Rep: OEB Doc: 13BFF Rev: 0 ONTARIO ENERGY BOARD Volume: NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON RATE REGULATIONS, FOCUSING ON PBR - VOLUME 6 5 OCTOBER 2004 BEFORE: R. BETTS PRESIDING MEMBER C. CHAPLIN MEMBER 1 RP-2004-0213 2 IN THE MATTER OF a hearing held on Tuesday, 5 October 2004, in Toronto, Ontario; Natural Gas Forum - Technical Consultations on Rate Regulations, Focusing on PBR 3 RP-2004-0213 4 5 OCTOBER 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 GEORGE VEGH Board Counsel BEVERLEY JAFFRAY Board Staff LAURIE KLEIN Board Staff MIKE BERMON ICF Consulting Canada Inc. LEONARD CROOK ICF Consulting Canada Inc. LARRY KAUFMAN Pacific Economics Group CHRIS HAUSMANN Hausmann Consulting DAVE CHARLESON Enbridge Gas Distribution DAVE MATTHEWS Enbridge Gas Distribution TOM LADANYI Enbridge Gas Distribution JIM GRANT Enbridge Gas Distribution FRED HASSAN Enbridge Gas Distribution MARIKA HARE Enbridge Gas Distribution RICHARD CAMPBELL Enbridge Gas Distribution IAN MONDROW Direct Energy GIA DeJULIO TransAlta Energy GREG BADEN Coral Energy PAUL KERR Coral Energy MURRAY ROSS TransCanada Pipelines GORDON POTTER Ontario Energy Savings Corp. CHRISTOPHER GAFFNEY Ontario Energy Savings Corp. MARK ISHERWOOD Union Gas Limited BRUCE HENNING Union Gas Limited STEVE POREDOS Union Gas Limited MIKE PACKER Union Gas Limited TOM ADAMS Energy Probe PATRICK HOEY Canadian Gas Association GERRY HAGGERTY Superior Energy ELISABETH DeMARCO Superior Energy BILL FARQUHAR Northern Cross Energy DARRYL SEAL School Energy Coalition PETER MILNE School Energy Coalition JAY SHEPHERD School Energy Coailtion PETER BUDD Tribute Resources DAVID POCH Green Energy Coalition ROGER HIGGIN Vulnerable Energy Consumers Coalition MICHAEL JANIGAN 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 CHRIS MACKIE Self-represented 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [15] NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON RATE REGULATIONS, FOCUSING ON PBR: [29] SUBMISSIONS BY MR. FOURNIER: [30] SUBMISSIONS BY MR. SCULLY: [81] SUBMISSIONS BY MR. SEAL AND MR. SHEPHERD: [116] SUBMISSIONS BY MR. JANIGAN AND MR. HIGGIN: [193] SUBMISSIONS BY MR. GIBBONS: [277] DISCUSSION PERIOD: [300] PROCEDURAL MATTERS: [521] 10 EXHIBITS 11 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:00 a.m. 15 PRELIMINARY MATTERS: 16 MR. BETTS: I'll ask everybody to please take their places now. 17 Thank you, everybody. I've surveyed the room and I'm looking for unfamiliar faces and I think most of you have been here at least one or more of the days of this Forum, so I won't go through all of the routine that we have been doing on introductory days to new sessions. So I will introduce myself again. I'm Bob Betts, Board Member, and with me is Cynthia Chaplin, fellow Board Member. 18 Again, this is not a typical hearing process, it's not an adjudicated process. We're here representing the Board, guiding the process, and hopefully asking questions that fellow Board Members would like to hear the answers to. 19 With that brief introduction, I do have a couple of housekeeping items to mention. First of all, it's been our practice in the previous two discussion papers to publish towards the end of each session a list of questions that the Board would like to have addressed. By no means are we suggesting that you should limit your submissions to the answers to those questions, but certainly we would hope that you could provide us with some input on those specific questions. 20 It's our goal to send those to all of you by e-mail later today and we would ask -- we've also indicated in the past that we'd appreciate comments from anybody, whether the list should be changed or added to or if questions should be deleted, for that matter. If we could have any of those comments by the end of the day on Thursday, and that would be the 7th, thank you. So if we could have any comments with respect to those questions or any others no later than the 7th, that would be appreciated. We can then finalize the list on the 8th for everybody's consideration. 21 The other item of housekeeping that I did want to cover was a request made by Mr. Packer on behalf of Union with respect to the study by EEA. And Mr. Packer asked if EEA could have the opportunity to make submissions in rebuttal of any comments that were received regarding that study. The request, for those of you who weren't here, the Board asked if EEA, through Union, could submit their study for review by all of the parties on the 27th, which was the original due date, which would allow the parties an opportunity to consider those and perhaps provide their submissions on the new due date, which is November 10th. 22 The Board has considered that request and we do not want to create another round of rebuttal and submissions, so we will not find -- not be able to satisfy the request of Union. We do not want EEA to submit rebuttal submissions on anything that comes up. The point behind that or the reason behind that is that many parties have provided their submissions already and made their oral submissions to us and, in fact, they will be receiving submissions by other parties that will be contrary to their view and they will not have the opportunity to rebut those either. So the Board will evaluate all of the information that's before us on an equal and objective basis and consider all of the submissions based on their merits. 23 So I think with that, we will turn this hearing over, not hearing, this proceeding - it's not even a proceeding, this session; I've got to be careful about my words here - back to our facilitator, Mr. Chris Hausmann, who's done us very well in keeping us in line throughout this proceeding. I'm not even going to correct that. We do have a very full agenda today and we may run a little bit late, but I'm sure all of you will not mind if we do that. And also, it will allow everybody to get away and do their business later in the afternoon. 24 So Mr. Hausmann, over to you. 25 MR. HAUSMANN: Thank you, Mr. Chair. 26 I guess we're somewhere between a providing and a gabfest or whatever, but just a couple of quick reminders. I think you've all been to one of these sessions, as the Chair has mentioned. Please be sure that all your cell phones have been turned off. Please speak into the microphones when you speak. If you don't have one at your chair, there are chairs or seats available where there are microphones. Please come forward and we'll see that you get to say what you need to say. Be sure to give your name when you first speak. If there's a dialogue ongoing, as long as the people listening on the webcast or certainly in the transcript here recognize who you are. 27 As the Chair mentioned, we have a fairly heavy agenda this morning. You should all have a new agenda. It was revised from the original, but we have five presentations and seven people. So our panel spreads out beyond the usual arrangement here today, so there will be a little bit of musical chairs between presentations to make sure everybody gets in. 28 We're going to start with Mr. Peter Fournier of The Industrial Gas Users' Association. Mr. Fournier. 29 NATURAL GAS FORUM - TECHNICAL CONSULTATIONS ON RATE REGULATIONS, FOCUSING ON PBR: 30 SUBMISSIONS BY MR. FOURNIER: 31 MR. FOURNIER: Thank you. 32 First, is IGUA's interests. IGUA participates not only in the OEB's regulatory process, but also in that of the Regie de L'Energie and the National Energy Board. IGUA's, therefore, familiar with the results of incentive regulation approaches that involve Gaz Metro, TransCanada PipeLines, and others, and bases its views on the merits of incentive regulation mechanisms on its observations and experience over the past ten years with incentive schemes involving not only Enbridge Gas Distribution and Union Gas, but also GMI and TransCanada. 33 I use the term incentive regulation intentionally. I don't accept the term performance-based regulation, at least as it's applied in Ontario. I believe there's no linkage between utility performance and the allowed revenue return and natural regulatory oversight of the Ontario utilities. That is, the performance measures, if any, are typically such things as telephone response time or meter reading performance and they bear no relationship to the financial performance of the utility. 34 And in any event, they're measured by the utility, reported by the utility, and not by an independent third party. The LDC is hardly likely to tell the regulator it failed to meet its performance measures. And regardless of the utility's performance with its performance measures, we are unaware of an regulator adjusting a return to allowed return of a utility to reflect the performance results. We believe the correct term to use is incentive regulation; to incent the utility to cut costs and be more efficient. 35 Our position on rate regulation. IGUA's fundamental concern is its perception that there is a bias in Ontario favouring the replacement of traditional cost-of-service regulation with some form of incentive regulation, probably in order to minimize the time and cost of the rate-review process. That should not be the objective. Rather the traditional cost-of-service model should only be replaced with an incentive regulation process if there is a certainty that the incentive model will generate positive benefits for all stakeholders, including the utility, and that the change would be appropriate in the known market circumstances. In IGUA's view, this is not the time for regulatory experimentation in determining the rate regime for the natural gas distributors in Ontario, and I say so for the following reasons. 36 We believe that the current, unsettled natural gas market situation in Ontario requires a continued hands-on, OEB regulation of the LDCs for at least the foreseeable future. By there, I mean the next three, four years. IGUA believes that continued application of the traditional cost-of-service model is the appropriate method of regulation in these circumstances. Among considerations are the current tightness of natural gas supplies and the resulting volatility of gas prices, the potentially large increase in natural gas demand in Ontario represented by new gas-fired electrical generation projects, two large LNG projects, which have now been proposed for the lower St. Lawrence, which, if developed, would change the whole gas supply, gas storage and transportation dynamic through Ontario, these two projects could deliver up to 1 Bcf a day out of the Quebec and Ontario markets into the eastern end of the pipeline system, starting in about 2008. Finally, the potential changes to the infrastructure in the Dawn Parkway corridor, together with the current uncertainties regarding TransCanada's services and tolls, could result in significant changes in the LDC gas supply and transportation arrangements, especially in the central delivery area. 37 All of these potential developments have the potential to result in a material shift in the existing market structure, including changes in the role played by the LDCs. An incentive mechanism appropriate for currently-known market conditions could rapidly become inappropriate because of changes in conditions in the marketplace caused by any of the above. 38 In IGUA's view, a departure from the traditional form of cost-of-service rate regulation should be considered only if ratepayers can be assured that such a change will bring real benefits for them. IGUA's experience to date with the various incentive regulation schemes it has been involved with is that there have been few, if any, benefits; rather, there have been real negative results for most stakeholders. 39 However, if incentive mechanisms are to be contemplated, they should not be imposed via the regulator; rather, they should only be implemented if they result from a negotiated settlement between the utility and its stakeholder community. If there is not a consensus among the parties, the regulator may then be consulted. But we caution against imposing an incentive plan that does not have the support of, at least, a large majority of the stakeholder community. 40 If an incentive mechanism is contemplated, the object should not be to reduce the regulatory burden; rather, it should be the result of carefully conceived and negotiated terms and conditions, containing appropriate checks and balances for it to be challengeable or reviewable - and I'll come to that in a second - at any time, on application by any effected party, and, most importantly, contain a fair balancing of benefits and risks between the utility and its stakeholders. 41 And I gave an example yesterday, when you asked for our views on the previous schemes, of the kind of thing that can take place. If you have a negotiated agreement put together and based upon the circumstances as we understand them, the various cost elements of the utility and so forth, and if the utility subsequently makes changes in those elements, such as to change the parameters or dynamics of the incentive scheme, there's got to be an ability to ask the regulator to reopen the scheme and to allow stakeholders to at least address their concerns. 42 At the end of the day, it may well be that what the utility has done is proven -- is found to be quite acceptable; alternatively, it may be required to make some changes. But I think that, certainly, any scheme that IGUA would get involved in would require a considerable number of these kinds of checks and balances, and it may be to the extent that the utility then would not be interested in entering into such a scheme. 43 One should not overlook the real merits of the cost-of-service regulation model. The cost-of-service regulation has stood the test of time across North American and, while the regulated decisions do not always satisfy all of the parties in a rate proceeding, the results are, at least, a product of a known set of facts, examined in a public-hearing process. 44 I haven't included in my talk here, Mr. Betts, but I do believe many improvements could be made to the OEB's cost-of-service process which I do think onerous, very expensive, time-consuming and could be greatly streamlined. And, if you wish, I could describe to you my understanding of the Regie process, which I think is a good model for Ontario to study and adapt for its own particular set of circumstances. 45 Cost-of-service regulation necessarily produces a year-over-year record of utility revenues and expenditures, which provide stakeholders and the regulator with scope to assess the reasonableness of a requested test-year revenue requirement, and for the determination of fair and reasonable rates. It allows for the adjustment of rates on a regular basis, usually annually, to ensure that neither the utility nor its ratepayers are harmed by changing circumstances. Multiyear incentive mechanisms typically result in a cost-of-service record of revenues and expenditures much less detailed than that resulting from annual cost reviews, making the determination of fair rates difficult when the multiyear plan comes up for review. 46 Now, this can be avoided by requiring annual filings of detailed cost-of-service material, but that defeats the so-called "objective" of incentive scheme to reduce the regulatory burden. This contrary result will occur especially if stakeholders have the right to examine and challenge elements of the filed annual information, which is a logical entitlement to ensure that the filed information is appropriate and accurate. The design and implementation of a incentive regulation plan which contains all the processes needed to ensure the appropriate checks and balances may well result in a regulatory model with little, if any, reduction in the regulatory burden, compared to the traditional cost-of-service model. If that is the result, then one must question the justification for, and so-called "benefits" of, the change from the cost-of-service model to an incentive regulation model. 47 Just briefly, I'll comment on the consultant's study. I have no comments on the Rate Regulation in Ontario discussion paper. We note that the discussion of technical considerations for incentive schemes, which is contained in appendix 4, is a very good review of the various elements that can be incorporated into an incentive mechanism, and that appendix can serve as a useful reference if stakeholders agree to negotiate in an incentive regulatory plan for a particular utility. 48 So, in conclusion, IGUA cautions against changing from the traditional cost-of-service model at this time. The OEB should not impose an incentive model on ratepayers, nor mandate that the LDCs move to that model. If an incentive-regulation methodology is to be contemplated, it should be the result of negotiated settlements between the LDC and its stakeholders. 49 Thank you. 50 MR. HAUSMANN: Thank you, Mr. Fournier. 51 Any questions from the Board? 52 MS. CHAPLIN: Thank you. Cynthia Chaplin. 53 Mr. Fournier, you made the comment, I guess you started off by making the comment, that IGUA had had experience dealing with both TCPL and Gaz Metro incentive-type regulation. And then, later on in your presentation, you made the comment that, based on your experience, you'd seen few benefits from incentive regulation and some real negative results. Were you referring to experience with Gaz Metro or TCPL? And, whether or not, could you perhaps explain a little bit more about the details around that? 54 MR. FOURNIER: Yes. All the incentive schemes that I've been involved in, or IGUA has been involved in, have greatly benefited, I think, the utility, whether the pipeline or the LDC, and have generated few benefits, if any, for the stakeholders; the main benefit being, Yes, we haven't had to do annual cost-of-service rate toll hearings, but I don't view that as a benefit. I think it's one of the negatives, because it has not allowed for this year-over-year record of cost-tracking, which I think is essential when you then get to the end of the term of the incentive agreement to -- whether to renew it or not, or to go back to the cost-of-service model. 55 I think somebody yesterday referred to it being "unfair and unrealistic" to ask the utility, at the end of, say, a three- or four- or five-year time frame, to go back and assemble annual cost data so that the accurate cost of service can be measured for the following test year and I agree with that. You either do it all along, and that defeats one of the objectives of incentive regulation, or you're left at the end of the term with unsatisfactory information on which to base your assessment of fair rates or tolls for the following period. 56 MS. CHAPLIN: And do you see that lack of transparency of information as sort of -- would it be your position that that would be acceptable if the benefits for stakeholders from such incentive regulation were significant enough? In other words, do you see it as a trade off or -- 57 MR. FOURNIER: Yes. I mean, I don't shut the door on negotiated settlements and incentive regulation. So you have to take into account what are you prepared to give up and what are you getting for it in exchange. I think we've learned, we've all learned a great deal with the experiences from Union and Enbridge here in Ontario, and I've certainly learned with my experiences with TransCanada and Gaz Metro, that next time around, I will take a different approach or, at least, I know to ask for more things than we did last time. 58 But it's the -- one of the problems with not having a good record of the costs and expenses are it's inevitable, it's natural that at the end of a three- or four- or five-year term, if the utility was spending a thousand dollars on library books in year one, it's not spending a thousand dollars on library books in year five. It's either spending 500 or 1,500 or something like that. And if library books are an expense which is a concern and you want to know why they're doing it, what's happened, then you need to have some kind of a history. Because if they're asking for $2,000 in that six-year or that -- the new test year, you want to know what's happened when they move from $500 in year one to where they are now. And that's the kind of change in expenditure that you need to have an understanding for. 59 It's unfair to make the utility go back and do that for every single expense that they have in the O&M. That's one of the things you give up in incentive regulation, is the ability to have a good grasp on what is -- how do we set fair rates for the next period of time if you don't have that cost. 60 MS. CHAPLIN: Thank you for that. And I'll take you up on your invitation to perhaps give some examples or explain a bit about what your perception is of the benefits of the Regie process. You made comments that you felt that it presented a good model for a more streamlined regulatory process. 61 MR. FOURNIER: My criticism of the OEB's process is that it's extremely expensive, it's extremely burdensome on time and resources, especially for the utilities. It's got to be burdensome on the OEB. In the last Enbridge case, what did we end up with? Something like 18 four-inch ring binders. My pulp and paper members are ecstatic when this happens but the rest of us aren't very keen on that. 62 And I think that happens because the process the OEB goes through forces that. The Regie process puts things in a very different order and let me run it through. 63 The LDC files its application, and it would be typically the two volume or so filing that they make now, containing its cost of service, rates and tariff matters, and the LDC identifies those issues that it wants to change. So perhaps it's indicated it wants to change its depreciation rate or its rate of return or something like that. The Regie then issues a procedural order which invites parties to seek intervenor status and for them to identify the issues that they want to address. So if it's not included in the LDC's application, perhaps I want to raise, let's say, DSM or energy efficiency, something like that, so I can put that in my intervention to say that's an issue I want to see addressed. 64 So the stakeholders submit their requests for status, and the issues they want to address. The Regie then issues another procedural order, and that identifies the parties to be granted status, and they don't necessarily grant status to everybody. They will look and see if there are, let's say, five parties all claiming to go represent environmental interests, they may only grant status to two and tell the others to get together with those two. 65 It identifies the total number of issues to be addressed in the hearing process. It establishes a task force or working group and it lists the issues that working group is to address. And it also identifies any issues that would go straight to litigation. So, for example, if the utility was seeking an increase in depreciation, the Regie may identify that as one that they'll litigate, knowing that it has -- just as in Ontario here, if Enbridge seeks to change depreciation, Union is probably not far behind and the OEB might want to deal with that in a generic fashion or something like that. 66 The Regie then orders the intervenors to submit budgets. So this is based on a scale of maximum amounts per meeting. The Regie sets the number of meetings for the working group and it fixes a date for that working group to file a report. So there is a scale, and typically they allow something like a $1,000 preparatory costs and $1,000 a day for meetings. So for each meeting an intervenor can expect to claim a maximum of $2,000. It sets the number of meetings that it expects the working group to hold and it must come up with a task force report in the end. 67 If there's an issue of some importance to me, for example, and I feel necessary to participate in the working group to hire a consultant, I will put that into my budget submission and the Regie may or may not approve that. 68 Once that procedural order is issued, then the LDC sets up this task force or working group and sets up a schedule of meetings. Now in the task force, this is like the ADR but it's coming up front. And all we've had filed so far by Gaz Metro or Gazifere is that the first two volumes or so of -- that constitutes "the application." 69 In the task force, some or all the issues get resolved and some may not. But all parties in that task force must either agree or oppose and we'll litigate. You can't sit on the fence. So at the end of the day when the report is written and submitted to the Regie, everybody has to sign the report, and if there is something that IGUA say disagrees with, then we sign the balance of the report and we put in a dissent saying we disagree about issue number 7, and that binds us then to appearing at the hearing and addressing that issue number 7. 70 The LDC then submits the report to the Regie. The Regie then issues another procedural order at that stage. It accepts the report and then sets a hearing schedule for the issues that remain unsettled or which it said at the outset would be dealt with in the hearing process directly. It requires intervenors to submit a budget for their participation in the hearing. So if I agreed to the report and had no dissent, I can get a very small approval of funds probably from my lawyer to deliver argument in the end supporting the agreement or supporting the findings. If I am opposed, then I can apply for a larger budget which would include my lawyer's costs to deal with those issues, and possibly a consultant. But it's a much more restricted number of issues to be dealt with. 71 From that point, the process followed is similar to the OEB's. At that point, intervenors can send IRs to the utility on the issues that remain unsettled, and the utility responds to the IRs. Intervenors then submit their evidence on the issues in which they have opposed, IRs follow on that, the hearing goes on. The hearing typically takes about two days, then a decision is finally rendered. 72 The important thing here, costs are limited to the approved budgets. Because of that working group up front, what happens in that, if we're looking at O&M as an issue in the working group, the parties will then ask the utility, Why are your salaries going up by 8 percent this year? And the utility will respond. They may provide some information in tables, or whatever other formats similar to it, in an IR process. But, more likely, they'll bring their HR people in explaining why they're hiring 10 more engineers, or whatever it is that they're doing. You don't get this enormous huge IR process; you don't get the lawyers involved nearly as much. 73 In the OEB's process, because we submit evidence, intervenors submit evidence before we get to the ADR process, it sort of locks us into our position by the time we get to the ADR. If I've said I oppose the utility having any cell phones for their employees, when you get to the ADR, I'm not that solid on the thing, and I might be willing to come off of that position, except I've put it in writing. It's in my written evidence, I oppose the utilities having cell phones for employees. If I turn around in the ADR and say, Well, I didn't really mean it, I'll go along with everybody else and agree to it, I view that as being -- it affects my credibility. So I'm not going to agree to that in the ADR. 74 If we have this working-group process in advance, stuff that's done in that is without prejudice to the positions you'll take in the hearing. It's much more open. It requires a willing and open cooperative utility, and it also requires willing and cooperative stakeholders or intervenors. I think it's doable. I think it's -- you can probably cut in half both the time and the costs of the regulatory process for determining the rates of Union and Enbridge, at least try. 75 What I would conclude with is, I've made this proposal to you to determine what's -- I urge you to send a Board Member or two, and a senior staff person or two, up to Montreal and sit down with the Regie and talk to them about it and their process. Because I've probably got some parts -- I was trying to recall this last night by mind, so I probably missed out a few things, but it's not, probably, Take it and plunk it down, and, See, here it is, Ontario, that's what you're going to do. I'm sure there's things you need to adapt; I'm sure there's things you need to consult with the two utilities, in particular, because they're the ones that are affected by all this. But it's something, at least, I invite you to consider to streamline the Ontario process. 76 MS. CHAPLIN: Thank you. 77 MR. BETTS: Thank you. 78 I had the same question, and thank you for the answer. No further questions. 79 MR. HAUSMANN: Thank you, Mr. Chair. In that case we'll move right along. 80 Mr. Scully from Federation of Northern Ontario Municipalities? 81 SUBMISSIONS BY MR. SCULLY: 82 MR. SCULLY: Thank you, Mr. Hausmann. 83 Peter Scully, as you say, for the Federation of Northern Ontario Municipalities, Cities of Greater Sudbury and Timmins. 84 I grew up with cost-of-service regulation, so I have an inherent bias towards it that I'll confess, and just take a minute to tell you about my first rate case for -- I can't even remember if we'd switched from northern Ontario natural gas to northern and central by then. 85 But what happened was the finance department called me in and gave me a set of rates that were very similar to our existing rates. We might have had a new rate for small uninterruptibles or something. I made an appointment with the Board, came in, and, when I came in, it turned out I was going to sit down with the then chairman of the Board, Archie Crozier. We did that and he asked me, Are the revenue levels per customer going to stay about the same? I said that they would, that's what the finance department had promised me. He said, Fine, file the application like that and the Board will approve it. I did, and they did. So it was done in an afternoon, essentially, and I have a fondness for that type of procedure. 86 It's gotten a bit more complicated, but one of the messages we would like to convey is that, one way or another, the avenue should be kept open for deals between all the participating parties. The last case that I was involved in was the Union Gas case, and Union Gas, in that instance, made an effort early on in the proceedings to negotiate a settlement. And one thing I'd urge the Board to do is keep those sorts of possibilities open; that, no matter how much we structure this process, there should be freedom within the structure for innovative approaches. And Union Gas, at the time, they called it a multiyear pricing agreement. It struck me as a real possibility for the future. 87 That rate case that I told you about, sort of quasi cost-of-service rate case, was back in 1967. When I came back to the process after a gap of about 10 years, things didn't seem a whole lot different, except for the level of detail, and materials which had grown exponentially. You've heard people talk about the volume of the filings now. 88 As I say, the last case I was involved in was a Union Gas case, and I guess I saw two things that had happened in that 10-year gap, that interim. One was that what we call the ADR process had been entrenched; in other words, before you went anywhere, there was a settlement conference that you had to participate in, and the Board had introduced a formula for fixing the rate of return. I was not that familiar with that second item. And it still seemed like an excellent idea to me, personally, not having to sit around and listen to and learn about beta factors once again, or avoiding listening to endless testimony about what utility was comparable and, therefore, the return should be comparable. Anything to avoid that seemed preferable to me. 89 How did those two things work in the context of an actual hearing? My perception was, first, on the rate of return, that part of the hearing I hadn't, sort of, gotten involved in a hearing before it happened, but in the ADR process, I sort of listened to both sides while I anticipated the Board's decision on that portion, and both parties seemed to think they had won. So I didn't go back and review the transcript, but at the time I thought, Well, maybe that formula thing could use a little extra work. 90 And that would be my comment on that to the Board and, indeed, all participants. Is there some refinement of that process that could make it more of a rubber stamp, Okay, if the long-term rates are here and the other factor is there, then that's it. I don't know if that's possible, but that strikes me as something that we might aim for. 91 In the ADR process, and when I say that term, I have to tell you that when I was writing up this paper, I got to the stage of writing down ADR and I couldn't remember what ADR exactly stood for. And that's another thing I want to come back to, in what I say to you this morning. 92 We get a little insular as we sit around this hearing room, this same group, almost, all of the time, and acronyms just get to be the thing to do. What we're really talking about at ADR is the settlement conference. And I think we have to keep doubling back to the basic idea, and the basic language, because we have to start -- keep thinking that we're speaking to a much larger group. We're talking to all of the clients that I act for, and when I say ADR to them, they just sort of look at me and say, What are you talking about anyway? Communication and education has to be a strong part of the regulatory process, in my submission. 93 Listening to Peter Fournier's presentation, particularly the end part about GMI, ties in with some of the things I'd like to say about process. I think the cost-of-service, one way or another, seems to be an inevitable step in OEB Ontario rate regulation. I think there's a lot of things that could be improved. As he said, knowing what parties come to the table with is very important, particularly at the settlement level. We spent a lot of time in the Union case trying to find out how many dollars they were asking for. It came up on about the second day of the settlement conference and I think it was on the table in the last day of the hearing after 22 days of hearing process. 94 On the other side of that, I think that some of the intervenors are guilty of the same thing. When I think of the next rate case, I'm very conscious of trying to make a list, make a shopping list of what I think my clients want and bring it to the table very early. I think that sort of approach is essential. 95 One thing that I thought of for the settlement process was that we might look to arbitration generally and see what's being done out there, and one thing that's done out there is the last clear chance. I'm not sure if that's been tried in the regulatory forum, and perhaps CIF might have some comments on this, but the idea is that when you get down close to a deal, the parties, and usually it's the utilities against the intervenors when it comes to a settlement conference, at least, you'd say, Okay you each have a chance to put your deal on the table and the Board might take yours and it might take theirs. That's the gamble, so be very careful about what you're asking for. 96 It maybe is too unwieldy a beast to deal with in that way, but the other element that I thought might be introduced is the Board having the flexibility to say to the parties, I'm sorry, neither one of you really came up with a winner there, and in addition we don't think you really gave it a good shot. We're going to penalize you for costs on that. When you come to ask us to pay out for costs in the end, we're going to say to you, You really didn't give it a try at the point that meant a lot to all of us and you cost us a lot of extra effort here in the whole hearing, so we're going to reduce by 30 percent, or 20 percent, or whatever. 97 I just throw that out as a possible idea. I think we have to think of all of the things that might help us out in this process. 98 The other thing that -- and this ties in with what I hear may be done in Quebec, is having the Board issue interim decisions. There may be some items that are isolatable that we could deal with and have the Board actually hand down a decision, get something off the table early on or in the midst of a process. It's just such a huge unwieldy beast when you deal with a full cost-of-service hearing, and any time you can isolate and settle, I think, would be very helpful. 99 Just a few final comments on some of the nitty gritty that I've experienced in that last Union Gas hearing and maybe Consumers hearing before that. One thing that I just find overwhelming as an intervenor is the waves of filing of material by a utility. You get the initial filing that gives you some picture of what's happening. It seems to me the pattern is that the second step is the company finishes its cost-of-service -- cost-allocation process and refiles all of that material and it gets all rejigged. So you're really starting the case all over again. 100 Then there's a, quite often, final filing which changes the basic numbers once again, and it can happen in the last week or two of the hearing when you're already tired out and sort of overwhelmed by the 22 volumes or whatever it is of material. Any efforts or any strictures that the Board could impose on a process in that area, I think, would be very helpful. 101 And there's just some technical things. Like in the midst of the case, I found myself going out to buy one of those big plastic sheets that will magnify things so I could read the schedules that were being put in front of me. I mean there's some cosmetics here that could be dealt with. 102 I'm very sympathetic to limiting my profession in its participation in the process. In the Union case, we had 22 days of hearing. I certainly got interested in my own cross-examinations but I'm not sure that I could say that I scored a whole lot of winning points or anything. And when I think back on it, there was -- I remember Jay's cross-examination and I thought that there were some real wins in that one, but it's a very inefficient way to get the material out on the table and actually get it dealt with. It's a dialogue process, it's an education process, it's an understanding process, and cross-examination is just the clumsiest way I can think of to get at that learning process. 103 My final comments, I think, just to double back and say, it's communication and education that I'd like to see us always have in the back of our minds. I began my comments in the first phase of this hearing by saying I don't like that other word for utility, gas. I think that language is important and keeping things as simple and as direct as we can in this process so that the larger constituency out there, the actual ratepayer, begins to understand what is being done for him and her, gets down to things like the customer notice for the quarterly rate adjustment mechanism. 104 Along the way since the process in the Union Gas hearing, I raised some language questions about that form of notice because I had trouble understanding it, and I knew my individual customer clients out there would have the same difficulty. The answer sort of was, Well, you agreed to that in the rate case. Well, the day I agreed to that, there were 432 other things swirling around in the world in my mind. I think we have to always be sympathetic to and aware of the difficulties of communicating the very complicated thing we're dealing with here and with that I'll complete my remarks. 105 Thank you for letting me participate in three of the panels and FONOM very much appreciates the opportunity. 106 MR. HAUSMANN: Thank you, Mr. Scully. 107 Before we have questions from the Board, perhaps -- sorry. We'll do that next. Questions from the Board. 108 MR. BETTS: Just one question for you, Mr. Scully. It's Bob Betts here. 109 I've recognized in your comments that they all relate to the current regulatory process and suggestions that you have in ways of improving that process. Do I take from that that you're satisfied with the cost-of-service approach, and it's really a question of improving that? Or did you want to take any position with respect to cost of service versus PBR? 110 MR. SCULLY: Thank you. I did mean to touch on that. We certainly aren't totally attached to cost of service. We just see it as, maybe, something that is going to be done from time to time. We're quite open to PBR being fully investigated and applied again. But again, it's -- I haven't been through a PBR process. I've been on the fringes of a few. You've got an even bigger communication, learning, education task there. 111 Yesterday, for instance, I was sitting at the back of the room with another person who I would call a very sophisticated regulatory person, and the two of us were saying to each other, What's TPF or TFP? I mean, we were lost. And that's an essential item in the process. So that's one of the difficulties in that area that we see. Thank you. 112 MR. HAUSMANN: Anything else? 113 MR. BETTS: No further questions. 114 MR. HAUSMANN: Now I can say what I was going to say: If you wouldn't mind, Mr. Scully, trading seats with Mr. Gibbons, and then -- he will be up for presentation later on, but we can do that while you're at the presentation table. 115 So the next presentation is from the School Energy Coalition, Mr. Darryl Seal and Mr. Jay Shepherd. 116 SUBMISSIONS BY MR. SEAL AND MR. SHEPHERD: 117 MR. SEAL: My name is Darryl Seal, and I'm appearing here today on behalf of the School Energy Coalition. With me is Mr. Jay Shepherd, counsel for the School Energy Coalition, who will be sharing the presentation with me. 118 Before I talk about our views on rate regulation and the issue we're discussing today, I will just provide a bit of background information on who we represent, and why schools are interested in rates and regulation. 119 The School Energy Coalition is made up of an organization representing all the public school boards in the province, and there are seven different school-related associations that are part of the School Energy Coalition. The associations cover business officials, directors of education, trustees of school boards, and French and Catholic organizations in the province. Overall, it represents about 5,000 schools across the province, with annual budgets of $14 billion, teaching 1.2 million students in the province, so you've got a rather large customer base. 120 Why do schools care about rate regulation? Well, as I mentioned last week, we're a rather significant consumer of energy in the province. Significant proportions of annual budgets go towards energy costs in schools, about $400 million spent annually on energy, with about 150 million of that spent on the gas budget, which represents close to 40 percent of the total energy bill of schools. 121 Over the past five years, costs, energy costs to schools, have been escalating at a rate greater than inflation, around 7 to 8 percent per year, which is a significant concern to schools because, at the same time, funding for schools, as everybody is aware, has been quite tight. 122 Within the regulatory and policy arenas, schools have two principal interests. The first is receiving the lowest possible fair rates. And when we talk about that, we're talking about both the level of rates that schools pay, as well as interest in the rate design for schools. The second key issue that schools are interested in is having a reasonable degree of predictability, and reductions in volatility in rates. Schools are on fixed budgets set at the beginning of the year, and do not have a lot of ability to change and adjust in response to changing energy rates. 123 So with respect to the issues that we are discussing here today, and specifically for PBR, we think that the ICF paper has provided a good foundation and starting point for these discussions. Certainly, in theory, PBR has the potential to benefit both the utilities and consumers. Utilities benefit through reduced regulatory burden, through incentives to improve earnings; consumers, they benefit through greater efficiencies, increased rate certainty, and guaranteed productivity. 124 In practice, PBR is not quite as simple as it sounds, and has not always been as successful as it sounds. The ICF paper, in its review of PBR, has provided a good outline of different experiences of PBR plans, without perhaps going into a lot of the detail behind some of those plans. Likely that was outside of the scope of what ICF was asked to do, and probably we should be somewhat thankful, because a paper that was 100 pages would probably be in the neighbourhood of 500 or 600 pages with those details. But, unfortunately, as with a lot of things, like system gas, like storage, two of the items that have already been covered at this Forum, the devil, quite often, is in those details. 125 Turning to the experience in Ontario with PBR, something we've got a bit more direct experience with, I don't think you'd find too many people who would disagree with the statement that Ontario's experience with PBR, to date, has been somewhat less than successful. We heard yesterday from the utilities, and a few of the other stakeholders, that I think echoed that view. And I think the fact that both Union and Enbridge are on cost of service, back on cost of service, after their PBR experiences, is a testament to that. 126 Now, there's a number of reasons why we think that PBR was less than a full success here in Ontario. One is, likely, the newness of PBR. The first plans for both Ontario utilities were their very first plan. It had not been tried here. 127 With respect to cost of service, there is a comfort level, I think, of all stakeholders. We all experienced cost of service, we understood it, we'd been working with it. The expectations, I think, of both the utilities and the stakeholders, going into those initial PBRs, was somewhat elevated as compared to what came out at the end. There was, I think, clearly, a demonstrated lack of regulatory savings. And at the same time, we had a lot of external changes, a changing environment happening. 128 You can point to those multiple reasons, but, overall, I think what those amount to is that we had an environment of distrust and suspicion - somewhat strong words - on behalf of both the utilities and the stakeholders in the process, so all stakeholders in the process. 129 I think Mr. Shepherd, yesterday, when asked what failed, talked about some of those issues. And also, Mr. Hoey, I think, talked about some of the distrust that customers may have felt. So, perhaps, for all those reasons mentioned above is why we had that distrust and suspicion. 130 So, with that background, if distrust and suspicion were the culprits in the early exercises in changing rate regulation, what can we do to overcome those, then? Well, the best answer, we think, is full transparency and the patience to let it work. This means all stakeholders being part of the process, and starts with the discussion such as we're having right now. It means an open dialogue between all the parties, recognition of different perspectives, and, quite frankly, some flexibility in positions. 131 Perhaps most of all, and of most difficulty, it takes some time. Rome wasn't built in a day and neither was PBR. And I think ICF's review of PBR in other jurisdictions is a good example of that. 132 An alternate example of dealing with this distrust and suspicion, though not a mutually-exclusive option, is to make regulation a very simple process. So, along those lines, we have identified a number of different regulatory options that might be considered. What we tried to do is present a number of options without, at this time, trying to determine which is the right option. 133 As far as the School Energy Coalition is concerned, we believe that there are benefits and drawbacks to each and every one of the options. There are some that have a clearer window than others, but we'd like to lay them all on the table at this point. 134 In terms of options driven by transparency, we have identified four and I will summarize each of them. 135 So first up, the familiar option, cost-of-service. It's a model that we've all worked with, a model that's quite well known by everyone, and I think a model that has, in general, worked. We're still using it. I think that's some proof. But it has its drawbacks and these are well known. It's costly, in terms of the effort required. It consumes a lot of resources from all the stakeholders in the process. It has some inefficiencies built into it, such as information asymmetry, and being, generally, an annual process, the incentives to utilities to engage in long-term productivity wins are limited. But we think that the drawbacks of this cost-of-service are not insurmountable. There are some things that can be done to improve the process and some of the presenters before us have mentioned some of the things. 136 Some of the examples we believe include clear and consistent, between the utilities, filing and disclosure of rules, electronic filings, standard filing schedules and also providing defaults for specific issues. As an example, I think something that became very clear to me in the last Union and Enbridge cases, a standard model for weather might be an example here. 137 Generally, we believe that transparency requires -- still requires detailed info. 138 The second transparency model extends on the annual cost-of-service model and can be termed in a multiyear cost-of-service PBR light, it might be called. In this model we've got the familiar cost-of-service filings but with multiple rate years being filed at the same time, two-, three-, four-, five-year multi-term cost-of-service. It continues the well-known practice of cost-of-service but provides for less frequent filings. It provides consumers with some multiyear rate certainty which, as I mentioned at the outset, is one of the things Schools desires. 139 While there may be an element of risk to the utility, especially with longer-term multiyear cost-of-service, there are likely mechanisms that can be used to help reduce this risk, such as symmetrical earnings mechanisms, for example. 140 Our fourth option that we put on the table we've called ring fence. Under this option, we're looking for full transparency being achieved by internalizing all of the cost accounting with affiliates serving the LDC. So much hearing time has been spent in the last year or two dealing with affiliate transaction issues. We heard yesterday from Mr. Adams how his impression that Enbridge's corporate restructuring damaged the reputation of PBR within Enbridge's case. In our ring fence option, we increase the efficiency of the process by providing for clear rules, clear accounting, and full disclosure up front of all those affiliate transactions. Necessarily, as part of this option, there would be very strong limits on the ability to transact across the fence or, generally, the process would fail. 141 Our fourth option we've titled PBR Redux. Here we're talking about the traditional PBR of the types that are described in the ICF paper, be it a rate or a price cap, a revenue cap or benchmarking, typical PBR-type mechanisms. The emphasis in this redux, however, is taking the time to get it right and involving the stakeholders up front. 142 Past PBR plans in the province, the two PBR plans that were in existence, have been primarily utility-driven, focused on regulatory timetables without a lot of up-front stakeholder input. The evidence, I think, in other jurisdictions, is that PBR plans improve for all stakeholders with spending more time in getting the plan right at the beginning. The involvement of the stakeholders is a very important part of the process, and again those plans that have involved stakeholders from the beginning, I think, have been more of a success. 143 A third point under our PBR Redux, and perhaps a more difficult one, is that we believe that one PBR mechanism fitting both Union and Enbridge and perhaps NRG would be desirable. We note that there are differences between the utilities, but probably something that is not insurmountable or workable within a single PBR plan. At the very least, we can get similar issues that can be debated only once. 144 So at this point, I will turn the mike to Mr. Shepherd for some further options. 145 MR. SHEPHERD: So we agreed that the wilder options would be presented by me in keeping with my reputation. 146 We're going to talk about three options that are driven by simplicity. And I'm sorry we're running a little long. I'll try to do this fairly quickly. 147 What we're trying to do is we're trying to promote some creative thinking about how to look at the problem instead of just accepting, sort of, the traditional ways of doing things. 148 So let's start with the first of those options which we called, "plain vanilla PBR". And what we should do is we should look at the situation from a pure ratepayers point of view. Let's forget about regulatory theory, forget about PBR design, annual filings, all that other stuff that we know and love. Schools, and I think this is true of most ratepayers, would be happy with long-term rate certainty at something well below inflation. 149 If Union or Enbridge came to us and offered us a simple price cap, a PBR, five years, rates at -- start with an agreed cost-of-service base and give us 50 percent of CPI, we'd take it right now, today. And if they made more than their allowed ROE during that period, we wouldn't get too fussed up about it. On that point, my clients disagree with Mr. Hoey the other day and with a number of others of the ratepayer groups. We don't care how much the utilities make, that's irrelevant to us. We care what our rates are, that's the thing that's important. If they can cut their costs in half and make a whole lot of money, what do we care if our rates go down. 150 The key to this though is certainty. What that means is no Z-factors, no true-ups, no offramps, none of that other nonsense. If you want to have a simple plan, a simple PBR, then give us a guarantee that our rates will go down and make as much money as you like. Come back to us in five years or ten for that matter. That truly decouples costs and rates. 151 The second option, these go from moderate to more wild as we go on. The second option says -- involves a philosophical shift from past practice. Mr. Ladanyi talked last Thursday about his Starbucks analogy and said, Why should the customers of a gas utility have the rights to the assets of the gas utility. It's not their business, it's the utility's business. I think his implicit philosophy drives the notion that the owner of a gas utility gets compensated by ROE. They have a business. It belongs to them. But because it's a monopoly, the regulator must limit their allowed return to avoid them getting what's called by the economists "monopoly rents". But there's another way of looking at that. That is, the utility is granted a public franchise, that's our franchise. We actually -- the business they run, that's ours. We, the ratepayers, own it. We are not just the customers, we're also Starbucks' head office in Seattle granting them a franchise. Our regulation of what they do is because they are operating our franchise. 152 Now, what does that mean in the context of PBR? Well, right now, we pay Enbridge and Union to run this franchise and we pay them, in effect, a fee, but we base it on the capital they put in. But we don't actually really need their capital, we can get capital anywhere. This is a regulated utility, it doesn't have a problem getting capital. What we need is their expertise, that's why we have them do it, otherwise we'd run it ourselves, right? So we should actually -- and you can think about it differently. You can say, Well, why don't we just pay them a fee, a management fee, to run our public franchise? And if we pay them enough, they'll do it, of course. 153 So the second option starts from this philosophical approach and says, Let's pay them a preagreed amount, and that amount would be the entire amount they get paid for all the services they provide in running the franchise. There would be no ROE, no payments to affiliates -- or they could pay affiliates, but it would be within the management fee. Nothing at all except the management fee. 154 So, for example, I went to Enbridge's 2005 rate filing to get some numbers. If Enbridge, today, started a PBR under this scenario, they would get a monthly management fee of $13 million a month. That would be everything EI ever got, that is, Enbridge Calgary ever got, from EGD, but over five years it would be $800 million. So ask yourself the question: If you said to Enbridge today, We'll pay you $800 million to run this utility for five years, would they take that deal? 155 I think the answer is, Yes, they would, and they would for a couple of reasons. First -- actually, if you asked them today, they'll say no, but then somebody in Calgary will sit down and do the numbers and they'll change their mind. And there's two reasons. 156 First of all, profit certainty. They get a guarantee of how much they'll be paid over the period, whatever the period is, and they have complete lack of regulatory risk. And, that, by the way, enhances the creditworthiness of the parent company, because they have this guaranteed cash flow coming in. 157 Second, the payments from the utility to the parents would be tax deductible and we know, we've seen in the last rate case, that the effective tax rate of the parent company is significantly lower in Enbridge's case, and I think that's also true in Union's case, than the effective tax rate in the utility. The result would be, the net tax benefit of that structure, somewhere between 20 and $40 million a year. And the effect of that is that the after-tax ROE rate of return, if you like, if they still want to calculate it that way, to the parent company, would be 100 to 200 basis points more than they get now, and it would be guaranteed. But the ratepayers would pay less. I used these numbers on purpose because, in 2005, the ratepayers are going to pay that much to the parent companies, and they're accepting it. That's enough for them; we know that. So, in theory, everybody should be happy. 158 The third option -- I sense that the second option has raised some eyebrows. If that's not off-the-wall enough for you, let's look at the concept of earnings-sharing. So, what we do right now is we plan earnings-sharing in advance. We say, Let's agree on how much we're going to share the excess. Well, the problem with that is that we don't know where the excess is going to come from. We don't know whether it's going to come from reducing expenses, from changes in growth levels, from weather. There's all sorts of reasons why there could be excess profits, and we just sort of assume that part of it will be good management and part of it will be fortuitous. We don't know that. 159 So the other way of doing that would be to say, Let's not arrange it in advance, let's take all excess earnings and treat them as a regulatory liability. They're not booked to the utility during -- you can do this with either PBR, or with a management fee-type approach, or with an ROE-type approach, it doesn't matter. But, whatever the excess earnings are, book them as a regulatory liability along the way so they're not included in earnings each year. They're not booked to the parent company; they don't recognize them. They've been collected from the ratepayers, and they're sitting there. 160 At the end of the five years, or the three years, or whatever it is, the Board can then look and see and say, Okay, what caused this? Was it all just fortuitous? If it is, give it back to the ratepayers. The management didn't do anything to get it. Or was it because the utility embarked on a visionary approach to rethinking its business, and drove its costs down, and that's maintainable reductions? In which case, give it to the shareholder, because they earned it. They're entitled to a bonus; they did a good job. 161 The point of this is that you're making the decision about splitting what could be a fair bit of money when you have the information to do it. And because you book it along the way as a regulatory liability, the utility and the ratepayers are not concerned about the uncertainty. It's a windfall to either at the end of the period. 162 Again, I apologize for going on too long. Schools want a well-functioning, transparent, inclusive regulatory process. We're probably more motivated than most ratepayers to seek predictability. But, generally speaking, we also want low rates, the same as everybody else. But you're going to hear from some ratepayer groups today, and you have already, that prefer cost of service. We don't. We prefer long-term PBR, if it's done right. We believe that there's not necessarily one way to do that, and that's why we have been trying to put out a menu of options, to make people think about the choices, and broaden their scope of how they think about it. 163 At the end of the day, we think that we're all going to have to work together to develop a structure that works for the gas utilities, and we're ready and willing to do so. Thank you. 164 MR. HAUSMANN: Questions? 165 MS. CHAPLIN: Thank you. Cynthia Chaplin. 166 Mr. Seal, Mr. Shepherd, we heard some comments this morning from Mr. Fournier of IGUA explaining that, how, in his view, now was not an opportune time, necessarily, to pursue PBR, given the changes or expected changes in the gas market, particularly around increased load for power generation, possible LNG plans, changing the configuration of the storage and transportation market. Do you have a particular view on whether or not PBR is an appropriate mechanism in a time of potential change? 167 MR. SHEPHERD: Somebody made the comment the other day that, the more you unbundle, the less that's a problem. And that's true. The changes in the gas market are not primarily changes in gas distribution. They're changes in other aspects of the market. And so, to the extent that you decouple those components, PBR for gas distribution is not a problem. That's actually quite a stable business. 168 MR. SEAL: I think, just to add to that, comments were made yesterday, a similar kind of comment, that if you waited for the industry to be stable, you'd never make change. And I think that's true. I think that, within these mechanisms that we've put out on the table, there are, potentially, ways to deal with things that might happen down the road. 169 MS. CHAPLIN: Thank you. Turning to your option 3, the long-term PVA, would you see that as being something that's potentially symmetrical, or as only designed to share access earnings? 170 MR. SHEPHERD: It depends on how you're compensating the utility, the parent, I guess, along the way. If they're being well compensated along the way, then I think part of that compensation is to make sure that you live within your budget. So, no, I don't think it should be symmetrical. If they have a downside, that's their problem. That's what we pay them to do. 171 MS. CHAPLIN: Even if that downside were, perhaps, items beyond their control? 172 MR. SHEPHERD: Managing every business includes items that are beyond your control. That's what management is. That's why you pay executives the big bucks. 173 MS. CHAPLIN: Thank you. 174 MR. BETTS: I have just a couple of questions, too, following up on that question from Ms. Chaplin. And it's Bob Betts here. 175 It seems to me that that particular option is perhaps a little bit one-sided if there was an excess in earning. I could see that being the source of a great deal of dispute at the end of five years, one that might be the longest hearing that the Board might have to face, in terms of what would be a fair apportioning of that excess, and how much should rightfully stay with the shareholder and how much should be shared with the ratepayer. How would you respond to that? 176 MR. SHEPHERD: Well, we had considerable debates internally about exactly that issue, and I think the answer to that is that you do the sharing at the same time as you do your rebasing, whatever it is, and so you have a lot of options as to how you deal with it. 177 For example, the ratepayers may not get as much of the earnings, but they may get a reduction in rates because the savings have been sustainable. If the savings are less sustainable, then you may say to the shareholder, look, if you saved money for a couple of years but couldn't make it work for the long term so the ratepayers aren't going to get a benefit, we're going to have to give them those savings. That's just one example. There's a lot of choices you have if they're done at the same time. In any case, I think a rebasing hearing is already a big hearing. 178 MR. BETTS: And along the same line, there are several parties that have indicated one of the important things that should be a component of any PBR plan, if it is to be successful, is some understanding at the outset as to what the rules will be. And it seems to me that that particular option wouldn't satisfy that requirement because the rules of apportioning the excess profit wouldn't be decided until the end of the plan. Do you want to comment on that? 179 MR. SHEPHERD: Yes. Whether you debate that at the beginning or the end, it's still a tussle between the ratepayers and the shareholders. The only difference is that at the end you have better information. So arguing about it at the beginning or the end is irrelevant. I think what the -- what the proposal we made and that particular proposal we made says both ratepayers and shareholders should assume that whatever those excess profits are, are not theirs. Don't count on them. Ratepayers, you've already paid them in rates so that's gone already. Shareholder, you can't book it as profit. You have to book it as a regulatory liability, so you can't count on it either. And then it's a windfall to either at the end of the day. 180 MR. BETTS: Thank you. 181 At the outset, and I found this helpful, Mr. Seal commented about the objectives that the School Energy Coalition have in rates. And the first one was lowest possible fair rate, I think is what it read. There are many parties that have talked about the expectation of the consumer not necessarily being the lowest possible rate but, in fact, being a rate that they find acceptable. The analogy being if you're happy with the price of the car, then you don't care if it's the lowest possible price or not. And that's interesting that you should express it that way because I think, in many cases, the consumer is hoping for the lowest possible rate not necessarily just a rate they're comfortable with. 182 But that particular statement, I bring that up as a point, but in one of your options, you made a contradictory statement. And I have to look at Mr. Shepherd; he presented it in this case. You start off by saying you're looking for the lowest possible rate, and then you say in the first option under simplicity, that you'd be happy to know that you were getting 50 percent of CPI over the next five years. That may be different than the lowest possible rate. How do you account for that difference? 183 MR. SHEPHERD: Well, I guess lowest possible rate doesn't necessarily mean relating to cost. We, all in this room -- and we saw it yesterday too, even the utilities that were arguing for PBR, that we get locked into thinking that low rates are tied, somehow inextricably coupled to cost. That's not the case in the normal business world. Out there in all the other prices, that's not true. It's about what is acceptable. The lowest possible rate is, in fact, what's acceptable to the ratepayers and what's acceptable to the provider of the service. It's like a Venn diagram and there's an overlap, and where the overlap is, that's where your deal is. 184 MR. BETTS: Okay. Thank you. 185 One thing, I think it was Mr. Seal that spoke about this in one of the options under transparency, and I think it was the one that you described as the ring fence; you talked about disclosure and transparency and I watched the slide as you commented verbally. You added one or two words in your oral presentation, and the two words were "up front", disclosure up front. They weren't on the slide, if I recall, and that is a different situation. I think you were referring to, kind of, changes in structure. If you could use -- I think you were talking around the issues of affiliate relations and that kind of thing. How important is the matter of up-front disclosure to you versus just transparency? 186 MR. SEAL: I think my comments dealt with specifically the information being visible and very clear. So up front in the manner that the -- any affiliate transaction costing details are provided and are clear and are explicit within the filing. So that is up front in that way. 187 MR. BETTS: Okay. Not necessarily chronologically. You don't necessarily feel that they have to be presented -- these concepts have to be presented to the intervenors in advance of making the change? 188 MR. SEAL: To the extent that the rules are made very clear on what kind of accounting costs are to be included as part of this ring fence type of filing, it would be up front already. So if there are those affiliate transactions going to be happening, it's very clear on what rules you have to report on what's going to happen. It's not necessarily saying us three years down the road how you are going to change things, because that might not be known, but you know exactly what you will have to report on. 189 MR. SHEPHERD: If I could add, Mr. Betts. We saw, particularly with Enbridge, but a little bit with Union as well, that they have been attempting to go come to their stakeholders when they have controversial things that they want to do to, in effect, socialize the ideas and get a sense of whether they're going to get buy-in from their stakeholders. And in that sense, that's a very good practice, but we're not suggesting it to be mandatory. I think it's just good business practice to do it. 190 MR. BETTS: Thank you. And those are all of our questions. Thank you. 191 MR. HAUSMANN: And thank you, Mr. Chair. Mr. Shepherd and Mr. Seal. 192 We're at 10:30. We probably have time for one more presentation but not two before the break. So if we could proceed with the Vulnerable Energy Consumers' Coalition, Mr. Janigan and Mr. Higgin. 193 SUBMISSIONS BY MR. JANIGAN AND MR. HIGGIN: 194 MR. JANIGAN: Thank you. 195 We have a slide presentation that was prepared by our consultants, ECS, on behalf of the Vulnerable Energy Consumers' Coalition. The Vulnerable Energy Consumers' Coalition or VECC represents the interests of low and fixed-income energy consumers, and includes in their membership senior's groups and tenant's organizations. 196 As well the representation of VECC is coordinated by the Public Interest Advocacy Centre, of which I am the general counsel. The Public Interest Advocacy Centre, PIAC, has had experience with the PBR process in telecommunications in the CRTC and receives information concerning regulatory practices through its memberships in the National Association of State Utility Consumer Advocates and Consumers International. 197 The focus of this presentation is on our conclusion that cost-of-service regulation for gas utilities appears to be preferable to price cap or other PBR forms in protecting the interests of our constituents, the vulnerable energy consumers. It does not seem to us that the design of comprehensive PBR plans for gas utilities will have sufficient benefits to overcome the perceived shortcomings. And we'll expand on why we hold that view. 198 First of all, we note the ICF discussion paper which appropriately frames the issues to be dealt with and the options for future regulation of Ontario natural gas distributors, and the options presented include cost-of-service regulation through to comprehensive performance-based regulation under a price cap or revenue cap regulation. 199 The paper concludes that the most appropriate form of regulation is a derivative of the policy decisions regarding the system gas unbundling of network and ancillary services, such as load balancing and storage. We note the consultant's list for the criteria to determine the form of regulation, which includes economic efficiency, fairness, consumer protection, and regulatory efficiency. And we certainly don't have any significant disagreement with those criteria. 200 Now, we try, in this presentation, to look at future options for rate regulation of Ontario gas distributors from the perspective to the protection of ratepayers, in particular, vulnerable ratepayers in the residential rate class. The most important issue for us in the debate between cost-of-service regulation versus PBR is addressing this issue of consumer protection. And in attempting to do so, we believe the first thing is to restate the goal of regulation. 201 There are many definitions in the literature, but the one we adopt is really a hybrid that recognizes that the primary goal of regulation is to protect consumers in the absence of competition in essential public services, including natural gas distribution services, and generating just and reasonable rates, based upon reasonable costs. 202 Now, we know the main differences between cost-of-service and performance-based rate-making, and those differences are well-known, but we note that cost-of-service regulation is, or should be, the starting point, and that PBR requires, really, a new regulatory compact between the utility, the regulator and, very importantly, the consumers of the regulated services. It's this latter point that is often forgotten. And, because the regulatory compact is a sort of a three-sided triangle, PBR places even greater burden on regulators to protect consumer interest, simply because, in the PBR process, there is less transparency, and a significantly greater exclusion of consumers and consumer advocates from the process than is involved in cost-of-service regulation. 203 Now, we know we have been through a couple of generations of price caps in the telecommunications industry, but we have to say the comparisons are difficult between telecom and energy, for a number of reasons. In particular, it's important to note, in looking at telecommunications, that one of the main objectives of going to a price cap was to prepare that sector for competition in basic services. Some may say that that might have been a rather optimistic objective, given the record on competition in local services, in local basic services, at the moment. But be that as it may, when we turn to gas, that sort of competition is not likely to transpire for core gas utility services in Ontario, given the current gas utility franchise structure. 204 One thing that we've experienced with performance-based rate-making and price cap in the telecom sector, however, illustrates the necessity for vigilance by the regulator and consumer advocates, on behalf of small consumers, concerning the various issues of pricing and offering of services and service quality, particularly in the context of the price-cap regime. 205 Now, the ICF discussion paper notes a number of the particular circumstances that make performance-based rate-making, or, certainly, the construct of the performance-based rate-making, a difficult proposition with respect to the interests of residential customers. And one of our chief concerns that we have about price caps, and PBR in general, is the opportunity that may be extended to the utility for pricing flexibility, which may lead to favouring consumers that have greater market power than, particularly, the constituents that we represent. We have concerns about several other issues, including transparency, earnings-sharing mechanisms, and end-of-term rebasing, but all tend to disadvantage consumers, particularly with respect to the position that's been advanced in the past by utilities in relation to the PBR process. 206 We just note in this line that PBR itself is, essentially, a movement away from cost-causality drivers and, in essence, is something that is designed to encourage pricing flexibility. At the same time, the design of PBR, by necessity, must put certain services in pricing baskets and protect against pricing flexibility because of the difference in the market power of the individual customers, and the market segmentation, in general. 207 We've tried to encapsulate in this slide what we've, essentially, discovered to date on the differences between the conventional wisdom on PBR and cost of service versus the actual experience involving cost of service and PBR. And we found that, contrary to conventional wisdom on issues such as complexity, regulatory burden and fairness in consumer protection, what was promised by PBR, or what seemed to be made, perhaps, possible with PBR, was not really achieved. In fact, it seemed to us that the efforts to attempt to make PBR at least reach the level of fairness, or perceived fairness, of cost of service were inordinately large, particularly on the part of the Board and the intervenors. 208 Accordingly, we suggest that the PBR experience has not been positive for gas consumers to date, either in the case of Enbridge's targeted O&M plan or Union's comprehensive plan. And, in terms of evaluation of the experience, it would have been helpful to have an in-depth analysis of that experience that, in fact, had the expected and actual outcomes of the two plans, and a comparison to potential cost-of-service regulation over that same period. That might have been, potentially, a very onerous task, but certainly it would have been helpful in terms of the assessment of the two, cost of service and PBR. 209 Our perspective is, accordingly, on a macro level and -- however, we suggest that there is a need to examine the financial impacts on the utility and the quantification of benefits to ratepayers, and other stakeholders, in the prior PBR regime. Our message on this is that you can't realistically look to the future without such a detailed quantitative assessment, and that should guide any forward discussions of rate regulation involving performance-based rate-making. 210 Now, in looking to, particularly, the aspect of what should be anticipated in the PBR experience, we have brought forward, again, the evidence of Dr. Johannes Bauer, of Michigan State University, in the regulatory program there, that was offered in the Union proceeding, RP-1999-0017. And I must say that, in fact, the perspective of Dr. Bauer, if anything, since that date, has become much more critical of the -- of PBR, in general, as we witnessed from his evidence that has been offered in subsequent proceedings, I believe the Enbridge proceeding, where he previously commented on PBR. 211 And just a note, in looking at the quote: 212 "In moving from one regulatory regime to a new regulatory regime, I think the basic test is whether, in the new framework, everyone is better off, or at least nobody is worse off, than in the status quo." 213 Secondly, in looking at the regulatory burden, or the regulatory cost argument, in general, the administrative costs of regulation have not significantly declined under PBR. Regulatory proceedings now often focus on other issues, like the estimation of productivity offsets that are not less contested. And further in that evidence, experience also indicates that in the medium and long run, PBR needs calibration with cost data, implying that cost-of-service principles are complementary to PBR methods. 214 And as well, that PBR works much better under relatively stable industry conditions, and it's much less appropriate during times of rapid structural change, when the definition of meaningful plan parameters is difficult, if not impossible. Under these conditions, there exists an increased risk that the plan does not properly reflect the underlying economic structures of the industry. And whenever regulators have influence on the timing of reforms, major structural adjustment should be completed prior to the introduction of PBR. 215 Now, this evidence offered in this proceeding I believe, mirrors our experience with PBR, that it does not produce huge reductions in regulatory costs, and, in fact, to some extent, the objective itself has to be looked at very critically. Not that the objective is wrong but in terms of the idea of achievement of great benefits under that objective certainly has to be scrutinized carefully. 216 For example, Enbridge spends about $7.7 million a year in regulatory costs and of this, about $5.5 million is fixed, which is internal staff and OEB costs. Of the other dollars, $2 million is hearing related, which includes the National Energy Board, compared to a non-gas cost service of about $700 million. 217 In our submission, to some extent our focus on regulatory costs, not that it's not advantageous to improve what we're doing on a constant basis, but our sensitivity of regulatory costs and the regulatory burden, I think, comes about from the fact that we are actually in the process itself as opposed to the other operations of the company. And that particular fact impinges a lot on our judgment in terms of what should be accomplished. We have to experience the tedium and the multiple pages of evidence and the difficulties in arranging proceedings, and at different points in time, the idea of having a silver bullet that would eliminate all of this is extraordinarily compelling. 218 But I think when we have reviewed this in the past and when we've looked at, effectively, the role of the Energy Board in scrutinizing rate applications, for example, and we've looked at what the revenue requirement of the utility was coming into the hearing, what the revenue requirement was going out, the Energy Board has played an extraordinary role in reducing the revenue requirements of utilities. Now, because they are representative of all stakeholders, they can't very well go about touting themselves as leaders in consumer protection as it were, but in fact they've done a remarkable job when you look at the figures in assuring that there have been just and reasonable rates paid by the consuming stakeholders. 219 So, yes, there's always a need for improvement and sure we can do things differently, but let's not throw the baby out with the bath water. And in looking at some of the other examples, in particular, the electricity situation, there are not the same imperatives that face the Board with electricity distributors, and we note that establishing the cost-of-service base is seen as a prerequisite for any second generation ADR plan. 220 Now, I'd like to turn it over to Dr. Higgin who will discuss the particular policy packages that have been presented by ICF in the context of their paper. 221 MR. HIGGIN: Thank you. Basically, we're going to give a very quick commentary on what I think is quite a lot of the report, in terms of which way to go is contingent or derivative of which is the policy packages the Board may feel should be followed or pursued. They outline the three policy packages. And how that choice relates to the form of regulation that may be more or less appropriate for each of those policy packages. 222 Fundamentally, we disagree with ICF if that our starting point is that improved or somewhat, it says in the literature, "streamlined cost-of-service regulation should be the gold standard against which performance-based regulation should be compared." Even with changes in the regulation of utility functions, such as system-gas supply, load balancing and storage, on which we have commented in the first two sessions, there is still a need to regulate the basic distribution service. 223 There's only Enbridge and Union which are very big in the hierarchy of utilities in North America, and, of course, NRG, which is very small in that hierarchy. Contrast the electricity sector with three or four large utilities and 80-plus small- to medium-sized utilities. 224 Now, in terms of package two, we've made our views clear in other sessions that maintaining customer choice means, more or less, stable status quo on system-gas supply. And that also means a QRAM or some similar cost-of-service-based regulation of that component of service. Even if system-gas supply was outsourced, in our view, that's not a good reason to move to some type of incentive rate making for the remaining services. In our view, the fundamentals of system-gas supply don't fit with a PBR model anyway. Close regulatory scrutiny and transparency are essential to the system-gas function. 225 Equally, we've made our views known in a separate paper on storage and transmission-related matters, and, in some, we state unbundling of storage and infranchise transmission assets and services does not benefit small-volume customers. It may provide opportunities for large customers and wholesale brokers, but this will be at the expense of small-volume customers. 226 But again, if this was to happen, then the core distribution services of the gas utilities can and should be under a form of cost-of-service regulation. 227 Finally, we come to package 3 and just to state that this reinforces our view that several of the components of policy package 3 are not in the interest of low-volume customers. There was even the suggestion that if the LDCs were forced to exit the system-gas supply function, the competitive suppliers should be subjected to some form of regulation over and beyond the marketers' code. Well, that's really a retrograde step in any sense. 228 Our message here is, of course, if it ain't broke, don't fix it. And second, that the core distribution functions remaining after unbundling should still be under a form of cost-of-service regulation. 229 So what do we mean by improved cost-of-service regulation? Like many others, we've had our attempt at thinking about this because we accept that the current practice on cost-of-service regulation needs to be updated, needs to be streamlined. 230 Now, Mr. Fournier has outlined the Regie process. Now ECS works with Option Consommateur, one of the other intervenors before the Regie in both Gaz Metro and Gazifere processes, and ECS also supports BC PIAC and CAC Manitoba in their cost-of-service/incentive schemes in those provinces. So our recommendations are based on that broader experience. We're not suggesting here that the Regie process is the new cost-of-service standard for Ontario. 231 It's worth looking at, but there are differences between GMI and Enbridge/Union and Gazifere and NRG. We need a made-for-Ontario cost-of-service solution not the Regie model. 232 Now, we support cost-of-service regulation - and these are some of the suggestions that we have for streamlining the existing one, and you've heard some of these before - that basically there should be materiality criteria based on improved regulatory reporting. We're very unhappy that the regulatory reporting system has fallen into, I think, disarray would be the best word to put it. And it should be resurrected and given CPR or whatever it is to get it working again, because without that, we are really bound without any information between milestones which would be cost-of-service-based applications. So that's number one. 233 First of all, standard filing requirements. I mean, not necessarily and certainly right now not necessarily your current electronic filing system. I think you need to take a look at what is done in other jurisdictions with current state-of-the-art packages, and a lot can be done without designing a brand new system that breaks through in technology. Right now, the fact is we have too much paper, we have too little information. Okay. That's how I see the current filing. 234 That electronic must encompass spreadsheet-type information as well as text information. It should be provided on CDs, CD-ROMs and it should be accessible with proper indexes, and so on. Other jurisdictions do this. They do it very well, and the information that's filed is accessible and usable in those formats. And yes, people still have to print out some information. That's their own prerogative as to what they're interested in. 235 The next thing is a tight issues list, and that means, based on the application, what the utility is seeking from the Board, what relief it is requesting. That issues list should be very tight, and it should be based on materiality criteria, as well. 236 First of all, a streamlined IR process and -- a big decision is whether Board Staff should go first or last. Are they going to lead the charge, or are they going to clean up after the horse parade? I think that's a big question that needs to be answered. In some jurisdictions that we work in, for example, in B.C., the Board Staff go first, and everybody else then has a very limited time slot to supplement the answers that they receive, very limited. So that's another aspect of how to streamline the process. 237 As others have said, we must try to make ADR more successful. We need to look at, what are the critical success factors? What are the incentives that will make for settlement? What will generate settlements that are workable and acceptable to all parties? 238 The next point is, OEB should target the time frames based on the application, and try to hold everybody's feet to the fire on those time frames. So, if it's going to be six months, and I think that might be, initially, reasonable from start to finish, assuming that the application and a big piece of the prefiled is delivered up front, then that's what the Board should hold everybody's feet to the fire, to deliver in that time frame. 239 So those are some of the other ones, and then sequencing. We can't be asking the Board to deal with three simultaneous applications in the same time frame, so let's sequence Union and Enbridge and NRG so that the Board has a lower regulatory burden and so do intervenors, so considering two-year test years and/or using indexing with earnings-sharing as being another way to extend the period for which another application would not be necessary. 240 So those are some of our suggestions. We do comment here on performance-based regulation, as has been said. There's no imperative to jump into that, in our view. We believe there should be a stable market and operating outlook for the utilities, and we think that, if some of the more radical policy packages are going to be implemented, that wouldn't meet that prerequisite. Also, we need a new type of regulatory compact, and here are some of the features that we believe need to be worked out, to use Mr. Betts' phrase, up front, before the deal is clear to everybody going in. 241 Those are some of our suggestions if we're going to look at PBR, but our preference is to try a new regime for a streamlined cost of service, and that's what we believe will work best for the interests of ratepayers. 242 Just a wrap-up Mr. Janigan is going to give us. 243 MR. JANIGAN: Well, I think we're probably out of time here. As Dr. Higgin has said, as we've indicated, that improved COS is the preferred alternative, and, as well, should really be the base standard on which we deal with the -- before considering any move to implementing PBR as a permanent mechanism for regulating gas utilities. 244 MS. CHAPLIN: Thank you. Cynthia Chaplin. 245 Mr. Janigan and Dr. Higgin, you've explained quite clearly your preference for retaining cost of service, and my understanding of the changes to cost of service that you're recommending seem to mostly go to the issue of streamlining it and making it, the process itself, as efficient as possible; I'm correct in that? 246 MR. JANIGAN: Yes. 247 MS. CHAPLIN: So, what's your view? Because I think one of the reasons -- one of the objectives of PBR is not only, ideally, to have a more efficient process, but also to have incentive features so that the utilities themselves run their business in a more efficient manner. Do you see that being achievable under cost of service? And if so, how is that achieved? 248 MR. HIGGIN: Yes, we indicate here that some incentive can be built in, and that is the case in many jurisdictions that use cost of service in North America. There's all kinds of earnings-sharing mechanisms. There's bands, where allowed rate of return can be higher or lower, et cetera, asymmetric. There's a number of mechanisms. Yes, the answer is -- in short, without going into details, there can be a combination of some level of incentive with the cost of service. And we would support and advocate that to try and, again, reduce the need for successive applications, just because of "over-earning/under-earning" situations. 249 MS. CHAPLIN: This may be a somewhat risky question, but many of the items that you identified as potential areas for improvement of the cost-of-service process looked quite familiar, even to me, who's been away for quite some time. Can you, perhaps, give us your perception as to why various attempts to improve the efficiency of the cost-of-service process have been, perhaps, not as successful as we would have liked? 250 MR. HIGGIN: I think the Board, to some degree, is and should be the controller of its own process, and in that respect, I think that the question of latitude given to the participants in the process is the trade-off between timeliness and fairness. And sometimes, the Board, in my view, is leaning towards fairness when, perhaps, they should be leaning a bit more towards timeliness, and getting a result that is reasonable for all parties. 251 So Mr. Fournier outlined some features that the Regie -- that it tends to be a little more direct, I think, in terms of the process. That's our experience. And you've got to be there; you've got to speak up when -- you've got to speak up or hold your peace; you've got to get on with it. They have a very tight control over the process. And I think that is one feature that I would say the Board has to take charge of, and take control of the process and make it work. 252 MS. CHAPLIN: And you commented that the Regie approach would not be an entirely appropriate model for the Board. Could you briefly, sort of, explain where you feel that we should be cautious, or what sort of information we should take into account when looking at that? 253 MR. HIGGIN: There are a number of things that make -- there are differences between Gaz Metropolitain and the utilities here. For example, they are a small utility in an electricity-dominated energy market. That has certain factors there. They also have monthly pass-through mechanism for gas costs. They also have unbundled rates and services, which operate in a -- there's quite a lot of customers that have elected those unbundled rates and services. So they are in a different paradigm than either Union or Enbridge. 254 Those things need to be considered, as a cautionary note, when you say you just can't adopt the model. There are some good features, those things I mentioned are very important, and of course they also regulate Gazifere, which is an subsidiary of Enbridge Gas Distribution. And Gazifere is just coming off a targeted PBR plan for O&M and they are going into their rebasing. Many of the -- you know, the script for that, of course, has been very similar to the script that's been happening in rebasing here. I won't go into that. 255 So they do have Gazifere and they recognize the differences, but you can't have a one-size-fits-all approach to regulation, and I think that the Board has recognized that with NRG. So there are differences, and I don't think that -- we can just adopt the model without a careful scrutiny of its features as to what will work and what won't work here. But I think that the first thing is for the Board to set out its own vision of what streamlined costs should be. 256 MS. CHAPLIN: Thank you. 257 MR. BETTS: Thank you. A couple of quick questions and I will let everybody go on a well-earned break. First of all, you talked about, again, an Ontario -- a made-for-Ontario solution. Can you give us some recommendations on how you feel we should get there? We've heard some people suggest the Board should just establish guidelines. Others suggest this should be a consultative process, a negotiated process between the utilities and stakeholders. Can you suggest the methodology by which the Board could consider such a change? 258 MR. HIGGIN: Well, my view is that you've already started the process. You've already got the stakeholders engaged. Therefore, as we suggest on the last point on there, that the draft policy paper that the Board Staff are going to prepare would be the next step, in my view, to continue that engagement. And if you really want to get input on both without necessarily having to choose, then you may want to consider two working groups, for example. One on streamlining cost of service and the other is on a new regulatory compact or structure for potential performance-based or incentive rate making. That's one option. But they should be given clear charge and get back to the Board within a very tight time frame. 259 I would like to see, if we're going to move on -- improve cost of service, that that should be in place and be tried in the next applications of either Enbridge or Union. I understand that maybe Enbridge might be the first, depending on the regulatory cycle. I'd like to see it applied, whatever features that have been agreed to and endorsed by the Board. We'd like to see it get on with that in the next application, which is likely to be a cost-of-service application in any event. 260 MR. JANIGAN: I think it's also important that if we're going to improve the cost of service, that the parameters for the measurement of the success are known in advance and that there's consistent measurement of whether or not we're achieving those parameters of success. It's not simply -- I don't mean to sound depletory, but frequently we simply get some comment at the end of the proceeding, How did you like this? How did you like that? I think there has to be some more objective measures in terms of what we were able to achieve in terms of the streamlined cost-of-service. 261 MR. BETTS: Thank you. 262 The last question, one of your slides indicated one of the improvements to the cost-of-service process could be for the Board to establish its own expectations for time frames, and I'd like to hear your comments. One of the issues is the regulatory costs or expenses. What is your position on, for example, the system I've heard that Regie uses which involves budgeting the expenses or costs of the participants as well? 263 MR. HIGGIN: I think that has a lot of merit. In fact, you are adopting a similar process with the ADR process. The only thing we'll advocate is that when you cut people back to 75 percent, then you have to cut back your expectations of what they will deliver to you as well, but having -- 264 MR. BETTS: This is a hypothetical question? 265 MR. HIGGIN: That's not a hypothetical, that's -- right? So I think that there should be care taken in that, but, yes, I think that type of model is one that you're now moving with in ADR and there's no reason why that type of approach can't be taken. That is, you have a series of we'll call them packages, which could be steps of so much for your IR process, so much for your settlement process, and so on, and you would base it on what would be a reasonable number of days and time and so on to complete those steps once the issues are known. It has to have a clearly defined tight issues list to start with. So those are some ideas, that is to try and do that, more or less, along the lines of the ADR process. 266 MR. JANIGAN: One addition to that is that the package or the envelope should be equally applied. So, for example, if the applicant has, in fact, unnecessarily protracted the amount of effort that's going to have to be done in relation to the proceeding, or just by force of circumstances that -- not that, in fact, that the efforts have to be protracted that there be some flexibility within that envelope in order to accommodate them. Obviously, if you're in circumstances where you can't afford to pursue this issue much further and it is something that is legitimately to be pursued, then the tactical advantage goes to the applicant to attempt to protract the proceedings as long as possible to, effectively, widow out your intervention. 267 MR. BETTS: Thank you. And those are all of our questions. 268 MR. HAUSMANN: Thank you, Mr. Chair. 269 We've had a long morning session. It's almost 11:10. We will take a break and reconvene at 11:25. We need all the time we've got. 270 --- Recess taken at 11:08 a.m. 271 --- On resuming at 11:25 a.m. 272 MR. HAUSMANN: Ladies and gentlemen, if you could please take your seats and we will reconvene. 273 Our next presentation is by Mr. Gibbons, Pollution Probe. 274 MR. BETTS: I'll just make one comment before we ask Jack to take the mike. It will be our plan to continue now until we're through, and then everyone will be able to go back to their normal business for the day. So, we'll see how long that takes, but, certainly, we don't want anyone to cut short their questions or comments on this section of the session. 275 Mr. Hausmann, back to you. 276 MR. HAUSMANN: Thank you. Mr. Gibbons, go ahead. 277 SUBMISSIONS BY MR. GIBBONS: 278 MR. GIBBONS: Thank you. I'm Jack Gibbons from Pollution Probe, and Pollution Probe greatly appreciates the opportunity to make its third presentation to the Natural Gas Forum. 279 I think, at the outset, we should start out by looking at the big picture. And, from a big picture perspective, I think we believe that natural gas regulation in Ontario over the past 40 years has been a tremendous success story. The gas utilities are well-run and financially healthy. There is no stranded debt. All consumers in urban areas have access to gas service. Gas supplies are rarely interrupted. And the gas utilities, DSM or energy conservation programs, are reducing their customers' bills by over a billion dollars. 280 Now, in previous sessions, we addressed the issue of system supply and storage issues. In Pollution Probe's view, the two remaining key issues that face the Board in terms of natural gas regulation are, first, expanding the natural gas distribution infrastructure in this province, and expanding the DSM or energy conservation programs. 281 Lets talk, first, about expanding distribution infrastructure. If Ontario's energy service needs are to be met at the lowest societal cost, the natural gas distribution infrastructure needs to be expanded, one, to accommodate the need, the needs of new natural gas-fired power plants, and, second, to accommodate the need of new residential, commercial, and industrial customers. In terms of residential customers, for example, ideally, all the new homes that are built in urban areas in this province should use natural gas for space heating, water heating, cooking and drying. 282 Now, to achieve these goals, to get the expansion of the distribution system that we need, it's going to require a very significant capital investment. And to motivate the gas utilities to aggressively pursue all these opportunities, we need to continue with rate base rate-of-return regulation, since it provides a strong incentive to the gas utilities to increase their rate base. We've had that, you know, for over 40 years in the province, and for very good reason: Because it was necessary to expand the gas distribution system in this province. And that's worked well in the past, and we're going to need to continue to expand it over the next 20 years or so. And so, at least with respect to the capital budgets, we have to stick with rate base rate-of-return regulation, so that the interests of the gas utilities are similar to those of their customers, and their prospective customers. 283 Pure price-cap regulation is not appropriate for a utility that must make large capital investments to meet its customers' needs, because under pure price-cap regulation, it is not always in the shareholders' self-interest to expand rate base, hook up new customers. Now, price cap regulation may be quite appropriate for the gas utilities operating at maintenance cost, but, in terms of rate base, we must stick to rate base regulation. 284 Second, we believe that the utilities should implement more aggressive and effective programs to increase their market share in end-uses that are appropriately served by natural gas, like space heating, water heating, cooking, and drying. At the most recent Enbridge hearing, we learned that that utility is losing market share in the water-heating market. That is totally inappropriate, it's unacceptable. It's not good for customers, and it's not good for public health, and it doesn't help the government achieve its coal phase-out targets. 285 Therefore, we believe that the reintroduction of a utility-sponsored water-heater rental program may be an appropriate option going forward, to ensure that the utilities capture a very large share in that market. 286 And there's also a very important need for the gas utilities to do more to switch social housing from electricity to natural gas for space heating. I think most people in this room would agree that, in the electricity sector, prices are going to rise and prices need to rise. One of the major objections to that, of course, is the negative impact that can have on low-income citizens. And the low-income citizens that are most affected by higher electricity prices are those that have electricity for space heating. So, the more of those customers we can switch to natural gas, the better, from many perspectives. 287 Now, turning to DSM. As we've mentioned -- Ontario's gas utilities DSM programs are reducing their customers' bills by more than a billion dollars. In particular, Enbridge's DSM programs are reducing its customers' bills by $785 million. Enbridge has one of the most successful gas DSM programs in North America, and that should be a matter of tremendous pride to this Board, that started implementing gas DSM about 10 years ago. 288 If you look at Enbridge fiscal 2004 DSM programs, they have a projected ratio of net bill reductions - net bill reductions - for their customers to utility spending of 13 to 1. There is no more cost-effective low-risk investment opportunity available to the Ontario economy. This is a great bargain. 289 Unfortunately, despite a decade of success, Enbridge's DSM programs and its DSM savings are being constrained by its small DSM budget. Enbridge's fiscal 2004 DSM budget is approximately $14 million, or, approximately, one-half of 1 percent of its total revenue requirement. By way of contrast, the initial DSM budget for Ontario's electric utilities is $225 million, or, approximately, 2 percent of their total revenue requirement. So we've got an initial electric DSM initiative that is four times greater, in terms of expenditure, than Enbridge's programs after ten years of success. 290 Given today's very high gas prices, and the fact that Russia is about to ratify the Kyoto protocol and make it legally binding, we need a significant increase in gas utility DSM in order to reduce energy bills and to keep Ontario's industries competitive. 291 According to Premier McGuinty and Minister Duncan, the creation of a conservation culture is a top priority for the government of Ontario. But the gas utilities need to hear this same message from the OEB. We need a strong statement from the Ontario Energy Board that it supports a significant increase in gas DSM spending, because the utilities are not going to increase their budgets, are not going to propose significant increases in gas DSM budgets, unless they know that the Ontario Energy Board is going to support it and is on side. And, quite frankly, the past history -- they've got mixed messages from the Ontario Energy Board in terms of DSM. We've not to stop with the mentioned messages. The Premier has been clear, the Minister has been clear, and now it's time for the OEB to send a clear message to the gas utilities that it wants them to ramp up their gas DSM programs. 292 Now, while Enbridge Gas Distribution is a North American leader in gas DSM, the same cannot be said of Union Gas. Despite the fact that Union Gas is Ontario's largest natural gas utility, as measured by through-put volumes, the forecast bill savings from its fiscal 2004 DSM programs are 56 percent lower than those of Enbridge. In Pollution Probe's mind, this is unacceptable. It is bad for our economy, it's bad for public health, and it's bad for the environment. To correct this problem, we believe that the Ontario Energy Board should do three things. 293 First, it should state that it supports a significant increase in gas utility DSM spending. Second, it should tell Union that at a minimum, it should achieve DSM parity with Enbridge Gas Distribution. And third, it should link Union's profits to its success at reducing its customers' bills by increasing their energy efficiency. 294 In closing, I guess I would like to repeat the key message that we started out with. Basically, we believe the gas utility regulation in Ontario has been a tremendous success story. There are needs for certain improvements and we've outlined the key ones in our three presentations here, but fundamentally, it is a tremendous success story and we really don't -- and there are needs for certain improvements, but I guess we sort of emphasize the message that Dr. Higgin made, if it's not broken, don't fix it. And especially, we don't think it's appropriate for the OEB to devote huge resources to making what, in our view, are potentially second-order or third-order improvements to natural gas regulation when there are such serious issues on the electricity side of the equation in terms of electric regulation in Ontario. 295 We believe that, you know, the OEB should fundamentally be devoting -- or its priority should be to fixing up the electricity sector. That's where the real serious problems are. And I guess from Pollution Probe's perspective, you know, we see the amount of resources that are devoted to what, in our view, are maybe second- or third-order refinements to the natural gas regulation sector, compared with the relativity few resources and time that is devoted to promoting DSM on the electricity side, and we think that's totally wrong. 296 You know, you're missing the big picture. You're missing where the biggest possible savings and benefits are for the Ontario economy and quite frankly, we think you're out of step with the policy direction of what Premier McGuinty has set as one of the central goals of his government. 297 Thank you very much for your attention. 298 MR. HAUSMANN: Board questions? 299 MR. BETTS: Thank you. No questions of Mr. Gibbons. 300 DISCUSSION PERIOD: 301 MR. HAUSMANN: All right. As the Chair indicated, we will proceed directly into our dialogue and discussion. 302 Mr. Poch. But before you begin, just for those of you who don't have microphones, there are various seats here. I know somebody is sitting in the reserved Q and A seat, but that doesn't matter. There are various seats with microphones at your disposal. Please, come to any one that you feel -- I see Mr. Scully is making his way back up to the panel. That's fine. 303 MR. SCULLY: Mr. Fournier and I can take turns, in case anybody asks us questions. 304 MR. FOURNIER: I can work from here. 305 MR. HAUSMANN: Sure. Mr. Poch. 306 MR. POCH: I think this is a question I'd like at least Jay and Jack to comment on. With respect to DSM, it seems to me we've had a PBR mechanism for DSM that has not had a long duration period because it doesn't have capital expenditures associated with it, but it's been parallel and separate from the overall PBR mechanism. It's existed within the cost-of-service context and it's existed within the general PBR or targeted PBR context. Do you agree that, in essence, it is a separate module and do you see that the choice of -- overall for general PBR or cost-of-service has implications for that or should we treat it as a separate module? 307 And Jay, in particular, you said -- your clients are after the lowest rates. Is DSM -- might I offer a friendly amendment? Is it lowest rates or lowest energy costs? 308 MR. SHEPHERD: It's absolutely lowest bills. 309 MR. POCH: All right. If you could comment on the more general question. 310 MR. GIBBONS: Sure. Yes, we believe a separate incentive mechanism is appropriate, is necessary for DSM. In terms of the gas utility's traditional business, the traditional pipe business, what you need is a regulatory mechanism that encourages them to increase their market share and to reduce their costs, whereas in terms of DSM, it's a different thing, what you want to focus on is reducing customers' bills. And certainly in terms of DSM, to do that, to expand that business which is a growth business, you're going to need increased utility expenditures. So it requires a different perspective for us. 311 The pipes business, it makes sense for ratepayer intervenors to focus on doing everything possible to incent the utilities to reduce their costs, to distribute the gas at the lowest possible cost. In terms of DSM, it's a growth area and there's going to be a need for increased utility spending. 312 MR. SHEPHERD: Two comments. First of all, I -- we strongly -- what's happening in DSM is not a PBR, I don't think, it's an incentive mechanism. It's not a PBR and -- but we think that you have to keep in mind that the utilities are just a bunch of people. They're not -- we talk about them as if they're things. They're not things, they're people, and people respond to incentives. So I think, generally speaking, we like incentives for things that benefit the ratepayers. 313 I think the one caution we would make, and Jack sort of commented on it inadvertently a few minutes ago in his talk, he talked about $785 million of bill savings as a result of DSM. And I think that points out the question that a lot of ratepayers asked, How good is our accounting here? How reliable are these numbers? $785 million sounds like a lot of money and we suspect, and I think other ratepayers suspect as well, that some of that may not be quite real. So it would be easier to sell incentives if we got the numbers right. 314 MR. POCH: Let me just pose a follow-up. Let's assume it's only a quarter of that. It's only a couple of hundred million. What would that change? 315 MR. SHEPHERD: We still like it. We're big fans of gas DSM and we think Enbridge, particularly, has done a wonderful job of DSM, but the use of wonky numbers leads people to have questions about the whole viability of the program. I agree with you. If it's only 200 million, if it's only 100 million, it's still a good thing. 316 MR. POCH: Thank you. 317 MR. HAUSMANN: Marika. 318 MS. HARE: Marika Hare from Enbridge Gas Distribution. 319 I have four questions for the panel. But before I get into my questions, I just wanted Mr. Scully to confirm for the record, you made a number of comments about process and ADR. I know you have not been involved in Enbridge Gas Distribution rate cases for at least the five rate cases, so are you speaking only about your experience with Union Gas when you make those comments? 320 MR. SCULLY: Sorry. For at least how many? 321 MS. HARE: Five. Because that's how long I had been around, 2001, 2002, 2003, 2004, 2005. 322 MR. SCULLY: I didn't think I recognized you. I'm going back to the last Consumers case that I was involved with, and frankly you may be doing a lot better. But back when the last time I looked, there were the same problems that I commented on. 323 MS. HARE: My first question -- 324 MR. HAUSMANN: Can everybody hear back there? 325 MS. DeMARCO: No, actually. 326 MS. HARE: Speak up into the mikes when you speak. Particularly, Jay and Peter Scully. 327 MR. BETTS: I've discovered, some are more sensitive than others. The one that Mr. Scully is at seems to be not quite as good as others. So particularly, Mr. Scully will have to get close to it. 328 MS. HARE: Marika Hare speaking. 329 My next question is with respect to the comment that Mr. Seal made about trust, and that that was one of the reasons that the PBR failed. I totally agree with that comment, but in my view it's not just intervenors not trusting the utilities, it's probably also utilities not trusting intervenors, and intervenors not trusting other intervenors. Would anybody on the panel care to comment on that and what the resolution of that could be? 330 MR. SEAL: Darryl Seal, School Energy. I agree with that, Ms. Hare. I think it was an all-around general distrust, and I think I outlined some of the reasons I think it was around, because of the newness of the process, because of the comfort with the existing process that was there. Really, I think one of the tried-and-true methods of gaining that trust, in any exercise where trust is important, is time. And I think we said that maybe one of the things that needs to happen is, do it right at the beginning, get everybody involved, and give it time to work. 331 MR. SHEPHERD: I'd just like to add two quick things. I think it's clear that the distrust and suspicion was fed by some things that the utilities did that were poor judgment calls. I think it was also fed by some intervenors who couldn't get their mind around the possibility that the utility could make more money than ROE. And I think both of those mistakes fed a difficult time. 332 MR. FOURNIER: Peter Fournier, the Industrial Gas Users Association. I agree with Marika that it's definitely not a one-way street. Stakeholders equally gave rise, I think, to some of the concerns of distrust. One area, I think, to address, and I think it was in the School's submission this morning, is that one of the things that gives rise to distrust, in the current process, is the ever-changing numbers. We get an initial application that says, I need $100 as a revenue requirement, and you start working on that basis, and then two months later that becomes 110, and then two months later that becomes 105, or something like this. And there's a real, or otherwise, I think there's some -- is a feeling that, you know, are these last numbers we now have the final numbers? Are they playing with the numbers? Or whatever else. So that's on one side. 333 And I think, in terms of better trust with the utility, if they can say, Right, here's our application, here's our final numbers, and let's work on these, we won't change them. From the stakeholder's side, I agree with what Jay just said. Stakeholders have got to play the game fairly. They've got to say, Here's our position, and stick with it. You can't sit on the fence and straddle, in my eyes. And it's one of the merits, I think, of having this task-force, working-group approach, to try to resolve the broad range of issues. 334 I recall when Union Gas was working on developing its PBR plan. They went into, really, about a year and a half's discussions with the stakeholder committee, which, initially, I went into quite excited; I thought this was the right way to do it. The problem was that they were totally immoveable in their approach. It was -- this was their proposal and they weren't changing from it. Their idea of discussions was to explain the wisdom of what they were doing. 335 And I, finally, one day, got extremely frustrated and, sort of, as I can tend to do at times, I blurted out to their vice-president who was handling this, I said, Why can you not consider some of the comments from the intervenors, that they're giving you; if you can only accept them and make these modifications, you probably would generate a lot of support for what you're proposing. His reply was, I'm not giving up anything until I get to the ADR, because no matter what I give up now, I'm going to have to give up more when I get to the ADR process. 336 It's that kind of institutionalized approach, if you like, to settlement negotiations and cooperation that have caused our current OEB system to get a bit unwieldy. I agree with Roger Higgin when he said the Regie process is not the right one for Ontario, but it's a different process. I just encourage the Board to consider different ways of doing things, because I think there are improvements that can be made. 337 MR. HAUSMANN: Question number 3, Ms. Hare. 338 MS. HARE: Totally changing subjects. The Enbridge written submission, and in the comments that were made yesterday, and then Energy Probe also had some comments, all to do with different capital structures, and I'd like to ask the panel if they've given any thought to how a restructuring, say, for example, of a limited partnership would be addressed in either a two-year cost-of-service or under a longer term PBR plan? 339 MR. SHEPHERD: As you know, my background is as a tax lawyer, so I spent more time than I would have cared to with limited partnerships. It's not something that you can discuss in a simple way in this Forum. There are ways of structuring limited partnerships - income trusts and various other structures - that would create tax efficiencies, which is what both of those are about. And, if there are tax dollars on the table, if you reduce the taxes, then you have more room to either reduce rates or increase ROE; it's a straightforward thing. The money comes from the federal government. But I think that it's not something you can deal with at a conceptual level; it's very much a detail-oriented sort of thing. 340 MR. HIGGIN: I might make one comment. And I think that, from my limited knowledge of limited partnership arrangements, and so on, there are a whole bunch of issues around control, accounting issues around how you ring-fence things, and so on, that add to the complexity that is already in place. And those things are some things that would have to be addressed relative to the increased complexity. And who should pay for that? That would occur with a limited partnership arrangement. I mean, basically, who is the gas utility? That's the first question. Who is it, really? Really, who is it? Sorry. That's the first question. 341 So there are a whole bunch of ramifications. What happens if you want to sell or transfer your interest in the limit partnership? And so on. I think it's a new structure, and I think that we haven't really had a chance to address that. But it's something that, if the utilities think there are big advantages for them, and possibly for ratepayers, it should be looked at some, separately, and it's up to them. They have stakeholdering processes that they can initiate, that they would get feedback on. And also that's something that they can make an application at any time to change their structure. 342 MS. HARE: If I could add just a follow-up. The reason for raising this is that that is exactly what we would hope to avoid, is to make an application only to find that, based on general principles, people are opposed to it, which is why we were hoping that it could be incorporated within the scope of these discussions so that we understand, sort of at a general level -- and there may be something that neither utility is interested in pursuing, but it would be the framework around how that would be addressed that we're after, as opposed to having to make a separate application and figuring out policies through an individual application. 343 MR. HIGGIN: I would agree that that should be done through this process, but the only question is: Is it an issue that lends itself to the broader questions that are facing the Board, and they're framed? Do they want to add that to their issues list, is the question, because I think it is a significant addition to that list. 344 MR. FOURNIER: Peter Fournier, Industrial Gas Users Association. I've noted in your submission the suggestion that one possible model might be to incorporate the intertrust. I have a massive intertrust in my retirement portfolio. And there's some that I like and have bought, and there's some I wouldn't touch with a 10-foot pole. But I would note Gaz Metro is a limited partnership and is -- it's a partnership; it's not a trust. 345 One of my problems with some trusts is their valuation by the parent when it was set up. TransCanada PipeLines had initially started a number of -- developed a number of power projects and turned around and converted them into TransCanada Power Investment Trust. The problem I had with it was the valuation of the initial power projects when TransCanada put them out, I think was about $400 million in the five or so power projects they had constructed. It held 50 percent of the units, or so, of the power trust and sold off the other 50 percent for approximately $400 million. So they -- the valuation, I thought, as was, was unfair and unreasonable. 346 One of the things that appeals to me with the proposal -- and it depends very much on whether Enbridge Inc., your parent, fully divests itself its ownership in Enbridge Gas Distribution. In other words, there is 100 percent conversion to either a limited partnership or an investment trust, or does it retain a large share of the ownership? One of the things that appeals to me about your suggestion is that I would rather see Enbridge Gas Distribution as a stand-alone utility, and this might be one way for that to happen. 347 But in response to your question as to how to get there, what I would rather see is that Enbridge Gas Distribution establish a working group with its interested stakeholders, because it very much depends on whether it's acceptable to IGUA, and I suppose to others, what particular structure you are proposing, the financial structure, the controls, who will be operating the company. What are the tax benefits for the previous owners and is there some -- there's a multitude of questions that -- I'm not a tax lawyer or a tax consultant. I'd probably run out and hire someone like Hugh Johnson and get his expert advice, and I'm sure others have other people they can go for. 348 But the best way, I think, to assess it is to sit down in a non-regulatory forum and see what you're suggesting, see if there are elements to what you're suggesting that would cause some concerns, are you open to modifying your proposal to overcome those, and at the end of the day, do we end up with a financial structure for this new entity that most people are very happy with? And that would be the ideal way of going about it. 349 MS. HARE: Last question from Enbridge Gas Distribution. 350 MR. SCULLY: Could I just speak to that too. Peter Scully for FONOM and the cities of Greater Sudbury and Timmins. 351 If you're thinking about this or Union is thinking about my clientele, it's a contractual relationship. We're the people that gave you the franchise, come and talk to us first. 352 MS. HARE: Okay. Last question for Marika Hare. 353 As schools, you've put forward a number of -- well, three options, which I think you described as trying to broaden the scope as to how to think about PBR. And certainly one option is immediately of interest, one that's a five-year plan with an escalator for some index-based inflation. The other two, again, they're just to broaden the thinking. 354 What I'd like to really ask is the other panel members to comment on those options and the idea of really thinking of something quite different. Any comments from IGUA or VECC? 355 MR. FOURNIER: Peter Fournier, IGUA. I'll jump in and let the others get their thoughts in line. 356 I think any approach to incentive regulation, anything should be open to consideration. We've heard this morning, and some appealed to me, of the simplicity and cleanness of what School's initially suggested, that is a price cap, half a percent of -- 50 percent of CPI, or CFI of your period. But I equally agree with -- I hate to admit it, I agree with Jack Gibbons, that that then puts into question the viability of continued investment in, say DSM programs, and rate base. 357 So no matter, I think, what scheme you come up with, there are pros and cons, and that's where I really advocate that a incentive scheme has to come from negotiated settlement. Not for the utilities to say, Right, here is what we are proposing, take it or lump it. Because most of the people will lump it and fight you in the hearing room. You end up with the regulator then having to make a decision, do we approve this thing or not? 358 It's far better if we can sit around a table, different people with different ideas, your priorities as a utility are one way, consumer interest groups have a different set of priorities, environmental groups have different priorities, and so forth. They're all important. Some of them have merit, some of them don't, probably in terms of any single point, but at the end of the day, if we can negotiate something that attempts to take in all the constituency's interests, that's a far better thing than just saying, Here's a simple model, put it in place, because something will probably not work right on it. 359 MR. JANIGAN: Michael Janigan for VECC. 360 I think we would start with the same premise that we introduced in our slide from Dr. Bauer's evidence, that any alternative has to leave the participants better off, or at least produce a result that nobody is worse off than the status quo. And I think that would be the approach to evaluating each of those different alternatives. 361 Simplicity certainly is preferable to complexity in terms of the design of solution, but it's not really the way in which we ultimately evaluate what is to take place. I think it has to be evaluated from the standpoint of the generation of fair and reasonable rates for all stakeholders, and the benefits of going into any of these particular plans would have to be demonstrably superior to that which would be produced by cost-of-service. 362 MR. CAMPBELL: Well, Mr. Janigan, a very specific supplement then. Rick Campbell for Enbridge. Would you take the deal that Mr. Shepherd's clients might take, which is a four- or five-year PBR plan, half the rate of inflation? 363 MR. JANIGAN: I don't think I would. I think that the -- part and parcel of the process guarantees some form of transparency. And I'll give you an example where the circumstance would be that the deal might not be so good. 364 In telecommunications, for example, the bills of Canadian customers have gone up 17 percent over the last 10 years, if I've got my figures right, but in any respect, they have generally trailed the rate of inflation. It sounds good, but when you look at the productivity increases that the telecommunications industry has managed to achieve, they've managed to achieve productivity increases of five times the national average. So if you were looking at a deal at the start, that we would have telephone bills that would be less than the CPI, it would look pretty advantageous. But the developments in the industry were such that, in fact, paying cost-based rates is much -- would have been a much better alternative. 365 MR. HAUSMANN: Mr. Scully or Mr. Gibbons, any comment? 366 MR. SCULLY: I have no comment. 367 MR. GIBBONS: No. 368 MR. HAUSMANN: Right. Then just a minute. I neglected earlier to give Mr. Bermon or Mr. Kaufman an opportunity to ask their questions, which we have traditionally done, given them the opportunity to ask question in any of the discussions. So I'll turn to them now, and then I see Ms. DeMarco has her hand up. Gentlemen? 369 MR. BERMON: Thank you, Mr. Chair. It's Mike Bermon from ICF. 370 We have two questions this morning, and I think not been able to go first has allowed Marika Hare to take most of my question. But maybe I'll just try to re-address it again. 371 I think Mr. Shepherd did provide an answer to this during his discussion this morning. But if the Board did decide to implement a multiyear incentive-based rate plan, I'd really like to focus a little more closely on Marika's question: Would it be possible for each of the panel members to reach a position where they could articulate three to five measurable desired outcomes that your constituency would accept as being an acceptable outcome of that process? I don't necessarily need to know what those are today, but is it possible that you could list, and I stress the word "measurable" outcomes of what that process might be? Anyone? 372 MR. HIGGIN: I could start. I think that, first of all, the basic premise of regulation is to protect consumers as well as to be a proxy for competition. So, basically, it looks like a good deal. You know, half of inflation, 1 percent, let's talk about 1 percent. But if the utility was able to go through, or the industry, more importantly, goes through a major restructuring during that five-year period, that may not look so good. So you have to have preset requirements, either for an offramp or some sort of earnings-sharing mechanism that may, at the front, may seem ridiculous when you're going in with 1 percent a year for 5 years, because you don't know what's going to happen with natural gas and the market. 373 For example, LNG, we talked about that, for example, could have big impacts. Power generation. A whole bunch of things could change the structure of the regulated entity and the services during that five-year period. You have to be able to protect against those things happening; therefore, you cannot necessarily anticipate all of those, so for that reason, we tend to think that periodic checks, we'll call it, would be required. That may be not less than a cost-of-service-type proceeding, but you need to check every so often as to whether those things are happening, and whether or not the rates still remain just and reasonable through that plan. And, therefore, you have to do that, and do that along with the ratepayers and stakeholders. That would be my comment. 374 MR. FOURNIER: Peter Fournier for IGUA. 375 I would endorse what Dr. Higgin just said and add a bit to it. 376 In my formal remarks, I referred to the need to have some process at the end of the term of the incentive regulation to set the new rates for the next term to stay on incentive regulation. We've seen, both in the TransCanada case and in the Enbridge case, where savings were made during the term of the program, but in the last year, costs shot back up again on the claim that the savings achieved were unsustainable. That kind of cost advice from the utility just begs the stakeholder community to say, you know, Prove it. 377 So you go back to this question of, what kind of a record of costs and revenues are appropriate so that when you get to the end of the term of the incentive mechanism period, you've got some basis going forward. 378 Now, I take and listen to School's comments this morning as saying they don't really care if the utility is making 100 percent return on equity or something else as long as the distribution rate is fair and predictable, and there's some merit in that. The trouble with agreeing to something today puts us on a five-year course that, at the end of that five years' time, what if the utility says, We've lost our shirt during this period; we now have to increase our rates 100 percent? Or you have a completely different set of Board Members at the OEB and they say, We're not bound by what our predecessors ruled upon; we look at each case as it comes up. And they do something totally different also. 379 So it's a -- put yourself on a five-year plan or three-year plan. There are, I think, checks and balances that you need to try and incorporate from the beginning, so a very simplified plan probably doesn't do the deal. I like the idea of a two-year cost of service, and I think -- was that VECC, I think, that made that suggestion, with the idea that the Enbridge rate case this year and Union's rate case next year, each for two-year periods, might be a compromise that would simplify the cost-of-service process, keep everything on an even keel, and accommodate changes which are bound to come along in terms of the market structure. 380 MR. HAUSMANN: Anybody else on the panel? 381 MR. SHEPHERD: Well, yeah, as appears to be the case, we're the outliers again. For schools, and I think this is true of most ratepayers, energy costs are important but they're not the most important things in their lives. And what they want to do is they want to deal with it. They want to deal with it in a way that they're satisfied that they are okay, but they don't want to go into the minutia. They're not energy experts, and they don't want to be energy experts. So they would like to see a solution, and, to respond to the question, they'd like to see a solution that reduces their risk and reduces their cost. And if you can do that, the rest of it is all just, you know, let the experts play with it. 382 MR. HAUSMANN: Jack? 383 MR. GIBBONS: In response to Mike's question, what's the criteria that should be used to judge a new regulatory regime, we always come back to the key criteria. In our view, it's got to provide secure natural gas supplies for the Ontario marketplace, it's got to give us reasonable and stable prices, and it's got to lead to lower energy bills. And we, quite frankly, believe that the best way to achieve that is basically the status quo system with minor modifications, incremental modifications that we've outlined. 384 And, you know what, quite frankly, at these OEB proceedings, there's a lot of people who love to have intellectual discussions about, you know, some theoretically perfect magical scheme, some kind of thing that will set rates for five years and everything will be perfect. People love to have these discussions. You know, I think I've been party to these discussions for years. There were various utilities coming forward with new proposals, and we go over and over these things. And, quite frankly, I don't -- I've never heard a better -- you know, everyone talks about having some perfect solution that is fantastic, but I've never heard anyone come forward with a comprehensive approach that is better than the status quo with certain minor modifications. 385 You know, I think we can spend the next year talking, and I don't think we're going to get it. And, quite frankly, you know, for the people who love these intellectual discussions, and we've got a lot of intellectual brain power that isn't being put to adequate use, I suggest, go to the electricity side of the OEB and help them out there. There are huge problems. 386 I mean, you know, the gas sector is in fantastic shape. You just have to look at the electricity sector and what has happened to a once-great corporation called Ontario Hydro that is bequeathed as a $20 billion debt. Go there. There's lots of problems for bright people. 387 MR. HAUSMANN: Anybody else on the panel? Mr. Scully? 388 MR. SCULLY: A few comments. 389 If we could sit there and see nice stable rates with maybe a little decline for a longer period, three years, five years, I think the things we'd want to put on the table are some sort of guarantee of a continuation of unbundling so that the leading edge of what's happening in the industry continues to happen. And I think that happens at the direct-purchase level. It's the guys who are beginning to trade in storage and do that kind of thing that are going to make a difference that really will bring down costs in the future. So maybe the benchmark would be 50 percent of the dedicated domestic storage is available on a direct basis to the marketplace and trading can take place at a hub. 390 Something in quality of service. Having a telephone answering service pick up the phone within 30 seconds just doesn't really do it. We'd be looking for a guarantee that you could talk to a live body and get things done. We'd want to see some guarantee of extension of gas service. Maybe we'd want a promise that gas would get to Wawa. I don't know just where the physical locations are, but it would be something like that. 391 MR. BERMON: I guess just to follow-up, probably nothing that I heard under that dialogue that couldn't be addressed as part of a measurable list of outcomes that would be acceptable to the parties whether we went to reorganization, whether it went to service to certain territories, whether it went, again, to further unbundling or restructuring issues whether relative to system gas or storage. So I'll just leave that as a comment for, perhaps, the Board to deal further with if we wish in their list of questions. 392 MR. HIGGIN: Could I just make one last comment. I think that one option to be looked at -- Roger Higgin -- could be look at. We tend to look at the utility as fulfilling a number of functions, but if you could really strip it down in terms of costs to the basic pipe function, that's pure, pure, pure distribution, pure wires. Then I think you get much more potential for a stable outlook there. Where there are factors is externalities in terms of the growth rate and housing and all of those things, but those are more controlled. And you might be able to put in place something with greater stability for a longer period once you strip it down to those bear bones, just the pipes, and the costs that are allocated to just the pipes and the rates for just the pipes. That's one option, I suggest, is a possibility. 393 MR. HAUSMANN: Ms. DeMarco. 394 MS. DeMARCO: Thanks very much. 395 It appears to follow-up on Peter Scully's last comment. Following up on Michael's comment that the objective here is to achieve fair and reasonable rates for all stakeholders, emphasizing the "for all", my question is not context of the 40 percent of customers that are served by direct-purchase arrangements and their service providers. It appears to me that the discussions that we've been having relate to whether or not the regulatory model is reactive in response to change or proactive in anticipation of dealing with change. And I think the seven options for regulatory model outlined in School's paper can be fit along that continuum, from reactive through to proactive. 396 I wonder if any or all, predominantly School's, could comment on which of those options would be best suited to addressing the needs of the 40 percent of customers in Ontario that want fair, transparent, and competitive market in relation to direct-purchase arrangements that they take. 397 MR. SHEPHERD: Jay Shepherd, School's. 398 The schools are direct-purchase customers, so this is what we're concerned with, of course. And I guess it's fair to say that we don't think either reactive or proactive is the right model. Any regulator has to be both pushing the envelope a little bit and making sure they react properly to how the market is evolving. And indeed, whenever you see a regulator try to get out too far in front of the market, they have problems, and whenever you see them lag behind what the market is doing, they have problems. They have to be there, sort of, on the wave, surfers on the wave, if you like. 399 MR. FOURNIER: They are a board, after all. 400 MR. SHEPHERD: So I would say there needs to be a balance. 401 MS. DeMARCO: Could you rank your options in relation to the interests of competition and fair market? Which would be most conducive to achieving the same? 402 MR. SHEPHERD: On the spot, on the panel, no, probably not. Give me some time to think about it, I probably could. 403 MR. HAUSMANN: Mr. Kaufman. 404 MR. KAUFMAN: Thank you. 405 I do have one question and it was touched on in part by Mike and partly by Marika. And at the risk of turning this to an intellectual discussion, I'd like to ask it at a more general level, because I think it's critical for thinking about the sort of regulatory reforms that might be appropriate. And it seems that two different objectives within the context of a regulatory compact have been mentioned by a number of presenters. One is the issue of transparency and information disclosure, which is something that cost-of-service regulation lends itself to. And the other is simplicity, which once you get it set up and in place, is something that PBR lends itself to. 406 And although no one's really formulated it in these terms exactly, it seems to me that there's a general sense that there's a trade-off between those two objectives; that if you lean towards simplicity, then you necessarily sacrifice transparency. But if you go for a more transparent regulatory framework, then you get yourself involved in more complex and move to a more complex information type of work. 407 So my question, and right now I'm just interested in your initial thoughts on this, and it might be valuable to give it more thought and to talk about it in terms of for the final submissions, but I'm wondering if people agree, if there is, in fact, a trade-off between those two objectives, between transparency on the one hand and between simplicity on the other. And if there is, is that trade-off inevitable? If there isn't, do you have any thoughts on how you can bridge those two objectives to come up with a regulatory approach that's both transparent and simple. And if there is no way to bridge the trade-off, I was wondering how you would prioritize those two goals? 408 MR. FOURNIER: You made it simple up until you put that last little qualifier. Peter Fournier, IGUA. 409 Intellectually, I can say with great intellect that it's obviously a trade-off between simplicity and transparency. But your last request for prioritization, I couldn't respond to that. I think it depends on all the nuances of the incentive regulation plan that is being contemplated. It -- because of the diversity of interests of the different stakeholder communities, including the utility, you know, there's got to be negotiations, there's got to be trade-offs between everything. 410 So it would be wrong to try and put down a list of, number 1 priority is X, and number 2 priority is Y, and so on, as if there's some kind of immutable law that if we meet the first four, then we've really done a good job. Because my list of priorities is, I'm certain, totally different than the utilities, totally different from some of the other consumer interest groups, different from the marketers, different from the environmental interests and so on. So because we're all different, the process has got to accommodate all these different interests and work towards a balance, a negotiated result that doesn't please everyone perfectly but everybody agrees there's not a bad compromise. 411 MR. HAUSMANN: Anybody else? 412 MR. JANIGAN: Michael Janigan, VECC. 413 I think, in part, that transparency and simplicity are both ends of the continuum. The way in which you try to adjudicate where you want to be on that continuum is on the basis of what benefits are going to be derived from being in that particular location. And we do that without thinking about it, probably, in the process that we do now. I mean, if we have a $50,000 expenditure that the company has made, we don't embark upon a process which is completely -- does not have a cost/benefit analysis associated with it to examine that articular expenditure, so that, you know, we do make hose decisions on how much transparency or how much we ant to deal with the level of costs in the current system of regulation. 414 It comes down to a situation of regulatory reporting, and I think those same issues of where you're going to be on the continuum of transparency and simplicity comes up in that regulatory reporting, both in the context of PBR and in cost of service. 415 MR. HAUSMANN: School's? 416 MR. SHEPHERD: We don't, in fact, agree that there's a - sorry, Jay Shepherd - that there is a necessary trade-off between transparency and simplicity. Take the plain vanilla PBR we talked about. There's no reason why you couldn't have regular reporting, at whatever level of specificity you wanted, and public information from the utility along the way. The goal of that sort of system is not to reduce regulatory costs primarily, it's to create benefits for the shareholder and the ratepayers. So if you're creating those benefits, you can still have complete information available to everybody. 417 What the Board then has to do is make sure that if parties try to make a meal out of that information when it's not really material, they have to whack them real hard and say, No, come back when you've got something important to say. But that's just policing the process. The actual transparency of information, I think it's really valuable that everybody gets to see what's going on so they don't suspect that something bad's going on. 418 MR. HAUSMANN: Any others? 419 MR. HIGGIN: I would just endorse that. I think that regardless of whether you're in a regime of cost of service with privy two-/three-year cost-of-service proceedings or you're in a PBR, regular regulatory reporting is a requirement, because otherwise you end up with suspicion, and suspicion comes from the asymmetry of information that the utility has. 420 MR. HAUSMANN: A comment on that question? 421 MS. DeMARCO: Could I just ask a point of clarification in relation to the question. Are we talking about simplicity of design or simplicity in result following design? 422 MR. KAUFMAN: My question was mostly simplicity in design. For example, I was thinking about the possibility of CPI minus some discount. And if you had that sort of approach where rates were set just with reference to the CPI and not with reference to the company's costs, then the issue is how much should the company report, and would there be a lack of transparency in terms of what the mechanism was that was used to set the prices, and whether there was information, relevant information, that wasn't being considered by the parties, and whether -- essentially, how people would view that sort of trade-off between having a very simple mechanism for setting prices versus having a very information-intensive and more transparent sort of approach. 423 MR. HAUSMANN: Does that answer your -- did you get your clarification? 424 MS. DeMARCO: I wonder if any of the responses, particularly IGUA's, would be affected by that clarification. 425 MR. HAUSMANN: Mr. Fournier? 426 MR. FOURNIER: I'm tempted to quote a former chairman of the OEB, one Mr. MacCauley, who would say, My mother told me not to answer any more of Ms. DeMarco's questions. But I'll try anyway. 427 I think the information requirement is essential for the reasons I gave earlier. You need to get, at the end of the process, a record upon which you can confirm that the costs that the utility is basing its next program on are fair and reasonable. I don't think you need as onerous a kind of annual reporting as you do under a full cost-of-service annual review process, but you do need something. 428 The problem I have with the simplicity approach is what happens when the axle breaks. And the axle can break one of two ways. One is that we find the utility is making some absolutely extraordinary overearnings, and you might see that, say, in the annual reports of the parent company showing what it's receiving from its utility's subsidiary, or you might see it from the utility itself. Because of the changes we talked about, it could take place in the marketplace. And it, all of a sudden, is not only not making any return, but it's losing money quite badly and needs a major change. 429 Those are not impossible results that could come from, say, a five-year incentive regulation plan where the wheels come off the cart or the axle breaks. And if we don't have that information record to underpin what's going on, for the utility to suddenly come forward and say, We're now in trouble and we need a change, or stakeholders observing that there is, you could say, unconscionable profits being made by the parent, we need to change it, if we don't have that scope, then we don't have a good method of regulation, notwithstanding the simplicity that you might have and, indeed, even the certainty of the rates that you have. 430 So I think simplicity is a very nice objective, but I think the realities are, and certainly from IGUA's perspective, there's a number of checks and balances that I want, including some fairly thorough annual revenue and cost reporting, probably with scope for examination of those reports by the stakeholder community if they want. And the end result might be a process that's no less onerous or less burdensome than what we have under a cost-of-service mechanism. Particularly if, I think, we went to a two-year process, that would reduce the cost-of-service burden; it might even be less of a burden than what I'm talking about with a so-called simplistic plan, with a bunch of checks and balances that take away the simplicity. 431 MR. HAUSMANN: Thank you, Mr. Fournier. 432 Does the clarification by Mr. Kaufman change anybody else's response on the panel? 433 In that case, we'll go to Mr. Packer. 434 MR. BETTS: Just before we do, if I could interrupt. It's Bob Betts here. I think somebody has their BlackBerry on, because, I'll tell you, even when it's silenced, it creates interference with the system. So without pointing anybody out, maybe you could quietly just turn it off. 435 Go ahead. 436 MR. HAUSMANN: Mr. Packer? 437 MR. PACKER: Mike Packer from Union Gas. 438 I just had a couple of questions to clarify my understanding. The first one is for Jack Gibbons. Jack, you referenced one of the things that the Board should do with respect to Union's DSM plan, would be to link our profits to energy efficiency and effectiveness. I wonder if you might comment on that in relation to the things that you identified the Board should focus on, being expansion of distribution infrastructure and DSM, I guess, predominantly the infrastructure expansion issue, and how the two might relate to one another. 439 MR. GIBBONS: Well, I'm not sure that there's too much of an interrelation. I mean, certainly when you're expanding and hooking up a new community or a new home, giving gas service, say, to a new home, that would be a great time to promote DSM for that new home and make sure they have the most efficient gas furnace and gas water heater, et cetera. But otherwise, I guess I'm a bit unclear about what your question is. 440 MR. PACKER: I guess I understood your suggestion being that our profits should be tied to DSM, and just I wondered if you didn't see some conflict in having that tie there when one of your objectives is for us to expand our system. 441 MR. GIBBONS: Oh, no, I didn't mean to suggest your profits should be solely a function of your DSM activity. You still get your profits from your traditional pipes business like you do now. You would still be subject to rate-base rate of return regulation, so you would have an incentive to expand your rate-base, your distribution rate-base, but in addition to that, you would have -- you would -- every year you would report to the OEB by how much your DSM programs reduce your customers' bills, and you would get a small percentage of that bill savings as a conservation profit bonus. And that would motivate you to very aggressively and very cost-effectively promote DSM, because the lower the cost you achieve a savings at, the greatest the net benefits, and the more participants, the greater the net benefits. So you have an incentive to get as many DSM participants as possible and to get them as big as possible net bill reduction. 442 MR. PACKER: So that comment was more in the lines of a shared savings mechanism than anything else. 443 MR. GIBBONS: Oh, absolutely, that's what it is. 444 MR. PACKER: Thanks. 445 In the context of one of the School's options, being off the ROE treadmill, I just wondered what happened to the capital in that option. Who's paying for it, who's putting it up? I think there was a reference to it being plentiful, but as I understood the option, it was really just a payment for expertise and no payment for use of capital. I just wondered if you might clarify that. 446 MR. SHEPHERD: It would be up to the parent to make sure that the utility had sufficient equity capital to ground its creditworthiness, which would typically be in the 25 to 40 percent equity range, but that capital wouldn't be paid for. 447 MR. PACKER: So in this context, the parent would be putting up the capital for free? 448 MR. SHEPHERD: Mm-hm. Yeah. 449 MR. HAUSMANN: Mr. Ladanyi, yes. 450 MR. LADANYI: Tom Ladanyi from Enbridge Gas Distribution. 451 Before I ask my question, first I'd like to thank Mr. Gibbons for the kind words about Enbridge's DSM program. Thank you very much. We're very proud of our program. 452 MR. GIBBONS: Thank you. 453 MR. LADANYI: Now, I'll come to my real question and it really has to deal with the issue of disclosure. We've had quite a lot of discussion about it so far, and I just heard Mr. Shepherd use the phrase "complete information." And in some ways, complete information in the OEB regulatory context has become an oxymoron. We never seem to be able to reach this complete information status. There's always more interrogatories. 454 Typically, what happens in our process is we would file five binders of the prefiled evidence where we think we're providing complete information, but we can't seem to get to it. Then we get maybe another thousand interrogatories, and then there are multiple motions for additional disclosure. There will be interrogatories asking for the filing of all documents on a particular issue. We were asked, for example, to file 3,000 documents on a particular issue. We couldn't really file them, we only had to file the index documents. 455 MR. HAUSMANN: Mr. Ladanyi, slow down a little bit, please. Thank you. 456 MR. LADANYI: It was just unwieldy to file so much information. So perhaps, maybe, if I could ask you, whoever wants to comment, should the OEB in the interest of streamlining the process set some limits of disclosure? At what point will we have enough information, or will we never have enough information to make this process work? 457 MR. FOURNIER: Let me -- Peter Fournier, Industrial Gas Users' Association. Let me respond first and let the others think through some intelligent answers. 458 Under the current process of the OEB, you're going to continue having that kind of huge regulatory burden because at the outset, everything is on the table. My lawyer, for example, will put in a thousand IRs, whatever he puts in, covering every single colour of the rainbow that's in the application. Then we put in our evidence and more things go on, and more things come to you over time and supplementary IRs and everything else. We don't like half the answers we get, so we send in more IRs and so on. 459 If we had this task force or working group at the beginning and we had a cooperative utility and cooperate stakeholder community sitting cooperatively around a table saying, I'm trying to understand why you need this new big program of whatever it is. And the company explains and you get a dialogue back and forth. If you ask for information, the company can explain it all, and at the end of the day you say, Yeah, okay, that sounds reasonable, so we'll agree to that program. This program here, intervenors might say, You're doing this in-house, we don't think you should, you should be going out for commercial solutions. And maybe the utility agrees with that or it doesn't. 460 At the end of the day, you narrow it down to, I hope, a much smaller range of issues and then the IRs go out. IRs can go out at that stage, rather than as a fishing expedition, to see how many rocks can we turn over to see how many worms are wiggling underneath, which is, more or less, what we do today. If you've had this dialogue through a working group and things, you at least have an idea now what the subject's about and you can ask far more focused, direct questions for information you know you're going to need now when you litigate that issue. 461 So it's a process thing, in part, which I think is -- if we change the cost-of-service process, it would hopefully, Tom, relieve some of the frustration, I know you have. But on any given subject, if the stakeholder community feels that they're not getting full disclosure from the utility or there are some other wrinkles that are there that we haven't asked the right questions yet to uncover, you're not bound to tell us everything in the first time around we ask the question, if there are some wrinkles that you feel are better to be kept not disclosed. But if there's a sense of those wrinkles, you will get more questions. Because at the end of the day, the intervenors want to have a full understanding of whatever it is that's involved, whether it's costs or whether it's relationships or whatever else, and they'll ask questions until -- if you don't like them, you can always refuse and then the OEB can rule on whether or not the question is fair and reasonable, but that gets litigious too. 462 At the end of the day, you can't say you're limited to 1000 questions, intervenors, and when the last person has asked the thousandth question, nobody may ask 1001, that just doesn't happen. 463 MR. HAUSMANN: Anybody else? 464 MR. SHEPHERD: I've -- Jay Shepherd, School's. 465 I've heard the comment a number of times from utilities, generally, that the intervenors are out of control, they ask millions and millions of interrogatories. And indeed, that is true, but we have to understand that everybody in cost of service right now is playing the game, and part of playing the game is the utility making a filing in the first place that tries to spin the facts, tries to package the facts so they look good and sometimes doesn't disclose all the facts. And a lot of the reason for 5,000 interrogatories is because the intervenors don't trust the filing. They are, as Mr. Fournier said, lifting over every single rock to see what's underneath. If instead the utilities -- and by the way, when the intervenors are doing that, they're playing the game too, and probably sometimes inappropriately. 466 If both the utility and the intervenor start from the premise that it's their job to put all the information on the table so that everybody can see, if they start from that premise, then there would be a lot less interrogatories and a lot less problems. The easiest way to test that, and I think the Board could police this, is the Board should look at the interrogatories at the end of a case and say to the utilities, Look, we see a whole lot of stuff in there that we think should have been in your prefiled. If you were actually telling the whole story, somebody shouldn't have had to ask that. And then say to the intervenors, By the way, intervenors, you asked 1,200 questions -- Mr. Thompson, for example, because better pick on him than me, and you know, we think you could have asked 600 questions and got the same result. So we're going to penalize both of you. Next time come back and do it right. 467 MR. HAUSMANN: Dr. Higgin. 468 MR. HIGGIN: Yeah, I've been recently working with Nova Scotia Power and basically, they have an unfunded, totally unfunded stakeholder process, okay. What they do, though, is they provide a lot of up-front information and then they put their key staff people in, in this case, three main topic areas in stakeholder conferences. And they bring their staff, they bring their experts, and they make a presentation in the morning and then they take questions. And if the questions are not answered then, they take them away and they give complete responses. 469 Now, this process does broaden the information base, and it also, I think, engenders trust and understanding between the stakeholders and the utility that they're not holding anything particularly back there, they're not hiding things under rocks, and so on. So that type of front-ending, which is similar to the Regie process, is, I think, something that we sometimes used to do. But those technical conferences somehow just fell apart, because there was not really a great deal of desire, I think, on both sides. It was just a step that had to be done. 470 We've got to make something, outcomes of those technical conferences, work. I think they have to happen; they have to be focused. You have to have people that are prepared, and the information, that has to be high quality. And that should hopefully broaden the understanding at the front end of what the issues really are, and then can help in focusing the rest of the process. That's just a suggestion. 471 MR. HAUSMANN: Anybody else? 472 MR. FOURNIER: Peter Fournier. 473 One thought, and Roger triggers it, and I will put this into our submission. If we went to this process of working groups, dialogue, early in the process, I think one question that has to be considered by all participants is the possible role of the Board, or the Board Staff, in these dialogue sessions. Should they be there or not? Should they participate or not? And I don't offer any answer, but I think it's a very valid question for everybody to consider, because I think there are pros and cons of Board Staff participating in these processes, which, I think, would be worthwhile considering. 474 MR. HIGGIN: Can I just add, I think that, in that process, both the Board Staff and the Ministry of Energy participate, and ask their questions, and get written undertakings and everything, and that doesn't prejudice them in any way in the following process. So that's another aspect. Why should Board Staff hold back until they're allowed by the process to file IRs? Why shouldn't they be asking very relevant up-front questions and getting clarifications, and so on, that help everybody? 475 MR. HAUSMANN: Ms. Hare, and Mr. Janigan. 476 MS. HARE: Marika Hare speaking, Enbridge Gas Distribution. 477 I actually wanted to make a comment rather than ask a question, because I think we're leaving the wrong impression with the consultants and, certainly, with Ms. Chaplin, being a new Board Member. There is lots wrong with the process, and everything we've talked about and the comments that VECC made about streamlining, I think, are very valid. But there are also some very good examples of the process, and I don't think we should totally ignore them. 478 Mr. Fournier talks about working groups. In fact, in our Enbridge 2005 case, we did have a number of stakeholder meetings. Then we filed, but there was a willingness by the intervenors to continue the dialogue, even though we were already in a formal process. Now, the intervenors at that point could have said, You filed a last-minute interrogatory. But they attended meetings, and asked for an additional few meetings, particularly on the subject that Mr. Ladanyi referred to, the EnVision project, where we had all the documents. And I don't think anybody can accuse us of not disclosing fully on that particular issue, which we knew was going to be very important. And it had a very satisfactory outcome, in that it was settled during ADR. It didn't go to litigation. 479 So, although we've got lots of examples of what didn't work, we've got some good examples of what did work, as well, and I think that was an example of the cooperation of all parties. So I just wanted to put that on the record. 480 MR. HAUSMANN: Put some smiles on faces for a change. 481 Mr. Janigan? 482 MR. JANIGAN: Just briefly a comment. I referred to the process in the CRTC where the board staff ask their interrogatories first, and when you get the case, effectively, you have the base case before you in order to deal with. I would find it far preferable to have Board Staff interrogatories go first, and establish that base case. 483 MR. FOURNIER: Peter Fournier, Industrial Gas. I'm just reminded that -- perhaps I could just add, the NEB process. First, both TransCanada, Westcoast, and I believe Foothills did - I'm not sure if they still do - they've now been rolled into TransCanada. Certainly the Nova, or the Alberta component of TransCanada pipeline, all do have working task forces. In fact, I'm flying off from here this afternoon to go to Quebec City for a task force meeting of TransCanada there, which -- we deal with quite a large range of issues and agree to a lot of things, particularly with respect to tariff toll design matters, any time during the year. These aren't held back until we get a toll application. But even on the cost of service and things, many of these things are dealt with, and discussed, and we will be discussing, tomorrow, with TransCanada, what they're proposing for their 2005 toll filing. 484 So you have a dialogue that's going on in a working group. I just note, though, that once you do get to hearing, the NEB's staff put their IRs first, and then intervenors follow shortly afterwards. 485 Just while I'm talking, I would like to add to Marika's comments. Yes, in the last Enbridge case, there were several issues that -- there was a very good dialogue between Enbridge staff and, certainly, ourselves on the two issues we were concerned with, with respect to the unauthorized overrun gas penalty and on the upstream cost allocation. And it's a good example of what can be done when, I think, there is trust and willingness to reach a solution. And that could have been broadened to cover other areas of the application, except that -- it's easy when it's two or three parties. It becomes more difficult when it's 20 parties around the table. And that becomes a bit more of a challenge. 486 MR. HAUSMANN: Mr. Poch? 487 MR. POCH: Just a very brief comment on that last exchange about interrogatories early in the process. I just think we might have regard to the DSM process. I recall, four or five years ago, we used to file hundreds of interrogatories. In the last few cases, I think, speaking for my client, we've filed 5, 10, maybe 12 interrogatories, and I think that's pretty typical, perhaps with one exception. The difference is we've got a consultative process where the detail gets talked about, tabled in ways that, instead of a cumbersome interrogatory process, people suggest a table, the utility goes away, produces the table, it's nicely crafted, in a way that serves people's needs. I can send a consultant at half my hourly rate to that process. And I think there has been just the -- it's a practical example of where there's early, and, in fact, ongoing disclosure that has really reduced the regulatory burden. 488 And so the Board sees the exceptional items where there's a disagreement and, usually, I think, now we're seeing more where there's disagreement about structural questions, the shape of the incentive, for example. 489 MR. HAUSMANN: Any other comments, questions? 490 Mr. Betts? 491 MR. BETTS: Thank you. Bob Betts here. 492 I think everybody on this panel has avoided the question, the direct question of PBR. Some of you expressed your position with respect to it, some kind of in favour, some kind of against, and I haven't heard anybody take a strong position one way or the other, but really have talked about the need for change. I'd like you to think, if you can, about PBR now. And I don't know that the scenario I'm about to present has any basis in reality. I think that this could be one way a corporation, a utility, would look at PBR that might -- it might generate concerns for them. And I'd like you to think about how you would position yourself on this. 493 The one phrase that was mentioned, or word that was mentioned, several times yesterday was "rebasing." I can see that a utility, after a three-, five-, whatever-year term PBR program that they're in, particularly if they went into that program with a productivity factor that they thought was particularly aggressive, that they might feel at the end of that period that it's, I could say unfair, but maybe unreasonable to expect them to give back to the consumers all of the additional earnings that they had generated through good corporate decisions. And in some cases, I think that's an expectation, particularly of intervenors, that at the end of that period, you rebase, you take it back. At that point, the consumer is able to capture all of those savings and then you start again into a new PBR program with a new productivity factor. 494 It would seem to me that if I were a corporation, I would look at that kind of an ongoing program and say, Where is it going to end? How long can I continue to be aggressively productive and benefit corporately from excess earnings? And when will I reach a point where I've rebased enough that there are very minute, if any, productivity benefits available again? 495 Just putting on your intervenor hats, but thinking also from the corporate point of view, is it fair to assume that after every period of PBR, that there should be rebasing? Who would like to take a shot? 496 MR. SCULLY: I probably have the least knowledge in this, so let me go first. It's Peter Scully from FONOM. 497 My idea of rebasing isn't rebating, it's let's find out where the proper base is now and, just in crude terms, if a corporation has been extremely efficient over that period of time and has set a new cost level, let's go from there. We wouldn't advocate stepping back and taking some of that savings away for the shareholder. I think that's -- we would be happy to leave it with the corporation and go with the new lower cost level. 498 MR. BETTS: Thank you for that clarification. And that's exactly what I'm suggesting, but I'm suggesting that in that rebasing you set the bar higher again, and in order for that corporation in the next five years to accomplish any excess earnings, they've got to squeeze harder and harder, and sooner or later, there's no more water in that stone. 499 MR. SCULLY: That may well happen. I guess it's their call. Maybe they just want to go with cost-of-service and say, Hey, we just don't see anything. We can't do anything more for you. 500 MR. BETTS: Thank you. 501 MR. SHEPHERD: Jay Shepherd, School's. 502 We would agree that there is a law of diminishing returns in this, as with anything else. I think it's probably not a near-term thing, in the sense that there's still a lot of things that the utilities can do with technology, for example, with management efficiencies, probably, you know, as long as we're going to be at this Board. But you're right, sooner or later -- and actually right from the beginning it becomes harder and harder, and sooner or later it becomes impossible to get gains that the ratepayers will be satisfied with. You just have to accept that that's a reality. 503 MR. HAUSMANN: Mr. Janigan. 504 MR. JANIGAN: In relation to PBR, I think you have take it from the premise that regulation is meant to proxy competition. And in competitive markets, you don't get a chance to take a break and take advantage of the efficiencies that you've saved. You go out and price your product in accordance with those efficiencies. So it's not a case where in the regulated world they get a little pat on the back and get a chance to keep all these incentives. In fact, we want to get to that level of costing that most mirrors a competitive situation. So it's justifiable from the PBR standpoint for rebasing. 505 But I think in a greater sense you're articulating one of the problems from the other end of PBR in general, that cost-of-service may, in fact, be superior as a model for regulation because it is, in effect, best able to mirror the ability of the utility to produce a certain level of costs. 506 MR. FOURNIER: Peter Fournier, IGUA. 507 There's, I think, a fallacy in your scheme that you've outlined. First off, under cost-of-service regulation, you set the allowed return for the utility, let's say it's 10 percent on equity. The incentive to the utility under a performance scheme or an incentive-regulation scheme is to allow them to make savings in their expenditures so they can earn more than that 10 percent. I agree with Jay Shepherd saying if that -- after they've made those savings, if they sustained those savings, that there is diminishing returns. They can't keep that up. Once they've made those savings, they've probably cut the company down to the bare bones, can't go any further. 508 But the fallacy in your assumption is that at the end of the term of the incentive mechanism scheme that the utility says, Right, we've cut our costs, we've cut our O&M by $10 million, so, you know, going into the next round of incentive regulation, our O&M is still $10 million less than it was 5 years ago. My observation is that they all come back and say the savings are unsustainable, and the last year they pack everything back in there again. 509 We've had, in the TransCanada case -- we can't, as intervenors, prove this, because we're not sitting on management's table when they make decisions, but we think in the last two-year deal TransCanada postponed a number of maintenance of some of its compressors. So when they came out of the two-year deal, they suddenly had a huge, huge -- it was about double what they had spent in the previous several years of claimed compressor maintenance costs that they were facing in this year. The problem of trying to challenge whether or not their claimed maintenance costs were correct or not was that every make of compressor has a different service life. And they were able to show that, well, you know, some have a 20,000 hour service life, some have a 25,000 hour service life or whatever, and it just so happens they've all come together in this one year and we've got this peak. 510 The utility can do quite a number of innovative things to change their costs at the end of a period of an incentive deal that makes the intervenor and the regulator's job of verifying very, very, very difficult. So I don't see -- I would be very surprised if a utility had cut its costs, when through the five-year term and said, Our costs are still down where they are, we're going to go forward from here. It just hasn't happened in real life. 511 MR. HAUSMANN: Mr. Gibbons. 512 MR. BETTS: Can I just follow up with Mr. Fournier on that because I -- I think what you're describing could very reasonably happen. I wanted to put to you this possibility that what you observe is a reaction of the utility to the scenario that I gave you, that they try to go into that next year, possibly, with some fat, knowing that at the end of the ADR process, they'll have a tight program. And I agree with you, if that is what's happening and people are just building the budget to project themselves, it's unfortunate, and it's something that should be addressed. But could that, in fact, be the cause of them taking those steps rather than a natural reaction that they would have? 513 MR. FOURNIER: Well, I think you're absolutely right. If I was budgeting at the utility, I would pack everything in there that I can. The same -- it's just a natural thing, I think, that we all do. I'm not saying there's anything sinister in the management actions of the utility but, yes, coming out of one period going into the next you want to put back in there whatever you can. 514 Maybe they did legitimately postpone some maintenance because they felt they could do it without jeopardizing the safety of the system, but you do get to a point -- you don't have to say change the oil and the oil filter of your car every 5,000 kilometres if you don't want to, but don't let it go to 50,000 miles, that's not good for your car. So you can delay some things, and I think they legitimately did in order to keep their costs down during those years because they were under, sort of, a revenue cap. But it does come to a head and you've got to deal with it at the time. 515 So I'm not suggesting anything sinister in what they did. It just is a natural -- the management of the company is going to do what they can to make sure that the shareholder doesn't suffer, otherwise they don't have a job tomorrow. So these are natural things, but we have to recognize that it happens and therefore, we don't live in a perfect world where theory says we should be. 516 MR. BETTS: There were some other answers. 517 MR. HAUSMANN: Yes, Mr. Gibbons. 518 MR. GIBBONS: Jack Gibbons, Pollution Probe. 519 I think, Mr. Betts, in response to your question, we certainly believe in shared savings mechanism to motivate the utility to achieve savings. And I don't think you can -- there's sort of an apriori right answer about what that term of that, how many years those savings should be shared. I think that's something to be determined on a case-by-case basis, but I don't think there's any magic answer. 520 Some people suggest there's diminishing returns to these savings and eventually everything is going to be squeezed out and there won't be any more potential. I don't think that's a realistic scenario to paint. I think over the last 200 years we've seen that technological progress always occurs in a free-market economy and, you know, I think there will continue to be technological progress. So utilities will continue to be able to find ways to become more efficient over time. I don't think we have to worry about, you know, eventually running out of ways to become more efficient. 521 PROCEDURAL MATTERS: 522 MR. HAUSMANN: Anybody else in response to Mr. Betts' question? 523 Well, I suspect maybe we're all getting hungry. I guess this would be -- before I turn the mike back to the Chair, are there any last comments, questions from anybody? 524 In that case, I would thank you for making my job easy, you've been very cooperative. I think the agenda builders have been very cooperative too and clairvoyant in terms of getting our timing pretty good throughout the six days. Thank you very much, and I'll turn the floor back to Mr. Betts. 525 MR. BETTS: Thank you. And I'll just make some closing comments if I can. The first one is to say thanks to all of you sincerely and truly. This has been a huge benefit, I believe, for Cynthia and I, and I trust that it will end up being a great benefit for the Board in general. We've learned a lot in a forum that was open and flexible, and I think I heard a great deal of free-wheeling discussion and debate going on and that's truly helpful. 526 I wanted to thank those that have helped us through this. I always start off, and I think most importantly, by thanking our court reporters who do a great job in capturing what was said with a tremendous amount of accuracy. And I thank them once again, Kim, in this case. 527 I want to thank our facilitator, Chris Hausmann, for a job well done. Any time there was an extension of the day's schedule, it was usually because I kind of pushed him to do it or Cynthia pushed him to do it, but he kept us right on track. And certainly to our consultants who have created the straw man that's taken a little bit of beating through this process, but that was probably one of its purposes. And today, certainly with Mike Bermon and Larry Kaufman and in the past, with Leonard Crook, thank you all for your participation. I think there's still some things you can do to help us through this process. 528 And Staff of course, with Laurie Klein and Beverley Jaffray, Cynthia and I would like to thank all of you for your support through this thing. 529 I thought it might be useful, if I could, just to take you back to my opening remarks, just a few paragraphs from them, which might help kind of finish off some things. It's just to help everybody remember what happens from here, the Board process. And I'm going to read it if you don't mind or if you'll excuse me. 530 In terms of the next steps in this process, and these were my remarks on the opening day, the Board requires stakeholders to submit final submissions by, now, November 10th, 2004. The Board will then consider those submissions and information gathered through this consultation to develop policy papers on the three broad topics being considered in this Forum. 531 The Board had expected to be able to publish the resulting papers in December of this year. That still, hopefully, will be our objective. As you know, we've extended the period for submissions. That may cause that date to drift a little as well. And we indicated at that time that those papers would be the first step to implementation. 532 Policy will ultimately be implemented through the various regulatory instruments that the Board has at its disposal. These instruments include Board orders, Board rules, and guidelines. If necessary, instruments will be developed in accordance with Board process. Board orders result from decisions and quasi-judicial hearings and rules result from the notices and comments process. Guidelines are non-binding, and the Board develops them through an open and transparent process. 533 The important point, and I stressed this on the opening day, is that stakeholders will have the opportunity to participate in the implementation of Board policy through various regulatory practices and proceedings. 534 In your submissions, I, for one, and I believe the Board in general, would appreciate some additional comments. A couple of things have been experimental in these six days of consultation. One is the process itself. This is not something the Board is used to, not something we're familiar with. We would appreciate your comments, those of you in this room and those that are reading the transcripts, on how this process went. What you thought of it, how it could be improved. Be gentle with the two Board members that are here. I'm just kidding. If we fell down somewhere, let us know. It's important to try and get this right if the Board's going to continue it. So we would appreciate your comments on this Forum. 535 The other thing we would appreciate your comments on, again, on an experimental basis, we are funding this, at least for some of the participants to some of their extent. And we would appreciate your comments on that so that the Board can consider how this has gone with respect to intervenor funding and how it might be changed if the Board decides to continue with that process. 536 I think, then, with that, I'm going to thank all of you in this room, and all of you that have been here before, for your six days that you've committed to this room and to the days prior to that and to the days following. We know it has been a huge commitment. I, for one, believe that we are at the crossroads in terms of the gas sector future. That doesn't mean that one of the roads ahead of us or one of the options isn't straight ahead, but certainly there are some other options that can be considered. This has been a wonderful vehicle, in my mind, to help us analyze what direction we should take at these crossroads. 537 I look forward to your submissions. I think they will be very important and hopefully the Board can be as effective in its policy papers as you all have been in helping us get to that stage. 538 Thank you all, and before I leave, I'll just say, are there any comments? Yes, Mr. Packer. 539 MR. PACKER: It's Mike Packer from Union Gas. 540 I was just wondering if the Board was planning to put the November 10th submissions out on its website or not. 541 MR. BETTS: Yes. Any other questions? 542 MR. FOURNIER: Mr. Betts, Peter Fournier, IGUA. 543 My counsel in rate hearings often acts as a coordinator or leader, if you like, of the pack of intervenors. In his absence, maybe I can speak on behalf of -- I'm not only speaking for myself but I'm, hopefully, speaking on behalf of all the parties here, that I certainly found your leadership of this six-day process, the facilitator's role, excellent work by the court reporters, your questions, both yours and Ms. Chaplin's, and I think there's sort of a spirit of cooperation and understanding between all the parties that has impressed me, and I just want to say, well done. 544 MR. BETTS: Thank you. And with that, I don't think I'll take any more comments. Thank you very much. We'll adjourn. 545 --- Whereupon the hearing concluded at 1:15 p.m.