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.

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?

WITNESS: Port Blandford to English Harbour East.

MR. VARDY: English Harbour East, and south I 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.

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.