Public Accounts Committee

1996-12-02

Newfoundland and Labrador — Committees

December 2, 1996

The Committee met at 9:00 a.m. in the Fifth Floor

Committee Room (5038).

CHAIR (E. Byrne): Order, please!

First of all, I shall introduce the Committee

members. My name is Ed. Byrne. I am the MHA for Kilbride and Chairman of the

Public Accounts Committee; Tom Lush, the Member for Terra Nova, is the

Vice-Chairman; Jack Byrne, the Member for Cape St. Francis; Bob French, the

Member for Conception Bay South; Don Whelan, the Member for Harbour Main -

Whitbourne; Doug Oldford, the Member for Trinity North (inaudible) and Anna

Thistle, the Member for Grand Falls - Buchans.

I shall ask witnesses to identify yourselves for

the record, and please speak into the microphone so that we get it back here.

MR. ROBERT BYRNE: Robert Byrne, with the Public

Utilities Board.

MR. DAVID VARDY: David Vardy, Public Utilities

Board

MS LESLIE GALWAY: Leslie Galway, Public

Utilities Board.

MS DOREEN DRAY: Doreen Dray, Public Utilities

Board.

CHAIR: I now ask the Clerk to proceed with

swearing in of the witnesses.

Swearing of Witnesses

Robert Byrne

David Vardy

Leslie Galway

Doreen Dray

CHAIR: We fulfil this role by investigating all

government expenditures and other financial transactions and reporting on our

work in the annual report that goes through to the Legislature. (Inaudible) for

the most part the Public Accounts Committee (inaudible) we highlight where

possible. Most of our work is certainly generated by the Auditor General's

Report, but while we are not confined to that, we certainly, for the most part,

hold forums of this nature to talk about what the Auditor General had to say on

particular agencies (inaudible) etcetera.

Essentially, on any item from that we then, as a

Committee, make recommendations to government and to the Legislature, to

eliminate such waste and mismanagement as we may see. The Public Utilities Board

has never appeared before the Public Accounts Committee, in my understanding.

That was one of the reasons the Committee felt we should request (inaudible) to

go through the Auditor General's Report and highlight anything that has to do

with the concerns that members may have.

Our Committee really does not concern itself with the

policies of government. That is not our role. We do not question government

policy. That is up to the government, and they have the mandate to set those

policies. We do not determine whether those policies are good or bad. Again, it

is strictly on the financial accountability aspect. Our Committee is basically

concerned with ensuring that the policies and programs of government are

implemented in an effective and economical manner, and that taxpayers are

receiving, I guess, value for their monies.

Essentially, that is the role of the Public Accounts

Committee. I would like to just ask the witnesses if they have any comments that

they wish to make, opening statements with respect to (inaudible), and to say

that this, while it is a formal process, is an exchange of ideas, an exchange of

questions and answers, to give the Public Accounts Committee an opportunity to

view specifically questions that are raised that may be in the report and may

not be. I do not think it is something to get too excited about. It is an

exchange of information for the most part.

I will just ask the witnesses from the Public

Utilities Board if they have any opening statements.

MR. VARDY: Mr. Chairman, I have an opening

statement.

CHAIR: Okay.

MR. VARDY: Good morning. My name is David Vardy

and I am the Chairperson and Chief Executive Officer of the Board of

Commissioners of Public Utilities. I was appointed to this position in August of

1994, having previously served in five Deputy Minister level positions over the

past twenty-two years, including those of Deputy Minister of Fisheries and

President of the Marine Institute.

With me this morning is the Vice-Chair, Leslie Galway,

who was appointed a Commissioner in March of 1990 and as Vice-Chair in January

of 1995. Mr. Byrne, the Manager of Insurance and Motor Carrier, and Doreen Dray,

the Board's accountant, are also in attendance this morning.

The part-time members of the Board are Mr. Gordon

MacDonald and Mr. Reg Good, both of whom are former Chairs of the Board, Mr.

Wallace Read, who is the President of the Institute of Electrical and

Electronics Engineers, Inc., and Mr. Ray Pollett, the Mayor of Corner Brook.

In this appearance before the Public Accounts

Committee this morning, we will endeavour to answer any questions or concerns

which the Committee may have. By way of preface, I should note that it is a

common misconception that the Board is funded from the Province's Consolidated

Revenue Fund. This is not the case. The Board is funded entirely by the

assessments it levies upon the industries which it regulates. Accordingly, it

receives no funding from the Consolidated Revenue Fund.

A legislative mandate: The Board of Commissioners of

Public Utilities was first established in 1949. The Board's role and

responsibilities have changed a great deal since that time. The Board is an

independent, quasi-judicial regulatory agency appointed by the

Lieutenant-Governor in Council which operates primarily by virtue of the Public

Utilities Act, 1990. In understanding what the Board does, it will be helpful

first to know exactly what a public utility is.

Public utilities have certain unique characteristics

which give rise to the need for regulation. Public utilities are normally

assigned certain franchise rights which give them a degree of exclusivity in

serving the needs of their customers. They are granted territorial franchises

which make them exclusive suppliers of a particular set of services in a given

geographic area. A public utility is expected to provide just and reasonable

services to all those who want them and to provide these services at just and

reasonable rates. For these and other reasons, society has deemed it appropriate

to regulate such industries.

The Board ensures that the public of Newfoundland and

Labrador are well served by equitably balancing the interests of consumers and

of regulated service providers in the electric utility, the automobile insurance

and motor carrier industries. Through this balancing of interests, consumers

receive reasonable service at a reasonable cost, while the providers receive a

reasonable return on investment.

The Board's investigative and monitoring processes

invite full public participation. The Board conducts itself pursuant to its

primary charge from the Legislature, namely, the power policy of the Province as

contained in the Electrical Power Control Act of 1994. The Board's primary

responsibility in the regulation of electric utilities in the Province is to

ensure that the rates charged are just and reasonable and that the service

provided is safe and secure. Other responsibilities include the supervision of

rates charged by automobile insurers for the various automobile insurance

coverages, as well as limited regulation of the motor carrier industry in

relation to passenger and ambulance operations. The electric power industry's

quality of service is also a matter of the Board's scrutiny in that the Board

reviews customer service issues including complaints and approves the rules and

regulations for the provision of service. The Board also approves the capital

budgets of electric utilities.

Appeals from decisions of the Board lie to the

Newfoundland Supreme Court - the Court of Appeal. For administrative purposes,

the Board submits an annual report to the Minister of Justice.

The Board administers various statutes related to its

regulatory functions, including the Public Utilities Act, the Electrical Power

Control Act, the Act to Amend the Electrical Power Control Act, the Public

Utilities Acquisition of Lands Act, the Automobile Insurance Act, the Motor

Carrier Act, and the Motor Vehicle Transport Act.

While many responsibilities are conferred upon the

Board by way of the foregoing statutes, the Board is most well known for its

following duties.

First, the Public Utilities Act defines the general

powers of the Board. The Act states that the Board has the general supervision

of public utilities to ensure compliance by public utilities with the law. The

public utilities regulated by the Board are Newfoundland Light and Power Company

Limited, Newfoundland and Labrador Hydro, and Deer Lake Power Company Limited.

The Electrical Power Control Act, which was proclaimed

in December 1995, requires the Board to regulate Newfoundland and Labrador Hydro

as it has regulated Newfoundland Light and Power Company Limited. Prior to this

enactment the Board could only review and recommend to government the rates

charged for power by Hydro. The Board now has the authority generally to

supervise the utility, including the power to set the rate

schedule using tests

consistent with generally accepted sound utility practices. The

Lieutenant-Governor in Council may still refer matters to the Board for its

report and recommendations.

The Automobile Insurance Act states that the Board has

the general supervision of the rates an insurer charges or proposes to charge

for automobile insurance. Matters respecting insurance other than the rates

charged are under the responsibility of the Superintendent of Insurance in the

Commercial and Corporate Affairs branch of the Department of Government Services

and Lands.

The -Carrier Act gives the Board the power to grant

certificates and approve rates for public service carriers such as regularly

scheduled bus service along the Trans-Canada Highway and ambulance operators.

All matters other than the processing of applications for certificates and

amendments to certificates, such as inspection and enforcement, are the

responsibility of the Government Services branch of the Department of Government

Services and Lands.

As to the Board's regulations, which govern its

practices and procedures, I am pleased to advise that government has accepted

the Board's new regulations by way of OC 96-476. These new regulations replace

those in place since 1949 and are far more user-friendly, up-to-date and

efficient.

Structure and Budget: A great many changes occurred

following the proclamation of the 1989 revisions to the Public Utilities Act. In

1988, the Board had a total of twenty-seven employees, including five

commissioners. With the transfer or the elimination of most motor carrier

functions and with general downsizing, the Board, since 1990, has had only seven

permanent staff, two permanent commissioners and four part-time commissioners.

As is stated in the Board's Mission Statement, these employees, although small

in number, are highly dedicated individuals who are committed to quality

service.

The total expenditures for the year ended March 31,

1995 were slightly less than $950,000. The Board is structured for cost-

allocation reasons, in three sections: Public Utilities, Insurance and Motor

Carrier. In terms of issues, the Auditor General had raised a number of issues

with the Board and all of these have been dealt with and are contained in the

two volumes of documents which were filed with the Committee on August 22, and

these are the two which I assume all members of the Committee have.

Strategic planning: I am pleased to advise that the

Board has embarked upon the development of a strategic plan. This strategic plan

will encompass the entire mandate and operations of the Board and will help us

to determine how we can discharge our legislative responsibilities more

effectively. In preparation of the plan, the Board will be seeking input from

the general public as well as from the industries which it regulates. Indeed,

the thrust and purpose of this exercise is external rather than internal; that

is to say, the Board is seeking the most effective means by which it can best

serve all of its client groups, consumers, industry and the general public.

One of the key issues to be addressed in this

strategic planning process is the issue of intervener funding. In some

jurisdictions, there is provision for interveners - public interest groups,

individuals, organizations, to be funded either by government or by the public

utility involved in the application. Such funding provides them with the

resources needed to conduct research and prepare the arguments needed for an

informed critique of the proposal being put forward by the applicant. Under our

Public Utilities Act, there is provision only for cost recovery. That is, the

approval of funds for interveners can be ordered by the Board only after the

hearing. At that time, the Board decides upon the value of a particular

intervention and can award costs after the matter has been adjudicated. This

approach discourages many interveners who are either unable or unwilling to put

resources at risk without the certain knowledge of cost recovery. Other

jurisdictions have found that interventions are more effective and substantial

when resources are provided up-front.

In its search for an acceptable intervener funding

model, based upon prior approval of funds rather than approval after the fact,

the Board has to ensure that the funds are effectively used. The balance being

sought is one whereby the intervener is given sufficient flexibility, freedom,

and resources to conduct its necessary research but yet is accountable for

cost-effective use of the funds.

In conclusion, in this statement, the Board has

attempted to provide a broad introduction to the role and responsibilities of

the Board, and we would be most pleased to answer any questions or to discuss

any concerns which the Committee may have.

Thank you very much.

CHAIR: I will not say there is no (inaudible) but

if there is any information or questions that are asked that, you know,

(inaudible), information is probably at your fingertips, I would say (inaudible)

unless the Auditor-General's office would have any (inaudible) comments or

questions.

NOTE: DUE TO TECHNICAL DIFFICULTIES HERE, A PORTION OF

THE TAPE WAS UNABLE TO BE TRANSCRIBED.

CONTINUING WITH:

CHAIR: (Inaudible) I am not sure if we have them

or not.

MR. VARDY: Yes. I am not sure you have them in the

same format they were presented in.

CHAIR: (Inaudible).

MR VARDY: I assume. I have not had a chance to

review the material that was just given to me, but it is in a different form,

which may make it more difficult to refer to matters, because what we had to put

forward was in tabbed form with, I think, something like thirteen different tabs

which will help to provide the same information but which is organized perhaps a

little differently.

CHAIR: I guess, at this point, (inaudible) and the

Committee members will ask some questions.

MS THISTLE: Mr. Chairman.

CHAIR: Please state your name for the record.

MS THISTLE: Anna Thistle, the Member for Grand

Falls - Buchans.

Mr. Vardy, you mentioned in your opening comments that

the PUB has now started a strategic plan. I wonder would you elaborate on that

plan? Because this is one of the recommendations that the Auditor General made,

that you did not have a strategic plan in place, nor did you have an operational

plan or a mission statement. I wonder could I hear more about that.

MR. VARDY: Yes. We commenced this process about a

year ago and began by hiring a strategic planning consultant. We advertised and

sought for a request for proposals and we selected a company which has been

working with us over the last year. What we have been doing is we have been

working as a group involving all the commissioners, all the staff, and also

involving officials from the Departments of Mines and Energy and Justice, and I

might add now the Department of Government Services and Lands. Because we are

dealing with insurance issues. Those moved recently, in a recent

re-organization, from the Department of Justice into the new department. I am

sorry, it is not the Department of Government Services and Lands, it is the

department of.... I have forgotten the name of the department. This is the

Superintendent of Insurance which has been transferred, actually, to the

department whose name I cannot remember.

WITNESS: (Inaudible) Government Services and

Lands.

MR. VARDY: Maybe it is Government Services and

Lands. It is Government Services and Lands, yes.

What we have been doing in this process is essentially

to map out for the Board a mission statement basically setting out what it is

the Board is doing, to identify clearly what our mission is, and to work out

basically how we can do a better job in the various areas that we regulate in

relationship to public utility regulation, with regard to automobile insurance.

We have put very little emphasis on the motor carrier side because that is an

area that is being deregulated. So we have really emphasized the public

utilities side and the automobile insurance side of things.

We have established a number of working groups. There

is a working group on electrical utilities, we have another on automobile

insurance, we have one on information technology, and we have one on human

resources. These working groups are basically looking at some of the issues the

Board has to come to grips with. For example, in the case of the electric

utilities working group, we have been looking at issues, in particular, on this

intervener funding question, which is one of the major issues that the Board is

dealing with.

This, I guess, is an issue, because the Board would

like to see greater participation by the public in the hearing process. Because

the whole process that the Board uses is a public hearing process and we do not

get full participation by all sectors of the general public, of course. We do

not get the input that we need in order to make the decisions that we are

required to take by legislation. So the intervener funding is a major issue that

we have been looking at under the electric utility side of things.

We have also been looking at the way we regulate

automobile insurance and we have, for example, introduced some improvements on

the audit side. We audit the rates that are charged by automobile companies and

we have been looking at how we can improve the audit that we conduct in order to

improve the efficiency of the audit. So those are just a couple of examples in

terms of the kinds of things that we are looking at under the strategic planning

process. But our objective is really to do a better job with the legislative

mandate that has been given to us by the Legislature and the emphasis that has

been placed upon quality, upon quality service, to ensure that we provide a

high-quality service to the public.

So that has been the aim of the Board, to try to

ensure that there is a better awareness of what the Board does and what its role

is and to ensure that we can do a better job with what we are doing. That is, in

broad terms, what the strategic planning process is all about. The emphasis is

on quality, quality service to the public.

MS THISTLE: Mr. Vardy, when you do the things -

your strategic plan, is it the intention of the Auditor General's office to

review the plan to see if it includes all the things you indicated in the

beginning, before this plan is, you know, in operation?

MR. VARDY: I would expect the Auditor General

would want to do that. The particular items, I think, that were raised and

highlighted by the Auditor General in terms of components that should be

included in a strategic plan are a set of objectives, an operational plan for

the first year of the plan and then a medium-term set of objectives for the

medium term and for the long term. I think these were the key issues that the

Auditor General was attempting to identify as being required for the Board so

that it has a directional plan - a long-term directional plan and a short-term

operational plan. I will not speak for the Auditor General, because whether she

intended to come back and review our strategic plan, I do not know. I do not

think that issue was particularly addressed in her report, so I will not speak

for her at this point.

MS THISTLE: I am just wondering now, once that

plan is ready for the Auditor General's office, will it then be able to be used

for the 1996 report? Is that the intention of the Auditor General's office?

MR. J. NOSEWORTHY: We do not normally go back and

follow up on every recommendation that we have made (inaudible). What we have

started for 1996 and we plan to have included in the report we table this year

is a separate

chapter on follow-up of all recommendations (inaudible) reports.

This year we will go back to 1994. So we would expect next year that we can do a

follow-up and it would be included in a chapter, but we really do not have the

resources to go back and follow up on recommendations (inaudible).

MS THISTLE: The recommendations, well, they are

made, but it would be now the responsibility of the PUB to ensure that they are

adhered to, I imagine, is it? There is no follow-up from your office?

MR. J. NOSEWORTHY: Except we would correspond. The

(inaudible) process now would be written correspondence and (inaudible) status

(inaudible). We would do that, and ask for their position as to how they

complied with the recommendation or what they decided to do with it. I guess,

depending on the response from that, we could, you know, browse through it, and

that sort of thing. But we would not go back to the PUB and do an update on

every recommendation. We would not have the resources to do that.

MS THISTLE: Okay. Thank you.

CHAIR: A quick question just as a follow-up to

Anna's question. Is there a time frame involved that you have set for yourself,

I guess in consultation with a consultant (inaudible) of when the strategic plan

will be completed for the PUB, and do you know if a short-term or long-term view

(inaudible)?

MR. VARDY: The first point I would make is that

the strategic planning is an ongoing process and it is never really completed.

It is something that has to be reviewed annually and turned over. I think that

is the first comment I would make in terms of the planning process. What we are

proposing to do is by June of 1997 to have in place a mission statement, a

vision statement, as well as operational and directional plans for the Board.

That is basically what the immediate target is. There are a number of things we

intend to do between now and then, and I will not take your time to bore you

with all of those, but we do want to look at the role of information technology,

for example, within our Board.

One of the problems we have is we are a very small

organization. We just do not have the technical engineering information

technology resources that most other agencies across Canada have that are in our

business. That is one of the reasons why we are so heavily dependent on

consultants, I guess. But the thing is that one area we want in particular to

move forward on over the next few months is information technology, and that

involves moving towards the electronic filing of applications. Whenever we go

into a rate application we end up with a mountain of paper. Most of the world

today is into using computer disks, and what we would hope is that in the very

near future we will be in a position whereby filing can be done using computer

compact disc material as opposed to this voluminous amount of material that gets

presented, which is very difficult to handle.

Somebody, I think in the media, said during the

Newfoundland Power rate application over the past summer there were 100,000

pages of testimony. Well, we never had the time to count the number of pages,

but I am certainly not surprised at a number of that magnitude. So one of the

things we have to do as a Board is to manage the database, to put in place a

better system to manage the database. So one of the major projects we have is to

put in place an Information Technology process that will serve the Board and the

customers of the Board more effectively.

MR. WHELAN: One other question (inaudible)

legislation (inaudible). You said that intervenor funding is a major issue for

the Board. Could you elaborate on that some more?

MR. VARDY: Sure.

MR. WHELAN: In terms of the (inaudible) of the

issue, the magnitude of it, and maybe some recommendation as to how the Board

could deal with it, or how the government or legislation could deal with it.

MR. VARDY: Yes. We conducted an inquiry back over

the past year which was an inquiry into electrical services in the area of the

Strait of Belle Isle, in the area that is served by power installation from Lake

Robertson, which is located in the Province of Quebec. This was an inquiry that

was conducted under the Electrical Power Control Act. Now, under the Electrical

Power Control Act there is provision for the Board to actually appoint a

representative of the consumers in the area. What happened up there was that the

consumers in the area, the local groups in the Strait of Belle Isle area,

selected a lawyer to represent them. Just as a matter of interest, the name of

the person was Ed Hearn. They proposed to us that Mr. Hearn be appointed to

represent their interest and basically to serve the role of intervener in the

hearing.

We did have provision under the Electrical Power

Control Act to appoint Mr. Hearn, and we then committed the Board to paying his

reasonable expenses. Now, we do not have similar provision under the Public

Utilities Act with regard to - that was under the Electrical Power Control Act

and it was with regard to a reference from the Lieutenant-Governor in Council.

We could do the same thing with a rate application from Newfoundland Hydro, or

Newfoundland Light and Power, for example, today. We do not have the power to do

the same kind of thing with regard to automobile insurance, but what we can do

is if an intervener wishes to expend resources up front, and wishes to basically

take the risk that the Board will provide the funding at the conclusion of the

hearing, then that individual can do that, but usually they do not have the

resources, they do not have the liquid funds, in order to be able to undertake

that kind of financial commitment. It has been done in the past, but it is not

deemed to be user-friendly, this - well, after the fact - after the fact, award

of cost.

CHAIR: Anybody who has been granted intervenor

status coming before the Board on the issue (inaudible) regulate, or if the

industry regulated it, any cost would be borne by them up front.

MR. VARDY: That is right, and then it would be -

CHAIR: Some would live, I guess, and hope and pray

that the Board may (inaudible) reimburse them for the expenses or costs that

they have incurred in making a presentation to the Board.

MR. VARDY: Yes,

whereas in some jurisdictions

there is an award, there are funds available up front so that intervenors can

apply to the Board and receive funding.

CHAIR: And in some jurisdictions that fund

certainly would be controlled by the PUB -

MR. VARDY: Yes.

CHAIR: - in terms of awarding, based on the

requests coming from the Board.

MR. VARDY: In some cases, the funds are provided

by government. In other cases, the funds are basically awarded by the Board and

they are charged to the applicant. That is the more normal process, that the

costs are basically assessed upon the applicant, but it is done up front. There

is a separate process whereby intervenors can be appointed and funding can be

committed to them.

CHAIR: (Inaudible) jurisdictions across Canada,

for example, we have that system in place?

MR. VARDY: We have been doing a survey of it. I

could not tell you exactly how many I do, but we have been looking at British

Columbia, for example. British Columbia does have a system with (inaudible) an

interesting model where they have intervenor funding, but to be quite honest

with you, I would not be able to report on each Province.

CHAIR: Okay. Are there any other questions?

WHELAN: Just a short question, I suppose to Mr.

Vardy. I noticed in your Statement of Revenues, you have Professional Services:

$142,947. You mentioned a minute ago that if you hired a lawyer (inaudible)

these types of services?

MR. VARDY: Is your question limited to lawyers, or

is it broader than that?

MR. WHELAN: Not necessarily.

MR. VARDY: No, okay; I guess you are asking about

consultants really, including lawyers.

MR. WHELAN: Yes.

MR. VARDY: The lawyer to whom I made reference a

moment ago, who was basically intervening in the case, what we call the Lake

Robertson - Strait of Belle Isle hearing, that particular cost does not get

budgeted for. That is not actually provided in our budget because that is the

cost of a hearing and it is a non-recurring hearing, it is a one-of hearing.

What happens is that there is an assessment undertaken in the context of that

particular hearing, so the cost of that lawyer was basically assessed upon

Newfoundland Hydro. So it does not actually appear as a budgeted item at all in

our financial statements. That would be true as well, for example, of the

Consumer Advocate who was appointed during the Newfoundland Power rate hearing.

That is an assessment. There is an assessment that is undertaken there. So that

is not something that the Board budgets for in advance.

But in terms of the consultants who are appointed by

the Board, who are appointed in advance, basically these are budgeted for. For

example, in the context of the Board's actuarial consultant. We have an

actuarial consultant who does a report for us every year on automobile insurance

rates. That is something we budget for, and that is a fairly major piece of

work. So there are a number of those consultants. If you wished, I could

describe the major consultancies of the Board for you. The Board uses a variety

of consultants. That is the actuarial consultant. The name of the firm is

Milliman and Robertson.

We also engage a financial consultant by the name of

Doane Raymond. Some of their work, actually, is budgeted for because it is

recurring and other parts of their work are specific to a hearing. For example,

in a hearing that took place over this past summer, the work that they did then

in assessing the application from Newfoundland Power was something that would

not appear in a prior budget of the Board because it was something that arose

from a hearing. Those are just a couple of examples of the consultants retained

by the Board. I am not sure I have answered your question.

MR. WHELAN: Basically you have, yes, but it sort

of leads to another question with regard to these special cases, these one-time

issues such as in the Straits and (inaudible) a lawyer looking into the request

for an increase from Newfoundland Light and Power. You say that was not budgeted

for.

MR. VARDY: Yes.

MR. WHELAN: Where does the money come from to pay

him? Is it passed over to Newfoundland Light and Power?

MR. VARDY: In the case of the inquiry, there was

an inquiry that was - and I will refer to the Lake Robertson situation. There,

there was a reference from the Lieutenant-Governor in Council to look at whether

the rates charged to people in the Straits area should be adjusted to reflect

the fact that the area was being electrically interconnected with a

hydro-electric system in Quebec. Previously, that area had been served by diesel

plants, and the rates on those diesel plants were significantly higher than

those in the electrically connected part of the Province. So by an

interconnection, there was the question as to whether rates should be adjusted.

The Lieutenant-Governor in Council made a reference to the Board, and the Board

undertook the inquiry. The costs of that full investigation, including the

appointment of the intervenor who intervened on behalf of the residents, were

assessed subsequently on Newfoundland Hydro. So those costs were paid by

Newfoundland Hydro.

CHAIR: Mr. Oldford.

MR. OLDFORD: I am looking at the insurance

(inaudible) raging out in my area now about the territory (inaudible) from here

to Bonavista, that is included in Territory 1. Someone out there has asked the

question: Why are we included with St. John's, where (inaudible) have more

drivers. How does the Board determine the make-up of territories?

MR. VARDY: The short answer to that is, the Board

does not set the territories. The territories are set by the Superintendent of

Insurance and this is part of the statistical plan. Currently, for the

information of the Committee, there are three territories in the Province,

Labrador is a third territory and the first territory is basically the Avalon

Peninsula as defined by a line from Port Blandford to Terrenceville?

guess, of that line and then, of course, the Bonavista Peninsula. The Bonavista

Peninsula is not part of Territory 1, it is part of Territory 2 and so -

WITNESS: Bonavista is Territory 1.

MR. VARDY: I am sorry, the Bonavista Peninsula and

the Burin Peninsula are part of Territory 1 - that is correct, and the rest of

the Island is Territory 2.

We do not really know where those territories

originated, but we have been compiling actuarial data on those territories ever

since the Board has been involved in automobile insurance, so the question has

been raised frequently as to whether some of the more rural areas should be

lumped in with urban areas, because the accident rate, of course, is a lot

higher in congested urban areas, and I think that the actuarial data will bear

that out. But it is not the prerogative of the Board to decide on what those

statistical areas are, so I think that is really the only answer I can give you

on that one.

MR. OLDFORD: Yes, because if you live in the

community of Bunyan's Cove and you happen to have a mailing address in Port

Blandford, the rates are (inaudible) over $200 in the difference (inaudible).

MR. VARDY: Yes.

MR. OLDFORD: So you understand (inaudible).

MR. VARDY: No. My understanding is that the

Superintendent is looking at this question and they have talked to us about it

and discussed it with us and I understand the matter is under consideration by

the Superintendent. My understanding, as well, is that this is a matter which

can be dealt with by the Superintendent, that it does not require an amendment

to the Act and I am not even sure that it requires Order in Council. Mr. Byrne,

do you have a comment on that?

MR. R. BYRNE: There is nothing specific that says

there is a requirement for government to approve a re-institution of the

territories but that could be a question best answered by the Superintendent.

WITNESS: (Inaudible) actuarial studies, by zones

or by territories?

MR. VARDY: They do it by territories, but simply

because of the fact that the territorial designation is the basis on which the

information is compiled. If the territorial designation were amended, the

industry would be directed to record its data on the basis of the new

definitions, so the data falls out of the statistical plan definition.

CHAIR: Mr. French.

MR. FRENCH: I notice here, and I guess it was

pointed out by the Auditor General, the consultants you use for different

things, is there a national list of consultants that you people would use?

MR. VARDY: The Board uses a number of different

consultants and I will sort of give you a general survey of that and you will

let me know then if I have answered your question.

The Board depends very heavily on its consultants

because it does not have the technical advice and people within the

organization, the engineering, the audit and the information technology people

we require in order to participate in a rate hearing or to conduct the ongoing

supervision of utilities that we are required by legislation to conduct. So what

we have done over the last few years is, we have put out a request for proposals

for consultants and there are four consultants who are currently engaged by the

Board who have been engaged through this process, what I will call an RFP

process.

The first is the Board's audit consultant, which is

Doane Raymond. They were selected several years ago when we went out and decided

we would get a better financial arrangement if we were to put out competitive

tenders. We did save some money by doing that and we entered into an engagement

with this auditor. We have done the same thing with our actuarial consultant. We

went through a process of defining exactly the kinds of services we required and

defining the expertise that was required. We looked at the cost of the proposals

that were put to the Board. We looked at the potential for conflict of interest,

and there was conflict of interest in a number of cases, particularly for the

actuarial consultants, because some of them were actively involved with the

companies that we regulate. The outcome of the process was that the Board

appointed a company called Milliman & Robertson as its actuarial consultant.

The third consultant that was appointed through this

competitive process was our strategic planning consultant, and the fourth one

was our financial consultant, which is a very significant engagement because the

financial consultant does an annual review of the utilities that we regulate,

and also is extensively engaged in the hearing process. So we went through the

process of selecting the financial consultant, and the financial consultant

appointed by the Board was Doane Raymond. These are the four principal

consultants that the Board is using at present.

During a rate hearing, depending on the nature of the

hearing, there are experts required from time to time. For example, in the case

of the hearing that took place this past Summer, we were required to engage a

rate consultant. Most of the rate-consulting expertise is resident in the United

States, so we engaged a consultant from the United States for that purpose only,

for the purpose of that particular rate hearing. There was a letter of

engagement with that consultant. I guess I have set up an overview of the use of

consultants by the Board. Those are the major consultants the Board has engaged

over the last year.

MR. FRENCH: So, there would not be a lot of work

setting up, it would be local - you would hire people as you (inaudible)

Newfoundland Power. Whatever consultants you would need, you would hire them at

that particular point in time. I assume, of course, that these would be

out-of-Province, so they -

MR. VARDY: Two comments on that: One, when we were

evaluating our financial consultants, one of the factors we looked at was local

presence, and one of the strong proposals we had was from a company that was

out-of-Province and we discounted that company, to some extent, as a result of

that, and also because of the higher rates. But the company we selected, Doane

Raymond, had a strong local presence, and that was an important factor in

considering and appointing that consultant.

The second point I would make is that there are small

things that come up from time to time. An example of that is, we did a study of

the underground wiring system in the north-eastern part of St. John's because

there were a number of breaks in the line. We engaged a consultant - as I recall

it, we went out with a request for proposals and all of the proposals that

responded were all local, they were all locally present, had local offices, and

we engaged a local company. So, yes, there are times when the Board has to go

outside the Province, such as the case with our actuarial consultant, where we

are actually using an American company because most of the Canadian companies

were in a conflict of interest. Yes, we did use an American consultant as a rate

expert during the hearing this past summer. And, of course, the Consumer

Advocate also used an American rate consultant for the same reason, which was

that there are not a lot and maybe none - I could not swear that there are no

Canadian rate consultants but there are very few of them.

AN HON. MEMBER: They are hard to find.

MR. VARDY: They are hard to find. They are really

hard to find. But the Board obviously attempts to use local people whenever it

can.

MR. FRENCH: So any time when the Board would want

a consultant, nine times out of ten, would I be safe in saying, we would go for

public proposals?

MR. VARDY: Yes.

MR. FRENCH: Just on insurance for a minute. I have

some grave concerns about insurances, problems that are blowing my mind, having

come from a business background where I could insure three vehicles for $239 but

when I closed the business, for the same insurance it went to in excess of

$2,000. I have to question that for those kinds of rates. I just wonder how much

monitoring is actually done on the insurance companies in this Province? Are we

doing it once a year? Are we doing it once a month or once every six months?

Exactly how are we checking the insurance companies in this Province? Because I

am sure any MHA in this room gets an average of (inaudible) calls a week, and I

get them, concerning insurance in the Province. I would like to know just how

much monitoring is done as it relates to insurance claims.

MR. VARDY: Okay.

MR. FRENCH: How much are we really regulating

these people? Because sometimes, to be honest with you, they frighten me to

death.

MR. VARDY: I will give you a fairly detailed

response because I think your question is a fairly broad question.

The first point I will make to you is that we regulate

the automobile insurance industry in the context of rates. We do not regulate

other aspects of the automobile insurance industry. That is a prerogative of the

Superintendent of Insurance. We regulate the rates, and we audit the rates, and

I will come back to the audit question in a moment. But we regulate the

automobile insurance industry in a different way from the way we regulate the

electric utility industry. In the case of the electric utility industry, we do

what I will call a `micro approach'. We do a company-by-company approach, and we

call in the company; we do a detailed analysis of the costs and the earnings of

the company, as we did this past Summer with Newfoundland Power. So you had a

single entity that was subject to considerable regulation. We do the same thing

with Hydro, of course, but we do not do that with automobile insurance, and the

reason for that is because there are fifty-five companies in the market and it

would be an expensive regulation to conduct a separate hearing for every

company.

So the process the Board has engaged upon in lieu of

an individual hearing for each company, and an individual financial assessment

of each company, is a process which we call the benchmark approach. With the

benchmark approach, what we do is, we undertake an actuarial survey every year

to look at: What are the costs? How are the costs changing? That then gives us

some indication of whether the applications that are coming from the companies

are reasonable or whether they are outside the range of reasonableness.

What we found in the analysis we have been doing, in

our actuarial studies over the past few years, is that there is a major problem,

particularly in Territory 1, and a major problem with third-party liability. The

problem is not so much with collision or comprehensive, it is with third-party

liability. And the problem is not property damage, it is bodily injury. There

has been exponential increase in bodily injury, in the accidents, and we have

statistics which we can provide to your Committee with regard to what has

happened to the enormous increase in rates driven by increases in bodily injury

claims in the courts. The result of that, of course, is that third-party

liability costs have increased, and our actuarial consultant has confirmed that

these cost increases are legitimate. So, in terms of the process, the companies,

when they file, if they file within the adjusted benchmarks each year, the Board

approves the increases that are proposed. If they are outside the benchmark,

then we will undertake an individual assessment of the company to see why they

are looking for more, or looking for less, for that matter, than the benchmarks.

Now, the benchmarks are set based upon the actuarial costs reported to us, but

we do not take a single number, we establish a range that is 10 per cent above

the benchmark and 10 per cent below. We reason we set the upper limit and the

lower limit is basically for two reasons. We set a lower limit to ensure that

the amount of revenue forthcoming from the companies is sufficient to meet the

claim liability that is incurred and to protect the consumer against the

inability of the company to meet their obligations.

The second thing we do is in relationship to the

ceiling. We have a ceiling to ensure that the consumer is not gouged, that the

consumer is not charged an excessively high rate. So, as I said, the bottom

range is established, in a sense, as of the need for solvency in the industry,

and the upper end of the range is established by the need to protect the

consumer from gouging. So, we do a thorough analysis every year to ensure that

those benchmarks are adjusted in a reasonable way, and we use industry data, the

data based on the industry as a whole, as opposed to individual companies.

That does not mean that the Board could not look at a

different kind of regulation which would involve looking at each of the major

companies, but the process we are into now is this review process so that if a

company files and they are within the benchmarks, then they are approved, but if

they are outside the benchmark, then they are subject to review to ensure what

they are seeking is reasonable.

AN HON. MEMBER: If I could interrupt for a second,

you say if companies file within the benchmarks then they are approved

automatically?

MR. VARDY: Yes.

AN HON. MEMBER: Then there would not be a great

degree of probing into the application filed. It would be a matter of course.

MR. VARDY: There would be no probing with those

who are outside the benchmark. We tend to accept those that are within the

benchmark because those are numbers that are justified by our actuarial report.

These filings that are done, are done every year. They are annual filings.

Now, just to get back to the other part of your

question: Back in 1994, the Board commenced an audit program, so we have been

doing an audit of all of the companies. We do not do all the claims and we do

not do all the policies, far from it, we do a small sample. I think we have done

all the companies, Bob?

MR. BYRNE: The ones that write the majority of the

business, 98 per cent, I think.

MR. VARDY: If you have a situation where eleven of

the fifty-five companies are writing 78 per cent of the business, even though

there are fifty-five companies in the market, eleven or twelve of those

companies are writing the lion's share of the business.

We have been doing an audit of those over the last

couple of years. The audits have disclosed a number of anomalies, and where

people have been overcharged we have insisted the companies reimburse the

overpayment. But I have to emphasize, in fairness, that this is a small sample.

We do not audit a large percentage of the total number of policies in the run of

a year. I do not know, but maybe Mr. Byrne could sort of give some indication of

just what percentage of the policies we actually audit.

MR. R. BYRNE: No, that is a difficult one to put a

quantifiable figure on, because of the fact that each individual insurer writes

a different volume of business. We have done insurers that have written 98 per

cent of the total volume of premiums written in the market in 1994. If, in the

course of conducting the audit, there are a number of areas that are uncovered,

we will then expand the audit sample to see whether or not those areas are

consistently found throughout the course of their policy writings, or if they

are isolated. If they are consistent, then we will deal with the insurer on an

individual basis to determine methods and ways by which they can correct the

problems they seem to be experiencing. Subsequent to that, we will go back and

do a follow-up audit.

CHAIR: It is an important issue, the insurance

industry and how you audit, how you implement the plans to ensure the protection

of the public. The Auditor General in her report noted that there were

complaints concerning one insurance company in particular that were launched to

the PUB in 1993. There were a number of complaints from a number of insurers and

the public, from what I understand, but the Board did not carry out an audit or

act upon or be seen to be acting upon these complaints up until a year later in

1994. Now, you have already indicated that you did not have any sort of pilot

program in place or policy in (inaudible) the insurance companies up until 1994.

What did you do with complaints previous to that?

MR. VARDY: Prior to that the Board would

investigate complaints that came forward. We would essentially do an

investigation driven by the complaints. What we decided was that a more

proactive approach was needed, and that is why we launched an audit program. We

have launched this audit program, by the way, using co-op students from Memorial

University, from the business administration program at Memorial University,

because we did not have the in-house staff to do it, and we tried to keep the

cost down.

I should also mention that I think we are the only

insurance regulator in Canada that is doing these audits. It is not something

that is normal practice, but something we have done and we found that these

audits have been extremely useful in uncovering information and I think it has

forced the industry to be much more vigilant and much more careful in the way

they rate people.

CHAIR: In terms of - and this is an important

issue I have here - we saw, I guess, a great number of people who were

personally damaged and (inaudible) one insurance company in the recent past,

that being Hiland Insurance, for example, and complaints go to the Board in 1993

about that company. If so, how many complaints were there from other insurers in

the industry, other people who were involved in the underwriting industry, and

what action did the Board take on it?

MR. VARDY: I will ask Mr. Byrne to respond to

that.

MR. R. BYRNE: There are a couple of issues at play

here, not the least of which, No. 1, is that the Board's regulatory

responsibility is restricted to rates, a general supervision of rates. In rating

a risk, there are a number of factors that are taken into consideration in

determining the rate that is going to be charged. These factors are usually

contained in documents entitled: Underwriting Guidelines or Underwriting Rules.

The Underwriting Guidelines are not subject to

regulation at this point in time and as a result, insurers, while they may have

a rate filed for a specific risk classification being a Class 2 driving record

5, with a limited liability of $200,000, how they actually fit an insured into

that risk category is not a regulated undertaking so they can vary their

underwriting guidelines to accomplish changing an individual across categories,

across driving records or, for that matter, into rating groups.

The number of complaints that we get on an annual

basis, intercompany complaints, I will call them, is relatively constant. We

will always end up with complaints from insurance companies that a particular

insurer seems to be taking a large volume of business from them, that a

particular agent is taking a large volume of business from them. In those cases,

what we would normally do is, undertake to obtain from the complainant

information with respect to how an insured is, in fact, rated by that particular

insurance company, that would be the company that is losing the business.

Using that information, we would then review the

rating of that risk in relation to the gaining companies underwriting guidelines

which are filed with us on a voluntary basis. If, in fact, the rate that is

developed using that company's underwriting guidelines and its filed rates works

out to be what is charged, then there is no basis to the complaint. Because the

insurer has gained the business in accordance with its own underwriting rules

and regulations, and the rates that are charged are appropriate.

If we find a situation where the rates that are

actually being charged do not match what has been given to us and what has been

approved by us, then we will go back to the company and ask for specific

information as to how they rated the risk and how they arrived at the rate that

they did. Depending upon the response, there will be follow-up action taken. I

assume that answers your question.

MR. FRENCH: When we do an audit on a firm, and it

does not matter which one, is the cost of that audit then charged back to - the

PUB would then charge back, say, to Newfoundland Power?

MR. R. BYRNE: Exactly the same.

WITNESS: No, it is not.

MR. R. BYRNE: Exactly the same?

WITNESS: Do you want me to answer that?

WITNESS: Okay.

CHAIR: (Inaudible).

MS GALWAY: My name is Leslie Galway, and I am

vice-chair of the Board. If we provide an audit on a regular basis, such as the

audit of an insurance company, what we do is we budget for that in the year, and

when we are setting the assessments for the insurance companies it would be

included in their overall assessment fee for the full industry. With respect to

Newfoundland Power, if we are doing an audit that is associated with a hearing,

then it gets billed directly to Newfoundland Power. So it is a different

approach. We are trying to audit roughly 98 per cent of the insurance business

over a period of three years, so instead of charging each individual company the

audit fee, which would have a lot of cost allocations associated with it, we

include that in our overall insurance costs and then we base our assessment on

those. So it is slightly different.

MR. FRENCH: So it is not the same as Newfoundland

Power.

MS GALWAY: No.

MR. FRENCH: Okay. In the recent rate hearings, to

go back to Newfoundland Power before I go on to insurance, there were a few

things that were uncovered. I believe what came out was that any donations they

made, or most, were being actually charged back to the consumer. Is that

practice still allowed to continue by Newfoundland Power, or was that, in fact,

the case? That Share the Light program - their contribution into that, was that

also being charged back to the consumer? If it was, what has been done to stop

it, or has anything been done to stop it?

MR. VARDY: I will respond to that. I just want to

make sure that we have responded fully to the previous question. In terms of the

cost of the audits, those audit costs are not imposed on the specific companies,

but they are part of a blanket assessment. We impose an assessment on the

automobile insurance industry, so we do not charge the ABC Company specifically

for the cost of the audit of that company.

WITNESS: All insurers contribute up front

(inaudible).

MR. VARDY: All insurers contribute, yes - I was

going to go on to say the same.

Moving on then to your question with regard to

donations, charitable donations. In the order the Board issued this past Summer,

the Board basically disallowed the process of the company charging donations to

the ratepayer, so that if the company wishes to make donations, they have to do

this after tax, or out of their profits. They do it out of their profits, so in

other words, the ratepayer is not contributing. If they want to use their

profits for charitable donations, well, that is obviously in the hands of the

shareholder. So we totally disallowed that process.

MR. FRENCH: That has now stopped?

MR. VARDY: That is stopped, yes.

MR. FRENCH: `Share the Light' and every other

thing?

MR. VARDY: Any donation, any kind of donation. In

the order, by the way, we broadened it, because this has come up before in

previous hearings. In the order we issued this year, we had a very broad

definition of charitable donation, so that whatever form it might take, we

basically disallowed charitable donations.

MR. FRENCH: Permit me just one quick question. The

money then that was actually charged back to the ratepayer, was Newfoundland

Power instructed to pay that back to the ratepayer?

MR. VARDY: This is in the context of - are you

talking about 1996 or 1997?

MR. FRENCH: Yes, the most recent appearance.

MR. VARDY: Would you like to answer that?

MS GALWAY: When you are compiling rates, what you

do is, you bring together all of the regulated costs associated with

electricity. In 1991 as well as in 1996, when we did this for the purposes of

establishing the rate, there was no charitable donation included in those costs,

so that is consistent.

What you may be thinking about is the period

in-between, when they allocated in their books, $15,000 I think it was for

`Share the Light' as a donation and included them with their regulatory expenses

for the purposes of preparing their financial statements.

We have told them that is a non-regulated item. The

only way that would be returned to the customer is if their rate of return on

rate base or rate of return on equity, depending on the outcome of a stated

case, is exceeded, and then it will go back to the customer, but in terms of

establishing the rate, it was never part of the test year costs either in

previous years or in this year.

MR. FRENCH: Okay, go ahead, Anna.

MS THISTLE: Well, actually, I wanted to ask a

question on it earlier (inaudible) Mr. French, but I would like for him to

continue if he is not finished with his questioning.

MR. FRENCH: No, no, go ahead. I will come back to

some of this because I still have some concerns.

CHAIR: Before you proceed - we can have a couple

of questions. We are going to take probably a fifteen-minute break. We will

conclude with the set of questions that you may have.

MS THISTLE: Mr. French asked a question about

consultants. According to the Auditor General's report, apparently there was

$500,000 paid in fees for three firms from April of 1993 to March of 1995. I

wonder, why were these services not tendered?

MS GALWAY: With respect to BDO Dunwoody which

received I guess a large share of that $500,000, that is in respect to an audit

that was requested by the cable companies in the pole attachment costs. We, as a

group - it was almost more of an arbitration - got together and there was not

any single firm in Newfoundland without a conflict. Either a cable company was

using that audit firm, or they had done work for Newfoundland Power, so that

eliminated every firm in the Province. Then there were three firms on the

mainland that were considered to be possible. Two of them were involved in

forensic accounting and they were more suitable to the job that was being

requested, and the company that had the more suitable rate was selected. While

it does not appear to be a public tender, there was a great deal of work and

effort taken in order to select that firm to do that study.

The other firm, Milliman and Robertson, they are the

Board's actuaries. First of all, we had never received the information that had

gone to the departments about the requirement to go to tender for these

particular services. At the time, the Board was under the impression that it was

completely within its rights - I believe it still turned out that way, because

that directive still applies specifically to departments - to engage this

specialized firm which had been doing this year after year and had the database

and the programs already established to do these actuarial studies on an annual

basis. We continued to engage them because there really are not that many

available to do that work.

MS THISTLE: Are you now using the Public Tender

Act (inaudible)?

MS GALWAY: We did. Yes, after this report came out

- it really is not a problem for the Board to engage in such a process, so we

did that. As it turned out, even after the short list and a great deal of

investigation, Milliman and Robertson were still the lowest-priced firm that

could provide this service.

MS THISTLE: Also, according to the Auditor

General's report, there were no contracts in place for these consultants, nor

was there any evaluation done on their performance in the (inaudible).

MS GALWAY: The Board had engaged them through the

years on an annual basis. They had a program that is repeated each year, and

unfortunately, the Board had not provided any terms of engagement, unlike what

they would do with their financial consultants for this particular area. It is

very complicated. It is well-known to the Board. I think Bob has the reports

that are generated in the same fashion each year that they provide to us.

When we have a special engagement, they receive a

special letter that indicates that we wish for them to undertake an actuarial

review of x, y, z, insurance company who has filed rates outside the benchmarks,

so they would get specific direction to do that, and that would be very close to

a letter of engagement.

It is a matter that has since been completely

rectified. You will find contracts on everybody that we engage, and their

letters of engagement on everybody. But with respect to that actuarial firm,

they have been in place, the system continued, it was very systematic, and we

have never had any difficulty with the reports that they have provided.

In terms of evaluating the performance, we do discuss

these reports at Board meetings, and if we are not satisfied with the

information in the particular reports, we will go back to them and ask them for

additional detail: `Please write something on this', or, `Please answer these

questions'. But we have not had any specific problems with those firms at all.

MS THISTLE: So what you are saying is, it is a

case of your having been used to their quality of work, but since the Auditor

General has brought it to your attention, you now have contracts in place for

any consultants that you might hire in the future?

MS. GALWAY: Yes.

MS THISTLE: Okay.

CHAIR: We will take a twenty-minute break.

Thank you very much.

Recess

Swearing of Witnesses

Elizabeth Marshall

CHAIR: Okay, are you (inaudible) point of

clarification (inaudible)?

MR. VARDY: Yes, I wanted to just clarify a point

with regard to the assessments of the Board. Basically there are two types of

assessments that the Board undertakes. One is a general assessment which is part

of the annual budgetary process where we impose an assessment on the automobile

insurance industry and the utilities. That is for the purpose of the general

operating expenses of the Board and it is an annual assessment. Those

assessments are included in the budget which we present to the Minister of

Justice in December but, in addition to those, where there are special hearings

- for example the Newfoundland Power hearing this past Summer - those

assessments are separate from that. They involve incremental costs. Those

assessments are incremental and are, in fact, done under a different

section of

the PU Act. They are separate from the general ongoing assessment. So, if there

is a special hearing that takes place, whether it is Newfoundland Power or

whatever the case may be, that has not been budgeted for and where there are

costs that have not been budgeted, then those are the subject of a separate

assessment. So I just wanted to make that clear, those are two separate

assessments. In the case of the work that we do with regard to the audits of

insurance companies, those are budgeted for and those are part of the general

assessment. So that is really all I wanted to say.

MR. LUSH: Does the PUB operate (inaudible) surplus

conditions?

MR. VARDY: The PUB currently has a reserve. The

Board has always had a reserve. Normally, you had access to a reserve for a

number of reasons, one is the fact of the matter I just mentioned, which is that

the Board is required to conduct inquiries and hearings. Those inquiries and

hearings are sometimes not budgeted for and the cost recovery only takes place

at the conclusion of the hearing. So there have to be resources available to the

Board to enable it to undertake an inquiry or a hearing.

At the moment, for example, the Board is owed over $1

million outstanding which it will eventually recover. Now, most of that is

actually the assessment on Newfoundland Power from the hearing that has just

concluded, but there is another one that is a fairly significant one which is

the hearing with regard to pole attachments, an inquiry on pole attachments,

which is not concluded and where the Board has had to carry a considerable

amount of cost for a period of time.

Just to respond more fully now to this question. As I

mentioned before, the costs of the Board are borne by the regulated entities

through an assessment, and

section 13 of the Act provides for the ongoing costs

of the Board. But where there is a specific inquiry those inquiries are funded

by an assessment under

section 90. Those assessments under

section 90 are

assessments at the end of the hearing. In other words, we do not actually derive

the funds until the hearing has concluded. That means that there is a

requirement for the Board to have funds available to it in order to finance its

activities during that period of time, because the assessment under

section 90

is at the conclusion of a hearing. So the Board does have a reserve, and there

is a reserve required by the Board in order to carry out its interim funding.

I might add that there is recognition in

section 13(6)

of the Act for the Board to have a reserve. That is in terms of the - just to

explain to the Committee why the Board needs a reserve. With regard to the

reserve that is currently in the possession of the Board, we have had legal

opinion on that as to the disposition of that reserve. The legal opinion we have

is that the excess revenue as defined in

section 15(3) of the Act refers to a

motor-carrier grant. There was a time when the Board received a motor-carrier

grant which was eliminated about two years ago. Prior to that there was a

motor-carrier grant, and there is a provision in

section 15(3) with regard to

excess revenue to be returned to the Consolidated Revenue Fund. Our legal

opinion is that the excess revenue in

section 15(3) refers to this motor carrier

grant in excess of the amount estimated by the Board.

Bearing in mind that most of the reserve that the

Board presently holds was contributed by the public utilities and not by the

government, the disposition of that revenue must be used by the Board for the

benefit of the ratepayers, because to do otherwise would be to convert funds

which were derived as assessments into a tax. So that is a long answer to a

short question.

MR. LUSH: There will be another matter, too, in

addition to that. I think the Auditor General mentioned that at one point there

was a reduced assessment to Newfoundland Light and Power to diminish the amount

of the accumulated surplus. I think the Auditor General (inaudible) the

legislation would not allow (inaudible), and (inaudible). I am just wondering

whether you have resolved that.

MR. VARDY: Our intention is to discuss those

matters with the Department of Justice and to determine what changes are

required in the legislation in order to clarify some of these matters. There is

a number of matters in the Public Utilities Act where there is a requirement for

some updating of the legislation. In the context of this particular issue, in

light of the fact that there is no grant currently made to the Board, there may

be some merit in some change in

section 15.

With regard to the reduction of the assessment, as you

mentioned, in the context of our reducing the assessment rate, while our legal

counsel indicates that there is no problem, we propose to deal with this by

discussing it with the Department of Justice to see if they concur. If they do

not concur, then we would have to propose to the Minister of Justice that an

amendment be made to the Act to clarify that point.

MR. LUSH: I just want to ask a question on auto

insurance for the time being. You referred to the fact that a major contributor

to the increase in insurance rates are third party liabilities. From your

experience, would you care to say (inaudible) that there is any possibility that

the rates of insurance charged to the consumer can be stabilized under the

present system? Because I think, as you mentioned, your job is to ensure that

consumers are not being gouged with respect to insurance. I do not believe that

there are too many consumers who would believe that they are not being gouged

right now. I just wondered, under the present set-up we have, whether you could

see the possibility of a break, or any stabilization of insurance rates to

people. I realize that is not your job, they are (inaudible) costs, but

obviously the Board has some experience in dealing with it, and with what your

predictions might be.

MR. VARDY: I am going to ask Mr. Byrne to respond

more fully, but I am going to make some comments in response to your question.

When you say the present system, I assume you mean the

system as it is without any changes in the tort law with regard to no-fault. One

of the things that appears to be happening is some levelling off taking place

and I think Mr. R. Byrne may have some more up-to-date numbers in terms of what

is happening there. Of course, as I indicated earlier, it is the bodily injury

that is really driving the cost increase right now, and just for the members of

the Committee who are not familiar with this, if you go back to 1984, the

estimated ultimate loss for bodily injury was in the order of $10 million. In

1994, the corresponding figure was $61 million. So that gives you some sense of

what is happening there. The latest actuarial report from our consultant

indicates that there is some levelling off, but Mr. R. Byrne is more familiar

with those numbers, so I will turn that over to him.

MR. R. BYRNE: The figures that Mr. Vardy just

quoted are from the Board's benchmark report for 1996 prepared by its actuarial

consultants. As part of that process, a number of years ago, we asked the

consultant to track the rates that had been established by way of the benchmarks

on a go forward basis against the rates that ultimately were developed when the

information matured with respect to the bodily injury and property damage

component of the third party liability rate. We found that for the last eight to

ten years, with minor exceptions, the rates that had been estimated to be the

equitable average rate, in fact, tracked very closely with what was developed as

the ultimate rate once all the claims had been settled.

Just to give a little bit of expansion on the figures

that Mr. Vardy has just given you. In 1985, there was a total of 712 bodily

injury claims alone which provided for a total ultimate pay-out of $12,220,000

or an average of $17,000 per claim. In 1994, the number of claims had risen 120

per cent from 712 to 1,628 claims and the total ultimate estimated pay-out on

those 1,628 claims was $61,375,000, for a total increase in your third-party

liability bodily injury component only, of 402 per cent. That is over a ten-year

period. The average claim went from $17,163 to an estimated ultimate $37,700 for

1994, or a total increase of 120 per cent.

What we are dealing with in current days' rates is the

best estimate of what claims will ultimately settle for. The difficulty with it

is that you have, in relation to the third-party liability component of

automobile insurance, in particular, an item which is referred to as the

`long-tail effects'. What that is, is that claims that are made today, in

particular for bodily injury, may take years to settle in the court system, and

what the insurer sets aside today as a reserve may be totally inadequate in

relation to what the ultimate pay-out would be. By way of an example, an insurer

could today encounter a whiplash claim which is currently settling in the range

of $15,000 to $20,000, and the claimant take the matter to court. By the time

that claim goes through the court system there may have been other

precedent-setting decisions which ultimately increases the amount of the pay-out

and the $20,000 that the insurer has set aside for that particular claim today

may be totally inadequate to what he will have to pay in three or four years.

However, the rates are based on the best available information today.

At the present time, there appears to be a levelling

off of the rate increases that we have experienced over the last number of

years. Whether or not that trend actually continues will, in large measure, be

determined by what action is taken on settlements, and the level of settlements

that courts give in relation to the claims that are currently pending before it.

MR. LUSH: My question goes beyond the (inaudible)

but insurance is such an important matter to the people of the Province, could

you venture an answer as to why we have had this tremendous increase in the

period you mentioned, 1985-1994, which is less than a nine-year period. What

factors would cause that tremendous escalation? Roads were supposed to be

getting safer. Whether drivers are getting more careless, nobody can tell that,

but logic tells us that roads have been getting safer - certain (inaudible) but

the condition and shape of automobiles, and I think (inaudible) driver's

licences, and all of those kinds of things, everything which should in the end

result in fewer accidents and fewer claimants, but they have gone the other way.

MR. R. BYRNE: One thing I have to say is that we

have not done an investigation into the causes of this per se, but our sort of

general assessment is that it is the result of what is happening in the courts.

It is the result of litigation that is taking place in the courts with regard to

bodily injury, and there is a tendency for these court awards to increase over a

period of time. There is a process going on there, a very litigious process that

is going on that is causing an increase in the claims and in the out-of-court

settlements with regard to bodily injury, and whether this will stabilize of its

own accord is very difficult to say. Why is this litigious action being taken?

This is something the Board does not fully understand and it is something that

certainly merits further investigation. I do not know, Mr. Byrne, if you would

like to make any further comment on that?

MR. R. BYRNE: No, I think that gives a good

picture as to where it is rising from.

CHAIR: Mr. Oldford.

MR. OLDFORD: I just want to question something

else. On the cost of the pay-out, your figures state that you paid, or the

insurance industry paid out a certain amount per claim. Does that pay-out

include the cost of legal services and the cost of the insurance company

defending against an action or against a claim?

MR. R. BYRNE: My understanding of the loss costs

that are reported by the insurance industry is inclusive of all allocated lost

cost expense, which would be any cost associated with a loss that can be

allocated to a specific loss. So that would include your legal expenses, your

adjustment expenses, your negotiation settlement expenses, and the actual

pay-out as well as any associated court costs that may be incurred in relation

to that particular claim. Those are lumped in as a figure and reported for

statistical purposes.

Unallocated loss costs such as the overall operation

of the claims department having an adjuster on staff, or having a claims manager

on staff, those would be included in the general overhead expense of the

insurance company and not as a loss expense. These would be costs associated

strictly with the losses that are incurred and settled by the companies.

AN HON. MEMBER: I made a statement in the House -

I was a former member of the no-fault insurance committee, too, and I made a

statement at one time - I do not know if it was in this jurisdiction or when we

were travelling. Part of our problem was that this Americanization of our

television where the ad says, if you slip and fall, call Sam, you do not

(inaudible) my theory is that that might have done something with our insurance

claims and insurance rates in the Province. Anyway, I just wanted to know if all

the costs were inclusive? So the actual amount that a claimant would get in his

pocket is not all reflected in your figures? Is there is an additional cost?

MR. R. BYRNE: Yes.

CHAIR: Before proceeding, just to present a point

of information. I know we are scheduled to not finish until 12:00 today but we

will cut it short by a half-hour. The Committee has to meet on a couple of other

issues but we will conclude at 11:30 a.m. if that is - just a short (inaudible).

I have a couple of questions dealing with the

(inaudible). The other (inaudible) are affected by the Public Utilities Board,

and the Board seemed to disagree on one

section there,

section 15 (inaudible)

the Consolidated Revenue Fund.

Section 15.(3) of the Act, dealing with the

Public Utility Board's budget, clearly says that where the amount of revenue in

a financial year exceeds the amount designated by the Board, the surplus shall

be taken into the Consolidated Revenue Fund. And this, I guess, disagreement,

has been solved -

MR. VARDY: I guess our view on it is as presented

in the material. I am not sure where it is now in the booklet you have but there

is a legal opinion - the legal opinion of the Board's solicitor - with regard to

the

interpretation of this

section 15.(3), and this is where it stands.

As you will see, the reference here is to the `amount

of revenue in a financial year exceeds the amount estimated by the Board', so it

is in relationship to an estimate of revenue versus the actual realized revenue.

So the Board's

interpretation of this is that this is in relationship to monies

that have been paid over to the Board by government. This

section was written

into the Act at about the time when a motor-carrier grant was instigated,

because prior to that time the Board had quite a large motor-carrier operation

which was all self-financing. Then there was a change in the operation of the

Board; the money that was coming from the motor-carrier operation went into the

Consolidated Revenue Fund and government then funded the Board through a grant.

So it was in the context of that, that this

section was put into the Act.

As I said, our

interpretation of this is that where

money comes from the government which is in excess of what was forecast by the

Board, that any surplus should be paid into the Consolidated Revenue Fund. To do

otherwise would be to take money that has been contributed by the ratepayers and

to turn it over to the Consolidated Revenue Fund.

CHAIR: Has there been a clarification sought from

the Department of Justice on that?

MR. VARDY: No, we have not done that yet.

CHAIR: (Inaudible) plan to (inaudible)?

MR. VARDY: Yes, it is.

MS GALWAY: The Board is compiling various changes

that may be warranted given the report of the Auditor General and through our

own review, and we have tried to separate them in terms of general housekeeping

items for the Act versus those that would require, I guess, the direction of

government instead of us, but we will bring it to their attention so that they

do not think we just want this put through as a slight change.

I would just like to add one small item to the Board's

interpretation of that

section 15.(3). When we read it initially we interpreted

the word `strictly' to mean where the amount of revenue in a financial year

exceeds the amount estimated. It was not that we interpreted it that we were no

longer able to hold a reserve; it was that we estimate our revenue prudently,

and if we overestimate in the motor-carrier area then that would have to be

either refunded to Consolidated Revenue or it would be deducted from the next

year's grant. That is how that operated over the years. We did not read any more

into it than that.

I would like to point out from a practical standpoint,

we had one year, I think it was 1992 - yes, it was the year end 1992 - and we

were running an accumulated reserve of approximately $40,000. That particular

year we had trouble meeting our payroll, paying our debts, and we had to phone

Treasury Board and ask for our grant right away because we could not meet our

regular operating costs. If we do not have that reserve we cannot operate.

CHAIR: Okay, good enough. Another question

(inaudible). During the rate hearings, I know when I appeared before the Board

the question I raised about the Board's 1991 decision that it made in terms of

what the public utility - in this case, Newfoundland Power - was allowed to make

within a - and it prescribed the percentages allowed. But yet, over the course

of the next three to four years, the utility exceeded and went beyond the

Board's decision, on the one hand, without really any - at least from what I can

determine, without any repercussions.

Section 16 of the Act is pretty clear in that the

Board - I believe it says: "The Board shall have the general supervision of all

public utilities, and may make all necessary examinations and inquiries and keep

itself informed as to the compliance by public utilities with the law and shall

have the right to obtain from a public utility all information necessary to

enable the Board to fulfil its duties."

What compliance measures are in place to ensure that,

in this instance or any other instance, a public utility, number one, on the

first hand complies with a Board decision, a mission (inaudible) - so what are

the measures or the regular accounting of that? -, and number two, if a public

utility falls beyond or outside of a decision rendered by the Board, what

measures would normally take place, if any? And what repercussions would fall to

the utility? I will just leave it at those three for a moment, because it is an

important issue as I see it. Some have argued, I guess, and some would see it

that the Act has been breached clearly. I (inaudible) something for the Board

(inaudible).

MR. VARDY: The first point I would make is that

the Board does an annual compliance audit to ensure that the utility is

operating within the framework of the legislation and the previous orders of the

Board. That gives the Board the factual information that we need.

The other point that I would like to make is that when

the Board established its allowable rate of return in the order of 1991,

basically it set two ranges. There was a range with regard to the overall rate

of return on the financial capital invested in the company, which is known as

the rate base, and that range of acceptable rate of return was established in

that order. There was also an order which established an acceptable range of

rate of return with regard to one component of that rate base, namely a common

equity.

Now, in the course of the hearing of the past Summer,

one of the things that came out was that there is an ambiguity as to whether the

compliance with the legislation would disallow any excess earnings with

reference to either one of those two benchmarks, those two indicators, common

equity or overall rate base or whether it is specific to only one of them. The

result of that was that we refer the case to the Supreme Court of Newfoundland

as to whether, in fact, the Board can enforce the upper limit with regard to

both the rate of return on common equity and rate of return on rate base. So

that is a contentious issue which has been contested by Newfoundland Power, and

the Consumer Advocate recommended that this matter be raised through the courts

in order to get an answer to it. So I think that is really as much as I can say,

that at the moment, this is a contentious issue as to the

interpretation of the

relevant

section in the Act as to whether, in fact, there was non-compliance.

Whether the utility was not complying is a question that will be resolved with

the stated case, and that case, I gather, will be set down early in the new

year. I cannot really say any more than that because I think that would be to

present - the Board will be arguing in that case and that is where it should

take place rather than here.

CHAIR: Okay, fair enough. In terms of outside a

specific instance thing, what controls does the Board have in place to, I guess,

monitor on a regular and systematic basis compliance of both orders, whether

that deals certainly with insurance companies or with Newfoundland Power? What

is the process established (inaudible) guarantee that each and every year the

Board will go through to ensure that utilities in the Province, or the utility,

in this case, in order that the decisions you make and that they are adhering to

the decisions of the Board on the one hand and complying with (inaudible)

legislation governing all of it?

MR. VARDY: Every month the Board receives a report

from Newfoundland Power. With the regulation of Newfoundland Hydro under the new

Electrical Power Control Act, Hydro is now moving into the same position where

they are subject to the same kind of reporting.

So there is a reporting arrangement now whereby every

month Newfoundland Power provides a report to the Board on operations, and

basically that gives us an opportunity to compare where they are with where they

should be with regard to the orders of the Board. Every quarter, we receive a

report on their capital budget, their compliance with their capital budget. So

we have a monthly process that is in place, and we have a quarterly process

where we review their capital budget, and we have an annual process. That annual

process is a review by our financial consultant.

In terms of if the Board finds that the company is not

in compliance, then there is a penalty

section in the Act that the Board can

invoke. Also, the Board can call a hearing and basically hear the arguments from

the company as to why they are not in compliance. There is quite an extensive

mechanism of review that is ongoing. As I said, it is not just when there is a

rate hearing. There is an ongoing review process. Many people tend to think the

Board is sort of quiescent between hearings, but in point of fact, we are always

very active.

Just to give you an example, we have established

policies with regard to something called contributions in aid of construction.

Those contributions in aid of construction relate to the requirement where

people who are living at some distance from a transmission line, where there is

no requirement for Newfoundland Power to pick up 100 per cent of the cost, and

where there is a share required from the customer who wishes to be electrically

interconnected, there is a set of policies there, and the Board has established

a process to review compliance with those contributions in aid of construction.

Because we have encountered some problems, some people who have complained about

not being treated consistently with other people, and so there we are involved

in a very detailed compliance audit. That is going on right now and there will

be a hearing to deal with that, just on that one issue.

Ms Galway may have other comments to make on this. I

do not know if there is anything she would like to add to what I have said.

MS GALWAY: In addition to what Chairman Vardy has

mentioned so far, we also have a clerk of the Board who monitors on a daily

basis, as well as annually and monthly and so on, the various required filings

by the company. Because there are various dates throughout the year when they

have filing that they have to provide to the Board on compliance issues. In the

terms of engagement and in the call for proposals, even, for the financial

consultants, we specify that their annual review must check for compliance of

previous Board orders, and we verify that through our consultants and review

that in detail.

The clerk of the Board is very diligent in trying to

maintain all filings and all compliance documentation of the utilities or the

insurance companies, so that is actually one of that position's main functions.

CHAIR: You say that you receive a monthly report.

I am assuming that to be both in a written format and may involve from time to

time - you can clarify it certainly - monthly meetings with the utility. Does it

involve that, or what exactly does it involve?

MS GALWAY: We did have a monthly reporting format

as long as we were not engaged in any public hearing at that time. As you were

aware, during the Summer there were quite a few comments on whether or not it is

appropriate for the Board to meet with the utility, so we are re-examining that

issue before we reconvene after the eventual order comes out on Newfoundland

Power, and we are intending to make that a more transparent process so that

while the nature of the meetings may not change much, the process itself will be

more open to the general public should they wish to attend.

CHAIR: I would say it is hard to get a monthly

report if you are not going to meet with somebody every (inaudible). That is the

important thing. But my question, really, (inaudible) is does it involve a

written report that the utility or the insurance company, whatever the case may

be, are required by the PUB to provide a monthly report so the PUB can have a

look at the (inaudible) and a look at where they are in terms of supplies,

number one, how they are doing, number two, because, on the other hand, you have

(inaudible) the PUB has a responsibility to ensure that the utility is operating

in an efficient manner for the protection all of us as well. Can you provide any

more information on that?

MS GALWAY: There is a standard format for

reporting, and it includes financial information of the utility so that you are

aware of the number of customers, the actual billings, the annualized sales

figure because of weather adjustments that are entered into it, the various rate

stabilization plans, their operating expenses, their income tax provisions,

their returns are measured. In addition to that, there are other reports such as

- it is hard to get out an acronym, so... There are statistics related to the

reliability of the system, and they are provided as well on a monthly basis so

that you can track by Newfoundland Power's regions what their number of power

interruptions have been, the duration of those power interruptions in comparison

with this time last year on a monthly basis, on twelve months to date and in

comparison to a five-year average with the '94 blackout and without the '94

blackout. So quite a bit of information is provided.

In addition to that, they have to provide intercompany

transaction reports so that we can ensure that the amounts that are being billed

between the various subsidiaries and parent company are appropriately accounted

for. I am sure there are other reports that are just slipping my mind now but

that is a standard package that is provided to us each month.

CHAIR: Mr. Lush.

MR. LUSH: Mr. Vardy, your company recognizes you

are a very competent and diligent person. You do have a small staff though, a

very small staff for what is a big job (inaudible) in terms of technical

(inaudible). Are you telling us that you are totally happy with the compliance

procedures and that the Newfoundland people under the present structure are well

served with respect to the compliance procedures, that you are totally happy

with that particular component of the Board's job?

MR. VARDY: It is a very good question, Mr. Lush.

The Board does discharge its mandate. I believe we could more cost effectively

discharge our mandate if we had the technical staff in the Board in order to do

the things we need to do so that we do not have to rely as much on consultants.

We rely quite heavily on consultants and that is extremely expensive. That can

be well documented that if we were to do what we - I am not saying that

everything that we put out to be done by consultants should be done internally

but I would suggest to you that more than is currently being done should be done

in-house.

I think it would be extremely important for us to have

an engineer on staff. We do not have an engineer on staff. We have an electrical

engineer, probably for the first time in the history of the Board - I may be

corrected on that - we have Dr. Wally Reid as an electrical engineer. He was a

part-time member of the Board and he contributes immeasurably. But he has other

commitments and is not always available. It would be extremely useful if the

Board had an electrical engineer available to it. I would like to link it back

to the last question as well because during the hearing, there was some

discussion about these monthly meetings.

The Board has had monthly meetings with the utility

because under

section 16 of the Act, there is a general supervision requirement

and because of the fact that the Board did not have the staff to do it, the

Board itself had monthly meetings with the utility and I am thinking of Hydro

and Newfoundland Power in particular.

In other jurisdictions, much of that monthly liaison

takes place at the staff level and because we do not have the staff, we cannot

do it at that level, so that puts us in a position where, as the Vice-Chair said

a moment ago, we have to come up with a more transparent approach because we do

not have the option of basically asking the staff to conduct the ongoing

liaison.

One of the things in the Auditor General's report that

is well documented is, I think she has pointed out that the Board is very short

of the kind of technical expertise that we need in order to do our job. While we

do our job and we use outside consultants, we believe that we would be able to

be more efficient and more effective if we had a small core of technical people

who would be able to help the Board on a number of things, on a number of its

assignments.

MR. LUSH: (Inaudible) utilities. Why do they not

have it?

MR. VARDY: Because there is a requirement under

the Act that the Board submit a budget in December of every year; I cannot speak

for any of my predecessors but I have sought approval which has not been

forthcoming for staffing through that process, through the

section 15.(1)

process, so that is the short answer.

CHAIR: Okay. I guess we will conclude for today

and begin again at nine o'clock tomorrow morning (inaudible). I would like

tomorrow, if possible, for the Board and its (inaudible) twenty minutes

tomorrow, to, I guess, provide us with what you feel might be some of the tools

that we presently do not have that we really should have, that would enable the

Board to (inaudible) in, I guess, a more appropriate manner. (Inaudible).

MR. VARDY: We welcome that opportunity.

CHAIR: Okay. With that, the meeting is adjourned.

Document details

Collection	Newfoundland and Labrador — Committees
Citation	1996-12-02
Type	committee
Volume / chapter	committees_standingcommittees_publicaccounts_ga43session1_1996-12-02_pac_.htm
Language	en
Format	html
Source	PROVINCIAL
Identifier	bd2957deb7e628df5729d8960a7b1f1ba0e63a9c

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