both Chris and I forgot to mention was all cell phones off please. They play havoc with the system, actually the Blackberry -- in fact the Blackberry is the worst culprit. So if you can, please, shut down for now. Back to you, Chris. 41 MR. HAUSMANN: Thanks, Mr. Chairman. 42 In terms of our agenda today, we have three presenters. It is not quite the order as is shown on your agenda. We will be starting with the Vulnerable Energy Consumers' Coalition, then Pollution Probe, and then Energy Probe. After their 15-minute presentation, we'll have five minutes for questions of clarification from the Board, and then we'll move on to the next presentation leading up to the break. And then after the break, we'll engage in a broader discussion. 43 So I would turn it over to Roger, I guess. In the beginning, if you would state your name and who you represent, that would be helpful. 44 NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON SYSTEM GAS: 45 SUBMISSIONS BY MR. HIGGIN AND MS. POON: 46 MR. HIGGIN: Good morning, everybody. My name is Roger Higgin, and I'm a consultant, associate consultant, with ECS Consulting, and with me today is Joyce Poon, who is also a consultant at ECS. We've been retained by the Vulnerable Energy Consumers' Coalition to put together this 15-minute overview and presentation on system-gas issues. So we will start with that and get on with the show. 47 This is just the title slide, and the presentation will actually only last about 12 minutes, because VECC has had its funding cut to 75 percent. So we'll only present for 12 minutes, then it will be 3 minutes of silence. 48 Okay. So we start here by just reviewing quickly the discussion paper that was prepared by the consultants for the Board. And, as you all know by now, they set out three options. And in our view, options 1 and 2 are certainly things that we should pursue and discuss; but, as far as we're concerned, and our clients, specifically, we believe that option 3 is a non-starter. That's because there is insufficient true retail gas competition and, without a utility system-gas option, there will be limited choice and potential for price-gouging and other practices that will harm small-volume customers. 49 So, we believe options 1 and 2 need to be looked at further. And our view is it's critical to maintain the viability of the system-gas choice, and protect consumers who choose system gas as a choice. 50 In assessing the other options, that's 1 and 2, proposed by ICF, VECC notes that a major role of the Board is to protect consumers. In this case, that means both retail supply customers and system-gas customers. In addition, although the Board's practice to date is clear in respect of regulation of system-gas supply, we have significant concerns about the lack of a statutory regulatory framework that recognized the reality of unbundled utility commodity supply markets, and the system-gas supply option from the LDCs. And we'll go into that further. 51 Now, in assessing the choices between option 1 and 2, the consultants listed a number of criteria -- and, of course, as a consumer representative, we believe that, from a low-volume customer's perspective, there are some other key criteria. And we listed those criteria here, five of them, that we think are important. And we will go on to discuss those in more detail. 52 Turning to the first criterion we believe should be used in assessing the two options. We believe maintaining customer choice is very important, and we suggest that the first choice for low-volume gas customers be, at present, to remain a system-gas supply customer. In other words, there shouldn't be any requirement for any positive election to stay with the regulated utility, or the need for a written contract. Rather, positive election should apply, as at present, to choosing a competitive gas retailer. 53 In the case that a regulated rate option was going to be introduced, our view is that there would be a massive public-education requirement before gas customers are given choice. You're going to be facing that with the electricity with the introduction of the RPP, and we're just saying it would be the same if you tried to introduce something similar in gas. There would be a massive public customer-education requirement prior to that being introduced. 54 As we talk later on, we don't believe that there is any imperative for such a regulated rate option right now. Once the issues that are affecting customer satisfaction with the current system-gas supply option are fixed, then these problems are the things that we need to address. These include the price transparency, retroactive-adjustment debate, and customer education about the SG option. 55 Our view is that the Board should resist pressure from marketers either to require a positive election for system gas, or to do other things that position LDC system gas as a default supply option. We believe it is not a default supply option. It is a real choice that should be available to consumers. 56 The tactics that we see from marketers include restrictions on promotion of the system-gas choice, restrictions on risk management, the use of sensitive QRAM triggers, and the use of one-time PGVA adjustments, big adjustments, as opposed to rate-riders, to name a few of the tactics. 57 So, our main concern with the status quo that although the Board has a mandate to protect consumers, the current legislation does not recognize the realities of the unbundled commodity market. True, there is a historic precedent of gas supply bundled with utility services, but that is a historic anachronism. History can be changed, and if the utility wanted, or was offered, money to exit or transfer the SG function, then they would probably do so. What we suggest is system gas be explicitly recognized as a separate function to distribution, and for the LDC to be the approved service provider, with related rates and terms of service regulated by the OEB, under a specific regulation that would allow for codes of conduct and a requirement for OEB approval to delegate or transfer the function to an affiliate, a related or a third party. The LDC service provider would have a clear role to inform and promote the SG service. 58 So that is the construct that we are proposing, that is, a mandated OEB appointment of an SG service provider, likely the LDC, for synergistic efficiency reasons. 59 In addition, we believe that system-gas customers should have better protection than at present in terms of price stability and bill stability, and better service quality protection than at present. 60 So, we're now going to move on and look at the pricing of -- price quality benchmark. And, basically, we believe, as I said earlier, that system gas should be viewed as a distinct service offering. This is consistent with the construct of a legislative distinct SG role. System-gas supply should be gas supplied for, and bought for, the purpose, specific purpose, of system-gas supply customers. The system-gas supply portfolio should then be a price quality benchmark for gas supply as a market-competitive price. SG customers should know that, although there's no requirement for a contract, the LDC system gas is, in essence, a market-related supply option, with price adjustments that would occur, we say, at least once a quarter. 61 That doesn't mean there's anything magic to quarterly rate adjustments every three months, and market conditions can and should drive the frequency of price adjustments. Now, three months is probably okay, provided there are no big true-ups due to volatility in gas supply in the period; however, the utility should have the ability to act in the exception rather than wait for the standard QRAM cycle. 62 There are other issues as to whether retroactive adjustments should be made in the framework. For example, as the equal billing plan, i.e., customers true up at the end of the gas year, or whether the balances should carry forward into the next year, there are issues that need to be looked at. 63 Finally on the cost of administration, system-gas customers should pay the costs of administration of their supply; no more, no less. That means for direct-purchase customers and system-gas customers, the utility costs are costed and allocated in the same way, on a per-customer or unit basis. This means that system operation costs and load-balancing costs should be viewed as distinct LDC functions, and these functions should also be costed on an identical basis for system gas and direct purchase. 64 Our view is that the Board must hold a generic hearing to sort out the utility functions that are distinct to system gas and direct purchase, and which functions and related costs are common and how these common costs should be allocated between system gas, direct purchase, and system operations. 65 Now, this slide just briefly compares the existing system-gas supply with what we believe should be called a modified status quo and the proposed hybrid RRO. We prefer to characterize the consultant's status quo as a viable option that requires fixing the problems with the current LDC system-gas function. As noted earlier, we think that is the primary option from a consumer perspective rather than to abandon the no-contract SG option for a hybrid rate-regulated option. 66 The modified status quo, we suggest, has several similar features to an RRO, but without the need for a contract. 67 Now, Joyce is going to take over and talk about the current administration of system gas and particularly about QRAMs and other things. 68 MS. POON: This specific slide, actually, just shows you the status quo option and what we consider as some of the deficiencies in the regulated rate framework for the existing system-gas supply option, the genesis of this unbundled commodity in distribution service. So I'm now moving on. 69 I'm going to really address what the ICF paper indicated as being the status quo with minor modifications. It highlights four specific modifications as indicated in this slide. What VECC believes is that there needs to be addressed three other options, those specifically are risk management, code of conduct, SQIs and the customer care and billing. 70 With respect to the modifications on the QRAM, we view that currently there is a formulaic and automatic QRAM approach. What really is missing is a standardized approach to QRAM which has the customers' nodes in mind. The QRAM process is really an establishment of forward market price, which is known as your reference price, but it also addresses the price variances of prior periods. And what we see is the price transparency is a price that's void of any prior-period adjustments, however, given that there's a need to address the PGVA balances, the price transparency goal is somewhat distorted as noted in the ICF report. 71 Union clears this PGVA balance on a 12-month forward basis which, in effect, minimizes some distortion on the price transparency. Then we have Enbridge which is clearing its PGVA balances within a fiscal year, which really closely more reflects cost-causality principles. 72 So clearly, all these differences have impacts on customer choices, on how they view the system-gas supply option versus what is offered by the marketer. And when you're looking at a standardized approach for a QRAM, you have to look at one that's going to be fair to both the option of system gas and the marketers. And so we believe we must basically have to go -- what we have to do is go back to the basic objectives of the QRAM so that the starting point -- that would be the starting point before we do any standardization of the QRAM process. 73 VECC suggests that the Board establish a process to review the fundamental issues not only related to price adjustment mechanism but also the fundamental legislative and regulatory underpinnings of the system-gas supply in Ontario. 74 In turning to the changes that we would advocate being addressed by the OEB in a generic hearing, we contend that the first step is to legitimize the system-gas supply as an option to the Ontario gas consumers within an appropriate legislative and regulatory framework, and this will ensure that system-gas supply is in place for all customers and its provision of this service is going to be directly under the control of the OEB. 75 In appointing the system-gas service provider, should it be the LDC, we could all benefit from synergies including regulatory and administrative synergies. It's critical that as in the case of the electrician section, the function of system supply be recognized and be distinct from distribution and systems operations such as storage and transmission. 76 When we look at the cost of system-gas service, this slide highlights that there are three disputes at issue, really, between the marketers and the LDC and the system-gas customers. The issue in dispute is the appropriate administration cost that should be charged to system-gas customers. The ICF report claims direct-purchase providers are at a disadvantage, and we feel its claim is carried out without any evidence. And currently, there is a system-gas administration charge recovered by system-gas customers for the procurement of natural gas commodity. The ICF report doesn't imply that this administration cost is being allocated to system-gas customers for this function, which isn't true. 77 This is an old dispute that has been carried out in the Enbridge cases and it dates back to the RP-2000-0040 proceeding. And this issue has not been resolved completely by a hearing which tests the evidence of the LDCs or other such marketers. So we are of the view that the costs for the function of system gas be sorted out by this Board in an open regulatory process. We're not accepting of the claims made by the ICF report, that imply there isn't a level playing field, as the springboard for any future policy associated with system-gas rates. 78 Load balancing, in our view, is in effect something that's clearly not related to system gas. It's a historical issue that's trying to address prior period adjustments. And what we view is that load balancing is clearly a service that's available to both system-gas, direct-purchase customers and really more in line with storage. 79 So VECC, basically, supports the fact that we approve the modified status quo approach. So what we see as the next step is that we need to establish a regulatory process for the QRAM addressing the legislative changes, also have an open regulatory process to assess the accounting changes. Load balancing, as I noted earlier, is more of an operational issue between system-gas and direct-purchase customers whereby costs are borne by both system-gas and direct-purchase customers that are completely outside the scope of system-gas supply. 80 Finally, we think that the issues with risk management can be dealt with in the QRAM process, whereby customers need to assess price stability. Code of conducts can be addressed in the expansion of the legislative changes. And finally, customer billing and customer care are really an extension of the accounting regulatory process. 81 MR. HIGGIN: Just very briefly on the option 2. As we see, we see it as a future option once the transition to a proper system gas, option 1, is complete. And some of the desirable features that we see would be here. We're not supporting the need to move there and so basically, at this point, we think fixing the existing system-gas option is the way to go. 82 So our conclusions are: It's vital to maintain customer choice in Ontario. We need an enabling regulatory regime that is actually explicit, and secures the future of system gas as an option. We support option 1, the status quo modified. And so that's our main conclusions. 83 And the message we'd like to leave with you is that low-volume customers want a viable system-gas choice now, and in the future, and the regulatory framework should be put in place to ensure that. Over 50 percent of low-volume customers are system-gas customers, and protecting their interest is key, and the current issues should be addressed by the Board in a generic proceeding. 84 There's no basis to go outside, to exit from the system-gas function, and no imperative to throw the baby out with the bath water by going to an RRO-like electricity. Let's fix the current option, let's legitimize it, and let's carry on from there. Thank you. 85 MR. HAUSMANN: Thank you. That was 125 percent, Roger. 86 Questions from the Board? 87 MS. CHAPLIN: Thank you. Cynthia Chaplin. 88 Would I be correct in paraphrasing that what you feel is in the best interests of customers is having a regulated supply choice? I got the sense that you don't -- it doesn't necessarily, in the long run, have to be provided by the distribution company, but it needs to be regulated. 89 MR. HIGGIN: No. 90 MS. CHAPLIN: Am I correct? 91 MR. HIGGIN: No, you're wrong. Our choice is fixing the LDC supply option. We believe the synergies are available from having the LDC continue to provide that function, but to do so within a proper statutory regulated framework. Right now, the framework is the practices of the Board. Everything comes from bundled gas and distribution. That's not the reality of today or tomorrow. 92 So what we say is you must recognize system gas as a distinct function, separate from distribution. 93 MS. CHAPLIN: So you maintain the synergies, but you properly allocate the common costs; is that it in a nutshell? 94 MR. HIGGIN: Exactly. 95 MS. CHAPLIN: And maybe, if you could just clarify, why is that of benefit to customers? What's in it for customers? As opposed to, I guess, contrasting that with the competitive retail option of fixed prices, of potentially various terms? 96 MR. HIGGIN: One word, confidence. 97 MS. CHAPLIN: Could I ask you, is there a lack of confidence in the direct retail -- 98 MR. HIGGIN: I'm not saying that, I'm just saying there is confidence in the LDC and its option. 99 MS. CHAPLIN: And that confidence comes from the fact that it's regulated? 100 MR. HIGGIN: It comes from a number of things, one of which is regulation, yes. And people really delved into how the regulation is done. We believe that it is still pre-1986 regulation of -- it's a bundled type of regulation. We're saying, No, we're not in a bundled regime, we're in a unbundled regime. Commodity is unbundled; that should be recognized in the way -- this is a distinct function to distribution. 101 If you look at electricity, let's go there. The commodity is -- the supply of the commodity is already recognized as a totally different function to being distribution. And we're saying the same thing should be recognized, and that legislative underpinnings and regulations should do that. And it should have a code of conduct; for example, it shouldn't just rely on the Affiliate Relationships Code. There should be a system-gas code of conduct. So you need a proper framework to maintain that choice. 102 But that's part of -- currently, there is confidence, and I think, we think, that the confidence will be maintained by ensuring the future of, we call it assuring the future of, LDC as a choice for low-volume customers. 103 MS. CHAPLIN: Just one more question. Would it be in the interests of customers if the Board were, perhaps simultaneously, to take some actions to build confidence in the competitive supply options? And how would they do that? 104 MR. HIGGIN: I don't know that the Board has a role to build confidence in that. I think that the Board's role is to protect consumers, and you have instruments already in place to do that. And you are reactive to, and deal with, complaints where there are abuses of those instruments. 105 And I don't know what -- I don't see the role of the Board as being more intrusive into the competitive market. So, the fact is it's an unregulated competitive market. People choose to stay with a regulated option, or they go to the unregulated model. 106 MS. CHAPLIN: Thank you. 107 MR. BETTS: Thank you. It's Bob Betts here. I just have one question in addition to those that were asked already. It relates to the issue of customer choice, and you said a couple of things in some ways are contradictory. You've indicated that a consumer makes a choice when they choose system gas and you -- but you've also said in another regard that they shouldn't -- that action shouldn't be a positive election. Can you tell me what concern you have, or what concerns you have, about the prospects of a consumer making a positive election to choose system gas? 108 MR. HIGGIN: I think our concern is that requiring a positive election requires a great deal higher level of consumer information and education than is currently available, particularly for the client group that we represent here today, and that is the low-income and senior citizens. And so, if they were required to make a positive election, then there would need to be a much, much higher level of understanding as to exactly what they are choosing, and what they're choosing between, that and what else. 109 So, our belief is that it's a very, very major undertaking to require people to make that, and to get that level of consumer education and awareness, and to make a proper choice. And some segments of the group are just not going to be reachable, in terms of that choice. So there'll be slamming. In essence, it's slamming, when they don't know what they're doing. And we are against that. 110 MR. BETTS: Thank you for that. 111 No further questions, thank you. 112 MR. HAUSMANN: Thank you, Mr. Chair. 113 Our next presenter is Jack Gibbons of Pollution Probe, and while he's giving his presentation, Tom, if we could set your computer up. Jack. 114 SUBMISSIONS BY MR. GIBBONS: 115 MR. GIBBONS: Thanks, Chris. I'm Jack Gibbons, from Pollution Probe. We appreciate the opportunity to speak to the Natural Gas Forum today. 116 Pollution Probe supports Premier McGuinty's decision to phase out the dirty, coal-fired plants by 2007. Pollution Probe believes that natural gas can play a very important role as a transition fuel to help Ontario phase out coal, and move to a cleaner and greener future. 117 Specifically, we believe that natural gas has an important role to play as a generation fuel, as a fuel for the generation of electricity. We also believe that natural gas has an important role to play as we, hopefully, fuel-switch numerous electric end-users to natural gas, where natural gas can meet the customer's energy service need at a lower cost, more efficiently, and with less adverse impact on the environment. 118 Specifically, we're talking about space heating, water heating, cooking and drying, if we want to look at residential customers. These uses, to the fullest extent possible, we believe should be switched from electricity to natural gas. 119 So, natural gas has a -- potentially, a very important role to play in helping Ontario meet its energy service needs. But for natural gas to achieve its full potential as a transition fuel for Ontario, to move to a cleaner energy future, we must ensure that there are secure supplies of natural gas for the Ontario market, at stable and reasonable prices. That's absolutely essential, both to protect public health and to ensure that Ontario's industries remain competitive and that we create jobs in this province. 120 We believe that the mantra for the Ontario Energy Board in their regulation of the gas industry should be to ensure that there are secure supplies of natural gas for the Ontario economy at stable and reasonable prices. That should be the goal, and everything should follow from that. 121 We need secure supplies. We need stable prices. We need reasonable prices and we need to reduce bills. We need to reduce customers' bills. That's key and that, we believe, should be the overriding objective of natural gas regulation in this province. 122 And Pollution Probe believes that Ontario's natural gas utilities can and should play a pivotal role in ensuring that we have secure supplies of natural gas, at reasonable prices, stable prices, and to reduce bills by promoting the efficient use of natural gas. The wise and efficient use of natural gas. 123 Now, in order to get more specific, to move from generalizations to specific steps, as a first step, to create stable and reasonable gas prices, we believe that there is a need to create a fixed price system supply option. A fixed price supply option for small-volume customers, and any customers who want it, that is supported by a diversified portfolio of long-term, medium-term, and short-term and spot gas supplies. That is, Pollution Probe believes that we need a fixed price system supply option for gas which is similar to Premier McGuinty's proposed fixed price option for small-volume electricity consumers. 124 We strongly believe that most Ontario consumers want stable and reasonably-priced natural gas supplies. The status quo system supply option, which is 100 percent tied to the spot-market price of natural gas, is not providing consumers with what they want from their gas utility. 125 As people in this room are well aware, until recently in Ontario, we had fixed price system supply options for gas and electricity. However, in the last few years, we moved away from that. We have 20/20 hindsight. We believe it is clear that that was a mistake, that was a fundamental mistake that was not in the interests of energy consumers in this province. Former Premier Eaves recognized that mistake with respect to the electricity sector in November of 2002 when he abolished the electricity supply option which was tied to the spot market price. 126 Premier McGuinty has proposed a solution to that problem on the electricity side: A fixed-price electricity system supply option for small-volume customers which is backed by a diversified portfolio of long-term heritage contracts, the new contracts that will be assigned by the Ontario Power Authority with new generators, as well as short-term and spot prices. We believe that a similar approach is appropriate for the natural gas system-supply option. 127 The second step we believe that's important to earn sure stable and reasonable prices for the Ontario gas marketplace is to deal with the issue of infrastructure. We need adequate supply infrastructure for the Ontario economy to ensure stable prices and reasonably-priced prices of natural gas. 128 We agree with Allan Greenspan that LNG imports can help to reduce the volatility of natural gas prices and to ensure reasonably-priced and secure supplies of natural gas for the North American economy. Therefore, we believe that it may be in the public interest for Ontario's gas utilities to enter into long-term contracts to ensure that LNG is an option for the Ontario marketplace and Ontario's gas consumers. 129 I think it's important to note that LNG supplies, by dampening price volatility and by lowering gas prices, will provide benefits, significant economic benefits, to all Ontario energy consumers, regardless of whether or not they are system-supply customers. That is, the gas utilities entering into contracts for LNG can provide a public benefit to all consumers. That's a public benefit that wouldn't be taken into account by marketers or by individual industrial end-users. If they were to enter into an LNG contract, they would just be looking at the immediate, direct benefits to them. The spillover benefits in terms of lower prices for everyone, in terms of stable prices, less volatile prices for all Ontario energy consumers, would not be taken into account by companies that are just operating purely subject to competitive market forces. 130 That is, I think, one reason why it can be very much in the best interests of the Ontario economy for the gas utilities to enter into long-term LNG contracts, because it can provide these great public benefits for all gas consumers in Ontario. And that is a role that can be appropriate for a regulated utility to undertake. 131 Thank you very much. 132 MR. BETTS: Thank you. We have no questions. Oh, we do have one question. 133 MS. CHAPLIN: I always have questions. Cynthia Chaplin. 134 Mr. Gibbons, would I be correct in, sort of, summarizing or paraphrasing your conclusions that the public interest is better served by lower gas prices than perhaps it might be served if prices were higher, potentially more volatile, and thereby incenting greater levels of conservation of gas? 135 I'm asking that because the gist of your presentation seems to be that the objective should be to have stable and lower prices, thereby -- I infer increasing the attractiveness of gas vis-a-vis other fuels. I guess I'm asking you, isn't that counter to other incentives that we might want? 136 MR. GIBBONS: We believe that natural gas, as the cleanest of the fossil fuels, can play a very important role as a transition fuel to a cleaner economy and a healthier economy. We believe that consumers want stable gas prices. That's a legitimate desire. We believe that consumers want reasonably priced gas prices. That's a legitimate desire too. We also believe that energy conservation is very important, it can provide huge bill savings for Ontario's consumers. Our gas utilities now have in place energy conservation programs that are reducing customers' bills by over a billion dollars. They are providing huge benefits to the Ontario economy. We believe those programs should be expanded very, very significantly to provide huge additional bill savings to Ontario's economy and to make the economy more competitive. 137 Would higher prices promote additional conservation? Absolutely. But is it appropriate to get higher prices by increasing the profits of marketers? No, I don't think so. Pollution Probe does not support moves that will promote a shift off system supply, increase the market share of marketers, and allow them to make excess profits to promote conservation. That is not, what we think is, an appropriate way to promote conservation. It's not in the best interests of the Ontario economy or Ontario consumers. 138 To the extent the prices should be raised and the government of Ontario makes the decision that the prices are too low -- at the moment, natural gas prices are at a historically high level, oil prices are $50 a barrel. But if the government decides that higher gas prices are appropriate, then we believe the best way to achieve that would be for the government of Ontario to impose an energy tax on gas prices and use those tax revenues to finance schools and hospitals for the people of Ontario, instead of allowing marketers to make windfall profits at the expense of Ontario consumers. Thank you. 139 MS. CHAPLIN: I'll leave it for others to challenge you on some of those, but, perhaps, just asking one other point of clarification or explanation. Would it be fair to say that your position is that the LDC is somehow placed to be able to contract for supplies which will, in some way, insulate Ontario from what the market price is going to be, in any event, in North America? 140 MR. GIBBONS: We believe that the LDC's contract for balanced portfolio supplies, long-term, medium-term, short-term, spot, that we will have more stable prices. And we believe that stable prices are what consumers want and that's -- and it's desirable to respond to that consumer need. 141 MS. CHAPLIN: And who is it that bears the risk if that stable, albeit perhaps stable, price is out of the market? 142 MR. GIBBONS: Ratepayers and shareholders. 143 MS. CHAPLIN: Thank you. 144 MR. BETTS: One question that came to mind as Ms. Chaplin was questioning that -- it's Bob Betts here. 145 Just with respect to the fixed-price supply option, without trying to get into the rate regulation issues, how do you see that price being placed in the market? Do you see it as being a price that's similar to those that are being offered by direct marketers? Lower? Higher? How would you sense that price being placed? 146 MR. GIBBONS: I would sense it being lower. The LDCs will contract for these supplies. The LDCs will not be seeking a profit mark-up on their system supply function and, therefore, I would expect it to be lower than the marketers' price. 147 MR. BETTS: And just following up on that, do you see any risk of undermining the competitive marketplace with that price structure? 148 MR. GIBBONS: If the -- by that you mean, will this, potentially, reduce the market share of marketers? 149 MR. BETTS: That's it. 150 MR. GIBBONS: The three marketers that are now in Ontario? Yes, I think it would, because you would provide consumers with what they want. You would provide them with reasonably-priced and stable gas supplies, from their preferred purchaser, which is the utilities, which are reputable companies with a high degree of integrity and who customers trust. And I think most customers prefer, everything else being equal, to buy their gas from LDCs. 151 MR. BETTS: Thank you very much. Those are all our questions. 152 MR. HAUSMANN: Thank you, Mr. Chair. 153 We'll move on to our next presentation then, Tom Adams, Energy Probe. Tom are you ready? 154 SUBMISSIONS BY MR. ADAMS: 155 MR. ADAMS: Thanks very much. My name is Tom Adams. I'm here representing the Energy Probe Research Foundation. I'm focusing my presentation today on a subset of the issues that are presented in the Board Staff's issue paper. I'm addressing, strictly, the issue -- well, primarily, the issue of whether or not utilities should contract long for gas commodity. 156 The overview of my presentation is that I am going to present to you reasons why the LDCs should not take on that role. 157 For those of you who are unfamiliar with Energy Probe, Energy Probe is a national consumer and environmental research organization. We've been active before the OEB on gas and electricity matters since 1972. We have, since that time, adopted a broad public-interest perspective, promoting economic efficiency and resource use. We are able to make our presentation today thanks, in part, to the -- some financial support from the Board in its funding decision, but also in -- by virtue of financial support from our many supporters across the province in Ontario. 158 Our presentation is addressed to two major areas. The first is to attack the -- some of the major reasons that have been identified by those who have promoted the idea of utilities contracting for supply, and the second area of the presentation is somewhat more constructive, hoping to make some modest suggestions on how to improve a relatively well-functioning system supply status quo. 159 We see the status quo in natural gas service generally, and specifically in the area of system supply, to be dramatically more beneficial from a public-interest perspective relative to what's been going on in electricity, and we are here to speak out against those that would follow the electricity model for our gas system. 160 The first fallacy I'd like to address is those who say that, since there are only two marketers that so-called "dominate" a large fraction of the retail market, that therefore the market is uncompetitive and therefore we can't trust the market to perform its beneficial options for consumers; therefore, we need a stronger system supply option. 161 We believe that this -- well, those that are propounding this view have taken a narrow view. It is not the case that market share, alone, measures competitiveness. There are other ways to assess whether the competitiveness of the market is able to protect consumers appropriately, with regard to their gas-purchasing choices. Ease of entry, and the speed at which marketers in the competitive market follow the leader when prices drop, those are two indicators of how competitive the market is. 162 Ontario currently has five marketers that are active in the retail market sector. We've had many new entries. We've had some exits. But the fact that we've had several entries is, I think, an indicator of relative ease of entry. And, with regard to the speed of follow-the-leader price drops, we maintain a data base that attempts to keep up with some of the offerings in the marketplace, and there does seem to be a rapid response when one of the marketers drops a price. Often within a matter of days, the other marketers follow. 163 The policy priority here, it seems to us to be for the Board, is to identify and eliminate regulatory and artificial barriers to entry so that we can have as many marketers in the marketplace as possible. There are those who say that without a large system-gas balance -- system-gas volume, that the system can't balance. Not so. Reducing the cost -- there are many options for reducing the cost and, perhaps, eventually the need for utility balancing. And if we had methods that more accurately valued gas, like, for example, shippers that are oversupplied in any particular point in time, and options also for reducing artificial barriers to trade, there would be, in our view, less need for utility balancing, and the costly balancing services that utilities now have to bear would be -- could be more efficiently performed by more diversified involvement of market. 164 So the policy priorities we see here are multipoint balancing, combined with better balancing and trading options, transparency on a number of fronts, curtailments and public release of information, such as storage balances and delivery/sendout activity, for the utilities. 165 Then there's the reliability bogey-man, that we need large system-gas volumes to support reliability, and we'll all freeze in the dark if we don't have these robust, empowered, active monopoly utilities. Market mechanisms are effectively managing markets of much greater complexity than Ontario's gas market, where the technical challenges are much more substantial than they are for us. Ontario has many, many natural advantages in the way our gas system operates, in terms of the many delivery points, lots of storage, at present, some excess pipeline capacity. So I really don't think the reliability issue is a significant one, but reliability has to be an important part of the rules, going forward, so that reliability can always be protected. It is a top priority. And there are options for ensuring reliability is maintained as we move toward more diversified participation in the market. 166 One option that I think makes some sense -- I mean I've proposed previously the idea of the gas ISO which could perform this function. That went over kind of like a lead balloon. A lesser version or a lighter alternative for maintaining reliability is to make individual shippers maintain their own reserve requirements and apply escalating penalties for non-compliance. And then the reserve requirements can be allocated out to the participants, the shippers that are moving gas on the system, so that the need for the utility to be the backstop for everybody becomes less as individual shippers start to take responsibility for their own. 167 There are those that take the view that the utilities are the smartest buyers so we should depend on them, that they have some special advantages and special knowledge on how to access the market, special knowledge of the supply requirements, and I think this is just simply a canard. The history of long-term commodity contracting in Ontario suggests that we should be very cautious. Even in the area of purchasing pipe in fairly recent years, I think the result of some of the major commitments to pipe has been, perhaps, negative overall value for consumers relative to options that existed at the time of the initiation, and particularly around the Alliance-Vector. So utilities ought to know a lot more about buying pipe than they do about buying commodity, and in the recent years with pipe purchases, the results have been, at best, mixed. 168 Why is it that utilities may not be the best buyers? Well, there's little incentive for utilities to effectively judge and manage risk when they can dump the risk on their customers. A second factor that the Board has to be very mindful of, given recent history, is the impact of the holding company structures above these utilities. Our local LDCs are relatively small elements of large conglomerates. These conglomerates have the motive, method, and regrettably, the history of mischievous transactions between regulated and unregulated businesses. 169 There are those that have proposed the concept of before-the-fact regulatory approval. We strongly resist that suggestion and recommend instead that the Board resist the temptation to change the status quo with regard to contracting and prudence review. 170 The final fallacy I want to address is that the Ontario Energy Board should undertake a review of regulated term offerings. There are those that take the view that expanding regulation with fixed price/fixed term gas would be beneficial. In our view, not so. The issue has been decided. The Board has already ruled. There are no new relevant facts. Streaming of gas contracts would increase cost allocation fights and the regulatory burden very substantially, we expect, and create additional opportunities for gaming of regulation through affiliate transactions. Again, resist the temptation to revisit streaming decisions. 171 So what can we do with system gas? It's not perfect. There are things to do. And the general recommendation we have is to continue moving along. If you look at what has happened to system gas over, well, the last 16 years or so, is it has been drifting towards spot price pass-through. Now, that's a rude thing to say in some quarters, but that's really what's happened with system gas, and it's happened for lots of reasons. 172 It's provided customer mobility benefits, and I think to agree with some of the comments that VECC was expressing, it has this -- this model has a desirability of no regrets, no questions, no hassle, just pay the bill type of service, which is attractive to a lot of people. They don't want to be preoccupied with gas purchasing decisions. And very importantly, this is at the end of the list kind of by accident, but it's very important from the point of view of the overall integrity of this system, spot pass-through minimizes utility risk. In the long-term, that's beneficial for consumers. 173 So what do consumers want? Energy Probe is in a position where we're constantly dealing with supporters and the public at large, with the media and individual consumers that come to us, often many times a day, looking for advice of what to do about these things. So we have some sense of what people want. My perception is that some people want price stability, other people want minimum cost. Some people don't understand that there's a trade off between those two things, but I think that it's important for the regulatory process to respect that diversity. 174 When it comes to consumer education, I think the primary issue here is price. Put price in front of consumers, make sure it's a price that makes some sense, that reflects the reality of how the customer is being served, and let the customer make up their own mind. 175 This is an annoyance to me, but we have allowed these utilities to operate with this big blob of a PGVA. I don't see why that's necessary. If you went to your bank and the bank said, Well, we've had over a period of time, we've had a lot of deposits, and we've had a lot of withdrawals, and now we have a balancing account that's a little out of whack, so we're going to either credit or debit your account to take care of our balancing account. You would say, What are you talking about? And so in the modern era where we have computers that can keep track of things, why can't we have customer-specific PGVA? So that there's a customer account, and if it's a little out of balance, it's the customer's gas that's being dealt with? I just don't understand why utilities can't do that. 176 On this controversial issue of how to cost system gas, I think the principle that I don't hear any dissent from is that we ought to charge -- well there is some dissent, but I think, generally, there's more or less some consensus around that fact that we ought to charge system-gas customers no more, no less than the cost of service. The proper way to do this so it doesn't create perverse incentives one way or another, in my view, is long-run incremental costing. Fully-allocated costing is not the way to go, long-run incremental costing is a smarter way to do it. That's a concept that's easy to say and hard to do, but that's what we have regulators for. 177 The conclusion is: Resist the temptation to remodel Ontario's gas system on the model of Ontario's failed electricity system. We don't want to go down that road. We got a good gas system. It's solvent. It's nice to have a solvent energy sector. It's nice for customers to have some knowledge about how the system works, they've got unbundled charges that do make sense. And you can -- I mean you can take pieces of the customer bill and actually explain it with regard to gas. 178 In electricity, there are large areas of the electricity bill that do not bear explanation. You know, I mean just for example, the debt reduction charge is not an explainable concept. It does not have a logical underpinning, whereas, more or less, everything on the gas bill with the exception of some of these leftovers do have a explanation like the PGVA and we ought to stick with it. Thank you. 179 MR. HAUSMANN: Questions from the Board? 180 MS. CHAPLIN: Thank you. Cynthia Chaplin. 181 I just want to follow up on a couple of the points that you made, particularly respecting the fallacies. The fallacy number one, you identified that a policy priority should be to eliminate the barriers to entry. Could you maybe briefly give us your view on what those barriers -- what barriers remain? 182 MR. ADAMS: I think there may be a barrier -- I want to get some views from the legal community before I shoot off my mouth too much on this, but I think there may be some limitations on the ability of marketers to come into the market with index-type offerings, or formulaic pricing, that isn't specifically tied to a volume charge. It's going to take a little more research to nail that down, but I think it might be -- I don't know if there would be interest on behalf of the consuming community for it. 183 But it seems to me, if a marketer wanted to provide some kind of mixed offering, perhaps, with a fixed amount, fixed price for a fixed volume, and then floating for the rest or, you know, seasonally floating and fixed for other seasons, there are a whole variety of things that might be possible, if there were a little bit more options in the marketer code of conduct with regard to the definition of price. 184 MS. CHAPLIN: With respect to fallacy number two, and it was around the issue of load balancing, and there you had, as one of the priorities, reducing barriers to trade, presumably amongst shippers for their balances. Could you elaborate there what you see as being, sort of, the first steps to doing that? Or how that might be achieved? 185 MR. ADAMS: Yeah, I think one thing that would be really helpful is -- I think there's some real transparency issues. The curtailment, the whole approach, who is going to get curtailed and when, has been controversial in the past, and that makes it difficult for people to know what to do with their position in the market. And the utilities have been very resistant about disclosing their storage balances, so that makes it -- these are monopoly facilities, after all. They're at rate base and the customer is paying for it, anyway, so, I mean, why is the customer not allowed to see what's going on? 186 It would really help people that are shipping, if they had a sense that -- like, if they were drafting the system and the -- but the system is packed from other volumes, or the other way around or, I mean, there are lots of ways that information might be useful to facilitate just efficient trades between people. 187 So right now we've got a situation where, if somebody's packing the system, they don't get any credit for it. If somebody's drafting the system, they're subject to, potentially, severe penalties at some periods of time. Now, the natural thing to do would be for those two people to get together, but sometimes it's hard for them to find each other, just because of the way we've got the market set up. 188 MS. CHAPLIN: Okay. And then you touched on this issue a bit, in your fallacy number four, about the LDC as being the smartest buyer, and I guess I'm wondering -- you're making your case for why that's not necessarily true. I guess I'd like to maybe turn it around and ask you the question: How does Ontario secure -- insure its long-term security of supply and infrastructure requirements? 189 MR. ADAMS: We had this amazing experience in this room yesterday where there was a panel of various utilities, and some of the utility representatives were talking about how there's a necessity for utilities to contract, because you're never sure who is going to step up to the plate to provide, you know, the needed infrastructure and supply to meet our needs. And on this very same panel, there was another representative of another firm that was partly regulated, partly unregulated, talking about an unregulated frontier development that they're pursuing, that would have dramatic impacts on the local demand/supply balance in our part of the world. 190 So there was -- the ironies were just right in our face. And I think the ironies, those ironies are abundantly evident. I mean, voluntary investors are putting up 100 million bucks a pop to drill exploration wells into the Scotian shelf. And, regrettably, many of them have gone dry in recent years, but it shows just how much capital is available to go and meet needs. 191 There is a tendency in this room to focus discussion around meeting Ontario's gas requirements. I understand the legislative mandate of the Board, and how that confines the scope of the discussion, and that's appropriate; but we have to appreciate that, in the scheme of things, we're not a drop in the bucket, but we're a small piece of a big, very complex North American gas economy. 192 So, we're not going to Ontario's needs by decisions that we take in this room about supply on the commodity side. That's not the case with regard to pipe. With regard to pipe we have to -- location matters, but with regard to supply, it doesn't. 193 MS. CHAPLIN: Thank you. 194 MR. BETTS: I have a couple questions, too, and it's Bob Betts here. 195 With respect to fallacy number four, you did indicate on your slide the -- you referred to the credit characteristics of the party that would be contracting for long-term supply. Clearly, the LDCs in Ontario are the ones that fall into that category, and I'm sure the upstream suppliers and producers want to deal with those parties. How do you see that being resolved in the future? Is it just that the producer will adapt if they're not there? Or how will we manage this credit issue with alternate buyers? 196 MR. ADAMS: Well, the utilities' credit is strong because their franchises are strong. They serve strong dynamic communities that have diversified loads, and they've got steady cash-flows. These are really blue-chip companies, because they are low risk. As soon as we start making them riskier, then we are threatening the very credit quality that people are offering as a resource to backstop these commitments. And I think that that's just not the right thing to do. 197 We ought to protect the credit quality of the utilities for the benefit, ultimately, of their consumers. I mean, that -- good credit quality should translate into low cost of capital, and we should all be able to enjoy the benefits of that in terms of infrastructure, the stick-to-your-knitting job of the LDC. And allowing that to be diluted by other adventurers is, ultimately, threatening to the credit quality. 198 So where is the credit going to come from for all these other requirements? Well, ultimately, the credit comes from the -- like, ultimately, it's only the consumers that are paying the bills for these things, so the firms that have an ability to gain confidence from lenders so they can make these major investments are the ones that can convince the lenders that they have access to the consumers on a preferred basis. They've got cheap prices, and they've got business plans that are likely to be successful. 199 The upstream oil and gas industry is absolutely flush with cash right now. They've got lots of dough, so it's not like we've got to feed them to keep them from starving. 200 MR. BETTS: Thank you. One other point. I don't think you've spelled out exactly which of the three options you were supporting, but I sense that it's option number one, primarily, with some changes; is that correct? 201 MR. ADAMS: Yeah. In general, I think the discussion paper -- being given the job of writing the discussion paper in this environment is a tough assignment, right, because this is a tough audience. And you're going to take some shots. But from my point of view, I think it's a pretty useful discussion about the issues that we face and the perspectives of some of the parties. You know, we all have our little cringes when we read the parts of the people that we don't agree with here and there, but that's not the fault of the discussion paper. I think the discussion paper is pretty good. 202 One small adjustment that I would recommend is that the option of incremental costing, long-run incremental costing for resolving this system supply controversy is one that, I think, needs some attention, as opposed to the fully-allocated costing approach which the Board has used previously. 203 MR. BETTS: Actually that was where I was heading with that, which was to ask you of any changes that you would recommend. What, perhaps, is the most important and are there any that are close to that importance? And I assume by you bringing that one up, that you feel that is a very important one. 204 MR. ADAMS: Yes. 205 MR. BETTS: Okay. Are there any others that you would highlight as being pretty important changes to consider? 206 MR. ADAMS: I think it's more sensible for me to respond in our final written remarks because it's a question with broad scope and I don't trust myself to give you a complete answer. 207 MR. BETTS: Thank you, that would be fine. That's all of our questions, thanks. 208 MR. HAUSMANN: All right. Thank you, Tom and Mr. Chair. 209 We're heading into the break now. It's 10:25, we'll reconvene at 20 to 11:00, a 15-minute break, please, and then we'll get into our discussion. 210 --- Recess taken at 10:25 a.m. 211 --- On resuming at 10:43 a.m. 212 DISCUSSION PERIOD: 213 MR. HAUSMANN: Can we take our seats, please, and reconvene. 214 So this is the discussion part of our morning. We have just a little over an hour. What we'd like to do is give ICF one question to kick things off while you're considering your own views and thoughts, and then we'll move into everybody who's here to have an opportunity. Now, again, there is an open mike there, and as well at the front here. If you want to speak, if you make your way to a table with a mike or chair with a mike, I will find you, or just raise your hand. 215 Leonard or Mike. 216 MR. BERMON: This is Mike Bermon, ICF Energy. My question is really one, I think, of clarification for Dr. Higgin, and that would be: Is your proposal for a regulated rate option premised on the fact that there is not a sufficient competitive marketplace in the province today? And if it is, would the need for a regulated rate option go away if it was determined that a competitive marketplace exists? And again, if your answer to that is yes, could you clarify for us what steps might be taken by the industry participants, including the Ontario Energy Board, to bring about a competitive marketplace in the province? 217 MR. HIGGIN: Well first of all, as a clarification, I think we have to understand one another by what we mean by "regulated rate option." What we're saying is a modified status quo, which is basically an LDC-provided option. We think the synergies that are there with the LDC providing it are there and they benefit customers. So first of all, we do not support the introduction of what we might call a regulated rate option, such as is being contemplated for electricity, okay. 218 What we're saying is it should be an identified LDC function separate from distribution, and it should have legislated underpinnings which go back to the Act, regulations on matters such as service quality requirements and so on. It should have those underpinnings and it should, therefore, be legitimized and it should have an assured future as an option. So that's what we mean by the modified status quo. 219 So then I was going to go to your next question. Sorry, go ahead. I see your colleague -- 220 MR. CROOK: Leonard Crook with ICF. So you would envision this entity to operate within a competitive framework? That's what we're trying to -- 221 MR. HIGGIN: Yes, that's where I was going to go next. 222 MR. CROOK: Sorry. 223 MR. HIGGIN: So it's not a prerequisite that there should or should not be the competitive market. It's a choice that consumers have available to them, to go with the LDC, to buy their gas from the LDC, under terms and conditions of service and at a price that's regulated. In that sense, it has similar features to an RRO, but basically then you have to come back to this question of what should be the supply that would underpin that. We don't have a difficulty with the structure that is in place now as to how the LDC is contracting for that supply, unlike some other people who think that it should move more to a spot price. We are against moving spot. I mean that's just going to have seasonal price spikes on top off, right? So basically, we're saying, we don't see anything wrong with the kind of portfolio that they've constructed. 224 Now, finally, we would say, as we do, that if conditions in the market change such that either consumers are fed up with the utility or there's only a 10 percent of people that choose that option, then you might want to look at something different. I think at this point -- so there is a relationship, in that sense, to the structure of the market as to how many people have chosen system gas versus competitive supply. There is a relationship. In other words, the current construct can't exist if there's only 10 percent customers choosing it. It's not going to be viable. You then are forced into something like spot gas pass-through. 225 MR. FOURNIER: Peter Fournier, IGUA. I wasn't going to ask any questions, but Tom you gave a response to Ms. Chaplin and I think we should have an opportunity to give you to clarify. 226 You referred to yesterday's panel, when we had TransCanada PipeLines on together with the two LDCs, and you contrasted the LDC's position that they are needed to underpin major facility expansions or projects by the long-term contracting they can do. And you contrasted that to -- what you said was TransCanada undertaking, and you used the example with the Northern Pipeline, but I think the better example in the short-term is the LNG projects. And surely, you were not trying to suggest to Ms. Chaplin that TransCanada would go ahead and build any of these major projects in the absence of securing, first, long-term contracts held by either a producer/marketer, an industrial, or an LDC. Surely you're not suggesting the National Energy Board permits a project to go forward without at least a minimum of 10-year contracts underpinning the capacity that the project proponent goes forward with. 227 And just -- if I can just add that the first LNG project was Gaz Metro's, and I can tell you that they were early on to, through my office, our members soliciting interest in long-term contracts by a Quebec-based industrial to take LNG from their project. So what I heard you say to Ms. Chaplin was that really, TransCanada could go ahead and do all these things, all on its own, without these long-term contracts by, what I would call, shippers or buyers. 228 So I wonder if you could clarify if you meant to say what I heard you say. 229 MR. ADAMS: All I was referring to is whether or not these frontier investments are going to be backed by involuntary investors that are captive ratepayers, or people that voluntarily enter into those agreements of their own free will, as your members might or choose not to. That was the only extent to which I was saying that. 230 MR. FOURNIER: But you agree that somebody's got to sign at least a 10-year contract, or longer, to underpin these projects. Somebody has to, whether it's a marketer, whether it's the producers themselves, whether it's the LDC, whether it's an industrial or whether it's somebody else. 231 MR. ADAMS: I do not have enough understanding of the current thinking at the NEB on what they take for approvals for facilities like LNG to be able to speculate on what amount of underpinning these -- projects of that type would require. 232 MR. FOURNIER: It's not a matter of thinking. It's what's in their regulations. And if you're not familiar, that's fine. I'll speak to it this afternoon. 233 MR. ADAMS: Go ahead. 234 MR. HAUSMANN: Gerry? 235 MR. HAGGARTY: Gerry Haggarty, Superior Energy. 236 Just a clarification from Dr. Higgin. You made a statement, and Ms. Poon also made a statement, regarding load balancing, and that it should be separated from the system gas in your model. Were you referring to the daily load balancing or the annual volumetric balancing, or both? 237 MR. HIGGIN: I think I'll pass that one on to Ms. Poon. It was one of her slides, and we had to skip over it very quickly because of time. 238 MS. POON: I think it should be both. I mean it's a service whereby -- well, load balancing is a service whereby it's used by both direct-purchase customers and system-supply customers. And it's just a matter of consistency in regards to how you treat a system-supply customer and a direct-purchase customer, and an operational perspective that is really outside the entire gambit of system supply. 239 MR. HIGGIN: I think there's one other thing. The way the costs are allocated right now, they're allocated on a class basis -- 240 MS. POON: Yes. 241 MR. HIGGIN: -- and there may be distinctions between direct -- cost-based distinctions between system gas and direct purchase. Then, it wouldn't be appropriate to allocate the load-balancing costs on a -- just on a class basis. 242 MR. HAGGARTY: Thank you. 243 MR. HAUSMANN: Gord, I think you were next. 244 MR. POTTER: Gord Potter, Ontario Energy Savings. 245 I just have three questions, the first of which is for the representative of Pollution Probe. I think Pollution Probe's position is that they support and incent the need to ensure that we have long-term sustainability in the natural gas market, as it's one of the cleanest fuels to replace coal. And I guess my first question to yourself, sir, is: Do you not feel that, I guess, the option of the marketers that support and sell natural gas supports that long-term view? 246 The second part of that, for all panelists, if you could, is, given some of the information that VECC shared with us this morning, as well as some of the other panelists, if we are to look at the current structure in the market, and we do take steps to, I guess, improve or enhance the system-gas function such that it is fully reflective of the costs, in some people's views, and rightfully, it provides kind of a benchmark for consumers to say that's generally the price out there. And we have choice in the market which we think is very important, and there are marketers in the market that offer competitive choices to standard system gas, that the existence of those competitive offers, by default, will ensure that market forces will drive low and reasonable pricing. Clearly, I can't sell a contract to a consumer that's well out of the market, because they know what the price is, or have an idea of what the price is, on a basic system gas offer. 247 So, would you agree with, or do you have alternate suggestions, or positions, with respect to the fact that the existence of that will mitigate -- or protect consumers from price-gouging, or from certain parties in the market making windfall profits off the back of consumers? 248 My second and last question is just directed to Mr. Adams, from Energy Probe. I'm not too familiar with it, and I was hoping if you could just give us a quick kind of overview, maybe a 30-second, one-minute answer, with respect to what long-run incremental costing looks like. I understand incremental costing, and fully-allocated, but I just wanted a feel for that, because that's new to me. Thanks. 249 MR. GIBBONS: Jack Gibbons, Pollution Probe. 250 It's our belief that many consumers in Ontario, residential and industrial consumers, are very concerned about the future availability of natural gas in terms of price, in terms of volatility, and whether there will be enough gas for the Ontario market. 251 We've heard, I think, that statement expressed repeatedly, at least over the last 12 months, often in newspapers and trade journals. Therefore, we definitely believe that, if the LDC has a system supply option that provides fixed prices, that, clearly, this will help send a message to the marketplace that natural gas is a viable option, that the price is stable and there will be secure supplies. And I think if that LDC option is available, it will encourage more people either to stay on gas or to switch to gas, and that will be positive. 252 But any efforts by marketers to promote fuel-switching to natural gas are greatly appreciated by my organization. And I know some marketers that suggest they're going to build new, natural gas-fired power plants in this province, and I think that's wonderful. I encourage them to submit their bids to the RFP process for 2,500 megawatts of new clean supply. 253 As I mentioned before, there is considerable concern about natural gas supplies and its price. And we learned, in the most recent Enbridge rate case, that Enbridge Gas is losing market share in the water-heater market, in the residential water-heater market, and that's, in our view, extremely unfortunate because, one, it makes the coal phase-out that much more difficult, if people are switching to electricity for water heating, and, quite frankly, it's not in the best interests of customers, not in their best long-term interests, because natural gas water-heating is a lower-cost option, and it's a much cleaner option. 254 MR. HAUSMANN: We still have two more questions. 255 MR. HIGGIN: Do you want us to answer the -- 256 MR. HAUSMANN: There was a second question, for the whole panel. 257 MR. POTTER: If you would, please, sir. 258 MR. HIGGIN: There are a number of aspects to your question. Our position is, clearly, that competitive offerings and system-gas options should co-exist, and they are complementary, they have different features. And if a consumer wants the certainty of long-term price stability and so on, then they can choose that, and that's what some people want. 259 As far as providing a price-quality benchmark, we believe that, currently, the prices are relatively a market-competitive price. You said that yourself. But what we also think is that there should be actual, explicit clarity on the terms of service, for example, customer mobility. We believe there should be absolute clarity on service quality, including call centre, all of those things. They should be part of the package. And they are now provided, but they're not guaranteed as part of the package which is approved. So that's all. And the utilities could change their approach to any of those components right now, and okay, they might run into problems. 260 Anyway, the other one is price stability. And I think this is one of the biggest issues, as you know, with regard to the existing system-gas supply. And people just don't like big true-ups, and so on, and that's when you people get extra calls on your line, right, saying, Well, can you offer me something that's not going to do that to me? You know? And so, basically, price stability is one of the concerns. 261 And we believe that there can be some options, including the way in which equal billing plans are extended to more customers, for example, than currently. That's one example where we could deal with some aspects of price stability by including, to a broader segment -- some customers are not eligible for equal billing. That would be one thing. We've talked about the costs of administration. 262 So I think our position is clear that it should be a distinct choice that's available to consumers, and there should not be any requirement, one way or another, for a competitive market, but it will coexist or should coexist if it's properly structured with all of the competitors. 263 MR. ADAMS: With regard to your second question about system gas as a price point that provides additional customer options and customer protection, I think that I agree with the point that you're making and note that all -- to the extent that price becomes muddied by out-of-period adjustments, whether they are related to PGVA or hedging, all of this confuses the quality of the signal that's going out to the customer. So that's the main reason why we're not supportive of the utility hedging. 264 If customers are not comfortable with a volumetric charge that flows, then they have other alternatives in the marketplace to go for that. 265 With regard to the distinction between long-run incremental costing, which I advocate, as opposed to the short-run incremental costing approach that is currently used for the system-gas fee, the question really relates -- I think the distinction between short-run and long-run relates to the time horizon for consideration of costs. The current approach that's taken is one whereby if the LDC went out of the system-gas business tomorrow or increased its volumes in system gas by 10 percent, which of its costs would increase by a proportionate amount? And that defines what falls in the category of incremental costing, as it's currently defined in the system-gas fee. So procurement and contracting are the bulk of what's reflected there. 266 The approach that I'm suggesting is one where you take a long-term view of the utility's business activity related to system gas. So their customer care costs and other costs that fit into that category, the customer education and various things that are related to system gas. Of course there's going to be allocations because you're stuck with the problem of joint uses. The utility has to communicate with his customers for other reasons or it has to maintain various of these functions that have dual purposes, so you have to allocate them. But the concept is; take a long view of the cost stream. 267 MR. POTTER: Thank you very much. 268 MR. HAUSMANN: The gentleman in the third row. 269 MR. LADANYI: Tom Ladanyi with Enbridge Gas Distribution. 270 My question is only to be directed at Mr. Adams. Mr. Adams said a lot of very critical things about gas distribution utilities, but one, in particular, I'd want to challenge him on, and that's his negative comments about load balancing. I think you called it expensive and possibly even unnecessary; I didn't get all the right terms. But let me give you an analogy of load balancing just to get it in perspective, what it really looks like. 271 If you look at the post office analogy, we receive, every day, a package at our Victoria gate station that says, Here are some gas molecules, send it to Mr. Adams's house. And it's the same package every day, winter or summer, the same package arrives. And now we have got a problem because we ship this gas to Mr. Adams's house on September 28th, but he can't take the gas, he can't use all of the gas because it's a warm day. 272 In winter, that package arrives and we take it to Mr. Adams's house he says, "Oh, that's not enough. I want more gas." So we've got a big problem, and we've got 1.7 million customers like this, whether they are on system gas or whether they're on direct purchase. So what do we do every day? Every day we check to see if anybody else can use excess molecules that were going to Mr. Adams's house. We check around the system, and if somebody else can use those molecules, we send it to them. If not, the molecules go to storage, and that's a huge transportation problem every single day. It's not like electricity. Those molecules have to get from Alberta to your basement when you need it in the right quantity every single day, and it's a big, big problem. 273 Now, you were saying that's unnecessary, that's costly. We believe that's a very efficient process, but you're saying this is an inefficient process. How would you do it more efficiently? Would you take those molecules and store them in your basement, for example, every day, and then use them in winter when you need them? Would you? Would you be ready to call your gas supplier and tell them I'm not going to use those gas molecules every day. Tell you what, send me fewer molecules today because I'm going to use more in the winter. How would you operate this more efficiently than what we're doing now? 274 MR. ADAMS: Tom Adams, Energy Probe. 275 The question is premised on the way we used to do this function, and the way we used to do it was a way that evolved out of the way we did it before the way we used to do it. 276 We've been slowly, kind of, creeping towards a system, but what you're take talking about is annual load balancing for shippers that are delivering to your system. 277 MR. LADANYI: No, I'm talking about daily load balancing. Forget about annual. 278 MR. ADAMS: It creates the problem of daily load balancing when the shippers are delivering DCQ. And that's -- it's not a very smart system. What we do currently, it leaves a lot of opportunities for optimization out of the equation. I'm sure there are ways to make money off of it for some of the shippers that have -- particularly those that have load shapes that are favorable, relative to the load shape, but I bet they'd be able to do better if they were able to make more trades. 279 So if we had multipoint balancing, which is one of the comments that is reflected in my slide, then the burden on the utility becomes less. So that this big problem that you've been describing becomes a littler problem, and the costs associated with the littler problem get passed on to consumers in terms of the lower charges. 280 Right now, the customer is bearing a lot of expense so that the utility can bear the responsibility of this big problem that you've described, in terms of all the capacity that has to get built into the system. And I just think there's so many smart people out there that have so many diversified interests, if more of them were participating in the decisions, we'd probably get better outcomes than leaving it all up to the utility. 281 MR. LADANYI: If I ask you a subquestion, the current system is built on the premise that upstream pipelines, like TransCanada, will operate at 100 percent load factor. That is, they will be operating at full capacity each day. That's the premise. You are saying, for anything else to work, you really need spare capacity on upstream pipelines, and the question is who is going to pay for the spare capacity? 282 MR. ADAMS: No, I'm not. You're putting words in my mouth. There are those that take the view and have taken the view in the past, and some of the utilities have taken the view, that for the market to work we have to have excess capacity. I don't know where this idea comes from. Excess capacity is very expensive, and we're bearing that cost now in terms of the firm shippers on TCPL are seeing the impact of that. So I'm not advocating that we build in excess, what I'm advocating is that people should have more opportunities to help the utility deal with its big problem that you've just described. 283 MR. HAUSMANN: Mr. Charleson may be next. 284 MR. CHARLESON: Dave Charleson, Enbridge Gas Distribution. 285 I'll try to be -- I have basically -- I have three questions, one for each of the panelists. And in the interest of keeping, kind of, the question and the answer together, I'd like to ask each question individually, have it responded to and then move to the next question. 286 I'll start with Dr. Higgen. Just as a follow-up to the question that Mr. Haggarty asked regarding the, kind of, segregation of the load balancing from the system supply. One aspect that still isn't clear to me is whether you're proposing that the utility would acquire those supplies individually as well. So it would go out and acquire its load-balancing supply separate from its system supply -- the supply for its system-gas customers. If that is the case, what do you see the cost implications and the operational implications of that being? Or have you considered that? 287 MS. POON: In my view, I think the utilities do, in fact, carry out procurement of assets in pipelines to deal with load balancing separate from the 100 percent DCQ sort of situation. I mean clearly, you know, storage assets and transportation assets are purchased currently to service load balancing which is, in effect, as Tom Ladanyi has just described, the daily balancing over and above the annual through-put that is received and delivered off of TCPL. So I guess my answer is, it's currently done today. 288 MR. CHARLESON: Although our position is that, I guess, we do daily balancing on system gas. 289 MS. POON: Yes, you do. And you procure assets to do that, just as you do that for direct-purchase customers, you do that for all customers on your system. 290 MR. HIGGIN: You functionalize the load balancing as a separate set of assets, and that's how you do for your cost allocation. That's what we're saying is keep that separate from the actual basic supply, and then you will allocate those costs to each of your services. We'll call it system gas and direct purchase. 291 MR. CHARLESON: Thanks for that clarification. 292 MR. HIGGIN: That's our view. 293 MR. HAUSMANN: The second question? 294 MR. CHARLESON: For Mr. Gibbons. You talked about the fixed-price offering for -- from the LDC and you provided -- and Mr. Betts asked you a question which provided some clarification around it. But I'm still not clear in terms of -- you had indicated, in the response to Mr. Betts, that you saw the risk around the -- the fixed price being borne by the ratepayers and the shareholders. If that's the case, would you -- if the shareholder is bearing some of that risk, should there be some incremental return included, or some profit included in that, to compensate for the risk that they're taking, that they wouldn't bear today? 295 MR. GIBBONS: I guess I should have said the risk will be borne by the ratepayers and/or the shareholders. Clearly, if you enter into medium-term or long-term contracts, sometimes you will find out that you've -- you've got supplies that are above market price, above spot price, sometimes below. Over time, hopefully, it will balance out. 296 Under normal circumstances, those variances, be it positive or negative, I would see flowing through to the ratepayers 100 percent, and/or the extra costs being borne by the ratepayers 100 percent. If, though, there is a case where it's demonstrated that the LDC didn't contract prudently, then, in that situation, some of the cost might be borne by the shareholder. We did have one case, that with Union Gas many, many years ago -- Mike Bermon, of course, can give a lecture on that. But that, I think, was an anomaly. I mean, we can all point to that Petrosar contract, but my recollection doesn't bring up another one. So if that gives you any comfort. 297 MR. CHARLESON: Thank you. And for you, Mr. Adams. Looking at your fallacy three, which I think called the reliability bogey-man, in that, you talked about -- there are market mechanisms in place that effectively manage, kind of, the reliability issues in some other jurisdictions. I was just wondering if you can identify a jurisdiction that's similar to Ontario, in terms of the way it's connected to the market, where that's working. 298 MR. ADAMS: Well, I think one -- Tom Adams. One instance that I think is really interesting is the state of Victoria, where they have this short piece of pipe between the Bass Strait and the delivery zone, where the primary delivery zone's in Melbourne. Their load-balancing problem -- their big problem on their physical system is manageable only -- that is, the balance between injections and withdrawals, manageable only, really, through the management of line pack, which is a lot tougher than what we've got to deal with here. Because we've got this big, elastic spring between us and Alberta; they've got a short spring, same elasticity, but over a shorter distance, which means just a lot less flex in their system. And they do it, basically, without system gas. So, if they're smart enough to do it, what's wrong with us? 299 MR. HAUSMANN: Okay. I'm sorry, I've forgotten your name. 300 MS. ALLAN: Judy Allan. We've gotten a lot of echoes - Roger, this question is for you - over the last couple of days, with the market design task force and some of the previous debates we've had around this issue. But one of the big differences that I see between these discussions and the previous discussions is, at the time of the market design task force, we had a number of marketers, and I would include, I would say, some that had some brand recognition with consumers, offering one-year gas. And, I guess, it's my view that the current design of system gas has led to the -- effectively, led to the elimination of one-year gas for residential consumers; would you agree with that? 301 MR. HIGGIN: I don't think the system gas has any -- has changed very much in its characteristics. The elimination of one-year gas as an option was a marketers' decision. So I don't believe, but I don't know the details -- whether the structure was too close to the system-gas option, that it wouldn't survive on its own. If that's the case -- 302 MS. ALLAN: I think a lot of it was -- I heard a lot of comments about how it related to dates earned, and expectations, so it would no longer be in the business. 303 MR. HIGGIN: Isn't that a major concern? That if you go to a one-year offering on an RRO, like electricity, which is one of the options here, that basically, that would have, maybe, quite negative effects on marketers, as opposed to the current system-gas structure, which you could characterize as a relatively short-term arrangement, say, three months with true-ups. Or, if you did go to the Gaz Metropolitain option, you know, once-a-month price adjustments with rolling forward, it's relatively a short-term arrangement -- not a short-term supply that underpins that arrangement, but the arrangement, and the mobility of it, is relatively short-term. And that's what we're saying. Let's continue that. 304 You characterized it as a no-hassles, no-contract, come-and-go arrangement. I would suspect that there would be concerns that, if the one-year utility offering was put in place as an RRO, fixed-price, that that would have, maybe, a major impact on the competitive market. 305 MS. ALLAN: An additional impact, probably. 306 MR. HIGGIN: Yes. 307 MS. ALLAN: And I guess the second question I have is also for you, and it's kind of a fundamental one. It strikes me that the policy rationale for your position is, fundamentally, that consumers are satisfied with the status quo because they don't understand it. To me, that suggests we should solve that problem, not use it as a reason for continuing the status quo. Is there more of a policy rationale? 308 MR. HIGGIN: Well, I think that there is, and that is that it's, A, a choice, it should be a clear choice, but it should have what I believe are modern underpinnings, in terms of recognizing the fact that it is a separate function to distribution. We're no longer in the bundled regime, and that service provided by the LDC should have proper legislative underpinnings, which would include a QRAM or some other price adjustment. But it would include service quality. It would include an ability to have to get approval to exit, or sell it, or transfer it, such as ATCO did. 309 And so those -- we want to see assured as a choice. That's our fundamental message here is -- that's why we don't quite like the status quo, because it's too iffy. I believe there's very few barriers. If the company, one of the companies, wished to exit that function voluntarily, or sell, or transfer that function to a third party or to an affiliate, the Board would have, in my view, somewhat limited jurisdiction to oppose that. 310 MS. ALLAN: Thank you. 311 MR. HAUSMANN: Mr. George. 312 MR. GEORGE: Roland George with Purvin & Gertz. Only for the transcript's purpose, P-u-r-v-i-n instead of P-e-r-v-i-n. I have two questions for Roger Higgin, and one for Jack Gibbons. 313 The first one, for Roger Higgin is, basically, when we're asked what are the advantages of maintaining the utility as the system-gas provider, you had mentioned something about synergies. If you could elaborate on that. 314 The second question was, when Tom Adams mentioned the desirability of no regrets, no questions, no decisions, no volumes or time commitments, just-pay-the-bill service, would you see that as being part of the advantages of no requirement for positive election? 315 And my question for Mr. Jack Gibbons of Pollution Probe is, you mentioned about reducing customer bills, and on that you mentioned about efficiency and conservation, I believe, and you also mentioned about programs to save on energy. So if you could elaborate on which programs you see would have the biggest bang for the buck. Just as importantly, how should those programs be financed? 316 MR. HIGGIN: I will say we haven't spent a lot of time thinking about those synergies. Some of those synergies have been mentioned in both the Enbridge and the Union presentations and in prior filings by those companies, including the one that was withdrawn in the last Enbridge hearing. 317 Some of those synergies would relate to load balancing and the system operation of the utility, and others would relate to its customer-care packages, including billing and so on. So those are, we believe, ways in which the costs of providing the service can be lower, by capitalizing on some of those synergies between the LDC as a distributor and operator, and the LDC as the service provider for system gas. So I don't know, Ms. Poon may have an additional point or two. 318 MS. POON: In my view, synergies are as a result of an integrated business whereby you can draw upon your knowledge to help you carry out another competitive offering. It is no different, in my view, as a marketer has other lines of business, other than system-gas supply function, out there in the market whereby they can draw synergies from their billing systems if they sell appliances or carry out other types of services with customers and through customer contact which has built up their reputation. 319 I think what we want is an efficient market whereby all players in that market have the ability to use their synergies available to them as an entity to bring benefits to customers. And I think that that's basically what we're looking for, a level playing field that is consistent, not only for the utility, but is also available therefore in the competitive market already by the competitors that the utilities are facing. 320 That's, basically, how I view the synergies. 321 MR. HAUSMANN: Does that answer both the questions? Jack. 322 MR. GIBBONS: Thanks. I'm Jack Gibbons from Pollution Probe. 323 The question was about utility programs to promote energy conservation and efficiency and reduce bills. 324 Ontario's gas utilities, Enbridge and Union Gas, have been doing this for approximately 10 years. As I've mentioned previously, they're providing huge bill savings to customers. They're reducing customers' bills by over a billion dollars, and that's residential customers, commercial, institutional, and industrial. It's a huge success story. I mean I think it's an tremendous credit to the Ontario Energy Board that it pursued this initiative back in the early 1990s, and it's been extremely successful, and I don't think the Ontario Energy Board gets enough credit for the huge leadership role its played in terms of gas DSM in North America. 325 You know, the benefits have been huge, especially when you compare it to the very small expenditures in terms of ratepayer money on conservation programs and the relatively very low regulatory costs and regulatory time spent on this issue. I mean, I was back at the Board in 1985 at the dawn of gas commodity deregulation. And we have spent years, and years, and years, and huge amounts of intellectual and regulatory resources trying to fine-tune this natural gas commodity market. And we're still going on 19 years later. 326 The amount of regulatory resources and financial resources devoted to gas DSM are just a small, small fraction of that, and we've had a tremendous success story that's been a win-win for everyone in this province. 327 Now, one of the questions was how should the gas utilities promote energy conservation. I think the question was, give me examples of specific programs. Well that would be a very long discussion, and I think it's better, if you want to pursue that, to actually phone up the gas utilities and maybe get one of their filings with a list of their programs. And I say that also because, basically, it's Pollution Probe's view that the Ontario Energy Board or intervenors shouldn't micromanage the gas or electric utilities and tell them how to promote energy conservation. Rather, we believe that what the OEB should do is create institutional framework that makes it profitable for the gas and electric utilities to promote cost-effective and aggressive conservation programs. 328 And the OEB did that, especially with respect to Enbridge Gas Distribution. They have linked Enbridge's profits to the bill reductions they achieved for their customers. So they have fully aligned customer interest with shareholder interests, and that's been extremely beneficial, and it means you don't need to micromanage them and harass them with all kinds of sticks and penalties. 329 And that's, quite frankly, what we're advocating for the electric utilities. We've got many great electric utilities that, again, are trusted utilities, very well-run companies, who have customer contact. And we believe that the Ontario Energy Board should, basically, put a regulatory framework which makes the promotion of conservation a profitable course of action for those utilities, ties their profits to the bill reductions they achieve for their customers. Create that institutional framework and then we believe that the LDCs, the electric LDCs, will promote conservation like gangbusters and provide huge benefits for this great province. 330 MR. HAUSMANN: Mr. Potter. 331 MR. POTTER: Thanks. Gord Potter, Ontario Energy Savings. 332 I have two questions. Since they're not closely related, I'll ask the first one, and it's for any panel members to respond, and then I'll ask the second question, if that's okay. 333 On the first question, with respect to the LDC's contracting for long-term commitments for supply, one view could be characterized that customers that are on system gas are on system gas for a variety of reasons, one being that they choose not to choose or to look into the option as some people have presented over the last two days. Some people don't pay it a lot of mind. They know that it's a basic function or a basic essential service provided under the eyes of a regulatory body, and that they're, basically, paying the basic costs for gas for what gas costs, more or less. The true price or transparency to market price over time. 334 If LDCs are allowed to contract for long-term supply, then in essence it could be viewed that the customers's choice to choose the basic, market-based product is taken away from them unilaterally, without their choice. And not withstanding that, and I'm certainly interested in your views on that if you'd like to share them, but moreover, do you agree or what are your views with respect to whether it's fair that ratepayers should be on the hook for the risks associated with long-term commitments? 335 Marketers, for example, as private investment, take on those risks, as do most businesses when they invest in products that they serve. So I guess the first question is: Do you believe it's fair that ratepayers should have to be on the hook for that? 336 MR. GIBBONS: Jack Gibbons from Pollution Probe. 337 I think you make a good point about customer choice, and so I think the solution to that is that the LDCs should provide two system-supply options. One is the existing spot market pass-through, people should still have that option who want it, and also they should provide a second option which is the fixed-price option. And that will, I think, give customers the two choices they want. 338 MR. HIGGIN: Roger Higgin. 339 We don't characterize the existing system supply portfolio on spot. Basically, it isn't and -- 340 MS. POON: It's a mixed bag. 341 MR. HIGGIN: It's a mix. And what we believe is that the utility has tried to strike a balance between the question of longer-term risk and risk and price, and that's the question. And then, of course, there's the role that risk management of that portfolio plays, and who should bear those costs, and how much risk management should be done. In fact, that's one of issues that we alluded to - we didn't expand on it - that needs to get addressed. 342 Right now, there are marketers that want to see restrictions on risk management. Not customers, marketers that want to see it, okay? The customers aren't saying anything. At this point, I have been in a number of ADRs where they've come in with 40 million dollars of risk management costs and the customers have said, Oh well, we just happen to lose that cycle but next time around. So there hasn't been a backlash from customer groups against risk management at this point. 343 So I think that is an issue that needs to be addressed and therefore, we don't disagree. Basically, with the current structure of the portfolio as the utilities are constructing it and managing it. 344 So with that, I think, trying to talk, then, about the other aspect of this, I'll just ask Joyce if she has any additional comments on that, as to whether any other features of the current portfolio that we would like to see changed, or if there's anything we're unhappy with. 345 MS. POON: Well, I think what's important is that, clearly, customers all have different desires in regards to price stability. And price stability comes with electing fixed options versus variable-price options. And I just think it's important that this Board be aware of how customers view those choices, and of how they value those choices. 346 In Manitoba, there are opinion surveys that have been conducted and have been filed with their regulatory boards. I think that it's appropriate that maybe Ontario do something similar, whereby they assess those values so that we provide options that are available to customers, that are in their specific wants and needs. 347 MR. HIGGIN: Perhaps the only other addition would be, we still think that then you move to the question of contract and, once you go to longer term, then you implicitly are looking at higher risk, and, therefore, the requirement for some sort of contract with entry and exit provisions. And therefore, we -- it's not something that we see as needed. At this point, we think that the current mobility and the current arrangement is satisfactory, and that is an adjunct, if we call it, to the existing structure of the system-gas portfolio. Thank you. 348 MR. ADAMS: Tom Adams, Energy Probe. 349 I think it's important to inject a little bit of history into this discussion. Utilities contracting long for supply is very likely to necessitate constraints on customer mobility. And if anybody doubts that, I just recommend that you review the return-to-system crisis that developed in 1993. The position of the utilities at that time was -- with regard to constraints on customer mobility arising from long-term contracts, was exactly opposite to the position espoused by some of the utilities in the discussion yesterday. 350 With regard to the -- Roger's comment that customer groups have not organized a backlash against risk management. That is true, so far, in Ontario, to date. It is not true in some of the other jurisdictions in Canada. There was a big customer backlash against risk management in Manitoba, and the LDC was so severely harmed by that, the resulting decision, that the utility was nationalized. 351 So the -- I think that those are not -- both of these problems, of constraints on customer mobility and risk to the utility from risk management, are issues that need to be considered very carefully when anybody is proposing long-term contracting. 352 MR. POTTER: Thank you very much. Gord Potter. 353 My second question, which is just to further on the question, I believe, Ms. Chaplin asked Tom Adams with respect to what he saw as some of the barriers to entry for new competitors. Part of Tom's response was that there was an issue with respect -- or constraint with respect to flexibility of product offerings that a marketer could offer. So I thought I'd take the opportunity to continue from my discussion yesterday, that we share that same concern, in the fact that we are constrained through, I guess, our current technical systems and processes that we've all developed and worked together with over the years, with respect to being able to offer innovative new pricing and new products. Because, based on the -- our ability to bill, we're only allowed to offer fixed price. Things like budget billing, or equal billing, which we'd like to offer, and can offer in our jurisdictions that we operate in, are things that we can't offer here. 354 Innovation with respect to how we price products and those kinds of things which, I think -- assuming that people on the panel are of the view that choice should remain in the market, would, I think, improve choice and address customers -- offer customers new products instead of just general, standard products that we have today. 355 So I guess my question to you, to the panel, is, would you agree that improving the ability to allow for different products and pricing in the market as exists today, i.e., working towards improving our ability to bill and allowed to access to get those products out, would be a benefit, and something that consumers would want? 356 MR. ADAMS: My view is that if we were able to achieve that result from this process, this process would be able to demonstrate some benefits for all of the investment that's gone into it. 357 MR. HIGGIN: Our position is clear that we want to have choice in the market and, if there are barriers that limit that choice, from the competitive side, then they shouldn't be -- should be removed, if the Board has the power to do that. The billing issue is obviously one of the big ones, and that's something that is both part of the GDAR process and the courts, and therefore, right now, nothing much can be said except that that needs to get sorted out. And the option of retailer-consolidated billing is not something that our clients have opposed, as long as the costs are fully allocated, and there isn't any cross-subsidy for people that are on the system gas, and vice versa. I'm sure you have the same view on the costs of billing through system gas. 358 MR. POTTER: If I could, for clarity -- just to clarify, for the representative from VECC. I wasn't looking at options such as retailer-consolidated billing, although that is an option. It was more, if we could look at the market as it exists today, we have DCB billing and we currently have, for example, one opportunity and that's rate-ready billing. And if we could look to expand those services with that access, then that would provide another alternative, or enhancement, of what exists today, to be able to allow us to provide different products and price differently. 359 MR. HIGGIN: I understand, and I think, coming back to basics, I think that the ability to offer a range of products, either alone or bundled with other services, is what consumers want. 360 MR. POTTER: Thank you. 361 MR. HAUSMANN: Thank you. 362 Anybody else? I don't have anybody else on my list. 363 MR. GRUENBAUER: Jim Gruenbauer for the City of Kitchener, and my question is for Dr. Higgin. 364 I know that VECC is not in favour of option 3, as set out in the consultant's paper, but my question is, if we assume that that end-state was at play in Ontario, would you expect more or less regulatory intervention by this Board? 365 MR. HIGGIN: You are saying if the LDC was forced to exit, is that the premise? 366 MR. GRUENBAUER: Yes. 367 MR. HIGGIN: Okay. Well, I would say, first of all, our position is clear, and that is that would restrict choice and, therefore, is not something we support. I don't think that has necessarily worked in other jurisdictions, and I would cite to you Georgia and the problems that resulted from forced allocation of customers to marketers. 368 And so I think that the repercussions of that are, A, contrary to customer choice, and, B, I don't think they would necessarily enhance the competitive market in ways that would benefit consumers. As far as Kitchener is concerned, when are we going to see your next DSM program? 369 MR. GRUENBAUER: Thanks for your answer, Doctor. 370 MR. QUINN: I would love to -- sorry. Dwayne Quinn, City of Kitchener Utilities. 371 I'd love to provide Dr. Higgin with the success of our DSM program that we initiated a few years ago, sir. We just haven't had the opportunity to have that interaction. 372 I wanted to respect the panel in terms of the investment of time, and being on the forefront here, so I deferred this question to the end. 373 Just prior to adjournment yesterday, we were asked to consider the criteria that was established for evaluating the alternatives, and consider, should additional criteria be added, what, you know, weight we would put on those criteria. And in trying to think it through, I realized in defining criteria for the evaluation of competing alternatives, it's important that we understand what one is trying to accomplish. And so while we understand that the evolution of the natural gas market towards greater efficiency is in the public interest, I'm still struggling with exactly what the Board believes we are going to try to accomplish in this process. 374 So if it doesn't compromise the integrity of the process and the scope of what I might want to learn, is it possible the Board could provide us some instruction as to what the Board would like to have accomplished at the end of the day, which then would help us establish criteria and weight those criteria toward those ends? 375 MR. BETTS: I don't think I'm even prepared, at this point, to limit where this might go. Quite frankly, there are no limitations as to where it might go. We started off by saying we are in an information gathering process. We all believe that change is appropriate in the gas sector. We all support that recognition and that need, and I think at this point, in many ways we're looking for direction from you. That's how this process started. 376 We started asking the industry and stakeholders: What do you think is wrong? What do we need to talk about? So I don't want to really send this, and I'm going to ask Cynthia to make comments as well, but I don't want to send this down a certain tunnel. I'd like to see where we're led rather than trying to determine what our destination is. 377 So I'm a little reluctant to do that, other than to say that we will, and Cynthia will, undertake to give us a list of some questions at the end of today, and at the end of each of the three phases, that will identify some of the questions that are still there in the minds of the Board that will, by being answered, help us determine, perhaps, the future policy. But at this point, I think we'd like to hold back on giving you any direction at this stage. 378 Cynthia, I don't know whether you'd like to add to that. 379 MS. CHAPLIN: Yes. I won't repeat, but I think Mr. Betts' comments are echoed by the fact that the discussion papers were explicitly formulated to provide options rather than a single proposal, shall we say. And I guess, sort of, the fundamental guidance is that we are, in fact, guided by the objectives in our legislation, and we will be examining the options and assessing them against the criteria, and also against those objectives that we have in our legislation. 380 MR. BETTS: I think that was clearly a non-answer, but it's the best we can give you right now. 381 MR. QUINN: I appreciate that there is a process in place. I'm just trying to understand if we're going to start refining criteria, that we know toward what end. And I'll accept that you don't want to limit the scope at this time, and so we will just define the criteria towards the public interest we all serve. Thank you. 382 MR. BETTS: I think you said it better than I did. 383 MR. HAUSMANN: Well, we are at the lunch break time. Before everybody leaves, I'm going to ask the transcriber if she has any needs with respect to names, spellings, or anything like that. We're all in good shape. 384 We will be reconvening in one hour at 12:45 in this room and we'll carry on through the afternoon session. Thank you very much. 385 --- Luncheon recess taken at 11:45 a.m. 386 --- On resuming at 12:47 p.m. 387 PROCEDURAL MATTERS: 388 MR. HAUSMANN: Welcome back, ladies and gentlemen. We have one comment from the Chair and I -- do you have a question? 389 MR. CHARLESON: Yes. 390 MR. HAUSMANN: Comment. 391 MR. BETTS: First of all, just about the transcription. First of all, I have an e-mail, an e-mail address that you can forward your requests for changes to -- and it will be on the transcript, but if anyone wants to note it now, they're welcome to. And that is, first of all, one word, sdonison@vvr.ca. So that was sdonison@vvr.ca, and your changes then will be entered. 392 The one point that our transcription experts made to me, and I think -- anybody that's not familiar with the process of keeping transcribed records, they can't change what you've said. What you've said is what you've said. What they can change is, if a word has been incorrectly heard, and you said the word "wish" and it was typed down as "smith", or something like that, those things can be corrected. But unfortunately -- and I can tell from you my own experience, whenever you read your own words, you can't believe that you spoke in such a silly manner, but all of us do it, so don't worry about that. What you said is what you said. But certainly correct any spelling errors, or if the incorrect word was typed and mistaken. 393 I think with that clarification, I'll turn it back to you. 394 MR. HAUSMANN: Dave Charleson, do you have a comment? 395 MR. CHARLESON: Dave Charleson, from Enbridge. 396 There's just three items that I'd like to raise. Given some time to debate, or discuss, some things over lunch within Enbridge, there's some comments on some of the things that you've asked for input from participants here. 397 First, we wanted to provide a comment on one of the questions that Cynthia proposed yesterday, and that was whether in her question number four. And that question was phrased, "How should the transition to the preferred LDC role be implemented?" I guess our concern -- we have some concern with the phrasing of the question. We feel that the question shouldn't pre-suppose that there is a change in, kind of, in the LDC role. So we'd ask that that be taken into consideration. 398 The second point that we would ask is, I believe yesterday it was requested that any comments or additional questions be provided by the end of the day today. We would suggest that it may be better if parties had an additional day to provide comments on the questions, given that we may not see all the questions until, kind of, the end of the day today. That extra day would allow a better opportunity to comment. 399 MS. CHAPLIN: Maybe -- Cynthia Chaplin -- maybe I'll just respond to that. I'm not sure that you are done. It's our intention at the end of today to e-mail our list of key questions to all the parties, and that would give you an opportunity to respond by e-mail, if that's your choice, and we'll leave that as sort of a live document. Does that answer your concern? 400 MR. HAUSMANN: That's great. We appreciate that. 401 MR. CHARLESON: The final point I wanted to raise is -- at the opening yesterday, it was indicated that final submissions needed to be provided by October 27th. And, again, there is some concern related to the effort that is going to be required by all parties here to adequately address the three different areas, the three different technical conferences that are going to be going on, a list of questions that are -- or responses that are being sought within that time frame. And we're just wondering if there is an opportunity for some extra time beyond that date, or if there's something within the Board's process that's driving that date as being a critical milestone? 402 MR. BETTS: Let us take that question and consider it a little bit further. Certainly we'll answer it, but I would like to see what flexibility we have. And I think we acknowledge that there is a lot coming out in this Forum, perhaps far beyond what any of us anticipated. And therefore, it's legitimate to look to see if we can extend that at all. We will do that, and we'll report back to you. 403 MR. CHARLESON: We'd appreciate that, thank you. 404 MR. FOURNIER: Peter Fournier, can I just interject? 405 I appreciate the Board's efforts to move this process along and do it quickly. I'm from out of town. I did not bring, and I don't usually bring, a computer with me. It's just too complicated for an old man like me to figure out this new technology, so I won't see anything that you e-mail until I get back to Ottawa on Friday. 406 MS. CHAPLIN: We'll provide you with a hard copy. 407 MR. FOURNIER: Will you? 408 MS. CHAPLIN: Yes, certainly. 409 MR. BETTS: What we'll do, and we'll try to set this up as a protocol, if there's documents that we feel should be available to everybody, we'll try to put them on the back shelf at the back room. But, certainly, if anybody, as Mr. Fournier says, sees a need for something to be there, please bring it to our attention, and we'll try to help with that. 410 MR. HAUSMANN: If there are no further housekeeping comments, we'll move on with the presentations. 411 This afternoon we have the Canadian Association of Petroleum Producers and the Industrial Gas Users Association. I understand the Gas Users Association is going to begin; is that correct? No, CAPP's going to begin. Please proceed and introduce yourself. 412 NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON SYSTEM GAS: 413 SUBMISSIONS BY MR. BASHAM: 414 MR. BASHAM: Frank Basham with the Canadian Association of Petroleum Producers, and also Talisman Energy. 415 We would like to thank the Board for inviting the producer community down here to speak to your Forum. It's a very, very welcome Forum for us to participate in. The issues that you are dealing with are highly important, especially to the upstream oil and gas industry. And that industry is not just confined to the western basin, but most of us explore around North America, so your deliberations are of a very vital interest to us. 416 CAPP is an oil and gas producer organization that represents approximately 150 member companies. And the association membership, the producers, represent about 98 percent of the natural gas production from Canada. 417 I would just like to introduce my colleagues on the stand here with me -- this is not the witness stand, so to speak, but people that helped with this presentation, in particular, Greg Stringham, to my left, who is vice-president of markets, transportation and fiscal policy with CAPP, the CAPP staff, and my colleague, on my extreme left, is Bob Fraser, from EnCana Corporation, and I'm with another company called Talisman. Both Mr. Fraser and I are co-chairs of the Canadian Gas Committee of the association, so our little committee at CAPP are responsible for looking at some of the issues that your Forum has placed into discussion. 418 I'd like to ask Greg, now, to go through the bulk of the presentation that we would wish to make to you. 419 SUBMISSIONS BY MR. STRINGHAM: 420 MR. STRINGHAM: Thank you. I'm Greg Stringham, with the Canadian Association of Petroleum Producers. I will refer to ourselves as CAPP, just for the transcription. 421 I guess I should start off by saying, And now for something completely different. I know you've had a lot of discussion. I did have a chance to read the transcript last night. And what I'd like to focus on today, in our presentation, is the context in which we believe this discussion is relevant. 422 We will be talking about the North American natural gas and supply demand situation mostly, but I think that is extremely relevant to the considerations of this Forum. The reason I say that is because I believe we have moved from the dynamic of a supply-push world of the 1990s when it comes to natural gas, very much into a demand-pull world, if I can use that terminology, where the demand across North America is growing to the extent that it is pulling, and sending price signals to pull, on new supply areas. 423 The reason I say that's relevant is because Ontario is a very important part of our natural gas market. It is strong, it is connected by a pipeline, and it is growing. 424 But there are other areas across North America that have similar characteristics, and so a key consideration of what I will be talking to here is, how does Ontario decide to be supportive of the developments of these new supplies of natural gas which the market will require through the considerations that you're having today regarding system gas, and who is involved in that discussion? 425 In the world of supply push, back in the 1990s, it was producers who had excess supply that were pushing it into the market and, therefore, were willing to take on the contracts, the risk, and associated elements of that development. In today's world of demand pull, it is the consumer that does that. And so, although we do not have a strong recommendation on status quo, or option 1 or 2 or 3, or the modifications that have been proposed here, I think it's important for you to consider as I go through this, how is it that in this world of consumer pulling on demand, will those consumers -- through what form will they be able to participate in supporting that new supply in order to bring that supply to market, which we all want to see for the benefit of both the producers' consumers. 426 Let me briefly lay this out in a presentation. This chart shows the North American picture in which we live for the North American demand. It looks at both the United States and Canada. Canada is a small portion on the top there, but with an integrated natural gas market, it is the growth in that overall market that is pulling on the supplies of natural gas across the continent. And now we will talk a little bit about, perhaps, even beyond the continent. 427 As you can see, the pipeline infrastructure shown on this chart is really just showing you the connections of all the pipelines for natural gas across North America. It is a very integrated market. Because there has been recently some surplus pipeline capacity, we've had the ability to move gas to whichever market from whichever supply point is necessary, depending on temperature load, demand profiles, a number of different things. And we've only seen, as in the case of New York last winter, when there are infrastructure constraints that there does get to be some disconnects in the market, which again are not beneficial for producers nor consumers. 428 We can see in here, looking at a Canadian and a U.S. price index, and again I've chosen AECO which is a very fluid market, but you could also choose one here in Ontario, except for some periods back in the '90s there has been a very close correlation. It is not identical, but it does indicate that the continental nature of this market is such that demand or supply changes in any part of the continent can have influences across that continental price. 429 When it comes to supply, there has been a lot of discussion regarding western Canadian supply. I think you can see by the size of the pie charts shown on here, what is shown in yellow is as-yet undeveloped, and what is shown as red is already produced. We have crossed that magic 50 percent mark in Alberta, British Columbia's approaching a third, but there are some very large areas that are yet to be developed when it comes to natural gas supply. 430 Again, bringing it back to the relevancy of your discussions and considerations is how does that get developed? Is it the producer that comes along and says, Well I'm going to develop it, or is it the consumer that says, I'm going to be involved in supporting it, whatever that support might mean. Through transportation, through contracts or other ways. There's a number of different ways that that's possible. 431 Looking specifically at gas coming from the western part of the continent, you can see what's shown in the red slice here is already produced western Canadian conventional gas. You can see that we've crossed the halfway mark, and the yellow is what's left remaining to produce in western Canada. But then you also see shown here things like coal-bed methane, otherwise known as natural gas from coal, gas from the MacKenzie Delta, and potentially Alaskan gas coming down through that same transportation corridor that could feed through existing transportation. 432 Just to put a little history on this, I've gone back and looked at what the gas flows have been for the last 30 or so years. And can you see that when the prices were deregulated in the mid-'80s in Canada, there was an almost instantaneous response in gas supplies increasing as it goes forward. That was really caused by what is shown in this chart as the number of natural gas wells that have been drilled. This is showing mostly western Canada; there have been a few in offshore eastern Canada as well. But what it has caused in that price signal is a very strong response in the conventional areas, and can you see that we're now up over 15,000 natural gas wells compared, and let me just pick the lowest one, but in the early '90s, 1992, we drilled 800 natural gas wells. 433 So there has been a market response associated with that. But what it has led to, and this chart shows essentially the natural gas production over the last two years, is a flat profile for natural gas. Although we do see a small up-tick in the last few months because of the very strong record drilling over this past winter, most forecasts, as I will show later on, predict that the western Canadian conventional supply will remain relatively flat. And I guess the key point for here will be supplemented by different forms or different sources of natural gas, all of which will require some form of commitment to bring on stream. 434 Let me start with a few of those. Before I get there, one thing I also wanted to put in context for you is if you compare that same - this is only a 20-year period - with other key natural gas producing basins across North America to which Ontario is somewhat connected, you can see that when basins do reach a certain point in their life, they do flatten out over time. Many people believe that natural resources behave on a bell curve, that you go up to the top, and you come back down to the bottom. Whereas more realistically what happens is you produce to a certain level, there's some adjustment that you may decline slightly, but then it reaches a sustainable level which lasts for many years, as is shown in this chart. 435 Some of the new areas that I referred to. The first one is natural gas from coal or otherwise known as coal-bed methane. This chart simply compares the amount of resource in this new source of natural gas in Canada versus the United States. The key point here is that the United States now relies on coal-bed methane for 10 percent of its total supply. In Canada, it's relatively small, less than one percent. But it took us 20 years to drill our first 200 wells in this resource, and then over the last two or three years, as you can see there, we drilled about 200 a year. This year we expect to drill over a thousand, and you can see what happens for the forecast for where it's going from there. Again, a new source of natural gas that we believe will be an important part of the profile going forward. 436 Another one that is really key is the northern gas. In looking at northern gas, be it from the MacKenzie Delta pipeline or from the Alaska pipeline, there will have to be serious commitments, either by producers or consumers or the marketers in between or the LDCs, in order to make sure that the risk of these very large capital projects is distributed evenly enough that they do come on stream. The consequence of a delay in getting these on stream is not having that supply in the market, which is something that neither producers nor consumers want to see happen. 437 Again one that is further, but is being discussed now, is a new source of natural gas which is off-shore British Columbia. Again, this is not something that's going to be on stream in the next six months to a year. But finally, after many years, and there is a moratorium put on by the province and the federal government, they have begun discussions about lifting those moratoria and bringing this into production. This is likely a decade away, but it too will require some form of commitment in order to bring that gas on stream. 438 And there has been discussion about liquefied natural gas or LNG. In fact I had to take the FERC map shown here and add several elements in Canada that have been announced recently. And as I was in Washington yesterday, FERC tells me that there have been even more announcements for LNG facilities in the United States. Again, no one expects that all, this one shows 46, all 46 of these LNG projects will go ahead, but it does indicate that liquefied natural gas is primed to become another source into the mix of natural gas in North America. There have been four plants operating and they are going to expand to their full capacity in the United States, but the question of having them come into Canada is one that has added a new source of natural gas to that mix if they go ahead. 439 The relevancy of that to this discussion is if there is an LNG project, or two, or three, or more that come on stream, yes, the private industry proponents will likely propose to go ahead, but they will be looking to the market in some form to support or underpin the amount of investment for a length of time that will be important to your considerations as to how that can be done going forward, because the market will want to see this gas as well. 440 Simply shared, here are some economics of LNG, and I won't stop on that one but I can come back to it if there are some questions. 441 The other one that I want to address directly has been, well, one of the big market pulls that we have heard about is the development of the oil sands in western Canada as a natural gas consumer. And right now, producing over a million barrels a day, it consumes a fair amount of natural gas. The projections are that it will grow by at least another million barrels a day over the next five to seven years. If that's the case, will it consume vast quantities of natural gas as well? This chart simply shows you that the market signal is being felt by all consumers, including the oil sands, and they are looking for alternative technologies so that they can reduce and/or eliminate the use of natural gas and allow that natural gas to then flow on to the markets elsewhere in North America. 442 The Nexant project, which is the one demonstrated in a very fine flow chart on the right-hand side that I know you can't read from where you're at, is a new process that uses no natural gas. It actually burns some of its bitumen to generate the heat, power and steam required for the process, freeing up that natural gas to go to market. So this is something that I think is important as we look at them as a consumer, going forward. 443 And, finally, let me conclude with a couple of slides. 444 This simply shows one case that was put forward by the Canadian Energy Research Institute of what the future for natural gas mix they expect to happen over the next 15 to 20 years. And you can see that there is a new mix of natural gas supplies coming forward. 445 The reason for our appearance here today is simply to say, we would like to see this happen, as well as consumers happen, and we want to make sure that the framework that is established allows for that to happen so that the risks and the contracts associated with bringing these new sources of gas to market can be managed appropriately. 446 Finally, just to show that there isn't just one forecast out there - in fact, there may be more than the five that I show here - is to lay out some of the other forecasts of what supply -- natural gas supply looks like from Canada. It's going to be here for a while, but it's certainly not going to be the doubling and tripling that we saw during the 1990s, and so, therefore, the market pull or the demand-pull aspect becomes all that more important. 447 So let me conclude. The demand for natural gas does continue to grow across North America. While the primary driver seems to be, right now, power generation, it is really a mix of a number of different things that are happening. There is a stable outlook for western supply, but it's going to require a new mix of natural gas supply, going forward, and that new mix is going to include a number of things, both in the conventional areas and in the non-conventional areas. 448 The North American natural gas market right now is working. It is sending a price signal to producers to go after these new forms of natural gas. It is also sending the price signal to consumers, like the oil sands, like some of the chemical plants, to adjust or find new technologies to reduce the amount of natural gas that is being used. 449 And, finally, I think it's important, as you well know but to reiterate, that where Ontario sits with the pipeline infrastructure that it has, it is really very well connected to the North American market. That can sometimes be seen as a pro and sometimes be seen as a con, but it is connected and plays part of that market currently and will into the future. 450 So it's important that in your deliberations and considerations of this Forum, that that be taken into account as you consider what roles you see for the consumer that you represent, going forward, from Ontario. Thank you. 451 MR. HAUSMANN: Questions from the Board? 452 MR. BETTS: Yes, sir. 453 MS. CHAPLIN: Thank you. Cynthia Chapman. 454 Mr. Stringham, I guess I'd invite you to elaborate a bit on a point you made earlier, indicating that there were a number of ways that new developments could be supported. Perhaps, could I get you to expand a bit on that? 455 MR. STRINGHAM: Yes, in looking at it in the world that we find ourselves today, in this demand-pull world, as I call it - there are other names for it - but it really suggests to us as producers that there needs to be some way of looking at diversifying or spreading the risk of these very large capital investments for new frontier developments across the marketplace. 456 Producers could take that on themselves, but then there is a question of whether or not the transportation capacity will be contracted for. Could that be contracted for by marketers? Perhaps. By consumers directly? Individually, at the residential level, I see that's hard, but it's a possibility if they could be aggregated by LDCs. Is there an industrial consumer that is willing to say, In order to have that security of supply in the market, I'm willing to contract for it? 457 One of the basic things, I guess, I'm saying is there has to be some contractual relationship over a longer term to permit those kinds of facilities to see the marketing opportunity to come on stream. 458 MS. CHAPLIN: Thanks. 459 MR. BETTS: A similar question - it's Bob Betts here - but a little more specific. You chose to present this in the area that we're calling system gas. So can you be a little more specific as to how you feel the consumers' responsibility to help promote new resources can be assisted through the system-gas system? What components there do you see to be helpful towards this end? 460 MR. STRINGHAM: The question that I raise, rather than providing an answer directly to that question, is really, as you look at the options that have been discussed amongst the parties over the last day and a half, going forward, I think there are questions of credit, that there are questions of supply availability, that there are questions of contracts, a number of other things, that you need to, or that we jointly need to ask, in looking at this future of natural gas supply, to how could we best expedite the development of that supply. 461 So either we can set a framework that allows that to be taken -- it will be taken care of in one way or the other; I have no reservations regarding that. But it's a question of whether or not it gets taken care of in a short time frame, or it will take a longer time frame for that to happen, as the market tries to sort through on top of the framework that you choose to establish here in Ontario. 462 Is that specific enough? 463 MR. BETTS: I'll ask you a couple more, and we'll get a little closer, I think. Is there anything that you see at this point that is characteristic of our current system-supply arrangements, or, in fact, the current structure of our LDCs in Ontario, that could be improved to support resource development? 464 MR. STRINGHAM: One of the things that has been discussed, and, again, it's for consideration, not that we're recommending it, but in looking to longer-term contracts and the regulator approving longer-term contracts, that is one aspect that could be beneficial for these longer-term large investments into new sources of supply that may be necessary. 465 MR. BETTS: Okay. 466 MR. STRINGHAM: The market has been, over the last decade and perhaps 15 years, moving to much shorter contracts. That's the way the whole market has been working at both ends. There's no accusation here. It's just the way it has been working. In order to look at the shift from the supply push, where shorter-term contracts were fine, to this demand-pull or bringing new supplies into market, the length of contracting term may be one element that can help assist that. 467 MR. BETTS: And a little more pointed still. Does your group feel that those parties today that have a system-gas function within their operation are better suited to provide those long-term commitments; and if so, why? 468 MR. STRINGHAM: I don't have an answer to that question directly, because I think there are different ways that that could be addressed and we have not done a complete analysis of how each one of those could happen. I can leave it to the individual proponents to be able to answer that, because I think there are ways that they think they can answer this question better than I could directly. 469 I'm just laying out that it is a very key consideration from our aspect as to what is decided from this Forum to go forward that will help support bringing on that new supply. But there may be a variety - from the LDCs, from the marketers, from the direct consumers - that they could propose to address that question. But I wanted to make sure, in appearing here today, that that question was at least considered as part of your deliberations. So I don't have a direct answer for you. 470 MR. BETTS: Thank you. 471 No further questions. 472 MR. HAUSMANN: Thank you, Mr. Chair. 473 In that case, we'll carry on a Peter Fournier and the Gas Users Association's presentation. 474 SUBMISSIONS BY MR. FOURNIER: 475 MR. FOURNIER: Thank you. 476 Last but, I hope, not least on the subject of system-gas supply. Just to refresh ourselves on who IGUA is, I represent 33 members with facilities in Ontario. These are primarily large users of natural gas either as a process fuel or as a feedstock in case of the chemical sector. 477 Twelve of my members are located in Union north, and they consume about 35 Bcf a year; 17 are in Union south, and they consume about 29 and a half Bcf last year; and I have 17 members in the Enbridge CDA and EDA, and they used 11 and a half Bcf last year. 478 My members embrace the chemicals, the steel, metals mining and refining, pulp and paper, food processing, and other general manufacturing. Out of the total of what is classified as industrial activity in Ontario, it's about -- I represent about 25 percent. That larger sector includes, I believe, and this is just some of the cogeneration power generation sector. Altogether, my members employ about 39,000 direct employees in Ontario. Our position on the issue of system-gas supply, is we believe the LDCs should continue to be suppliers of natural gas for those of their customers who choose LDC supply. 479 Now, why are we, IGUA, interested in this question of system supply? Because virtually all industrials buy their own gas supplies. There's a few that use some system supply, typically they heat a remote warehouse or office building, but the volume is insignificant. Industrials rely upon the LDCs for balancing and sometimes for supplementary supply. 480 Industrials typically buy their gas under terms whereby they take the same volume daily from their suppliers and they deliver all of that volume to the LDC. So on days when an industrial doesn't need all that he's buying from his supplier, the LDC takes that gas and puts the excess into storage. And on days when the industrial needs more than his DCQ, he draws on gas from the LDC system. So in effect, the LDC acts, for us at least, as a bank on which industrials can deposit gas on days they don't need their full DCQ and they can withdraw when they need more than what they've got under their own contracts. For this system to work, in our submission, the LDC must hold storage and the LDC has to be in the system-gas supply game. 481 More importantly, I think, for Ontario, and it's something that nobody has really mentioned in any of the options, including the utilities in their presentations, and there's not much said in the consultant study, but it is what I would suggest is the critical role that industrial supplies play in the market for the utility to be able to interrupt the gas supplies from industrials to meet peak period needs. 482 The LDC, as I understand it, looks at his gas receipts on a daily basis, what his expected flow of gas is into his system, and he does, at least daily and more frequently, forecasts what his send-outs are going to be. He knows what he's got available that he can draw out of storage. And when he sees that his send-outs exceed what he's receiving, what he can draw from storage, he curtails industrials. 483 If LDCs are removed from this system supply role, it's difficult to contemplate how interruptible services can operate fairly. Who would declare a curtailment? Would such a call be regulated? Would it be challengeable? Who would determine at what price the industrial would be compensated for his interrupted supplies? Termination of the LDC supply role would create a disconnect between the role played by industrial gas supplies and peak-period requirements of the residential and commercial markets. 484 Replacing the regulated LDC with unregulated marketers in the load balancing, gas banking, and interruptible function would be completely unacceptable to industrials. 485 And our last point of issue addresses what I promised I would address this morning. IGUA believes that LDCs will continue to have an important role to play if Ontario will require pipeline expansions or new projects to meet market growth in the future. Expansions require long-term contracts, both by the proponents of the expansion of the project and by the National Energy Board. If it's an NEB-regulated project which, under its part 3 regulations, the pipeline must demonstrate that there is a market and there are 10-year contracts underpinning the project. 486 Industrials and other large direct purchasers look to the LDC to fulfil much of that role. It's possible, I would suggest, only if the LDC remains as a supplier of system gas. 487 I want to address the consultant's study. I was very disappointed in the study on this subject of system supply. I felt it was heavily biased towards marketer interests, and it certainly neglects the very important role and position of the large-volume users in the Ontario market. 488 In 2004, as I can glean from regulatory filings, the Enbridge system had about 41 percent of their delivers of system gas, Union about 20 percent. So the balance of that in the Enbridge system, 59 percent, then is direct-purchase gas. Only 20 out of that 59 I would call large end-users, and 39 reflects the marketer community. 489 But in the Union system, of that 80 percent that is direct-purchase gas, 65 of that 80 is large industrial users, and only 15 is marketers. I suggest the industrial in the large-volume direct-purchase community is a very important component of the Ontario market. 490 The report assumes that end-users want to get involved in trading activity. You can see that at page 16, for example. Well, we disagree. The only parties who want to engage in trading are marketers, and we know well what happened to Enron, Engage, El Paso and so on. If end-users wanted to be engaging in trading activity they would be doing so today. We don't need new market structures ordered by this Board to cause that to happen. 491 I want to give you some specific comments on the consultants study. 492 We totally disagree with the suggestion at page 30 to modify the LDC gas supply account to capture the equivalent costs as incurred by direct marketers. There's been a fair bit of discussion on this. We totally disagree with the suggestion on page 32 that LDCs be required to purchase system gas only in the spot market. This is so ridiculous it defies any rational response. 493 Totally disagree with suggestions at page 35 that somehow the LDC system supply must respond to the same balancing requirements of marketers. The marketer role and the LDC role are different. 494 Option 1, as presented by the consultants, is not a status quo, they go on to make a recommended changes. Status quo, in my books, means what we have today without change. But with regard to the change they made to option 1, IGUA is prepared to consider the merits to the formulaic approach to QRAM as proposed at page 37 if it can be demonstrated that both Union Gas and Enbridge markets are sufficiently equal, if there's no significant impact on customers adopting a common formulaic approach, and if it's widely accepted by stakeholders. But I note that Enbridge, for one, observes that their system is distinct from Union, and while they are working towards commonization where they can, they say total commonization would be totally inappropriate. 495 We totally reject the suggestion at page 37 that the accounting for system-gas purchased-gas costs and requirements for balancing would be made consistent with direct-marketer costs. This would, in my analysis, only raise the commodity cost for current system-supply customers and would only advantage the marketers. 496 At page 40 we disagree with the, "options for system gas suggest that separating system gas and ancillary services is desirable in order to reduce cross-subsidization and to improve the playing field for direct marketers." Oh, very, very nice. It may be nice for direct marketers. The regulator's obligation, I respectfully submit, is to protect the interests of the Ontario consumer, the majority of whom clearly prefer to be served by system gas. 497 The conclusion at page 42 that option 3 would be the most effective option is entirely without merit. It's unsupported by detailed, effective, quantified analysis. The parties who should make the judgment on what is best for the current market are the stakeholders. 498 In our respectful submission, IGUA supports the true status quo. Let's leave things as they are. 499 MR. BETTS: Thank you. No questions. 500 MR. HAUSMANN: We've only been underway for about 45 minutes and the agenda calls for a break. I don't know how people feel about that. If we want to just carry on for a while and we can take a break a little bit later. If we can just take a show of hands, who would like a break now? 501 MR. BETTS: Feel free, I think, if I can add to that - Bob Betts here - to obviously go out and grab a coffee or whatever if you need to. We're kind of restricted so we won't, and probably our panel is restricted so they can't. But it may -- there may be an opportunity for us to have a full question period and still get away a little bit early. So I would support the kind of proposal that's being put to you, and it looks like we've had kind of general agreement for that. So let us continue and see if we can complete our question and answer period and head off for the day. 502 DISCUSSION PERIOD: 503 MR. HAUSMANN: We'll follow our usual practice and we'll give the ICF consultants an opportunity to place the first question to the panel, and then we'll carry on with the rest of the dialogue. 504 MR. CROOK: Leonard Crook, with ICF. A general question for the panel. 505 As the LDCs market share declines, or waxes and wanes over time in this sort of competitive market, do you see any effect of that on this -- the effect of the size of their market on their ability to support any sort of long-term upstream infrastructure commitments? How does that change as their share of the system -- of the amount of gas that's sold in Ontario affect the upstream commitments for supply and infrastructure that are described as being necessary? 506 MR. BASHAM: I'm going to start. Frank Basham with Talisman and CAPP. I view there to be a strong linkage between the magnitude of LDC system supply and what I could call LDC capacity holdings, almost a direct relationship. And as the LDC's share of local supply diminishes, I would expect that, over time, it would be logical for you to see the LDC vacating, on a proportionate basis, its capacity holdings. So if you wish your marketplace to have access to particularly frontier supplies, which require an attendant longer-term contracting commitment, you've got to balance it with, in my view, some capacity downstream in the market, system-supply capacity. 507 Now, if that implies, and I'm speaking for myself and not our association, if that implies a retention of the LDC role as the supplier, utility supplier, so be it. But we have to acknowledge that the procurement of upstream frontier pipeline capacity, as Peter has alluded to earlier, it does require very, very major contractual commitments to hold that capacity. And what goes along with that are very, very deep pockets and important creditworthiness considerations and that kind of thing. But it also requires a market. The holder of the capacity needs a market almost as firm as the commitments that that party is making to pay demand charges. 508 Does that help a bit? 509 MR. FOURNIER: If I could add. Peter Fournier. 510 If we look at, for example, the two LNG projects now in the proposal stage for the St. Lawrence River, I can certainly see the LDCs - Gaz Metro and Enbridge Gas Distribution - being looked to to contract for some of that. I could see some very creditworthy producer/marketers, for example, in the TransCanada project, Petro-Canada has been announced as a partner in it, and Petro-Canada being a large integrated company, I assume, I don't know this, but I assume it has fairly solid credit credentials with the financial community. So they could, I can see, contract for a block of the LNG gas which they would then turn around and hope to sell to industrials or whoever. 511 I'm not sure that companies who are purely in the retail marketing end, in today's community, with the financial environment following the Enron situation, could commit to the 10-year-plus kind of commitment, unless they're a company like a Direct Energy that has a large international corporate parent. They may be able to. 512 To me, one of the key players in this is the LDC. I don't see industrials. Industrials don't like to sign for long-term gas supply unless they're building a new greenfield plant. If I'm building a new plant in the outskirts of Peterborough and I need a big gas supply for it, I can expect to have a sign a 10-year contract for several reasons. My financiers of that plant are going to demand that I've got an ensured supply; my distributor and possibly the pipeline is going to demand that I've taken out at least a 10-year contract to underpin the facilities that they have to bid -- that they have to have to underpin their facilities. But I don't see, otherwise, industrials stepping up for 10-year contracts for existing operating plants. It falls back to the LDC once again. 513 If we want to see and increase in supply for Ontario, either from new pipelines from the west, LNG from the east, then I think the LDC is the principal party likely to contract for that 10-year supply; not all of it but a good chunk of it. 514 MR. HAUSMANN: Any other questions? 515 Mr. Potter? 516 MR. POTTER: Thank you very much. Gord Potter, Ontario Energy Savings. 517 Just a couple of observations, and I thought I'd ask for some clarification of your views, if I could. 518 The first question I wanted to ask, and, Mr. Fournier, if you could answer, is with respect to your comments -- I just wanted to clarify your viewpoints with respect to some of the views you shared with the discussion papers with respect to system gas being costed like marketers or being balanced as marketers, and some other references. 519 Would it be correct, or could you tell us your views with respect to whether you feel it's fair that system gas -- or that all ratepayers subsidize system-gas customers through their distribution rates, or would you feel that it would be more fair that system-gas customers should bear all the costs related to that function and that those costs should not be subsidized, in part, through distribution across all ratepayers that are served for both direct purchase and system gas? 520 MR. FOURNIER: You have an assumption that there's a subsidy. 521 MR. POTTER: Correct. 522 MR. FOURNIER: I think step number one is to -- if there is a view to be taken of whether or not changes should be made, the first thing to establish is what costs are we talking about? Are they really a cross-subsidization or not? 523 Let's not forget, the utility's been there, in the case of Consumers' Gas, since before the turn of the last century. Some of their employees have changed. They're set up to operate, and they would be entirely prepared tomorrow, I think, to serve the whole of their franchise area if that was thrown back at them. We've had, initially, a larger handful of marketers. That fell down to two, and I'm pleased to see that there are two or three more coming back on the scene. But the two or three more that come back on the scene this year, at least of the five or six or seven marketers that we have in a new community a few years from now, that could decline if circumstances come along that cause that to decline. I thought it was a very honest and correct admission the other day by the gentleman from MxEnergy who noted that in a time of increasing gas prices, direct marketers have done all right, but when the price falls in the other direction, that it's a different situation. Things can come and go. The utility is always to go to be there. 524 The staff that they have on hand today who administer their system supply, people they have in their customer service or they've outsourced for customer service, they're all located in the same office building. How do you start carving out to say that this person's computer belongs to the operations side and this person's computer belongs to the system-supply customer service. 525 If the costs involved were of some magnitude that clearly this is shown to be an impediment to a more competitive, more open market, then let's see what we should do if we demonstrate that. But we've had lots of talk, but nothing's been quantified, nothing's been shown to show that this is a problem. If this is a problem, then let's see what we do with it then. But until I'm satisfied it's a problem, I don't see the solutions offered are -- have been justified. 526 MR. POTTER: Thank you. 527 My second question for all of you, and it's more for me just to understand or to ask for your perspectives, is if we could just establish a hypothetical situation and then if you could provide me your views. We've heard from yourselves reference to the fact that in order to ensure that we have supply coming to Ontario, even though there's a demand in a market and people who have a core business of developing supply and producing supply would see that demand and want to sell their product, if we assume that Ontario had no LDC providing system gas and all there were were parties that supplied system gas. So there's no marketers -- they weren't all marketers, they were just parties. Some provide, perhaps, a regulated function for default supply, some provide competitive options, but there's 100 parties in the market that take care of everybody's system gas needs. How would you propose that transportation was looked after to ensure that those parties had access to the supply or that producers could sell their product to the market that demanded it? Because we're assuming there's 100 or 200 parties in the market, there's no one or two big players with a lot of money, there's a lot of well-established smaller players. How would you see that in order for you to underpin that supply, how would you do that? 528 It's just hypothetical. Because I understand the arguments but I -- I mean the arguments are somewhat based on the situation we have and the fact that there are a couple of very large players with deep pockets and big parents. So what we would do in the case that that wasn't there? And I open it up to all of to please respond. Give us your thoughts. 529 MR. FOURNIER: If I can go first, that'll give you guys a chance to think. Peter Fournier. 530 I note today that TransCanada PipeLines, as one of the pipelines serving the Ontario market, has something probably in the order of 200 shippers to Ontario. If I'm wrong in that number, they can correct me. We have Alliance, we have northern border bringing gas down to Chicago, and we have Vector bringing that gas over to here, and there are other pipelines connecting over to Dawn, MichCon, Panhandle Eastern, which is a new name now. So we have a number of pipelines that flow into Ontario now, all which have shippers contracting for that. 531 In the environment that you postulate, I would see as to continuation. If 200 shippers today, the largest volume holders being the LDCs, Gaz Met, Enbridge, Union, if they're gone, I would see some of the others would pick that up. 532 What I don't see is how we overcome the problem of, certainly, the capacity held by the LDCs, and I suspect it's the same for the marketers. They contract, typically, on the average demand of your market. They don't contract for the peak-day demand because for a great many days of the year, you've got some idle capacity and stranded costs. There's a big problem with taking the LDC out of system supply of how you deal with that, those peak days. Who holds the storage, who interrupts and so on. 533 If I could just add to the comment that we have a number of different kinds of shipper parties on the pipeline system. Of course there's the LDCs, some of my members as end-users, many marketers, we have producer marketers. If an industrial is buying gas, he has a choice of buying it at the Alberta border from a producer, he can buy it at a hub such as Dawn from any number of parties, he can buy it from a marketer who delivers it to the LDC city gate and then the LDC takes it from there and then delivers it to the plant. So there's a host of different ways that people can buy gas. 534 so in this situation, you hypothesize, I don't see any problem with the pipeline contracting end of it, I do see a problem of meeting those anomalies of the Ontario situation. Let's not forget, I heard one parallel this morning about the State of Victoria in Australia. Excuse me, they don't have Ontario's climate. So there are peaking needs that are distinct for Ontario and Quebec. We're at the end of the pipeline at the moment, and I would be very uncomfortable if the LDCs weren't there. 535 You see my members don't buy very much from the LDCs, but they sure rely upon them and the LDCs rely upon my members to make things balance. Take the LDC out of that and I think we've got some very serious problems which are not readily overcome. If for no other reason -- if I can just throw in one final comment. 536 Marketers, they have a very important role in this gas market, and they're not charities. They're here to make a profit. They're not going to offer the kind of services to industrials that come as part of the service of an LDC. They'll provide the service for them, no question, but at what price? And what does that do to the economics of at least some of my members? 537 So it's not a ready let's replace the LDC with marketers and the balancing gas storage daily banking and so on arrangement, it just doesn't quite -- not quite a simple solution as that. 538 So having mumbled away those words, I hope my colleagues can give an intelligent response. 539 MR. BASHAM: Frank Basham. 540 I'm going to start with a bit of a premise to your question and ask Greg to carry on with the proper answer. I guess the preliminary comments I would have are that I think you have to understand the motivation of the typical or average pure upstream producer in respect to why or why not he holds capacity. And from the standpoint of the pure upstream producer, what he really wants to do is he wants to monetize his natural gas resource in the ground. And he will try to do so by selling that gas at the nearest fungible, liquid transparent trading point or trading hub. And if that happens to be the wellhead, which it is not, well so be it. He'd be happy. All he wants to do is drill holes, produce gas, and get out of here, and sell it at market price. That's not the nearest, most fungible liquid trading hub at the wellhead. 541 So what's the next point? The next point within the Alberta system is called the NIT, or the AECO C trading hub, and many, many pure upstream producers sell at that hub because that is a highly liquid, highly transparent, very fungible, and very tradeable sales point for that party. There are other producers that have different motivations for different reasons that take it one step further to other trading hubs, and those include Dawn and also Chicago and even other trading points 542 So our motivation for holding capacity, I would say, is driven by our desire to sell the product as quickly as we can, at the most marketable, viable price. The highest net-back? Yes. But the most fungible, liquid trading point. We are not in the business of holding capacity as a business, for sure, for sure. We're in the business of trying to sell the gas. 543 And with that premise, I guess I'll turn it to Greg and see if he can add to that. This is in the context of a -- primarily in the context of what Greg describes as a demand-pull environment in which we're operating right now. We're not in a supply-push environment, which might have dictated me going further downstream in my capacity holdings. 544 MR. POTTER: Okay. If I may just interject before you begin, just for my clarity - it's Gord Potter - just one last response to that, that you're selling the commodity. If you -- if all of these 100 parties in the market would not commit to 20 -- or long long-term contracts that would offer -- you know, would secure supply for five years or seven years or three years, would you be disinterested in that market and try to look elsewhere, or would you sell supply in the shorter-term contracts? That was, I think, one part of it, just before -- or if you can include that in there. And thank you very kindly for your answer. 545 MR. STRINGHAM: Sure. Greg Stringham. Let me try and answer that part and then come back to the beginning. 546 First, I think we can learn an awful lot from hypotheticals, and so this is one extreme of an hypothetical. In fact, you can even extend it beyond the hundreds you've suggested. The other extreme, I think, is going back to one single party. I think you can learn from both of those. I want to be very clear that we are in neither, okay? And so from that perspective, what you suggested is, if someone would come forward and say, Well, I'm only willing to contract for three years, and the infrastructure, be it LNG or new gas supply from whatever area, was coming on, I believe that, being that we are into the North American market, other customers may come forward and say, I'm willing to contract for four years. And so, therefore, if that's the case, the gas supply will go in that direction, if they're willing to make that contract. That's the issue that I have with your hypothetical. 547 If I take your assumptions, let me expand on, which I believe are there, 100 to 200 parties, all equal, all creditworthy, all outstanding corporate citizens, a lot of well-established contacts - I can continue, but you get my point - if that's the hypothetical, I still believe that in that case, if the requirement for the new gas supply is, hypothetically, a 10-year contract, in order to get a 10-year contract with 200 parties, it is much more time-consuming than to get a contract with five or six. And the worry that I put forward as a premise earlier in this world is, the faster we can bring on that supply, the more beneficial to all parties. And so delay is my concern, not necessarily that, in your hypothetical world, it could not happen. 548 MR. POTTER: And I guess maybe a natural conclusion of that is, basically, across the continent or wherever, you would obviously sell to whatever is most beneficial to you. And if everybody else in our jurisdictions were willing to sign 20-year contracts, you would abandon the Ontario market and go with that longer-term commitments, generally speaking. 549 MR. STRINGHAM: I don't think those words came out of my mouth. 550 MR. POTTER: No, no, but I'm just asking, is that generally the case, that you'd go where that was most feasible for you? 551 MR. STRINGHAM: I think consumers will meet the supply, as Frank Basham has said, the most liquid hub. I am not saying that there would be any abandonment. I think I said the opposite in my presentation. Ontario is a very good, valuable market. It depends on where consumers and producer will meet. It's not a "one or the other." 552 MR. POTTER: Thank you very kindly. 553 MR. BASHAM: I just have one other thing to add. Your other premise was 20-year contracts, that's where the gas goes; was that a question that I heard? 554 MR. POTTER: No. In essence, the longer- or -- the larger- or longer-term commitment would bear more weight than a shorter-term commit. 555 MR. BASHAM: Frank Basham. Not necessarily, and the reason for that is the producer doesn't hold a promised inventory of 20 years in the ground at any one point in time, so why would he necessarily opt to sell his gas or sign a contract to promise to supply for 20 years? He may not be able to do that. 556 MR. POTTER: Okay. Let me rephrase it, then. And I just mean this from my informational sake. I apologize for taking time. What I'm saying is, the more longer-term commitment would bear more weight relative to what you could commit to yourself. Would that be a -- 557 MR. BASHAM: Not to a producer, necessarily. To a pipeline company, perhaps, on infrastructure commitments. But on gas supply, not necessarily. 558 MR. POTTER: Okay, that's great. Thank you very kindly. 559 MR. FOURNIER: Peter Fournier. If I could just add to this. Their reply gave me another thought, and that is, we can't overlook either the merits of the aggregation that the LDC contracting for upstream transportation does. This is probably more a subject for tomorrow's panel. But I have close to 50 members in IGUA; some are very large, very prosperous, because they're a commodity where the product that they're producing today is enjoying good prices. But I also have some members who are -- would have trouble, I think, getting much financing at the bank today. 560 The successful company, yeah, you can sign a contract and do all right; the company that's on more shaky grounds might not find his -- you might find the financial assurances of the pipeline are too onerous and he cannot sign up. But he can sign a one-year contract with the LDC, take gas, and doesn't have to sign the longer-term deal, and the LDC takes on the risk of the longer term. 561 So if we went away from the model of system supply, certainly that would jeopardize, I think, the viability of some industrials in the province. 562 MR. FRASER: If I may, my name is Bob Fraser, and my company, EnCana, considers itself to be an E&P company, exploration and development company. And we currently spend about $5 billion a year trying to get more supply. We currently produce about 2.7 Bcf a day, which is almost Ontario's entire demand for gas. It's not one of our objectives, I don't think, to be in the pipeline business, but I'd just like to say that when necessary, we can do those things, and we have done those things. But the more we spread our resources around, it's obvious that the less money we have for looking for gas. 563 MR. HAUSMANN: Mr. Poch, you are in the seat there. Do you have a question? 564 MR. POCH: Yes, I have a brief question to the folks from CAPP. Greg Stringham, in your penultimate slide, you were explaining to us the demand pull and where you saw the gas coming from. And I was just interested, the slide showed a cumulative -- the top line was tapering off in the future, and I just wondered if you could give us an explanation for that. Sorry, it's David Poch for GEC, for the record. 565 MR. STRINGHAM: Greg Stringham for CAPP. You're referring to the CERI forecast that showed the stacked supply going forward? 566 MR. POCH: Yeah. 567 MR. STRINGHAM: Yes. What they've shown is that there's a modest growth over the next decade period, and then with the forms of supply coming on, that that does peak and begin to gradually decline over the next 20-some-odd years. Because of that, I showed -- the other graph that I think you need to look at is what's happening in other basins. It then flattens off relatively flat from there, if it follows the same kind of profile as other basins. 568 MR. POCH: So when you showed this stacked supply, including new forms, even then it was tapering it off. Was that simply because it isn't going to be available, is the current projection, or because you saw a demand pull slackening? 569 MR. STRINGHAM: Okay. If I'm looking at the same chart, it goes from 2002, at about 6 trillion cubic feet per year, and it increases up to about 8 trillion cubic feet per year by about 2010, and then remains relatively flat from there just below eight up to 2020. So, yes, there is a decline in the western basin, but these other sources of supply, if and when they come on, will keep it relatively flat over the period that they're forecasting. 570 MR. POCH: I guess what I'm asking is why you didn't forecast further new sources showing a continuing positive slope at the end of that graph? Is that just because you're not in a position to see what those might be, or because you imagine the current forecast is that demand will, in fact, level off. 571 MR. STRINGHAM: As we have come to understand, demand always does equal supply. And so from that perspective, this is matched to demand over that time frame as well. It has built into it a specific assumption on price forecast. You'd have to talk to the folks at CERI to get the exact details of their forecast. 572 MR. POCH: That's great. Thanks. 573 MR. HAUSMANN: Ms. Allan? 574 MS. ALLAN: Peter, a question for you on your position on curtailments. You raised a number of pretty important questions that would have to be addressed, but I wondered whether you had discussed with your members an ability to structure a contract with the marketer that would address things like who could call a curtailment, whether the industrial would have to accept that curtailment or whether it could buy it through. Is your position that is it a flat, no. Or is it something that you would see being developed down the road? 575 MR. FOURNIER: No. You could have today arrangements between an industrial and his supplier where the supplier could curtail the industrial, and presumably that curtailability would be reflected in a lower price than what he would otherwise pay on a fixed contract fee. The question then goes -- that's in the period of the supply end. But it then gets to the point of, what kind of delivery service does that industrial contract for with the LDC? If it's a firm service, then the industrial's going to pay his demand charges, his delivery rates, even on those days he's curtailed. So he's got to, in his price with his supplier, get that deducted also, so that he's kept whole. 576 If he's an interruptible customer, then the LDC could nevertheless interrupt him. And if he does that coincident with the time that the supplier has interrupted him, you've got to disconnect. The industrial has got to deliver the gas to the LDC, and he doesn't have any gas to deliver to the LDC because his supplier agreement is that the supplier wasn't delivering it to him. That could, at times of spiked prices in the $60 market in New York, be fairly expensive fairly quickly. 577 So it's possible. It's possible today, but there are, I think, good and valid reasons why it's not prevalent. And I'm not even sure any of that is happening today, because of these uncertainties of service within the LDC system. 578 MS. ALLAN: I just wondered why your members would turn down an opportunity to have somebody pay more, potentially, for the interruption or for the curtailability. 579 MR. FOURNIER: If there were benefits in that today, we might see more of it. So the fact that we're not seeing more of it may give you one answer. The other side of the coin is, my members are in the game to produce widgets, or whatever their product is. They're not in the game to trade -- to make money on their natural gas contracted supplies. So that they're not interested, really, in conducting themselves in the gas speculative market, and their focus is on producing their product. That's probably the biggest reason why. They just want the certainty of the gas supply coming in, knowing that they can produce widgets tomorrow. 580 MS. ALLAN: Or as I've heard it phrased sometimes, if I have to hire three people in order to manage this business, then I -- it's not going to work for me. I've heard it phrased that way as well. 581 MR. FOURNIER: Well there are lots of agents available in the marketplace. You can gauge them and almost all industrials do. Notwithstanding that, the capability is there today, and indeed I'm aware of several members who have, when they've built up an excess of gas in their balancing accounts, have sold some gas on the spot market. But it's not a standard operating practice, it's always the exception, and they all tell me that that's not what they're in the game for. 582 MS. ALLAN: Thank you. 583 MR. MATTHEWS: Dave Matthews for Enbridge. 584 We've heard a bit today from CAPP, and I just want to make sure that I'm quoting you correctly, that we're shifting from a supply-push market to a demand-pull market. And because of that, producers are less inclined to underwrite pipeline capacity to get to market and, in fact, they are focused mainly on getting to the closest to the most-liquid hub where they can get the highest price for their gas. Have I got that correct? 585 MR. BASHAM: Pretty much. 586 MR. MATTHEWS: And from the other side of the equation where we look at the consuming end of the pipe, I see, because of the shrinking supply that we're looking at, that there may be competition between consuming areas. Is that something that you could comment on? 587 MR. STRINGHAM: Greg Stringham from CAPP. 588 Yes, briefly. As I laid out in front of you, it really is a North American market, but I think it is unfair to simply say there is competition between consumers. There is also going to be, as I pointed out, different sources of supply coming into that North American market. Today I've only focused on the Canadian sources of supply, but the possibilities of LNG and Gulf Coast offshore gas coming into that market is something that will also face competing consumers. So there is a continental market, including consumers and supply. 589 MR. MATTHEWS: So just for follow up, both on existing supply and these new supplies, because they are in scarcer availability, there is a competition to bring them to your market if you want to consume gas. 590 MR. STRINGHAM: There is competition for that, but there is also competition for new supply. Whether LNG appears in Quebec or whether it appears on the east coast or the Gulf coast, we'll also be part of that equation. The closer it is to a market, the more economic it will be because of the transportation costs. 591 MR. MATTHEWS: Thank you. 592 MR. HAUSMANN: Tom. 593 MR. ADAMS: I've got a couple questions for Mr. Fournier, just questions of clarification. 594 MR. FOURNIER: Quid pro quo. 595 MR. ADAMS: Mr. Fournier, when you filed evidence in the Enbridge case, you included in the evidence statement, the prefiled statement, a strong endorsement for the utility contracting for long-term supply from frontier resources of commodity. And then in your presentation this morning, you made also a very forceful statement in favour of the status quo, which I understand is not utility contracting long-term for a commodity from frontier regions. And then in response to questions from the ICF consultants, you appeared to express support for utility contracting for a commodity on a long-term basis, notwithstanding the lack of interest from your members in directly engaging in long-term contracts in the main. 596 Can you just help me understand what your position is with regard to long-term contracting? What is the position of IGUA with regard to long-term contracting for commodity? 597 MR. FOURNIER: Peter Fournier. 598 Your question about our evidence in the Enbridge case, I confess that stuff went in about last March or so. So I may be wrong, but my recollection is we supported Enbridge participating in the acquisition of new supplies and entering into the appropriate contracts to do so. I don't think it was tied to frontier areas. Certainly, in my mind, at the time, there was knowledge of the Gaz Metro project which had not yet been announced publicly but which I knew Enbridge Inc. was a partner of. And I put that evidence in, not only wearing my Ontario hat, but also my Quebec hat, because half my members are in Quebec, because I view the LNG project proposal as a very positive development for Quebec, and for eastern Ontario, certainly. And to the extent that one of those projects, or, indeed, both of the projects, now that TransCanada has announced -- to the extent that they do come on-stream, it has a beneficial effect for all of Ontario, because gas -- western Canadian gas currently flowing as far as Quebec City on a TQ&M pipeline, we get backed out and it's re-contractible, or available, for supply growth in the balance of Ontario. 599 So I would see the LNG pushing western gas out of all of Quebec, and in a good part of eastern Ontario, in the Union and Enbridge EDA area, and the displaced gas then is available for contracting in the CDA, and the NDA, and the SWDA. These are all TransCanada delivery-area terms that -- which we all use in our vernacular. But it means that the tightness of supplies that we're facing today out of western Canada will be alleviated if those projects come on. 600 With respect to the rest of your question, I come back that -- Gaz Metro and, when they get around to it, TransCanada, are going to be looking for parties to step up and sign at least 10-year deals, in order for them to be able to finance and get approval for those projects. And my members with existing sitting plants are not going to commit to 10-year deals. They prefer to buy on a year-to-year basis, to buy from supplier A today, and next year, if they can get a better deal with supplier B, they may move there. They do not want to sign long-term deals. 601 The party that has to do that is either, then, the marketer himself or the LDC. Hence, I don't think there's any disconnect in what I've said today. I think the LDC plays a very important role in bringing on these new streams of supply. I think they're very, very important for Ontario, and that the -- I don't see many marketers signing up on speculation, either, that they'll take that gas and hope to sell it. It's going to take parties with more of a certainty of market. And the LDCs are one of them who are going to sign those 10-year, or longer, commitments. 602 MR. ADAMS: Thank you for the clarification. So I understand that you don't support the status quo; you want the utilities contracting long. 603 MR. FOURNIER: Maybe let's clarify. I don't want them contracting long. I want the utilities to be in the system supply game. If, in their wisdom, they think they need to secure new gas supplies from a new project, which requires that they contract long, they will do so. If they can go to a supplier in western Canada and say, Look, we're prepared to sign a five-year deal, if you give us this price concession, or that price arrangement, or whatever deal they want to work, which they think is a prudent thing to do, I want them to be able to do that. 604 I don't want them to be in the spot market, that would be the craziest thing that you could ever possibly do. I had a member who, for the period '99 through early 2001, was buying all his gas on a spot market a heck of a lot more cheaply than a lot of my other members were, who were buying on a one-year deal with producer/suppliers. He ran into a stone wall in 2001. He ran into a stone wall so badly that they had to shut down most of their operations, because he ran into a spot market that suddenly spiked out of sight. Anybody suggesting that the LDCs should be buying their system supply on the spot market is -- that's the day I convert my house to, wholly to electricity or something, because ... 605 MR. ADAMS: I was just trying to get at what IGUA's position is with regard to long-term contracting for commodity. So, if I understand now your position, it is if -- so long as the utilities do it wisely, IGUA supports the utilities in entering into long-term contracts? Have I got that part straight? 606 MR. FOURNIER: I think any purchaser of gas should have the option of buying a one-day contract, a one-month contract, a one-year contract or a long-term contract. It depends on the circumstances, and I wouldn't put any restrictions on the utility arranging for a basket -- a prudent utility has a basket of supplies, and it has a bunch of short-terms, and it has a bunch of long-terms. And I wouldn't want to sit, and I would hope the regulator doesn't want to sit, in judgment over the experts within the utility of knowing what is best for their system-supply requirement. 607 The long-term, obligatory long-term, is connected to -- if we must -- the only way we can meet new growth in Ontario tomorrow, the only way we can, say, fuel these off-coal gas-fueled generating stations that the Ontario government wants to see built, the only way to do that is that we have to contract for a gas supply from wherever, that requires new facilities being built, whether pipeline or LNG or whatever. If that is the only way we can make those, and that is going to require somebody stepping up to the Board with a minimum of a 10-year contract, because that's what the NEB requires, that's what that project is going to require. And I wouldn't want to shut the door on the LDCs, on direct marketers, on industrials, whatever, to make those long-term contracts. But I would think we would be absolutely incorrect if we were suggesting to the OEB to say, Tell the LDCs they should only purchase in a spot market, or Tell the LDCs they should only purchase 20-year gas contracts. They shouldn't have their hands tied behind their back any more than my members have options, or as marketers have options. 608 I trust the LDC to have -- I expect them to have intelligent, competent people managing their gas supply, and if they don't, I'll be one of the first before this Board to say that they're not doing their job. But let's not sit on their management. Let them manage their gas supplies. 609 MR. ADAMS: Let's just take the hypothetical that the utilities do contract long for commodity supply, and they've got a firm commitment to take deliveries for a fixed volume: Are your members prepared to take -- in their delivery rates, take or pay non-bypassable charges for commodity that -- so that the utility is not at risk for those volumes at those prices? 610 MR. FOURNIER: Peter Fournier. I've already said my members don't buy system gas, except if they're heating a warehouse, or an outlying building somewhere, or something. My members buy their own gas. 611 MR. ADAMS: So your comments about the utilities contracting for gas are for somebody else, not for your members? 612 MR. FOURNIER: The linkage between my members and the utility is the necessity for the LDC to be in the system-supply game so that they can provide the balancing, what I call the banking, and, I think, the market operation that the role of an interruption of industrials plays. And for the LDC then to be in the system-supply game to fulfil those three functions, which are what my members look for, they've got to have an ability to operate their system supply in a prudent way and serving their -- the vast, or, at least, the majority of Ontarians who want system supply. 613 MR. ADAMS: One last question. If utilities are contracting for supply, and they've done it with great wisdom, and it turns out that they're -- long-term supplies are available to them at what turn out to be well-below-market prices, are your members prepared to forgo access to that commodity? 614 MR. FOURNIER: I think there's a flaw in your assumption. Let's assume the utility signs a long-term contract. That long-term contract says that I commit to buy your gas for 10 years or 5 years, whatever. I would be very, highly surprised, because I have not heard of it, that the counterparty would agree to a fixed price on a long-term contract basis. Almost all sales contracts, gas supply contracts, are tied to some kind of formula, whether it's the price of landed fuel oil in New York Harbor, or it's a basket of things including the spot market in Chicago, and Henry hub, and a bunch of other places. They're almost all that kind of a contract where the price moves under whatever the terms of the contract provide for. 615 So where the LDC has purchased today a gas supply which, five years from now, the price five years behind was attractive, they're not paying that attractive price in five years time. They're paying whatever the formula is, and the formula typically reflects, sort of, the average of the market. It doesn't reflect the spot price, it reflects, sort of, the average price. 616 Now, my members when they buy their gas, they typically also buy a portfolio of gas supplies that may include some spot gas. But if the spot price in this notional time in the future we're talking about is -- if the price today is for the commodity only, without transportation, let's say $7 Canadian at Dawn. If in five years hence that we're talking about, that spot price at Dawn was suddenly $15, the price my members would be paying would be some kind of an average price, perhaps something 8 or 9, $10, and that contract that the LDC had which has this price adjustment clause in it, because I think they all do, would be in that same, $8, $9, $10. So there probably would not be any advantage in price in those circumstances. 617 So I don't see that kind of a scenario or results. If it did, then I wouldn't preclude my members from buying from the LDC any more than any other commercial residential customer. 618 MR. ADAMS: Thanks. 619 MR. HAUSMANN: I have two people on my list. Mr. Scully. 620 MR. SCULLY: This is a question to the CAPP people. 621 In a demand-pull situation, it seems to me that this Board and Ontario has to look at where that pull is going to come from, and my concern is the U.S. market. It's 20 times the size of the Canadian market at least, and my understanding is there are very few controls on the export of natural gas from Canada. Can you provide us your viewpoint on that situation, including the history of whether there have been any constraints or any turndowns of exports to the United States? 622 MR. STRINGHAM: Greg Stringham, CAPP. 623 The answer to that question is written in many textbooks, so I will try and summarize for you. Basically, the way that we perceive this, the demand pull is not just the U.S. versus Canada. We are both part of a North American market. It will be the aggregate pull of the market that is bringing those supplies on to the market at this point in time. 624 There is a very good trading relationship between Canada and the U.S., but they do compete at the market. And so if the market in Ontario is buying that gas, as you know, much of that gas goes right past this market on its way to the U.S., and in an open market that gas can be freely supplied to the Ontario market if it requires it. 625 MR. SCULLY: Sorry I missed that last term. We would stop it at the border if we really needed it? 626 MR. STRINGHAM: You can buy it in the open market if you really need it. It's going right past here. 627 MR. SCULLY: So we have to bid the price. 628 MR. STRINGHAM: It's an open market, that's correct. 629 MR. BASHAM: Just to add, Frank Basham. 630 On the regulatory front and with respect to export issues, you will be aware that there is a National Energy Board set of regulations having to do with both long- and short-term exports from Canada. And in fact, I think it was last year there was a challenge by the province of New Brunswick to the exportability of solely offshore Sable gas. And the issue there was, did they have a fair and proper opportunity to bid for gas supply from that project, and there was a full adjudication. My point to you, I think, is simply that there is a piece of regulatory apparatus that does address both long- and short-term exports. There is a complaints procedure that handles that, and at the moment that's with the NEB, on an import and export basis. 631 MR. SCULLY: Aside from the New Brunswick challenge which wasn't successful - the gas flowed to the U.S. - have there been any other challenges in the last five years? 632 MR. FOURNIER: Peter Fournier. 633 MR. BASHAM: I don't think so. 634 MR. FOURNIER: Mr. Scully, don't forget we having something called the North American Free Trade Agreement. 635 MR. SCULLY: I'm not forgetting, that's why I'm asking the question. 636 MR. FOURNIER: If I wanted to build a plant in downtown Toronto, and I went to a bunch of producers and said, I want to buy some gas from you, and they said, We'll sell it to you, pay the market price. And I went running off to the National Energy Board and said complain, complain, I don't like the price they want to charge me, so force them to reduce their exports and give me the gas at the price I want to pay, they'd laugh me out of town. Because their response to me would be, It's a free market and they're selling a commodity that's governed by the free market rules, and gas is available to you if you pay the price. 637 MR. SCULLY: Thank you. I just wonder if I could have an answer to my question from the CAPP people. Do you know of any other challenges in the last five years? 638 MR. BASHAM: I'm not aware of any challenges. I am aware that from time to time, there are full adjudications of long-term export licences. I don't know whether they're -- actually, in the case of Alliance, I don't think there was even any long-term export licences applied for by most of the shippers. There might have been one, but most of us did not use long-term licensing as a device for getting gas to the States on the Alliance project. 639 But again, I emphasize, there is a complaints procedure where if Canadian customers do not have a fair and equitable opportunity to bid for the gas supply on market-based principles, there is an adjudicator for that. It's called the NEB. 640 MR. SCULLY: Thank you. 641 MR. HAUSMANN: Okay. I now have three people still on the list, and I'm thinking about our reporter here who's been at it for two hours. Are they short questions? I guess we never know the -- because the answers might be long. 642 Why don't we take a five-minute break, just a quick break because we're due to adjourn early anyway. So take a quick five-minute break and we'll reconvene. 643 --- Recess taken at 2:25 p.m. 644 --- On resuming at 2:37 p.m. 645 MR. HAUSMANN: Can we reconvene, please? 646 Okay, the next person on my list was Mark Isherwood. Mark. 647 MR. ISHERWOOD: I have, hopefully, a fairly short question. It's address the to the CAPP panel. I would like to, first, complement you on your presentation. I think it really brought into context the whole supply and demand, matching of supply and demand, the whole market, I guess, from a contextual point of view going forward. How it's going to be tight, and supply -- it's a very good presentation. 648 The question I have is very similar to one that I think Mr. Betts had asked, and I'm going to ask it in a slightly different way. In the context of this proceeding, do you see the LDCs exiting system gas as supporting your need for market pole? 649 MR. STRINGHAM: I think the market pole is going to be coming from consumers in aggregate. The LDC exiting the system gas capacity in the short term, unless there were a replacement for that, could be seen as a constraint on the ability to contract for the long term, either Alaska gas or LNG or something like that. But if there was something that was transitioned into there, there may be some other answers associated with it. But in the short term, unless there was, I think it could have a negative impact. 650 MR. HAUSMANN: Gentleman at the -- I'm sorry, I don't know your name. 651 MR. HASSAN: My name is Fred Hassan, on behalf of Enbridge. I have a question for Peter Fournier. 652 Peter, would it be fair to characterize your position in the following manner: That your members rely on the LDCs to do the following: To do long-term planning, and, in that regard, make the necessary arrangements for upstream facilities. Rate the bulk of those upstream facilities on the basis of volume and time; in other words, your customers don't want 10 million a day, they may want 1 and a half million a day, and they don't want a 10-year contract, they want a one-year contract; and to that extent, they rely on a subassignment from the utilities to affect that perking of bulk. And thirdly, that the LDCs, in many cases, advocate on behalf of their marketplace terms and conditions of access on the upstream facilities that allow them to do that and that allow your customers to have access to the capacity. Is that a fair characterization, Peter? 653 MR. FOURNIER: Peter Fournier. First, I don't have any customers, I do have members. They have -- there are three different ways my members obtain their gas from the context of transportation. Some of them buy their gas at the Alberta border and hold their own transportation on TransCanada. At my last count, I think there were seven members doing that. Some buy their gas from the producer/supplier/marketer at the city gate of the distributor; in other words, the producer/supplier/marketer holds the upstream transportation on whichever pipeline he brings it in on, and he deliveries it to my member, if it's the case of Enbridge, at say Maple, or in the Union case, if it's Union north, say at North Bay, if that's where the factory is. Those -- there's not too many that do it that way. 654 The vast majority of my members purchase their gas at the Alberta border, some at Dawn, and turn it over to the LDC who uses T-service, and then to -- the LDC holds the transportation on the pipeline and delivers the gas to my members' plant. 655 And the reason for that is that the vast majority of my members, to manage a gas transportation contract, you've got to do daily nominations. You often have to change that nomination during the day if your gas flow has variances in it. Many of my members, some of the very large ones have fairly sophisticated energy management staff who do both the supply management and the transportation management. Many of my -- a good number of my members, the gas purchase person, who also would administer the transportation contracts if he held them, is also, say, buying -- if he's a cement manufacturer, he's buying the aggregate and he's buying the paper and stationery for the front office and everything else. He just doesn't have either the time or the sophistication to manage the transportation contract. 656 So they very much rely heavily upon the LDC to do that. He just goes out and he buys the supply of gas of 100 units a day and he delivers that 100 units a day to the LDC. And if he only takes 50, or if he takes 150, he doesn't care, he's giving 100 a day to the LDC and it manages the transportation. 657 So in terms of what we look to the LDC for is upholding the upstream transportation, but that's an issue, really, for tomorrow's storage and transportation panel, I think. 658 In terms of system supply, what we've been addressing here, the critical services to the industrial are balancing, banking, as I referred to it, and for the market. My members would be absolutely happy if there was never any interruptions. I mean, they get upset when it does happen; if it hasn't happened for a while, they forget that they are on interruptible service and they complain, and we have to remind them that they are getting a lower rate because they signed an interruptible contract, and take it or leave it, they're going to get interrupted. 659 But that's an important component of the operation of the Ontario natural gas market, is the interruptability of industrials in order to meet peak-day requirements. I wholly accept that industrials provide that service, if you can call it that, or provide that opportunity, at least, for the market to take their gas supplies on days that it's needed. But the submission I was making, Fred, is that we believe it's got to be the LDC performing that function, and in order for the LDC to perform that function, it's got to hold or have system gas which goes together with the storage and the whole sort of interconnection of all of that to make that work and operate. 660 MR. HAUSMANN: Thank you. 661 Mr. Haggarty? 662 MR. HAGGARTY: Gerry Haggarty, Superior Energy. My question is for the CAPP people. 663 Now, this morning there was a comment or two made that marketers don't offer one-year prices, that they only offer longer-term, three-, four-year prices and contracts to customers. And up until about six months ago, Superior offered a one-year price and we stopped offering it because nobody was taking it up, customers didn't sign up for it. 664 We purchase a lot of gas from natural gas producers in western Canada, all of whom are CAPP members, and when we purchase gas from them, we are looking for three- and five-year contracts to back up what our customers want and sign up in contracts. And we are constantly running into a situation where the producers say, We really don't want to sell you long-term. Why don't you just take one year? 665 Can you give us any comments on how we bridge that gap? 666 MR. STRINGHAM: Greg Stringham with CAPP. 667 I think that points out one of the highlights I was just mentioning to Peter over the break, is there seems to be some confusion in the room in our discussions so far between commodity price contracts on a short or long term and transportation contracts on a short or a long term. I want to emphasize that in my presentation, when I talked about the need for support, whether that be contracts, underpinning, whatever other word you want to talk about, is that is for the transportation side of things to bring new supply on. 668 There can be a contract for ten years to bring new supply from an LNG for Arctic gas that can be traded on a month-to-month/year-to-year basis for the commodity portion. Vice versa, as Peter just said, you can also have a longer-term one-year contract that's moving on monthly month-to-month interruptible transportation, and then there's a variety of ones in between there. 669 So to come to your question of asking us, on behalf of our CAPP members, to say, So how is it that we can't sign longer-term contracts? It is a market. The longer-term contracts are available out there. And even if producers, right now, in a market-pull world, have a propensity to move, as do customers, to shorter-term contracts, there are some financial instruments available in the market to allow that gap to be bridged. 670 MR. BASHAM: Frank Basham. 671 I have a supplement to that as well. And I think another distinction that you made in your question was a price distinction, if I'm not mistaken. You were looking for an expression of interest at, let's say, in a three-year price arrangement. 672 Producers probably inclined to do term supply contracts and are somewhat less inclined to do what I call fixed-price term arrangements. They prefer to operate at the market. That way, they're always in the market, they're not out of the market. They don't like to hedge as a normal state of affairs, even though many of us do have a hedging component to our sales programming and that kind of thing. 673 So if you're asking why -- I can see an interest in doing a term capacity contract deal for pipeline capacity. I can see us having an interest in doing some sort of supply term beyond a month, beyond a year, whatever, and we have those kinds of supply arrangements. And sometimes the pricing is always at the market for a whole bunch of reasons. And if you want something different price-wise, you can go out and do a derivatives deal and figure out a way to fix it. If I want to do the same thing, I can go out to the derivatives market and do something like that as well. 674 So I don't have an answer for your question as to why some producers might not have an interest in certain kinds of pricing arrangements. It depends. It depends on who the market is, who the buyer is, what's behind them, a whole bunch of reasons like that. 675 MR. GORMLEY: Bryan Gormley for the CGA. 676 My question is probably for the whole panel, but more directly to the CAPP folks. What I'd like to know is what you feel or consider to be the key characteristics that prospective counterparties would need to have in the contracting arrangements in a demand-pull world? And a second question that follows on from that, is there something different or unique about what you see as the future sources of natural gas supply, be it the risk environment or the cost environment, that's different from our past supply that should be considered in terms of influencing contracts and how it might impact system gas? 677 MR. STRINGHAM: Greg Stringham with CAPP. 678 I think a lot of the characteristics, regarding your first question, in a demand-pull world, that would be necessary to look at for a contracting, I'm not sure that the characteristics change much. But what people are looking for, as we've gone through some of the volatility in the commercial market, is certainly a very strong credit and being able to enter into a contract that you know is going to be there for the duration, however long that is, short or long term. So in the discussions in the producing sectors where they are looking at markets, credit has been an important discussion. I'm not saying you can't come up with it in different varieties in the market, but it is one of the major discussion points. 679 The other discussion point is certainly flexibility. The characteristic that producers are looking at is flexibility regarding either transportation arrangements or load profiles or different things that they can match to their production profile. For large, major companies, they have a variety of sources of gas and have a fairly flat profile. For smaller companies, they do not have the same type of profile and may be looking for that kind of flexibility in the contract to be able to deal with. For example, when it goes to minus 40 in northern Alberta and it freezes off two of their seven wells. So that is one of the characteristics that need to be looked at as well. 680 Those are the two that really, I think, come to mind in my assessment of going forward. I haven't spent a lot of time thinking it through and I will try and get you a more complete answer. Anything else? 681 Let me try and address the second part of your question. The risks in the future, I think, is what you're trying to get at. Could you just kind of describe what you mean by that a little more fulsome? 682 MR. GORMLEY: Bryan Gormley, CGA. 683 What I was more interested in was more of a comparison of the prospective sources of supply, such as LNG, Arctic, or whatever, as compared to where we've gotten our gas from the western Canadian sedimentary basin, and whether or not there's anything unique about where that supply might come from and the cost risk aspects around that that might influence the discussion. 684 MR. STRINGHAM: Sure. Absolutely. Greg Stringham from CAPP. 685 In looking forward, as I mentioned, over the decade of the '90s and even before that, we were basically coming from a mostly conventional basin across North America, whether it was from Canada or the United States. In the recent years, and I see going into the future, what we have definitely noticed is there is a higher cost profile that is coming out of the new basins. We are either going for -- because of technology, going for smaller supply pools, the prices supporting that development in the past they would not have been development, or higher costs of sources of supply, be they more distant or more expensive to develop. 686 The example I showed in my presentation regarding coal-bed methane, it is 10 percent of the United States' supply today because they started off with a $1.35 per thousand cubic foot tax credit back in the '90s that kicked in that kept it going. We're not looking for that tax credit, the price level is sufficient to develop it now, but it's taken a decade for it to move into Canada because of that. But it's a higher cost supply. 687 If you start looking at LNG, I did put a slide forward that shows that the cost of LNG is higher than the conventional cost had been in the past. Going forward, I imagine it will be comparable as we go forward depending on where you look at. But it is much higher cost, going forward. 688 The risks associated with these new sources of supply is that they are new sources of supply. In the past, the exploration for new gas has been new sources, but we are now going into deeper parts of the basin. They are turning out to be quite prolific, but they take longer times to come on. We used to be able to go out and drill another thousand wells and that would be enough to go forward to bring on more supply of gas. Now we're saying the new sources of supply, coal-bed methane will take two or three years to build up, as you saw in my chart, but things like LNG, northern gas, where it needs new infrastructure, other sources of supply, offshore British Columbia, are three to five to ten years out. So, therefore, we're looking at future supplies that are longer lead time than ones that we had in the past. Is that helpful? 689 MR. GORMLEY: And then just as a slight -- as a follow on. How would you see that impacting in your answer to the first question then? How does that affect your assessment or the levels required for the kinds of counterparty characteristics that you're looking for? I think it's a little bit obvious, but feel free. 690 MR. STRINGHAM: It is, and so I won't spend a lot of time on that. Greg Stringham again. 691 In looking forward for those new sources of supply, the parties that will need to contract and move forward on that will have to have the characteristics that I referred to earlier. When new infrastructure, I'm separating from the supply price question that was being put on the table, when new infrastructure is required, there will need to be an underpinning contract between the consumers in some form, there's a variety of forms that could take, but the consumers in some form, and the pipeline that's going to be required for that, pipeline or infrastructure, it could be LNG so not just necessarily a pipeline, in moving forward that in the past was absorbed by the market because it was just conventional gas and the pipeline infrastructure since 1999, when we've had sufficient pipeline capacity, was not required. And thus we've seen over the last five years a contracting in the length of the contracts, whereas in the past it had been a longer-term underpinning infrastructure contract to get it going. 692 MR. FOURNIER: If I can add. Peter Fournier. 693 I will be addressing this next Monday or Tuesday, whenever it is that I get to the rate regulation subject. But in terms of impediments, issues to be dealt with, we have an interesting situation this summer. We have Union Gas announced an open season for the expansion of its Dawn-Trafalgar line, because clearly there is a demand in Ontario and the export market for more capacity out of Dawn. If you layer on top of that, though, the potential of either one or both of the LNG projects coming on and bringing into Quebec and eastern Ontario this 500 million Bcf a day of LNG supplies, pushing back western Canadian supplies into central Ontario, what does that do in terms of the assurance that an expansion of the Union line, which might cost $400 to $500 million is going to be used and useful in four years' time, say, when the LNG comes on? 694 So this will be an issue that this Board is going to have to grapple with if and when it comes before it, and it's something that Union and its parent are going to have to grapple with in terms of are they prepared to go forward with the risk of this expansion becoming -- having some excess capacity in the future. If so, who should bear that risk? So these are some interesting questions that will come as we look as how we're going to serve the growth market in Ontario. 695 PROCEDURAL MATTERS: 696 MR. HAUSMANN: Well thank you. Any last questions, comments out there? Our agenda makers seem to have an uncanny ability to know exactly how long it's going to take to get through all your comments, because here we are at 3:00 and we seem to have pretty much exhausted our comments and our thoughts. 697 Any last comments from the Board members? 698 MS. CHAPLIN: Just to reiterate what I said when we first came back after lunch. We've made some further refinements to the list of key questions and we will e-mail that to parties this afternoon and we will make hard copies available at the back of the room tomorrow morning. And we say once again that we welcome your comments on that, and if there are further changes that are required, we will update it again. Thanks. 699 MR. BETTS: Thank you. And I think just in summary again, this day, as yesterday was, has been very beneficial to the Board, and we'll thank all the presenters both this morning and this afternoon, and we thank all of those that contributed their questions and thoughts to those panel discussions as well. It has been very beneficial and today we are basically winding up the system gas dialogue. There's a great deal of additional information that the Board is looking forward to in each of your submissions, and truly we look forward to that and we will consider the idea to give you a little more time to deal with that in its fullest way. 700 I did want to just make one housekeeping announcement. I learned earlier this afternoon, actually, that at least one party was working off an older agenda and was not aware of the fact that we are sitting tomorrow morning and Thursday. I hope nobody else is facing the problems that that has caused for them. But in fact, everybody should be referring to the latest agenda at the back and we are sitting both Wednesday and Thursday, breaking on Friday, and then coming back next week. 701 There were some earlier agendas that didn't have that same schedule sometime ago, and I just want to make sure that everyone's aware of that. We don't want to miss any of these friendly faces tomorrow at 9:00 a.m., by the way. 702 MR. HAUSMANN: Just one item of housekeeping, Mr. Chair. I made a note on, sort or, a parking lot sheet that I made here that the Board was going to address the issue of time available for submissions. So if you will give that some thought whenever it's appropriate. 703 MR. BETTS: We will, thank you. I think with that, we're able to conclude things a little early today, allow you to get back and answer all your e-mails and do all the things that are piling up. Thank you once again, we look forward to seeing you tomorrow morning at 9:00. 704 --- Whereupon the hearing adjourned at 3:00 p.m.