ASSOCIATION OF MUNICIPALITIES OF ONTARIO and THE CITY OF TORONTO. - and - STEWARDSHIP ONTARIO. AFFIDAVIT OF GUY PERRY (sworn April 22, 2014)

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1 BETWEEN: ASSOCIATION OF MUNICIPALITIES OF ONTARIO and THE CITY OF TORONTO Applicants - and - STEWARDSHIP ONTARIO AFFIDAVIT OF GUY PERRY (sworn April 22, 2014) Respondent SAY: I, GUY PERRY, of the City of Toronto, in the Province of Ontario, MAKE OATH AND A. INTRODUCTION 1. I have worked in the waste diversion and recycling industry for more than 20 years in both the public and private sectors. 2. From 1993 to 2002, 1 was a Senior Consultant with the firm Resource Integration Systems ( "RIS"), one of the foremost consultancies in North America specializing in waste diversion. From January 2002 to October 2003, 1 was a Senior Engineer in the Solid Waste Management Services Division of the City of Toronto. From October 2003 to April 2009, 1 was Manager and subsequently Director of Technical Services with Corporations Supporting Recycling ("CSR") and, in this capacity, was extensively involved in implementing the Blue Box Program on behalf of Stewardship Ontario. From May 2009 to October 2012, 1 was part owner and a Director of and Senior Consultant with StewardEdge, which was formed by the senior management team of CSR after CSR ceased operations. In November 2012, 1 established Guy Perry and Associates, a consultancy, and continued to provide consulting services relating to waste management planning and product stewardship, including to Stewardship Ontario. A copy of my Curriculum Vitae can be found at Tab 41 of the Respondent's Document Book. 3. Based on my experience, which is explained in more detail in the next section of this Affidavit, I have personal knowledge of the matters to which I hereinafter depose, except where

2 N041 I have obtained information from others. In such cases, I identify the source of the information and believe the information I am conveying to be true. B. PERSONAL EXPERIENCE IN THE WASTE DIVERSION AND RECYCLING INDUSTRY 4. RIS, the consulting firm that I joined in 1993, was'an early participant in the development of several blue box programs in Ontario and their replication elsewhere. While with RIS (and its successor, Enviros-RIS), I was involved in waste diversion planning projects for municipal authorities in Canada and the United Kingdom, and to provincial and federal governments. As well, I provided technical support to industry associations, funding organizations and compliance schemes involved in printed paper and packaging recovery, both in Canada and in Europe. 5. White at RIS, I provided regular technical support to Ontario Multi-Material Recycling Incorporated ("OMMRI"). OMMRI was formed in 1986 by Ontario soft drink manufacturers, distributors, and suppliers and contributed funding to municipal blue box operations on a voluntary basis. In 1996, OMMRI expanded its membership and became known as CSR. During my involvement in the 1990s, OMMRI and CSR worked with and provided funding to municipalities for projects focused on improving the efficiency and effectiveness of their recycling programs. I was involved in many demonstration projects, benchmarking studies, the design and delivery of training courses and cost and financial modelling. 6. For example, in the mid-1990s, I assisted in a Cost Reductions Opportunities Study (the "CRO Study"). This study, which was completed over the course of a year, was a collaborative process involving municipalities and was one of the earliest efforts to develop benchmarks for municipal recycling operations. With data compiled from participating municipalities, we identified potential cost saving initiatives and we developed key performance indicators. These were measures that could be monitored, such as (i) cost per tonne, (ii) cost per household, (iii) number of stops, per hour for collection vehicles, (iv) number of tonnes per hour on processing lines, and (v) revenue achieved for selling specific recycled materials, intended to allow municipalities to track and identify potential areas to improve their performance. The resulting benchmarks and case studies subsequently became the basis of a province-wide training program for municipal staff developed and delivered by RIS on behalf of CSR. 7. Subsequently, I was involved in the development and implementation of other cost monitoring and data collection protocols related to municipal recycling operations, including those for printed paper and packaging stewardship programs.

3 -3-8. Another initiative in which I was involved while at RIS on behalf of CSR and other industry associations was known as the Canadian Industry Packaging Stewardship Initiative ("CIPSI"). I provided analytical and modelling support. CIPSI was an initiative whereby industry would provide funding to municipalities to cover a portion of the costs incurred in relation to their respective blue box programs based on an efficiency standard. While CIPSI gained significant support, ultimately there was insufficient support for the initiative with the result that broader industry funding for blue box recycling programs was delayed for several years until the enactment of the Waste Diversion Act, 2002, S.O. 2002, c. 6 (the "Waste Diversion Act'). 9. In October 2003, 1 joined CSR as Manager and, later, Director, Technical Services. At that time, CSR had been engaged by Stewardship Ontario, the designated Industry Funding Organization for the new, but yet to be approved, Blue Box Program Plan, to provide the secretariat and the staff to support the implementation of the Blue Box Program Plan. 10. At CSR, my initial primary functions were to: take the lead in the technical review and analysis of costs for recycling and diversion of printed paper and packaging and other product categories (e.g., household special waste and waste electronics); act as the primary liaison between CSR and Stewardship Ontario and municipalities in completing those reviews; and, take the lead on collecting and compiling data and modelling the system costs for the purpose of developing program plans and eventually determining the Stewards' fees became one of the five Stewardship Ontario representatives on the Municipal Industry Program Committee ( "MIPC") of Waste Diversion Ontario ("WDO"). I also supported the chair of the Stewardship Ontario Projects Committee, which, on behalf of the Stewardship Ontario Board, oversaw the implementation of the Effectiveness and Efficiency Fund ( "E&E Fund"), which had been established to fund selected municipal projects that would enhance the effectiveness and efficiency of the Blue Box Program, and the development and implementation of initiatives designed to strengthen markets for recovered blue box materials. Between late 2008 and 2011, 1 also represented Stewardship Ontario on the governing committee of the Continuous Improvement Fund ("CIF"), which replaced the E&E Fund in contributed to MIPC in a variety of ways including the definition, compilation and verification of data relating to municipal blue box programs through the WDO Datacall, the annual survey administered by WDO, and the development and implementation of the Cost Containment Plan. In particular, I was directly involved in the process of determining the total

4 -4- net costs incurred by the municipalities as a result of the program pursuant to subsection 25(5) of the Waste Diversion Act in every year from 2004 through 2010 (i.e., program years 2005 through 2011). 13. In or about 2007, Stewardship Ontario hired a Chief Executive Officer and subsequently started the process of hiring additional in-house staff to transition day-to-day operations from CSR, a consultancy, to an in-house team. Three individuals under my supervision and I were among the last members of CSR (which by then was Steward Edge) to provide services to Stewardship Ontario relating to the Blue Box Program once the entire operation was brought inhouse. Nonetheless, I continued to provide consulting services to Stewardship Ontario in relation to the annual calculation of the total net costs incurred by the municipalities as a result of the program until 2010 (i.e., the 2011 Stewards fees), and continued to serve on MIPC and the governing committee of the CIF until the end of Mustan Lalani, who reported to me and worked under my supervision, participated on MIPC from 2008 (initially as an alternate) through the beginning of As such, Mr. Lalani was involved in the negotiations relating to the annual calculation for those years, reporting to me throughout. In 2011, his involvement in the process was more limited but he assisted Stewardship Ontario staff in the preparation for negotiations in 2011 and again in From late 2011 and through early July 2012, after Steward Edge ceased to provide services to Stewardship Ontario, I managed a joint Steward Edge/Resource Recycling System ("RRS") Study of the Optimization of the Blue Box Processing System in Ontario commissioned by MIPC, as described further below. This was a $400, project with the objective to produce a model that would, in theory, reflect a cost-effective, efficient and successful recovery system for packaging and printed paper in Ontario, and inform decision-making toward an optimized provincial system for the transfer, hauling and sorting of Blue Box recyclables for market. C. THE EARLY YEARS OF THE BLUE Box PROGRAM & MIPC 16. Although the Blue Box Program Plan had been submitted to the Minister of the Environment (the "Minister") in February 2003, when I joined CSR eight months later, in October 2003, the plan had still not been approved by the Minister, the Ontario Progressive Conservative government had been defeated by the Liberal Party in the provincial election, a new Minister was about to fill the role and there was significant lobbying by Stewards

5 -5- surrounding the Blue Box Program Plan that had been submitted. Stewards were concerned about the significant discrepancy in the estimated costs and the data that was now being reported through the Datacall. Some were lobbying for the plan not to be approved, others to ensure that steps were taken to ensure that the municipalities were not given a "blank cheque" and that steps were taken to ensure that the process to determine their 50% share of the total net costs incurred by the municipalities as a result of the program specifically addressed this concern. 17. Upon joining CSR, I became involved with MIPC's work on the Datacall process which was already underway including, in particular, reviewing the data collected in 2003 so as to prepare for the 2004 Stewards' fee setting process. Right from the start, we were tasked with developing the processes and methodologies that would be needed and used annually to determine the total net costs incurred by those municipalities as a result of the program. We needed accurate data, and we needed the process to get the accurate data was the first year that municipalities had been asked to report financial data in addition to tonnage data, which meant that there was no prior experience and no prior data to use for comparative purposes. There were significant differences between the reported data and the estimates that had been previously provided and the resulting projections that had been included in the Blue Box Program Plan, causing concerns among Stewards about the reliability of the data that had been and was being reported. These concerns were shared by the municipalities' representatives and WDO's Executive Director and MIPC Chair, Glenda Gies. Accordingly, MIPC decided that it was necessary to retain an independent consulting firm, C.N. Watson & Associates Ltd., to assist. 19. C.N. Watson & Associates Ltd. conducted an analysis, which included verification reviews and audits of selected programs, and submitted a report in the early part of This report stated that there had been significant inaccuracies in the reporting of data by municipalities. One contributing factor was the imprecision and lack of clarity in the questions that were posed to the municipalities in the Datacall. Another contributing factor was that the municipalities tracked the data and determined which data to report inconsistently. For example, only data that related to municipal residential recycling programs was meant to be reported, yet some municipalities reported data that related to their commercial recycling programs as well. Obtaining consistent, reliable data was proving to be a challenge. We were trying to develop an information gathering tool to tap into a recycling system that had evolved

6 -6- without significant coordination in Ontario over decades and which was being operated in a variety of ways by a diverse group of municipalities. 20. Todd Pepper, on behalf of the municipalities, and I, on behalf of Stewardship Ontario, reviewed the recommendations from the verification process and the report from C.N. Watson & Associates Ltd. and, after MIPC approval, incorporated a significant number of adjustments into the database. 21. Recommendations from C.N. Watson & Associates Ltd. to make reporting more accurate were incorporated into the 2004 Datacall forms which were released in April In particular, C.N. Watson and MIPC had identified problems associated with the identification of costs specific to residential Blue Box recycling, reporting of capital costs, administration costs, costs associated with marketing of materials and revenue. 22. MIPC also developed, in collaboration with staff from WDO, a verification protocol, which included using prior year data to flag year-over-year discrepancies, a process for WDO followup with municipal staff and an audit process to be undertaken by third parties. The Datacall Team, which included representatives of the municipalities and Stewardship Ontario, together with WDO staff, would identify the municipalities that would be subject to financial audits and/or program reviews and then an RFP was issued for the audits to be undertaken by a third party. In later years, the list of municipalities to be audited was proposed by WDO staff but reviewed and approved by MIPC. 23. In subsequent years, MIPC and WDO made significant efforts to enhance the Datacall to improve the accuracy of reporting and the handling of the data to ensure that the information available for the calculation of total net cost was as accurate and reliable as possible. This included extensive outreach to municipal staff completing the Datacall and the vigilant review of the data for aberrations and selective auditing. Recommendations for changes to the Datacall survey, the guidance provided to municipalities, the protocols for the review, verification and adjustment of the reported data and the methodology for calculating total net costs were always developed jointly by municipal and Stewardship Ontario representatives, often after initial consideration by those on the Datacall Teams; and were always approved by MIPC as a whole. It was a very collaborative effort.

7 Furthermore, when we, the members of MIPC, lacked the necessary skills, knowledge, expertise or resources, or where we needed assistance in reaching consensus and agreement, we would turn to third party expertise for assistance. Early examples include: (a) the Ministry of Municipal Affairs and Housing ("MMAH") and the Ontario Benchmarking Initiative ( "OMBI") were consulted in 2004 for guidance both on requesting information on fixed assets and on historic interest rates; (b) C.N. Watson & Associates Ltd. was engaged in or about February/March 2005 to recommend the appropriate method for determining the interest paid on municipal capital; and (c) MacViro Consultants Inc. and WFM Williams Financial Management were engaged in December of 2004 to review and make recommendations and provide guidance regarding the methodology for the allocation of costs in the WDO Datacall. 25. On each occasion, this third party advice and input was reviewed and discussed by MIPC and appropriate decisions taken. 26. Notwithstanding the vested interests of the municipalities and Stewards, it was my experience that MIPC's decisions were, at the end of the day, based on principle after a reasonable analysis and investigation of the issue. Furthermore, whenever members of MIPC, whether they were municipal representatives or Steward representatives, requested information or assistance, that information or assistance was provided to the extent possible. Whenever there was a view that third parry expertise was required, third parry expertise was obtained. Whenever a representative wished to consult with his or her constituency, that opportunity was afforded. We all knew that for this system to work, we needed to work together and that decisions needed to be based on principle, practicality and compromise. 27. For example, in paragraphs 79 and 80 of Derek Stephenson's Affidavit, he has referred to concessions made in relation to the use of three-year average revenue when calculating the total net costs incurred by the municipalities as a result of the program. The change to the calculation methodology that he is referring to was necessary to ensure the common and jointly- desired objective of modulating the effect of fluctuations in commodity prices would be correct. The various options were discussed by the representatives of the Datacall Team and presented to MIPC by Todd Pepper, a municipal representative on MIPC. In the end, it is my recollection and belief that the municipal representatives agreed to make the changes described in Mr. Stephenson's Affidavit based on principle and the options that were presented. I did not have

8 -8- the impression that the effects of these concessions were not always apparent to the municipal representatives on MIPC also wish to point out that that three-year averaging over time does not favour Stewards. Nor does it favour municipalities. In years when prices increase, the 3-year average revenue is lower than reported, favouring municipalities in the net cost calculation that year; but in years when prices decline, the 3-year revenue is higher than reported, favouring Stewards. The effect would have been similar relating to tonnes recovered had the formula not been changed. In fact, the effect of these 3-year average revenue calculations for the data between 2004 and 2012, using the summary of cost data submitted by Mr. Scott in Appendix 7 to his affidavit, is a net difference of about $26 million favouring municipalities. D. THE COST CONTAINMENT PLAN 29. When the Minister approved the Blue Box Program Plan, on or about December 22, 2003, she also directed WDO to develop a Cost Containment Plan. Her letter stated: The new 2004 [Steward] fees schedule should include 2 new actions. First, a costcontainment strategy that will ensure municipal blue box program costs are properly managed The appendix to the letter listed seven "Detailed Program Requirements," including: Specific cost containment principles for municipalities and Stewards to follow. Policies and practices that will ensure compliance with cost containment principles. Policies and practices to encourage effectiveness and efficiency for municipal Blue Box systems. 31. Although work had already started months before on cost containment and cost effectiveness principles, MIPC began work on the official Cost Containment Plan in January Initially, Discussion Paper # 2, which is at Tab 31 of the Applicants' Document Book, was developed for the purpose of consultation. Along with other MIPC members, both Stewardship Ontario and municipal representatives, I assisted in drafting this background document. In completing Discussion Paper #2, we drew on the work that had previously been done by the WDO Board's Cost Effectiveness Committee. 32. Discussion Paper #2 set out the principles that had been developed by the Cost Effectiveness Committee, including Principles #4, 5, and 6 (at p. 4): 4. Cost bands must reflect:

9 -9- i. municipal diversity; ii. best practices; iii. incentives to move municipal program costs into bands; iv. opportunities over time to reduce costs and fit within bands. 5. Gap between BBPP cost projections and real municipal cost numbers must be bridged over life of the plan. 6. Cost increases above baseline in years 2 to 5 must be related to increases in tonnage and/or cost of living or must be supported by documentation. 33. Discussion Paper #2 also set out policies and practices for activity areas that had been identified by the Cost Effectiveness Committee, including (at p. 8): 9. Cost Bands to Identify Extraordinary Blue Box Costs Analysis of costs by groups of municipalities reflecting municipal diversity combined with incentives to move programs from the lower portion of the group into acceptable bands and identify opportunities over time to reduce costs and fit within bands. 34. A series of four consultations was held around the province as well as a meeting of Steward representatives. 35. MIPC subsequently completed the Cost Containment Plan, again with various Stewardship Ontario and municipal representatives contributing to the drafting of the report. We all were able to bring our unique knowledge, experience and skill sets to the process. Discussions at MIPC highlighted two different aspects of the Cost Containment Plan: (a) (b) measures which serve to incentivize municipal programs to reduce costs and provide information on existing performance, and information and funding support to implement policies, practices and technologies to become more efficient, and provisions for efficient and best practice costs to be reflected in the calculation of the net cost which would be used to calculate the Stewards' financial obligation. 36. This is reflected in minutes from the May 11, 2004 MIPC meeting and these concepts were incorporated into the Cost Containment Plan that was agreed to by the members of MIPC, submitted to the WDO for ratification and eventually presented to the Minister. The July 12, 2004 Cost Containment Plan specifically required that "cost bands" be utilized to determine net program costs and funding and provided as follows (at p. 18):

10 -10- Cost bands will be: 1. defined to reflect municipal diversity and best practices; 2. utilized to analyze program costs to identify those that are higher than best practice costs; 3. utilized to direct funding to improve municipal performance through a new fund; and 4. subsequently utilized to determine net program costs and funding. [emphasis added] 37. It was my impression at the time, and it is my belief now, that the members of MIPC understood that cost bands would have to be used as part of whatever calculation methodology was developed to determine net costs incurred by municipalities as a result of the program, since the WDO Board had tasked us with that requirement also believe that municipalities did not like the outcome and would continue to drive the calculation towards an outcome that was closer or equal to the total net costs based on the Datacall data without the use of cost bands. But the bottom line is that we all knew that the Cost Containment Plan required us to develop and use a cost bands approach. We all knew that the challenge for us would be developing a methodology we could all live with to achieve what the Cost Containment Plan required. 39. At around the same time as the Cost Containment Plan was completed and submitted to WDO, the data that had been submitted as part of the 2004 Datacall had been verified. Once again, significant errors were identified during the verification process. This further complicated Steward concerns and our confidence in the data. As the cost data from the 2004 Datacall arrived, the Financial Datacall Team, which included me, began to analyse the results of the 2003 data to try to understand what factors were driving municipal costs, to discern if there were any trends in the data, and to look for new ways of verifying the data. 40. For example, we were trying to identify whether program characteristics such as the frequency of collection, the method of set-out, the sorting of materials in one or more streams or the number of different materials collected affected program costs in a predictable way. Once again, this was a collaborative process, and MIPC was kept informed of the analysis.

11 At the end of 2004 and into early 2005, it had become apparent that analysing the data collected through the 2003 and 2004 Datacalls would be a very challenging exercise. This was because the data reported by the various municipalities were not consistently comparable. Firstly, the structure of municipal recycling programs differed, which required any analysis to control for many different elements. Most importantly, though, although a large volume of data had been collected, municipalities often had different contractual arrangements and therefore reported costs in different formats, making it difficult to control for different factors and to see through the data clearly. In addition, it was understood and recognized that errors in reporting likely limited the accuracy of the data despite the verification process. 42. At the end of December 2004, our task was made harder. The Minister approved the Cost Containment Plan but also requested an expedited schedule that called for the implementation of reasonable cost bands by 2006 and best practices cost bands by We now had to analyse the data, account for its limitations and devise principles and methodologies for calculating net costs in a shorter time frame. A revised Cost Containment Plan was submitted to the Minister on January 31, 2005, a copy of which is found at Tab 35 of the Applicants' Document Book. This revised Cost Containment Plan provided for efforts to identify municipal programs that incurred higher than reasonable costs and initiatives to contain their future costs and calculations of net cost that reflected those potential improvements notwithstanding reported costs. In this regard, the revised Cost Containment Plan provided (at p. 17): Cost bands will be: 1. defined to reflect municipal diversity and `reasonable costs' in 2006 and best Practices by 2008; 2. utilized to analyze program costs to identify those that are higher than best practice costs; and 3. utilized to determine net program costs and funding. [emphasis added] 43. Once again, I believe the significance of point 3 was not lost on the members of MIPC, who all played a role in the drafting of the revised plan. Costs bands would be utilized as part of the methodology developed to calculate the total net costs incurred by those municipalities as a result of the program. There was no ambiguity. The challenge was, and remains, how are cost bands to be defined, adjusted and utilized to determine net program costs.

12 In light of this expedited schedule and the analytical challenges that WDO and MIPC had encountered with the cost data from the 2003 and 2004 Datacalls, MIPC decided to retain the University of Toronto's Department of Statistical Sciences to conduct an analysis using statistical tools to help us to determine both reasonable cost bands and best practice cost bands. This work was overseen by Andy Campbell, from among the municipal representatives, and me, from among the Steward representatives, as part of an SO/AMO Cost Containment Team. The SO/AMO Cost Containment Team reported to MIPC. 45. The Department of Statistical Sciences worked initially with the 2003 data and subsequently, when it became available, the 2004 data, but the results were inconclusive. Given that there was a lack of consistency in the way that the data was reported, no strong correlations could be identified between program design characteristics and either the cost or recovery rates. The variability of the data could not be explained, and the department could only provide general, high-level conclusions that were already known to MIPC: for example, that diversion generally increased with the number of materials collected, and that more money spent on public promotion and education ( "P&E") tends to increase diversion rates up to a point. The Department was not able to provide more specific explanations of the cost drivers. 46. In early 2005, we turned to the Ontario Centre for Municipal Best Practices ( "OCMBP"), which was created by MMAH and managed by AMO, to determine whether there was value in collaborating. Unfortunately, this initiative did not really help us. E. THE CALCULATION OF REASONABLE COST BANDS FOR THE 2006 AND 2007 STEWARD OBLIGATIONS 47. As the work in analysing the data continued in the spring of 2005, it was necessary for MIPC to agree on a method of implementing the Minister's direction that "reasonable cost bands" be in place and "utilized to determine net program costs" for the 2006 fees. An agreement on how to implement reasonable cost bands and to utilize them to determine the net program costs was reached at a MIPC retreat in early June At a June 2005 MIPC retreat, both the municipal representatives and the Stewardship Ontario representatives acknowledged, understood and agreed that reasonable cost bands were to be defined for the purpose of determining the total net costs incurred by the municipalities as a result of the program in 2006 and 2007, and that the use of "reasonable cost bands" would result in a total net cost for each year that was less than what would have been

13 -13- calculated without the use of cost bands. The question was how the net costs were to be determined using "reasonable cost bands" in a manner that would be clear, logical, justifiable, and replicable. 49. Prior to this retreat, based on suggestions made earlier by Mr. Pepper to define effectiveness and efficiency during drafting of the cost containment Discussion Paper #2 and in consultations regarding possible improvements to the Municipal Funding and Allocation Model ("MFAM"ewe employed a concept known as the Effectiveness and Efficiency Factor (the "E&E Factor"). The E&E Factor combines efficiency (i.e., net cost per tonne) and effectiveness (i.e., diversion percentage) in order to measure overall performance. The mathematical calculation is as follows: E & E Factor - Net Cost / Tonne ($/ tonne) Recovery 50. Within groupings of similar programs, better performing programs tend to have lower E&E Factors, given that they have a higher efficiency (i.e., lower cost) in the numerator and a higher effectiveness (i.e., a higher percentage recovery) in the denominator. The calculation of percentage recovery is as follows: percentage recovery equals total tonnes of blue box material marketed divided by total tonnes of blue box material generated. The E&E Factors for each municipality were calculated using: (a) (b) (c) the verified net cost per tonne as reported by each municipality in the WDO Datacall and verified by the WDO; the total tonnes marketed as reported by each municipality in the WDO Datacall and verified by the WDO; and estimates of generation of all residential blue box material within each municipality based on the data compiled from numerous composition studies conducted in municipalities around Ontario and taking into account the types of households (single or multi-family) in each municipality. 51. During the retreat, MIPC agreed on the definition of reasonable cost bands, which were based on a division of the province into eight municipal groupings (i.e., large urban, urban regional, small urban, rural regional, rural collection south, rural depot south, rural collection north, and rural depot north). 52. First, for each grouping, the E&E Factors for all municipalities were plotted on a graph showing a distribution of the data for program cost efficiency and effectiveness across the grouping.

14 53. MIPC then determined, for each grouping, a Reasonable Cost E&E Factor, which was calculated as the mean plus one standard deviation of the E&E Factors for the 75% better performing programs. The Reasonable Cost E&E Factor for each group was used to define an upper limit on the E&E Factors of municipal programs. 54. The net cost of municipal programs with E&E Factors at or below the Reasonable Cost E&E Factor for their respective grouping were included in the calculation of the total net costs incurred by the municipalities as a result of the program. The cost of municipal programs with E&E Factors above the Reasonable Cost E&E Factor of their respective grouping were adjusted to equal the cost corresponding to the number of tonnes recovered given the Reasonable Cost E&E Factor, and these adjusted costs also were included in the total net costs incurred by the municipalities as a result of the program. 55. By way of illustration, the graph below shows how the Reasonable Cost E&E Factor was applied with respect to one of the municipal groupings (small urban): m 0 v d m 00 0 m c c 0 err `o ro LL W w Profile of Net E&E Factors for Small Urban Municipal Blue Box Programs apt ~Oy~CC~, q, 'e ~~a 0 ~~ ~ 5 ~~,c ~ ~ cf~~ 56. It was recognized that inaccuracies remained in the data reported, the estimates of generation and, as a consequence, in the resulting Reasonable Cost E&E Factors. This was addressed using a sample of three quarters of the programs for 2006 (two thirds for 2007) and setting the Reasonable Cost E&E Factor at one standard deviation above the mean. It was understood that over time, with better data, and with the effects of other cost containment initiatives, much of the variability in cost and performance likely would decrease. However, it was also recognized that variability likely would remain for two reasons: i) -factors beyond the control of the municipalities, and ii) decisions made by the municipalities regarding the design and operation of their recycling programs, both of which would result in differences in cost and performance. Further work would be required to understand these differences.

15 The municipal representatives on MIPC accepted the definition of reasonable cost bands in this manner, and MIPC agreed to a $10 million reasonable cost band reduction for the 2006 Steward Obligation and a $14 million reasonable cost band reduction for the 2007 Steward Obligation. This resulted in a $24 million reduction in total net costs over two years and a corresponding impact of $12 million on the Steward Obligation. The chart below shows the impact of the reasonable cost band on the 2006 Steward Obligation: Funding Reduction Due to Reasonable Cost Band $30 c 0 E w c rc $25 $20 $15 $10 $5 anding,.d funding $0 Large Urban Small Rural Rural Rural Rural Rural Urban Regional Urban Regional Colledion Depot collection Depot South South North North Municipal Cost Band Grouping F. G'S~ WiG's BEST PRACTICES ROJECT 58. In early 2005, MIPC also initiated its work on defining best practices and best practice cost bands. This was a significant undertaking without precedent in the recycling industry. MIPC and the SO/AMO Cost Containment Team ramped up its work in or about June 2005, following the above-mentioned MIPC retreat at which the definition of reasonable cost bands had been reached. In light of the size of the undertaking, the timeframe was tight: we needed to have a definition of best practice costs by about June 2007 for the purpose of determining the 2008 Steward Obligation in accordance with the Minister's direction and the approved Cost Containment Plan. 59. In addition to its work with the University of Toronto's Department of Statistical Sciences, MIPC spearheaded other efforts in 2006 to define best practices costs: (a) (b) MIPC consulted with the OCMBP and the Ontario Municipal Benchmarking Initiative ( OKIW), which is a collaboration involving various Ontario municipalities that looks at ways to measure, share, and compare performance and operational practices. CSR, on behalf of Stewardship Ontario, consulted some of its contacts in Europe and Australia regarding initiatives to define best practices in municipal recycling.

16 -16- (c) (d) MIPC engaged Queen's University to perform a literature review to determine if any guidance could be found in transportation/logistics industries and industries requiring material handling technologies to assist with the definition of best practices costs. MIPC undertook a series of consultations with municipalities in an effort to define best practices and their impacts. For example, Andy Campbell and I presented at the Ontario Recycler Workshop ("ORW') on June 1, The ORW Workshop is a regular joint initiative by WDO, SO, and AMO attended primarily by municipal staff, continuing to this day under the CIF. A copy of our slide presentation can be found at Tab 166 of the Applicants' Document Book. Four additional sessions were held through the Association of Municipal Recycling Coordinators ( "AMRC"). 60. Despite these efforts, MIPC still had not identified a workable approach to defining best practice costs by June Developing a workable best practices model was more than what one person or one committee could accomplish. We needed help. We needed experts who were independent. Accordingly, at a retreat that month, MIPC decided to initiate a process to retain independent, third-party consultants to undertake a comprehensive best practices project (the "Best Practices Project"). The Best Practices Project was an opportunity to chart new territory in the recycling industry and was expected to be precedent-setting on an international level was one of seven people on the steering committee, comprised of two municipal representatives (Geoff Rathbone and Andy Campbell), three Stewardship Ontario representatives (Derek Stephenson, Geoff Love and me) and Glenda Gies as chair of MIPC. Nigel Guilford was retained, through a competitive selection process, to support MIPC and the steering committee as the project coordinator. As this was completed first, Mr. Guilford also participated in the selection process to engage the project consulting team. This project, which we expected to cost up to $2.5 million, was funded by the E&E Fund. 62. The consultant selection process was intended to identify a consulting team that would produce top-quality, state-of-the-art work, and it was highly competitive. On or about July 27, 2006, a "Request for Expressions of Interest," a copy of which is attached at Tab 37 of the Applicants' Document Book, was issued. On the same date, a "Request for Proposal for a Senior Project Coordinator," a copy of which can be found at Tab 38 of the Applicants' Document Book, was also issued. MIPC was the official author of these two.documents, the preparation of which was my responsibility. These two documents were a collaborative exercise that incorporated input from MIPC. The project was advertised broadly, including through

17 17- CSR's network in Europe and it attracted teams that included companies and experts from across Canada, the United States and Europe. 63. On or about August 22, 2006, a "Request for Proposals to Undertake Recycling Program Enhancement and Best Practices Assessment," a copy of which is found at Tab 41 of the Applicants' Document Book, was issued to four consulting teams that had been short-listed based upon the responses received in relation to the "Request for Expressions of Interest". I took the lead in drafting this document, which incorporated input from MIPC. 64. Ultimately, three of the consulting firms that submitted a proposal were interviewed in a rigorous selection process, which resulted in a consortium led by KPMG being selected as the consultant. 65. The broad framework for KPMG's engagement was explained in a "Project Charter," dated October 24, 2006, a copy of which can be found at Tab 49 of the Applicants' Document Book. The Project Charter set out (on p. 3) the following "Key Objective" for the Project: "To determine the Ontario net system best practice cost for determining Stewards' contribution." The Project Charter also set out the, following "Key Drivers" for the Project: Realization on the part of Stewardship Ontario, the Minister of the Environment, Stewards, and other stakeholders that the costs of Blue Box program are rising Municipalities want to maximize diversion Stewards are concerned that their share of the program cost goes toward some programs that are not considered to be best in class The Minister of the Environment has determined that Stewards' obligation will be confined to 50% of Best Practice costs by 2008 Net system cost for 2008 fee setting need to be determined, based on rigorous identification of true Best Practice costs Previous attempts to address this issue have not provided the information required to define best practice costs Municipalities expressed concerns that their unique characteristics have not been fully taken into account when previous classification and costing methods were employed 66. Further, the Project Charter contained the following working definition of best practices:

18 -18- Best Practices are defined as waste system practices that affect Blue Box recycling programs and that result in the attainment of provincial and municipal Blue Box material diversion goals in the most cost-effective way possible. 67. The Project Charter was reviewed at MIPC's meeting on October 24, Notably, the October 24, 2006 minutes, a copy of which can be found at Tab 268 of the Applicants' Document Book, do not record any disagreement with the following Key Driver, "The Minister of the Environment has determined that Stewards' obligation will be confined to 50% of Best Practice costs by 2008," nor do I recall any disagreement being voiced. Given the significance of the Key Drivers and the fact that they were intended to summarize the perspectives of both the municipalities and Stewardship Ontario, they were reviewed in detail. The October 24, 2006 minutes also confirm that MIPC agreed to the Project Charter's working definition of best practices. 68. The Best Practices Project was extensive. It lasted almost one year and was completed at a cost of approximately $2 million, although, as I recall, the budget was $2.5 million. The project team included not only the members of the consortium; it also included recycling system experts seconded from municipalities, representing large, small, and mid-sized recycling programs across the Province. As part of its information-gathering process, the project team conducted a detailed review and site visits of some thirty-two municipal recycling programs that were carefully chosen based on a series of criteria. Throughout the Best Practices Project, KPMG provided regular updates about its work at MIPC's meetings. Questions were allowed and the questions were answered and everyone participated. This was an open, comprehensive, inclusive process. 69. Ultimately, in July 2007, KPMG finalized a two-volume report, 268 pages in total (the. XPMG Report"). Copies of these two volumes can be found at Tabs 53 and 54 of the Applicants' Document Book, respectively. Volume 1 of the KPMG Report identified "Fundamental Best Practices" that apply to all programs, as well as "Conditional Best Practices" that apply to programs with specific characteristics and under certain conditions. The KPMG Report included a Decision Tree to assist in identifying which Conditional Best Practices apply, based on three main factors in program variability: geography (north or south); size (small, medium, or large, as defined by annual tonnage); and household density (rural, suburban, and urban).

19 _ KPIVIG's field observations and data analysis. indicated-that individual best practices (for specific municipalities) :,could:not be'easiiy quantifed;because of program variability; different baselines:for measurement, and the combined effects -of employing: several practices'.at once., But KPMG's team observed that programs that employed a large number of best practices (as identified in Volume 1 of the Report) generally tend to exhibit better cost and diversion performance as quantified by the above-mentioned: E&E factor.. KPMG therefore developed a program-wide,cost model, which used model or analog programs covering each of the Municipal groups already. being.uged:by M.I.PCI for=the costs bands with one modification to' include: a ninth group (the:"kpmg Models): KPMG then extrapolated the data, to all programs according to a;sef:of criteria and rules. 71. Specifically, the KPMG Model calculated a":program-wide best practice.gross ;cost by: (a) (b). (e) (d) (e) selecting,an analog program representative of each municipal group.,based on. its performance metrics and confirming that best practices are employed,-, adjusting the data for each analog program to.account for any extenuating circumstances; adjusting the processing. capital cost of all those,programs that own material, recycling facilities With throughputs over 10,0.00 tonnesper year to reflect the full cost of sucha facility;. extrapolating the adjusted analog Program data to; all programs in the same group by multiplying theadjusted unit cost metrics: (cost/tonne and cost/ household) by volume -drivers (tonnes of mat erial' marketed and number-of. households); and, adjusting the cost in all programs for (i) P&E, (n) the number, cost, and amortization of blue boxes for storing; and setting `out recyclable$, and: (iii) traini ng of program staff and management;'by agreed values reflecting best: practices. 72 Stewardship ~Ontario supported the general approach that KPMG took in building the. model in.light of MI PC's and now KPMG's inability to identify the range of best practices and. the specific: impact on costs resulting from their implementation. Nonetheless; the KPMG: model Was also seen as a compromise in that it did not`fnclude certain key terms'that municipalities raised' as contributing to the variability jn costs; and, nor did it; include certain key terms reflecting: best.practice conditions that-stewardship Ontario had doped would be included. From Stewardship Ontario's., perspective in particular, the: processing costs, did not :adequately reflect the, potential for effects of municipal cooperation and optimization ofahe: processing; infrastructure or the implementation of the latest technology; and there was no. consideration of

20 -20- best marketing practices affecting revenue. In spite of these shortcomings, Stewardship Ontario believed that the model was a useful development. 73. As KPMG's Report was being finalized, Mr. Guilford, who (as noted above) was engaged by MIPC as the Project Co-ordinator, submitted his report to MIPC assessing whether the KPMG had met the objectives laid out in the RFP, Project Workplan and Project Charter. In his report, a copy of which is at Tab 52 of the Applicants' Document Book, Mr. Guilford states (at p. 4):... The methodology which they [KPMG] elected to use (a combination of the analogy and expert opinion methods) was dictated primarily by the quality of the data and, of the methods available, the only one which would produce a defensible result... The model developed was carefully constructed and tested and generated an estimate of the total net system cost under best practices. It cannot be used by individual municipalities to estimate the potential savings which might result from the adoption of one or more individual best practices. This does not invalidate the result... In summary, KPMG was unable to estimate the cost implications of the adoption of individual best practices; this objective was not met because it could not be met. KPMG did deliver a model which estimates the total net system cost under best practices; this objective was met. 74. KPMG included a section in Volume II of their Report to address how the model could be updated for use in future years. In that section, KPMG stated (at p. 24): However, as Best Practices are temporal in nature, eventual review of Net System Cost under Best Practices may be necessary. For this purpose, the team has developed a process for updating the cost model, including gathering data, normalizing and aggregating costs, and testing the validity of results. 75. The Report goes on to describe in detail the steps required to update the model within its current architecture. These covered, among other things, updating the data from the Datacall for cost, quantities, operational information and revenue; population changes; changes to interest rates; inflation; and changes to the parameters, such as the cost and lifespan of blue boxes; expenditures on training and on P&E; factors for calculating administration costs; and so on. In addition, it includes the selection of analog communities within each municipal grouping, and this could involve conducting site visits or financial audits to verify Best Practices Use. 76. The Best Practices Project, resulting in the two volumes of the KPMG Report, represented the first attempt to deal with the challenge of identifying best practice costs for an entire, diverse, jurisdiction something which had not be accomplished at the time anywhere '

21 -21- else and it allowed us to continue to meet the requirements of the Cost Containment Plan to use cost bands to determine net costs reflecting best practices. 77. As contemplated by KPMG, and as is described below, the values of the parameters and the assumptions have been updated by MIPC, with the input and the mutual agreement of MIPC. Each year, a Best Practices Committee or Working Group comprising representatives from the municipalities and Stewardship Ontario have made recommendations regarding the parameters and assumptions. 78. Moreover, as described below, in 2010, the model architecture was modified relating to the selection of analog communities and the application of their data and other best practice reference data to other communities within each municipal grouping. These developments too were based on the recommendations of the Best Practices Working Group and mutually agreed upon by the municipal and Stewardship Ontario representatives of MIPC. G. USE OF THE KPMG MODEL IN DETERMINING THE. STEWARD OBLIGATION was directly involved in the process of setting the 2008, 2009, 2010 and 2011 Steward Obligations. Although I was not directly involved in setting the 2012 or 2013 Steward Obligations, I also have knowledge with respect to the 2012 Steward Obligation because Mustan Lalani, who reported to me, assisted Stewardship Ontario to prepare for the processes and remained active on MIPC until early In this section of my Affidavit, I summarize how the Steward Obligations for 2008 through 2012 were determined. As described below, the KPMG Model or agreed upon variations to the KPMG Model were central to the process in each of those years. Revisions to the variable inputs were always approved by MIPC and subsequent revisions that were made to the structure of the KPMG Model were developed jointly by municipal and Stewardship Ontario representatives and then approved by MIPC. i Steward Obligation 80. In the summer of 2007, MIPC representatives populated the KPMG Model with the 2006 data from the Datacall. There was considerable discussion at MIPC regarding the assumptions for some of the inputs to the KPMG Model which affected the resulting best practice cost. These included the cost, life and amortization of blue boxes supplied to residents, the minimum capacity of material recovery facilities ( "MRFs") to reflect economies of scale at best practice, and the level of spending on promotion and education. Therefore, the members of MIPC