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 Thursday, January 28, 1999 commencing at 9:05 a.m. ---------- VOLUME 2 ---------- B E F O R E : H. GAIL MORRISON PRESIDING MEMBER PAUL VLAHOS Member ROGER M. HIGGIN Member 135 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 136 ---Upon commencing at 9:05 a.m. THE PRESIDING MEMBER: Please be seated. PRELIMINARY MATTERS: THE PRESIDING MEMBER: Good morning. MR. CASS: Good morning. THE PRESIDING MEMBER: Are there any preliminary matters? Mr. Cass? MR. CASS: Madam Chair, I have only one preliminary matter; that is, that I understand Mr. Grant has a correction to make. And I see, in fact, that a corrected page of Exhibit I1.3 has already been passed around. So, in due course, perhaps when the evidence resumes, Mr. Grant could begin by explaining the correction for us. THE PRESIDING MEMBER: Thank you. Are there any other preliminary matters? ---(No verbal response) THE PRESIDING MEMBER: Seeing none, I guess we will resume. I think we were with Mr. Brett. MR. BRETT: No. THE PRESIDING MEMBER: No. We were about to begin with Mr. Pratte. That's right. Sorry, Mr. Pratte. MR. CASS: Sorry, Madam Chair. I wonder if Mr. Grant might just explain the correction. Thank you. Seal,Charleson,deJongh 137 Grant,McGill DARRYL SEAL, DAVE CHARLESON, DAVID J. DEJONGH, JAMES C. GRANT, STEPHEN McGILL; Resumed. MR. GRANT: Yes, thank you. Exhibit I1.3, page 2, in the series of calculations I was discussing yesterday, the line item No. 7 in that exhibit, that being the return component on common equity, was calculated at $109.3-million and that's an after-tax figure. And the analysis is conducted on a before-tax basis and, therefore, I needed to correct that figure. And that's what I've done in the blue pages at line 8, coming to a summation at line 9 of 193.5. The analysis then carries on from there and the ratios calculated at the bottom of the page have been updated accordingly. THE PRESIDING MEMBER: Thank you very much. Now, Mr. Pratte. MR. PRATTE: Thank you, Madam Chair. CROSS-EXAMINATION BY MR. PRATTE: Q. Mr. Grant, let me start with you with a few questions on the issue of your mandate or your group's mandate to consider PBR, if I might. MR. GRANT: A. Okay. Q. If I understood your evidence correctly yesterday, you said that you received a mandate in late 1996 or early 1997 from Mr. Lavergne, I think. Is that right? Seal,Charleson,deJongh 138 Grant,McGill cr ex (Pratte) A. Yes, that's correct. Q. And the mandate was to study the appropriateness of PBR in general terms for Consumers Gas. Is that right? A. Yes, that's correct. We had been monitoring developments in PBR up to that point and we then at that point launched this analysis and with that mandate -- with the mandate that you have indicated. Q. And, I take it, at that time the mandate was wide enough to encompass what we have come to know as either, on the one hand, a targeted plan; or, on the other hand, a comprehensive PBR plan? In other words, you had not prejudged the issue? A. That's correct. Q. For the purposes of this analysis and until you reported to the executive, as I understand it, in the fall of 1997, did you engage any outside experts? A. My recollection is that we did to a limited degree. Q. Did they produce any written reports? A. We were part of a benchmark study at the time that was being prepared by AUC Management Consultants. And that was not done for us specifically, but we were part of that study and, therefore, had access to Mr. Winter's expertise. Q. So I understand it, did Mr. Winter have input into the ultimate recommendation that your group made to Seal,Charleson,deJongh 139 Grant,McGill cr ex (Pratte) the effect that Consumers should adopt a targeted PBR plan rather than a comprehensive one at that time? A. No, he had no direct input. Q. Did Mr. Winter have access to the report which, as I understand it, you prepared for the executive or any other documents that may have formed part of that report in the fall of 1997? A. No, he did not. Q. Did Mr. Winter see any of the analysis that Consumers prepared in coming to the conclusion that it did to recommend a targeted PBR plan? MR. DEJONGH: A. No, only some preliminary drafts of the evidence. Q. Of the evidence in this case, sir? A. That's correct. Q. Okay. I'm going back -- up to the time '97 when your recommendation was made to the executive. So it's in the life of the group up to the time that you land on the conclusion that it should be a targeted plan which, as I understood from yesterday's evidence, was the fall of '97. Did he see any of the draft documentation leading your group to that conclusion? A. No. Q. Is it fair to say then that Mr. Winter was not part of the recommendation to go targeted versus comprehensive? A. I think Mr. Winter's input up to the time of Seal,Charleson,deJongh 140 Grant,McGill cr ex (Pratte) the decision was really just in an educational role, helping us survey the landscape of what was out there. Q. So he was not asked whether or not you should look at targeted -- sorry. He was not asked -- and I'm just for the purposes of our discussion now I'm talking now about until the time where you formed the conclusion, in the fall of '97, not thereafter, okay? In that part of your group's work, Mr. Grant, he was not asked; that is, Mr. Winter, to help you formulate a conclusion as to whether you should go targeted or comprehensive? He was not asked to make a recommendation in this regard? MR. GRANT: A. That's correct. Q. Okay. And nor was he asked, I take it then, that to the extent there might be obstacle in your view to going comprehensive, such as those you discussed yesterday with my friend Mr. Warren about your concerns over capital and the public policy concerns you identified, you did not ask Mr. Winter how, to the extent you had those concerns, the company could address them in the context of a comprehensive plan? A. No. Q. Did you ask anybody outside of the company; that is, any experts or other utilities that might have had some knowledge about comprehensive PBR plans as to how you could deal with those public policy concerns, if I can describe them generically, Mr. Grant? And, again, I'm going to the timeframe where you Seal,Charleson,deJongh 141 Grant,McGill cr ex (Pratte) make your recommendation in '97. A. The answer is no, with the exception that there were probably some discussions of a generic nature around PBR at the CGA, the Canadian Gas Association, one of the sub-committees which is a regulatory sub-committee. Q. All right. But those were generic discussions. They certainly weren't of a nature where Consumers was looking for assistance as to how to deal with the public policy concerns? A. That's correct. Q. Thank you. Now, notwithstanding that, do I understand your evidence correctly of yesterday, Mr. Grant, that you made a recommendation to your executive by doing at least, as part of your recommendation, a cost/benefit analysis comparing a comprehensive plan versus a targeted plan? A. Yes. Q. And when you made that comparison, as I understood the seriousness in your mind of these policy concerns, led you to the conclusion that the balance, for the time being, tilted in favour of a targeted plan? A. That was one of the factors-- Q. Okay. A. --that was tilting in favour of the targeted plan. Q. And, thus, you embraced this, what I think you said, this step-wise approach-- A. Yes. Seal,Charleson,deJongh 142 Grant,McGill cr ex (Pratte) Q. --as opposed to going directly to a comprehensive PBR plan? A. Yes. Q. But is it fair to say that in your recommendation of a targeted PBR plan, you didn't only look at targeted PBR to assess its merits, you looked at it in the context of one alternative, including comprehensive plans? A. Yes, I think that's fair. I think that a comprehensive PBR approach was in context of our decision-making, I think it had to be. We were out to really look at the entire issue and that included comprehensive PBR. Q. So what you're telling me is that the company, when it assessed the merits of targeted PBR, did not feel it could accurately assess its merits without comparing it to some of the alternatives, including comprehensive PBR? A. Yes, that's fair. Q. Now, you told us yesterday that the company intends to move toward a comprehensive PBR? A. Yes, that's correct. Q. And that we can agree; can't we, that whether we are talking targeted PBR or comprehensive PBR, both shareholders and ratepayers have a significant interest in that shift toward a new form of regulation of your company? A. Yes, we can agree on that. Not just my Seal,Charleson,deJongh 143 Grant,McGill cr ex (Pratte) company, but the whole industry. Q. Thank you. And you will agree that IGUA at least represents ratepayers? A. Yes. Q. And, in the context of the comprehensive plan, you want to move to -- I think you told my friend Mr. Warren yesterday that you do intend to engage in a consultative process with stakeholders including ratepayers and I assume including IGUA members? A. Yes, that's correct. Q. And did I understand your evidence correctly yesterday that in respect of the comprehensive PBR plan, you want that consultation to take place prior to finalizing your position on a comprehensive PBR plan? A. I don't think I was that specific. I think I said that we needed to do the analysis internally and we had to come to our own conclusions as to what the best design would be of a comprehensive PBR. Q. Okay. A. I would need to gain internal approvals of that work, and at that point we could start the consultative process. Q. Perhaps I can rephrase my question. Does the company intend, before it files a comprehensive PBR plan for approval by this Board, to consult with the stakeholders; unlike what it did in the targeted plan? Seal,Charleson,deJongh 144 Grant,McGill cr ex (Pratte) A. Yes, we intend to consult with stakeholders prior to filing, major stakeholders, those who are interested. Q. And now you did not do this in the context of this particular targeted plan that's up for approval by this Board? A. That's correct. I talked a bit with Mr. Brett yesterday about this and, of course, the time lines were such that we completed the work in late 1997 and then moved expeditiously to put all of the evidence together to file with this Board in this case. Q. When was the evidence for the targeted plan filed with this Board? A. Either late June or early July. Q. Of what year? A. Of 1998. Q. So approximately nine months after you had sought approval from your executive? A. Yes, that's right. Q. Is there anything intrinsically different in a targeted plan as opposed to a comprehensive plan that would have precluded consultation with stakeholders between the time you finalized your position and filed the evidence in this case? A. No, I don't believe so. I think at a conceptual level, it was really more of a practical matter, Mr. Pratte. We needed to, as I say, expeditiously get the evidence in front of the Board. Seal,Charleson,deJongh 145 Grant,McGill cr ex (Pratte) We filed our application, not just for the 497 case but the 497-01 case, on January the 8th I believe it was of 1998. So we needed to move expeditiously to get the evidence together. Q. Lastly on this point: Was there ever any contemplation in connection with your mandate from Mr. Lavergne or from the executive to consult with stakeholders between the time you had finished your internal analysis and filed in this case? Did you ever address your corporate mind to the possibility or desirability of consulting with stakeholders prior to filing with the Board? A. Not prior to filing with the Board. I think as -- again, it was really a practical matter. The same people who are involved in putting the evidence together in this 497-01 case were involved in the 497 case, and so we had to prioritize things within the company and that's what we did. As we all know, the 497 case then moved according to a good schedule. It was our expectation though that, once we had filed the evidence and all parties had had a chance to read it, that we would be going through a process of technical conferences to explain the material. Indeed, one of the ideas that we had, and turned out to be what we did, was to have a technical conference in August that did not have a transcript, and one of the reasons for that really was so there could be a more open Seal,Charleson,deJongh 146 Grant,McGill cr ex (Pratte) discussion and explanation of the material that we had filed so that everyone could gain an understanding and sort of come up a learning curve. We appreciated that other parties were having to come up a learning curve. I think the whole industry was at that point, and so we wanted to proceed on that basis. We felt that that would be a good way to educate everybody and bring everybody along. I was also obviously aware of the Board's processes and, at the end of the day, we had a negotiation session that, once again, provided an opportunity for a good lengthy discussion on the issues. Q. Let me move on to another point. Once you had finalized your position in the fall of 1997 and gotten approval for the targeted PBR plan from your executive, did you then engage any experts or consult with other utilities in North America to see if you could address the public policy concerns you discussed yesterday? You told me that that did not happen prior to finalizing your position. I'm asking the same question once you finished your internal analysis? A. My recollection is that we had a meeting with Union Gas once we had finalized internally our own decision-making process, and we talked about PBR and had a good exchange of ideas, and it was during that time that we discussed some of the issues that we had with the comprehensive PBR approach, those issues being the ones that we've discussed here. Seal,Charleson,deJongh 147 Grant,McGill cr ex (Pratte) Q. Apart from Union Gas - and I know you're much more knowledgeable about this than I am, Mr. Grant - but there are other utilities in North America that have comprehensive plans? A. Yes, that's correct. Q. There are others in Canada; right? A. Yes. Q. And those include B.C. Gas; is that right? A. Yes, that's correct. Q. And Northwestern Utilities; is that one too? A. Yes. Q. And presumably, because those utilities have comprehensive plans, they've had to address generically anyway those same public policy issues you've raised? A. In those jurisdictions, if those were issues, yes. Q. Well, surely it is an issue for all utilities, the capital investment issues you've raised yesterday you would have thought generically they'd be issues for all utilities? A. I suppose it is a generic issue. The extent to which it is a big generic issue probably varies. Q. But you don't know, you haven't asked them. A. We've had brief discussions with some of the other utilities. Mr. deJongh stays in touch with a couple of people across a spectrum of utilities and stays in general contact with them, but there wasn't any formal sort of meeting that I'm aware of anyway. Seal,Charleson,deJongh 148 Grant,McGill cr ex (Pratte) Q. Perhaps I can put my question this way: After you landed on your position in the fall of 1997 you did not actively seek to find a solution to those public policy concerns by engaging either outside experts or communicating directly and specifically with other utilities in North America that had comprehensive plans in order to address those concerns; is that a fair characterization, Mr. Grant? A. Yes, I think it is. We didn't do any substantive work and, again, I talked about this yesterday with Mr. Warren in terms of where we are in our analysis of comprehensive PBR. We had reached the conclusion that, as we've said before, the step-wise is approach is a prudent way to proceed. And then our efforts became focused on doing that and ensuring that we didn't forget about, obviously, the issues that our analysis raised around the comprehensive PBR approach. But again, our main -- in a practical sense, our main objective was to complete the 497 case, get our evidence filed in this case and proceed. Q. The company then reached that conclusion without any real input from either outside experts or companies in North America that had had experience in comprehensive PBR? A. Well, we certainly looked at lessons learned from other... Q. That's how you interpreted it. You did not Seal,Charleson,deJongh 149 Grant,McGill cr ex (Pratte) speak to people who had lived those lessons; right? A. I didn't. MR. DEJONGH: A. Nor did I, but I think a lot of the studies that were out at the time that we were preparing our evidence spoke to those lessons, surveys done by different organizations that talked either directly to utility managers or regulators or Board staff members in different jurisdictions.l. So certainly there was a wealth of information and lessons learned from those examples that we've been talking about. Q. You surprise me, because yesterday in your evidence you said there was very little literature out there on the benefits of comprehensive PBR, if I recollect your evidence correctly, Mr. deJongh. A. Yeah. I think that there's very little in the way of hard numbers that have come back yet from any of the plans because they haven't been operating for long enough. So, in terms of coming up with a quantifiable benefit that PBR stands to deliver, I think that's still an open question. Q. All right. Let me move on briefly to the issue of capital expenditures, Mr. Grant, you talked about with my friend Mr. Warren, among other things yesterday. You've already told me that the company does intend to move to a comprehensive plan. Do I take it from that that you are confident, Seal,Charleson,deJongh 150 Grant,McGill cr ex (Pratte) Mr. Grant, you will be able to address these concerns you've identified, these public policy concerns, including capital expenditures and the risk that there may be a...? THE PRESIDING MEMBER: Mr. Pratte, we're having a little bit of difficulty hearing you. MR. PRATTE: I'm sorry, Madam Chair. MR. PRATTE: Q. I'll repeat my question. You've indicated that the company will move to a comprehensive plan -- PBR plan. Do I take it from that, Mr. Grant, the company is confident it will be able to find a solution for these concerns that it has over the public policy issues you've identified, including the capital expenditures? MR. GRANT: A. I think that's fair. I think that we will be able to deal with them at the end of the day. Q. And since you're ultimately going to advocate a comprehensive plan, as I understand it, it's the company's view then that capital expenditures themselves would become optimal, if I can use that word, under a PBR comprehensive plan, as opposed to a cost of service plan? In other words, there is an advance advantage to both the shareholders and the ratepayers ultimately to deal with capital expenses through PBR rather than cost of service? A. I think at the end of the day there will be an advantage for dealing with capital expenditures in a Seal,Charleson,deJongh 151 Grant,McGill cr ex (Pratte) comprehensive PBR environment. Before we get there though, as - and I'm not going to repeat myself from yesterday - but before we get there, I would see us, for example, having to put together perhaps a multi-year plan for mains and services replacement that would operate during the PBR period and that plan would have to be quite detailed and well thought out. We would then bring that plan -- I'm not suggesting this is exactly what we would do, but one alternative would be to bring that plan forward as part of our comprehensive PBR and have that evidence tested before the Board and, at the end of the day, get a decision from the Board that relates to a multi-year plan. In other words, the Board at the end of the day could be satisfied that, yes, you've got a good multi-year plan for this area, we're prepared to accept, for example, an automatic Z-factor within a comprehensive PBR plan that passes those costs through into rates, subject to certain conditions which probably would be related to monitoring and ensuring that the utility was going to minimize variances from the plan over the five years. So I sort of am thinking in those terms, Mr. Pratte, about one way that we would deal with one aspect of capital expenditures. Once all of that was done, then I think you've got a much more efficient regulatory process for those five years around that capital issue. Seal,Charleson,deJongh 152 Grant,McGill cr ex (Pratte) Q. Thank you, that's very helpful. One last point I want to cover is also one that you touched on with Mr. Warren, but I'm still confused about. This is the truing up of the base issue. Let me try to ask you a few questions to see if I can clarify this. As I understand your current proposal, you are proposing to include the currently approved O&M expense by the Board in EBRO 497 as the base for the PBR plan starting October 1, 1999, adjusted for certain major items; is that correct? A. That's correct. Q. And what are those items? A. We filed an exhibit which itemizes them. MR. CHARLESON: A. If you look at Exhibit C, section 4.1 on page 4 of 4, you'll see those items listed. Q. Okay. A. So the adjustments that we're making is, the first one being an adjustment for the impact of unbundling which is a $21.5-million reduction. Q. Okay. Is that a forecast number? A. Yes, it is. Q. Okay. And the two -- the first number is the 271.9 approved by the Board? A. Yes, it is. Q. When was that number approved? A. It was approved in the decision in 497. I'm not sure of this. Seal,Charleson,deJongh 153 Grant,McGill cr ex (Pratte) Q. Yes. Is that August, 1998? MR. GRANT: A. Yes, that's correct. Q. Okay. And do you know when the most recent updates for that O&M expense which the Board approved had been filed prior to August 31, 1998; in other words, the figures that the Board relied on, how old were they before they were approved by the Board roughly? A. They were the test year 1999 budget-- Q. Right. A. --which was filed with the Board as part of the evidence that we normally file around about January or February of 1998. Q. Okay. So, in effect, that 271.9 is based on a figure that you prepared in January, 1998; correct? A. That's correct. The Board made some adjustments though in its decision. That wasn't the number that we had filed. They then made adjustments to it in August to come to the 271. Q. But the adjustments were from the numbers you had filed in January, '98? A. That's correct. Q. So, they were two numbers you had filed in January, 1998? A. That's right. Those numbers were tested through a regulatory process and, after that testing, the adjustments were made by the Board to come to 271.9. Q. I'm sorry, sir, I interrupted you. Then you told me the unbundling adjustments, the first one, Seal,Charleson,deJongh 154 Grant,McGill cr ex (Pratte) $21.5-million, that's also a forecast number? MR. CHARLESON: A. Yes, it is. Q. And when was that forecast prepared? A. The initial forecast of the unbundling adjustments was prepared in the fall of '97 in preparation of filing our unbundling application. It was then updated subject to the Board's decision in EBRO 497. Q. And is this the updated number? A. Yes, it is. Q. And the date of that update is what, approximately; is it also early 1998? A. No. The update would have been subsequent to the Board's decision in August of '98. Q. Oh. Okay, I see. I follow. Okay. Now, how about the other adjustments you wanted to make, the -- A. The other adjustments that we've identified are for the 1999 Y2K program expenses, also DSM expenses and the impact of the rental wind-down which was not included in the unbundled budget. Q. And those are all also forecast numbers? A. The DSM expenses are a forecast number. They're also -- it's also the Board-approved number for DSM expenses. Q. And the same would apply for the Y2K program expenses; that's a Board-approved number? A. (no verbal response) Q. Now, if instead of moving toward a targeted Seal,Charleson,deJongh 155 Grant,McGill cr ex (Pratte) O&M expense you were to proceed under the normal cost of service for O&M in 19 -- I guess it's fiscal 2000, your next rates case, Mr. Grant; is that right? MR. GRANT: A. Yes, that's correct. Q. You would file with the Board, in the context with the application which has been variously styled, I guess, EBRO 500 - although you gave a different nomenclature, let me stick with that, EBRO 500 - you would file updated numbers in the course of 1999? A. We would file -- you mean under cost of service regulation? Q. Yes. A. We would file a test year budget, a year 2000 budget-- Q. Right. A. --and we would file any supporting material and, typically, that has included an analysis of historic O&M right up -- and as well as what we call 'a bridge year forecast' that bridges the last actual year to the test year. Q. You wouldn't propose to simply include for EBRO 500 the numbers that the Board had approved for the previous test year. You'd update those numbers? A. That's correct. We will go through a normal process where we establish plans for that particular year that underpin the budget and then we would bring that forward. Q. And you would rely on actual 1998 numbers as Seal,Charleson,deJongh 156 Grant,McGill cr ex (Pratte) well? A. Actual 1998 numbers would be the take-off point, yes, or something close to actuals. Q. In the PBR plan you're proposing though, you're not proposing to use actual 1998 numbers as the take-off point, to use your terms? A. No. It would be -- the PBR plan is really related to the rate making process and, therefore, what you've got to do is start with something that has already been established in rates, very recently established, and then make adjustments from there. That was our intent. That was our stated intent in 497 as well, and that's one of the reasons why the Board required us to make two of the adjustments that are shown on the page that Mr. Charleson was talking to. Q. Well, is it your company's position that the Board, when it approved the O&M expense for -- in 497, approved that number with a view of using it again in respect of this application as the base for the targeted PBR? A. Yes. I think that that was understood, although the Board did make some comments in its decision and, in particular, the ones that I just referred to where certain adjustments -- they were expecting us to make certain adjustments to that figure, to the Board-approved figure for purposes of moving forward into this case. Q. Well, let me just try and understand that. Are you saying then that the Board is precluded Seal,Charleson,deJongh 157 Grant,McGill cr ex (Pratte) from ordering you to true up the numbers to the best numbers, closest numbers available when your plan starts in October, 1999; is that the company's position? A. No, I don't think the Board is precluded from that. Q. So EBRO 497 did not intend to approve the O&M budget as the base for your targeted plan; did it? A. Well, I think it was intended to approve the vast majority of the base. It was understood that we were going to be using that as a base and making appropriate adjustments. No one knew what the unbundling adjustments specifically were at that time, but it's my recollection that, subject to those adjustments, we were moving ahead with that bundled budget, if you will, that would be approved by the Board in 497. Q. Okay. So putting aside the unbundling adjustments and just focusing on the O&M number that was approved, I just want to understand again: Is it your position, Mr. Grant, that the Board is precluded from saying that the base in your plan -- targeted plan-, should be trued up, for example, with the actual 1998 numbers; is that your position? A. No, it's not my position that they're precluded from that. I just don't understand -- when you say 'true up for the '98 actuals', I don't understand what that is. We're starting from the '99 year, not the '98 Seal,Charleson,deJongh 158 Grant,McGill cr ex (Pratte) year. The PBR period starts in the year 2000, so the base isn't '98, it's '99. Q. I guess what I'm suggesting to you is that your forecast O&M number for fiscal 2000 is likely to be more accurate if you look at the numbers, including the actuals for 1998, as opposed to relying on numbers that were filed in January, 1998; isn't that true? A. I don't think that that's necessarily true. I don't know how the actual '98 figures are going to necessarily be related to what it is that we're using as a take-off point for '99. '99 is a different year, it has different plans and so on, Q. Well, let me ask you one last question, to go back: If you were filing your O&M number under a traditional cost of service approach, you would not dream of using the previous year's approved numbers as your take-off point; you would use the most recent numbers, including the actuals for your previous year. Isn't that right? A. What we use is, under cost of service, is we re-estimate the bridge year. The actual historic year has some significance to the budgeting process, but it's not as significant as a re-estimation of the bridge year for purposes of establishing the next test year. So what we run off is that re-estimation. In my experience, in the last few years anyway, when we re-estimated that bridge year in those cases, Seal,Charleson,deJongh 159 Grant,McGill cr ex (Pratte) those rates cases, we were very close to the Board-approved number from the previous case. I think we were within -- we were definitely within $1-million and maybe even within half-a-million dollars in the last case, for instance, when we re-estimated the bridge year. MR. PRATTE: I will leave it there. Thank you very much, Mr. Grant, and witnesses. Thank you, Madam Chair. THE PRESIDING MEMBER: Thank you, Mr. Pratte. Ms. Symes? MS. SYMES: Thank you, Madam Chair, Members of the Panel. CROSS-EXAMINATION BY MS. SYMES: Q. Perhaps to begin my cross-examination, I will ask if you would turn up the evidence of Mr. Winter which is found at Exhibit C, appendix E. And I'm actually going to refer you to page 7 of his evidence, just if this is of any help, so that people don't need to flip pages. As I understand, in both your answers to the questions that Mr. Pratte has just put to you and the answers that you gave to Mr. Warren yesterday, Enbridge Consumers Gas does not object to moving to a comprehensive PBR? MR. GRANT: A. In time, that's correct. Q. Yes. But you accept or acknowledge that a comprehensive PBR is where the future is or will be? Seal,Charleson,deJongh 160 Grant,McGill cr ex (Symes) A. Yes, I have stated that. I think that's where we're headed as an industry. Q. And, as I understand it, your position is that the limited or O&M proposal is the first -- Enbridge's first step towards a comprehensive PBR? A. Well, it's actually... It's probably the third major discrete step, if you think about the last few years and the history of regulation here in Ontario. One of the first steps was the ROE formula, which was the application of a formula to an element of the utility's revenue requirement. We made another important step in incentive arrangements when we moved to an incentive around the transactional services area of our business. And, most recently, I understand Union Gas is also operating, or will be operating under an incentive in that business as well. So that was, in my view, a second step. I think it was an important step because what we have learned from it is that, with that incentive, we were able to create benefits that we wouldn't have created without the incentive for both shareholders and ratepayers, and so that was a second step. And now, this O&M PBR is a third very important step. If you look at simply the numbers and the impact that it has on overall revenue requirement, it is quite a large step. So it also, in that regard, gets us a long way toward, in a financial sense, where we would be under Seal,Charleson,deJongh 161 Grant,McGill cr ex (Symes) a comprehensive PBR. Q. Let me just understand it. Are you saying then that the step between what you are proposing and the comprehensive is narrow? A. No, I said that the step that we're currently about to walk up, the O&M PBR, is a significant step, a significant step toward comprehensive PBR. Q. But are you saying that the step -- if the Board were to approve your proposal, that the step between the O&M PBR and a comprehensive PBR is a small step? A. Well, I haven't got the numbers in front of me and I haven't done any specific calculations. I'm just going to venture a guess that -- let me back up a step. This PBR step accounts for $272-million for a bundled utility and adjusted down to 240 after the adjustments that we have discussed, and that's a big number. When you incorporate capital, there will be another significant step. I don't know whether it's going to be greater than the 271-million from a cost of service point of view. I would doubt that it would be that large. The major elements that are left between where we're at today in terms of our O&M PBR and where we would get to in the comprehensive PBR are capital which we have discussed, and I guess the other area would be the other elements of return; that is, the debt rate times rest of the rate base and taxes. Q. Now, Mr. Grant, you have retained Mr. Winter Seal,Charleson,deJongh 162 Grant,McGill cr ex (Symes) to give you advice about developing PBR proposals for your utility? A. Yes. Q. And he has been giving you advice now for over a year? A. Yes, that's right. Q. And he has described on page 7 your proposal as conservative. Do you see that on page 7, bottom of the page? A. Yes. Q. He also describes it in the fourth paragraph as feasible? A. Yes. Q. And he describes it as straightforward? A. Yes. Q. And I presume you agree with him? A. Yes. I agree that it's very feasible and it is straightforward. Q. And that it's conservative? A. I suppose "conservative" is a relative term. I think it's an important step. Relative to a comprehensive PBR, it is a more conservative step. Q. He also states that your proposal is not as broadly based as other PBR programs currently in place. Is that correct? A. Yes. Q. And he also states that the pace is less aggressive than some programs in the U.S.? Seal,Charleson,deJongh 163 Grant,McGill cr ex (Symes) A. Yes. Q. And you would agree with those statements? A. Yes. Q. Now, Mr. Grant, if this Board were to reject your incremental -- not your, but the utility's incremental approach on the route to a comprehensive PBR, if they were to reject it, would the utility consult with stakeholders to build a comprehensive PBR? A. Yes. I already answered that question. Q. No, I don't think you have answered. The question is: If the Board were to reject your current proposal. A. Oh, I'm sorry. Q. I'm asking you a different question than you have been asked before-- A. Yes. Q. --to be clear. A. Yes. Q. If, at the end of the day, this Board says, "This proposal is not acceptable," will the utility then commence work on a comprehensive PBR? A. Well, I don't know, Ms. Symes. If the Board rejected this proposal, presumably they would give reasons and I don't know what those reasons would be, so I don't know what we would do. We would certainly have to react. Q. Well, if the reasons were that your proposal was not broadly based and not sufficiently aggressive, if that were their decision, would you then begin work on a Seal,Charleson,deJongh 164 Grant,McGill cr ex (Symes) comprehensive PBR? A. We would look at all of our options and that probably would include comprehensive PBR. Q. And would you consult with the stakeholders in analyzing those options? A. Well, any consultative process that we will have on a comprehensive PBR would be along the lines that I described in my earlier testimony, that is to say, that we run the business, so we do need to think through all the operational implications of a comprehensive PBR, get our plans together, get all our internal approvals, and then we would certainly launch a consultative process. Q. Mr. Grant, as I understand it, what you envision is you're going to come up with your proposal and then you're going to inform the stakeholders of what you intend to do? A. Yes. We have to reserve the right as managers to debate the issues internally in the company and receive appropriate internal approvals. Q. I'm not quarreling with you about that, but I want to be clear so that this fuzzy concept of consultation is not left out there. What you mean is, it's not a cooperative group or a cooperative or group effort to try and come up with a comprehensive PBR. I mean, you don't envision that at all; do you? A. No. Q. No. Seal,Charleson,deJongh 165 Grant,McGill cr ex (Symes) A. No, it's not a DSM collaborative effort. Q. No. And it's, in fact, you're going to do the work and when you have decided on your option, you're going to tell the stakeholders? A. No, we're going to consult with them. Q. Yes, you're going to -- A. We're going to indicate what we have decided and-- Q. Yes. A. --why we decided that. Q. Yes. A. That doesn't mean that we're not going to listen. Q. I understand. But it's your decision? A. Oh, yes. Q. Yes. A. I think it has to be the utility's decision. Q. And if the Board were to reject your proposal, I presume you would begin immediately at looking at the alternatives? A. I don't know what we would do, Ms. Symes. Again, we would have to read the decision and understand what the reasons were. Q. After you had read the decision and understood the reasons, would you react immediately; that is, begin to plan your response? A. I suppose we would react immediately and plan a response, and I don't know what that response would be. Seal,Charleson,deJongh 166 Grant,McGill cr ex (Symes) Q. And I presume that you would still have Mr. Winter who's available to consult with you? A. You're getting into areas of detail in a hypothetical situation. I don't know. Q. But he's still consulting to you? A. Yes. Q. Yes. And in terms of the timeframe then, you would have some six months to develop an alternative or alternatives? MR. CASS: Excuse me, Madam Chair. If this is helpful to the Board, of course I stand corrected. My concern is that this panel is here to address currently, as the issues list is set out, the issue of scope of the proposal. I can well understand that in examining the issue of scope of the proposal there's some need to look at alternatives and it was in that context, I understood, that the discussion of a potential comprehensive PBR might be relevant; in other words, the comprehensive PBR might be relevant in assessing an alternative. It appears to me that this cross-examination has gone far beyond comparing the proposal to an alternative and that it's now into what Mr. Grant has described as a hypothetical discussion as to what the company might do in the event of a certain Board decision and the company's response to that decision as to what proposal it might come up with at that time. In my respectful submission, Madam Chair, we're Seal,Charleson,deJongh 167 Grant,McGill cr ex (Symes) far beyond the scope issue. We're now into a hypothetical scenario about another proposal that might or might not occur at some point in the future. Again, if the Board feels it's helpful, I'm quite content to allow it to proceed, but it's not clear in my mind that it will be helpful to the Board. MS. SYMES: Madam Chair, the reason why, in my submission, this evidence is not only relevant but very helpful in terms of your decision-making, is that you have before you a step on the way towards a comprehensive PBR and obviously a number of the intervenors have difficulties with this step as opposed to going the whole route. These questions are designed to put before the Board an evidentiary base that, if you were to reject this proposal, how long -- what is a reasonable forecast for this utility to be in a position to put forward a comprehensive PBR. For example, if the answer were that it was going to take them three years to go through the materials, you may well have a different view of the cost benefits of rejecting the stepped approach. On the other hand, if the answer is, we could analyze your decision and prepare our options within six months, that's a different -- that may well affect what you do. And I would like that evidence in order to be able to make my submissions, and that's the point of Seal,Charleson,deJongh 168 Grant,McGill cr ex (Symes) asking these questions. And the other thing is, of course, I want to be able to be in a position to compare and contrast this utility with Union Gas which is also engaged in a similar process. THE PRESIDING MEMBER: Thank you, Ms. Symes. One moment, please. ---Off the record discussion. THE PRESIDING MEMBER: I think the Board would agree that it's useful to explore the timing of the development of a more comprehensive plan, so we'll carry on with the questions to that extent. Ms. Symes? MS. SYMES: Q. Mr. Grant? MR. GRANT: A. Could you pose your question again? Q. Sure. If this Board were to reject your application, which is the stepped approach towards comprehensive PBR, you told me that you would, of course, review the decision, analyze the reasons and then prepare your response. My question to you is: How long would it take you to prepare a comprehensive PBR? A. I think realistically to tackle the issues that we have discussed yesterday that are -- that the comprehensive PBR raises; to analyze the Board's Reasons for Decision in this case; and then get a plan together Seal,Charleson,deJongh 169 Grant,McGill cr ex (Symes) internally that is approved all the way up through the relevant levels of approval; and then to conduct a consultative process; and then to prepare an application; and then to prepare evidence; and then to bring it in front of the Board for disposition for a decision on a comprehensive PBR; and then to implement it, I think that we would be looking at an implementation of probably fiscal 2001 at the earliest. Q. Now, that's September 30th, roughly, of 2000? A. Yes, at the earliest. Q. Yes. A. Depends on how the process goes. These issues that I've raised, Ms. Symes, I'm not an expert on how we operate the system, how we need to reinforce the system. I need to spend time with people internally and my answer assumes that we can do this expeditiously, but I don't know whether there are any engineering reasons, for instance, why we may have to take a little longer time to study. That's why I'm telling you that that's the earliest. To be on the safe side, the most likely date would probably be a year later. Q. Mr. Grant, what you're saying to this Board is you think it unlikely that you would have it ready for rates in year 2000; that is, EBRO 500? A. It would be impossible. Not unlikely, impossible. Seal,Charleson,deJongh 170 Grant,McGill cr ex (Symes) Q. And you would aim for it to be in place for rates in fiscal 2001, but you may have some difficulty achieving them? A. At the earliest, correct. Q. And in contrast to that then, Union is proceeding to develop a comprehensive PBR to be in place for its next rate case? A. I don't know exactly what their time line is. I understand the same thing that you do. I understand that that is their intention. Q. Yes. You went through the same kind of consultation that everyone else did as a customer? A. Indeed. Q. So they're aiming to be there by the end of '99? A. Well, Ms. Symes, I suppose they are, but I don't know the details of their plan. Q. I understand. A. Do you want my impression of their plan so far? My impression is they need to do a bit more work before they bring it forward. I didn't hear any details -- any real details of their plan. I think they need to do a little bit more work and they're very capable people and I'm sure they're proceeding expeditiously. But my point to you in this proceeding is, I don't have all the information with respect to their plan in front of me. So, once again, we're speculating a lot Seal,Charleson,deJongh 171 Grant,McGill cr ex (Symes) on what may or may not happen with their proposal. Q. Now, Mr. Grant, other people have gone through with you the reasons that you did not proceed with a comprehensive PBR, and I'm not going to repeat them, but I'm going to go to two that I don't believe have been touched. And one of them was what you said, the ongoing obligation of the utility for conservation; is that correct? A. Yes, that's right, the DSM plan that we have. Q. But that's the ongoing obligation of Enbridge to continue to reduce gas volumes through DSM measures? A. Yes, we have that ongoing program. Q. Yes. A. And it's always subject to the Board's approval, but the Board has approved it historically and we would expect that they would continue to. Q. Because I really had trouble understanding your evidence. You see that the DSM obligation and the hope, at least the promise that the money spent on DSM is going to reduce volumes of gas as an impediment to comprehensive PBR? A. No, I think it's an issue that we need to deal with in the comprehensive PBR and perhaps I can be more -- perhaps I can explain a little further. Each year through DSM efforts, and indeed through non-DSM efforts of individual customers, gas is saved out Seal,Charleson,deJongh 172 Grant,McGill cr ex (Symes) in the field. And a non-DSM effort, what I mean there is that in the normal course of things peoples' furnaces break down, their old furnaces are replaced with new ones that are much more efficient, that reduces volumes in the system. It produces upward pressure on overall rates, and that upward pressure dealt with every year in the cost of service regulation regime. We need to deal with that issue in a comprehensive PBR context and, therefore, one potential way - again, it's not necessarily the only way - but one potential way would be, once again, an automatic kind of Z-factor where there was evidence brought before the Board that talked about this conservation throughout the comprehensive PBR period, made an adjustment -- an automatic adjustment in rates for that, subject to some truing-up process, and allowed for -- in effect, allowed for the fact that, without that adjustment, there would be a degradation in margins. And I'm not suggesting that's the only way to deal with the issue. I'm saying that that perhaps may be one way that we deal with it. All of that information, of course, would have to be thought out, put together as part of our evidence and decided on by the Board. Q. Now, Mr. Grant, obviously your utility has been under the obligation to do DSM for now over five years? Seal,Charleson,deJongh 173 Grant,McGill cr ex (Symes) A. We have pursued DSM for that period of time, yes, as a plan. Q. And Union Gas has been under the same obligation? A. They have their plan and that plan is approved by the Board, yes. Q. And in 495 your utility sought an LRAM in order to mitigate against the effect or impact of DSM in terms of volumes? A. I think that's a variance account and-- Q. Yes. A. --what it does is capture a variance between an expected value and an actual value. Q. And you asked for it and you got it? A. Yes, that's correct. Q. Yes. And in this rate case, 497, you sought an SSM, an incentive mechanism to encourage, in fact, financially reward you for conservation efforts? A. Yes, and all parties have agreed that's a good plan. Q. Yes. But you sought it; is that true? A. Yes. Q. Yes. And in fact, an agreement was reached by all parties and the utility was one of the signatures to that? A. That's correct. Q. Of course. And the second thing then that you indicated was that you didn't want -- in a Seal,Charleson,deJongh 174 Grant,McGill cr ex (Symes) comprehensive PBR, you didn't want to upset any of the DSM initiatives. Did I understand you correctly? A. Yes. Q. Mr. Grant, do you agree that the PBR that is proposed does not include O&M DSM expenditures? A. Yes. Q. Right. It's out of the targeted O&M? A. Correct. Q. Yes. And it's not going to be -- the formula, whatever the formula is, the factors won't apply to DSM spending? A. That's correct. Q. You're going to keep coming back each year with respect to conservation? A. With respect to DSM initiatives. Q. Yes. So this issue then of ongoing conservation is covered off, first of all, in terms of the variance account of an LRAM? A. Yes. Q. Secondly, that if this Board agrees with the ADR proposal, there will be an SSM in place? A. Right. Q. And, finally, your plan for the future is to continue to keep DSM out of the formula? A. Yes. MS. SYMES: Those are my questions -- MS. SYMES: Q. Oh, sorry, just one last Seal,Charleson,deJongh 175 Grant,McGill cr ex (Symes) question. You've had several people ask you about truing up the forecast in order to have a look at the base upon which the PBR formula would operate. Mr. Grant, we're now in the fourth month of EBRO 499? A. EBRO 499? Q. 497? A. Oh, sorry, yes. We're in the fourth month of fiscal 1999, yes. Q. Right. Sorry, I said it wrong. And so, therefore, you've got the figures, the actuals for the first three months? A. I would presume so, yes. Q. And could you file with us -- would you give us an undertaking to file with us then the -- I think it's called the 3 plus 9? A. Well, I don't know that there is a 3 plus 9. Q. Can you prepare it? You've got the numbers for the first three months, which is a quarter of the year. A. Correct. Q. Would you, please, file with this Board the most up-to-date information you have on your actuals to date? A. You're talking about actuals -- which actuals? Q. O&M. Seal,Charleson,deJongh 176 Grant,McGill cr ex (Symes) A. Utility O&M? Q. As opposed to what else? A. As opposed to total O&M. Q. Well, I'm interested in the actuals as opposed to the forecast based -- on which the evidence was given with respect to 4.1 -- Exhibit C, section 4.1, page 4 of 4, the blue sheet. A. Yes. Q. All right. And what I'm interested in then is the background or the backdrop for item No. 1, Board-approved 1999 O&M expense, $271.9-million, okay? My question then is: Could you, please, provide us with your actuals for the O&M expenses that are contained in that line and your updated forecast which I'm describing as the 3 and 9? A. Yes. We don't have one, we don't have a 3 and 9. We have actuals for the corporation in total. Q. And can you -- A. To get to utility O&M, one must go through a process where you eliminate certain costs, non-utility costs and calculate a number. So it's something that we don't have in that it would require work to provide. Q. I'm asking you, would you do it, please, and provide it to the Board? MR. CHARLESON: A. Ms. Symes, perhaps if I can just add to what Mr. Grant has indicated. The 3 plus 9 that you're proposing-- Q. I'm not proposing it, I'm asking for it. Seal,Charleson,deJongh 177 Grant,McGill cr ex (Symes) A. --that you're requesting, sorry, would also have to be adjusted to take into consideration any timing differences that have occurred during the first three months of the year; and, in essence, would require us to revisit the grassroots process and have each individual budget preparer assess the impact of timing differences on their individual budgets. So what you're asking for is not a trivial exercise. Q. You produce these things in DSM all the time. I'm asking you: Will you produce it in this hearing so that we can have a look at whether truing up the O&M will, in fact, make a difference? Will you give me that undertaking? A. I think what we're saying is that it would be a very lengthy exercise. Q. I'm still asking for it. Will you do it? MR. CASS: Well, Madam Chair, I think the witnesses have made clear their position, that it's an extremely onerous task to produce what Ms. Symes is asking for. I don't see in her questioning any base to establish the need for that amount of work to be done. And, on that basis, I don't think the company will want to go to that amount of effort, unless the Board deems that it's necessary for it to be done. MS. SYMES: Well, Madam Chair, that's fair enough in terms of my questions, but I undertook to you not to re-till the ground that Mr. Warren, Mr. Brett and Mr. Seal,Charleson,deJongh 178 Grant,McGill cr ex (Symes) Pratte did at great length. I can repeat all of those questions that they did. I don't think that will help anything. My submission to you is that an evidentiary base has been lead for a truing up of the O&M. Obviously the company disagrees with it. I'm now asking for the evidence to show why the truing up is in the public interest and should be done. THE PRESIDING MEMBER: Thank you. One moment, please. MR. CASS: Madam Chair, if I might just make one comment in response. Ms. Symes refers to the evidentiary base that's been built up as she said. Well, yes, there has been some cross-examination on the proposal that there be a true-up for actual. I do not -- in my submission, there is no evidentiary base as to how this proposed 3 and 9 would assist the Board in doing a truing up for actual, particularly bearing in mind the work that's required. So that's where I say there is no evidentiary base as to what this 3 and 9 is going to do for anyone. THE PRESIDING MEMBER: Mr. Cass, just a moment, please. ---Off the record discussion. THE PRESIDING MEMBER: Ms. Symes, the Board is of the view that any number that the company brought forward in response to your request, first of all, would take a Seal,Charleson,deJongh 179 Grant,McGill cr ex (Symes) good deal of work; but, secondly, we would not have the opportunity in this process to test that number in the way that those kinds of numbers are usually tested. We think that the opportunity is there to argue the merits of the truing up proposal whether or not we have that number, and so we're not going to request the company to give you that number. MS. SYMES: Thank you, Madam Chair. Those are my questions. THE PRESIDING MEMBER: Ms. Lawson, are you next or Mr. Mondrow? MR. MONDROW: Madam Chair, if we're going in order of appearances, I believe I was next on that list. THE PRESIDING MEMBER: And do you have a guess how long you'd be, Mr. Mondrow? MR. MONDROW: It won't be long, Madam Chair. I expect 10 to 15 minutes. THE PRESIDING MEMBER: Perhaps we'd proceed with you then. MR. MONDROW: Thank you, Madam Chair. CROSS-EXAMINATION BY MR. MONDROW: Q. Good morning, panel. Given my short cross-examination, if it's okay with you I'll just sit here, and please address your answers to the Board. As I understand the approval requested in this proceeding, there are, in essence, two aspects to it and I'll ask you to confirm this: You'd like the Board to approve the formula Seal,Charleson,deJongh 180 Grant,McGill cr ex (Mondrow) proposed, including the specific variables, proposed on the one hand, and the baseline budget that you propose to apply that formula to on the other, but those are distinct issues; do you agree with me? MR. GRANT: A. I'm just looking at the issues list, Mr. Mondrow. Generally that's correct. The baseline budget is not an issue per se in this proceeding, but that is what we're requesting. Q. The Board could approve the formula; could it not, without approving application of that formula to the current budget before it as a result of recent proceedings at this time? A. I suppose the Board could do that, but it would have -- it would create uncertainty because the company needs to know what this formula is applied to. Q. Before it comes time to implement fiscal year 2000 rates, that's true, but between now and the fall of 1999, that's not true; correct? A. I wouldn't say that. I think that we would be looking to the Board in this proceeding to approve a formula, approve a starting point so that we know where we're at through the whole PBR period. And, on that basis then, we can proceed to plan our business properly and conduct our business properly from the point at which the Board issues this decision onward. Q. Am I correct, however, that approval of the formula does not require approval of a baseline at the Seal,Charleson,deJongh 181 Grant,McGill cr ex (Mondrow) same time? A. In a practical sense, it does for the reasons I just stated. Q. Well, the reasons you stated, Mr. Grant, were to allow the company to get on with planning its operations. A. Yes. That's why I say in a practical sense it does. Q. And, in the normal course, the company gets the approval to go ahead and plan its operations somewhat later in the year than at the present time? A. That would be if we were under cost of service regulation for this component of the revenue requirement. Q. And so what's different about planning operations under the proposed PBR formula on the one hand, and planning them under cost of service on the other hand? A. Well, I think it's fair to say that performance-based regulation, as its name implies, requires certain adjustments on the part of the company to adjust to that form of regulation and run its business in that environment. And I think, for that reason alone, we need to know what the base is that we're working from as well as the approved formula. Q. Could you particularize for me, please, those specific adjustments which you referred to which require knowledge at this time of what the baseline will be? Seal,Charleson,deJongh 182 Grant,McGill cr ex (Mondrow) A. Well, in my view, performance-based regulation requires, to a certain extent, a cultural change within the organization. And when you're talking about cultural change, you're talking about people. And so I think that, for that reason alone, you want to move ahead with that cultural change and make sure that people understand in the company that there is a different regulatory approach that we're working under and it does apply to a specific starting point and that will allow us to do our proper planning for the next fiscal year. I should add that our planning process begins in the spring of each year and goes straight through into the summer so that we're ready for the next fiscal year. So that planning process will be starting up relatively shortly and, for that reason, once again, we need the Board's decision on both the formula and the base. Q. Mr. Grant, if the Board approved in this proceeding the formula proposed and, indeed, the variables proposed or some variation on those but, at the same time, said we will revisit the O&M baseline budget and approve a baseline in the next full rates case, would you not have the tools to begin to institute the cultural change of which you speak? A. No, we would not because we need to know from a planning point of view what base we're operating from. Essentially, Mr. Mondrow, it would delay the Seal,Charleson,deJongh 183 Grant,McGill cr ex (Mondrow) implementation of the Board's formula for a year. We would have an approved formula, but it really wouldn't be implemented from a rate-making perspective until some other process, as I understand your proposition. Q. The first year under the plan will take the Board-approved budget and nothing else, nothing will change. It's in the second year of the plan that the formula will be applied to change the cost of service, as it were. Am I misunderstanding that? A. Yes. The plan actually starts in fiscal 2000. Q. But the first year's rates are based on the Board-approved budget rather than the Board-approved budget as adjusted through application of the formula; is that not correct? A. The 1999 rates are based on that. That's correct. Q. You're proposing to take the 1999 approved rates and apply the formula to come up with the first year's adjusted rates in fiscal year 2000? A. Well, a little more precisely, we're proposing to take the O&M that is included in 1999 rates and make the adjustments that we spoke of earlier, including the unbundling adjustments-- Q. Fair enough. A. --and then set rates from that lower base-- Q. Fair enough. Seal,Charleson,deJongh 184 Grant,McGill cr ex (Mondrow) A. --in fiscal 2000. Q. I'm sorry. And the alternative I'm suggesting is the first year of formula application will kick in one year later, and that's the point you have made to me in response. There would be a delay of one year in application of the formula-- A. In your scenario. Q. --to preclude an O&M review in rates case in my scenario? A. In your scenario, that's correct. Q. Now, do I understand that it's the company's position, Mr. Grant, that given the time spent in EBRO 497 and, indeed, in EBRO 495 parsing the company's O&M budget, the Board now has a very good handle on the structure of that budget? A. Yes, it does. Q. And it's a good enough handle or understanding to accept the evidence in EBO 179-14, -15 to adjust the 497 budget and be comfortable with the resulting baseline? A. Yes. Q. Had there been significant structural changes in your business since 497, it would reasonably require that the Board take another look at the baseline O&M budget; would it not? A. Well, I don't know what major structural changes you're talking about. Seal,Charleson,deJongh 185 Grant,McGill cr ex (Mondrow) Q. No. But in the abstract, you would agree with me that had there been a significant O&M structural change, it would be reasonable for the Board to want to have another detailed look at the baseline before locking it in for three years? A. No, I think -- I mean, the major structural view, in my view, on the O&M might be, for example, if we were thinking of capitalizing a different number than what we've got in the base. In other words, if we were going to move to a completely different way of capitalizing our costs, if we were going to do that, we would bring evidence in this proceeding so the Board could deal with it now. So we have no intention to do that and, therefore, it's not part of this proceeding. That's a structural change, as I interpret your question. And, in that instance, we would have brought that in front of the Board now so the Board had it in front of it. We're not proposing that. Q. I think we're maybe ships passing here, Mr. Grant. What you're telling me, as I understand your evidence, is there has been no significant structural change? A. That's correct. Q. That's not what I asked. What I asked was: Assume with me for a moment that there had been a significant structural change, would Seal,Charleson,deJongh 186 Grant,McGill cr ex (Mondrow) it then be reasonable, in that hypothetical, for the Board to wish to revisit the baseline budget? A. I think if it was going to have a material impact on rates, that would be reasonable. Q. Now, let me just run through with you quickly a number of changes that I suggest have taken place since 497, either to date or prior to the fall of 1999. First, you will agree with me we have a new legislative regime, including a new set of undertakings, and that combination has impacted on the LDCs' operations; correct? A. Yes. Any time there's a change in the legislation like this, it impacts on a lot of things. Q. Well, it has impact on the LDC operations in the sense of requiring ancillary business unbundling; correct? A. I have trouble with your phrase "requiring ancillary business unbundling". Q. NGV may now be taken out of the utility and wasn't to be taken out prior to the undertaking change? A. Prior to the undertaking change and after the undertaking change the status of the NGV marketing program, which is distinct from the NGV delivery business, is up in the air. We don't know what we're going to do with that business. Q. Okay. The new legislation makes a point of underscoring the encouragement of competition in the supply of natural gas commodity; correct? Seal,Charleson,deJongh 187 Grant,McGill cr ex (Mondrow) A. Yes. Q. And that new legislative package in large part, I suggest, has driven the formation and work of a Market Design Task Force under the auspices of this Board to move the industry towards a further unbundling of the commodity? A. That's a fair summary. Q. Okay. And the Board will, within the next few months, undertake the first comprehensive review in quite some time, as I understand it, on affiliate transaction role-making. Would you agree with me on that? A. I understand there is a process that the Board has on that question. Q. And moving away from the legislation, it's trite to say again that you will be unbundling a number of significant businesses from your cost of service between now and fiscal year 2000. Am I correct in understanding the evidence of the last phase of this case that the detailed unbundling planning is still ongoing? A. Yes. I mean, clearly we have to be -- we have to implement the unbundling, if you will. Q. And am I correct in understanding that the CIS issue is somewhat up in the air still? A. I don't think it is. I don't know what you mean by that. Q. All right. There is an outstanding CIS issue to be dealt with by this Board in terms of allocation to Seal,Charleson,deJongh 188 Grant,McGill cr ex (Mondrow) ratepayers of both capital and operating costs for CIS-type services. Is that not true? A. Yes. CIS forms part of our RP-99-01 filing. Application and evidence will be brought in that proceeding dealing with CIS. Q. I'm sure we all look forward to finally seeing that. And between now and fiscal year 2000, the bulk of the rest of the year 2000 problems will hopefully be dealt with. You will agree with me on that? A. Are you speaking about the Y2K issue? Q. Yes. A. Yes. Q. And are any of those items that we just listed, Mr. Grant, in your view, significant changes or exigencies currently facing the utility? A. Well, they're significant projects. Q. Mr. Grant, I will ask you to agree with me with this fairly fundamental premise. It's true; isn't it, that any O&M cost impacts not expressly anticipated by the company in the budget currently before the Board will be locked in if that budget is used as a baseline for applying your O&M -- proposed O&M PBR formula? A. I'm sorry, could you just repeat that question? Q. Sure. Sorry, it was a bit convoluted. Any unforeseen -- maybe let me reword it. Any Seal,Charleson,deJongh 189 Grant,McGill cr ex (Mondrow) unforeseen cost impacts one way or the other not captured in the current budget will be locked in for the next three years if the Board approves that budget on the basis of the information before it at this time? A. Well, any unforeseen impacts are a shareholder risk in that period. Q. Well, if the impact is to reduce cost of service, it's actually a ratepayer risk? A. No, it's a shareholder risk in the period. Once the base is established and you apply the formula, any variance up or down is a shareholder risk in the period. Q. If between now and the first year of -- well, if in between now and the beginning of fiscal year 2000, one or more of the exigencies we just talked about has the effect of significantly reducing your O&M costs, then to have the Board approve the budget now would prejudice the ratepayers? A. No, I don't think so. I think we have been careful in the way we have designed our PBR plan and our Z-factors to take account of the kinds of things that you have raised. The financial implications of Y2K are captured in the Y2K account and, as per the Board's decision in 497, we have removed the amount of Y2K costs that the Board approved in rates in 1999. We have removed that as part of this process. With respect to CIS, the Z-factor that is in the Seal,Charleson,deJongh 190 Grant,McGill cr ex (Mondrow) PBR formula before you today was initially put into the design of the program to account for a situation where CIS may be charged as an O&M charge into the utility. And, therefore, the Z-factor, subject to Board approval, would be the mechanism whereby it would get into rates. So that was the major reason for that Z-factor, the CIS Z-factor at the time we put the evidence together. Q. Can I just stop you there for a moment. A. Yes. Q. On CIS and Y2K, if we can look at those together for a minute. Would you agree with me that those are both complex issues; that is, the impacts of those issues permeate various aspects of the utility's operations? A. The Y2K is pretty much being managed and, from a cost point of view, is concentrated in those variance accounts that have been approved by the Board. CIS, it's my understanding, will have the most substantive impact in the area that Mr. McGill works in. I think it's -- I forget the name of it -- the department. MR. McGILL: A. Customer Support Services. MR. GRANT: A. Right. So that's where I see it having an impact on the O&M as it stands today. Q. Sorry, Mr. Grant, I don't think -- perhaps I didn't phrase my question properly. The CIS and, to a larger extent, perhaps in light of your recent answer to the Y2K issue, would you agree Seal,Charleson,deJongh 191 Grant,McGill cr ex (Mondrow) with me that the impacts of those issues are fairly broad across the scope of the utility's operations? Quite apart from whether you capture them all, would you agree with me that they are broad and complex impacts? A. Operationally Y2K is broad, yes. Q. And so, to the extent that the Board can take comfort in the inclusion of a Z-factor to deal with, let's just look at Y2K for a second, will depend on the extent to which they can be satisfied that you have, in fact, captured all of the impacts of the issue, because if you've missed them, then they don't get captured by the Z-factor? A. Yes. And I would say expect that in the disposition of the Y2K account the Board may wish to hear evidence from the company as to how -- not just how much the dollars are, but the process -- the accounting process that we go through to place those dollars into the Y2K account which, of course, is consistent with the Board-approved methodology. Q. And if intervenors wish to examine that issue before the Board, based on your prefiled evidence on that issue, would it be legitimate for them to seek information on O&M budget aspects that they feel might be impacted by Y2K but which you might have missed or miscalculated? A. Well, I suppose intervenors have every right to ask questions as to the amounts that are in that Y2K account. Q. Or not in the Y2K account? Seal,Charleson,deJongh 192 Grant,McGill cr ex (Mondrow) A. Yes, they have the right to ask that question as well. Q. Okay. Sorry, I interrupted you. You were, I think, reviewing some of the other changes. Was there something else you wanted to add? A. Yes. As I was saying, the initial design of the PBR had CIS as a Z-factor, and it would capture all of the O&M effects, the incremental O&M effects of CIS. And it was -- so it's there -- it's still in our plan, it's still in our PBR plan. And even though we will be rate-basing -- proposing to rate-base the CIS system in the next case, we believe that it's important to keep that Z-factor in the PBR plan that we have before you because any incremental O&M cost savings; in other words, incremental to the current base, current PBR base that result from - and these would be true cost reductions that result from the implementation of CIS - ought to be flowed to ratepayers, those benefits, and that's what that Z-factor would be designed to capture. Q. So, Mr. Grant, is it fair for me to conclude that the degree to which ratepayers are protected is directly dependent on the degree to which the Z-factor is presented to include all of the cost impacts of whatever the driver of that factor is? We've been talking about Y2K, for example. A. All of the incremental cost reductions, and I'm speaking here on CIS. Seal,Charleson,deJongh 193 Grant,McGill cr ex (Mondrow) MR. McGILL: A. Incremental O&M cost reductions. MR. GRANT: A. Correct. Related to CIS, we would propose to capture in that Z-factor and utilize, subject to the Board's approval, utilize that as a credit to rates. Q. Okay. The unbundled budget which you propose to be the base for your proposed PBR O&M plan was reviewed most recently as I've noted in 179-14, -15. Would you agree with me, Mr. Grant, that that review was relatively less comprehensive than the normal O&M budget review, normal being in the course of the historically normal rate case? A. You're talking about the $21.5-million adjustment? Q. I'm talking about the impact of the separation on your O&M budget? A. Which is $21.5-million? Q. That's the company's position. We spent relatively little time in that hearing looking at that issue relative to a normal rates case O&M review? A. Well, I think you spent as much time as you felt was necessary on that issue, you and other intervenors, and we certainly explained all of those adjustments. And I take the point that it took up less time than the four days that are normally spent on O&M in a rates case. Q. You'll agree with me that it wasn't a Seal,Charleson,deJongh 194 Grant,McGill cr ex (Mondrow) full-scale O&M review? A. I won't agree with that. I think there was full opportunity for everyone to explore that issue and those adjustments, and I presume that everyone took that full opportunity. Q. But, in effect, the review was less thorough in terms of the record than in the past and you're suggesting that's because people were comfortable with it? A. I didn't say that the record was less thorough. Q. Well, we had less than a day versus four days of record. Wouldn't that mean it was less thorough? A. I don't now whether it was less than a day. I think there was a fair bit of cross-examination. But, in any event, the amount of cross-examination that intervenors felt was necessary on this issue was provided and, in my view, at the end of the day that completes the record on that particular issue. Q. There is no stakeholder consensus on the baseline budget for PBR O&M; agreed? A. Well, to the extent that stakeholders agree with the Board's decision, I think there is. Q. Sorry, which Board's decision? A. The starting point, the 497 decision. I presume all stakeholders agree with that decision. That's the starting point. Q. You went through an ADR process in which the issue of what to use as the baseline was canvassed and you Seal,Charleson,deJongh 195 Grant,McGill cr ex (Mondrow) came out of that process without agreeing? A. You're talking about which ADR process? Q. The ADR process immediately proceeding this hearing, this phase of the hearing. A. Yes, the Board had scheduled two days and, as I understand it, the negotiations broke down after one. Q. Well, I won't probe you into the nature of the ADR discussions in any detail. One final area, a couple of questions. It's my understanding from the evidence that, given the timing of the 2000 application -- rates application, it's the company's intention to provide in its prefiled material an O&M estimate which, as I understand it, will be based on the proposed application of the proposed PBR formula to the 1999 base? A. Yes, I went through that in one of my interrogatories, the process that we would go through. Q. Right. And if the Board in this proceeding decides to alter one of the variables that you've proposed, you would file an update to that evidence with a new O&M number based on that adjusted variable? A. Yes, we'll reflect the Board's 497-01 decision in an update in the RP-99-01 case. Q. Okay. Now, if the Board's 497-01 decision is to say you can't use the proposed baseline budget because we're not satisfied it's the right one, what are you going to do for the 2000 rates case? A. Well, that's a good question. I don't know. Seal,Charleson,deJongh 196 Grant,McGill cr ex (Mondrow) I think, as Mr. Hills testified, there's -- we have not put together a 2000 budget and that would really leave us in limbo. Q. How long would it take to put together a 2000 budget? A. The budgeting process typically takes -- the cycle time is between five and six months. Q. And you've made no contingency plans for the event that the Board, for some reason, is uncomfortable with the budget currently put before it? A. No, no, and we didn't need to. We went through the process last year and established, as we've discussed, the just and reasonable base that we started from and we made the adjustments -- the appropriate adjustments to that and discussed the $21.5-million unbundling adjustment in the previous proceeding. So we believe all of those elements provide very solid building blocks for the Board to determine that, after adjustments that there's a just and reasonable base to move forward for PBR. Q. But if the Board disagrees with you, are you saying that at best your rates case filing will be delayed by some three or four months? A. I don't know how long the rate case process would be delayed. It's probably longer than that. Q. Is anyone working on a budget at this point that could be used for a full rates case filing, if one was required? Seal,Charleson,deJongh 197 Grant,McGill A. No. Not to my knowledge, no. MR. MONDROW: Thank you very much, Mr. Grant. Thank you, Madam Chair. THE PRESIDING MEMBER: Thank you, Mr. Mondrow. Mr. Vlahos? MR. VLAHOS: Mr. Grant, I would like to ask a clarification question. I can read that I guess in the record tomorrow but I would like to understand today as to what you had agreed with Mr. Mondrow about 10 minutes ago as to delaying of the use of what -- by one year of the O&M base. I didn't understand that exchange. Do you recall that discussion? MR. GRANT: Yes, I do. And Mr. Mondrow was postulating a scenario, I believe, where the Board approved a PBR formula but did not approve a base and it was under those conditions that I suggested that there would be a delay -- in effect, a delay in the implementation of PBR for a year. MR. VLAHOS: And what would apply then for year 2000 rates? MR. GRANT: Well, I don't know. That was, I believe, really the essence of our last discussion, the last discussion I had with Mr. Mondrow. And it would delay things, and I don't know what we would end up with in terms of timing on that case. MR. VLAHOS: Yes. I thought you had agreed with his proposition and I just wasn't sure about the mechanics Seal,Charleson,deJongh 198 Grant,McGill of how it would work to the 2000 rates. But I'll go back to the transcript. MR. GRANT: Yes. I don't think I was agreeing at all with the proposition that it would be okay for the Board to give us a ruling on the formula and not rule on the base; that would create significant uncertainties in the business, and so I did not accept that proposition. MR. VLAHOS: All right, thank you. ---(Witness panel stands down) THE PRESIDING MEMBER: Thank you. We'll take a break, return at ten past eleven, please. ---(Witness panel stands down) ---Recess taken at 10:50 a.m. ---On resuming at 11:16 p.m. THE PRESIDING MEMBER: Please be seated. Sorry we're late. MR. CASS: Madam Chair, over the break we did a canvass of counsel on time estimates for the remainder of the panel that was on the stand, and also for Mr. Winter's panel. It really did appear that if we didn't get Mr. Winter up after the break, we were in real danger that he would not be finished today. With the Board's indulgence, the Applicant proposes to call Mr. Winter now, together with Mr. deJongh who is the other member of that panel. THE PRESIDING MEMBER: Thank you. MR. CASS: Mr. Winter would need to come forward 199 and be sworn. DAVID deJONGH; Recalled. JACK V. WINTER; Sworn. DIRECT EXAMINATION BY MR. CASS: Q. Mr. Winter, I understand that you are a managing executive consultant with AUC Management Consultants which is part of the Metzler Group; is that correct? MR. WINTER: A. Yes, sir. Q. And I understand that, at least as part of its business, that AUC Management Consultants work with -- works with utilities, regulators and other companies; is that correct? A. Yes, sir. Q. And you, yourself, I believe have a BS and an MS degree in electrical engineering from the University of Louisville; is that correct? A. Yes, sir. Q. You also have an MBa from the University of New Mexico; correct? A. Yes, sir. Q. I understand that early in your career you spent, I think it was, three years working with the Public Utilities Commission of Ohio; is that correct? A. Yes, it is. Q. And subsequently you had, I think, 15 years with the Public Service Company of New Mexico; is that correct? Winter,deJongh 200 dr ex (Cass) A. Yes, sir. Q. And in 1986 you became Director of Planning and Budgets for the Gas Company of New Mexico; correct? A. That's correct. Q. And subsequently, from '88 through April of '93, you were operations manager for that company; is that correct? A. Yes, sir. Q. I understand that you have been accepted as an expert witness and given expert testimony before the Public Utility Commission of Ohio and the Ohio Power Plant Siting Commission; is that correct? A. That's correct. Q. Now, more specifically with respect to performance-based regulation, am I correct in thinking that during your work in Ohio you initially had some exposure there to incentive rates; is that correct? A. That's right. We were dealing with target incentive rates for mostly electric companies then. Q. And then, in 1985, I understand that you were a lead consultant in a major international study of PBR in the utility industry that was sponsored by utilities? A. Actually it was '95. Q. I'm sorry. Did I not say '95? I apologize. A. But that is correct. Q. Thank you. And then, in 1997, you lead a team which completed an update to that study including work for some sponsoring Canadian firms; is that correct? Winter,deJongh 201 dr ex (Cass) A. That's correct. Q. And just for the purposes of the record, Enbridge Consumers Gas was one of the Canadian firms; is that right? A. That's right. Q. And you've provided PBR program input to -- sorry, in a number of jurisdictions including American states and the Province of Ontario? A. That's right. Q. And, again, Enbridge Consumers Gas is one of the companies where you've provided that input? A. That's correct. Q. And I understand that you've been involved in the development of specific PBR mechanisms in a number of American states? A. Yes, sir. Q. I understand as well that you've delivered papers on PBR mechanisms at a number of industry conferences; is that right? A. Yes, sir. Q. And I believe that some of those conferences would include those of the National Association of Regulatory Utility Commissioners in the United States; is that correct? A. Yes, that is correct. Q. And I believe that you've also put on industry workshops and forums including forums for regulators in Hawaii and Indiana; is that correct? Winter,deJongh 202 dr ex (Cass) A. Yes, sir. Q. And those forums were on PBR? A. Yes, sir. Q. Thank you, Mr. Winter. MR. CASS: I would ask that Mr. Winter be accepted as an expert, Madam Chair, in his area of testimony. THE PRESIDING MEMBER: Thank you, Mr. Cass. The Board has no problems with that. MR. CASS: Thank you. THE PRESIDING MEMBER: Mr. Warren? MR. WARREN: Good morning, Mr. Winter, my name is Robert Warren -- MR. CASS: Sorry, Madam Chair, I did have some examination in-chief. [Laughter] MR. WARREN: Oh, sorry. THE PRESIDING MEMBER: Oh, did you? Sorry, Mr. Cass. MR. WARREN: I'm actually going to do your examination in-chief. MR. CASS: You'd probably do it better than I would, so... MR. CASS: Q. Mr. Warren, I take -- sorry - (laughter) - Mr. Winter, you were responsible for the evidence shown opposite your name at Exhibit A, tab 8, schedule 1; is that correct? MR. WINTER: A. Yes, sir. Winter,deJongh 203 dr ex (Cass) 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, I do not. Q. And is it accurate, to the best of your knowledge or belief? A. Yes, it is. Q. Just a few additional questions, Mr. Warren -- Mr. Winter. I'm going to do that continually now. MR. MONDROW: Perhaps Mr. Warren should now be sworn. [Laughter] MR. CASS: Q. The company's evidence touches on some of the history of performance-based regulation and I wonder if you might just wrap it up in a brief overview as to the history of PBR, bringing us to where it stands now. MR. WINTER: A. Certainly, although brief I hope. My understanding of the background of the whole environment was, there was a lot of economic theory in place regarding cost of service, regulation and deficiencies as early as the '60s. In Great Britain, Stephen Littlechild proposed a PBR price cap approach for the ultimate privatization and regulation of British Telecom and that occurred in 1983. Winter,deJongh 204 dr ex (Cass) This was the first incidence of price caps being used as an incentive regulation anywhere. Over the next five years, the concept, if you will, across the ocean came to the United States in conjunction with the break-up and divestiture of AT&T in 1984 and a subsequent change in regulation for that company. Many states adopted similar programs to the Federal Communication Commission price cap approach to AT&T and it worked its way in the United States down through state jurisdictions. In the energy business nothing was adopted in the United States until approximately the mid-90s. Even in Great Britain, British Gas didn't fall under a price cap regime until '93. So the concept of price caps for - excuse me, I'm a little bit nervous - energy regulation was something that delayed or followed on the telecommunication business. And, as I understand the Canadian evolution, it was more in parallel. Energy and the telecommunication incentive regulation occurred in parallel, although only recently. We did our initial study over the period of '94 and '95 and we found then at that time in the United States less than 25 energy companies had adopted or proposed PBR mechanisms. It was a rapidly growing trend. When we did our follow-up study two years later, there was over 35 Winter,deJongh 205 dr ex (Cass) jurisdictions in the United States that had begun to evolve PBR programs. So the wave, if you will, of that particular type of regulation was beginning to grow. And I followed the Canadian jurisdictional developments, it's kind of the same pattern, not all of your provincial regulators have adopted PBR programs, but some of them have. One of the last things to come in on the evolution of the process, in my opinion, is what we found was that every state jurisdiction, and apparently provincial jurisdiction, tends to take a different tack towards incentive regulation. Every company tends to adopt a different type of incentive regulation. So the only conclusion I can draw from the roughly 10 to 12 years of incentive regulation in PBR in the United States, and perhaps in Canada, is that a one-size program does not fit all. It's up to the unique, individual jurisdictional pressures, political pressures and company issues that drive the ultimate end product. Q. Thank you, Mr. Winter. I believe that you've been here for the testimony so far of the first witness panel; have you? A. That's correct. Q. There's been some discussion during that testimony about a comprehensive PBR in relation to the applicant, Enbridge Consumers Gas. Do you have any comment on what you've heard so far in that area? Winter,deJongh 206 dr ex (Cass) A. Well, a few comments, yes. As I just mentioned, different companies and jurisdictions adopt different programs for varied reasons. A comprehensive program includes a number of factors that are not represented in a more simpler approach such as a targeted O&M incentive, and the members here are fully familiar with those differences. I just wanted to point out that as you increase the number of variables involved in a more comprehensive program, quite often the interaction of those variables and the objectives interact in unknown ways. And especially with first generation programs, with the multiple goals, you often get unintended consequences, as were raised yesterday regarding some of the early programs in Great Britain and potentially the southern California incidents. So adopting a simpler program, a step-wise approach, as the company refers to it, allows people time to adapt to a new way of doing business. For instance, companies, as we found, tend to change their internal management approaches, decision-making techniques, oftentimes even organizational structures to respond to a different way of focusing on the business which is now, hopefully, focused more on efficiency and quality of service, versus cost of service types of pressures which often force management of utility companies to worry more about cost control and to worry more about the next test year, rather than making proper Winter,deJongh 207 dr ex (Cass) business decisions on a long-term basis. These kind of structural changes take time. They're new to utilities. Our business is based upon helping utilities overcome many of these performance management issues. So we get exposed to a lot of the structural issues there. It's often an advantage to the regulatory body, staff as well as Board Members, in this learning curve process to start out with a smaller step which allows the regulatory process time to evolve, time to measure and take objective view of the actual components that are in place and to track direct response to direct intent. The more variables you have, the harder it is to do that. Finally, customers and competitors often take advantage of the learning curve as well in a simpler model to react and adapt to their choices and to their ultimate business strategies on the part of competitors. So, over all, a simpler step-wise approach as the company has proposed for their particular business situation - and, in my opinion, in the current regulatory environment here where this is the first program, if you will, in the jurisdiction to come out - offers certain advantages. Q. Thank you, Mr. Winter. And then one final question. Certain of the intervenor questions have commented on the success of targeted plans. Do you have any comments of your own on the success of that type of plan? Winter,deJongh 208 dr ex (Cass) A. Yes, I do. Referring back to the history of how PBR came into the United States, what we found and of record is that the early adopting jurisdictions in the United States were fairly large states and that, more importantly, they were states that had had experience with targeted incentive programs. In the gas business, primarily, those were reflected in gas cost incentive mechanisms to reduce or maintain the competitive price of gas. However, since the mid-70s in the United States in the electric side of the business, there's been numerous types of targeted incentive programs that range from incentives to run your power plants more efficiently, to have them more available, to control the fuel cost of power plants, to plant rate -- heat rate incentives, power plant availability incentives, some construction cost incentives and some early O&M targeted incentives, particularly in the Michigan jurisdiction. What we find is that the success or problems that arise with these targeted incentive programs allow these early adopting jurisdictions to have more comfort with programs -- price cap programs, PBR programs. So that our study in '95 we found maybe seven or eight U.S. jurisdictions, and those were the same ones that had this previous history of targeted incentives. Today another 30 or so U.S. jurisdictions are involved based upon experience from the early adopting states that you all have certainly been exposed to, but Winter,deJongh 209 dr ex (Cass) also based upon some of their more recent experience in expanding these targeted incentives. MR. CASS: Thank you, Mr. Winter. Those are my questions, Madam Chair. Thank you. THE PRESIDING MEMBER: Thank you, Mr. Cass. Mr. Warren? CROSS-EXAMINATION BY MR. WARREN: Q. Mr. Winter, I'm still Robert Warren. MR. WINTER: A. Yes, sir. Q. I appear in this proceeding for the Consumers Association of Canada and that organization's constituency is entirely composed of residential ratepayers/consumers of natural gas, so you understand the perspective of my client. I have just a few questions for you, Mr. Winter. You indicated to Mr. Cass that you had heard the testimony yesterday; is that correct? A. Yes, sir. Q. And you would have heard then that Mr. Grant said to me in response to one of my questions that the desired end state for Consumers Gas is a comprehensive PBR; correct? A. Yes, I heard that. Q. And you would have heard Mr. Grant this morning -- did you hear his testimony this morning? A. Yes, sir. Q. You would have heard Mr. Grant say in Winter,deJongh 210 cr ex (Warren) response to my friend Mr. Pratte's questions that a comprehensive PBR is ultimately better for all stakeholders. You heard him say that? A. Yes, sir. Q. And you would have heard him say that the principal impediment to Consumers implementing a comprehensive PBR was a cluster of issues around capital investment where the utility is required, for broadly speaking public policy reasons, to make investments in either mains or improvements, upgrades where the recovery -- economic recovery is over a longer period of time. You heard him say that? A. I think so. Q. And, finally, you would have heard Mr. Grant say to Mr. Pratte this morning that what is needed to address that cluster of capital-related impediments or impediment is some form of - and this is my rough note of his testimony - a Z-factor that passes costs through automatically with some conditions attached to it, such as monitoring; correct? A. Okay. Yes, sir. Q. Now, I think you said in response to a question in-chief that there have been a number of utilities in North America, principally in the United States, that have made the transition from being the classic cost of service utility to comprehensive PBRs; correct? Winter,deJongh 211 cr ex (Warren) A. Yes. It's a small number; but, yes, there are a number. Q. And you would agree with me, I take it, Mr. Winter, that in making that transition that many, if not all of those utilities, would have had to address the very kind of problem that Mr. Grant says is the principal impediment; namely, how to deal with this public policy obligation to invest in mains and upgrades that may not pay an economic return in the short term. You agree with me that the problem's been dealt with elsewhere? A. I'm sure that all those utilities had similar concerns about capital costs, yes. Q. And you would agree with me that there is, therefore, a body of experience which Consumers could look to in making that transition to -- if it wanted to, from a traditional cost of service regulation to a full comprehensive PBR; correct? A. Well, I must disagree slightly with that. There are certainly generic lessons learned about what can go wrong or what can go right when you include capital cost. Unfortunately, due to the varied differences both in terms of specific utility situations, growth levels, cost of existing service, demographics, business strategy and combined with their level of competition and the current regulatory environment, it's very difficult to translate direct program components or even intents. Winter,deJongh 212 cr ex (Warren) As a matter of fact, we tried to do that for our multi-client base in 1995 and were, unfortunately, unable to do that. We ended up with only generic types of lessons learned. The accounting intricacies, the capital structure differences, the tax bases complicate just a simple translation of program components or even specific application of program components. And I think you see that even in Canadian jurisdictions where you've got, British Columbia has two types of PBR programs where capital is handled differently. So, that's the only place I would differ with you. Q. There is no perfect model which can be translated from one jurisdiction to the next seamlessly; fair enough. Is that what you're telling us? A. Yes, sir. Q. And you would agree with me, I take it, that the same is true for targeted PBRs; that it's not ever a seamless transition or translation - I suppose is a better term - from one jurisdiction to another with respect to a targeted PBR either; is there? A. That's correct. Q. And you would agree with me that while there are advantages and disadvantages to a comprehensive PBR, there are also advantages and disadvantages to a targeted PBR; correct? Winter,deJongh 213 cr ex (Warren) A. Certainly. Q. Okay. But my point - and I take it that we are on common ground on this - is that the kind of difficulty generically that Mr. Grant refers to, this problem of dealing with capital and public policy context, it is generically an issue which a number of other utilities have had to address; correct? A. I agree with that. Q. Now, can I ask you to turn up your prefiled evidence which is Exhibit C, appendix E, page 4. And at the top of the page, you indicate that: 'Beneficial mechanisms will promote success for firms, regulators and customers in the developing competitive environment.' You then say: 'From the regulatory perspective, success often includes...' And I take it, what I'm to take -- am I to take from that that what you're talking about is success in a PBR regime, whatever it is; that's what you're talking about there? A. That's correct. Q. Okay. And when you talk about a regulatory perspective, are we talking there about the perspective of the regulator, or the ratepayers, or both? A. Specifically that comment refers to the regulators. Q. Regulators? Winter,deJongh 214 cr ex (Warren) A. Yes. Q. Okay. And if I could just take the first observation: '...is a reduced regulatory burden in cost, scope and backlog.' Are you aware, Mr. Winter, of the evidence in this case about the extent to which this targeted PBR will reduce regulatory burden? A. I'm familiar with an approximation of a reduction in days spent on reducing, debate and discourse and preparation on O&M costs; is that what you're referring to? Q. Yes, that is -- you're not aware of anything else that should be referred to. And the Board should, when it's measuring success and reduced regulatory burden, which is one of your criteria, that's what they should be looking for in this case? A. That would be a goal. Q. Okay. And you also refer then in your next category to: 'An increased level of customer service information being available.' Can you tell me, in the context of this particular case, what is the "increased level of customer service information available" that you would be talking about? A. Yes, sir. As I understand right now there are no formal Winter,deJongh 215 cr ex (Warren) requirements to submit customer service information to the Board. More than likely the Board or staff get involved on a complaint basis, so there are probably detailed information on a customer-by-customer basis. From my perspective, the opportunity to review on a regular basis the kinds of customer quality measurements indices that the company has indicated is a benefit. It allows customers, unfortunately competitors, but also regulators to view how the company has performed in a series of strategic areas. Q. Is what you're talking about, Mr. Winter, so that I understand it exactly, is the Board's ability to see whether or not the utility has met the service quality indicators? A. Yes, sir. Q. Okay. And is it your understanding, sir, that in, for example, a regular cost of service rate case, the Board and the intervenors cannot examine whether or not the company was performing up to its own standards in those categories? A. No, I'm not familiar with your historical approach, but I'm not distinguishing between the ability of any intervenor to actually go after specific performance information. What I was focusing on was both the company's ability to track and monitor specific defined-in-advance performance measures, if you will, and the expectation Winter,deJongh 216 cr ex (Warren) that those measures would be reviewed regularly, which brings a different discipline and a different structure to how the utility deals with that information versus a response to perhaps an "ad hoc" investigation. Q. I just want to understand, Mr. Winter, in this category how the world will be different in a targeted PBR than the world is today. As I understand it - we haven't yet got to the SQI panel - but as I understand it, the service quality standards which are being proposed are the standards which the company now meets. Do you understand that? A. I would have to defer it to the internal expert. I wasn't involved in putting those together. Q. Can you take it for the moment that the standards they're proposing are the standards they now meet? A. Right. Q. Okay. And that presumes, I take it, the existence of a standard and presumes the existence of a measurement for meeting that standard that exists today; correct? A. I would hope so. Q. Okay. And would you take it as a given that in a rate case, if the ratepayers wanted to examine whether or not the utility had met the standard in those categories, they could do so today? A. Sure. Winter,deJongh 217 cr ex (Warren) Q. Okay. Now, the next and final category from the regulator's perspective is long-term price stability for basic services. Is it your understanding that under the cost of service regime as it has obtained, let's say, in the last five years in this province, that there has been long-term instability in the prices for basic services? A. I would have to say I'm not familiar with the last five years' rates. Q. Okay. A. I would doubt if there's instability. I would say that because there's a hearing that takes place annually, that as a customer I would always be subject to only knowing the potential rate impact on an annual basis. The concept of a term PBR longer than one year theoretically allows customers to make decisions for the long-term nature of the PBR term, rather than just the calendar year. Q. But we were looking at this from the perspective of the regulator and my question is: Is it your position when you set out this criterion that the Board will be in a better position to assure long-term price stability for better basic services? A. Yes. Yes, it is. Q. Okay. Now, you do not anywhere in the evidence, as far as I can see - and please correct me if I'm wrong - set out the criteria for success from a ratepayer perspective, and that's just the last category Winter,deJongh 218 cr ex (Warren) of information I would like to deal with on. Would you agree with me at a high level of generality, Mr. Winter, that when the ratepayers - in this case, my constituency, consumers, residential consumers - what they might look at, at a very crude level of analysis, is whether or not they're better off with a targeted PBR than they are under the existing cost of service regime; fair? A. Sure. Q. And would you agree with me, Mr. Winter, that under the current cost of service regime, one of the benefits which ratepayers feel they may have is that they can scrutinize and challenge in some -- they can scrutinize in some detail and challenge both the O&M costs annually and the productivity of the company. Would you agree with me, they can do that now? A. Well, as long as we're distinguishing between, for instance, a representative of a customer and the customer base entirely, I would agree with that. In my experience both running utilities and dealing with customers I haven't ever had one come up and challenge my O&M budget as an individual. [Laughter] But your point is well taken, that you do have the opportunity, as representing the customer base, to certainly challenge those issues. Q. I should have been clearer. I'm sorry, Mr. Winter, I wasn't talking about the demented ratepayer who Winter,deJongh 219 cr ex (Warren) may come through your door and challenge your O&M budget; I'm talking about the cost of service process before the Board. A. Yes, I understand. Q. And certainly you would understand, Mr. Winter, that in that process ratepayer representatives can scrutinize and challenge the O&M costs and productivity; correct? A. Yes, sir. Q. And you would understand, Mr. Winter, I'm sure, that the ratepayers have the right under the existing cost of service regime to try and persuade the Board that the O&M budget should be reduced and the productivity level should be increased; fair? A. Certainly. Q. Are you sufficiently familiar with the process in Ontario to understand that there is a mandatory alternate dispute resolution process which precedes every main rates case? A. Yes. I'm very impressed with that. We don't have that in the States. Q. And would you agree with me, sir, at a high level of generality that in the ADR process, if the ratepayers have the ability to negotiate trading off factors - for example, capital investment versus O&M - that if the O&M budget is one of the issues in play, it gives them, the ratepayers, certain leverage in the ADR process to try and reduce that O&M budget. Winter,deJongh 220 cr ex (Warren) Would you agree with that? A. As I understand any negotiated process, there are tradeoffs and, to the extent that occurs in your ADR level, then sure, I agree with that. Q. Okay. Now, can we agree with -- is it common ground between us, Mr. Winter, that the proposal that's before the Board, this targeted PBR proposal is, looked at from one perspective, another way to set the utility's O&M budget over the course of a period of three years? Do you agree? A. The starting point, yes. Q. And would you agree with me, Mr. Winter, that ratepayers could legitimately say that the tradeoff -- that the sacrifice they're giving up in terms of the ability to scrutinize the O&M budget and the ability to ask the Board to reduce it and to negotiate an ADR might very well persuade them that they're really not better off under the targeted PBR; is that fair? A. I'm sorry, I wasn't following the logic. Q. My proposition to you -- we've agreed a few moments ago, Mr. Winter, that one of the measures which ratepayers might bring to the examination of this scheme is whether or not they're better or worse off under the existing system as opposed to targeted PBR. We've agreed on that? A. Yes. Q. And you'd agree with me that, under the targeted PBR, what ratepayers are giving up is among other Winter,deJongh 221 cr ex (Warren) things (a), the ability to scrutinize the O&M budget; (b), the ability to scrutinize the productivity factors; (c), the ability to persuade the Board that both the O&M budget is too high and the productivity factor too low; and, finally, the ability to negotiate in an ADR process the leverage to use O&M as a negotiating tool. We've agreed on all those points; correct? A. Well, not exactly. The way PBR is structured is that the initial debate sets the starting point in every one of those variables. What the customer and regulator potentially trade is the ability to readjust those under normal conditions over the term of the PBR. What they gain in return, hopefully, is a clearer future, the long-run stability of rates, the understanding of where the company is headed and, hopefully, a more efficient and better run utility. So that would be my understanding of the contract, if you will, under a PBR environment. Q. What we're going to get -- my constituents as well as those of Mr. Pratte and others, we're going to get $4.5-million savings so we're told. Do you understand that? A. I understand that's what the company has identified as potentially a minimum. You would hope that as the company makes cultural change, structural change and becomes more aligned to compete, you'll get longer term, more far-reaching benefits. Winter,deJongh 222 cr ex (Warren) I think that's been the case in several -- both targeted programs, certainly in some more of the second generation comprehensive programs. Q. We might get increased benefits, we might get bigger benefits if there were a comprehensive PBR; fair enough? A. That's possible. Q. Okay. Now, the last question I wanted to ask you was with respect to page 8 of your prefiled evidence. Two things. In the second full paragraph you observe that -- you conclude that, in general, the company's program goals and objectives reflect the current state of industry plans and approaches. We agree that in terms of the current state of industry plans and approaches there are a number of utilities that have comprehensive PBR plans; correct? A. Yes, sir. Q. And you indicate that there is, in the next paragraph: '...an increase in communication between the company, its regulator and its customers, will improve information flow and reduce barriers to cooperation.' Can you tell me, sir, what increase in communication you're talking about in the context of this case? Winter,deJongh 223 cr ex (Warren) A. Sure. Certainly in the initial negotiations and ADR proceedings the company and the parties to those proceedings have focused on longer term issues: Setting the starting point, debating the variables that will change, and under what conditions they change. That normally wouldn't take place, you'd be focused on a one-year type of - as I understand the process - discussion. That, in and of itself looking long-term, in our view, is positive to all parties, takes away some of the negatives of regular cost of service filings. There's also the annual review and report I guess on these specific customer service quality issues. There's a review on the performance of the company in a much more potentially detailed basis, although I haven't seen the monitoring and reporting requirements yet to be developed that often occurs at the term end of the PBR. In general what happens is that all parties begin to understand more completely the tradeoffs, the business strategies and the intent of the regulatory and business objectives. Q. Is it your position in this case that all of those categories of information - I have too many negatives in this question - that the ratepayers can't get all of that information now? A. No, sir, I think that-- Winter,deJongh 224 cr ex (Warren) Q. Just let me finish my question, Mr. Winter. A. Yes, sir. Q. --that they can't get that information now, in the rigorous examination of rate filings in a cost of service regime? A. No, that's not my contention. The entire approach to PBR is to do three things that are different from cost of service. First of all, you set pre-defined targets for performance instead of after-the-fact regulation. Secondly, the company is held accountable for specific performance measures, whether those are financial or customer service quality issues. And third, it's done far less frequently than the normal cost of service rate cases. Q. You understand, sir, of course, that we're going to continue to have cost of service rate cases. We're going to have one this July on this very company. I understand that under a targeted PBR we're going to continue to have cost of service rate cases in any event; right? A. It's a known fact -- not known, it's an accepted fact that first generation PBR programs may not necessarily lead to reduced regulatory burden. What's hoped is that you move up the learning curve so that the next generation -- the next step, if you will, will lead to further regulatory burden decreases. In your particular situation this targeted Winter,deJongh 225 cr ex (Warren) approach hopefully will certainly reduce the amount of time you spend on these annual cases? Q. Can I take it from your answer, Mr. Winter, to be fair to you, that the Board should disregard in this case the suggestion that there's going to be a reduced regulatory burden. There, in fact, is not going to be a reduced regulatory burden; is that what you're saying to us? A. I think it's probably safe to assume that you'll see a reduction in the specific types of reviews that you've experienced in past. What we have seen in other jurisdictions is that the change in regulatory perspective that occurs often raises issues and, depending on the complexity of the formula, may lead to an equal amount of regulatory review. The simpler the formula the less likely that regulatory review will be decreased. But, in your case, since you're going to have annual cost of service component review every year, it's possible that the four days, or whatever the estimate is of whatever the reduction in O&M review, may not be totally applied to a reduction in regulatory burden. MR. WARREN: Thanks, Mr. Winter. THE PRESIDING MEMBER: Mr. Brett? MR. BRETT: Madam Chair, I have no more than 10 minutes. I'd like to proceed if possible now. THE PRESIDING MEMBER: Yes, go ahead. MR. BRETT: Thanks. Winter,deJongh 226 cr ex (Brett) CROSS-EXAMINATION BY MR. BRETT: Q. Mr. Winter, my name is Tom Brett. I represent certain institutional customers of the utility. Could you turn up page 3 of your prefiled evidence, please. And about two-thirds of the way down the page there is a paragraph that starts: 'We further believe that PBR...', Do you see that, page 3 of 12? A. Yes, sir. Q. The second sentence of that paragraph: 'More than a simple formula approach to rate levels, PBR is a process. In its most successful form this process creates an open collaborative environment which requires that all stakeholders structure a responsive and responsible relationship in the competitive utility marketplace.' And then again on page 8 of your -- if you turn over to page 8 of your evidence, the middle paragraph of the page - that's page 8 of 12, the middle paragraph - the last sentence of that paragraph: 'The collaborative approach to developing PBR specifics will also create future opportunities to address changes and modifications in the non-adjudicated environment.' Mr. Winter, you're aware that the company has come forward as part of its PBR proposal with an SSM proposal, a shared savings mechanism? Winter,deJongh 227 cr ex (Brett) A. Yes, sir. Q. And that that proposal has been agreed to by the parties. A. Yes, sir. I'm not aware of the formal agreement, but... Q. All right. Will you take, subject to check, it was agreed to by the parties in a settlement conference? A. Certainly. Q. You may want to take this subject to check as well, that that SSM proposal had been the subject of a consultative process, a collaborative process with the DSM community that relates to the company's DSM work over the last two years or so? A. Yes, sir. Q. Now, with the exception of that part of the proposal, Mr. Winter, the remainder of the -- all of the rest of the company's targeted PBR proposal has not been the subject of a collaborative process or a consultative process; are you aware of that? A. No, I assumed you guys went through the same ADR process that you would do with a normal case. Q. Well, what I'm referring to here is the -- when you say "ADR process", you're referring to the settlement conference process that precedes a hearing in a rates case. When I say a collaborative environment and a collaborative process, Mr. Winter, I'm talking about a Winter,deJongh 228 cr ex (Brett) process whereby the company, early on in the development of its proposal, attempts to solicit views from stakeholders and try and build them in, to the extent possible, always having the final decision itself, but trying to incorporate them to the extent possible in its proposal. Are you aware that that was not done in this case by Consumers Gas? A. I think I'm aware that the company proposed its initial program which was then subject to your ADR discussion. Q. That's correct. All right. Now, the way I read the propositions that I read back to you, Mr. Winter, it seems to me that you're talking here about an open collaborative proposal, an open collaborative process for developing a proposal; is that fair? A. If I could expand that for a minute? Q. Sure. A. Yes, it is. And that's based upon what we've experienced and what we've participated in in a number of areas, but the definition of open and collaborative does range. For instance, you may be familiar with the Boston Gas process whereby they went through well over two years of open collaborative discussions, submitted a settlement to the Department of Public Utilities in Massachusetts which was rejected by that regulatory body. Winter,deJongh 229 cr ex (Brett) A. Yes, sir. Q. --and then was rejected by the regulator? A. Yes, sir. Q. I see. A. That set a different tone to a lot of companies, some of my clients in the United States. We have been involved in collaborative environments in Rhode Island and Massachusetts, and those ranged from the company actually providing an initial proposal and obtaining reactions from intervenors, to generic types of discussions on PBR environments as I assume this jurisdiction has gone through as well from some of the output that I've seen generically. Q. You're probably aware that the Board has coordinated a generic process of PBR consultation for the municipal electric utilities in this province? A. Yes, I think that's what I was referring to. So I guess what I would say is that that term "collaborative effort" can range, depending on past history, companies' timing and business strategy positions. Quite often in a mandated approach, you have to meet certain deadlines which may not allow for as full a collaborative effort as if you started from zero. Q. Just on that point, you're aware here that there was no mandated approach? A. Yes. There was in Massachusetts. Q. They were not told they must produce a... Winter,deJongh 230 cr ex (Brett) A. There was in California. Collaboration there would differ, I think, from other states. And quite often, to be frank, depending upon the company's experience with formal negotiations and settlement agreements. I would assume this company has a lot of experience in the ADR process and potentially that facilitated these sessions. Parties react better to proposals than just -- and move forward, than just trying to structure a proposal by consensus. So... Q. Sorry, carry on. A. --so I would say that, you know, the statement in my testimony would cover a wide range of collaborative or even consultative-type approaches. But, by and large, the more people you get involved, educated and exposed to your idea, the better the likelihood that the idea will be accepted. But as we've seen, this is not always the case, so.... Q. It's not always the case, but you would not, based on that experience or your general experience advise companies not to actively solicit the views of other parties in developing their PBRs? A. We do advise companies to actively solicit views. Q. You do. Okay. MR. BRETT: Those are my questions. Thanks, Madam Chair. Thank you, panel. Winter,deJongh 231 THE PRESIDING MEMBER: Thank you, Mr. Brett. As we said yesterday, we can't sit between now and two o'clock. So, Mr. Pratte, we'll stand down now and you can begin at two. ---Luncheon recess at 12:05 p.m. ---On resuming at 2:09 p.m. THE PRESIDING MEMBER: Please be seated. We apologize for the delay, and we'd just like to note that the Board has other business that it's trying to jamb in between sessions at the hearing and this sometimes requires us to be away a bit longer than we had hoped. But there's a whole other energy industry out there that is demanding our time. So our sincere apologies for keeping you waiting. Mr. Pratte? MR. PRATTE: Thank you, Madam Chair. CROSS-EXAMINATION BY MR. PRATTE: Q. Mr. Winter, my name is Guy Pratte and I appear in these proceedings on behalf of the Industrial Gas Users Association and it's an association that represents large users of gas. Let me start with a few generalities about the purpose of PBR. I took from your discussion with Mr. Warren that, based on your studies and experience, you are of the view that PBR is preferable to cost of service regulation in the current environment? MR. WINTER: A. Yes, sir. Q. And is it fair to say that one, if not the Winter,deJongh 232 cr ex (Pratte) major purpose of PBR is to expose regulated utilities to the forces of competition? A. I would word it "to prepare them to respond better in a competitive market". The extent of exposure depends upon the individual nature and level of competition in the marketplace, but generically to get them prepared. Q. Although even in comprehensive plans, in terms of distribution utilities, there is no actual competition. What we're trying to achieve is to, in a way, simulate what true competition would generate; is that right? A. That's right, moving closer to what the market forces would produce. Q. Would produce if there were actual market forces in operation; correct? A. I agree. Q. And you may want to refer to your evidence, but on a number of instances, you note, that in order to achieve that, what I might call, virtual competition, if you understand what I mean? A. I think so. Q. Okay. So not actual competition between different LDCs in the same area, but trying to achieve the results that true competition would produce - that's the goal -- one goal of PBR - in order to achieve that, we need to set performance standards that are objective, for instance. Winter,deJongh 233 cr ex (Pratte) And you noted that I think at page 3 of 12 of your evidence; correct? A. Yes. Q. And elsewhere at page 7 of 12, in the first paragraph, second and third line of your evidence, Exhibit C, appendix E, page 7 of 12. Are you there? A. Yes, sir. Q. You say, and I quote: 'We have found that measuring the results of management actions externally through well-defined and prescribed targets and components produces new behaviors.' Right. You've written that? A. Yes. Q. And I take it that what you mean by that is, it produces new behaviors that are closer to what market competition would generate? A. Yes. What the signals would send if you were in actual competition for your customers. Q. And when you measure -- when you have standards that measure externally, we're talking about objective standards, that is outside of the company in question? A. I'm sorry...? Q. What are those external standards that you look at? Would you look at, for instance, other LDCs' performance as on average establishing a benchmark against which you might measure the company whose PBR you're Winter,deJongh 234 cr ex (Pratte) analyzing? A. The specific reference on page 7 in terms of measuring results externally refers to the fact that the company is now in any measure being asked publicly how they performed. The types of measures that you could use range from the kinds that the company has endorsed or offered to hundreds of different types of variables. In the telecommunication business, for instance, I've seen PBR programs, because they are so highly measured, they have very detailed performance measures. The energy business is not as highly monitored, not as digital, not as easy to produce those measures, so... Q. I guess what I'm trying to get at, Mr. Winter, is when you look at performance indicators and you're trying to get a handle for how the company should perform in a PBR plan, would you not typically look at standards of performance outside of what the company might have historically achieved? A. Okay, I understand. It depends. It's not a clean answer. What we have seen in the last seven to eight years is as the energy business has become more competitive, at least in the United States, companies that once shared information quite freely and that joined in benchmarking and publicly available data consortiums now will withhold information. So five years ago I would have said it's easier Winter,deJongh 235 cr ex (Pratte) to compare yourself or benchmark yourself to utility data. You have an apples-versus-oranges problem whenever you compare yourself to a group of companies, as you're aware of, trying to make sure that the data is equal or it represents the same set of conditions. But beyond that, you have problems these days just getting people to provide data. So there are some measures where you could work off publicly-available information. There are some where you can't. What we find is that because of the accuracy of this data and the availability of the data over the last five to eight years, you're probably better off measuring yourself against a known target, which is how you performed in the past, because that's something that you control the data as a company, you can track improvements or decreases in performance, and you're not dependent upon unknown factors that may lie inherent in other databases. Q. So your view of PBR is that, in effect now, you measure yourself against yourself and not as against an external benchmark; is that your view? A. One of the elements of a performance-based regulation is a performance based on service quality and, to that extent, yes, I would hope that that is more -- now there are external factors involved in a formula approach such as the inflation index that you select, which is not controlled by the company. So that's an external performance measure. Such as the actual rate of growth, Winter,deJongh 236 cr ex (Pratte) all right? So these are factors that you can't control. Those are external factors. To the extent service quality indicators or performance benchmarks consist of a mix of your own performance and benchmarks that could be gathered in an industry, I guess you could develop a mix. Q. What about productivity and efficiency; is that not something that you would try to, if you can, get outside information on, try to measure yourself against other companies? If you're really trying to simulate competition, you'll try to see whether you're doing as well as or better than other companies in the same industry; wouldn't you? A. I've seen many attempts to do that. It's very difficult to assure yourself you're measuring the same levels. I'm not an economist. I would defer to the expert economist witness that the company offers. I can't go into that in any more detail. Productivity against your own historical performance and constantly increasing that is an element, it's a good element. To the extent you compare yourself on an ongoing basis against an industry pool, whether that's regional or national, it takes away some of the focus and impact. It can be done, I've seen it done. Q. How do you simulate competition if you're Winter,deJongh 237 cr ex (Pratte) comparing yourself only as against yourself as opposed to an external benchmark? A. What competition requires companies to do, in my opinion, is to make decisions and put in place structures, policies and techniques that force the company to begin to look externally, more towards what the customer would expect, what the customer could receive from an alternative supplier, an alternative deliverer of energy, not necessarily to simulate that there are competitors out there. So, to the extent in a policy fashion you can send this signal to utility management, you can incent utility employees to begin to change the way they view their job, rather than just controlling cost to adding value, to making decisions on the long term rather than on a test year basis, to sharing information, to communicating and encouraging customer input. Those are the kinds of issues and activities that you would hope a PBR program would bring to play. I don't think we're ever going to be able to simulate actual market forces, at least, you know, while I'm working. It's just -- it's a very complex interactive market. Opening it up and actually having competition is the best way to go. And, to that extent, PBR begins to set the right signals and set the right structure in place for utilities to move forward. Q. Thank you. When you define your mandate in Winter,deJongh 238 cr ex (Pratte) your evidence - I think in the first page - you say that you were asked three questions. That is the first page of your evidence. A. Yes, sir. Q. The first question is: Are the scope and pace of the company's PBR proposal reasonable given industry trends; right? A. Yes, sir. Q. And then also the second question: Are the stated goals of the PBR program balanced and reflective of company and industry experience? Now, this morning in your examination in-chief, as well as in your paper, you look at a variety of plans -- or you've made an assessment that there are comprehensive plans out there and all sorts of targeted plans; right? A. Yes, sir. Q. And in coming to the conclusion that you do at the end of your paper about the Consumers -- the Enbridge Consumers plan, you looked at not only targeted plans but also the availability of comprehensive plans; right? A. Sure. Q. Yes? A. Yes. Q. And so your assessment of the merits of that plan was not limited only to targeted plans, but also what else could have been available as an option? Winter,deJongh 239 cr ex (Pratte) A. That's right. Q. Including comprehensive plans? A. That's right. As well as, to my knowledge that I had, the background context and evolution of those comprehensive plans. Q. Now, I understand that you have been involved as an expert or consultant for Consumers -- or Enbridge Consumers for some time now? A. It was a two-part support. It was this very early educational and benchmark study, and then it was the more recent testimony, yes. Q. Okay. But you were not engaged to develop a PBR plan on behalf of Consumers Gas; is that right? A. I was not engaged to do that. Q. Nor were you engaged to compare the merits specifically of a targeted plan versus a comprehensive plan for Consumers Gas? A. I would have to say that in developing my testimony that was a consideration. Q. By that time Consumers had filed its plan; had it not? A. Yes, sir. Q. Okay. So you were not engaged to help Consumers in deciding whether it should go to a targeted plan versus a comprehensive PBR for the purposes of this application or this filing; correct? A. Yes. Q. And in preparing for your testimony -- you Winter,deJongh 240 cr ex (Pratte) said you looked at that issue in preparing your testimony. Were you provided with any analysis, internal Consumers' analysis measuring the relative merits of the comprehensive plan versus a targeted plan? A. No, I just received the filed application. Q. Did you know that there was such internal analyses? A. Not specifically. Q. Did you ask for any? A. No. Q. And I take it - and maybe this is just a refinement on my question and your answer, sir - but that you were not involved then in developing the specific formula that is presented as part of the targeted plan? A. I was not. Q. And were you asked to specifically evaluate the formula that is offered as well as the benchmarks that are used in that formula? I don't see that as part of the actual testimony. A. Not really. It was more the general scope issues as I've represented here and whether or not the plan would be viewed by a third party as something as acceptable, current, feasible, balanced; not a specific question regarding any of the components. Q. Okay. So you did not, for the purposes of your testimony or the evidence that you've prefiled, look at each element and say to yourself: This growth component is reasonable in the circumstances; this Winter,deJongh 241 cr ex (Pratte) inflation factor is reasonable; or this efficiency factor, you didn't look at that? A. No, I did not. I deferred to the witnesses that the company had. Q. So when we have in your evidence that you believe that this targeted PBR is, while conservative, reasonable in the circumstances, we are not to take your testimony as meaning that you agree that the specific elements of the formula are the best ones available? A. Are the most conservative ones available. No, it was the general overall intent and scope of the actual program. Q. So target versus comprehensive? A. Is one element, right. Q. And in terms of the possibility that you say you've considered of a comprehensive plan, you know that in answers that you gave to Mr. Warren that looking at other LDCs that may have such plans can be difficult because each state is different and each company is different. Do you recall that testimony? A. Yes, I do. Q. Well, first of all, were you made aware of Consumers own concerns with a comprehensive plan, going directly to a comprehensive plan? A. Not specifically. Q. They never told you. I mean, when they engaged you in respect to this case they were going to go targeted plan and were not considering comprehensive plan; Winter,deJongh 242 cr ex (Pratte) correct? A. That's right. Q. Okay. So I take it that you never had occasion to say: Well, if you people are considering a comprehensive plan, we could look for which utilities in North America might be relatively similar to your own so that we might learn something from that. You never did that? A. In late '96 and early '97 as part of the benchmark approach we collected data on behalf of Consumers and other clients that reflected a number of issues including that type of issue, targeted plans, comprehensive plans, electric companies, gas companies. So to that extent the knowledge was there. I wasn't ever consulted or asked to provide an opinion as to which was best. Q. Just let me get this clear. Am I right, the first time that you heard of the nature of Consumers' concerns with a comprehensive plan - and you'll remember Mr. Warren took you to some of them, the capital investment and the policy issues - was when you sat here? A. Yes. Q. They never advised you until such time that that was their real concern for not moving to a comprehensive plan? A. I was aware of the company's business strategy just generically. In terms of the specific proposal, I got it in - I forget when it was filed - the Winter,deJongh 243 cr ex (Pratte) summer and basically was asked to develop my testimony without any further input from the company. Q. So you never looked then at the possibility of developing a comprehensive plan which would deal with those concerns that Consumers had; you never looked at that? A. I didn't look specifically at their issues. I did look at the difference between targeted and comprehensive plans, obviously understanding that in your jurisdiction you're going to be asked to address a number of different kinds of case issues. So that was part of the underlying testimony or content of the testimony, but not the specific issues that Mr. Grant talked about or that you folks discussed yesterday. Q. So that, again, when we come to your ultimate conclusion in your report, which I find at the bottom of page 7 of 12, the last paragraph, where you say that: 'The conclusion is that the company's PBR plan, while conservative, is reasonable, in effect, given the company's business direction...' We're supposed to take this at a very high level of generality. In other words, doing a targeted PBR approach is reasonable in the context of many things including the fact that there are comprehensive plans out there, but you've not looked to either their specific targeted plan Winter,deJongh 244 cr ex (Pratte) or possible alternative comprehensive plans? A. For the company? Q. Yes. A. No, I haven't. Now, the testimony and the comments I made this morning when I started out were an attempt to, you know, focus that generic discussion to know that there were differences between targeted and comprehensive. And that, in my opinion, that the method that the company has adopted to move forward, given the fact that the initial plan in this province that they're following on the steps of some Canadian targeted incentive programs, and that we have seen evolution in other jurisdictions from targeted to comprehensive, makes sense. Q. Now, we're not to take though, Mr. Winter; are we, your statement that the company's plan, while conservative, is nevertheless reasonable, we're not to take it to mean; are we, that if they had tried to do a comprehensive plan that would have been imprudent or unreasonable? In other words, you're not saying that a targeted plan is the only reasonable approach in this particular case; are you? A. No. Q. They could have done a comprehensive plan or tried to do one? A. I think companies have a myriad of options and the business strategy has to match the company's Winter,deJongh 245 cr ex (Pratte) approach. This was the plan I was asked to comment on and from a basic underlying assumption, that moving away from cost of service towards - if I could use your words - a virtual marketplace, virtual competition is better than remaining with cost of service. Q. Okay. Let me get this clear though. If they had said: Look, our business strategy is to move into a comprehensive plan. We know there's some out there and we want to do that rather than doing the step-wise approach, you wouldn't have said that was necessarily imprudent; would you? A. I don't know. It would have depended on the plan. Q. It would have depended on the plan? A. Yes. Q. But you're certainly not excluding as a prudent alternative trying to do a comprehensive plan as a one-step process? A. No. If it's appropriate for the company and a number of components represent, you know, a fair and balanced approach to the problem, sure. Q. And I think you said to my friend Mr. Warren this morning, unless I misunderstood you, that ultimately we want to get a comprehensive plan because that's where all the stakeholders will get the maximum benefits from performance-based regulation? A. I think that's a good direction and that the Winter,deJongh 246 multiple elements in those plans provide more opportunities for everybody. MR. PRATTE: I'm grateful for your assistance, sir. Thank you, Madam Chair. THE PRESIDING MEMBER: Thank you, Mr. Pratte. Ms. Symes? MS. SYMES: Thank you. CROSS-EXAMINATION BY MS. SYMES: Q. Mr. Winter, my name is Beth Symes and I represent the Alliance of Manufacturers and Exporters and I'm going to try and not repeat any of the areas of questioning. I gather in looking at your experience, your skills and experience which begin in the prefiled evidence Appendix E, page 9 and 10, that the utilities that you have worked with - and I'm particularly looking at page 10 - that a number of those utilities have engaged in DSM activities; is that correct? A. Let me just clarify. The companies listed on page 10 were included in a benchmark exercise, not necessarily clients that I've worked with. Q. But these companies that you examined in order to give your evidence and provide advice to Enbridge Consumers Gas included British Columbia Gas, Minnegasco and West Kootenay Power; is that right? A. Yes, that's right. Q. And is it fair to say that virtually all of Winter,deJongh 247 cr ex (Symes) those utilities are doing some form of DSM? A. I'm not trying to be evasive here. I honestly don't recall because the benchmark study was fairly targeted on PBR activities. We did ask a few questions regarding public policy issues and my best recollection - I hate to use that term - but I believe that most of these companies were involved in some form of energy conservation programs, whether social programs mandated or demand-side management programs, so I would generally tend to agree with you on that point. Q. Let's go more specifically then to the clients for whom you have helped prepare PBR mechanisms or proposals. Have some of them been involved in DSM? A. Yes, ma'am. Q. And will you agree with me that it is possible to prepare a comprehensive PBR, even if you're involved in DSM activities? A. Certainly. Q. And, in fact, not only is it possible, it has been done? A. There are many models out there. Q. Okay. And so, therefore, if Enbridge were looking for solutions to the issue of effective DSM reducing the volumes of gas; is it fair to say that there are other utilities that have faced that problem and have developed solutions to answer it? A. I will agree with you that other utilities Winter,deJongh 248 cr ex (Symes) have tackled the problem. The ultimate success of many of the programs is yet to be decided, although we do have, you know, perhaps two dozen utilities that are reaching the end of their first term. Q. Just to be clear, a term is how long? A. It depends. Two to five years in most cases. Q. So we've got approximately two dozen utilities with somewhere between two and five years' experience each and these have had DSM programs or initiatives and comprehensive PBR? A. I'd say probably a majority of them have. These are electric and gas. Q. Okay. A. And, again, with just the ongoing qualification that it's very difficult to translate individual company programs across jurisdictions and even into different business climates just because of the change in demographics and the demands and the growth in the specific areas, but... Q. Are you really saying to me there may be 24 different solutions out there that run a gamut? A. There you go. That's good. I agree with that. Q. And in terms of trying to figure out where Enbridge Consumers Gas might be, they would have a range of options that at least someone else had tried? A. I think there's probably a good selection to Winter,deJongh 249 cr ex (Symes) examine, sure. Q. Now, I'm not sure whether you can answer this question in terms of the list that's on page 10 of the companies that you looked at, that you benchmarked with respect to PBR, or if you have to answer the question just in the clients that you've had that you've helped develop PBR, but here's my question and then you can tell me how you can answer it. Once a utility, whether it's a gas or an electricity utility, makes the decision to go to, or to develop a comprehensive PBR mechanism, based on your experience, how long has it taken them to develop the proposal? A. I can't answer this because -- I mean, I'm able to answer this because we have some data that we've tracked both from our original study in '95 and then ongoing. It's fairly symmetric. It usually takes around two to three years. And, in fact, if you examine the list of companies that is in the Consumers Gas application and you look at the underlying case application data with that matrix, they fall into that range, two to three years. Q. And looking at a targeted PBR such as Enbridge's application here, has that been part of the process? A. For every company? Q. No, for some of the companies? A. Oh, you mean to examine that as an Winter,deJongh 250 cr ex (Symes) alternative? Q. Well -- or along the spectrum of moving towards comprehensive PBR? A. Yes. Some of those companies were involved in previous targeted incentive programs. Am I responding to your question? Q. That's helpful. A. All right. Q. And once a company has developed a targeted or a limited PBR, based on your experience, how much longer does it take them to develop a comprehensive PBR? A. I understand. It depends. And, again, I don't mean to be evasive. The specific nature of the jurisdiction and timing requirements often dictate that next step. Q. What's the shortest it's ever been? A. Oh, wow! In a mandated environment in Massachusetts, we were involved in the development of a program under intense time requirements in a somewhat collaborative environment and it was 18 months, and they -- Q. From start to finish? A. Yes. Well, from start to... They're still not done - [Laughter] - from start to submission. Q. Yes? A. Implementation takes, depending upon the jurisdiction, a little bit more time. Q. Of course. Winter,deJongh 251 cr ex (Symes) A. But to get to the point where the program can be debated and a decision can be made, 18 months is fairly rapid. On a second go-round, if you will, a second generation where a lot is known, a lot has already been established, such as may occur at the end of a three-year term in this case, you can address it well within a six-month window because a lot is already established. So I would have to say, you know, probably if you take the median there, a year would be a fast pace for someone with that kind of experience. MS. SYMES: Thank you very much. Those are my questions. THE PRESIDING MEMBER: Thank you, Ms. Symes. Mr. Mondrow? MR. MONDROW: Thank you, Madam Chair. CROSS-EXAMINATION BY MR. MONDROW: Q. Good afternoon, Mr. Winter. My name is Ian Mondrow, I am counsel for HVAC Coalition. "HVAC" stands for Heating, Ventilation and Air Conditioning Contractors Coalition Inc., the utility's at least previous competitors and their ancillary businesses. And I just have a few questions for you, if I could. Mr. Pratte spoke to you in some detail about the nature of your retainer. Am I correct in understanding that that retainer did not include review of particulars of this company's fiscal situation? A. That did not. Winter,deJongh 252 cr ex (Mondrow) Q. Or the application of the company's proposed formula to that particular fiscal situation? A. Other than what was filed in the case, in the application. Q. Okay. Or whether the application is brought forward at the appropriate time in the business cycle of the company? A. No. Q. You had some discussion with Mr. Warren I believe earlier today and you used the metaphor of 'setting off on a clear path to the future' as one of the kind of certainty or focus benefits that PBR brings. You recall that testimony? A. Yes. Q. And would you agree with me that in order to achieve that benefit, one must start to continue the metaphor on a solid footing? A. Absolutely. Q. And so the regulator would need a good understanding of the current circumstances of the company insofar as they are impacted by the PBR proposal? A. One of the most strategic elements in the PBR is the starting position. Q. Okay. And you would agree with me, I take it, that errors or inaccuracies in the baseline, once the PBR is implemented, are, in effect, locked in for the period of the program? A. A well-designed plan leaves all parties an Winter,deJongh 253 cr ex (Mondrow) off-ramp or an element to challenge major impacts on the plan. That's usually for the protection of the customer as well as the stockholder. I don't know if I'm responding to your question. Q. Well, let me -- I think you are, and let me suggest that my proposition that errors in the baseline are locked in is correct; but subject to, as you point out, built-in mechanisms to deal with significant mechanisms around what was assumed at the outset. Is that fair? A. Yes, that's fair. Q. Okay. If you could just open your testimony for a moment to page 4 of 12. And in the top paragraph you run through some of the benefits of PBR in a generic basis. And the last one, if we look at the last part of the sentence is stated: '...as a certain level of regulatory finality, avoiding frequent changes and numerous revisits to the base price and measures.' And am I correct that, in your view, that is a significant advantage of the PBR regime over the traditional cost of service regime? A. Well, that is definitely the view of companies I have been employed by and of companies that were surveyed in several benchmark cases. Obviously, utilities want certainty, regulatory certainty. Practically speaking, given the nature of a Winter,deJongh 254 cr ex (Mondrow) sitting regulatory agency and the changing dynamics of economics and situations, it's tough to get. So, to the extent this is measured in terms of the length or duration of a PBR, then the reduction in the number of situations that could re-open, that's what companies would like to have. Q. And that's what Consumers Gas would like to have, as far as you're aware? A. I would assume they fall into that realm. Q. Okay. Now, particular -- utility-particular circumstances that would or could lead to the need to re-open the PBR plan or the baseline would; you would agree with me, limit the realization of that particular goal or benefit? A. I agree with the fact that as you increase the number of opportunities to re-open a PBR plan of set duration, you're decreasing the ability to have a long-term stable plan. Q. And if the plan is proposed at a time of particular collection of significant evolutionary events or changes that yield a strong potential of having to revisit the basic structure of the utility's financial situation, that would limit the achievement of regulatory finality? A. Well, practically speaking, most PBR plans occur in precisely that arena. Movement towards competition, deregulation in the United States, your unbundling process here actually causes regulators and Winter,deJongh 255 cr ex (Mondrow) companies to want to change the way that they're viewed in the regulatory environment. Uncertainty is part of the risk that both customers and the company take on in hopes that they move further towards this competitive environment and develop the skills and techniques to survive. Q. And are you suggesting that, in your experience, PBR proposals, certainly first-time proposals, have generally been brought forward and wrestled with and ultimately implemented precisely during times of significant change-- A. Absolutely. Q. --in the utility's business? A. Absolutely. Q. And thus the particular need to have very clearly defined and workable Z-factor and off-ramp mechanisms-- A. Those are -- Q. --to deal with that volatile situation? A. I'm sorry. Q. No, it's okay. A. Yes, sir. Yes, first generation programs, precisely because of the unstable situation in which they are born, often end up with more of these types of factors than, say, your second generation programs. And you can track that in the telecommunications business. Q. And the same volatile context would bolster; would it not, what we agreed to earlier, that it's Winter,deJongh 256 cr ex (Mondrow) critical for the regulator to have a good understanding of the baseline going in for the plan to work as it's supposed to? A. I would agree that the more knowledge you have, the better off you are. Perfect knowledge obviously is not available, so there's a balancing that has to take place between investing the time and resources in guaranteeing a certain result versus putting in place the incentives and the mechanism to review that result. But the fact that the more knowledge you have, the better off is your decision is true. Q. Practically speaking, in your experience, is it generally true that the best formulated and, indeed, the best in the result PBR plans follow upon a baseline determination that immediately precedes implementation of the plan? Is that the general target for regulators who impose or enter into PBR regimes; to get as close to the PBR in terms of satisfaction with the baseline as is possible in the jurisdiction? A. Well, I have two separate responses to that, and bear with me. Q. Please. A. In the United States a future test year is fairly unusual. So what happens in a PBR environment in the States is that a historical test year has been filed where the data is known and then there's agreement to Winter,deJongh 257 cr ex (Mondrow) adjustments to that test year. So, from that respect, in terms of experience in the United States, most of the starting point has already occurred, it's already been agreed to by the fact that it's real. There's a necessary regulatory lag, therefore, every time a U.S. -- not every time, most times that a U.S. energy firm files for a rate case because they're working on dated information. So, in that environment, they have data. Now, let's go to my second part of that question. The fact that, yes, the more knowledge you have, the closer to the date certain or the start of a program, the easier it is to cover any unknowns. Keep in mind that one of the goals of a PBR program is to minimize that precise type of discussion. So if you can get an agreement on specifics and put in place a mechanism which allows significant alterations from that agreement to be covered, in my opinion, the company and the customer and the regulator are better off because now you're moving down that learning curve, you're beginning to send the right signal to the company, and you're beginning to learn how to work in that environment. MR. MONDROW: Okay. That is very helpful. Thank you very much, sir. Thank you, Madam Chair. THE PRESIDING MEMBER: Thank you, Mr. Mondrow. Winter,deJongh 258 cr ex (DeMarco) Ms. DeMarco, are you next? MS. DeMARCO: I am. I have to apologize to both the Board and the panel. I seem to be suffering from a cold, so my questions may be riddled with sniffles. CROSS-EXAMINATION BY MS. DeMARCO: Q. Mr. Winter, can we generally agree that the goals of PBR are to provide a financial incentive to encourage the utility to cut costs? MR. WINTER: A. Not really. The actual major strength of a PBR formula is to weaken the link between a utility's performance and its costs. It's to strengthen the link and encourage a link between a utility's performance and things like ultimate results. So it doesn't really have, as a primary goal, to cut costs. Q. How about if I rephrase. Maybe the primary goal is to strive for efficiency; is that better? A. One of the goals is to provide incentives which would increase the efficiency, yes. Q. And to strive for efficiency in a manner that balances all customers' interests with the shareholderers' interests? A. Hopefully, yes. Q. And that balance can be either financially or, particularly in the interest of -- in the area of service quality? A. Yes. It would definitely be in the interests Winter,deJongh 259 cr ex (DeMarco) of the utility as well as the customers to provide the highest level of quality of service as well as to stay a viable entity financially. Q. And to balance those interests? A. Yes, ma'am. Q. All right. And, in addition, a central goal of PBR is to effect all these objectives with minimum administrative costs? A. Absolutely. Q. Great. So I'd like to ask you a few questions about incentives in this process. Mr. Grant has indicated that incentives are very important; do you agree? A. Yes, ma'am. Utilities respond to incentives as do individuals, so they are a key component of this plan. Q. They, in effect, drive the behavior; is what you're saying? A. Yes, ma'am. Q. And incentives can be either positive or negative? A. That's correct. Q. So, for example, if the company fails to achieve the proposed productivity factor, there's a negative incentive? A. That's right. Q. And, in fact, one of the major criticisms of cost of service regulation is that it doesn't provide Winter,deJongh 260 cr ex (DeMarco) those incentives? A. In fact, it provides more disincentives than incentives, yes. Q. So I'd like to ask you a few questions about the term "balance". Does that mean 50/50? A. Not necessarily. Q. So balance could be achieved, for example, with 60 per cent of the shareholders' interest represented and only 40 per cent of the ratepayers' interest represented? A. You'll find plans, especially earning sharing mechanisms, where there is a sliding scale depending upon an incentive based upon performance. In other words, if the utility achieves a higher level of performance in certain areas, then the earning sharing mechanism would go more towards the stockholder. This is based upon the theory in that jurisdiction that the utility needed to move in that direction, so the regulator provided that incentive for them to do that. It's asymmetrical. Q. Right, okay. In preparing your report or in asking you to prepare your report - I'm referring to Exhibit E -- sorry, Exhibit C, appendix E, page 1 of 12 - under No. 2, one of your tasks was to determine whether the stated goals of the PBR program were balanced. Did the company give you any indication of what it meant by "balanced"? A. No, not really. Winter,deJongh 261 cr ex (DeMarco) Q. I'd like to refer you to a few articles in what is now labeled Exhibit I1.2. If you could turn to tab 2, page 28. Could you just read the first two paragraphs for me at the top of the page under 5.1, Introduction? A. Out loud? Q. Please. A. Oh, great. 'Unfettered incentives to reduce costs could result in unacceptable declines in service quality. In the United Kingdom prices have fallen since the advent of competition in the generation business, but complaints about quality have risen. At three companies complaints have more than doubled.' Q. And the next paragraph? A. 'The potential problem here should be obvious. In order to "beat" the moving baseline and cream rewards from the sharing mechanism, the utility may be tempted to achieve false cost savings by deferring necessary maintenance, reducing service personnel or engaging in some other type of cost cutting that reduces some measure of performance. The equally obvious solution to this problem is to devise a system that penalizes utilities in such a way as to directly link the sharing of cost savings to the maintenance of quality Winter,deJongh 262 cr ex (DeMarco) standards.' Q. I'm sorry, I just wanted to indicate that this article was prepared for the National Association of Regulatory Utility Commissioners by several authors... If you'd like to look on page 1 of the exhibit, Bruce Biewald, Tim Woolf, Peter Bradford, Paul Chernick, Susan Geller and Jerrold Oppenheim. Are you familiar with any of these authors? A. Not really. Q. Are you familiar with the National Association of Regulatory Utility Commissioners? A. Yes, ma'am. Q. I'd now like to ask you to turn to tab 3 of the same exhibit at page 1. Now, this is an article written by Michael Eby and it was published in Transmission and Distribution World. Are you familiar with this author? A. No, I'm not. Q. Are you familiar with the publication Transmission and Distribution World? A. Yes, I am. Q. Can you just read out loud the second paragraph for me. A. Sure. 'Several U.S. state commissions are so concerned with reliability that they are introducing performance-based penalties that Winter,deJongh 263 cr ex (DeMarco) fine utilities for poor performance. What better way to catch your attention than to hit you where it hurts, in your wallet. Although this approach doesn't directly address the technical issues facing the industry, it does force industry technical personnel to develop innovative solutions to maintain current reliability levels. Q. Now, if I can refer to your evidence, that's Exhibit C, appendix E at the bottom of page 5 of 12. Is it safe to summarize your last paragraph as indicating that you do not recommend penalties for service quality? A. That's correct. MR. CASS: Madam Chair, if I might just interrupt. I don't know how many more passages we're going to have Mr. Winter reading into evidence. I might just point out that if Ms. DeMarco is going to have him read passages and not even ask him questions about them, I will certainly, on re-examination be asking -- I will ask him to comment on these passages. So she might as well do it now. It's going to happen in re-examination anyway. I don't see the point in having him read things into the record and then not even asking questions about them. MS. DeMARCO: The questions are coming, Mr. Cass. MS. DeMARCO: Q. Now, in addition, I'd like to you turn to tab 6. And, for the record, I believe there Winter,deJongh 264 cr ex (DeMarco) are two more passages that I'd like him to read from. At page 4 of that article -- actually, just before we get to page 4 -- MS. LEA: Sorry, what tab, Ms. DeMarco? MS. DeMARCO: I'm sorry, it's tab 6 of Exhibit E1.2. MS. DeMARCO: Q. At the beginning of the article it indicates that the author is Dr. Peter Navarro. Are you familiar with Dr. Navarro? MR. WINTER: A. Not personally. Q. Are you aware of his work? A. Yes, I think I've read some of his published literature. MS. DeMARCO: Madam Chair, I have to apologize, the copy of the article that I have pulled directly from the Electricity Journal has a bit of a biography on Dr. Navarro. I'd be happy to undertake to provide both the Board and the witnesses with the Electricity Journal copy if it's acceptable for me to read in this biography on Dr. Navarro. THE PRESIDING MEMBER: When we accepted this exhibit I didn't understand you to be tendering the exhibit for the purpose of expert evidence of any kind, but just to use it as part of the basis for your cross-examination. MS. DEMARCO: Yes, that's right. And the biography just refers to something that Mr. Winter has Winter,deJongh 265 cr ex (DeMarco) said in his direct -- or in his cross-examination with Mr. Pratte. THE PRESIDING MEMBER: Okay, continue. MS. DeMARCO: Just two lines. Specifically it says: 'Peter Navarro is an Associate Professor of Economics and Public Policy at the California School of Management, University of California, Irvine, and Dr. Navarro holds a Ph.D in Economics from Harvard University and a Masters of Public Administration from the Kennedy School of Government.' MS. DeMARCO: If you could turn to page 4. Under the heading "the PBR quality control mechanism", there are some typographical errors in this paragraph, Madam Chair, and I should point them out to you. The fourth line down, it reads: 'Cost cutting that I trim muscle, not height.' It should read: 'Cost cutting that trims muscle, not fat.' MS. DeMARCO: Q. Mr. Winter, I wonder if you could just read into the record that paragraph directly under the heading No. 4, "the PBR quality control mechanism". MR. WINTER: A. The function of the quality control mechanism is to link any utility cost savings achieved under PBR to maintaining various measures of utility quality. The potential Winter,deJongh 266 cr ex (DeMarco) problem is that the utility may pursue false cost savings by deferring necessary maintenance, reducing service personnel below a necessary level, or engaging in other types of cost cutting that trims muscle, not fat. To deter this type of behavior, the PBR regulator must devise a system that penalizes the utility for undesirable --' THE PRESIDING MEMBER: Not quite so fast, please. MR. WINTER: I'm sorry. 'To deter this type of behavior, the PBR regulator must devise a system that penalizes the utility for undesirable reductions in quality. In designing this third PBR component, the regulator must determine what measures of quality to include, set thresholds or floors for quality performance, and establish penalties for violating the quality constraints.' MS. DeMARCO: Q. Do you agree with this paragraph? MR. WINTER: A. No. Q. Can you explain why? A. Sure. My background and experience comes from a practitioner's approach, not a theoretical economist, which Mr. Navarro is, as are some of the other opinions I read originally. What you find in the real world is that utilities are conservative of nature anyway and to move a utility Winter,deJongh 267 cr ex (DeMarco) into a competitive environment, into a changing culture, we need very strong incentives to move that utility. Disincentives of any type will not accomplish nearly as much as a properly designed incentive. And, in fact, in this particular area I would agree that part of a regulator's responsibility is to determine those specific measures of quality that are important to the customer - obviously that's what we care about - and to even examine the level of performance, perhaps even to set thresholds. It's the disincentive of applying usually an asymmetric penalty that causes me to disagree with the theory. Q. Would you agree with me that the -- under tab 1, that the National -- sorry, under tab 2, that the National Association of Regulatory Utility Commissioners is part of the real world, the practical world? A. That association is the-- DR. HIGGIN: Be careful how you answer that. [Laughter] MR. WINTER: --professional association of the regulatory commissioners in the United States and, yes, they deal with real world problems all the time. In fact-- MR. WARREN: They deal with them very well of course; don't they? [Laughter] MR. WINTER: --and, in fact, is a very learned Winter,deJongh 268 cr ex (DeMarco) body and have a number of forums and environments in which to explore new methods of regulation at which I, myself, and our company collectively have presented many papers such as this. This is not a policy-setting paper. The individual states set their own policies, but I would agree that, yes, they deal with real world problems. MS. DeMARCO: Q. Would you, please, turn to page 33 of that article. And the last two paragraphs, could you, please, read those into the record. MR. WINTER: A. All right. 'Although incentives may have worked well in other parts of the utility business, they may have perverse results in a service quality PBR. Generally speaking, customers are happy paying for adequate service quality, but they may not want to pay premium rates for lexus quality service. Of course, when customers receive less than adequate service, they feel they are not getting what they bargained for, so a reduction in rates is appropriate to reflect the lower value received. For these reasons, it is easier to justify a service quality PBR penalty in order to keep service quality from declining, than it is to justify an incentive to raise service quality to levels which customers may not value.' Q. And do you still disagree with this statement Winter,deJongh 269 cr ex (DeMarco) as it applies to the practical world? A. Well, this statement taken in that context is somewhat illogical because I would agree, of course, that if customers could price services that they receive in an open marketplace, they would obviously choose the best valued service, which means quality and price for their individual needs. They're not allowed to do that in a monopoly environment. So the assumption that customers receiving less than adequate service feel they're not getting what they bargained for, to me, is very difficult for them to make that decision. I think most customers assume a certain level of service that their utility provides and when they don't get it; i.e., when the lights don't come on, when the phone doesn't work, when their gas is cut off, they expect prompt response to fix it. I don't know if they make a value decision as yet. Industrial customers, perhaps yes. Let me continue. So I would agree pretty much that, you know, the premise is presented well; however, that last line loses me in its logic. The fact that customers receiving less than adequate service should imply a reduction in rates in the utility environment seems to ignore the historical cost basis of those services. Now, in an ongoing environment, which would be a PBR environment, the equation could change. Q. Just, if I understand you correctly, much of Winter,deJongh 270 cr ex (DeMarco) the determination as to whether or not you agree with this depends on the customers' assumption? A. Well, that's what I'm reading in this particular article. In terms of the conclusion that it's easier to justify a service quality penalty versus justifying an incentive to raise service quality to levels that customers don't want, it's very difficult for me to envision a level of service that a customer wouldn't want beyond the current environment. Now, I will say that I have seen experiments, customer service experiments where, for instance, new service hook-ups at a standard rate of $100 hypothetically in a two-week window could be accelerated or expedited if the customer were willing to pay the extra labour and the extra expense for a $200 price. So then you're beginning to equate value with demand on what the customer needs and actually give them a choice. It's very rare in the industry and it doesn't really exist widespread, but I have seen that begun in various jurisdictions in the United States. I still have a problem with the fact that I have seen and still expect that individuals and companies, especially utilities, respond more efficiently and better to incentives than they do to disincentives. Q. Maybe to help you with that problem we can refer you to Dr. Bauer's evidence which is found at, I believe it's Exhibit E, tab 2.1. Winter,deJongh 271 cr ex (DeMarco) Initially I'd just like to point out that at page 2 of 21, Dr. Bauer indicates that he received his Ph.D in economics from the Vienna University of Economics and Business Administration in 1989 and joined Michigan State University following that. I wonder if I can then refer you to page 14 -- sorry, page 15 of 21. I wonder if you can read the second paragraph into the record. A. 'It is correct that the status quo does not necessarily reflect customer valuations. In the emerging, more competitive energy industry, service quality will probably become more differentiated to better reflect customer preferences. Yet the goal of a service quality safeguard in the context of PBR is of a different nature. It is meant to define a minimum service quality threshold to be maintained by the company to be compatible with the concept of performance-based regulation (that is, to provide internal incentives for management to pursue desirable goals). A penalty must be established for violations of this minimal service quality requirement. This penalty needs to be high enough to encourage management to pursue quality-enhancing activities, thus...' I believe the next word is a typo. '...it must be commensurate with the cost of Winter,deJongh 272 cr ex (DeMarco) maintaining the desired service quality level.' Q. So despite the fact that Dr. Bauer addresses the customer assumption, or the customer valuation issue that you were speaking of, you still disagree with the use of penalties? A. Yes, I do. I believe that most of what Dr. Bauer states is accurate, that it is worthwhile to establish service quality safeguards. It is worthwhile to examine thresholds of performance, that's what performance management is all about. It's this concept of what is best for the customer and the company; to provide a disincentive for which the company will obviously take less risk, or to provide an incentive which encourages the company to take more risk in providing these service qualities. And let me go to an example. One of the options companies have to increase customer service in the gas business, all right, innumerous ways and, as the company has offered, is to respond to outages, all right? Now, if I have a disincentive as a company that any outage I respond to over an hour will cost me a penalty, I'm going to staff to a certain level to ensure that I will not violate that one hour. I will not -- however, I have no incentive to improve upon that one-hour performance. What's better for the customer is to incent me to improve from one hour perhaps over a period of years through technology investment, through staffing Winter,deJongh 273 cr ex (DeMarco) improvements, through SCADA monitoring systems to be able to respond quicker and more efficiently, I would take that case. I'm not going to do it as a utility because I'm incented, if you will, to not violate that one hour. So when I'm making resource decisions, long-term as well as daily as a manager, I'm going to make sure I don't go over the hour. If I have people standing around able to respond to emergencies, I'm going to make sure they're where they can respond in an hour, not perhaps a more proper resource allocation of allowing people to respond more efficiently and more effectively. Now, please understand that's my opinion, it's not necessarily the company's goal to establish. I don't know what their operational objectives are, but that's an example of where disincentive, in my view, overcomes the ability -- overwhelms the ability of the utility to focus on more proper customer service. Q. In your example there's nothing to stop the company from responding to the call in less than an hour; is there? A. Sure there is. The company has limited resources: people, equipment, capital. And if I'm going to balance those resources on a daily decision, I can staff to respond just as an ambulance company does. I'm sure you've seen ambulances dispatched, parked in various strategic locations and their response rate is dependent upon the number of ambulances and where Winter,deJongh 274 cr ex (DeMarco) they stand. The same as the gas company. If I'm going to respond to every emergency faster than an hour, I may need more staff. I may dispatch them in a different manner. I may centralize that operation to allow me to use those resources. I don't have an incentive to do that, I have an incentive not to go over an hour. Q. So you'd agree with me then, if you didn't have adequate staff, there's a possibility that you could go well over an hour? A. I think staffing is a part of that response, yes. Q. So the basic minimum level is very important then? A. I think establishing and agreeing to up front in a PBR environment, everybody agrees that this is an important service quality measure, then you agree to what is a level of service that's acceptable, yes. Q. And just as a final matter, in responding to Mr. Pratte's question regarding data and external indices, you indicated that you would defer to an expert economist on that matter. A. Yes, I'm only an economist by osmosis, not by education. I apologize. MS. DeMARCO: Thank you, Madam Chair. THE PRESIDING MEMBER: Thank you, Ms. DeMarco. Ms. Lawson, are you next? MS. LAWSON: I think I am, Madam Chair. Winter,deJongh 275 cr-ex (Lawson) Thank you. CROSS-EXAMINATION BY MS. LAWSON: Q. Mr. Winter, my name is Philippa Lawson. I represent lower income residential customers. And you've already answered most of my questions but I just have a couple of follow-up ones. I heard you say in response to questioning from Ms. DeMarco that not only does cost of service regulation fail to provide the same efficiency incentives as does PBR regulation but, in fact, cost of service regulation provides some disincentives to efficiency. Do you recall making those statements? A. Yes, ma'am. Q. What were you thinking of in terms of those disincentives to efficiency? A. A focus on cost versus performance, number one; a focus on near-term decision-making due to the recurring necessity to come in for rate cases; numerous other disincentives as established in economic literature. Q. For example, one that I'm familiar with, the Averch-Johnson effect to overinvest in capital? A. That's been around since they wrote that article in 1962. I'm not sure, again, if I have the skills to debate that. I would somewhat question the application of that particular economic theory in an environment with little regulatory lag. Q. However, you've acknowledged that-- Winter,deJongh 276 cr-ex (Lawson) A. Sure, that's come out. That came out in... A. --it has been around and it has not been debunked. So you would agree then that the ECG plan doesn't deal with capital, and so to the extent that there is any truth to the Averch-Johnson effect, the Consumers Gas plan doesn't overcome that incentive to overinvest in capital? A. Well, the PBR plan portion of the plan does not include a capital recovery component but, as I understand the overall intent - as Mr. Warren pointed out - you'll be back in every year to discuss numerous other components associated, still in the cost of service environment and the capital budget is one of those, along with rate of return. Q. Then we're back into cost of service and your point was it's not as good as PBR? A. I agree, yes. And I'm sure I'm not following your point there. Q. That's okay. I just want to move on to one other statement you made in response to Ms. DeMarco's questioning. I think I heard you say that probably the major advantage of performance-based regulation is that it breaks the link between cost and prices? A. That's right. Q. And you'd agree that the Enbridge Consumers Gas plan doesn't break that link? A. No, I think it goes on a targeted basis when Winter,deJongh 277 cr-ex (Lawson) you move away from establishing either after the fact or annual O&M costs, you allow the company the flexibility for a longer-term approach to managing its business which begins to move you into an environment where you're judged on results and, ultimately, the overall price of your product. Q. But, Mr. Winter, you would agree that the Enbridge Consumers Gas plan leaves 80 per cent of total company costs still subject to cost of service regulation? It only deals with Operations and Maintenance expenses? MR. CASS: Ms. Lawson, could you perhaps give the witness a reference for your 80 per cent figure, please? MS. LAWSON: Q. Mr. Winter, do you have the evidence of Dr. Norsworthy in front of you? Actually maybe even better would be Exhibit I1.3, the company's own figures. A. Okay, I have that now. Q. Now, I think you only need to look at the first page there. If you look down at line 18, you see a revenue requirement of just over -- is that 2,090-million? A. Okay. Q. And if you look up at line 5, you can see the operations and maintenance portion of that, which is about 272-million? A. Okay. Q. So you would agree that the bulk of the Winter,deJongh 278 cr-ex (Lawson) company's revenue requirement remains subject to cost of service regulation? A. On this first page? Q. Well, I thought the point was simply to look at the proportion of the company's overall revenue requirement that operations and maintenance accounts for. A. Well, in a PBR mode, what you're looking for -- what you're trying to incent is for the company to control those things in a better fashion that they may have left to a costs of service mandate or regulatory environment. So to the extent things like rate of return, depreciation rates, capital budgets are left in a cost of service environment, they're "not as controllable" to the company's managers on a day-to-day basis as things that are put into an equation, things that are put into a formula and allowed to make decisions on over a term. This exhibit on page 1 doesn't capture those things. It doesn't split out those things in a fashion that would allow me to respond to you. Page 2 does, if we're looking at the same exhibit. Does she have this? MR. DeJONGH: A. Mm-hmm. MR. WINTER: A. The revised page 2, I guess. Q. Yes, I'm looking at that. A. I see the same 271- or $272-million on line 13. But in the context of -- and there's the same $2-billion revenue requirement on line 1. Winter,deJongh 279 cr-ex (Lawson) And that -- again, I'm sorry, I haven't been involved in the development of these numbers, so I'm responding to your answer on these numbers. Probably Mr. Grant would be more expert to respond to your question. But what I see here is that $272-million which will now allow the management to control is really a significant portion of the total, if you will, controllable dollars. Management doesn't control the cost of gas. Q. Well, Mr. Winter, maybe I will follow up on that point with Mr. Grant. Really, I didn't mean to get into the details of these numbers with you. A. Okay. Q. It was the company that wanted you to look at them, I think. My question was just a follow-up on your remark that the major advantage of performance-based regulation is to break the link between costs and prices. And I just wanted your acknowledgement that the plan that this Board is looking at today breaks that link only in respect of a small portion of the company's overall budget, the operations and maintenance? A. I'm sorry. It breaks the link for the O&M portion of the company's budget. Q. And leaves the rest? A. The debate over small or large, in my mind, depends on how you parse those numbers out. MS. LAWSON: Thank you very much, Mr. Winter. Winter,deJongh 280 Thank you, Madam Chair. THE PRESIDING MEMBER: Thank you, Ms. Lawson. Mr. Adams, are you going to ask some questions? MR. ADAMS: No, thank you. I'm waiting for the next panel. THE PRESIDING MEMBER: Thank you. Mr. Morrison, are you going to...? MR. MORRISON: No, thank you, Madam Chair. THE PRESIDING MEMBER: Ms. Lea, are you going to ask some questions? MS. LEA: Thank you. Yes. I estimate, Madam Chair, that I will probably have some 15 to 20 minutes of questions. Do you wish me to proceed now, or do you wish to take a break? THE PRESIDING MEMBER: Go ahead, thank you. MS. LEA: Thank you. CROSS-EXAMINATION BY MS. LEA: Q. A couple of clarification questions, please, Mr. Winter. I act for Board Staff in this proceeding. A couple of clarification questions. At page 3 in your evidence at paragraph 3-- MR. WINTER: A. Yes, ma'am. Q. --you mention the phrase "self-supporting" in reference to a PBR plan. I don't understand what you mean by a PBR plan being self-supporting. A. Basically, one that will continue absent any re-opening, absent any revisit, absent any term end date. Winter,deJongh 281 cr ex (Lea) Q. I see. But a self-supporting PBR plan can have off-ramps that would trigger a revisit? A. In theory, if you had a plan that was working, the off-ramps would still be there for extreme contingencies, but probably not used. Q. Do you consider this plan that is before this Board as self-supporting? A. Oh, no. Q. And why not? A. Well, it's an initial move towards a full complex, comprehensive PBR. There are these other elements that are left to the decision and left embedded in the cost of service environment which require that very support; an annual revisit, an annual test, an annual decision that costs are appropriate and proper. Q. In considering this plan and its limited nature versus a broader plan, did you consider the number of off-ramps that had been listed for this plan? A. I have examined the number of off-ramps. Q. Does the number of off-ramps cause you some surprise, given that this plan is supposed to be a limited plan? A. I am not surprised by those factors being included as off-ramps in this particular state of the PBR evolution. Q. Would you not agree that the list of off-ramps that we see here would be more typically found in a comprehensive PBR plan than one that is limited to Winter,deJongh 282 cr ex (Lea) O&M expenses? A. I think you will find similar elements in a comprehensive plan. I think it's in the nature of most conservative utilities to try to reach out into the future and capture or eliminate as much risk as they can. So I don't think it would be limited to comprehensive. I have seen similar types of off-ramps or in extenuating circumstances covered in some targeted mechanism. Q. In some, sir? A. Yes, ma'am. Q. And you would agree that this list of offer-ramps provides, given that this is a limited plan, considerable protection for the shareholder? A. I think it covers quite a few of the risks for the shareholder. Q. Thank you. I wonder if we could look for a moment at page 4 of your evidence. You have listed there 10 items that go into good targets for PBR plans, I believe. That's page 4 of the evidence, there's a 10-item list. I notice on that list, no item speaks to a closer alignment or an increased alignment of consumer and shareholder interests which I understood to be one of the primary goals of PBR plans in my somewhat limited reading on this subject. Could you comment? A. Well, sure. I would tend to offer -- I would Winter,deJongh 283 cr ex (Lea) offer to you that No. 3, system integrity and reliability, are shared interests both by the company and the customer. I would also offer that No. 7, a feasible easily understood attribute, reasonable and achievable goals are also shared by customers and stockholders. I would agree that the plan term is something that is of benefit. Too short of a term doesn't allow the full cycle of reactions on the company and customer to occur, so there is some agreement there in terms of aligning interests. The overall alignment that customers and stockholders want is a company that is, you know, more efficient, is a company that delivers quality service in a competitive environment, and is a company that cares about the customers. And I think that, you know, most companies, including utilities, want to have all those attributes. There's no explicit attribute, and I was assuming that when we put this list together that that was an understood assumption, that a lot of these would, of necessity, be shared concerns. I'm sorry. Q. Okay. So a closer alignment of ratepayer and shareholder interests is a worthy goal of the PBR plan, and some of the things you have listed here work to achieve that goal? A. I would believe so, yes. Q. Thank you. Now, at page 8 of your evidence - and here, I'm Winter,deJongh 284 cr ex (Lea) not sure you need to turn it up, although of course you're welcome to do so - you conclude that: 'In general, the company's program goals and objectives reflect the current state of industry plans and approaches.' Can you tell me, sir, how many utilities you looked at or reviewed in determining that conclusion? A. Well, I based that upon my general experience and knowledge. And since '94, have been exposed to probably 100 proposed or existing PBR plans, both in this country and overseas. Q. And in the last two years, how many utilities within your experience have begun or implemented the equivalent of this targeted PBR plan that's before this Board now? A. Well, you will see in several jurisdictions in the U.S. that targeted incentives are the regulation of choice. Mississippi, Alabama, even in Maine, which was an early adopter of a comprehensive PBR program, has now fallen back to what they call a rate stabilization approach which is basically a negotiated rate schedule. Q. Is that still a PBR plan though, sir? A. Well, to the extent incentive regulation falls into a fairly broad category, probably not. It's more of an incentive program. It's when you start drawing boundaries around whether something is a target, a comprehensive PBR, you Winter,deJongh 285 cr ex (Lea) get a little fuzzy. There's definitely still target incentives in place in many electric utilities. There are definitely more gas distribution companies in the United States in the last two years that have adopted gas cost incentive programs which are targeted incentive mechanisms. How many companies have adopted or instituted targeted O&M mechanisms in the last two years? Last two years? Q. I was thinking particularly of the sort of approach we have here which looks at O&M as opposed to gas costs which in Canada perhaps isn't as relevant. A. Right. I will say the pace of overall PBR adoption has dropped off in the last two years. Q. Is that because people are finding it doesn't work; sir? A. No, I think it's because what's happened at least in the U.S. is that the debate over deregulation in the electric utility business has taken precedence. And what you will find is that PBR movement that would have been occurring separate prior to the deregulation debate has now been put in the same environment which turns into fairly long-term collaborative consultative debate. For instance, I'm involved in one in Ohio that has been going on since 1994, and they still have yet to develop rules. So PBR has kind of been put on the back burner in Winter,deJongh 286 cr ex (Lea) those jurisdictions, not because of lack of success. I think what you will find is, in those regulatory jurisdictions that have adopted PBR that continue to measure and monitor programs already in place, that the regulators and the companies, at least in surveys we've done, would agree they don't want to go back. They know what they have is not perfect, they want to continue to evolve it. I would have a very difficult time establishing a number of companies -- a specific number that have adopted O&M programs like this because there are some in place that remain in place in Canada. And if you go back, not two years but perhaps three years, you know, you have your entire pipeline industry that's adopted this approach, a targeted costs O&M component. So is it less than the companies that have started up with comprehensive PBRs? Yes, probably. Q. I guess what I was trying to understand is whether the current state of the industry with respect to PBR is to introduce limited PBR plans restricted to O&M expenses? A. More appropriate, what I was referring to there was that the current state of the energy industry is to move away from cost of service after-the-fact type of regulation and move more towards PBR incentive-type regulation. And, to that extent, and to look at that list of Winter,deJongh 287 cr ex (Lea) attributes that we discussed earlier, the company's program begins to fulfill those attributes rather than staying with the cost of service environment. Q. You have indicated in your evidence that the scope of the company's program is not as broadly based as other PBR programs currently in place and the pace is less aggressive than some of the programs in the United States. We've heard your evidence I think today a little bit about the advantages of a step-wise program. I wonder if you could assist the Board by outlining whatever drawbacks you see to the implementation of a restricted PBR plan, such as the one before us? A. Well, it's difficult to make a global statement, but there are certain things you have to keep in mind when you adopt a comprehensive PBR without prior experience in any kind of incentive mechanism. Now, this jurisdiction apparently does have prior experience in terms of -- Q. We're getting it real fast, let's put it that way. A. Okay, for formula approaches and... What you find when you look at that limited group, which is growing, of finished terms or first generation PBR programs is that the interaction of multiple goals: A goal to provide specific performance measures of service quality, a goal to look at earning sharing mechanisms, a goal to run your business based upon an external indice, a goal to run your business price-wise Winter,deJongh 288 cr ex (Lea) compared to a benchmark group of utilities, those goals that drive management behavior, that drive employee behavior begin to interact in ways that you can't imagine right now. It's difficult. And, in reality, to some extent, it will never be easy to forecast how those goals interact. That's not to say you shouldn't go forward with them. It's just to say that you need to make sure you pick the right things to measure and that you set the right targets of performance and financial performance so that you can monitor them so that you can fix the things that don't work and increase the ability of the things that do work to move forward. So you have to be very cognizant of the interaction of all those variables. Secondly, you will get unintended consequences. Q. Of what, sir? A. Without a doubt. You will not be able to pick in a -- I'm sorry. It is likely that people will be less than perfect in picking the right combination of target measures, incentive programs, the components -- Q. Mr. Winter, I'm sorry to interrupt you. I just want to make sure that we're on the same -- playing from the same card here. My question was: What are the disadvantages of implementing a limited plan as compared to a comprehensive plan? A. Oh, I'm sorry, I was answering the reverse of Winter,deJongh 289 cr ex (Lea) that question. You're absolutely correct. Q. Yes, I thought perhaps. We've heard a little bit about that already today. I wonder if, to assist the Board -- as I say, we've heard about the advantages of the company's proposal. I'm asking you, as an independent expert, to tell me about the disadvantages, please, of the company's proposal to bring forward a limited plan as opposed to a comprehensive plan. A. Of disadvantages? Q. Yeah. A. To the extent that a jurisdiction has experience with a comprehensive PBR and understands the interactions and is prepared for the unintended consequences, then you're avoiding the benefits; you're delaying the benefits that are inherent in there. To the extent that a comprehensive PBR drives management behavior faster and farther down that road of competitive environment, then you're delaying that opportunity. It takes longer to implement, for a company, a comprehensive program. And to the extent a targeted program needs to be changed in order to comply with the comprehensive program, then that's a disadvantage. Q. So there may be some additional costs or time involved in moving in a step-wise fashion than there would be in moving directly to a comprehensive plan? A. That is a risk. Winter,deJongh 290 cr ex (Lea) Q. In your evidence at page 6 you indicate that, upon examination, you believe the company's PBR proposal reflects the energy utility experiences and is structured to capture many of the attributes previously discussed, I presume attributes of a PBR plan here. Can you just briefly tell me what attributes you're talking about? A. Sure. It's the ones listed on page 4. Q. Okay, thanks. That's helpful. Now, which of these attributes will not be captured by the company's plan as it's put forward before this Board? A. Probably No. 9. Q. Yes? A. I'm assuming No. 4 is one that it meets, but I'm not absolutely sure since I'm not fully aware of your accounting standards. But in your existing regulatory environment, it looks like it does fit, so probably No. 9. Q. No. 9 and possibly No. 4 depending, but you're not sufficiently aware? A. Right. Q. One moment, please. On a couple of occasions you have discussed the question of a change in regulatory costs as a result of PBR. I'm not sure that I completely understand the evidence in this regard. I understood -- or at least my understanding is, that a comprehensive PBR plan will often decrease Winter,deJongh 291 cr ex (Lea) regulatory costs in the long run, but I believe that I'm right in quoting your evidence at page 5, that first generation PBR plans often increase regulatory costs in the first few periods; that is, as I understand it, as you first begin to implement PBR, there may be an increased regulatory burden? A. Well, you have increased costs due to the fact that there's a startup curve, a learning curve, both from -- and parties involved and from potentially monitoring and evaluation systems that have to be established. So to the extent this step-wise approach already encompasses those existing mechanisms, you're going to avoid some of that. I think we have tried on several occasions to track the regulatory costs involved in implementing PBR plans to precisely determine what the regulatory burden decrease is and it's been impossible to do for a number of reasons: Various jurisdictions have reduced staff due to budget constraints; the deregulation debate in the United States and those jurisdictions has increased expert witness costs and increased hearing costs; to attract actual regulatory burden reductions at least in the energy industry based upon the PBR implementation has been very difficult. Now, you will see in the telecommunications business second and third generation, in fact, no generation telecommunication plans where they're no longer even regulated. So you could say that, you know, the PBR Winter,deJongh 292 cr ex (Lea) approach has moved that industry at least in the United States into a competitive marketplace so that regulatory reviews and regulatory costs have gone down. The other aspect unfortunately that has occurred that makes this more difficult, is many utilities in the United States have opted to simply not go back in to the regulatory commission due to the regulatory review and regulatory process of cost of service. In fact, many of my own clients have elected not to do that where we developed PBR programs and they elected not to put themselves at that risk, just simply to operate under the current equation and to continue to monitor and maintain their own performance, so .... Q. In your view, having reviewed Consumers' proposal and given, for example, a two-year time frame, if the Board were to adopt Consumers' proposal as filed, can you give us an opinion as to whether it would increase or decrease the regulatory burden? A. Without subsequent steps? Q. I'm only looking at the next two years. I understand they're not going to be bringing forward anything more comprehensive for that period of time. A. Okay. So this given plan, what would it do to your regulatory burden in the next two years? Q. Yes. A. Based upon their testimony, it looks like it will decrease the debate over O&M. Dependent upon the economy and the level of competition, some of those 'Z' Winter,deJongh 293 cr ex (Lea) factors may come into play which would require a hearing, so I'm unsure. I guess I can't tell you without being able to forecast the impact of those unknown contingencies whether or not your burden will be decreased. I will say it's probably an equal chance that it won't go down as that it will go down. Q. All right. So you've got about a 50/50 there. A. I think so. Q. You heard Mr. Grant's testimony yesterday, that he anticipates some additional scrutiny may be given to capital expenditures then as a result of the fact that this plan includes only O&M expenses and there's always a danger at least perceived by those outside the company the capital expenditures will replace O&M expenditures. Did you hear that evidence? A. Yes. Q. So if we have a 50/50 shot at decreasing the regulatory burden through the adoption of this plan and we have an almost certain increase in scrutiny on capital expenditures, I guess we'd have to agree that it is more likely that the regulatory burden will increase with the adoption of this plan over the next two-year period. A. Well, I will say that you have a very positive aspect of regulation going for you that we don't have down in the States and that's your ADR process. In the States, that only occurs after forced litigation and settlement after the fact, so it's a very lengthy process. Winter,deJongh 294 cr ex (Lea) So to the extent you take advantage in this collaborative approach with PBR as a process, you may very well tremendously reduce some of your regulatory burden. Again -- Q. I think, sir, actually we've reduced our regulatory burden with regard to O&M for many years through the ADR process, so I'm not sure that this program will reduce it further. One last area, sir: At page 5 of your evidence, you indicated the following sentence - I'm not sure exactly where on the page it is: As PBR programs evolve, we often see new systems of measurement, innovative communication - I think I'm on the third paragraph. Thank you very much - innovative communication and feedback processes and new management tools to ensure successful implementation. I'm not sure exactly what you mean by those phrases. Perhaps you could tell me what each of those three things means and whether they're reflected in the Consumers' proposal. A. Certainly. New systems of measurement. Performance measurement is a goal that regulators, customers and hopefully utility management has. When you expose your performance to external review, you focus more closely on the results and the techniques that you use to achieve that performance. So what you'll find is things Winter,deJongh 295 cr ex (Lea) being adopted, new approaches to budgeting, new approaches to accounting and new approaches to gathering data faster, reviewing it, using it and making decisions. That's what that particular measurement aspect refers to, accountability measurement systems. Communication and feedback processes. Most utilities that enter into a PBR environment become very sensitive to customer complaints, become very sensitive to customer needs. It's remarkable how it changes the culture, because they now have entered a competitive nature where they realize, including down to the front line, that customers have choice. Now, you offer in this environment and, as I understand it, in the province customers some choice of gas suppliers anyway. I don't know how transparent that is to your customers, but certainly as these five service quality indicators become very pre-eminent in the utility's mind, they're going to want to know how they're doing way before they report it to the regulator, so they're going to be establishing, I assume, new ways to gather data, at least customer surveys, at least types of communication to their employees, types of communication to other stakeholders that will improve the overall environment in our opinion. And finally, new management tools are such things as activity-based accounting systems, other types of information systems and information technologies that allow companies to respond quicker, that allow companies Winter,deJongh 296 cr ex (Lea) to track costs, that allow those day-to-day resource decisions that must be made to be made in a better fashion. We see decision-making tools. We see education forums occur with employees to strengthen their ability to take on responsibilities, to make decisions, to follow through with decisions. I'm not familiar with the inherent operations of the company as it exists today, but we have seen in almost every case we've worked with that utilities move in this direction. Q. Okay. So do I understand the last part of your evidence to indicate that you cannot tell us whether or not these things are in place at Enbridge Consumers Gas? A. I'm not aware of their detailed operation activities. Q. You cannot tell us whether this targeted PBR plan is, in fact, going to bring about these three things? A. I can't guarantee that. I believe it will. MS. LEA: Thank you. One moment. Thank you very much, Mr. Winter, for attending to testify. Thank you for your answers. Madam Chair, thank you. THE PRESIDING MEMBER: The Board has some questions. EXAMINATION BY DR. HIGGIN: Q. Good afternoon, Mr. Winter. My name is Roger Higgin. I've been sitting here for two days and this is the first time I've spoken, so I'll try and contain my Winter,deJongh 297 ex (Higgin) enthusiasm. I'd like to follow one thread of your assignment through and get some perhaps expansion of your opinions, if you could start by turning up your evidence and turning to page 1 and we'll try and follow this thread through. It's point 3, starting there. 'Part of program mechanism structured appropriately to provide desirable measurable benefits.' Okay? And then if you could turn to page 3 of 12, at the bottom there, you define benefits as four bullet points? MR. WINTER: A. Yes, sir. Q. I'd like to focus on the first two bullet points which relate to the utility performance and the increase in the quality and quantity of products and services. And just to pick that up again, it also appears on your list on page 4 as point 10 which is Performance Measures. So that's where I want to go. And you've given also -- just to finally -- you talked about the company's proposal about providing stronger links between management and performance and rewards. And finally, you express an opinion on page 7. This is again Benefits - that's my key word search here - that at paragraph 4 you state: 'We feel the company proposal is Winter,deJongh 298 ex (Higgin) straightforward and feasible and will produce a comparable level of benefits and results as other comparable PBR alternatives.' So that's the area I'd like to explore with you. So if we could start then. And I assume you've had a chance to examine the performance measures the company has proposed. You'd find these in Exhibit C, section 3 and at page 1 of 16. A. Yes, I have looked at those. Q. You have looked at those, good. Now, do you feel based on your experience in general that these would meet the criteria that you found in typical other industry situations? I used the old acronym of SMART measures, using the SMART acronym. You're perhaps familiar with that from your management background? A. Perhaps you could remind me? Q. Simple, measurable, accountable, relevant and transparent? A. Yes, sir. Q. Okay. The question I'm really coming to now is have you reviewed these measures, and leaving aside whether customers place value on these because you wouldn't know that, are they typically the type of measures that meet the requirements of measurable performance measures that link management performance to the performance of the utility? Have you reviewed this set and do you think they Winter,deJongh 299 ex (Higgin) are complete as far as this limited PBR proposal is concerned? Are they complete; are they all measurable; and do they indicate levels of improvement that are in that or are they minimum standards? A. All right. Q. Three questions. So based on your experience do they meet the criteria? A. I believe all of these are measurable which is a major criteria. You have to be able to measure something to... Q. Even No. 4? A. Yes. Q. Just doing a survey? A. The fact that you did one is measurable. The fact that being concerned about distribution system integrity as a measurable concept is definitely a premier service quality. Q. Does it have any quantifiable... A. The content of the service quality index itself. Q. Unlike the other measures it has no specific integrity standard? A. Although I do recall a supplementary interrogatory that responded to both leak surveys and cathodic protection survey activity which tends to produce a more measurable level that you could trace; are you familiar with that? Q. Yes, I'm quite familiar. Winter,deJongh 300 ex (Higgin) So I think we'll put a question mark around that one unless you would like to totally disagree. If you look at the performance indicator, it's merely to do the survey? A. Yes, the situation as you know in Canada is different than in the United States where the Department of Transportation specifies minimum Maintenance and Operation activities for the LDCs of which a survey is an inherent part. So to the extent you don't mandate that and the company is doing this as a function of proper business, then offering it as a measure, the fact that the system integrity as a construct is good, is this broad enough to capture all elements of system integrity as a measure? No. Could you improve upon this measure? Yes. I don't know how far you want me to take that. Q. That's fine. I'm just trying to get some broad feel from you. The other concern that I've identified - see whether you agree with this - is that customer growth is an important component of the PBR scheme? A. Definitely has an impact, yes. Q. Has an impact. It drives both capital and O&M? A. Yes, it does. Q. I don't see any measure related to customer growth in this particular basket of measures? Winter,deJongh 301 ex (Higgin) A. In terms of service quality indicators? Q. Yes. Hook-ups, you used the term, I know that the speed at which hook-ups are done, for example, in a conversion from oil to gas or other measures. A. Right. I've seen new service additions used as performance measures in other jurisdictions. To the extent the O&M -- Q. Is there value in that? Is it a good measure? A. It depends on a couple of parameters, your growth rate. I mean if you're in a fairly stagnant growth area then it doesn't become important and you wouldn't see it anyway in there. Is there a problem, you know, with like in the telecommunication business there used to be a problem with getting dial tone at your house and so regulators began to focus on that. I don't know if there's a problem in this jurisdiction with the wait time or missed appointments or even the cost of adding new service but if there was then it may be reasonable to look at that as a service quality index of concern. Q. So generally do you see these as being typical of the type of indicators that would be used and there's a connection between them and very importantly the O&M? A. Oh, yes. Yes, I do. Anything dealing with the system itself as you know will increase as you get more pipe in the ground so Winter,deJongh 302 ex (Higgin) the fact that they're committing to do leak surveys for instance means they'll have to invest more later in time, perhaps technology as well, to become more efficient at doing those surveys. Q. But it's true I think that you've just identified that in meeting these measures the response from a financial point of view can either be capital or O&M or a combination of the two? A. Yes, sir. Q. We don't have capital in the current plan; we only have O&M? A. That's correct. Q. Now, are you aware of activity-based cost accounting? A. Yes, sir. Q. And can you just briefly give me your understanding on how that might relate to performance measures? A. Oh, sure. Typical traditional utility accounting is based upon a code of accounts that derives from cost components: meters, materials, specific activities related to meters, pipes. Activity-based approaches, both management and cost accounting, try to capture all elements of a single process. For instance adding a service would include not only the pipe and the meter but would also include the administration of adding that customer, an allocated Winter,deJongh 303 ex (Higgin) portion of a CIS system, the vehicle costs and equipment which often are indirect costs captured as indirect costs in the traditional accounting environment but now summed together to allow you to track total costs of an activity. So you cut across the traditional accounting matrix by activities. The utility may only provide ten to twelve critical strategic activities to its customers versus a chartered account that probably has 2,000 elements in it. Q. And there are growing attempts to link activity-based cost accounting to the performance measures? A. Absolutely. That data provides you an opportunity to track specific activities and to hold employees, management, companies accountable for delivering on performance. Q. Such as the measures that the company has proposed here? A. Yes, sir. Q. Do you think a plan is stronger if there is an underlying activity-based costing that relates to the performance measures that both the regulator, the customers and the manager can look at if it's the stronger plan? A. I would think it would be essential that the company either has that or develops that in order to provide the type of data they've committed to providing. They're either going to have to do it manually or they're Winter,deJongh 304 ex (Higgin) going to have to set up separate tracking accounts to ensure that the performance levels, the resource decisions, the simple reporting and monitoring is done on a logical basis. So, yes, I would agree with you. Q. And the other criterion that I've heard - perhaps you'd like to comment on. Just help me with this - is that the basket of performance measures and the costs associated with them on the activity-based costing basis should form a significant portion of the company's overall activities that are under the plan. Is that another criterion? When I say "significant," it means more than, say, 50 per cent. It doesn't mean it's 90 or 100 per cent. A. I think we're back into that gray area there. Ideally if the company were not a monopoly, in a competitive marketplace, they would be providing the value-added service that the customer wants and is willing to pay the margin quality for. Q. We're trying to get to virtual competition, right? A. Yes. So hopefully what the company has done is it has a selected - and that's why they offered them for review I assume - those measures which they feel the customers will benefit most by. Now, does that incur -- has it of necessity developed or enveloped a majority of the distribution O&M expenses? I don't know. Winter,deJongh 305 ex (Higgin) Is it important that it does? I don't know. Quite often we spend 80 per cent of our time worrying about 20 per cent of our customer base, those that end up being bad debt customers. Are we suffering from not providing enough service to the other 80 per cent of our customers because we do that? I don't know. That's the quandary you deal with when you try to capture a significant O&M portion. There are activities in a gas LDC which inherently do not add as much value nor reduce system risk nor increase system reliability as much as others. Leak repair could be argued as a very significant safety and system integrity activity and yet if you have a new system you're not having many leaks so your leak repair costs as a component of O&M are probably not significant. So I didn't have their O&M budget broken down by those activities so I can't respond to the significance of it but I would suggest that you have to weigh both the costs and the value to the customer in that decision. Q. So just in summary you feel that this is a good attempt at a set of performance measures but perhaps there could be some further development and perhaps linking of the costs to the measures? A. I would agree with that. DR. HIGGIN: Thank you very much. THE PRESIDING MEMBER: Mr. Vlahos? MR. VLAHOS: Thank you, Madam Chair. Winter,deJongh 306 ex (Vlahos) EXAMINATION BY MR. VLAHOS: Q. Mr. Winter, just a couple of areas. One is I notice the "gold-plating" term has come up a couple times today and yesterday. Can you just give us your understanding of "gold-plating" or the Averch-Johnson effect? MR. WINTER: A. Sure, I'll try. More predominantly when the paper was brought out in '62, the electric utility business in the United States was undergoing rapid expansion of capacity. And the rate of return environment in that case was rewarding capital additions to rate base. Whether or not those additions were proved used and useful in the context of providing new capacity at the most efficient basis, they were being added and there was a return on it... So the theory was that as long as the utility has no disincentive nor penalty for capital cost control, it won't control its capital cost. Gold plating, in my experience, occurs more predominantly in the electric utility business because there's more opportunities to flow that capital cost and take advantage of technology, for instance, on the generation side where there's huge plant components and major decisions and differences in costs can occur depending on how you build your power plant. On the gas side, the gas cost flows through most utilities, so as a commodity carrier, you don't have much chance to mark that gas cost up; whereas, the power plant Winter,deJongh 307 ex (Vlahos) in a fuel adjustment clause, the entire capital cost and maintenance cost flows through to the consumer. In terms of gold plating or whether or not inefficient capital investment could be made in the gas business, it's a real stretch for me to envision that. Having been involved with the business, a meter is a meter, pipe is steel or plastic, a truck is a truck. Now, I guess a utility could add capacity that wasn't required at that particular time and to the extent that excess capacity, a 6-inch pipe versus a 4-inch pipe, a 20-mile line versus a 10-mile line could be viewed as capital investment beyond the immediate need, that may be viewed in the short run as a form of inefficient capital investment. As a strategic planner being involved in the business, you should be able to defend that investment on some kind of discounted cash flow basis, some kind of hurdle rate on return if the growth occurs that you're assuming is there. And I don't think a gas company is going to go and put in excess capacity on purpose. You know, they may legitimately miss an expansion possibility. I have been involved in those myself, and sometimes you just can't guess where the economic growth is going to occur. But by and large, I feel that that theory and that that approach, No. 1, occurs more in electric business and, No. 2, in the utility business in the U.S., we had this historical test year problem. So there was a Winter,deJongh 308 ex (Vlahos) regulatory lag - in some cases, two to three years - as cases drew out. So the company was, in essence, if they were adding capital inefficiently, earning that extra benefit for a longer period of time. In the environment that you have, you're reviewing capital annually, so whatever benefit is theirs, if there is any from an uninvested or inefficient capital investment seems to be captured regularly on an annual basis an you revisit the capital budget. Q. By earning extra, I guess it's accepted that large capital projects do not, you know, Year 1 or 2 or 3. A. Hopefully that's true, yes. Q. So I guess there's no really excess profits from that specific capital project for two or three years. But I guess it goes to the notion that if unchecked, an investor would increase rate base, would likely increase rate base forever? A. Well, to the extent they have a ratchet approval; in other words, every dollar I add to rate base, I automatically earn my rate of return on it, I'm going to do that. Now, I'm not going to go into, you know, uneconomical debt or risk levels of debt. I still have my capital cost structure to contend with, but that's the theory. Q. And to the extent that there was gold plating in the gas industry in any jurisdiction - well, let's talk about this province - to what extent is this related to Winter,deJongh 309 ex (Vlahos) the cost of service, if you can think of O&M dollars, cost of service, as opposed to the notion that you just talked about, an increasing rate base gives you higher returns? A. Yeah. I don't think it does return to O&M dollars. Q. You were thinking of just the rate base increase and return on that rate base? A. Yes, sir. Q. Okay. Thank you for that. Can you give us some sense of the other jurisdictions you spoke of in North America specifically that have ventured into PBR programs, whether they're targeted or not or comprehensive; how many of those jurisdictions, the utilities, they have to implement a PBR because of the law of the land or is that just a voluntary basis? I want to get some sense as to what was a must and what was a wish. A. The early adopter jurisdictions in the '95-'96 timeframe were pretty much required to come in, either due to the settlement negotiations of existing rate cases or, in several cases, problems with maintaining financial viability in the main jurisdiction; for instance, with Maine Public Service, they've had problems maintaining their nuclear capacity and PBR was a way for them to sustain revenue over a period of time. There was a beginning movement where all utilities wanted more flexibility and saw PBR as an Winter,deJongh 310 ex (Vlahos) opportunity to come in and actually increase their flexibility, avoid regulatory scrutiny, you know, stretch out the time by which they had to come in. So it was becoming a voluntarily move here until this debate over electric utility restructuring occurred. And now what has happened is that the regulation of what is left as we unbundle in our sense the electric utilities in the United States, you're left with what we call a wires company. And PBR is becoming the accepted form of jurisdictional regulatory review, and so that aspect has become no longer voluntary; it has become an accepted and, if you will, negotiated agreement among the company and the regulators. But I will lastly say that there are companies that voluntarily undertook to go in with PBRs because they saw it as a release from regulatory burden and scrutiny. Q. Okay. And from the comprehensive PBRs that you're aware of, I suspect that we're talking about either a revenue cap or a rate cap or a hybrid, are we? We are talking about the ability of the utility to change rates at any time without Board authority? A. In most cases, not. In most cases, there is a shortened review period, an express rate filing, a rate tariff expedited process where there is still review. We have contract rates there where you can contract with a large industrial customer and as long as that contract is with one customer and the company states Winter,deJongh 311 ex (Vlahos) there are no long-term impacts on the rest of the customer base, and if there are, they take the risk, they tend to file those unreviewed subsequent, you know, to any risk inherent falling upon the shareholder, like they built a transmission line or a service and the customer goes bankrupt. Those costs are not recovered in rate base or even allowed in a capital budget-type environment. But except for that small minority, I don't know of many jurisdictions, I don't know of any PBR programs where new rates and specifically new tariffs aren't reviewed by the regulator. Now, a price cap and a revenue cap are a hybrid which is usually the case, does allow the company to be judged only on prices, but within those tariff classes that they had when they started. And you will see quite frequently the introduction of new types of tariffs because they're trying to set up for the future a series of new services or new opportunities for customers that they may not have today, and they're starting from a cost-based environment. So they have to do the cost allocation and calculations involved. But once they're established, in most cases they're allowed to add customers to those classes. There's not a lot of inter-class transfer until the end of the term period. Now, in California, that happens to be an off-ramp in some of those programs because the transportation clients or what I guess we call Winter,deJongh 312 ex (Vlahos) transportation customers - people who just buy capacity on your distribution system and bring in their own gas - dramatically increased in the mid '90s, and some utilities didn't have their tariff structured correctly, so they had to re-open their comprehensive PBR. Q. There was a question from Ms. Lea and I'm not sure I got the response or perhaps she jumped to the next question. Perhaps you hadn't finished your answer, Mr. Winter. But it had to do with to what extent the O&M, targeted O&M PBR is unique to this proposal or you may be aware of the same or similar situation elsewhere, and I didn't get your answer. You started speaking about it and then -- A. Yes. Actually, I probably spoke too long and confused you, so I apologize. Let me restate. Targeted incentive programs -- Q. I am talking about O&M specifically. A. Right. Targeted O&M is a component in several programs in Canadian jurisdictions included in the company's testimony, has been a component in electric and gas companies in jurisdictions in the U.S. since as early as 1980 in Michigan and in other jurisdictions since then. Is it the accepted or majority program today on new proposals? No, it's not. But, again, what we are talking about, there are still jurisdictions where O&M programs, monitoring O&M rate stabilization programs through targeting that component are in place; Winter,deJongh 313 ex (Vlahos) Mississippi, Alabama, to a certain extent some of the northeast jurisdictions like Maine and Vermont. And that's where I was headed. It's not the dominant new entry; it's around, it has been around, and you have seen it as the new entry, if you will, of choice in your pipeline industry here, I guess at the NGV level and in certain of the provincial plants that are included in the company's testimony. Q. Thank you for that. You mentioned the rate stabilization and also earlier on, you spoke about the gas cost incentives and that was some half-hour ago, so it leads me to my next question. In circumstances where instead of a comprehensive PBR in the sense of a rate cap or a revenue cap or a hybrid, you would have formulaic approaches to various components of the cost of service, O&M being one, rate of return common equity being another, as we do have in Ontario. And you spoke about gas cost incentives and you spoke of rate stabilization. So are there any situations where you would have blocks of PBR as opposed to call it comprehensive, and I thought what you meant by "comprehensive" is a price or a revenue cap or did you mean that of some of those programs, the block programs, that you also refer to them as comprehensive? A. I would tend to refer to a comprehensive program as a traditionally defined price cap or revenue Winter,deJongh 314 ex (Vlahos) cap; however, the industry has a wealth of definitions of comprehensive programs. And, in fact, if you look at some of the California programs that are submitted here, like San Diego Gas & Electric, it's a block of individual incentive mechanisms. There's a gas costs incentive mechanism, there's an O&M mechanism, there's I think a DSM mechanism, there's a capital mechanism. You know, there's a series of mechanisms that somehow join together in their minds and provide a congruent approach to incentive regulation. That's one of the problems with the California system. They were some of the first involved and moved from a very abusive regulatory environment where companies were in 12, 13, 18 times a year to one that looks very complicated to the outside world but to them is more of a panacea than what they had before. So yes, those do exist. Q. I don't mean to put you on the spot. I know you're not here to provide evidence on the merits of a comprehensive rate cap, a revenue cap or hybrid versus the block approach, but could you care to offer any opinion as to the merits of multi-targeted PBRs, if we can call it that, versus comprehensive PBRs? A. Well, I can offer you basically some observations. I think that moving companies away from cost of service into an environment where employees are required to make different types of decisions, where Winter,deJongh 315 ex (Vlahos) management is held accountable for different types of performance is good and if you can get that through an incremental approach as a start, that we should take it. If we can get it through a comprehensive approach to start, we should take it, but we should take as soon as we can the opportunity to move companies into that new environment, to prepare them, to allow you to judge whether they're ready, to allow you to monitor the effectiveness of them, their services and their performance. Now, as you continue to add blocks upon blocks, you lose the symmetry, you lose the ability for management to make congruent decisions that accomplish a number of factors. San Diego Gas and Electric has been a client of ours and, again, coming from an environment where they were basically living with the regulator on a year-round basis to one where they have more freedom still today sends many different signals to their employees depending on what particular process is involved, what particular activity is involved, and they would prefer to move -- I'm putting words in their mouth. I believe that those companies would prefer to move to a more comprehensive price cap/revenue cap environment where the flexibility for their decisions is given back to them rather than on a block-by-block-by-block basis. Now, is that the right way to go in your jurisdiction? I'm not sure. Winter,deJongh 316 ex (Vlahos) California has a long history of innovative ratemaking in our country and has tried many different things, and those companies, those very companies today that have these block approaches have had targeted incentive mechanisms since the early '80s, so they're comfortable with that approach. The regulators are comfortable with that approach and seem to be able to drive down specific -- or put in place specific programs for which they're concerned about. For instance, the driving mechanism for PBRs in California was the fact that they were priced above the market on the electric side 140, 150 per cent and so they wanted specifically to drive out cost and to make the companies more efficient. That's not the case in many jurisdictions. The case in other jurisdictions may be specific service quality issues, for sure in Boston. Boston Gas unfortunately had a terrible reputation for service with their customers, so the DPU wanted a range of service quality indicators that would drive the company to improve its service. The telecommunications business when they first entered the PBR environment went for rate freezes, not even a price cap, just a freeze. They should have had a 20 per cent refund because technology had driven down the costs of their business, but the regulators accepted the rate freeze in exchange for extension of service - universal service, rural service, digital service. There was an explicit bargaining and negotiating component to Winter,deJongh 317 ex (Vlahos) that PBR environment. So you have to make the decision inside of our own jurisdiction and with the evidence of the companies that come to you as to what is best for that particular company in my opinion. It's difficult. There is no easy answer to that. And unfortunately or fortunately you'll have other opportunities to change the initial decision as you move out because we don't get it right the first time -- at least I haven't been involved with one that hasn't gone through modifications in the second generation, so, Q. Thank you very much for those comments. A. Thank you. MR. VLAHOS: Thank you, Madam Chair. THE PRESIDING MEMBER: Thank you. I have no questions. Thank you, Mr. Winter, for your assistance. Oh, Mr. Cass, did you want to come back, sorry? MR. CASS: Madam Chair, I did have a few questions, thank you. RE-EXAMINATION BY MR. CASS: Q. Mr. Winter, during Ms. Symes' cross-examination, she had asked you some questions about companies who had found it possible to prepare a comprehensive PBR approach even though involved in DSM. I wonder if you could briefly address some of the implications for those companies trying to make that effort, please. MR. WINTER: A. All right. I'll try. Quite Winter,deJongh 318 re ex (Cass) often demand side management programs come out of a social agenda, policy programs and jurisdictions, regulators, want to maintain those programs intact. So what you deal with is implications of continuing to drive down your own -- demand for your own product while maintaining a social agenda to improve the conservation and energy utilization effort. If you go into a comprehensive program without taking the dilution or decrease of revenue into account, then you're going to end up reducing your revenues by complying with the social agenda requirement. So what you have, companies have to devise ways to either exclude DSM, cover revenue reductions with specific pass-throughs, produce 'Z' factors, off-ramps that allow them to be held harmless, if you will, for complying with a demand side management effort. Q. Thank you. And during Ms. DeMarco's cross-examination, she took you to page 1 of your report where one of the steps in your mandate was described as considering whether the stated goals of the PBR program are balanced. Do you recall that? A. Yes. Q. And she asked you whether the company had given any indication of what it meant by the word 'balanced' and you said 'no'. Do you recall that? A. Yes. Winter,deJongh 319 re ex (Cass) Q. Now, what did you -- in your application of this mandate, how did you apply the word 'balanced'? A. An approach that would not unfairly impact either the ratepayer or the stockholder. We know that there will be impacts. We know that there will be changes, both in terms of potential financial risk on the company, decision-making and potential, hopefully, cost reductions or efficiencies on the part of the customer. What you don't want to see is a plan that is explicitly biased one way or the other towards achieving overwhelming benefit on one side or the other. Q. Thank you. You'll also recall, I'm sure, that Ms. DeMarco had you read into the record a number of passages from her book of materials, Exhibit I1.2. I'll only take to you one of those, if you don't mind, Mr. Winter. It was tab 2, page 28 of that book. A. Yes. Q. As I recall, you were asked to read the first two paragraphs on this page and I don't recall any questions. It strikes me that these paragraphs are loaded with quite a number of statements, so I'd like you to have the opportunity to make any comments you feel appropriate about what is said in these two paragraphs if you don't mind. A. Well, I would like to just respond from the aspect I'm not an economist and Mr. Navarro is obviously and I believe that the econometric theory is involved in his statements here. Winter,deJongh 320 re ex (Cass) From a practical level, I find -- I disagree with his statements and I disagree that there is an easy obvious solution to encouraging utilities away from misappropriate behavior. There is no easy obvious solution. Disincentives have just as much an impact - in fact, I would propound a larger impact - on the company's risk reward profile as incentives do. I think anyone who raises children know that children respond more appropriately to incentives rather than to threat of punishment. I mean, that's basic human nature in my view. So I'm speaking from just my experience and my feelings, not from an econometric theory, so... Q. Thank you very much. I'm tempted to ask you how much children you have, but I better not, Mr. Winter. [Laughter] And finally, Mr. Winter, during Ms. Lea's cross-examination, you were giving an answer about the disadvantages of a comprehensive PBR that I don't think you finished and I'll just give you an opportunity, if you had anything more to say, to complete that answer. A. I think that as was characterized, we have a lot on the record about the disadvantages, so I'll just leave it there. MR. CASS: Thank you very much, Mr. Winter. On behalf of Mr. Winter and the Applicant, Madam Chair, I'd like to thank the Board and all participants for accommodating Mr. Winter today. Winter,deJongh 321 re ex (Cass) MR. WINTER: Me, too, thank you very much. THE PRESIDING MEMBER: Thank you, Mr. Winter, for your assistance. ---(Witness panel stands down) PROCEDURAL MATTERS: THE PRESIDING MEMBER: I think we will not recall the other panel at this late time this afternoon, but I would like to address tomorrow's schedule if I could. We have some questions left of the panel that we had up this morning. Can I have an estimate of how long that might be? Can counsel help with that? Ms. Lawson? MS. LAWSON: Madam Chair, I think I have about 45 minutes of questioning. MS. LEA: Is this just on the scope issue, Madam Chair, or on all three matters that that panel was to address? I didn't understand the question. MS. LAWSON: I'm speaking to scope only. THE PRESIDING MEMBER: Yes, I think we're still on scope and then I thought we were coming back to question them on PBR formula-- MS. LEA: Thank you, that's helpful. THE PRESIDING MEMBER: --'Z' factors and off-ramps and I was including that in my question. So you have 45 minutes with respect to scope. Is there anyone else who still is to question on scope? Procedural Matters 322 Ms. DeMarco? MS. DeMARCO: Yes, Madam Chair, I have approximately 30 to 45 minutes on scope as well. MS. LEA: I have five minutes or less. MR. ADAMS: I've got 15 minutes. THE PRESIDING MEMBER: So we're talking about the best part of -- well, a large part of the morning, I guess, on the scope. We would then be coming back to the PBR formula questions and starting the rotation over again. Have people got some estimate yet of their questions on that aspect? MR. WARREN: Mr. Pratte is going to precede me on that, Madam Chair, and assuming that Mr. Pratte is characteristically thorough, I anticipate I will be very brief on the issues of the PBR formula. I would estimate -- THE PRESIDING MEMBER: Mr. Pratte, do you have any idea of how long you'd be? I don't want to put you on the spot. MR. PRATTE: In my accuracy in predicting, I don't think I'll be more than 45 minutes and maybe 30 minutes. THE PRESIDING MEMBER: Okay. Mr. Cass, did you have a comment? MR. CASS: Madam Chair, at the risk of incurring the Board's wrath by reason of raising an issue that we have discussed already, I'd like to ask the Board and the Procedural Matters 323 participants whether we could possibly combine the remaining two issues for this panel and just have one more go-round. It doesn't strike me that the issues are so clearly differentiated that the record will be confused if they're both dealt with at once. And again I make my plea for efficiency that I did before. I just feel that the time is used more efficiently if we don't continually go around and around with the same panel. THE PRESIDING MEMBER: We did say we'd revisit this if we thought we were getting off track and I must say we've taken much longer on the scope aspect of this panel than I expected we would. So could other counsel comment on whether they think they could deal with the PBR formula and the 'Z' factors and off-ramps all in one go? MS. LAWSON: Madam Chair, if I were to do that, I would estimate that I would need an hour and a half to two hours-- THE PRESIDING MEMBER: For -- MS. LAWSON: --for the three topics - scope, PBR formula -- THE PRESIDING MEMBER: That wasn't my question. I thought we'd go ahead with the rest of the scope questions, then go back and try PBR formula and 'Z' factors and off-ramps. I also would like counsel to try really hard if other counsel have ploughed any of the ground that they think they'd want to go over to try not to do it again. Procedural Matters 324 So perhaps if we could combine the PBR formula, the 'Z' factors and the off-ramps and do as much sort of throwing out of questions as possible where there are duplications without damaging one's cross-examination unduly, you could get along a little faster. Mr. Pratte? MR. PRATTE: I'm sorry, Madam Chair. Is this something you could leave with us over overnight so that we could see - I think we hear the Board - and see whether or not we could do it? I'd like to speak -- Mr. Warren and I, as he's indicated, have tried to allocate the work certainly on the formula aspect and we may be able to combine the remainder of this panel in the way that you indicated, but if we could have a chance to discuss it ... THE PRESIDING MEMBER: Certainly. I think that's a good idea, if people think that through overnight. And if there are serious objections to putting them together, we'll hear about them first thing in the morning. But we will complete the scope part first since we've started out that way. MR. CASS: Yes, Madam Chair. Thank you. THE PRESIDING MEMBER: I was just checking with my panel members. It is the Board's intention to sit both tomorrow morning and tomorrow afternoon if necessary, although I would hope that if we completed all parts - it doesn't sound too likely - but if we completed all parts of this panel, we would stop. Can the panel be available for the afternoon? Procedural Matters 325 MR. CASS: I'm afraid not, Madam Chair. We've not resolved our witness problems for the afternoon. ---Off the record discussion. THE PRESIDING MEMBER: Sorry, Mr. Cass, I think we misunderstood and thought that perhaps it was the next panel that could be available, but you would expect to stop at what time then? MR. CASS: I was actually going to say that if we were only going to sit a half day there's an absolute deadline in our minds. Would one o'clock be appropriate. THE PRESIDING MEMBER: I guess it depends on the witness' availability. If the witness is available until one, we'll sit until one. MR. CASS: I'll have to check on that, Madam Chair. I think Ms. Allan is doing that. THE PRESIDING MEMBER: We'll revisit that in the morning. But we will certainly sit all morning. MR. CASS: Thank you, Madam Chair. ---Whereupon the hearing adjourned at 4:40 p.m., to be reconvened on Friday, January 29th, 1999, commencing at 9:00 a.m. I N D E X O F P R O C E E D I N G S Page No. Preliminary matters.............................136 DARRYL SEAL, DAVE CHARLESON, DAVID J. deJONGH, JAMES C. GRANT, STEPHEN McGILL; Sworn. 137 Cross-Examination by Mr. Pratte 137 Cross-Examination by Ms. Symes 159 Cross-Examination by Mr. Mondrow 179 DAVID J. deJONGH; Recalled. 199 JACK V. WINTER; Sworn. Direct Examination by Mr. Cass 199 Cross-Examination by Mr. Warren 209 Cross-Examination by Mr. Brett 226 ---[Luncheon Recess 12:05 p.m. - 2:09 p.m. ] 231 Cross-Examination by Mr. Pratte 231 Cross-Examination by Ms. Symes 246 Cross-Examination by Mr. Mondrow 251 Cross-Examination by Ms. DeMarco 257 Cross-Examination by Ms. Lawson 275 Cross-Examination by Ms. Lea 280 Examination by Dr. Higgin 297 Examination by Mr. Vlahos 306 Re-Examination by Mr. Cass 317 Procedural Matters..............................321