E.B.R.O. 497-01 THE ONTARIO ENERGY BOARD IN THE MATTER OF the Ontario Energy Board Act, R.S.O. 1990, c. O.13; AND IN THE MATTER OF an Application by The Consumers' Gas Company Ltd. for approval of an incentive mechanism in relation to the Operation and Maintenance Expense component of its cost of service, effective during the 2000 through 2002 fiscal years, and an incentive mechanism in relation to Demand Side Management. Hearing held at 2300 Yonge Street, 25th Floor, Hearing Room No. 1, Toronto, Ontario on Wednesday, January 27, 1999 commencing at 9:03 a.m. ---------- VOLUME 1 ---------- B E F O R E : H. GAIL MORRISON PRESIDING MEMBER PAUL VLAHOS Member ROGER M. HIGGIN Member 2 A P P E A R A N C E S JENNIFER LEA ) Board Technical Staff EDWARD SWEET ) KATHI LITT ) FRED CASS Enbridge Consumers Gas, Applicant MURRAY KLIPPENSTEIN Pollution Probe ROBERT WARREN Consumers Association of Canada (CAC) TOM BRETT Metropolitan Separate School Board, Ontario Association of School Board Officials and CAESCO BETH SYMES Alliance of Manufacturers and Exporters, Canada GUY PRATTE Industrial Gas Users Association (IGUA) DAVID POCH Green Energy Coalition IAN MONDROW HVAC Coalition ELIZABETH DeMARCO Coalition for Efficient Energy Distribution (CEED) THOMAS ADAMS Energy Probe PHILIPPA LAWSON Ontario Coalition Against Poverty (OCAP) MICHAEL MORRISON Ontario Association of Physical Plant Administrators LINDA ANDERSON Union Gas Preliminary Matters 3 ---Upon commencing at 9:03 a.m. THE PRESIDING MEMBER: Please be seated. Good morning. The Board is sitting today to hear the application of Enbridge Consumers Gas for an incentive mechanism in relation to the operation and maintenance component of its cost of service effective during fiscal years 2000 through 2002, and an incentive mechanism in relation to demand-side management effective in fiscal year 2000. The Board has assigned file number EBRO 497-01 to this portion of the application. The related rates application for fiscal year 1999 was heard by the Board under file number EBRO 497. A Decision with Reasons on the rates application was issued on August 31st, 1998, and a Rate Order on September 30th, 1998. With me today to hear this application, Mr. Paul Vlahos and Dr. Roger Higgin. We have asked that the transcripts for this application be numbered separately from those of earlier related applications and that transcript undertakings and exhibits filed in this application be noted under letters 'H' and 'I' respectively to distinguish them from documents filed in earlier portions of this proceeding. We were advised, as part of the settlement proposal dated December 4th, 1998, that there had been an agreement by parties in relation to the company's proposed shared savings mechanism. This agreement is set out at Preliminary Matters 4 pages 7 to 16 of the settlement proposal, Exhibit C, section 9. The Board was advised on January 21st that an additional meeting to consider settlement of other issues in relation to this proceeding was unsuccessful and was terminated after one day. The Board has reviewed the settlement proposed in relation to the shared savings mechanism and is prepared to accept the proposal subject to the usual caveats relating to unsettled issues and to changes in external circumstances. The Board is, however, still in the process of obtaining a full understanding of the mechanics of the program and, if it needs further information in this respect, we will advise the parties. May I have appearances, please? MR. CASS: Good morning, Madam Chair. Fred Cass for Enbridge Consumers Gas. THE PRESIDING MEMBER: Good morning, Mr. Cass. MR. KLIPPENSTEIN: Murray Klippenstein for Pollution Probe. THE PRESIDING MEMBER: Mr. Klippenstein. MR. WARREN: Robert Warren for the Consumers Association of Canada. THE PRESIDING MEMBER: Mr. Warren. MR. BRETT: Tom Brett for the Metropolitan Separate School Board, the Ontario Association of School Business Officials and CAESCO, Madam Chair. Preliminary Matters 5 THE PRESIDING MEMBER: Good morning, Mr. Brett. MS. LEA: Jennifer Lea appearing for Board Technical Staff. With me are Mr. Edward Sweet and Ms. Kathi Litt. THE PRESIDING MEMBER: Good morning, Ms. Lea. MS. SYMES: Beth Symes appearing for the Alliance of Manufacturers and Exporters, Canada. Madam Chair, I have a trial commencing February 1st and will be replaced at that date by my partner Carol Street. THE PRESIDING MEMBER: Thank you, Ms. Symes. MR. PRATTE: Guy Pratte for the Industrial Gas Users Association. THE PRESIDING MEMBER: Mr. Pratte. MR. POCH: David Poch for the Green Energy Coalition. Good morning. THE PRESIDING MEMBER: Good morning, Mr. Poch. MR. MONDROW: Good morning, Madam Chair. Ian Mondrow for HVAC Coalition. THE PRESIDING MEMBER: Good morning, Mr. Mondrow. MS. DE MARCO: Good morning, Madam Chair, Elizabeth De Marco for the Coalition for Efficient Energy Distribution. THE PRESIDING MEMBER: Good morning. MR. ADAMS: Good morning. Tom Adams for Energy Probe standing in for Mark Mattson. THE PRESIDING MEMBER: Mr. Adams. MS. LAWSON: Philippa Lawson for the Ontario Preliminary Matters 6 Coalition Against Poverty. MR. MORRISON: Good morning, Madam Chair. Michael Morrison for the Ontario Association of Physical Plant Administrators. THE PRESIDING MEMBER: Good morning, Mr. Morrison. MS. ANDERSON: Good morning, Madam Chair. Linda Anderson for Union Gas. THE PRESIDING MEMBER: Good morning, Ms. Anderson. Are there any other appearances? ---(No response) Seeing none.... THE PRESIDING MEMBER: Are there any preliminary matters? MR. POCH: Madam Chair, I have one matter. THE PRESIDING MEMBER: Yes, Mr. Poch? MR. POCH: Madam Chair, on the issues list is the DSM and PBR issue - I don't have the exact wording in front of me - and Mr. Chernick, whose evidence was filed predominantly in support of the shared savings issue or directed at the shared savings issue, does have a section at page 14 of his evidence entitled 'DSM-related PBR issues'. And if you'll bear with me a minute, I think I can -- I have dissected the matter and can satisfy you that his attendance may not be necessary. Mr. Chernick comments on the -- first of all, on Preliminary Matters 7 the appropriateness of excluding DSM costs from any PBR mechanism, and indeed the SSM mechanism agreed to assumes that DSM is outside of any PBR and isn't trying -- and we don't have the SSM mechanism that's trying to compete with any other incentive for DSM. And, accordingly, I'm assuming that that is not a controversial matter. Mr. Chernick does not take any position on the issue of PBR scope which, apart from the exclusion of DSM, and that, of course, will be an issue that is before you but he is, I think it's fair to say, silent on. As to the question of compatibility of the PBR proposal with DSM and with the SSM, which he speaks to briefly, I note that Dr. Bauer - who is, I think, the only other witness that speaks to it - agreed in the technical conference that while certainly his preference is for broader PBR, if it assumed the Board wishes to encourage DSM, he agreed that SSM is the way to go with either -- with any PBR mechanism. And, thus, I think parties have agreed, indeed by signing it and by some agreement, I think have agreed that we've satisfied ourselves that the SSM doesn't turn on what form PBR takes and I think Mr. Chernick is relatively silent on that point as well. But as to the specifics of the PBR, Mr. Chernick does express an opinion that it -- in support of the notion that Consumers Gas has chosen a growth factor that isn't gas volumes. Again, I've examined the opposing -- potentially Preliminary Matters 8 opposing points of view. Dr. Bauer in his evidence at pages 13 and 14 addresses this question. He notes the linear relationship -- the evidence of a linear relationship that Consumers has provided between customer growth and OM&A, although he does note there appears to be some decline over time. I wanted to be clear, Mr. Chernick doesn't take any position on whether or not there needs to be, for example, a co-efficient applied to that which presumably Dr. Bauer may have an opinion on given his observation and so, again, I think his position appears to be not controversial in this context. So I guess I'm assuming that while you'll no doubt hear a lot of argument in cross-examination on the merits of a narrow -- the narrow PBR proposal before you versus some more comprehensive one, that the specifics of a subsequent PBR mechanism would not be debated in this hearing, although the merits of it may; and, accordingly, Mr. Chernick's evidence is really not in any sense part of the live debate before you. And, indeed, if my understanding is correct, unless my friends correct me, I would probably excuse myself on that same basis. So, with your permission, I would propose that Mr. Chernick not be called, subject to the Board's interests and any questions you may have or the other parties, and if -- unless I'm wrong in how I've viewed the matter, especially this question of whether we're going to Preliminary Matters 9 debate, for example, the merits of a price cap versus revenue cap in a comprehensive as opposed to merely the benefits of comprehensive versus narrow, I would also excuse myself. THE PRESIDING MEMBER: Thank you, Mr. Poch. Do other parties have a comment on Mr. Poch's proposal? MR. CASS: Madam Chair, I had intended to address the same preliminary point. As the Board is aware, the company sent out a proposed schedule for this hearing. The issue which Mr. Poch has been addressing, I believe, is issue A.6, impact of PBR on DSM. And, as everyone would be aware, there was no allowance made for that issue on the proposed hearing schedule. It was the company's expectation that, as Mr. Poch has indicated, that there is no controversy around that issue and that's why it was not included, or allowance was not made for it on the hearing schedule. THE PRESIDING MEMBER: Thank you, Mr. Cass. Are there any other comments? (No response) Does Board Staff have any concerns? MS. LEA: No, thank you, Madam Chair. ---Off the record discussion. THE PRESIDING MEMBER: Thank you. Mr. Poch, to the extent that you want that evidence as part of the record, an affidavit will be filed Preliminary Matters 10 we assume? MR. POCH: Yes, of course. THE PRESIDING MEMBER: Then that's satisfactory. Thank you very much. MR. POCH: Thank you very much. THE PRESIDING MEMBER: I'll just deal very briefly with the scheduling, if I might. As I said earlier this week in another proceeding, we will be sitting this morning with a slightly longer break than usual and sitting until about 1:30, but we won't be sitting this afternoon. Tomorrow, Thursday, we will sit the usual hours beginning at nine o'clock, but we will not sit between 12:00 and 2:00 tomorrow. Is there any update on the Friday schedule that would assist us in any way? Mr. Cass? MR. CASS: I don't think there is, Madam Chair. We've been working at other options, but I don't think we have a solution for Friday afternoon at this time. THE PRESIDING MEMBER: So is it likely, in your view, that we will go through Friday morning with what we have on the schedule for the 27th and 28th then, or that we may be finished Thursday evening and won't sit on Friday? MR. CASS: Yes, Madam Chair, subject to the fact that we've allowed I believe -- or we have because of the sitting time today, something in the order of a half a day Preliminary Matters 11 for the first panel and I suspect that we may need to pick up some more time for the first panel which may shift things a little bit in relation to Friday morning. THE PRESIDING MEMBER: Thank you, Mr. Cass. Ms. Lawson, did you have some advice for us? MS. LAWSON: Madam Chair, Mr. Cass and I have had some discussions about the scheduling of Dr. Norsworthy and I just wanted to state for the record that our position is that there is no need to move Dr. Norsworthy's appearance up, that he's available as of Tuesday afternoon next week and we think that that will be fine in the course of the proceeding. If it turns out that by tomorrow afternoon that it looks like he may be called prior to Tuesday afternoon, we could then have him come Friday afternoon, if necessary. I think that that is very unlikely and, therefore, we're just leaving it as a contingency plan. THE PRESIDING MEMBER: Thank you, Ms. Lawson. Just for your information, the Board cannot sit on the 5th of February, which is Friday, but every indication is that we should be finished by then I think. MR. WARREN: Madam Chair, could I ask a question, I guess through you to Mr. Cass, about the nature of the problem on Friday. I didn't understand from his comments the other day. Is the problem that we cannot get Messrs. Fuss and Seal on Friday at all? And the reason that I ask the question is this, is that we had originally, as you're Preliminary Matters 12 aware, been prepared to make Dr. Bauer available on Monday even though it was out of order and before the case was finished. We are less enthusiastic about doing that if it's spank in the middle of the Consumers' case and before Messrs. Fuss and Seal go on, and I wasn't quite sure what the problem on Friday was. I think we'd still be prepared to bring Dr. Bauer in on Monday if there was only the SQI and monitoring panel to follow him, but if we have to wait until Monday to hear -- sorry, Fuss and Seal - I know I'm going to mix those two up at some point. So if I could just get some indication of that then it helps me in trying to indicate to you what Dr. Bauer's schedule is and indicate to him when it is he should make flight arrangements. THE PRESIDING MEMBER: Thank you, Mr. Warren. Mr. Cass, can you help us? MR. CASS: Yes, Madam Chair. My understanding is that the difficulty with Dr. Fuss and Mr. Seal is in relation to Friday afternoon. If there was a way that they could be put on the stand on Friday morning, they are available at that time. I'm not sure how that will work in the schedule, but the problem is with Friday afternoon. THE PRESIDING MEMBER: Does that assist you a little bit, Mr. Warren? MR. WARREN: I think, with apologies to the Board Preliminary Matters 13 and to Mr. Cass, what I would like to do is see how things progress today and early tomorrow and then I can let Dr. Bauer know about when he should come in. It may be that he'll have to come in Tuesday with Dr. Norsworthy, but if I could... THE PRESIDING MEMBER: Let's see how we get along then today. MR. WARREN: The only other preliminary matter I wanted to raise, Madam Chair, was with respect to the first and second panels and how we might sort out how we approach those panels, because they deal with three different issues. And my suggestion, Madam Chair, is this: So that the record, when we come to read it to prepare argument, is in my view somewhat easier. I'm wondering if what we could do is cross-examine on discrete topics, so that, for example, Mr. Brett and I and Mr. Klippenstein, we could all go through the issue of scope, so there's one portion of the record that deals with scope and then deal with the PBR formula and then deal with the 'Z' factors and off-ramps because, otherwise, we'll have to keep jumping through the record to find them. I'm wondering if that suggestion makes any sense? THE PRESIDING MEMBER: Could I just ask -- while we're discussing this, I was going to ask about how we were going to sort out A.1 on January 27th and A.1 on January 28th in terms of making sure that we're not saying Preliminary Matters 14 all the time: Well, that's tomorrow and then saying: Well, that was yesterday. So, Mr. Cass, can you help us with that? MR. CASS: Yes, Madam Chair. The panels which are shown as the second and third panels on the proposed schedule were intended to be specific in the first instance to the evidence of Mr. Winter, and in the second instance to the evidence of Dr. Fuss. There are additional witnesses with each of those experts because of the need to ensure questions can be fully answered, but that was the intention, and it was the company's expectation that that would provide a clear method of delineating between the various panels. And I appreciate what Mr. Warren has said in relation to cross-examining on an issue-by-issue basis. I realize that there are some advantages to that, or can be. On the other hand, in my experience with that in the past, it has a disadvantage of we seem to lose a little bit of efficiency when that occurs, and that would be a concern of mine. If we break the first panel up issue-by-issue it might not be an efficient way of doing it. THE PRESIDING MEMBER: Thank you, Mr. Cass. Do any other parties have any specific concerns about this? Mr. Pratte? MR. PRATTE: Thank you, Madam Chair. Preliminary Matters 15 Just to say that Mr. Warren and I discussed the topic he raised with you and I agree with him, because it's not only the scope issue but, similarly, the PBR formula issue appears in two places and, notwithstanding that one witness may have more specific evidence, I'm not quite how we'll be able to sort it out. So generically I support Mr. Warren's submission to you. THE PRESIDING MEMBER: Thank you, Mr. Pratte. Ms. Lawson? MS. LAWSON: Madam Chair, I might just point out to you that while there may be some efficiencies gained during the hearing process from having each party deal with all the issues at once, I think there will be efficiencies gained during the preparation of argument time if we have the record more discretely organized as Mr. Warren has suggested. So we, therefore, support his suggestion. THE PRESIDING MEMBER: Thank you, Ms. Lawson. One moment please. ---Off the record discussion. THE PRESIDING MEMBER: Mr. Warren, I think we'll give that a try and see how we get on. If it appears not to be working efficiently, I think we can reconsider. So let's start that way and see how we do. Are there any other preliminary matters? MS. DeMARCO: I have one preliminary matter, Madam Chair. Preliminary Matters 16 CEED has filed a book of materials that's available to the intervenors over at the side right now. I have to apologize to the Board because many of the materials were downloaded through the Internet and, as a result, some interesting typographical errors have occurred throughout. So my apologies. THE PRESIDING MEMBER: Thank you, Ms. DeMarco. MS. LEA: I think we should assign exhibit numbers to a couple of things, if it please the Board. The first is the evidence from Mr. Chernick which is entitled: Shared Savings Incentive for DSM Performance by Consumers Gas. I ask that that be given Exhibit No. I1.1. ---EXHIBIT NO. I1.1: Written evidence prepared by Mr. Chernick entitled: Shared Savings Incentive for DSM Performance by Consumers Gas. MS. LEA: Ms. DeMarco, has your book of materials been given an exhibit number for identification? MS. DeMARCO: No, it hasn't. MS. LEA: Let's give that I2 then, please. ---EXHIBIT NO. I1.2: Book of materials submitted by CEED. THE PRESIDING MEMBER: Could I just ask a clarifying question about that, Ms. DeMarco? The Board has that document. Do you intend that just to be background information? I don't understand you to be going to call anyone in relation to that information; is that correct? MS. DeMARCO: That's correct, it's simply for the Preliminary Matters 17 purpose of cross-examination. I wonder, just in terms of numbering exhibits, there are sub-tabs throughout the exhibit, so in referring to the tabs it might appear as though it's I2-2. Is it possible to name it J and have the sub-tabs, sub 1 through...? THE PRESIDING MEMBER: I think 'I' is our general category for new exhibits for this process. MS. DeMARCO: Okay, great, thanks very much. THE PRESIDING MEMBER: We have a document on the dais that we're not sure of its identification. Its heading is: Enbridge Consumers Gas EBRO 497 Board-approved revenue requirement for the 1999 Test Year. We just want some clarification of where this came from and what we're to do with it? MR. CASS: Yes, Madam Chair. Mr. Grant will be addressing that during examination-in-chief. THE PRESIDING MEMBER: Thank you, Mr. Cass. I think that's all the housekeeping matters. Any other concerns before we begin? Mr. Cass? MR. CASS: Yes, Madam Chair. The first panel of witnesses consists of Mr. Darryl Seal, Mr. Dave Charleson - I'm stating these in the order in which they're sitting, starting with the closest to the Board - Mr. David deJongh, Mr. Jim Grant and Mr. Steve McGill. I wonder if they might all be sworn at this time? Seal,Charleson,deJongh, 18 Grant,McGill dr ex (Cass) THE PRESIDING MEMBER: Thank you, Mr. Cass. DARRYL SEAL, DAVE CHARLESON, DAVID J. deJONGH, JAMES C. GRANT, STEPHEN McGILL; Sworn. DIRECT EXAMINATION BY MR. CASS: Q. Mr. Seal, if I might start with you. You are Manager, Economic Studies of Enbridge Consumers Gas. Is that correct? MR. SEAL: A. That's correct. Q. And your curriculum vitae at Exhibit A, section 4 accurately describes your background and experience; does it? A. Yes, it does. Q. And you were responsibility for the evidence shown opposite your name on the evidence list at Exhibit A, tab 8, schedule 1; is that correct? A. That is correct. Q. And was that evidence prepared by you or under your direction and control? A. Yes, it was. Q. Do you have any corrections to be made to your evidence? A. No. Q. Is the evidence accurate to the best of your knowledge or belief? A. It is. Q. Thank you. Mr. Charleson, you are manager, Accounting Seal,Charleson,deJongh, 19 Grant,McGill dr ex (Cass) Systems for Enbridge Consumers Gas; is that correct? MR. CHARLESON: A. That's correct. Q. And your curriculum vitae also is found at Exhibit A, section 4; is it? A. Yes, it is. Q. And you were responsible for the evidence shown opposite your name at Exhibit A, tab 8, schedule 1; is that correct? A. That's correct. Q. Was that evidence prepared by you or under your direction and control? A. Yes, it was. Q. Do you have any corrections to make to the evidence? A. No, I don't. Q. And is that evidence accurate to the best of your knowledge and belief? A. Yes, it is. Q. Thank you. Mr. deJongh, you are Senior Research Analyst, Regulatory Affairs of the company; is that correct; MR. DEJONGH: A. That's correct. Q. Your CV is also found at Exhibit A, section 4; is it? A. That is correct. Q. And, also, you were responsible for the evidence shown opposite your name at Exhibit A, tab 8, schedule 1; is that correct? Seal,Charleson,deJongh, 20 Grant,McGill dr ex (Cass) A. Yes. Q. Excuse me. Do you have any corrections to your evidence? A. No, I do not. Q. Was it prepared by you or under your direction and control? A. Yes, it was. Q. And is it accurate to the best of your knowledge or belief? A. Yes, it is. Q. Thank you. Mr. Grant, you are Director, Regulatory Affairs of the company; is that correct? MR. GRANT: A. That's correct. Q. Your CV is found at Exhibit A, section 4; is it? A. Yes, it is. Q. And you were responsible for the evidence shown opposite your name at Exhibit A, tab 8, schedule 1? A. That's correct. Q. Do you have any corrections to the evidence for which you were responsible? A. No, I do not. Q. That was prepared under your direction and control; was it? A. Yes, it was. Q. Is it accurate to the best of your knowledge or belief? Seal,Charleson,deJongh, 21 Grant,McGill dr ex (Cass) A. Yes, it is. Q. Thank you. Mr. McGill, you are Manager, Customer Accounting Projects for the company; is that correct? MR. McGILL: A. The title is Manager, Customer Support, Planning and Analysis. Q. Thank you. And your curriculum vitae is at Exhibit A, section 4; is it? A. Yes, it is. Q. And you were responsible for the evidence shown opposite your name at Exhibit A, tab 8, schedule 1? A. Yes, I am. Q. Was that prepared by you or under your direction and control? A. Yes, it was. Q. Do you have any corrections to your evidence? A. Yes. I have one correction and that is on Exhibit C, section 3, page 2 of 16. At the bottom of the page on the last sentence, the sentence reads: 'AHT has increased from 295 seconds in 1996.' The reference to "295" should be revised to 274. THE PRESIDING MEMBER: 274? MR. McGILL: Yes. THE PRESIDING MEMBER: Thank you. MR. CASS: Q. Thank you, Mr. McGill. And, subject to that correction, is your evidence Seal,Charleson,deJongh, 22 Grant,McGill dr ex (Cass) accurate to the best of your knowledge or belief? MR. McGILL: A. Yes, it is. Q. Okay. Coming back to you just briefly, Mr. Grant. In the evidence from Mr. - I'm sorry, Dr. Norsworthy, there is some discussion of a position that the company proposes to be regulated on only a small proportion of its total costs. Do you have any comments to make in relation to that position? MR. GRANT: A. Yes, I have a couple of brief comments to make, and here I'm making reference to page 14 of Dr. Norsworthy's evidence. And we are filing this morning the information that we discussed a few minutes ago to help, I think, put some perspective on the situation as it relates to the issues raised by Dr. Norsworthy in this section of his evidence. On page 14, he has a table of ratios which have been calculated in some way and he draws some conclusions from that and states, about midway down the page, that O&M costs are only about 19 per cent of total costs and so on. The purpose of the information that we filed this morning is to just briefly take us through what the numbers are in relation to the Board's approved revenue requirement from EBRO 497 which, of course, is the take-off point for the PBR. Page 1 of the material which I have handed out Seal,Charleson,deJongh, 23 Grant,McGill dr ex (Cass) simply shows the Board-approved rate base and cost of capital. It goes down through cost of service, miscellaneous operating and non-operating revenue, taxes and so on, coming down to a total revenue requirement of 2090.8 inclusive of the deficiency recovery of 90.4-million which the Board found in that decision. The second page then takes that 2090.8 figure and subtracts at line 2 the gas cost component to come down to at line 3 the 750.3-million, which is the Board-approved revenue requirement exclusive of gas costs. Further down the page there is a removal at line 7 of the return component on common equity, and then further down the page still there's a removal of the depreciation and amortization component of the 750.3-million. Now, the purpose for all of these figures and these adjustments is found at the bottom of the page where we calculate ratios of O&M as a proportion in line 12 of the 750.3-million shown at line 3, and that ratio is 36.24 per cent. Line 13 then removes the return on equity component which, as we know, is derived on the basis of a Board-approved formula, and indicates that the ratio then is 42.42 per cent. And finally at line 14, we remove those components and the depreciation expense which is largely driven by Board-approved rates applied to a Board-approved Seal,Charleson,deJongh, 24 Grant,McGill dr ex (Cass) rate base, a historic rate base, to add some further perspective I think to the figures. And on that basis then, the O&M component is some 63.78 per cent of the remaining revenue requirement. So the purpose then of all this information really is to add perspective to the issue on the basis of what the Board has just approved in 497. Dr. Norsworthy also makes a second statement on page 14 in relation to capital, going over to page 15, and makes the point that the proposal -- and I'm reading here: 'Precisely those expenses and costs most difficult to monitor and justify, those associated with capital...' He's making the point that that's excluded from our proposal, and he then concludes that: 'It, therefore, retains the present incentive to overinvest in capital.' Now, I appreciate in that statement he's accepting the Board -- sorry, he's asking the Board to accept an assumption there that there's a present incentive. But in order to add perspective once again to this issue which he raises, I filed page 3 of the material which is the Board-approved capital budget from EBRO 497. And, as the Board is aware, the total expenditures there of 363-million were approved by the Board in that proceeding and are made up of largely three components. Seal,Charleson,deJongh, 25 Grant,McGill dr ex (Cass) The first one at line 1.1, which is customer-driven or market demand capital; the second major category, that being system improvements and upgrades, which is really focused on system integrity issues. And the most significant components there are the replacement mains and services program which we have had underway for a number of years and has been approved by the Board for a number of years. And then, finally, the third major category of expenditures is found at line 1.3, total general and other plant, which is really the area where we have a fair bit of technology-driven capital. And, in the context of PBR, this really is the focus of the capital budget, in my view, the area of the capital budget that has the most technology focus to it with the possible exception of the meters categories. Finally then, we have underground storage which, as the Board knows, we bring forward those expenditures from time to time and, before we actually make those expenditures, they require separate approval by the Board. So I felt that it was important, Mr. Cass, in reading this material of Dr. Norsworthy, that we have all of the facts as they relate to the Board-approved -- the most recent Board-approved rates in front of us. MR. CASS: Thank you, Mr. Grant. Madam Chair, could we give the document that Mr. Grant has been referring to an exhibit number at this point? Seal,Charleson,deJongh, 26 Grant,McGill dr ex (Cass) MS. LEA: Yes. Thank you, Mr. Cass. I have to confess that I gave incorrect exhibit numbers to the first two exhibits. Apparently my brain at this hour, or on this day is not sufficiently complex to comprehend the exhibit numbering system. The first exhibit should be I1.1; that is, first day of the hearing, first exhibit, so that's the exhibit from the Green Energy Coalition, is I1.1. The CEED exhibit is I1.2, and this exhibit, I'd ask that it be given Exhibit No. I1.3. ---EXHIBIT NO. I1.3: Excerpt of Dr. Norsworthy's prefiled evidence. MR. CASS: Madam Chair, my examination in-chief is complete. Thank you. THE PRESIDING MEMBER: Thank you, Mr. Cass. Mr. Warren? MR. WARREN: Thanks, Madam Chair. CROSS-EXAMINATION BY MR. WARREN: Q. Mr. Grant, I'll return to this a little later in my cross-examination, but just while it is freshly before us, could you turn up the Exhibit I1.3 which you've just spoken to and it's the third page. And this comparison of utility capital expenditures budget 1999 and estimated 1998 was introduced, if I understand it, to address Dr. Norsworthy's point on page 14 and 15 of his prefiled evidence that there is an incentive to overinvest in Seal,Charleson,deJongh, 27 Grant,McGill cr ex (Warren) capital. Have I understood that correctly? MR. GRANT: A. I think it's a relevant piece of information in addressing the point that Dr. Norsworthy is making. It's not the only piece of information, but it's a relevant piece of information. Q. Like Ms. Lea, I'm fuzzy-headed and so I'm looking for the punch, and I want you to tell me what it is this says about Dr. Norsworthy's point so I understand it. What are you telling us in this exhibit? I'm sure I'm the only one in the room that doesn't get it, but can you help me? A. Well, what I'm suggesting in this exhibit is that, as we're all well aware of, we expend capital every year to add customers. I guess that's the first point and that was the first category that I took everyone to, so that's based on market demand. And that's what drives that area of the capital budget. I appreciate on a go-forward basis into the PBR period there will be no rental equipment expenditures, so that figure would drop somewhat in the PBR period. And, again, the second point that I was trying to make with this exhibit is that if you look at the second major category of capital expenditures, the principal driving factor in this area has to do with system integrity, and our plans that we've had for a number of years in this area which the Board has approved - for Seal,Charleson,deJongh, 28 Grant,McGill cr ex (Warren) instance, in the replacement main category - I believe that there's about a thousand miles of cast iron main low pressure that is still left in the system and we've got an ongoing program to address cast iron mains, and that's the $22.8-million. And as we address that -- those mains, we relay the services on that line and that drives item No. 1.2.5 which is the service relay. So, in the context of PBR, Mr. Warren, the expenditures in this area of budget are driven by operational considerations that are quite unique and unique to this utility. The third point I guess I was making is that under general plant, that's where we have technology-type expenditures, and the only other major technology sensitive areas of the budget - and I'm going to back up a second here - are found in the meters section at line 1.2.8 and line 1.1.3. So, in the context of efficient capital that may be expended for the purposes of saving some O&M dollars, it's those line items that are relevant in the capital budget. So that's how it's linked to the issue that's currently before the Board. Q. Well, I'm sorry to be literal about it, Mr. Grant, but is your point with respect to -- keeping in mind that our -- that the one poll is Dr. Norsworthy's point on page 14 and 15 about an incentive to overinvest, is your point that the only category which the company has Seal,Charleson,deJongh, 29 Grant,McGill cr ex (Warren) an incentive to overinvest is in category 3, specifically the technology; is that what you're saying? A. I don't accept that the company has an incentive to overinvest to begin with. But what I'm suggesting is that in the PBR context and, in particular, in the O&M PBR that's currently before the Board, there is some linkage between the capital budget in the O&M area and it's the areas that I was just going through. Q. I'd have to think about that, Mr. Grant, and I'll return to it a little later on. Thanks for that clarification. The first area I want to deal with, Mr. Grant and members of the panel - and all of these matters that I'm going to deal with can be broadly encompassed within the issue of scope - and the first matter I want to deal with, or the first category I want to touch on is simply the background to this PBR proposal. And can you tell me, panel members, when was the decision taken within Consumers to apply for approval of a PBR scheme? A. It would have been the fall of 1997 that we completed our analysis of PBR and made a decision to move forward on PBR and, in particular, on PBR that is concentrated on O&M. Q. And when you say "we completed", I wonder if you could just give me the line of decision on this line of analysis and decision? When you say you "completed your analysis", who Seal,Charleson,deJongh, 30 Grant,McGill cr ex (Warren) was it that did the analysis within Consumers of the PBR scheme? A. There is a group of about 15 people which included people from the Regulatory Affairs area, I think it included people from the Budget area, from the Economics area, in particular Mr. Seal, and we also had people from the Operations area who were looking at this issue. Q. And was this a specific team that had been designated, or group that had been designated by management to come up with a PBR proposal? A. Yes, we were charged with the task of researching a performance-based regulation and in coming to some conclusions as to what is the PBR mechanism that best fits this particular utility and that is something that we should move forward on. We also examined, by the way, the issue of whether one should move forward on PBR. Is it a trend that is happening in North America? Is it something that we should be pursuing? Q. The direction to create this group and to undertake this analysis was given by whom? A. It was from the executive management team, gave the direction through Mr. Lavergne and then Mr. Lavergne put the group together. Q. And the analysis was completed in the fall of 1997. When was the direction given by the executive Seal,Charleson,deJongh, 31 Grant,McGill cr ex (Warren) management team to undertake this, to form the group and undertake these analyses? A. I think it was probably given either in the early part of calendar '97 or the latter part of '96, subject to check. Q. So if I'm to understand the time line, the group took, let's say, roughly eight or nine months to undertake its analysis and make a recommendation (a): That there should be an application for some form of PBR, and that it should take the particular form which is before the Board today; correct? A. Yes, I think that's fair. Q. Now, if you could turn up, please, in this context Exhibit D, section 1.37 which, for shorthand purposes, I'll refer to as Board Staff Interrogatory No. 37. And at the same time, panel members, if you could turn up Board Staff Interrogatory No. 41 which is Exhibit D, section 1.41. Do you have those two in front of you? A. Yes, I have them. Q. Now, the first of the Board Staff interrogatories asked you to list and describe the alternative PBR methodologies that Consumers considered for determining the O&M budget and why each was rejected. Now, in the course of your examination -- the group's examination, did you consider the alternative of what I will describe generically as a comprehensive PBR scheme, one that would cover all aspects of the company's Seal,Charleson,deJongh, 32 Grant,McGill cr ex (Warren) operations and not just O&M? A. Yes. Q. And, in the course of that the examination, Mr. Grant, did the group do cost/benefit analyses of the various alternatives, including a comprehensive PBR? A. Yes, we did a lot of analysis and that included what you would refer to as a cost/benefit analysis, but that wasn't the only analysis we did. Q. Okay. The answer that was -- the question that was asked at 41 was: 'Please describe in full the a priori testing statistical and other that Consumers conducted on the proposed model and provide the outcomes of each test. Please describe how these results were used to identify the preferred model. If such testing was not done, please justify this choice.' And the last sentence indicates there was no statistical testing of the proposed model that -- sorry, no statistical testing of the proposed model was needed, although statistical analysis was used to support the choice of the inflation variable and productivity offset. Am I now to understand that there was, in fact, a statistical analysis done of all of -- certainly of two alternatives, the comprehensive PBR and the targeted PBR in the form of a cost/benefit analysis? A. Well, I think you're mixing up two different types of analyses. Seal,Charleson,deJongh, 33 Grant,McGill cr ex (Warren) The question referred to a statistical analysis and the only areas of the model where statistical analysis is relevant is inflation and productivity, and that's what we conducted. But, in addition, as I mentioned a few minutes ago, there was a lot of different types of analysis that we did and a statistical analysis is only one of it, one of the types. Q. Fair enough. Thanks for the qualification on that. But you did a cost/benefit analysis on - am I correct in understanding it - on the comprehensive model and on the targeted one which is before the Board; is that correct? A. Yes. Q. And did you look at the costs and benefits from the perspective of the company and its shareholders? A. Oh, yes. I mean, that's a prudent thing to do as managers. Q. And did you look at the costs and benefits from the perspective of the company's ratepayers? A. Yes. Q. Now, let me -- I'll return to these points in a moment, but I want to go forward with the decision-making process. Once you had completed your analyses in the fall of 1997, what then happened to it; did it go up the chain of command for review and approval? Seal,Charleson,deJongh, 34 Grant,McGill cr ex (Warren) A. Yes. We summarized our analysis and presented it to the decision-makers, the executive management team and, after approval was given, then we moved forward. Q. And the approval was given by the executive management team. That's within Enbridge Consumers Gas; is that right? A. Yes, that's correct. Q. And do you know if that executive management team had to seek further approval further up the chain of command to the parent company? A. Yes, I believe so. I believe that there would have been a subsequent process to at least inform and perhaps seek approval. I guess seek -- by informing you're also seeking approval of the team in Calgary. Q. Now, at the first level of approval, that is, the level of approval of the executive management team within Enbridge Consumers Gas, can you describe for me what materials were presented to them for their review and analysis? A. We presented some detailed materials as background, but we summarized that information and presented it to them in seeking their buy-in, if you will, in their decision and we assessed all of the implications of the proposal that is currently before the Board; that is, the one that we were recommending to move forward on, as well as some of the pros and cons of alternative models. Seal,Charleson,deJongh, 35 Grant,McGill cr ex (Warren) Q. Were the cost/benefit analyses that had been undertaken of the comprehensive scheme and the targeted scheme presented to that first level of management approval; that is, the executive team? A. Yes, that was part of the points that we were making, discussing the pros and cons and part of the analysis. Q. You used the material that was presented to that first level of the executive -- for executive approval. Is that material in the record before the Board in this case? A. No, it's not, although the basic conclusions form part of the record here. For instance, when we discuss the way the formula works and the benefits that the ratepayer would derive from the formula and from the approach, all of that is discussed at some length here in the evidence before the Board. And the implications of the mechanism as it relates to the operation of the company, in particular the performance measures that we're committing to, that is also before the Board. Q. Can I summarize your response - and please, correct me if I've got it unfairly - can I summarize your response as what you're telling me is that the rationale from the company's perspective of coming forward with a targeted proposal is reflected in the evidence; correct? A. Yes, that's right. That's correct. As part of the rationale, as I was stating a Seal,Charleson,deJongh, 36 Grant,McGill cr ex (Warren) little earlier, you also have to look at the potential for benefits and it's only a potential with respect to the shareholder. And I think by examining the way the formula is going to work, that is something that we've tried to do here in the evidence; and, therefore, I think that that aspect is covered. I appreciate that there may not be financial scenarios from the shareholders' point of view before the Board, but all other aspects of the formula and the implications that it may have on the ratepayers is before the Board. Q. Mr. Grant, are you prepared to produce for us, first of all, in the first category the cost/benefit analyses that were undertaken by your group for both the targeted PBR which is before the Board and the comprehensive, and in the second category produce the materials that went to the executive management team for their approval. Will you produce those? A. I would produce those if the Board felt that it was absolutely necessary. But I can tell you that from the shareholders' point of view I can give you a couple of the salient conclusions now, if you wish, on both alternatives, if that's helpful. Q. Well, at this stage I'm asking for the production of the materials which I've itemized and I take it that - please correct me if I'm wrong - that you will Seal,Charleson,deJongh, 37 Grant,McGill cr ex (Warren) not produce them unless the Board orders you to produce them. Is that a fair summary of your position? A. Yeah, that's fair. I don't think that it would add a lot to produce that material -- the detailed material for the Board. But if the Board felt that it really needed it, we would provide it. I would prefer to provide it to them in confidence. But I can also testify now as to the general conclusions that we came to on those two areas, the targeted PBR and the comprehensive one. I can explain that now in answer to your question and perhaps that would help. Q. Before I ask the Board to make a ruling on this issue, perhaps in fairness to you, if you could articulate the confidentiality issues which you believe surround the production of this material? A. Yes, I think there are basically two of them. First of all, the analysis was conducted on the basis of a bundled utility. We were still looking at a bundled utility operation at that point in time. And what we were trying to do is project forward kind of operating scenarios that we may be in in a bundled environment. We hadn't unbundled anything at that point. So in producing the material in today's context there would really have to be some additional either analysis or perspective put on the numbers because they aren't terribly relevant now at this juncture. Seal,Charleson,deJongh, 38 Grant,McGill cr ex (Warren) So that's one issue that I've got with it. Q. Sorry to interrupt, I'll let you go on. But is that a confidentiality issue? That's -- as I understand your answer, that's a need for amplification and correction concern that you might have to explain the numbers to the Board, but I don't in that - and correct me if I'm wrong - hear an issue about confidentiality of these records; is that fair? A. That's a fair point. I guess it's an issue that I was raising as opposed to a confidentiality issue. Q. Thanks for that. I interrupted you. Please, go ahead. A. The other confidentiality issue really has to do with the company's right and the shareholders' right to postulate different scenarios to try to get an understanding ourselves as to whether there is any potential whatsoever, any incentive period, for additional profitability. And, you know, I just think that that's a fair and reasonable -- in fact, it's a required part of running a business. I mean, you can't go to a board of directors or a senior management group and not discuss that particular issue. So I think it really should stay within the confines of the company itself. However, as I said, I'm prepared to give you the salient conclusions from the analysis, if you wish. MR. WARREN: Madam Chair, I'm asking for Submissions (Warren) 39 production of the materials. SUBMISSIONS BY MR. WARREN: Let me first begin by saying that both Dr. Norsworthy and Bauer in their evidence take the position that one of the difficulties the Board faces in deciding whether or not to approve a PBR scheme is what they refer to as the information deficit or the asymmetry in information which is available; namely, that the utility has a lot of information which the regulator never gets access to. And in understanding how it is we arrive at this proposal, my submission is it would be immensely helpful for the Board to know what were the analyses of the costs and benefits that were taken by the entity that has all of the relevant information. On the second point, Madam Chair, which is that Mr. Grant can provide us with a synopsis; with great respect to Mr. Grant, it will be an edited synopsis. And unless I have the information and other counsel have the information with which to inform themselves before cross-examining, we don't know what we're missing and what has been edited out, and we are - I should only speak for myself - unable I don't think to conduct a meaningful cross-examination on the information that is provided unless I have the base information. The third point on the issue of confidentiality is that this is a monopoly operation. And the regulator, in our respectful submission, is entitled to have this Submissions (Warren) 40 information on which to make a decision. So I may be speaking only for myself but, in my respectful submission, this would be very helpful information for the Board to know and it would make an analysis of the threshold question of what's the appropriate scheme of PBR far easier for us to make. Those are my submissions on that point. THE PRESIDING MEMBER: Thank you, Mr. Warren. Mr. Cass? MR. MONDROW: Madam Chair, just before Mr. Cass responds, I'd like to chime in for a moment if I could in support of Mr. Warren's request. SUBMISSIONS BY MR. MONDROW: Specifically in listening to Mr. Grant's testimony with respect to answering the question of how the company might be commercially or competitively injured by disclosure of the information, I couldn't divine in the end - again, with great respect to Mr. Grant - any legitimate confidentiality or commercial sensitivity issue. As I understood Mr. Grant's response on that point, he referenced the company's and the shareholders' right to analyze the potential for efficiencies impacting on profitability of the utility. Certainly that is a matter centrally within the purview of the Board and Mr. Grant did not address any prejudice with respect to or vis-a-vis other parties. And so I would endorse Mr. Warren's read of -- or Submissions (Mondrow) 41 my interpretation of Mr. Warren's read of a lack of legitimate excuse for making an exception to the rule that relevant information should be provided. Thank you. THE PRESIDING MEMBER: Thank you, Mr. Mondrow. Mr. Pratte? MR. PRATTE: Thank you, Madam Chair. SUBMISSIONS BY MR. PRATTE: I have two points, one on the substance of the motion; and, secondly, on the scope of the ruling you might issue. On the first point I just want to say I support Mr. Warren's submissions and add the following: The PBR scheme that is before you impacts not only the shareholders, of course, but the ratepayers. And Mr. Grant has already admitted that they had looked at the benefits from both the shareholders' and the ratepayers' point of view in their analyses that were submitted up the chain and, surely, that gives us sufficient interest in the ratepayers, at least equal to that of the shareholders, to have those documents. The second point I wanted to make, Madam Chair, is simply that when you rule, if you're disposed not to at this stage require the company to produce these documents, that you leave the matter open as the cross-examination on this issue proceeds to revisit the issue, if it's appropriate. THE PRESIDING MEMBER: Thank you, Mr. Pratte. Submissions (Lawson) 42 MR. PRATTE: Thank you, Madam Chair. THE PRESIDING MEMBER: Ms. Lawson, you had something to add? MS. LAWSON: Just a very small point. SUBMISSIONS BY MS. LAWSON: It's really supporting Mr. Mondrow's point, that I believe that unless the company can prove that it will suffer specific direct harm from the disclosure of this information, the information should be disclosed on the public record. THE PRESIDING MEMBER: Thank you, Ms. Lawson. Ms. Lea? SUBMISSIONS BY MS. LEA: Madam Chair, the Board's rules relevant to these sorts of issues are found at Rules 13 and 47 of the Board's Rules of Practice and Procedure. I know that you are familiar with them. I can go through the options that you have or the criteria, if it's of assistance, but I wanted to draw those to your attention. I'm happy to make further submissions, if they're needed. THE PRESIDING MEMBER: Thank you, Ms. Lea. Mr. Cass? MR. CASS: Thank you, Madam Chair. SUBMISSIONS BY MR. CASS: Madam Chair, yes, as Mr. Warren has submitted, the company operates a monopoly business of gas Submissions (Cass) 43 distribution. Yes, of course, the company is a regulated business insofar as that monopoly operation is concerned and there is a need, in appropriate circumstances, for the regulator to have information to fulfill its role. I suggest, on the other hand though, Madam Chair, that there is also the need for the company to be able to do strategic planning just like any other business. I submit to you that the type of process that Mr. Grant has just described is very much a strategic planning process. It's my submission to the Board, Madam Chair, that the company can't do an effective strategic planning process if the threat of it being put under the microscope hangs over its head at all times. So, in my submission, with the greatest of respect to the Board, there's a balancing that needs to occur here. The Board needs to balance the interests of regulation with the need for the company to be able to do strategic planning and not always have the threat of full public disclosure lurking in the background any time it embarks on any planning of that nature. I suggest to the Board that in balancing those interests the first step would be for Mr. Warren to pursue the questions that Mr. Grant has invited him to ask; that is, to endeavour to get the information here by questions to Mr. Grant. I suggest to the Board that this shouldn't even get to the point of balancing the two interests I've talked about until Mr. Warren has at least pursued the Submissions (Cass) 44 questions and endeavoured to see whether it could be done in another way. Those are my submissions, Madam Chair. Thank you. MR. WARREN: Madam Chair, may I just respond briefly to Mr. Cass's point? REPLY SUBMISSIONS BY MR. WARREN: I accept the legitimacy of the Board having to balance contesting concerns. One is, on the one hand, the need for effective regulatory administration requires the optimum disclosure of information and, on the other hand, the legitimate need of a company to undertake strategic planning. I accept that there's a tension between them and the Board has to strike a balance. But, at a minimum, producing simply the cost/benefit analyses that were produced on the two scenarios doesn't violate the company's right to undertake, in confidence, strategic planning. It doesn't need to tell us anything at all about what its long-term plans are vis-a-vis restructuring or reducing itself to a core distribution utility. What we need to have is all of the information which the company brought to bear in deciding what the relative costs and benefits were for the relative scenarios. That's the key information and that, in my respectful submission, falls well on the balance side of disclosure to the utility. Reply Submissions (Warren) 45 And simply, in response to Mr. Cass's point about, I can explore with Mr. Grant, unless I have the cost/benefit analysis in front me, that exploration is essentially the blind being led by the unblind, and that puts me in a difficult position. Those are my responses. Thank you. THE PRESIDING MEMBER: Mr. Warren, a moment, please. ---Off the record discussion. THE PRESIDING MEMBER: Thank you. BOARD RULING: THE PRESIDING MEMBER: Mr. Warren, it is the Board's present view that the company's application is for a particular model of PBR, and that, while judging the merits of that particular model might be assisted by comparing it to other models, the application will stand or fall on the evidence that the company has submitted. Mr. Grant has offered to testify to the salient points and I think we might pursue that, but we are not at this time prepared to order the production of the documents requested. MR. WARREN: Thank you, Madam Chair. DARRYL SEAL, DAVE CHARLESON, DAVID J. deJONGH, JAMES C. GRANT, STEPHEN McGILL; Resumed. CROSS-EXAMINATION BY MR. WARREN (Cont'd): Q. Mr. Grant, the approval went -- the analyses were concluded, according to what you have told me, some Seal,Charleson,deJongh 46 Grant,McGill cr ex (Warren) time in the fall of 1997; is that correct? MR. GRANT: A. That's correct. Q. And it went up the chain of command for approval and the approval was given to a targeted proposal and that approval was given when? A. It wasn't long after the presentation in the fall. I would guess that it would be late fall '97. Q. And then this application was filed some time I believe in January of 1998? A. Yes, that's correct. Q. Now, if you could turn back to Board Staff Interrogatory No. 37. You indicated in the second paragraph of the response that you considered each of the four broad categories of incentive mechanisms and assessed them relative to the company's business environment and PBR objectives. And you indicate then that it was concluded that price caps and other comprehensive PBR approaches were not appropriate. THE PRESIDING MEMBER: Mr. Warren, please remember the court reporter. MR. WARREN: Q. It was concluded that price caps and other comprehensive PBR approaches were not appropriate because of legislative restrictions. And do I understand that the legislative restrictions that are there being referred to were those that you felt were imposed by the old Ontario Energy Board Seal,Charleson,deJongh 47 Grant,McGill cr ex (Warren) Act and the limitations on what the Board could or could not approve? MR. GRANT: A. Yes. It's my understanding that under Section 19 of the old Act the Board was required to find a rate base. Q. And you understand now that the legislation has been changed and the Board has broad authority to approve, among other things, an incentive-based form of regulation; correct? A. Yes, that's correct. Q. Can you advise me, sir, whether or not the company has undertaken a reconsideration of its targeted PBR proposal in light of the changes in the legislation? A. No, we haven't because the targeted PBR that we have before the Board picks up all of the relevant aspects of performance-based regulation, whether it relates to just one component of the revenue requirement or all of the revenue requirement. So we didn't see, from a model point of view, from a conceptual point of view, a need to change that view or revisit it or anything like that. We believe we have the elements of good PBR regulation buried in our model as it is today. So Z-factors are common, not just in our proposal, but in comprehensive schemes. It's that sort of thing that I'm making reference to there, Mr. Warren. Q. If I understand the chronology correctly, we are now about two years from the time when the initial Seal,Charleson,deJongh 48 Grant,McGill cr ex (Warren) direction was given to form your group and undertake an analysis of PBR alternatives. Have I got that correctly? A. I think that's fair, yes. Q. Now, during that time -- first of all, is it the company's intention to move towards a comprehensive form of PBR? A. Yes, it is. Q. And in that two-year period, has the company been working on the development of a comprehensive PBR scheme? A. No, we have not. Q. Did the cost/benefit analyses that you spoke about -- we spoke about a few moments ago, did they conclude that there were greater benefits to the shareholders from a targeted PBR scheme than there were from a comprehensive PBR scheme? A. No, not necessarily. From a financial point of view what it confirmed -- what the analysis confirmed is the very points that we're making in the answer to Board Staff Interrogatory No. 37, as well as a couple of others which I will elaborate on. Under a comprehensive situation there needs to be, in our view, a financial mechanism or a mechanism, a regulatory mechanism to capture the financial implications of system expansion as it relates to the current Board-approved methodology. EBO 188 is what I'm referring to here. Seal,Charleson,deJongh 49 Grant,McGill cr ex (Warren) So we believe that there's got to be some sort of a Z-factor which would address the financial implications of adding pipe in the ground now that really has a very long payback period, well beyond a comprehensive PBR window of, say, five years. So we believe that is a window that has to be addressed, and that's one of the financial conclusions that we came to. There were others. As I indicated earlier today, we have -- what is unique to our utility is the mains replacement and service replacement program that we have underway and have had for a number of years. And, of course, that capital doesn't produce any additional revenue and has a financial implication under comprehensive PBR. So we concluded that that issue had to be dealt with under comprehensive PBR. And we had a couple of other issues that we felt needed to be wrestled with, one of which was conservation -- ongoing conservation. And, obviously, we are committed to demand-side management and promoting conservation out in the marketplace. And because of that declining profile and average uses, there's a revenue degradation, if you will, over time. So those are all financial issues that were relevant to our consideration of comprehensive PBR and really lead us to the conclusion that, in a comprehensive PBR proposal, we would have to wrestle with all those Seal,Charleson,deJongh 50 Grant,McGill cr ex (Warren) issues, internally come to some sort of resolution and a proposal as a part of an overall comprehensive PBR scheme. That was a long-winded answer to a short question, I apologize. Q. I'm going to return to those points in a moment, but I just want to stay with the analyses to which we referred. Did the internal analyses to which you've referred target - I don't know if that's the right word - did they indicate what the company believed internally it could -- by how much the company could reduce the O&M budget over the course of the three years of the targeted O&M? A. You're talking about the targeted PBR analysis? Q. Targeted PBR. A. It didn't identify how much we could reduce it, it made an assumption. So, in other words, we weren't identifying any areas that we could reduce; we were simply -- we had to make an assumption on a go-forward basis as to what might be achievable. Q. And can you tell me what the assumption was of what savings you could achieve in the O&M budget in the three years of the operation of the targeted PBR? A. Yes. Our analysis assumed that we would be able to somehow find a way to carve out approximately $5-million per year, and that's on the basis that we went Seal,Charleson,deJongh 51 Grant,McGill cr ex (Warren) forward with our analysis. The analysis also assumed that we were starting from a base that -- an O&M base that was equal to what we had filed with the Board in EBRO 495. Q. Would you agree with me, Mr. Grant, that to the extent that you can save more than $5-million a year under the scheme as it's presently presented, that's a benefit to the shareholders? A. Well, no, I don't agree with that. I think the way the model works is, the benefit to shareholders in the PBR period only occurs after you can save more than .63 per cent of the base per year. Q. Okay. The benefit to shareholders then -- there is a benefit to shareholders if you can save more than the .63 per cent productivity factor; correct? A. That's correct. Q. Okay. And my question to you is: In the internal analysis, did you postulate that the company could save more than .63 per cent; and, if so, how much? A. We did assume that, with the assumption that I just gave you, that we were starting from a base that was equivalent to what we applied for in EBRO 495. So starting from that base, we said: Okay, what does it look like if we save $5-million more than what we're currently expecting our costs to be over the horizon of the PBR proposal? So that analysis was -- we went forward with that analysis. And, on that basis, the $5-million represents Seal,Charleson,deJongh 52 Grant,McGill cr ex (Warren) more than .63 per cent. But, of course, it was on the understanding that we were starting from a base that was equivalent to what we applied for. That changed after the EBRO 495 decision. Q. Have there been any further analyses that have been undertaken that would target something more than the $5-million in savings every year; specifically, is there a plan in place now that has identified where the savings are going to be found and how much the savings are in the O&M budget? A. We're not aware of one, Mr. Warren. Q. If there were one within the company, would you be aware of it, Mr. Grant? A. It's quite likely that I would be aware of it. You know, I'm at a fairly senior level, but I could certainly undertake to check as to whether there is or isn't. Q. Okay. Could you undertake to check and advise us if there is a plan that targets savings within the O&M budget which are in excess of the $5-million which you've spoken of? If so, would you produce that plan? MS. LEA: That would be Undertaking H1.1, please. ---UNDERTAKING NO. H1.1: Enbridge Consumers Gas undertakes to check and advise if there is a plan that targets savings within the O&M budget in excess of the $5-million spoken of and, if so, to produce same. MR. WARREN: Q. Madam Chair, I was about to move on to a second discrete category of cross-examination. Do you want me to do that? It would take me about half an Seal,Charleson,deJongh 53 Grant,McGill cr ex (Warren) hour to complete that discrete category. I don't know what your plans are. THE PRESIDING MEMBER: I think we'll take our break now, Mr. Warren. We'll return at 11:00. ---Recess taken at 10:29 a.m. ---On resuming at 11:02 a.m. THE PRESIDING MEMBER: Please be seated. Mr. Warren? MR. WARREN: Q. Mr. Grant, I wanted to move into a new area which is the rationale for the decision of the company to go forward with its targeted PBR. And before I do that, I wonder if we can agree, if it's common ground between us, that the long-term objective of Enbridge Consumers Gas is to have a comprehensive PBR plan in place; is that fair? MR. GRANT: A. That's fair. Q. Now, could I ask you to turn up Board Staff Interrogatory No. 37. That's Exhibit D, section 1.37. And in that answer, Mr. Grant, in the second paragraph, I take it that you have articulated the grounds on which the company does not believe a comprehensive PBR is appropriate and they are, first, the legislative restrictions; correct? A. Correct. Q. And we've agreed that those legislative restrictions no longer obtain; correct? A. That's correct. Q. Now, the second category is what you describe Seal,Charleson,deJongh 54 Grant,McGill cr ex (Warren) as the need to consider the implications on system expansion and system integrity and safety. And a few moments ago you were kind enough to indicate to me that in considering the choice of PBR schemes you indicated - and this is my rough note of your testimony, correct me if I'm wrong - that a Z-factor was needed for putting pipe in the ground with a longer payback period, that the mains replacement program didn't produce a return. Is that what you're speaking of when you talk about the need to consider the implications on system expansion and system integrity and safety? Are those the factors we're talking about? A. Yes, those are two of the factors. It's not a complete listing of the factors that we need to consider under comprehensive PBR, but those are two of the factors. Q. I want to -- you've set out in this interrogatory response the two reasons why a comprehensive approach was not appropriate. I want to explore. We've dealt with legislative restrictions. I want to deal with the second category now. Perhaps in this context, if you could turn up Dr. Bauer's prefiled evidence. MR. WARREN: Madam Chair, I apologize, I haven't made a note of what exhibit number that is. MR. CASS: Madam Chair, I believe it is Exhibit E, section 2.1. MS. LEA: Thank you, Mr. Cass. Seal,Charleson,deJongh 55 Grant,McGill cr ex (Warren) MR. WARREN: Thanks. Q. So it's Exhibit E, section 2.1, please. And I'd like you to turn up page 8 of his prefiled testimony. MR. GRANT: A. Yes, I have that. Q. Now, in the first full paragraph on that page, Dr. Bauer is, broadly speaking, responding to what I take to be the second of the two grounds on which you rejected a PBR; namely, the implications on system expansion and system integrity and safety. And he says, about a third of the way into it: 'Projects with a longer payback period and a higher degree of uncertainty may not be induced by pure price caps. System expansion into high cost areas may fall into this category.' Is that, in your view, Mr. Grant, an apt -- or accurate, rather, summary of the concern which is set out in Exhibit D, section 1.37; namely, the need to consider the implications on system expansion and system integrity and safety? Has he captured it? A. Yes, I think he's captured the essence of it. There's also a public policy aspect to the thing -- to this issue as well which I don't see him addressing specifically, but that is an element of -- that is something that the Board has considered in the past and I would think that the Board would want to consider it in the future as well. Q. And may I summarize -- or have I captured the public policy component thus, that there are some system Seal,Charleson,deJongh 56 Grant,McGill cr ex (Warren) expansions which it is in the public interest to pursue which are not economic in the short term? Is that one element of the public policy? A. Yes, I think so. Q. And a second element of the public policy is the need for system upgrades in order to ensure that the system is safe; fair? A. Yes. Q. Are there any other elements of public policy that are relevant? A. I can't think of any at this point. Q. Now, Dr. Bauer then goes on in the balance of the paragraph to which I've referred you on page 8 of his prefiled testimony to indicate that there are solutions to this problem. He says, for example, beginning about two-thirds of the way down in that paragraph: 'Comprehensive revenue caps can easily be adjusted for the expansion of the system: the growth factor will have to represent to capital costs of expanding the system; rather than of the O&M associated with increased customer base. Like in the case of price caps, a more explicit capital incentive mechanism could be designed, if so desired.' Can you tell me whether or to what extent the company has explored ways of dealing with this second ground for rejecting a PBR -- a comprehensive PBR? Seal,Charleson,deJongh 57 Grant,McGill cr ex (Warren) You've had two years to think about it, and can you tell me, first, has the company been working on a solution to this; and, if so, what's it been doing? A. No, we've not been working on a solution to it. We've identified it as a conceptual problem that we have, an issue that needs to be addressed as we move forward and consider the comprehensive PBR model and the implications that it might have for the entire operation of the company, but we haven't nailed down any specifics or any particular approach that we would take to tackle these issues. Q. I'll return to that in a moment, but if I could just stay for a moment with Dr. Bauer's analysis in that same paragraph. Just above the passage which I put to you, he says: 'However, it is striking that the empirical record with price caps in the U.K., Australia or South America so far does not show any cases of systematic deterioration of system reliability or system expansion.' Do you have any reason to quarrel with that statement by him? A. I don't think we have any reason to quarrel with it. It's probably something that we would take a look at as we're wrestling with the issue ourselves in the future. Q. Now, as I understood your response to me Seal,Charleson,deJongh 58 Grant,McGill cr ex (Warren) earlier, what you need to deal with this second ground is some form of Z-factor; is that fair? A. Yes. And I think, as you know, there are two types of Z-factors and we would have to think about what type of Z-factor would be appropriate in the circumstance. Q. Now, I'll put this proposition to you and I'd like your response to it: If, as we've agreed, a comprehensive PBR is the desired end state of Consumers, and if the only remaining impediment, as I understand your Interrogatory Response No. 37, is this issue of system expansion and system integrity and safety, why would the company have not, in the course of the last two years, done work to come up with a Z-factor or other consideration that would have eliminated this impediment? A. Well, I guess there are a couple of points to be made in response. First of all, I don't think I ever said that those were the only issues in front of us with respect to comprehensive PBR. Those are the issues that we've outlined in Interrogatory 37. There may even be others as we go through the analysis phase ourselves internally that we come across that need to be dealt with. But, again, at a conceptual level, that's certainly one of them and it's a significant one that we need to deal with. So I guess the other thing to keep in mind is that the legislative environment has just changed and so Seal,Charleson,deJongh 59 Grant,McGill cr ex (Warren) that we are -- we were proceeding in the last couple of years on the assumption, and still are, that our proposal that's before the Board deals with a substantial component of our revenue requirement and that these other issues that need to be dealt with were going to take some time. When I read the Board's EBO 188 guidelines, and we're currently operating on those guidelines, I see an inconsistency between the application of those guidelines and a comprehensive PBR environment; and, therefore, that's a big tough issue that needs to be dealt with, not just by ourselves but by the Board and a number of parties, so... We don't control the agenda, if you will, on that particular issue. We certainly have to get our proposals together at some point in the future, but it's not something that we could have worked on, resolved and then come forward with in the last little while. Q. Just to stay with this narrow point for a moment, the Board's 188 system expansion guidelines are -- presumably they apply to Union Energy as well -- Union Gas, sorry, a Freudian slip. I'm sorry. A. Yes, they apply to Union Gas as well. Q. If they apply to Union Energy we're all in trouble, I suppose, eh? And so presumably they are an impediment, if that's the case, to Union's development of a comprehensive PBR as well; fair enough? A. I can't speak for whether it is or isn't an Seal,Charleson,deJongh 60 Grant,McGill cr ex (Warren) impediment from their point of view. Q. Could you tell me whether or not in the past two years you've had any discussions with Union Energy about the way to solve the - I'll call it the 188 impediment - Union Gas, sorry, about how to solve this impediment for purposes of a comprehensive PBR plan, since you're both in the same boat? A. We have not had any in-depth discussion on it but we've raised the point with Union Gas and indicated to them that that is something that we need to consider in going forward, and we raised it with them just so that they knew that it was something that we felt was an issue. But we haven't done any work with them on that beyond that. We just really had a discussion about it. Q. Now, I want to return to your response to Board Staff Interrogatory 37 and I'll, as they say in the lawyers' trade, lead with my chin on this. I read this interrogatory response as setting out the two grounds on which you rejected a comprehensive PBR, but your answer to me a moment ago suggested that there were other grounds on which a comprehensive PBR approach was determined to be not appropriate; is that fair? A. Yeah, that's correct. Q. And can you list for me what those other grounds were, since they're not in the answer? A. Yeah. I think they're dealt with perhaps not so much in this answer but elsewhere in the evidence, we mention some of the other issues that we have that we Seal,Charleson,deJongh 61 Grant,McGill cr ex (Warren) haven't tackled as yet. And those include the thing that I mentioned a little bit earlier in my testimony, the fact that there's ongoing conservation with the existing customer base each and every year. So, in other words, volumes are dropping, all other things being equal, with the existing customer base out into the future, and that means that revenues and margin drop all other things being equal. And that's okay because that's a part of -- that's induced by our DSM activities as well as individual decisions that our customers make about replacing old equipment with more efficient equipment. So that's a factor in the marketplace that we need to consider in a comprehensive PBR plan. We wouldn't want to upset any DSM objectives by the implementation of a comprehensive PBR plan. We also, by the way, made sure that we were -- in designing our targeted PBR plan, that we were considering that and that's why we've left the O&M expenditure component of our DSM plans out of the targeted PBR proposal. It just sits off to the side and will be dealt with by the Board in each case going forward. So that was an issue for us, Mr. Warren, that needs to be dealt with somehow in a comprehensive PBR environment. The next issue relates to the use of the Board's formula for ROE. We believe that it may be timely for a Seal,Charleson,deJongh 62 Grant,McGill cr ex (Warren) review of the ROE formula at the point that you're implementing a comprehensive PBR if the utility is going to be placed under a greater risk in a comprehensive PBR situation. The targeted PBR proposal that you have before you today does not substantially or materially change the risk profile of the utility, so that's something that the Board does not need to deal with now, but I believe that the Board will need to deal with that issue when comprehensive PBR plans are implemented generically in Ontario, at least for the gas side of the industry. So that's another issue, Mr. Warren, that I believe we need to tackle. There still may be others, and the reason I say that is because we haven't completed the analysis -- the detailed analysis on a comprehensive PBR approach. Q. I want to take you back, Mr. Grant, to the point at which you had the options that were going forward to your executive management team, and one of the options was a comprehensive PBR, you felt it was inappropriate. OEB Staff Interrogatory No. 37 sets out two of the grounds and you've just added two more. One was the possible need to adjust the Board's formula ROE and the second is the possible adverse impact on DSM plans. Were there any others that were included in the list that went to the executive management team as grounds upon which it was inappropriate to go to comprehensive? A. Excuse me for a second? Seal,Charleson,deJongh 63 Grant,McGill cr ex (Warren) ---Off the record discussion. MR. GRANT: A. I don't recall any other significant ones, Mr. Warren. And just so that the record is clear on this, when I was talking about the conservation volumes it was in the context of DSM, but it was also in the context that in a comprehensive PBR environment you've got this declining margin throughout the whole period and that needs to be dealt with. I guess that, given those issues that we still had to deal with and that are not inconsequential, they're fairly substantive issues, that was one of the things that drove us to the conclusion that a step-wise approach was the right way to go and that we could tackle the O&M area in particular because, as I said earlier, it represents a significant component of revenue requirement but also because it's something that's well understood by the parties, by the Board and by ourselves. So those aspects of the comprehensive PBR situation, or of a comprehensive PBR plan really help to support, in our view, the step-wise approach. Q. Now, in the 15 or 16 months since you made your recommendations to the executive management group, can you tell me: Have you done any work within Consumers Gas to address these three supplementary issues, the ongoing conservation issue, the possible impact on DSM plans, and the formula ROE? Have you done any work to try and overcome those Seal,Charleson,deJongh 64 Grant,McGill cr ex (Warren) impediments to find a way of dealing with them if the desired end state, as we've agreed, is a comprehensive PBR? A. No. Q. Okay. Now, one of Dr. Bauer's critiques of the proposal that you have before the Board which is articulated on page 7 of his prefiled evidence, if you could turn that up. In the last full paragraph on page 7 of his prefiled evidence, it says: 'There are several disadvantages to leaving out the capital side of the company's operations. First, the proposed model creates only weak, if any, incentives to realize possible efficiency gains that are contingent upon the realignment of the overall input structure (labour, materials and capital). Indeed, the proposed plan may even create the opposite effect of gold plating.' And to like effect, if I could just ask you for a moment to refer to Dr. Norsworthy's evidence at page 5, where he says -- beginning in the first full paragraph about half-way down the page, he says: 'The chief objection is that the company's O&M productivity proposal omits capital. The incentive to overinvest in capital is well known in regulatory economics as the 'average Johnson Seal,Charleson,deJongh 65 Grant,McGill cr ex (Warren) effect'. Under cost of service regulation, the company has an incentive to overinvest in capital where a comfortable rate of return is insured.' Can we agree that generically Dr. Bauer and Dr. Norsworthy are making the same observation or the same critique which is that by leaving out capital there is this risk of overinvestment in capital; is that fair? A. I think they seem to be making the same -- it would appear they're making the same observation, yes. Q. Now, just dealing with the text of Dr. Norsworthy's critique, he says, and I quote: 'The incentive to overinvest in capital is well known in regulatory economics as the 'average Johnson effect'.' Do you agree with the observation that the incentive to overinvest in capital is well known in regulatory economics? A. Dr. Norsworthy is the expert in regulatory economics and I'll accept his statement, that it's well known. Q. Do you accept the concern which the two experts Bauer and Norsworthy have articulated about this deficiency in a limited plan; namely, that it doesn't capture capital? Do you accept that that's a legitimate concern? A. No, I don't. Q. Can you explain why? A. I don't think it's a concern really for a Seal,Charleson,deJongh 66 Grant,McGill cr ex (Warren) number of reasons. The first reason is that in our PBR period for the next three years we're going to be bringing cases before the Board that involve a capital budget and involve the establishment of a rate base arising from that capital budget. And, as we have done in the past, we will need to justify each and every dollar in that capital budget to the Board and indicate to the Board why we're pursuing the plans that we're pursuing that affect the capital budget. The burden of proof remains with us in that process and we're prepared to discharge that burden of proof. So I don't see any relevance to this point that they're making in our situation for that reason alone. Secondly, if you look at this issue in a little more detail, the capital budget, and that's one of the reasons why I have put that piece of evidence before the Board earlier this morning, the three principal areas of the capital budget that are brought before the Board each and every year have to do with either providing service to customers who request it under Board-approved guidelines, have to do with operating an efficient and effective system in replacing plant that needs to be replaced in a reasonable way, in a timely way, in a just and reasonable way. Those two elements make up the vast majority of our capital budget. The area of the capital budget where technology drives the dollars, that being in some cases the meter Seal,Charleson,deJongh 67 Grant,McGill cr ex (Warren) reading area, or in some cases the computing area, those might be areas for examination in future proceedings. Those might be areas that we will have to ensure that we're explaining why the budget is the way it is and, if need be, any interrelationship between those capital budget items and the company's O&M area. So I expect that that will be something that we will be doing in the future and we're prepared to do all of that. So I don't see any risk whatsoever in our proposal, from a rate making point of view. Q. Is it the case, Mr. Grant, that of the two grounds that you've articulated as a response to the Bauer/Norsworthy critique, both of them in the end are variations on one theme; and, that is, the existence of a regulatory scrutiny over the capital budget. Isn't that fair? A. Well, it's based on two things; prudent planning, from our point of view, which we have conducted for years, and then the demonstration of that prudent planning in a regulatory context. Q. But the protection of the ratepayer interest, which I think we can agree lies behind what has been articulated by Drs. Norsworthy and Bauer, that protection, according to you, will come in the ability of the Board to scrutinize capital investment in the rate case; right, to see whether or not, in fact, you have invested prudently. Correct? Seal,Charleson,deJongh 68 Grant,McGill cr ex (Warren) A. Yes, I agree with that and I don't think that there's a problem with that. I think that we will need to lead evidence in these areas, perhaps a little bit more that we have in the past, such that the process of approving these capital items remains as efficient as possible in successive rates cases. Q. Now, if we could just stay with -- or return to, I'm sorry, Dr. Bauer at page 7 of his prefiled evidence. Dr. Bauer speaks to this issue of increased regulatory scrutiny beginning at the bottom of page 7 where he says: 'In defence of the narrow plan, the company argues that the Board has the established power to review the prudence of capital expenditures; however, this point is inconsistent with one of the key arguments pertinent to PBR; namely, that the regulatory agency has a systematic information deficit compared to the utility, thus, it often can only distinguish between prudent and wasteful projects if there is a gross misconduct of the utility.' Now, what is your response to that concern expressed by Dr. Bauer? A. Well, I have been around long enough to know how much information we place on the public record and provide to the Board in regulatory processes and have done so for years, so I don't accept, in the case of Enbridge Seal,Charleson,deJongh 69 Grant,McGill cr ex (Warren) Consumers Gas, that there is any systematic information deficit whatsoever. Q. But I thought you just agreed with me or observed, apropos this regulatory scrutiny issue, that perhaps increased evidence would be required in this context in order to satisfy the Board that you hadn't overinvested in capital in order to compensate for the PBR scheme. You have agreed that -- A. But I think -- sorry. Q. I thought you had agreed that increased evidence may be necessary and appropriate? A. Yes. I can see us -- and let me give you this by way of example, and perhaps that illustrates my point better. We have not invested significantly in the automatic meter-reading area. We have put some dollars into this area. Some utilities have gone a lot further than we have in terms of pursuing that particular area. And that's an example, Mr. Warren, where there is some overlap between O&M and capital. So, in other words, if you spent a lot of money on automatic meter-reading equipment, you would be able to save some dollars in terms of meter-reading, which is an O&M item. As I said, we don't have a significant -- historically, we haven't spent significantly in that area. I think that if we were to - and I will come back to this in a second - but if we were to pursue that in the Seal,Charleson,deJongh 70 Grant,McGill cr ex (Warren) next couple of years, putting a lot of dollars, throwing a lot of dollars at automatic meter-reading, clearly that would be a budget item, capital budget item. Clearly we would have to come forward to the Board to say: 'Here's why we're doing this,' and we would have to demonstrate that over the long term there's a benefit to ratepayers in doing so. Now, it's my understanding, from speaking to the people in our company that are closest to this technology issue, that it will be some time before we can pursue automatic meter-reading to any great extent. One of the reasons, by the way, is that we only read meters once every second month and we do it to save O&M dollars and that, of course, is one of the reasons why our O&M base is so low. So that to make it economically feasible to save dollars, we've got relatively few dollars to save in the O&M area and I'm saying relative to other utilities that may read once every month. So we've found it very difficult to make these expenditures pay out economically. Now, we would not, Mr. Warren, bring this forward to the Board if we can't internally make it pay. But if we could make it pay, and if we could demonstrate that the ratepayers were better off in the overall scheme of things, we would bring evidence to explain that. And, in that regard, there would be a little bit more evidence before the Board than otherwise, but I don't Seal,Charleson,deJongh 71 Grant,McGill cr ex (Warren) see it as a significant problem. Q. Thank you for those answers, Mr. Grant. Finally on this particular category - the narrow issue of the scope of the proposed PBR plan - are you aware, Mr. Grant, what I take to be common knowledge, but correct me if I'm wrong, that Union Gas... Have I got that right, Union Gas? [Laughter] I was waiting for Ms. Allan to leap to the mike if I had it wrong. [Laughter] ...that Union Gas has embarked upon a form of stakeholder consultation process, talking to various stakeholders on an informal basis with a view to seeing if it can reach a consensus on a comprehensive PBR plan to put before the Board some time later this spring? Are you aware that that's taking place? A. I'm aware that they have started down that road and that they are discussing things with various parties. We're a major customer of Union Gas and we were, I presume, given the same presentation as others on this particular issue. So there -- that's how they're approaching their own situation. Q. Now, have I correctly understood your answers that you are not now; that is, Consumers Gas is not now presently working on the development of a comprehensive PBR plan; is that right? Seal,Charleson,deJongh 72 Grant,McGill cr ex (Warren) A. That's correct. Q. Now, can you indicate to the Board when it is you intend to begin working on the comprehensive PBR plan, given that we have agreed it is the desired end state? A. I believe that we're going to continue to analyze and work on, if you will, a comprehensive PBR plan probably starting this spring and then, proceeding from there, to tackle a number of the issues that you and I have discussed, Mr. Warren. And hopefully, at some point, we will be able to have something that we ourselves internally are happy with and that we can move forward on that particular area. Q. Is the company prepared to commit itself to a stakeholder process as it develops that comprehensive PBR plan? A. We're prepared to commit to a stakeholder process, yes. I think that it would probably be -- it would probably take place after we have completed our analysis internally and worked up, or come to conclusions on these issues. We would then launch a stakeholder consultation process. Q. You would be aware, I take it, Mr. Grant, that there has been considerable movement towards the development of PBR schemes for Servco and for the individual electric distribution utilities; correct? A. I understand that those processes are currently underway. Q. Can you explain to me, Mr. Grant, what Seal,Charleson,deJongh 73 Grant,McGill cr ex (Warren) impediments would there be to Consumers Gas being able to put before the Board a comprehensive PBR plan to be considered immediately after the conclusion of EBRO 500? Why can't you do that? A. Immediately after EBRO 500? Q. EBRO 500 is about to be filed, as I understand it-- A. We filed the application, yes. Q. --as we speak. A. It's actually RP-1999-0001. I think the Board has moved off the EBRO reference. Q. The story of my life. I'm always just behind the wave. [Laughter] MS. LEA: Apparently you're not alone. [Laughter] MR. WARREN: Q. Whatever it is-- MR. GRANT: A. Yes. Q. --your next main rates case, the thing has been filed; is that right? A. The application has been filed, correct. Q. And, in the ordinary course, it would probably be considered, according to the usual schedule, some time late spring with a view to getting a decision some time hopefully August, early September. Fair enough? A. Yes. Q. And that, we can agree - I'll return to this point in another context in a few minutes - but we can Seal,Charleson,deJongh 74 Grant,McGill cr ex (Warren) agree that as part of that - if we left aside this PBR scheme, if we magically imagined that we were back in our offices doing other things today - that as part of that process, the Board in the ordinary course would be considering an O&M budget for the company; correct? A. Yes. In the absence of a... Q. In the absence of this? A. Yes. Q. Okay. And my question then is: What impediments are there that would preclude the company filing either simultaneously or over the course of the next few months a comprehensive PBR plan that the Board could then consider armed with, among other things, a freshly considered O&M budget? Why can't you do it? A. Well, I think that there are two reasons. First of all - and this may not seem significant to you, and I'm not suggesting this is the most significant reason - but we just don't have the horsepower to put it all together. I would be involved in the process and I'm not in that process right now; I'm in this process. But, secondly -- Q. You can be excused, if you like, Mr. Grant. [Laughter] A. And secondly, and more importantly, is the issues that you and I were discussing a little earlier. I think that especially because there is a public Seal,Charleson,deJongh 75 Grant,McGill cr ex (Warren) interest angle or aspect to system expansion, I believe that those issues need to be dealt with carefully and thoroughly and it's going to take us a little bit of time to do that. I mean, the last thing that you want to have is a situation, in my view, where you cannot expand the system into certain areas and some customers are either going to have to go without gas service for some period of time because it's not economic under a comprehensive PBR to do so, or they will have to pay very large contributions in aid of construction to get the main extended to their area. Those are big issues, in my view, and we need to wrestle with those and decide what implications there are in the comprehensive PBR environment for system expansion. Q. In the context of that, I return to my puzzlement which I expressed earlier: Why you haven't been working on those major impediments for the last two years when you have been considering PBR? MR. CASS: Madam Chair, if I might, Mr. Warren has several times referred to this two-year period, and if I could just remind him that two years was the start of the process of analysis, it was not the time at which the impediments were identified. MR. WARREN: Q. You approved, and your executive management team approved of it 16 months ago; right? MR. GRANT: A. Yes. Q. Sixteen months ago you were aware of these Seal,Charleson,deJongh 76 Grant,McGill cr ex (Warren) impediments; right? A. Yes. Q. Why haven't you been working on reducing those impediments in the last 16 months? A. Well, I think that the reason is clear enough. We are pursuing a step-wise approach to performance-based regulation. You know, you can't -- we don't have the ability to, on our own, decide on these issues and we -- but we do have the ability to analyse them and we believe that it's going to take a little bit of time to do so. We have not done so in the last 16 months, that's true, but on a go-forward basis we need some time. Q. Okay. My final question in this area: Is there -- do you believe there is any concern which this Board ought to have about having the two major distribution utilities having different PBR plans in place? Accept for a moment the hypothetical, that Union would have a comprehensive PBR and the Board were to approve your targeted PBR: Should the Board be concerned, from a public policy point of view or from a practical point of view, about having the two major distribution utilities have different PBRs? A. I don't think so. I think what is clear in our evidence, and also in respect of the processes on the electric side, is that there may have to be some customization of PBR plans as amongst utilities and I Seal,Charleson,deJongh 77 Grant,McGill cr ex (Warren) think that that is -- at the end of the day, I think that's probably what we will have ended up with, not just on the gas side but on the electric side in Ontario. So I don't think that the Board needs to be concerned about that. There can be custom-designed PBR plans for utilities, and it's actually happened in other jurisdictions as well. So I don't see where there's a big concern there. In respect of the reference you've made to the Union situation, you and I don't have enough details on the Union proposal to know at this point whether there would be any concerns. I would assume that Union would be tackling some of the issues that I've raised and finding some way to resolve them, but I don't have any details at this point, so it's rather difficult for us to speculate. Q. I want to turn to the third of my four categories and, that is, to examine just briefly some of the basic underlying principles of, what I'll call, the baseline O&M budget. This was dealt with in the context of the last case. I don't want to repeat it beyond a few basic structural issues. First of all, the baseline O&M budget for your proposed PBR, is that O&M budget which was approved by the Board in EBRO 497 as adjusted for separation; that is, as adjusted by the results of the Board's decision in the 179-14 and -15; is that right? Seal,Charleson,deJongh 78 Grant,McGill cr ex (Warren) MR. CHARLESON: A. Yes, that's correct. Q. And with respect to the budget that was approved by the Board in 497, Mr. Charleson, as I recollect the record in that case, the budget numbers which form the core of that were originally prepared in the summer of 1997; is that correct? A. Late in the summer of '97, yes, that would be correct. Q. And those numbers prepared in late 1997, your proposal is that they will form the baseline budget for an O&M PBR scheme which is to last three years into the future; is that correct? A. That's correct. Q. Now, some mechanical questions to you, Mr. Charleson, I guess. Will there will be any adjustments to the baseline budget, and let me give you the particular categories. Will the 1997 forecast numbers which are in the budget approved in 497, will they be adjusted for 1998 actuals? A. It's my understanding that, no, they would not be adjusted. That is the Board-approved number for 1999. Q. Is it the intention of the company that there be what I describe as a true-up mechanism so that the baseline budget at the beginning of the PBR scheme will reflect, for example, the actual numbers coming out of the separation of various activities out of the utility? Seal,Charleson,deJongh 79 Grant,McGill cr ex (Warren) A. It's my understanding a true-up mechanism was discussed to a certain extent in 179-14 and -15. I believe Mr. Hills had some discussion with you on that and I believe our feeling is that there would not be a need for a true-up mechanism and we would not be -- we're not proposing one in our application. Q. And can you just, for the purposes of this application, articulate why you would reject a true-up mechanism? MR. GRANT: A. Let me back up a step, that there will be a -- with respect to the PBR base, there will be a true-up mechanism in the sense that we will, at the end of the day, reflect in the base what the Board decides in EBO 179-14 and -15. So, in other words, the Board has to approve the numbers in the unbundled budget to do it. So that's -- Q. Those are forecast numbers; can we agree on that, Mr. Grant? A. That's correct, yes. Q. Go ahead, please. A. So we'll true up for what the Board decides in that decision. The evidence in this proceeding assumes that the Board is going to approve the numbers as filed in the 179-14 and -15 proceeding. But that's the only true-up to the base. Remember what we're starting from is the Board-approved 1999 test year base and then making adjustments to it. Seal,Charleson,deJongh 80 Grant,McGill cr ex (Warren) Q. And my question was: What's the objection which the company has to a true-up mechanism so that we would be dealing with a baseline that reflects actuals? A. That reflects actuals? Q. Actual cost of separation, for example. A. Excuse me. ---Off the record discussion. MR. GRANT: A. As with any forecast, I guess, Mr. Warren, there is some risk around the forecast that the amount might end up being slightly different than what is in the evidence, and that's a risk that the shareholder bears each and every year opposite forecasts. I don't think that there's going to -- there would be a substantial change in the figure. I guess I can't go any further than that at this point. I don't know what the actuals are, but I can't conceive of why they would be substantially different. We're going to move 570 odd people over to Consumersfirst and their salaries have been accounted for in the 179-14, -15 application and when we move them, that's when the actuals happen. Q. I don't want to beat this horse beyond the stage of the post mortem, but I'd like an answer to my question which was: I asked you the question why you object to it. And the answer I'm getting is: Well, you don't really think it is necessary other than minor adjustments. My question is a simple one: What's your Seal,Charleson,deJongh 81 Grant,McGill cr ex (Warren) objection to having a true-up mechanism? A. I guess my objection is that I don't think it's necessary in the circumstances. You know, if at the end of the day instead of $21.5-million being the unbundling adjustments, if it was $18-million, which would set a higher PBR base, and if all parties, including the Board, were prepared to accept that that was what we were going to go forward in the base or, alternatively, that it wasn't 21.5, it was 23 in the actuals, I suppose it wouldn't be a significant concern of ours if that was what the Board really wanted to do. But I just don't -- my objection is that I don't see a need for it. I think we've got a pretty accurate number. Q. Do you have an objection to the baseline budget for PBR going forward on the basis of 1998 actuals as opposed to the old '97 forecast? A. Well, I don't think it was ever -- you said the 1997 forecast. It's based on the 1999 Board-approved. Q. No. It was actually the 1996 forecast of -- it was developed... I've forgotten my time line Mr. Charleson and I were talking about when these numbers were first produced. A. Yeah. Q. And I'm just wondering why it is, for a three-year PBR, the company would object to having a baseline that reflected the most current numbers we have, which would be 1998 actuals. Seal,Charleson,deJongh 82 Grant,McGill cr ex (Warren) A. I don't think that it's appropriate to do that. I think what is appropriate is for the Board, in going into a PBR period, to know that they're starting out with a just and reasonable number. The Board has already decided that the 1999 number is just and reasonable and I think we can all take great comfort in that. Any other number, in my view, becomes problematic. We've got to have -- indeed the way I read the Board's principles on PBR, they've got to be satisfied that there are just and reasonable rates that they're ending up with in the PBR period and, in my view, that means starting with a just and reasonable base. Q. Now, just following on from that, Mr. Grant, the -- can you and I agree at a very high level - Mr. Thompson's 50,000 feet of observation space - that at a very high level of generality, your company as well as Union is going through a significant period of change in which some of the functions that have been historically carried out by the utility are being pared away as you get down to your desired end state of a core utility; is that fair? A. I can't speak for Union's. I don't know. Q. But you are? A. We're going through a process, as we always have, of change and the pace of change has picked up in the last couple of years and that has meant that we've had to -- I think as the Board knows, we reorganized some Seal,Charleson,deJongh 83 Grant,McGill cr ex (Warren) responsibilities a couple of years back and that was really as a result of the pace of change picking up and that really continues to be an ongoing process as it does with any company in a competitive environment. Q. Okay. You would be aware that the Market Design Task Force has either issued a report or is in the process of issuing a report dealing with, for example, the further unbundling of LDC services, including transportation, storage, distribution and billing; is that fair? A. From a process point of view, I understand that they are either just about to issue that, issue a report, or have recently. Q. And can we not agree that if those recommendations are followed, there may be changes in the O&M expenses of the utility? A. You're going to have to give me an example. Q. Well, let's take billing services as an example. Mr. McGill reaches for the -- he's perhaps more knowledgeable. MR. McGILL: A. Well, I'm quite familiar with the Market Design Task Force process. I've been involved in three of the technical sub-committees. And the last draft of the Market Design Task Force report that I reviewed last week indicated to me that there's still some significant areas where there is little or no consensus that has been reached and there's a great deal of uncertainty as to how the market is going to Seal,Charleson,deJongh 84 Grant,McGill cr ex (Warren) restructure over the next two to three years. Q. Is it not the case -- sorry, Mr. Cass. MR. CASS: I just wanted to comment, Madam Chair. I don't know if Mr. Warren is carrying on with this line, but I just wonder about the propriety of getting into a discussion about a report that's only in draft form at this time. But perhaps Mr. Warren is moving on in any event, I don't know. MR. WARREN: I wasn't going there, Mr. Cass, so you don't need to worry. Q. Where I wanted to get to though, Mr. Grant and Mr. McGill, is whether the Board in January of 1999 can be confident that what the utility looks like and what services it provides will be the same as the utility that comes before the Board as early as -- whatever the next main rates case is called, services are being changed, the way you deliver services are being changed, some services are being taken out, all of which is an aid, I guess of the point, to save time. Is a consideration of this budget at this point not premature until we know what the utility actually looks like? MR. GRANT: A. I don't think it is. I suppose one could -- you know, given that there is always change happening, one could always try to argue that point, that you have to wait until all the change is done. But I don't think that the Board needs to be concerned about that. I think that over the three-year Seal,Charleson,deJongh 85 Grant,McGill cr ex (Warren) period that this PBR will be in place the core utility will require a billing function, it will require to simply bill the Board-approved charges and the Board-approved rates. If I think even to the end state that some parties postulate where there really is strictly a delivery business that you're operating, even in that end state I believe that there's an argument that can be made, a reasonable argument that that end state utility still requires billing and still will perhaps even be communicating each month with the end points, with the delivery points. And that may happen even if the actual billing of the regulated charge is found in somebody else's bill, in an energy service provider's bill as a line item. So I think that there are all kinds of end state scenarios that have been envisioned and it's not unreasonable to assume that billing, as an example, could be required by a delivery company at the very end state, let alone the next three years. MR. McGILL: A. I think another point associated with the type of change that we might be faced with is that there could be increased costs in trying to work our way through the transition and establishing the new processes and procedures and infrastructure required in order to support whatever end state we end up with. And the company, to some extent, is going to be at risk for that under the PBR. Seal,Charleson,deJongh 86 Grant,McGill cr ex (Warren) Q. Just finally though, gentlemen, could we not agree that the existence of some form of true-up mechanism in which the O&M budget would be trued up as of the date of the next main rates case, would capture the effects on the O&M budget on any changes that might take place between now and then as a safety valve? MR. GRANT: A. Well, I think I go back to my earlier answer. One of the primary concerns that the Board has opposite PBR is setting just and reasonable rates in that period, and I think you've got to start with something where the Board has already said that is just and reasonable; and, therefore, that's your starting point. Then the Board deals with the formula from that point forward and says: Is this formula going to result in just and reasonable rates? Those are the principal considerations of the Board. And because of that, I think the Board should be starting with the 1999 O&M base as laid out in our evidence as adjusted by the 179-14, -15 requirements and, indeed, as adjusted by some of the adjustments -- the specific adjustments that the Board required of us in the EBRO 497 decision. Q. All right, panel. I want to move to my last area of inquiry which is to see if I can understand the differences between what you're proposing in your PBR regime and the existing cost of service regime. As I understand the evidence, panel, the baseline Seal,Charleson,deJongh 87 Grant,McGill cr ex (Warren) budget will be adjusted annually according to a formula; is that right? A. Yes, we're going to rebase for inflation and for customer growth. Q. And there are some elements of the scheme which will be renewed and reviewed annually; is that correct? That includes your actual growth numbers and your inflation numbers; correct? A. Yes. Q. And is it the intention that those will be reviewed by the Board as part of a main rates case? A. Well, I don't think they need to be reviewed. It's a question of truing up for the actuals that were -- that happened in the period and the new forecast based on I believe it's the August point in time that I've suggested in one of my interrogatory responses. So I believe the true-up process to be relatively mechanical. The only -- I suppose the only element that would be reviewed in the normal course of events would be the customer growth variable. Well, obviously the customer growth variable, on a go-forward basis, is something that the Board would be reviewing as a matter of course in the rate case because that customer growth supports the capital budget. Q. Under what circumstances, Mr. Grant, will the Z-factors be reviewed? Would that be part of the main rates case? A. Yes, it would. Seal,Charleson,deJongh 88 Grant,McGill cr ex (Warren) Q. This is a topic for another panel, and I don't want to deal with it in detail, but if you could turn up your prefiled evidence at Exhibit C, section 6.0. At page 1 you list the six Z-factors. No. 6 is emerging programs and program refinements. Would that category include changes in the O&M expenditures that might arrive from the kinds of matters we were just talking about, further restructuring, a change in the way services are delivered, unbundling, that sort of thing? A. No. Q. Now, the Z-factors we have agreed would be reviewed in the rates case. Now, I want to turn to look at what the Board is going to be examining in whatever your next main rates case is numbered, I'll call it for shorthand purposes EBRO 500, okay? It's going to undertake, I assume, the usual array of examinations, including looking at your capital budget. I understand CIS is part of the case this year; is that right? A. Yes, that's correct. The Board will look at the capital budget and CIS is a part of the case. Q. Now, if we assume -- let's assume for a moment - it's the basis of my question - that this application were not before the Board, there was no PBR proposal and we were going into another typical rates case, you and I can agree that one of the factors in that Seal,Charleson,deJongh 89 Grant,McGill cr ex (Warren) case would be the scrutiny of the company's O&M budget; correct? A. Yes, it could be an issue. There's a slight chance that it wouldn't be on the issues list, Mr. Warren. Q. It's always nice to get a visit from the tooth fairy, Mr. Grant. [Laughter] And can we agree that as part of the scrutiny, looking at it from a ratepayer perspective if we can, Mr. Grant - I know you're a generous man and can put on the shoes of the ratepayer for a moment - that one of the things the ratepayer could do in that is it could examine the productivity factor to see whether it was, for example, higher than .73 per cent; do you agree? As part of a rates case, a ratepayer could do that? A. Under a cost of service regime? Q. Under the old cost of service regime. A. Yes, that's something that could be examined. Q. And can we agree that as a result of, if the Board were to approve the PBR scheme which is before it, that the ratepayers are losing, first, the opportunity to review annually, to scrutinize annually the O&M budget; and, secondly, the opportunity to scrutinize annually what your productivity factor is; is that fair? A. Well, I suppose that given that PBR is different from cost of service, so there are some things that disappear and the two rights that you mentioned, the right to examine those issues is something that is not Seal,Charleson,deJongh 90 Grant,McGill cr ex (Warren) there under a PBR proposal. And, of course, there's a quid pro quo here in the sense that obviously what the ratepayer is getting is something that is substantive in a PBR world, if you will. I think it's quite fair to say, from a ratepayer perspective, that that ongoing detailed line-by-line scrutiny of the O&M budget disappears and there is something that is disappearing as a result of that, some process. And, in return for that, then to ask yourselves a question: What is the ratepayer then getting under the PBR proposal? And it's that other side of the coin that I would stay focused on if I were ruling on this particular application that's before the Board, because I would be wanting to know: What is the ratepayer going to get from this PBR proposal. Q. I knew that you would get some of the quid from my pro quo in a moment, Mr. Grant, and perhaps we can turn up response to a joint CAC, IGUA and OCAP Interrogatory No. 1 and that's Exhibit D, section 6.1. A. Yes, I have that. Q. Now, there you have indicated that -- the question asked jointly was: What are the expected benefits for Consumers resulting from the proposed PBR? And you indicate that: 'The company has noted elsewhere in its evidence that the PBR formula net of Z-factors Seal,Charleson,deJongh 91 Grant,McGill cr ex (Warren) generates $4.7-million in savings as a result of the productivity offset.' Is that annual savings, or is that over the life of the PBR? A. That's over the life of the PBR. Q. Now, that is, as you've noted, a result of the productivity offset. And my question to you, Mr. Grant, is that in the ordinary cost of service system where the ratepayers are able to scrutinize the O&M budget and to argue before the Board for a higher productivity factor, is it not possible, Mr. Grant, that over the course of this targeted PBR that the ratepayers could achieve greater savings as a result of persuading the Board in the annual rates cases that the productivity factor ought to be higher? Surely we can agree on that? A. I actually don't agree with you on that and let me explain why. What the ratepayer is getting with the targeted PBR is whatever productivity is incorporated already as a guarantee in the PBR, and that's where you took me to that answer and that's what the 4.7-million is. So over the life of the PBR the ratepayer is guaranteed $4.7-million. So there are no guarantees in the cost of service regulatory process; in the PBR process there's a guarantee, 4.7-million. In addition to that, what the ratepayer is getting - and I hope we've discharged this burden of proof Seal,Charleson,deJongh 92 Grant,McGill cr ex (Warren) here - is the knowledge that the gas utility that's before it in this proceeding has a very efficient base to begin with; that is, an O&M cost per customer that is one of the lowest guaranteed in the industry. So the ratepayer is getting that guaranteed as well because that's the going-in point. The ratepayer also gets any savings beyond the .63 per cent that can be driven out in the PBR period when we rebase at the end of the PBR period. So that's part of our proposal. One hundred per cent of those savings, those permanent savings that we can drive out in that period of time will go to ratepayers when we rebase. The interim period is the incentive part of the deal; that is to say, there is an incentive given to the shareholder to try to achieve productivity that exceeds .63 per cent within the parameters of the commitments that we've made on customer service standards. So it's not a blank cheque to cut costs because it's book ended by our commitments on service levels. So the ratepayer is really getting quite a lot. The ratepayer is getting guaranteed service levels in the PBR period, a guaranteed productivity savings and one hundred per cent of the permanent reductions in O&M costs at the conclusion of the PBR period and, in return for all of those, the ratepayer is providing the shareholders with a meaningful incentive within that period of time. So on balance then, Mr. Warren, I don't think Seal,Charleson,deJongh 93 Grant,McGill cr ex (Warren) that you can just look at it -- you have to look at it holistically, not just sort of in a narrow way in terms of process around cost of service vis-a-vis PBR. You have to think about the whole picture and what the ratepayer is getting out of the whole PBR plan. Q. I just want to stick with the narrow question I asked you, Mr. Grant. Can we not agree, as part of the annual cost of service case, the ratepayer -- first of all, we have agreed that the ratepayer has the right to scrutinize the O&M budget every year and try and persuade the Board that the O&M budget should be lower? They have that right; correct? A. Under cost of service, yes. Q. No guarantee the Board is going to accept their argument, but they have that right; correct? A. Yes. Q. They have the right to try and persuade the Board every year that your productivity factor should be higher than the fixed productivity factor of 0.73 per cent; correct? A. Yes, they have that right. Q. In addition, can we not agree as a matter of process, Mr. Grant - without divulging any of the secrets in the ADR process - that when you're leveraging the various arguments that people can bring to bear, that if O&M is still in the mix, that the ratepayers have an opportunity to leverage down the O&M costs, leverage up Seal,Charleson,deJongh 94 Grant,McGill cr ex (Warren) the productivity costs in return for tradeoffs elsewhere? Can we agree at a generic level? A. At a generic level, I can agree that in any negotiation process there can be tradeoffs and the ADR process is no exception, that there's a possibility of tradeoffs. That has not been the case for this utility for the last two years. It has been much more of a line-by-line review of the O&M right through the hearing process. Q. But having agreed with me at a generic level, we can then agree that under your proposed PBR scheme, the ratepayers lose the leverage they're being able to bring to the table in the discussions, reductions in the O&M budget or increases in productivity. That is something they lose. You say they get benefits, but can we agree they lose that leverage? A. Yes. I suppose you're focusing on the negatives which is that that's what the ratepayers are giving up in return for something, and what they're getting in return are the things that I articulated earlier. What the Board is getting, in my view, and what the public is getting is a simplified regulatory process. And I think that has benefits, and some of them are quantifiable and some of them are not. But I think that that's a further benefit that arises from the proposal, Seal,Charleson,deJongh 95 Grant,McGill cr ex (Warren) from a PBR regime. So I take your point that there are some things that ratepayers or, put more accurately, I suppose, intervenors must give up. And there is a distinction between intervenors and ratepayers which I should make. So intervenors are giving something up in terms of process, but I think at the end of the day what ratepayers are getting far and away exceeds whatever potential negatives that there may be. Q. Now, you have expressed that the benefit to the Board is reduced regulatory complexity. That's right? A. Yes. Q. Okay. And just to put some numbers around that, could you turn up the joint interrogatory response, a question of my client IGUA and OCAP No. 24? A. Yes, I have that. Q. Now, as I understand it, under your PBR scheme there is the possibility that the rate cases annually will include a consideration of Z-factors; correct? A. Yes. Q. And if we look at Interrogatory No. 24, what we have is you putting some numbers around the saving time -- saving of regulatory complexity. And, as I understand it, as far as the Board is concerned, what the Board is going to save is four days annually of hearing time. Have I got that answer correctly? Seal,Charleson,deJongh 96 Grant,McGill cr ex (Warren) A. Yes, that's right. I think that's fair. You know, sometimes it's a little bit more; sometimes it's a little bit less; but, on balance, that's a fair number. Q. Okay. Now, just finally a few technical questions for you. If you could turn up, return to CAC, IGUA, OCAP Interrogatory No. 6, just the final paragraph in that, Mr. Grant. You indicate that, as part of the answer in the final paragraph: 'The company will calculate an initial estimate of the O&M line of utility income in its original EBRO 500...' Ah-hah. [Laughter] A. I should probably correct that. [Laughter] Q. The only point of my question, Mr. Grant -(laughter)- just to embarrass you on that point. '...following and pending the Board's decision in EBRO 497-01.' The only reason I want to direct you to that is that there was an exchange - I apologize, Madam Chair, and to Mr. Grant for this because I couldn't find it last night - but there was an exchange which I will undertake to find between Mr. Carroll and Mr. Hills last week in which Mr. Carroll asked whether or not you were, in fact, doing an O&M budget as part of EBRO 500 contingent upon the Board's decision in the earlier case, and I thought Seal,Charleson,deJongh 97 Grant,McGill cr ex (Warren) Mr. Hills said no. And this answer seems to suggest that you are, in fact, doing an O&M budget. Which is the case? A. Oh, no. No, Mr. Hills is correct. We're not. What I meant by this is the initial estimate is based on the formula that we've applied for, moving -- and starting from the adjusted base that we have in this evidence. And then my point is that if, for whatever reason, the numbers are different in the final 179-14, -15 proceeding and 497-01 proceeding, we will then update our evidence within EBRO 500 to reflect that. That was the only point I was trying to make. Q. Has the company, in fact - I'm sure they're confident of their success in all of their proceedings before the Board - but has the company, in fact, prepared an O&M budget for EBRO 500? A. No. Q. No? MR. CHARLESON: A. No, it hasn't. Q. Now, I want to return briefly to the question of the benefits and costs that accrue to the various stakeholders, if you wish, in the PBR regime that you're proposing as opposed to the cost of service regime that exists. The Board gets the benefit of the regulatory -- reduced regulatory burden we have spoken of. Seal,Charleson,deJongh 98 Grant,McGill cr ex (Warren) Can we agree that what the Board also gives up, though, is its historic entitlement to examine or scrutinize annually the O&M budget including your productivity factors? The Board is giving that up? A. As part of the rate-setting process, yes. Q. Now, one of the benefits which accrue to the company -- to its shareholders, I apologize, is that they get the benefit of any savings that they achieve in reducing the O&M budget; correct? A. Well, the shareholder is at risk for generating the 0.63 per cent, and if there is something that allows the shareholder to generate more, that's the benefit to the shareholder in the PBR period. Q. But they get that benefit today, do they not, under the existing cost of service, so they can reduce O&M budget below what it's forecast? They get that benefit today; don't they? A. Yes, there's no change in risk. The risk is the same under our proposed PBR as it is in the existing cost of service format. So the shareholders' risk for O&M could be higher, could be lower. Q. It benefits if it's lower; correct? A. Yes. Q. And because it benefits, there's an incentive under the existing cost of service regime to reduce O&M costs; isn't there? A. I think there's a limited incentive and I think that is really the essence of our point; that cost Seal,Charleson,deJongh 99 Grant,McGill cr ex (Warren) of service -- there is nothing that is inherently bad about cost of service. There is some incentive within cost of service, but PBR greatly expands incentives and that's really what it's all about, it's really a philosophical move off of cost of service regulation onto performance-based regulation. And that's a generic statement. That applies not just for this utility, but any other utility the Board regulates. And what is unique to our situation is that in moving from that old way, that cost of service way, moving philosophically to the performance-based regulation approach, that this is a significant step in that direction. So, once again, it's a step-wise approach, a step-wise move into that performance-based regulation regime. Q. Two final questions which I want to deal with the adverse effects on the company of two possible scenarios. First of all, would it adversely affect Consumers if the Board were to require the 1999 budget, baseline budget to be adjusted for the following three components: 1998 actuals, the results of any further restructuring - services out of the company for example - and the impact of separation? Would the company be prejudiced if the Board ordered that? Seal,Charleson,deJongh 100 Grant,McGill cr ex (Warren) A. You said the following three things in your preamble. I was just trying to get them down. Q. True-up for 1998 actuals-- A. Yes. Q. --the impact of any changes, further changes in the services which the company delivers as a result, for example, of the things that Mr. McGill and I talked about as the Market Design Task Force is considering, as well as the results of the 179-14, -15. Would the company's PBR proposal be prejudiced if the Board required that? A. Well, let me deal with this generically and then I will speak to some specifics. First of all, if the Board were to order that, there would have to be, I would presume, some basis to do that, an evidentiary basis. But the results of the 179-14, -15, that's exactly what we're proposing; that the Board adjust for what is currently before it in the 179-14, -15 case. If you meant in your question the actual results for the -- and we talked about this a little bit earlier, I don't see a significant problem in that regard. But, as I said, I don't think it's going to be much different than what is correctly in evidence. In other words, it's the 21.5-million that is the impact. As to the other two items, I don't think that there is a need to do that. And I come back to, once again, an earlier point that you've got to start with a Seal,Charleson,deJongh 101 Grant,McGill cr ex (Warren) just and reasonable base and move forward with that to know that you're going to get just and reasonable rates into the PBR period. Q. Finally, can I ask you to turn up Board Staff Interrogatory 68, Exhibit D, section 1.68. A. Yes, I have that. Q. Board Staff asked you the question: 'Please describe the ways in which Consumers would be affected if this application had been delayed for one fiscal year or until the next main rates case. Please be as specific as possible.' And the answer is: 'The company's reasons and the implications for delay are a matter of record and are found in the September 25, 1998 transcript of Procedures and Motions day.' Now, if I were to ask you -- I will ask you this morning to indicate the ways in which the company would be prejudiced if the Board were to deny this application and will require you to bring forward a comprehensive PBR scheme as part of the next main rates case, or adjunct to it, if you wish, or I'd ask you the ways in which the company would be prejudiced. Would the answer be the same? Would I be driven back to the submissions in the Procedures and Motions Day? A. Well, I think that those submissions stand as a matter of record, but what I would add at this point is Seal,Charleson,deJongh 102 Grant,McGill cr ex (Warren) that if the Board -- let me back up. This is the first PBR application in the province that's before the Board. And if the Board were to send a signal, not just to this company but to the entire industry, that it wasn't going to approve what amounts to, in my view, a reasonable step toward PBR for one of the utilities in the province, I think that there are public interest ramifications beyond just this company. I think it would send a signal. So... And I don't pretend to know all of what those implications would be. I'm just simply making that statement. For us, for our company this would be really unfortunate. We feel that we have in the last two rates cases established -- we being not just the company but, indeed, the intervenors and the Board itself, have been through this particular line item in the cost of service at some great length and we can all be satisfied that we're starting from a good base. We can all be satisfied, in my view, that we're moving forward in a constructive way on PBR. And so it would be a great disappointment for us if this application were denied. I think it would be telling us, in effect, it's cost of service until some date in the future which is unspecified at this point. So I think that it would be quite unfortunate. Q. So I'm to take that answer plus the transcript of the Procedures and Motions Day as the Seal,Charleson,deJongh 103 Grant,McGill cr ex (Warren) complete answer to my question: How would the company be prejudiced? Is that fair? A. Yes. At this point, I can't enumerate all of the negative implications, but I'm simply stating that there would be fairly profound ones. MR. WARREN: Thanks very much. Those are my questions. I'm sorry for the length of time it took. THE PRESIDING MEMBER: Mr. Warren, I think since we intend to sit for another hour, we'll take about a five-minute break now. And then I guess, Mr. Brett, would you be next? MR. BRETT: (Nodding) THE PRESIDING MEMBER: Thank you. ---Recess taken at 12:30 p.m. ---On resuming at 12:38 p.m. THE PRESIDING MEMBER: Please be seated. Mr. Brett? MR. BRETT: Thank you, Madam Chair. CROSS-EXAMINATION BY MR. BRETT: Q. Good morning, panel. Mr. Grant, you would agree, I take it, that given the magnitude of the change that you're proposing from cost of service regulation to PBR, that it would have been preferable to proceed by way of a consultative process and consult with the various stakeholders prior to filing this proposal with the Board? MR. GRANT: A. Well, let's not forget a few time lines here. I think that the first thing to keep in mind, Seal,Charleson,deJongh 104 Grant,McGill cr ex (Brett) as I was discussing with Mr. Warren, is that we completed our work and received internal approvals in the late fall of 1997. We then had the task of putting together the evidence that needed to be filed in this case and we also obviously were involved in the 497 case which started up shortly after we gained approval internally for the PBR. So our efforts were dedicated to getting that evidence ready and getting it filed in June of this past year. Now, I appreciate that PBR at that point in time was relatively new, or the details of it were relatively new to a number of parties, and I think that we -- in terms of consulting with them, I would hope that the technical conference that we held in August was helping to illuminate the issues for all intervenors. I appreciate your point that there wasn't a consultative process prior to the filing of evidence, but all of our internal resources were really dedicated to trying to get the evidence together and filed with the Board on a timely basis. Q. Because what puzzles me a bit -- I thank you for that answer. What puzzles me a bit is, you've talked to Mr. Warren about the consultative process that Union Gas has launched on and you mentioned that you were aware of the Board-coordinated process of consultation to develop a PBR framework for the municipal electric distribution Seal,Charleson,deJongh 105 Grant,McGill cr ex (Brett) companies and, yet, you didn't carry out a similar process yourselves trying to get a stakeholder buy-in, in effect, before coming forward with the proposal. You're effectively -- other than the technical conference which was sort in the context of a rate case, but your proposal was really developed and then laid out in a, more or less, completely finished basis; is that not fair? A. Yes. We had completed our case and filed that evidence, so it was complete in that respect. The Board's process though, as you know, allows for off-the-record, if you will, discussions and negotiations and we were looking forward to those negotiations and discussions. Q. Perhaps putting it another way, would you agree with me that there was no need in the sense that you weren't mandated or ordered to -- there was no need, strictly speaking, to have a PBR proposal in conjunction with your 497 rate case? You could have done that in a somewhat different way. You chose to include it as part of your 497 rate case. A. Yes, but I don't know what other way you're talking about. We put it into the 497 case so that it would be before the Board for approval. I don't know any other way to get it before the Board other than to file the evidence. Q. Well, it could have come in a subsequent rate Seal,Charleson,deJongh 106 Grant,McGill cr ex (Brett) case as an example. A. Well, we were -- it was timely, I submit, that we bring it forward when we did. We had addressed all of the implications of PBR internally and, indeed, laid those out in our evidence. So I don't -- I see no reason why not to proceed at that point. Q. But it is a fairly major departure from traditional ways of doing business, and I think you've agreed on that point. And it would just have seemed to me that it would be -- when you're starting down a new direction like this, it would have been more appropriate to try and bring everybody together and put a consensus proposal forward that all groups could buy into. A. I don't have a problem with the concept of a consensus process. In fact, I think I touched on that a little bit in the context of a comprehensive PBR process on a go-forward basis with Mr. Warren. But I don't believe that the Board's process that we've just been through; that is to say, the filing of evidence, technical conferences and negotiation sessions - are inconsistent whatsoever with a consensus-building exercise. Q. You'd agree with me, I think, that in the last two Consumers Gas' cases -- rate cases, 497 and 495, there's been a fairly vigorous scrutiny of the Consumers' O&M budget? A. Yes, I'll agree with that, 495 and 497, yes. Seal,Charleson,deJongh 107 Grant,McGill cr ex (Brett) Q. Yeah. And would you agree with me that that kind of scrutiny by intervenors is in the public interest? A. Well, I think that at the end of the day the Board has to set rates that are in the public interest and the Board has a number of ways that they can do that, and certainly intervenors are free to test the company's evidence. But I don't necessarily believe that it's an absolute requirement that O&M, as an example, will always be on an issues list. Q. All right. And just before -- I want to come back to that, but just before doing that, I want to clarify one answer you gave earlier. You expect to have annual rate cases going forward, notwithstanding the fact that you've made this targeted PBR proposal. And, as I understand it, the rate cases would deal with items including capital budget, utility revenue, cost allocation, rate design; is that fair, in the context of -- let's assume for the moment that you had in place your targeted PBR program dealing with O&. M. My understanding of how the process would unfold is that, pending some more comprehensive PBR plan, you would still have annual rate cases which would deal with at least those subjects that I've enumerated and perhaps others? A. That's correct. The O&M would be a line item on utility income and it would be pre-established, in Seal,Charleson,deJongh 108 Grant,McGill cr ex (Brett) effect, in a very similar way to the way in which the Board in its decision establishes the ROE; in other words, by formula. So it would be established by formula and a Board-approved formula from this proceeding. And then the issues that would remain -- potential issues that would remain in the case, would be along the lines of what you indicated, if I can call, the capital budget and revenue items for phase 1 of the proceeding and the cost allocation rate design area for phase 2 of a proceeding. Q. And would there be others -- other areas that would come to mind? A. As I discussed with Mr. Warren, there may be a need for the Board to deal with a Z-factor that had been proposed by the company. Q. As you discussed with Mr. Warren in a sense, one of the things the ratepayers or the intervenors give up, as it were, in a PBR regime as you've proposed is the right to these annual examinations of the O&M budget. Now, in return, I guess your proposition is that they will get -- they'll get some benefit coming back the other way and that benefit will -- would you agree with me that that benefit will have to do with the specific nature of the PBR -- the targeted PBR proposal itself? In other words, that the type of benefit that accrues to the ratepayer is very much contingent on the specifics of the PBR program: What the productivity Seal,Charleson,deJongh 109 Grant,McGill cr ex (Brett) offset is, how large it is in relation to the inflation factor used, to the growth factor used. In other words, whether a ratepayer is looking forward to a series of increasing O&M budgets over a period of years or is looking forward to a series of decreasing O&M budgets over a period of years or something in between is going to be a factor of -- is going to depend on the specifics of the individual program, whether it's a good, fair program, the targeted PBR program? A. Yes. In the three-year period, it will be a function of the application of the Board-approved formula. Q. Right. In other words, it's not an automatic benefit. He doesn't get an automatic benefit, he gets a benefit commensurate with the -- however the formula works in practice? A. Well, I think, as I testified earlier, he does get -- he or she does get an automatic or a guaranteed productivity benefit in our proposal. Q. Yeah, he gets that, but he may also, for example, get an O&M budget that is ratcheted upwards on an automatic basis over that three-year period based on a growth factor or an inflation factor? A. Yes, that's correct. There are other variables in the equation obviously and those-- Q. And under -- sorry? A. --and those variables increase O&M by applying the formula and they increase it for a reason; that being normal inflationary growth is the one reason. Seal,Charleson,deJongh 110 Grant,McGill cr ex (Brett) But the second reason, and an important one I believe, is the customer growth factor. And so what the ratepayer then gets for that particular component of the equation is a continuation of rationale system expansion. I think we sort of touched on that in some of our interrogatories, and obviously that's just the O&M component of customer growth. There are on the benefits side significant benefits to customer growth, increased margins -- sorry, increased volumes, increased margins and increased -- and those go to offset, in part, the O&M cost pressures. So that's -- the ratepayer is getting all of those things through the application of the formula. Q. And under a traditional cost of service regulatory regime though the ratepayer -- the company is not guaranteed as I understand it any particular growth factor in the O&M budget each year. The ratepayer is not necessarily guaranteed a growth -- an increase in his O&M budget - did I say ratepayer? I meant shareholder - based on application of a growth factor or even application of an inflation factor? A. Yes, I agree. There's no guarantees. It has to be something that is addressed by the applicant and the applicant must get the Board to approve that, so there are no guarantees. You and I know that for many years inflation and customer growth have been elements of the Board's consideration of O&M so I don't think that there's Seal,Charleson,deJongh 111 Grant,McGill cr ex (Brett) anything particularly new about that. Q. Well, we may come back to some of the details of those in the next phase of the questions here but as a general proposition - and I'm making this as a general proposition - I'm not referring to your plan particularly. But if a plan is not well-designed, if it's -- let me put it this way: A plan can be designed in such a manner either advertently or otherwise that it could be disastrous for ratepayers? There are examples of such plans that one sees out there. A. If you give us some examples... Q. Well, I was going to give you an example and I really just use this as an illustrative example of kind of the thing that the person doesn't want to see. I'm referring to the Board Staff -- if you look in the Board Staff position paper on Performance-Based Regulation for the Electricity Industry. And that's the first of the two papers, the one that was dated October 16th, the early paper. And I just want to refer to this as -- in I guess it's Appendix C to that paper, so that's the paper entitled Performance-Based Regulation PBR Issues List dated October 16th, '98. MR. CASS: Mr. Brett, might you just identify where you're finding this particular document for the benefit of everyone? MR. BRETT: I have it because it was sent to me. It's not in the record. It's a piece of material I want Seal,Charleson,deJongh 112 Grant,McGill cr ex (Brett) to ask a question about on cross-examination. I assume that you have access to it somewhere. If not, what I can probably do is read you the section from it and then I'll hand you the document if you like and you can have a look at it yourself. In this document the Board was discussing some case studies of PBR experience abroad and they were discussing PBR in the United Kingdom and Norway. And this really pertains to the PBR experience in the first five years in the United Kingdom with the regional electricity companies. These were the electric distribution companies. On pages 20 to 22, the Board describes the experience and the lessons learned and effectively the long and short of it was for the initial period of the price - this was a price cap regime - for the initial five-year period of the price cap regime, the return on equity, the average return on equity for the five -- for the twelve RECs, regional electric companies, was 20 per cent. And I'll just read the relevant paragraph at the bottom of page 20, then I can give you this: 'From '90 to '95, the RECs achieved strong earnings under the price cap. As was intended by the incentive regime, RECs improved productivity, in some cases reducing staff by 25 per cent. Economic growth during this period also resulted in higher allowable revenues. Seal,Charleson,deJongh 113 Grant,McGill cr ex (Brett) Planned parameters may also have contributed to higher earnings by overstating and understating price and productivity changes respectively. These combinations resulted in returns on equity, ROE, of 20 per cent for most of the RECs.' Then they go on to talk about how this result created a strong public perception that the benefits of restructuring were - and I'm quoting the Board: '...inequitably shared between customers and shareholders.' Anyway you may want to just glance at that. My point in raising it with you is just to show that you can have PBR proposals that if they're not carefully thought through are very one-sided and put the ratepayer in a very difficult position. That's really all I'm asking you to agree to. MR. CASS: Madam Chair, it's not my intention to be unduly technical in any way. Of course, we all appreciate I think that the usual rule is to provide something like this in advance of cross-examination. I'd suggest if the Board agrees that perhaps we let the witnesses see what they can do with the question in the way it's been put to them but if need be that they be given an opportunity to come back and supplement their answer by way of an undertaking or whatever. Thank you, Madam Chair. THE PRESIDING MEMBER: I think that's fine, Mr. Cass. Seal,Charleson,deJongh 114 Grant,McGill cr ex (Brett) Let them try and answer it. The question was fairly simply put at the end of Mr. Brett's explanation. Perhaps we can start with that and see where we go? MR. GRANT: I think to answer your question the lesson learned out of that process as I understand it or that particular situation as I understand it is that the incentive to cut costs and be more efficient was not bounded by anything such as a commitment on service quality levels. And I think that that's one of the lessons learned that we had when we designed our proposal. We know that we've got to maintain service quality through the PBR period and as I said earlier that bookends the situation. Having said that, we also know that to be successful you've got to have a meaningful incentive in a PBR scheme and so we've been balancing those issues all the way through as we are considering our particular proposal. At the end of the day what we have before the Board I believe is a good balance between those competing objectives. Just a moment please. ---Off the record discussion. MR. GRANT: Mr. deJongh is the expert in this particular area and I'm just asking him whether there is anything else that comes to his mind on this particular situation. Apparently not. Go ahead. Seal,Charleson,deJongh 115 Grant,McGill cr ex (Brett) MR. BRETT: Q. Well, then just if you would turn up your Exhibit C, section 1, page 2 of your evidence. I just want to ask you a question following on that about the effect of the plan. That's at the bottom of page 2 of 5, section 1, Exhibit C. It's under the title Operations and Maintenance, O&M PBR Program. You provide there a list of what your program is designed to do, a fairly straightforward list. Your first point is the incentive which aligns and balances ratepayer and shareholder interests. Now, I think we've talked a bit about that in the last few minutes and you talked about that with Mr. Warren. I think that what you're saying there as I understand it is it gives you an incentive to reduce costs over the term of the program and those cost reductions to the extent that they lower the -- well, to the extent that you've built in a fair and realistic set of program parameters, in particular the productivity offset, that gives the ratepayer a benefit as well. So the ratepayer benefits by the guaranteed productivity offset and you benefit by the difference between your actual O&M costs and your O&M ceiling as it were over the period of the program; is that fair? A. Yes, the shareholder benefits in that period as long as the shareholder can drive out the savings above the .63 per cent annually. As I said earlier though then when the rebasing occurs at the end of it, a hundred per Seal,Charleson,deJongh 116 Grant,McGill cr ex (Brett) cent of the permanent savings flow to ratepayers. Q. Yes, and we may come back to that later on the detailed characteristics but my understanding of this is that the rebasing that you speak of takes place at the end of the three-year period, not during the three-year period? A. Yes, that's correct. Q. Other than a truing-up for the actual inflation and actual growth with respect to the following years? A. That's correct. Q. Okay. Now, the next statement you make is under (ii) there: '...ensure an ongoing management commitment to service quality.' That's on the same page. I guess my question there is - and I'm making as I go along here something of an implicit comparison at least with conventional cost of service regulation - my question really there is when you say: '...ensure an ongoing management commitment to service quality...' You have that same commitment to service quality now, do you not? Is your commitment to service quality any greater under this than it is today? A. No, it's a commitment to today's service quality. I think the key point is it's ongoing. In other words, it ensures that throughout the PBR period that Seal,Charleson,deJongh 117 Grant,McGill cr ex (Brett) those commitments will be maintained. Q. We'll get into the detail of this later I assume but it doesn't contain -- I think you've agreed your proposal doesn't contain any automatic penalties in the event that you don't reach those service quality targets? A. That's correct. Q. Now, the next phrase you use is 'rational system expansion' and you've taken that -- I think in other IR responses you've indicated that what you mean there is that your proposal is consistent with EBO 188 and you've had a lengthy discussion with Mr. Warren about the fact that you have some issues to think through with respect to system expansion and reinforcement. But isn't it fair to say -- I mean the word 'rational system expansion' -- I don't want to go over the area of discussion at great length but without a system that applies to capital, and it may be a system that applies to capital has to have certain caveats in it or areas of flexibility in it to accommodate certain types of capital spending but isn't it difficult to say that you can have a PBR system that covers off -- encourages rational system expansion if it doesn't in some fashion deal with capital? A. What I meant by this statement 'rational system expansion' is that the formula allows for an increase in the Operating and Maintenance area of the overall cost of service to take account of the fact that Seal,Charleson,deJongh 118 Grant,McGill cr ex (Brett) you have additional customers that you're adding to the system. So in that regard it is entirely consistent with and promotes rational system expansion. If the variable wasn't there it wouldn't be promoting it because it wouldn't be making allowance for the fact that expenses go up as you add customers to the system. The term "rational system expansion" also I think in the context of our situation really relates to EBO 188. That's how the Board currently defines "rational system expansion" and I think, in contrast to a comprehensive PBR situation as I was discussing earlier, that whole issue would have to be reviewed and potentially changed at the end of a comprehensive PBR process. So the point here is that the targeted PBR approach is entirely consistent with what the Board's current guidelines are around system expansion. Q. In your final point, I think you refer to productivity here and you have discussed that, and I take it that the ongoing commitment to productivity that's referred to really is again contingent on the productivity goals and targets that are set out being realistic and fair, for want of a better term? A. Yes. Q. You have an ongoing commitment to productivity today under cost of service, but you would have, in your view, a heightened commitment to productivity under this...? Seal,Charleson,deJongh 119 Grant,McGill cr ex (Brett) A. Heightened incentive, yes. Q. Heightened incentive. And then the cost and complexity of the regulatory process that you refer to, you discussed with Mr. Warren, and that is basically the hearing days that are involved for the Board in looking at this part of the budget under a COS regime? A. Yes. I think clearly it would reduce hearing days and I think, as we say elsewhere, it would reduce interrogatories and other processes that are part of the rate-setting, the current rate-setting process. Q. I just want to ask you one further question on the relationship between this proposal and COS and that has to do with an excerpt, I would like to show you an excerpt from this little textbook, little book here - "pamphlet" perhaps is a better word - that's called Traditional and Incentive Regulation, Applications to Natural Gas Pipelines in Canada. It's written by Mansell and Church and they're from The Van Horne Institute, which Ms. Allan will know well, and it's associated with University of Calgary. I have some copies here for the Board and I think I provided your counsel with copies earlier. MR. CASS: That's right, Mr. Brett. You're referring to pages 171 and 172, I think. MR. BRETT: Yes. That's right. MR. BRETT: Q. Now, I don't want to get into this in any detail. It's a 170-page manual, but I did Seal,Charleson,deJongh 120 Grant,McGill cr ex (Brett) want to -- MR. SWEET: Madam Chair, I suggest that that would be Exhibit No. I1.4. ---EXHIBIT NO. I1.4: An excerpt consisting of pages 171 and 172 of a manual entitled Traditional and Incentive Regulation by R.L. Mansell and J. Church. MR. BRETT: Does the Board have copies of those now? DR. HIGGIN: Yes, we do. THE PRESIDING MEMBER: Yes, we do. MR. BRETT: Q. I have a question on the last section, the concluding observations. This is the very end of the book. The book, in very gross terms, goes through and discusses traditional cost of service regulation, the various alternatives of PBR, compares the two in the context of the classical criteria for good regulatory practice, and then draws some general conclusions. And his particular reference point is pipelines, but I want to just refer you over to page 172, the second full paragraph on that page where the authors state: 'After examining the many complex issues in the regulation of gas transmission and the various regulatory alternatives it seems apparent that none of the new-style incentive regimes represent a panacea. Nor is it possible to conclude that any one of these is uniformly better in terms of key evaluation criteria than Seal,Charleson,deJongh 121 Grant,McGill cr ex (Brett) the traditional COS approach, especially that which incorporates streamlining.' And just for I think your benefit, perhaps I could ask you to take, subject to check, when he speaks of streamlining with respect to the traditional COS approach, he's thinking of things like the introduction of settlement conferences, the introduction of a formulaic method for determining ROE, and items that have reduced the amount of work in the COS approach either from a process, either procedural innovations or simplification such as the Board's guidelines in determining ROE based on changes in capital markets. With that bit of explanation, can you tell me, do you have any problem with this assessment as it would apply to gas distribution companies? Now, he's making the statement with respect to gas pipeline companies, but... And if so, what problem would you have, if any, with this? MR. GRANT: A. Just having heard you read that and having an opportunity here to read a little bit of it myself, I can offer the following comments. First of all, in my view, no regulatory approach offers a panacea, so I don't disagree with him when he says it isn't a panacea. PBR isn't a panacea, but neither is cost of service, so I don't think that that particular point is terribly relevant to our consideration. I note in the next paragraph he talks about tradeoffs, and that's some of the things that we were discussing earlier today. He says, for instance: Seal,Charleson,deJongh 122 Grant,McGill cr ex (Brett) 'The first is whether the regime is appropriate given the characteristics of the system.' Well, that's the very thing that I was talking about earlier in the day in the context of a comprehensive PBR. The characteristics of our system need to be taken into account when you move to comprehensive PBR, so I don't disagree with that, and I think that that's the right way to approach a comprehensive PBR. On the question of streamlining, I think that it's fair to say that this Board has been streamlining the process for a while. They have introduced ADR conferences, settlement conferences which you indicated. The process has also been streamlined by way of application of another kind of a formula within the cost of service which the Board has already approved and that is the ROE formula. So that's another streamlining initiative that the Board has already implemented. And I think the whole point about streamlining and moving forward into a PBR environment is really made in our application because we're taking another step towards streamlining. We are taking another component of cost of service and applying a formula to arrive at that level. So our incremental approach to PBR - and it's a sizable increment, the O&M component, but this incremental approach allows the Board to continue down this road of Seal,Charleson,deJongh 123 Grant,McGill cr ex (Brett) streamlining and it allows us to have tangible benefits from the process as we go along. So I think that there are a lot of -- that the ideas that are put out in this paper about streamlining and the issues that are raised by him in the context of PBRs not being a panacea really are dealt with quite effectively in the proposal that we currently have before the Board and in what we are proposing to do in terms our study on the comprehensive PBR side. Q. Let me ask you, Mr. Grant, you discussed the failure of your proposal to take into account, to deal with the capital side of the company's budget with Mr. Warren at some length, and I won't go into that very much. This is an area, of course, that the Board has expressed concern about; that is to say, increasing capital budgets and capital expenditures in excess of budgets in the last couple of rate cases, 497 and 495. Would you agree with that? A. Capital budget variances; that is to say, the zero and 12 capital relative to the Board-approved capital have been issues in the past couple of cases. Q. And you seized on the example initially, it would happen to be just coincidentally the same example I was thinking about, so perhaps I could ask you about that. One of the concerns that I have about the proposal not being sufficiently comprehensive to cover capital is it would allow you to introduce capital expenditures, fairly large capital expenditures which Seal,Charleson,deJongh 124 Grant,McGill cr ex (Brett) would have the result of driving down operating costs over the plan period and yet these capital expenditures would not be incorporated in the formula. And I'm thinking of something like automatic meter-reading expenditures which we've seen your sister utility come forward with on fairly, potentially quite a large scale. Now, would it be fair to say that you would consider something like that a Z-factor? I mean, if you were to realize very significant O&M savings by the application of capital, but the application of capital was not included in this formula, how do we deal with that as ratepayers? Union are talking in terms of laying off many, many meter readers over a period of years if their project goes ahead full tilt. A. Yes. And I presumed in your question that when you said "sister utility", you meant Union. Q. Yes. I should have said just Union. There's no... Nothing meant by sisterhood there. A. It may very well be economic for Union to pursue that. I understand they read meters every month, so that their savings may, in fact, be greater than the kinds of savings we can generate. And in that respect, they may be able to justify the automatic meter-reading expenditures. But I think I return, and I think your question really is a process issue. I think I interpret your Seal,Charleson,deJongh 125 Grant,McGill cr ex (Brett) question to mean how can we be assured under the PBR, the targeted PBR proposal that you have that whatever you bring forward on the capital side is fair and reasonable, is justifiable? And I tried to address that a little bit earlier. But I foresee a situation where, again, returning to the automatic meter-reading example, and I only use that by way of example, but in that particular case, it seems logical to me that if we were to budget for automatic meter-reading of any substance, that we would go through a process where we demonstrate to the Board that on an NPV basis, it makes sense to allow that to go into rate base at that time. Now, in order to demonstrate that, what we would have to do is look at a stream of savings flowing to the ratepayer; not the shareholder, the ratepayer over that period of time. And what we would then have to do, I would think, is indicate to the Board that, yes, in the first three years of this particular proposal, there is a savings, but that doesn't to go the ratepayer; that goes to the shareholder. The ratepayer not only gets the savings when we rebase in the fourth year. So we would have to then analyze it from that point forward and say, 'Okay. Well, from that fourth year forward, if we present-value all of that stream of savings that's going to the ratepayer, is it reasonable now to justify that expenditure in rate Seal,Charleson,deJongh 126 Grant,McGill cr ex (Brett) base?' So we would have an additional -- in my view, a higher hurdle to overcome in justifying that particular capital item in rate base in that PBR period. And obviously, if we cannot make it pay out from the ratepayers' point of view, then there's no point in bringing it forward and trying to get it rate based. Q. You would do that, but in a regime which was either -- that included capital and that was either a revenue cap or particularly a price cap regime, as I understand it, you would have to fit within that cap, as it were, your capital expenditures perhaps subject to some caveats or extenders or 'Z' factors, but you'd have to basically, conceptually, in principle fit them within that framework to begin with because you would be limited by a cap? A. In a price cap regime? Q. Yes. A. Yes, in a pure price cap, that would be the case. Q. Now, if I can -- I don't know whether you need to turn this up, but it's at your evidence C, Exhibit C, section 2, page 9 to 15. This is the appendix that deals with the information you filed with respect to the other utilities, major gas utilities. Now, I haven't had the -- I guess I could have. I have not read the detailed decisions in each of these cases. I've read the summaries. And what I'm going to do Seal,Charleson,deJongh 127 Grant,McGill cr ex (Brett) is just refer you to the ones that -- the cases that you've brought forward here that deal with either gas distribution companies or gas and electric distribution companies in North America. And as I read it, there are six of them and they are: BC Gas, San Diego Gas and Electric, SoCal Gas, SoCal Edison and Boston Gas. I'm just selecting these out of pages 9 to 15 here. Having read each of these as I'm sure you have, having read each of these summaries, what I make these to be is as follows: BC Gas has a revenue cap, San Diego Gas and Electric has a revenue cap, SoCal Gas has a revenue cap, SoCal Edison has a revenue cap and Boston Gas has a price cap. Now, these are all -- Northwest Utilities has a price cap. Now, these are all basically utilities, large-ish utilities, presumably with a degree of management sophistication and background similar to your own, well-established firms, and they're at various points in their programs. But the observation -- the question I have for you is: Each of these firms has presumably had to grapple with the same problems you raise with respect to how do you deal with capital expenditures, safety factors, reinforcement of safety factors, system expansion capital expenditures and issues relating to the impact on the risk profile of the utility, yet they've all developed these plans and currently have them in operation. What is so difficult about this? If you've got so many companies that have already done it and have Seal,Charleson,deJongh 128 Grant,McGill cr ex (Brett) operating comprehensive plans both in Canada and in the United States, why is this such a problem? I take it you looked at these plans in the course of preparing your own proposal for example. MR. DEJONGH: A. I think it's fair to say that we have looked at these in the context of preparing our proposal, but many of these plans have been only operating for a relatively short period of time and there are only some results becoming available now in terms of how they have been operating. The Boston Gas plan has only been in place for a short period of time and some of its consequences are only becoming apparent now. The information you referred us to earlier talked about the U.K. and some of the lessons learned over the past five years with their plans. But I think as we look at the North American context and the evolution of PBR, there's a little history, perhaps fewer lessons learned thus far. So we'd certainly want to continue to monitor the evolution of these plans as they go forward. Q. I notice that, for example, Boston Gas commenced in 1996, agreed? A. That's correct. Q. SoCal Edison commenced in 1997, so you must have some experience from those two. A. Very little reported to date. I think if you take a look at the literature that's out on the subject right now, there are just starting to be a few reports published that detail the results of the operation of Seal,Charleson,deJongh 129 Grant,McGill cr ex (Brett) these utilities under their PBR plans. MR. BRETT: Thank you very much. Those are my questions, Madam Chair. THE PRESIDING MEMBER: Thank you, Mr. Brett. Who is next? MS. SYMES: Madam Chair, we have sort of organized our cross-examination for hopefully effective use of your time and Mr. Pratte is going to be next with your approval. THE PRESIDING MEMBER: Mr. Pratte, do you know how long you you'll be? MR. PRATTE: More than five minutes, not that much more, but more than five minutes. THE PRESIDING MEMBER: I think we'll break then. As we said earlier, we can't sit this afternoon. We will recommence tomorrow morning at 9:00. Mr. Cass, did you have a question? MR. CASS: Yes, Madam Chair. I think I should just alert the Board and all participants to a scheduling issue in relation to tomorrow. Mr. Winter, of course, is shown on the schedule for tomorrow. He has a serious commitment beyond tomorrow that requires him to be elsewhere. The company would propose given the way things seem to be going that this panel stand down for Mr. Winter, in the best of all possible worlds, since the issue that's now being covered is A1 scope and since that's Mr. Winter's issue, perhaps it will work out Seal,Charleson,deJongh 130 Grant,McGill tomorrow that this panel could stand down after the complete round on this first issue. But in any event, Mr. Winter does have a serious problem after tomorrow and I just wanted to make sure everyone was aware of that. THE PRESIDING MEMBER: Okay. Thank you, Mr. Cass. Okay. We'll adjourn until tomorrow at nine and we will try to deal with that problem. ---Whereupon, the hearing was adjourned at 1:26 p.m., to be reconvened on Thursday, the 28th day of January, 1999, at 9:00 a.m. 131 I N D E X O F P R O C E E D I N G S Page No. Preliminary matters 3-18 Appearances 4-6 Scheduling 10-13 DARRYL SEAL, DAVE CHARLESON, DAVID J. deJONGH, JAMES C. GRANT, STEPHEN McGILL; Sworn. 18 Direct Examination by Mr. Cass 18 Cross-Examination by Ms. Lea 26 Submissions: by Mr. Warren 39-40 by Mr. Mondrow 40-41 by Mr. Pratte 41 by Ms. Lawson 41 by Ms. Lea 42 by Mr. Cass 42-44 by Mr. Warren in reply 44-45 BOARD RULING. . . . . . . 45 DARRYL SEAL, DAVE CHARLESON, DAVID J. deJONGH, JAMES C. GRANT, STEPHEN McGILL; Resumed 45 Cross-Examination by Mr. Warren (cont'd) 45 Cross-Examination by Mr. Brett 103 132 L I S T O F E X H I B I T S No. Exhibit Page No. I1.1. Written evidence prepared by Mr. Chernick entitled: Shared Savings Incentive for DSM Performance by Consumers Gas. 16 I1.2 Book of materials submitted by CEED. 16 I1.3 Excerpt of Dr. Norsworthy's prefiled evidence. 26 I1.4 An excerpt consisting of pages 171 and 172 of a manual entitled Traditional and Incentive Regulation by R.L. Mansell and J. Church. 120 133 L I S T O F U N D E R T A K I N G S No. Description Page No. H1.1 Enbridge Consumers Gas undertakes to check and advise if there is a plan that targets savings within the O&M budget in excess of the $5-million spoken of and, if so to produce same. 52 JB LJ BV [(c) Copyright 1985].