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 Friday, January 29, 1999 commencing at 9:05 a.m. ---------- VOLUME 3 ---------- B E F O R E : H. GAIL MORRISON PRESIDING MEMBER PAUL VLAHOS Member ROGER M. HIGGIN Member 328 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 MARK MATTSON ) PHILIPPA LAWSON Ontario Coalition Against Poverty (OCAP) MICHAEL MORRISON Ontario Association of Physical Plant Administrators LINDA ANDERSON Union Gas Preliminary Matters 329 ---Upon commencing at 9:05 a.m. THE PRESIDING MEMBER: Please be seated. Good morning. Are there any preliminary matters? MR. PRATTE: I have a couple, Madam Chair. Firstly, in respect of the request that you made yesterday that we try to see if we could organize the cross-examinations as efficiently as possible, I can advise that in respect of the remainder of this panel, Mr. Warren and I are prepared to deal with all of the remaining issues, the formula, the Z-ramp and "X" factors in one round. And we have divided at least our respective clients' cross-examinations and interests for all those issues. So we will go once around and we will be done with this panel so far as we're concerned, and I believe that others are prepared to follow suit as well in that respect. THE PRESIDING MEMBER: Thank you very much, Mr. Pratte. That's helpful. Any other comments from other counsel? Is there anyone who finds it impossible to approach it that way? ---(No verbal response) THE PRESIDING MEMBER: Okay. Go ahead. MR. PRATTE: I also had one other preliminary matter, Madam Chair, which relates to the Motion that my friend Mr. Warren had brought on the first day of the hearing in order to seek production from the company of Preliminary Matters 330 the report that it had prepared to the executive relating to the merits of its targeted PBR plan. And in effect, what I would respectfully submit to the Board is that the evidentiary basis has been put on the record which would now justify, if it didn't at that time, production of those documents. And I would like to make submissions in that regard very briefly, Madam Chair, at this stage, if I might. THE PRESIDING MEMBER: Yes. Go ahead. MR. PRATTE: Thank you. SUBMISSIONS BY MR. PRATTE: Madam Chair, you will recall Mr. Warren made a motion seeking production from the company of all documents that the company had prepared for the purpose of bringing the matter of a targeted PBR plan to its executive committee and for approval by the executive of a recommendation of a targeted plan versus a comprehensive PBR plan. At that point, in respect of that motion, the Board ruled at page 45 of the first volume of transcript as follows, that -- at page 45, lines 12 and following, that it was the Board's present view that the company's application is for a particular model of PBR and that while judging the merits of that particular model might be assisted by comparing it to other models, the application will stand or fall on the evidence that the company has submitted. And the Board said that at this time you were not prepared to order production. Submissions 331 (Pratte) My submission, Madam Chair, is that since that time, the evidence from both the company witnesses and the expert, Mr. Winter, that appeared yesterday make it crystal clear that comparison with other alternatives is not only of assistance, but is indeed fundamental to whether the choice that was made by the company is appropriate and in the interests of all stakeholders. And I want to make a couple of brief references to the transcript of yesterday. At page 142, when I was cross-examining Mr. McGill at lines 10 and following, sorry, lines 4 and following of page 142, I asked, and this is the context of when Consumers internally decided to recommend a targeted plan to its executive. I asked him this question: 'Is it fair to say that in your recommendation of a targeted 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?' And he said: 'Yes. I think that's fair. I think that a comprehensive PBR approach was in the context of our decision-making, and I think it had to be. We were out to really look at the entire issue and that included comprehensive PBR.' Then I asked him: 'So what you're telling me is that the company, when it assessed the merits of targeted Submissions 332 (Pratte) PBR, did not feel it could accurately assess its merits without comparing it to some of the alternatives including comprehensive PBR? 'Yes. That's fair.' So in my submission, this passage makes it plain that you can't assess targeted PBR in isolation, and not only is looking at the alternative comprehensive of assistance, it's fundamental to the exercise of deciding whether or not the company moved prudently and appropriately when it decided to discount the comprehensive approach in favour of the targeted approach. Similarly, the expert which the company presented yesterday, Mr. Winter, in support of its step-wise approach, made it plain yesterday as well that in assessing the merits of that approach, he looked at the other plans and options that were out there. And in that regard, I would refer the Board to page 238 of the transcript at lines 18 and following. And I asked -- this is my cross-examination of Mr. Winter. I asked him: '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? 'ANSWER: Sure. 'QUESTION: Yes? 'ANSWER: Yes. Submissions 333 (Pratte) Question at line 26: 'And so your assessment of the merits of that plan was not limited only to targeted plans, but also to what else could have been available as an option? 'ANSWER: That's right. 'QUESTION: Including comprehensive plans? 'ANSWER: Yes. That's right.' Finally Madam Chair, Mr. Cass himself in an exchange or in connection with some of the cross-examination of Ms. Symes, interjected at page 166, and at lines 15 to 20, he said: 'I can well understand that in examining the issue of scope of the proposals, there's some need to look at alternatives and it was in that context I understood that the discussion of potential comprehensive PBR might be relevant. In other words, the comprehensive PBR might be relevant in assessing an alternative.' So, my submission on the basis of those passages that I have referred the Board to is that the assessment of PBR versus targeted is fundamental to assessing whether the specific plan that the Board is asked to approve is the right plan. And in that regard, my submission is that the most thorough information in terms of the assessment made by the company appears to be contained in documents that have not been produced which are clearly relevant, if it Submissions 334 (Pratte) didn't appear so, before because the Board's evidence, I'm sorry, the company's evidence is really limited to defending a targeted PBR without much looking at all at what the comprehensive plan alternative could have been. It appears that that comparison is contained in its internal documents which it refused to produce. Just a couple of more points before I finish, Madam Chair. There's agreement by the company and its experts that ultimately a comprehensive plan is better for all stakeholders and the company's position appears to be that it was not prepared to move to a comprehensive plan right away because of some public policy concerns, if I can capture them under that heading. However, the evidence yesterday was clear that it never at any time disclosed those concerns to Mr. Winter as obstacles that should be addressed. He learned of them when he was in the hearing room. Nor did the company at any time engage experts, other experts, after the fall of 1997 to address those concerns - what they now call are concerns - nor did they communicate with any of the several utilities in North America that had confronted those issues. For the Board to assess whether or not those concerns are really so significant as to warrant the step-wise approach, I submit, the only piece of evidence we could look at is that are those internal documents which presumably will have addressed those concerns in the Submissions 335 (Pratte) balance to choose a targeted versus a comprehensive plan. And in this regard, Madam Chair, my submission is that the proposal on the merits may or may not be flawed in terms of the specific elements of the formula, but the approach in general to go with the so-called step-wise approach could be of great prejudice to all the stakeholders as it appears fairly clear that if the company had moved in 1997 to devise a comprehensive plan, we could have accelerated the end state. And in my submission, Mr. Winter made it fairly clear yesterday that the adoption of the targeted plan, rather than looking for a comprehensive plan as early as 1997, might well delay, to the prejudice of the stakeholders, the creation of that end state which everyone agrees is better, will be better than the intermediate targeted plan or current cost of service regime. So I end by saying this: that it is absolutely clear on the basis of the evidence, I submit, that this comparison which the company undertook internally is relevant to your assessment of whether or not the step-wise approach was prudent and warranted and justified in the circumstances. And it will also be relevant in deciding whether the company was right and prudent in making that decision and making that recommendation without seeking any expert advice or talking to anybody to address concerns which it now says were so large that they warranted delaying the implementation of the comprehensive Submissions 336 (Pratte) plan farther than otherwise would have needed to be the case. Those are my submissions. I'm grateful for your indulgence, Madam Chair. THE PRESIDING MEMBER: Thank you, Mr. Pratte. Is there any other counsel who wish to speak? SUBMISSIONS BY MR. WARREN: May I just, Madam Chair, indicate that for the record we support Mr. Pratte's renewal I guess of my original motion. What has become apparent, in my respectful submission, in the last two days through the cross-examination is that the onus which the company seeks to discharge in persuading you that you should adopt a PBR is premised on the argument that the alternative was not a viable one. That is implicit if not explicit in their argument. And without knowing all of the information on which that was based, you are not in the position, in my respectful submission, to make an informed decision about whether or not their argument is a persuasive one. At all points in their testimony they say the alternative was not acceptable for the following reasons. They ask you to believe that without showing you the information on which they made that decision. The second point, Madam Chair, I say with respect is to return to the point which Dr. Bauer made and which Dr. Norsworthy made about information deficit, information Submissions 337 (Warren) asymmetry and that is the point that the utility has all of the information and discloses only that which it believes is sufficient to persuade the Board. In those circumstances we should have the best information. I quite agree with my friend Mr. Pratte that what the last two days have revealed is that the argument overwhelmingly is that this is better than the other but we're not going to show you what the other was. Those are my submissions. THE PRESIDING MEMBER: Thank you, Mr. Warren. Any other submissions? MS. DeMARCO: Madam Chair, in addition if I could refer you to tab 1 of CEED's book of materials, objective No. 7 of the Board's PBR objectives. It's located at page 4 of tab 1. THE PRESIDING MEMBER: One moment, please. Yes, I have that. SUBMISSIONS BY MS. DeMARCO: It's my submission, Madam Chair, that in order for the Board to assess whether the company's proposal meets this objective of the Board, that is, whether the proposal fairly allocates the benefits between customers and shareholders it's essential for stakeholders to have this information to be able to quantify what the company means by "fairly". THE PRESIDING MEMBER: Thank you, Ms. DeMarco. Any other comments? Mr. Cass. MR. CASS: Thank you, Madam Chair. Submissions 338 (Cass) I believe I have a number of points to make in response to this motion by Mr. Pratte and others. SUBMISSIONS BY MR. CASS: To begin with, Madam Chair, if I could go back to the words I spoke as recorded at page 166 of the transcript and referred to by Mr. Pratte. Looking back at it now I'm thankful I chose my words carefully because the Board will see there that when I referred to the discussion of comprehensive PBR as an alternative, I was careful to say twice that it might be relevant. Perhaps I should elaborate just a little bit on that now at this point in time. The Board will be aware that on the basis of the company's proposal the targeted plan and a comprehensive plan are not mutually exclusive options. Quite the contrary. The company's proposal foresees or envisages that it could be overtaken by a comprehensive plan if events work out that way. So the first submission I want to make to the Board is this is not the typical situation where an alternative is being examined because it's an either/or situation. And obviously in an either/or situation knowledge of the alternative is quite important because there's a choice that's being made. In this case that same sort of choice is not necessarily being made because the company can well move on to a comprehensive PBR whether or not the Board approves the targeted PBR. So, in my submission, the Submissions 339 (Cass) relevance of comprehensive PBR as an alternative in the strict sense of that word is quite watered down for that reason. That's why I was trying to be able careful in choosing my words and saying it might be relevant. It might be some of assistance to the Board but it's not an either/or sort of choice that the Board is being asked to make. The other point that I would add at this time in relation to relevance of the particular information that's now being requested is to remind the Board that at the time this very analysis was going on by the company the legislation, at least as the company viewed it, would not have allowed a comprehensive PBR. So the request is for an analysis that was occurring at a time when the company considered that the legislation didn't allow comprehensive PBR. That, in my submission, also goes to the relevance of whatever would be produced in response to this request. My next point, Madam Chair, is that I don't think I'm being unfair in saying that a very good portion of the last two days one way or another has gone to this issue of comprehensive versus targeted PBR plans. I think that the Board has quite an extensive record upon which parties can now argue. I don't believe and I submit to the Board that a strong case has not been made - sorry, I'm getting too many negatives in there now - but I submit to the Board Submissions 340 (Cass) that a strong case has not been made for the need to have this additional information in order for the Board to assess this issue of comprehensive versus targeted PBR. If I could just go back to some of the points that Mr. Pratte made in his initial submission, he referred to his understanding of the evidence from Mr. Winter that the company's concern about obstacles with respect to comprehensive PBR were not disclosed to Mr. Winter. Fine, Madam Chair and Board Members, if that's Mr. Pratte's understanding of the evidence, he can argue that at the end of this case. He made the point which I'm not sure is totally accurate that the company did not communicate with any other utilities on this issue. I'm not sure that accurately reflects the evidence. But if that's his point, he can argue that at the end of this case in support of his position that the so-called alternative of comprehensive PBR has not been - I take this to be his position - has not been adequately addressed. I don't see that the additional information that's now been requested is going to impair in any way the arguments that will be made on the basis -- or can be made on the basis of the type of evidence that Mr. Pratte has referred to. And we've had lots of evidence over the last two days. The next point I wanted to come back to is the point I made when this issue first came up about the Submissions 341 (Cass) company's ability to do strategic planning. I didn't get into this in detail the first time around but now that we're at this issue for a second time, perhaps it's appropriate to address it just a little bit more. I ask the Board to consider just the obvious proposition that when one attempts to put words on paper to reflect ones's plans and intentions, there's always a reason to be concerned if someone else looks at the words they can be interpreted in different ways. That's not to suggested bad motives on the part of the person writing the words or the person reading the words. All I ask the Board to think about in that context is that if a company is trying to do some strategic planning and every time a word goes down on a piece of paper about that strategic planning, the company has to think 'Now if this got into the regulatory forum and ten intervenors were to be picking away at this how many potential interpretations could this word have and what would all the implications be?', I suggest to the Board that strategic planning would grind to a halt at least insofar as it involves ever putting a word down in paper. Again, there's no intention here to ascribe any ulterior motives. It's just to add some flesh on the bones of my argument when this issue first came up that the company has to be able to do strategic planning. Yes, the regulator has to have the information that it needs but there's got to be a balance there. There's got to be a real need, a real need established for the information Submissions 342 (Cass) before the regulator puts the company in that position of thinking our strategic planning is going to be put under a microscope in a public forum where there's a group of intervenors that are going to be picking away at every word. In my submission, that's a great impediment to any company's ability to do planning. Sorry, Madam Chair, I just want to be sure I'm sweeping up all of the points I wanted to make. I apologize for hesitating. I think I have covered my points, Madam Chair. I'm really back where I was when this issue first came up. I think put some additional or attempted to put some additional stress on the importance of giving weight to the company's need to do strategic planning and I'm suggesting to the Board that far from the record having established -- having gone further to establish the regulatory need for this information from the time when we first argued the issue, I would say submit to the Board that the record has virtually made the issue go away. I would say to the Board that I frankly was surprised when I heard Mr. Pratte raise it this morning because we seem to have gotten so far away from it. We seem to have built such an extensive record on comprehensive versus targeted PBR, I frankly felt that the issue had gone away and, in my submission, it should have on the basis of the record that the Board now has. I think it really has become essentially a point for argument. Reply Submissions 343 (Pratte) Thank you, Madam Chair. THE PRESIDING MEMBER: Thank you, Mr. Cass. Mr. Pratte. REPLY SUBMISSIONS BY MR. PRATTE: Madam Chair, I'll try to address my friend's points in the order in which he's presented them. The first point he's made, as I understand it, is challenging my statement to you that this is fundamental and truly relevant. And in this instance he first started by referring to his own comments, saying 'Well, when I had talked about comprehensive PBR, I meant that it might be the end of the road', is I guess what he was saying that comprehensive might be relevant because target is only a step toward comprehensive and it's only relevant in that sense. In my respectful submission, the last two days have demonstrated that for this hearing, comprehensive PBR as the end state; in other words, not a step-wise approach but moving from cost of service to fully comprehensive is an alternative that was considered by the company, rejected by the company, but that was not an imprudent alternative. I put that question to Mr. Winter and he said that the company could have moved with an appropriately balanced and measured comprehensive plan directly. And in fact, I suggest to the Board that one doesn't need to read too much between the lines of Mr. Winter's testimony that he felt the step-wise approach was quite timid and it was better than nothing, but that he Reply Submissions 344 (Pratte) might have preferred to go to a comprehensive plan. So the comprehensive plan is an alternative in this hearing and therefore relevant. And then the other point on relevancy, he said is that look, the legislation, at the time the plan was devised by the company 1997, precluded comprehensive and therefore whatever might have been said in the internal company's analysis is irrelevant. It's of no use to you. But as Mr. Warren pointed out at page 47 of the record, the plan -- the company never changed its analysis or recommendation upon the passage of the legislative amendments. In other words, it validated its 1997 analysis and decided to go forward, notwithstanding that the legislative framework had changed. So it's clear that it considered that its analysis was valid in 1997 and that it is relevant for you now. The point then, secondly, I guess, apart from relevance, Mr. Cass made this a number of ways, but he basically said that you now have, after two days of cross-examination, a very extensive record on the comprehensive plan alternative. He made that point at the end of his submissions as well and he dealt with that point comprehensively, if I can. The fact is, whatever record was built on the comprehensive alternative, comprehensive PBR, was as a result of pulling teeth, as it were, through cross-examination, because the company in its evidence Reply Submissions 345 (Pratte) really did not put forth a detailed exposition of its rejection of the comprehensive approach. And in my submission, it would have been a lot moor useful if we'd had as a stepping stone this internal document that they want to keep to themselves and which is clearly the foundation of their application. So it's no answer to say look, you finally got out of them as much as you can get out of them. We don't know whether actually we've covered all the points because they are keeping those documents to themselves. Finally, perhaps the most substantive objection that Mr. Cass attempts to make and to press upon the Board is the ability of the company to do strategic planning. And as I recall Mr. Warren's submission when that point was raised, he accepted, as I do, that the company must be allowed some leeway to do some strategic planning without too much of a fear of the gaze of public examination. But in my submission, this doesn't apply here. We are asking, not for the strategic plan if, in fact, there was such a thing at the end of the process, but for the analysis which was the basis of any strategic decision that may have been made. And if, for example, the company, instead of keeping this PBR analysis all to itself internally had commissioned an expert's record to say 'Please analyze the options and make a recommendation', surely no one would have suggested that that document was either irrelevant or, if relevant, not producible because it was part of the Reply Submissions 346 (Pratte) strategic planning or intrinsic to the strategic planning of the company. The strategic plan comes after you've had the evidentiary basis comparing the alternatives and that's -- we are not really seeking any strategic plan, what we are seeking is the analysis that was apparently undertaken by the company. And that is not strategic planning. In terms of any possible misinterpretation, surely, if there's any concern about that, the witnesses can explain - once the documents have been circulated and asked questions about them - can explain any possible misinterpretation that they fear on the documents. On that basis, every single document that a party asks for during a hearing on in an interrogatory process could be withheld because it can be misinterpreted. Surely, that is an interrorem argument that needs to be rejected. So I submit, Madam Chair, that those documents are clearly relevant. They are the foundation of the company's position before you. They are an analysis, an internal analysis which had it been produced by a third party would clearly be producible and the company shouldn't be excused or permitted not to produce it simply because they did the internal analysis rather than commissioning one outside. Those are my reply points. I'm grateful for the Board's attention. THE PRESIDING MEMBER: Thank you, Mr. Pratte. One moment please. Preliminary Matters 347 Mr. Pratte, the Board would like to reserve its decision on the motion until sometime later today or first thing next week. MR. PRATTE: Thank you, Madam Chair. THE PRESIDING MEMBER: We would like to proceed now with the cross-examination of this panel. Is there anything else preliminary to that? MR. CASS: Sorry, Madam Chair, I did have a few preliminary matters but I hope they will be very brief. First of all, with respect to today's schedule, Madam Chair, we've been unable to solve our difficulty with the availability of the witnesses of this panel. We endeavored to have Dr. Fuss here this afternoon to fill the gap, so to speak. That wasn't possible. If the Board agrees, the Applicant would propose that we sit through, with a break of course, but sit through until one o'clock today and then end the day at that time. THE PRESIDING MEMBER: Thank you. I think that's satisfactory, Mr. Cass. MR. CASS: Thank you, Madam Chair. The second matter is just a point of clarification, particularly in relation to the next issue that this panel will address once we get through scope. I just wanted to be sure that I hadn't created any confusion. The schedule that was produced for the witness Preliminary Matters 348 panels shows Dr. Fuss as addressing productivity. For the purposes of clarity and certainty, when Dr. Fuss is shown as addressing productivity, that's in relation to Dr. Fuss' evidence. His panel would address his evidence. This panel, of course, is able to address the company's evidence on productivity. So I just wanted to be sure that there was no confusion about that in the way that the schedule was set up. THE PRESIDING MEMBER: Thank you, Mr. Cass. MR. CASS: And then I just have one third matter, Madam Chair. I understand that both Mr. Charleson and Mr. Grant have clarifications on their evidence that they would like to speak to before the cross-examination resumes. I don't know the nature of it, but I understand they each have a matter to speak to. THE PRESIDING MEMBER: Perhaps we could proceed with that now then, please. DARRYL SEAL, DAVE CHARLESON, DAVID J. deJONGH, JAMES C. GRANT, STEPHEN McGILL; Resumed. MR. CHARLESON: Thank you. On the top of page 154 in yesterday's transcript. In response to Mr. Pratte, I indicated that the initial unbundling adjustments were prepared in the fall of 1997 and was then updated subject to the Board's 497 decision. I just wanted to comment further and just to ensure that the record is clear, the foundation for the unbundled budget was prepared late in the fall of '97. The Preliminary Matters 349 work on this budget, however, did continue through the early part of 1998 with elements of that budget being revisited and adjusted to reflect the expectations from unbundling as the proposal evolved. This work continued up until late May, early June of 1998. So I just wanted to provide some clarification in the time frame for that, for the unbundled budget. THE PRESIDING MEMBER: Thank you. Mr. Grant? MR. GRANT: Thank you, Madam Chair. Yesterday, at transcript page 174. THE PRESIDING MEMBER: Yes. MR. GRANT: Ms. Symes and I were discussing through this part of the testimony DSM, and at line 17 she asked a question. She said: 'So this issue then of ongoing conservation is covered off, first of all, in terms of the variance account of an LRAM?' And my answer was: 'Yes.' The answer that I gave is I felt more correctly phrased, the issue of an ongoing variance between actual and budget DSM volumes, which is what LRAM captured, is covered off by LRAM. But that doesn't mean that the overall issue of conservation over time is covered by LRAM. I note that Ms. Symes isn't here today and if there's further -- oh. There she is. If there's further clarification that's needed, Seal,Charleson, 350 deJongh,Grant,McGill cr-ex (DeMarco) I'm here for quite a while, so you can come back to me. [Laughter] THE PRESIDING MEMBER: Thank you, Mr. Grant. Now are we ready to proceed? And who is ready to proceed? Ms. De Marco? MS. DE MARCO: Madam Chair, I believe you left off the scope panel with me actually. Again, I apologize. I'm still suffering from the same cold. CROSS-EXAMINATION BY MS. De MARCO (Cont'd): Q. Members of the Panel, my name is Elizabeth De Marco and I represent the Coalition for Efficient Energy Distribution. I have a few questions today regarding the objectives of the company in developing of the plan and the nature of your customers; specifically, who are your customers. Mr. Grant, in response to Mr. Warren's questions, you indicated that the executive management team not only considered issues about which PBR plan to develop, but also whether or not to develop a PBR plan. Is that correct? MR. GRANT: A. Yes. I think the existing system of regulation provided background to our consideration of PBR, so it's fair to say that we were clearly looking at trends, the trends away from cost of service regulation toward PBR, and that was a context. The existing cost of service regulation was a context to our decision-making. Q. And given that you're here before the Board Seal,Charleson, 351 deJongh,Grant,McGill cr-ex (DeMarco) with a PBR application, I take it you concluded that it was worthwhile going forward with PBR? A. Yes. That's correct. Q. And given that you have just said the context of cost of service regulation was very important, is it safe to say that some of the inadequacies of cost of service forced you or aided in your decision to pursue PBR? A. I'm not sure that I would use the phrase "inadequacies". We are always looking for ways to improve the regulatory system and, indeed, I think the Board is and all parties are. So this was sort of part of that continuum. This was another step in improving the regulatory process, the efficiency of it and the outcome of it in terms of benefits to both ratepayers and shareholders. Q. So it's safe to say that you had criticisms of the cost of service method of regulation? A. There are always things that can be improved upon. They weren't criticisms, per se. They were perhaps weaknesses or issues within cost of service regulation that could be improved on. Q. And that's part of the philosophical move that you were speaking of? A. Yes. I think that's fair. I think it's a philosophical move that all players are making. Q. I would like to take you through just a few Seal,Charleson, 352 deJongh,Grant,McGill cr-ex (DeMarco) of the traditional criticisms of cost of service. Is it fair to say that one of the traditional criticisms is that cost of service regulation is generally inefficient? A. There are some inefficiencies to the process, yes. Q. It's time-consuming? A. It can be time-consuming, yes. Q. It's costly to all of the company, the Board and the customers? A. Yes. Q. And you have indicated that the rewards or the incentives aren't adequate under the cost of service regulation model? A. Correct. They can be improved on. Q. And we have heard a lot about the Averch- Johnson effect or the cost plus mentality problem. That's another traditional criticism of cost of service. Is that correct? A. Well, that's a criticism that those two individuals postulated, as I understand it, in 1962. I suppose they're speaking generically in an academic sense. Q. So since it's been around since 1962, can we assume that it is a traditional or a long-standing criticism of cost of service regulation? A. Well, it's their criticism. I don't think it applies to this utility and I don't think it applies in this province and with this Board. Seal,Charleson, 353 deJongh,Grant,McGill cr-ex (DeMarco) Q. Just so that I'm clear, not criticism of your cost of service experience, but a criticism of cost of service generally? A. That's their criticism, yes. Q. And cost of service is also criticized as not adequately incenting innovation. Is that correct? A. That's one of the criticisms, yes. Q. And I have asked Mr. Winter, as well, while we speak of incentives, they can be either positive or negative. Is that correct? A. No. I think an incentive is positive. A disincentive is negative. Q. So there's a distinction between disincentive and incentive and you prefer that distinction to be maintained throughout? A. In my mind, there is. I think that when I think of the word "incentive", it is in a positive sense. And I'm not trying to quibble with terminology, I guess, but I appreciate that some people may feel that penalties fall within that definition of "incentive", but I prefer to keep it on the positive when I think of "incentive". Q. And we have heard a lot as well about criticism of cost of service being the asymmetric information problem or the information deficit problem. Do you agree? A. I have heard parties raise that as, in their view, a criticism. I don't think it applies in this province with this Board and with this utility. Seal,Charleson, 354 deJongh,Grant,McGill cr-ex (DeMarco) We provide and have provided significant amounts of information so as to ensure that the Board has all relevant information in front of it when it sets just and reasonable rates. Q. So just to be fair, not that I'm specifically targeting this question at your behaviour, but generally, the Board or the regulator doesn't have all of the company's information before it. Is that correct? A. That's correct. The regulator does not have all the information. Q. And we have seen that with the motions of Mr. Warren and Mr. Pratte, haven't we? A. Well, there's a difference in my view. The Board has all the relevant information, but the Board does not have all the information that the company has. Q. And you agree that the assessment of relevance at times can be subjective? A. Well, there can be differing opinions as to the relevance of information. But in my experience over the years, all of the -- as I say, we have provided enormous amounts of information in the regulatory process and that has been deemed by the Board to be adequate and relevant for purposes of ratemaking. Q. Has there ever been a situation where the Board has deemed something relevant where you have not found it to be relevant over all the years of your experience? A. I can't think of one. There isn't one that Seal,Charleson, 355 deJongh,Grant,McGill cr-ex (DeMarco) jumps out at me. Q. Which is not to say that there isn't one? THE PRESIDING MEMBER: Ms. De Marco, I'm not quite sure where you're going here? The questions in relation to cost of service, I don't think anyone is putting forward or perhaps you will be putting forward the status quo as the desired state. If that's the point of your questions, I think you can -- MS. DE MARCO: Actually, Madam Chair, what I would like to do is probe the company's objectives in moving from a cost of service model of regulation to a PBR model, and to see if many of the traditional criticisms of cost of service have been addressed in the company's proposal. Q. So with that, I wonder if we could look at the Board's objectives for a PBR framework. If I could refer you to tab 1, I believe, of CEED's book of materials, specifically at page, starting at the bottom of page 3? MR. GRANT: A. Yes. We have that. Q. I wonder if you could have a quick read of objectives 1 through 6. A. Yes. I see that. Q. Now, do you agree that each of these objectives is generally a valid objective of PBR? A. Absolutely. Q. And the ideal PBR plan would seek to achieve Seal,Charleson, 356 deJongh,Grant,McGill cr-ex (DeMarco) each of these objectives. Is that correct? A. Yes. Q. And these were also the objectives of Enbridge Consumers when they were developing the targeted PBR plan? A. Yes. Q. Can I refer you to both of the objectives numbered 8? I believe it should be 8 and 9. A. Yes. Q. Just have a quick read of those objectives. A. Yes. I see them. Q. And would you agree again that each of these objectives is generally a valid objective of performance-based regulation? A. Yes. Q. And they would be objectives also of an ideal PBR plan? A. Yes. Q. And again the company sought to achieve these objectives in developing its targeted PBR plan? A. Yes. Q. And now please have a look at Objective No. 7. A. Yes. I see that. Q. And this is definitely a valid objective of performance based regulation generally? A. Yes, it is. Q. And any ideal plan should achieve this Seal,Charleson, 357 deJongh,Grant,McGill cr-ex (DeMarco) objective? A. Yes. Q. And it's your submission that Enbridge Consumers has achieved this objective? A. Yes. We have achieved all nine objectives. Q. So the remainder of my questions surround two terms in objective No. 7. The first is the word "fairly"; i.e., that PBR should allocate the benefits from greater efficiency fairly between the utility shareholder. And the second line of questions will surround the term "customers". So to address customers first, in preparing the prefiled evidence, did the company take considerable care to ensure its accuracy? A. Yes. Q. So the evidence is then accurate? A. Yes. Q. And complete? A. Yes. Q. I would like to refer you to Exhibit B, section 1. A. I am sorry. Could you give us the reference again? Exhibit -- which exhibit? Q. Exhibit B, sorry, section 1 at page 6 of 12. A. Yes. Q. Under the heading Future Core Utility, would you please read the first paragraph over? A. 'Most market participants agree that in the Seal,Charleson, 358 deJongh,Grant,McGill cr-ex (DeMarco) future, the unbundled core utility will continue to be regulated and will operate as an open access natural gas distribution utility serving a much smaller group of direct customers consisting of several hundred agents, brokers and marketers, ABMs and large volume customers.' Q. Stop there. A. I am sorry? Q. You can stop there. Thank you, Mr. Grant. Would you agree then that agents, brokers and marketers are also customers of the utility? A. Yes. The heading here is Future Core Utility, and certainly in the end state, agents, brokers and marketers will be customers. Q. And is it fair to say they're certainly customers now, as well? A. Yes. Q. So is it fair to say then that these customers' interests should also be reflected in the PBR plan? A. You mean their private commercial interests? Q. Their stakeholder interest generally? A. Well, if they're interested in just and reasonable regulated distribution rates, they have an interest. They're a stakeholder. Q. Their interest in rates would be one factor of general interest, and service quality may also be a factor. Do you agree? Seal,Charleson, 359 deJongh,Grant,McGill cr-ex (DeMarco) A. Yes. Q. I would now like to ask you a few questions about the concept of fairness. Now, just by way of analogy, is it safe to say that one interpretation of fairness may be 50/50? For example, if I were sharing an apple with my colleague Ms. Symes, we would cut it in half and that would be fair sharing. Is that correct? A. It's certainly sharing and fairness can run the gamut from 0 to 100 per cent I suppose. Q. Exactly, exactly. So if I were sharing with a toddler, for example, one quarter or three quarters could also be fair sharing? A. Yes, although I don't know the significance of your reference to a toddler. It could be with anyone. Q. What is the company's numerical concept of fairness in the context of the targeted PBR plan; is it 50/50 sharing? A. Well, I think we've articulated our views on sharing and fair sharing in our evidence. I think the first aspect of fairness and in my answer I'll be talking with respect to both ratepayers and shareholders as I go through my answer. But I think the first element of fairness from a ratepayer perspective is does this utility have a good starting point going into -- a good base going into its PBR. And we've led evidence and we've had some discussion on this point the last couple of days. Seal,Charleson, 360 deJongh,Grant,McGill cr-ex (DeMarco) I think in that regard for this particular situation, I think it is very fair from the ratepayer's point of view. We're starting out with a just and reasonable base from which we're moving from and that base isn't -- it is just and reasonable from a rate-making perspective in the sense that it's Board approved but in addition - and we've put this in our evidence - from a benchmarking point of view as well. When you benchmark that cost structure with like companies and like utilities that are regulated either under cost of service regulation or in PBR, we have a very favourable base that we're starting from, from that benchmarking point of view. So I think those two things are relevant to the question of fairness to ratepayers on a going-in basis. Then we move to the question of fairness within the PBR period as it relates to ratepayers and what the company's evidence shows is that we are providing a guarantee in terms of productivity to the ratepayers in that period that is calculated at .63 per cent per annum and that's consistent over the long run with the kind of productivity that ratepayers have come to get if you will in a cost of service context. So that's a guarantee in the PBR period on that productivity, another aspect of fairness to ratepayers. Then finally the third aspect of fairness to ratepayers has to do what happens when you come out of the PBR at the end of the process, at the end of the third Seal,Charleson, 361 deJongh,Grant,McGill cr-ex (DeMarco) year of the PBR plan, what do you do. And our evidence shows that we will be rebasing at that point for any permanent reductions that we have been able to achieve through the incentive period and flowing those permanent reductions to ratepayers and rate sat that time. So that's a third aspect of fairness. There's another aspect of fairness though and that has to do with our commitments in the PBR period around service levels because service levels are just as important to ratepayers as actual dollars. And so what we have done is put forward some performance measures that we're prepared to commit to during that PBR period. I think the final aspect to fairness from a ratepayer point of view has to do with the monitoring process in the PBR period. The question from a ratepayer perspective is is this utility prepared to submit to some sort of ongoing monitoring in that PBR period and insure that it's meeting these service quality commitments in that period. And the answer in our case is yes. Those are all of the ratepayer benefits -- the significant ratepayer benefits if you will. The ratepayer benefits as well through a simplified regulatory process and we had some discussion on that as well. Now, turning to the shareholder with respect to fairness -- Q. I wonder if I can interrupt you there. I think we have quite a bit on the record regarding the shareholder benefits but I would like to constrain my next Seal,Charleson, 362 deJongh,Grant,McGill cr-ex (DeMarco) series of questions -- A. My understanding of your previous question had to do -- I think the question had to do with sharing which usually involves two parties so that's why I wanted to answer from the shareholder's point of view. Q. Fine. A. So now we turn to the shareholder. What does the shareholder get in this period? The shareholder is obviously guaranteeing those benefits that I discussed earlier to ratepayers. The shareholder gets an incentive to improve its operations within that three-year period. That three-year period is an extension from the existing situation where it's, in effect, discrete one-year periods that are dealt with within the context of a cost of service regime. So the shareholder has to accept the risk in that period that he will either over- or under-perform opposite the commitments. But at least if he's able to over-perform relative to the productivity commitments that there is some temporary financial incentive to do so I do emphasize temporary. So that is what the shareholder gets. The shareholder also gets -- because of the design of this PBR the shareholder gets no significant change in the risk profile of the utility, no material change. I think if there is a material change then the shareholder has a right to come forward and request a revision to the ROE approach that the Board may take but Seal,Charleson, 363 deJongh,Grant,McGill cr-ex (DeMarco) in this particular case it's been designed in such a way so that there's no material change. Now, there's there a third party in this sharing arrangement and that's the Board itself. As a matter of public policy the Board wants to move forward as I understand it on performance-based regulation and what this proposal does is move in a very logical way one more step on the road to incentives and the road to PBR. It allows the Board an opportunity in that period of time through the monitoring process to understand what the company is doing and to learn from the experience just as the company is learning from the experience without taking on significant regulatory risk in the process. And I think that that's a substantial advantage. And, finally, of course, the Board gets a simpler process. So the Board is part of this sharing that you referred to and in my view our proposal accomplishes all those objectives. Q. So what I'd like to do is constrain your next answers to strictly the second aspect of the shareholder or customer benefits that you spoke of, that is fairness within the PBR period. And you referred specifically to a productivity factor 0.63 per cent. I wonder if you could clarify something on the record for me. During the first day's transcript - if you could turn to page 50 at line 23 - in response to a question asked by Mr. Warren you indicated: 'Our analysis assumed that we would be able to Seal,Charleson, 364 deJongh,Grant,McGill cr-ex (DeMarco) somehow find a way to carve out approximately 5-million per year.' Is that accurate? A. Yes, that was an assumption that we made. We didn't have specific ideas or plans. We were really just assuming that. Q. If you could go to page 51, line -- starting at line 23 again. The record indicates: 'So starting from that base we said, okay, what does it look like if we save 5-million more from what we're currently expecting our costs to be over the horizon of the PBR proposal.' Is the 5-million savings per year or over the term of the PBR proposal? A. No, it's per year and it was opposite a bundled utility forecast that we had at the time, so we said, okay, we've got this forecast. We've got a formula. How do the two compare? And let's assume that we're going to be able to save 5-million per year in addition to this forecast, in other words, 5-million below our forecast. That was the assumption. Q. So what does in dollar terms 0.63 per cent productivity equate to? A. I think I answered in an interrogatory that it's 4.7 per cent over the period. I'm sorry, 4.7-million. Q. I believe your answer in Interrogatory -- CAC, IGUA and OCAP Interrogatory No. 1 is 4.7-million net Seal,Charleson, 365 deJongh,Grant,McGill cr-ex (DeMarco) of "Z" factors? A. Yes, that's correct. That's applying the .63 per cent only. It doesn't include "Z" factors. Q. But you intend to have "Z" factors; is that correct? A. Yes, our proposal -- our plan has "Z" factors in it that are subject to Board review and approval. So in other words we don't pass any costs through to ratepayers using a "Z" factor mechanism until and unless the Board approves it. Q. So essentially what you're telling me is that the $4.7-million in guaranteed savings to the customer is only if you don't apply any "Z" factors? A. No, the 4.7-million is guaranteed. And then in addition to that if there are any impacts to ratepayers that are handled by way of "Z" factor, we've got to prove our case. Q. Assuming that you do prove your case and some "Z" factors get passed through, the customer is not necessarily guaranteed $4.7-million in savings? A. Well, I'm not so sure that -- I still think that the ratepayer is guaranteed $4.7-million above and beyond that we have the "Z" factors and to the extent that the "Z" factors modify the formula, that would have to be approved by the - or sorry, modify the rates that are derived by the formula - that would have to be approved by the Board. Q. So I'm not sure if you entirely answered my Seal,Charleson, 366 deJongh,Grant,McGill cr-ex (DeMarco) question. Assuming that we have a "Z" factor approved by the Board then that $4.7-million figure could go down; is that correct? A. It could go down or it could go up. The "Z" factor isn't applied to the productivity. It's above and beyond what the formula is giving us including the productivity. So I still believe that the 4.7 is a guarantee to ratepayers. Let me illustrate by way of example. I said the other day that one of the functions of the "Z" factor was to pass through into gas rates any cost reductions from the O&M base that result from the implementation of CIS. So what I believe -- the Board is obviously going to look at the CIS issue in the next case but to the extent that we can save dollars from the O&M base costs, actually reduce those costs from the O&M base over the next couple of years or three years I should say, that will be passed on to ratepayer. So assuming the Board approves the CIS, then the 4.7-million if you will in the way you're looking at it would go up. There may be other "Z" factors that's go the other way but in any event all of it has to be -- we have the burden of proof on it and we've got to convince the Board that that's fair and reasonable. That contrasts by the way, Ms. DeMarco, with other PBR plans that have automatic "Z" factors where you have to debate the issues at the front end of the PBR Seal,Charleson, 367 deJongh,Grant,McGill cr-ex (DeMarco) before you even enter into it and agree that you're automatically going to pass things through into rates. We don't think that's appropriate with respect to our targeted PBR plan. Q. That's right. You're asking for Board approval for those "Z" factors? A. Yes, that's correct. Q. And that would be additional work for the Board; is that correct? A. There would be some additional work on our part and there would be some additional, I expect, some additional evidence that would be filed and perhaps some additional work in the hearing room. MR. deJONGH: A. I would just like to add to what Mr. Grant was saying. No, I don't think that would be additional or incremental to cost of service if one of those exogenous events were to occur under cost of service, the same sort of analysis would have to be undertaken and the Board would still have to approve that cost. So it's not in addition to cost of service, but I suppose an item separate from what would normally occur in the course of a PBR period. Q. So we are talking an element of the PBR plan that has to be reviewed in the context of cost of service? MR. GRANT: A. In the context of a rates case, yes. Q. That's right. So the PBR plan isn't Seal,Charleson, 368 deJongh,Grant,McGill cr-ex (DeMarco) self-sustained or self-enclosed; is that correct? MR. deJONGH: A. No, I think we agreed to that yesterday. Q. I'd like to ask you a few more questions about the numbers, the quantum of the benefit. What does $5-million a year reduction in costs correspond to in terms of a productivity factor? MR. GRANT: A. You mean in percentage? Q. Yes. A. It would be $5-million on the $240-million base, so that's just a little bit over 2 per cent. Q. So your initial assumptions or your initial testing of the plan assumed approximately an achievable 2 per cent per year productivity? A. Yes. That was our analysis at the time. We wanted to see what it would look like. That's doesn't mean it's achievable. We just simply wanted to see what it would look like. Q. Okay. That was your base assumption? A. For a scenario in analytic purposes, that's correct. We wanted to analyze the financial implications of that assumption, so we pursued that in the analysis. That doesn't mean it's a slam-dunk. That doesn't mean it's a certainty. Q. Is it fair to say that you wouldn't test one of your proposals with an unreasonable assumption? A. Well, I think that's fair. When you do analysis, you want to make assumptions and you want to Seal,Charleson, 369 deJongh,Grant,McGill cr-ex (DeMarco) test -- you want to do scenarios that sort of look on either side of the situation. In doing the analysis, we were fully aware that we were at risk and that there may be cost pressures that happen that we couldn't anticipate as well. I mean, that's also a fair assumption to look on the other side of the coin. We don't just look on it as a one-sided -- from a one-sided point of view any financial analysis in my view has to consider both sides. For example, if we were to go into a recession in the period, we've had experience before in recessions where our bad debt provision shot up a million dollars easily. And that's a risk that we're under in the PBR period that we would have to bear. So there are all kinds of assumptions that you can make in your analysis and you have to look at both sides. Q. So assuming we look at both sides and all things being equal, a 2 per cent productivity factor isn't unreasonable? A. I didn't say that. I said that we -- we had made an assumption. We simply said, 'What would happen if', and said 'What are the implications of that'. That helped us in our decision making. That's good strategic planning. MR. CASS: Madam Chair, we seem to have spent a fair amount of time now on "Z" factors and then on to productivity. And I wonder if I might just inquire through you whether Ms. De Marco is doing her examination Seal,Charleson, 370 deJongh,Grant,McGill cr-ex (DeMarco) on all issues for this panel or the scope issue? THE PRESIDING MEMBER: Ms. De Marco, is this your complete cross-examination? MS. DeMARCO: It is largely just a scope issue given that the working assumption was $5-million as elicited by Mr. Warren. I wanted to just delve into that and we got into numbers as a result of that. I've only got one last question if that's all right with the Board. THE PRESIDING MEMBER: Related to the scope? MS. DeMARCO: Related to the scope. Related specifically to the fairness or the balance in the scope. It actually is numerical so if you prefer that I leave it for the panel that deals with productivity, I'd be happy to. THE PRESIDING MEMBER: Perhaps we could leave that for the moment and if it's not dealt with through someone else before you come back on your next round you could ask it then. MS. DeMARCO: Great. Thank you. THE PRESIDING MEMBER: Thanks. Ms. Lawson. MS. LAWSON: Thank you, Madam Chair. Good morning panel members. I don't know if I'll be able to see through the various heads in the hearing room. I think it's okay if you guys just don't move too much. I think I will manage. Ms. Symes was able to from this point, so I will. Seal,Charleson, 371 deJongh,Grant,McGill cr-ex (Lawson) CROSS-EXAMINATION BY MS. LAWSON: Q. I definitely don't want to tread ground that has already been trodden by other parties so I'll ask you panel members to all try not to do that and if you try not to do that as well. But I do have some follow up questions with respect to this issue of targeted versus comprehensive PBR plans. I get the impression, in particular from your responses to cross-examination yesterday, I think it was by Mr. Warren, I guess that would have been two days ago, that you're basically saying to the Board take it or leave it. If you leave our proposal because you don't like its targeted nature, then don't expect us to be in a position to file a more comprehensive PBR until the year 2001; is that right? MR. GRANT: A. Yes, and we went over those reasons in earlier testimony. Q. And one of the reasons you gave for this and you have a number of reasons and I know them, they are on the record, we don't need to go over them, but am I correct that one of the reasons for this is because you said you don't have the financial information necessary for the comprehensive plan available at this time, that since you decided to go with the PBR, you didn't bother to do the financial accounting necessary for the filing of a comprehensive plan; is that correct? A. I think you might be -- you might be confused about two separate issues. Seal,Charleson, 372 deJongh,Grant,McGill cr-ex (Lawson) I think, if I'm understanding your question correctly, what we were talking about the other day is that we have not done an O&M budget for the year 2000 and I think there was some cross-examination on time lines and that sort of thing as to what would happen if the Board turned down your proposal, what would you have to do. And I recall my testimony suggesting that it would take some significant period of time to both assess the implications of the decision and I think it was Mr. Mondrow who was really asking the question: What would you do opposite your 2000 fiscal year case that you've just filed? And I gave a series of answers on that point. Q. Okay. And that's right. And I do want to follow up on Mr. Mondrow's questioning because I just -- I don't really understand this. You say you haven't done an O&M budget for the year 2000-- A. That's correct. Q. --but don't you need an O&M budget just to manage the company? A. No, I think -- well, you need to know what your O&M is going to be, certainly, to manage a company, any company. We have not done an O&M budget at this point because that part of the process which was a significant effort internally in the company, we don't need to do it any more because we have by way of formula the establishment of an O&M number for ratemaking purposes. That doesn't mean that we won't be managing O&M, we certainly will be and we have to, but I think in terms of Seal,Charleson, 373 deJongh,Grant,McGill cr-ex (Lawson) process, typically around this time we had put together a year 2000 budget to bring forward as part of a cost of service proceeding and my point was we haven't done that because we don't need to do that. Q. Okay. Well, then I've got a bit of a problem. Could you turn to Board staff interrogatory 67. MR. CHARLESON: A. Yes, I have that. Q. In that answer you say and I quote. 'The company is not anticipating fundamental changes to its budgeting and other processes as a result of the proposed PBR O&M model. The company's budgeting and cost control processes continue to evolve in response to such things as the impacts of business drivers and managing within the Board-approved envelopes for O&M expense. As always, the company will continue to produce an operating budget representative of business priorities and responding to customer service requirements as reflected in the company's proposed service quality standards.' So are you continuing with your regular O&M budgeting or aren't you? A. To respond to your question, I guess, in light -- in terms of this response, you are referring to in terms of fundamental changes is the actual process of preparing an O&M budget. We don't see that fundamentally changing, the company will still need to prepare those elements. Seal,Charleson, 374 deJongh,Grant,McGill cr-ex (Lawson) What Mr. Grant was referring to or what I assume he's referring to - he can correct me if I'm misinterpreting him - is to do with the timing of preparing that O&M budget. The company has historically or for the past number of years prepared an O&M budget, say we would have prepared our 2000 budget in the fall of 1998 for the purpose of ratemaking. Under a PBR formula, that O&M level would be defined and therefore there's not the same need to develop an O&M budget two years in advance. So the timing for preparing an O&M budget may change; however, the fundamental process for preparing that budget, we do not see that as changing. Q. Okay. I would like to move on then. Would you agree with me that if the PBR plan that you put in place is successful, one of the results will be lower rates for consumers than would have been the case otherwise, everything else being equal? MR. GRANT: A. Yes. I would hope that that would be the case by the time we finished the whole PBR plan and were able to carve out costs by the end of the third year. Q. And those lower rates should come from efficiency gains? A. Yes. I think they will, once again constrained by our commitments on service levels. Q. They should not come, for example, from cost Seal,Charleson, 375 deJongh,Grant,McGill cr-ex (Lawson) shifting by the company, say, from Enbridge Consumers Gas to other service providers through unbundling, for example. And that's why, Mr. Grant, you have proposed to adjust the baseline for the 179 unbundling? A. Yes. That's true. Not all utilities do propose that. We do. We brought forward that unbundling prior to PBR and, indeed, it's my understanding that that's what Union Gas will be doing, as well. But those benefits of unbundling that you're referring to are being delivered prior to the implementation of PBR. Q. And those lower rates should come not because you have delayed costs, O&M costs, which would eventually to be incurred, thereby raising rates in the future, for example? A. Are you speaking, for instance, with respect to when we re-base; that sort of thing? Q. I'm just speaking hypothetical. The basic point I'm asking you to agree with is that the benefits to ratepayers from the PBR plan should come as a result of increases in efficiency. They should not come as a result of the company gaming the formula? A. No. I agree with that, yes. Q. And you would agree, in fact, that a good PBR plan should minimize the potential for such gaming? A. Well, help me out then. Perhaps I should ask for a clarification. Tell me what "gaming" is. Q. Well, I just gave you two possible examples; Seal,Charleson, 376 deJongh,Grant,McGill cr-ex (Lawson) cost shifting and cost delaying. A. I think it's perfectly within the PBR periods. What we need is an incentive, which this proposal gives us, to try and drive out savings. And I don't think that there should be any significant limitations to our capability to do that in that period. When we rebase at the end of the three-year period, I foresee a process wherein we will come back, we will explain what the rebase number is, we will have to justify what that is at that point in time, so that the Board is comfortable that the rebasing results in just and reasonable rates. Within the three-year period, though, there needs to be that flexibility to pursue whatever avenues we can to drive out the costs. Q. Okay. Thank you. Now, would you agree that there is an incentive for regulated companies in general to outsource activities to unregulated affiliates at premium rates? A. I don't agree that that's a -- as a general proposition. Q. You don't. Well, can I just turn you then to Dr. Norsworthy's evidence, page 16 and, in particular, I'm looking at Table 2? A. Are you at page 16, did you say? Q. Yes. My page 16. I hope it's the same as yours. A. Okay, yes. I have that. Seal,Charleson, 377 deJongh,Grant,McGill cr-ex (Lawson) Q. It's Table 2 that I'm looking at-- A. Yes. Q. --which is entitled Incentive for Out-sourcing Labour and Other Services in O&M. Calculations based on labour cost in 1997. Dr. Norsworthy has provided three hypothetical scenarios here of the per cent of labour cost shifted by the outsourcing. And if you follow the lines through, you will see that in each case, there is a net gain to the holding company from the outsourcing, despite the fact that there is a loss to the regulated company. Do you agree with those numbers and that conclusion? A. I'm still looking for the assumptions that he had made in his numbers. Q. Well, that's just the first column, per cent of labour cost shifted by outsourcing? A. So he has made an assumption that there's a 20 per cent premium. That's the way I understand that. And then he has done an arithmetic, a calculation. Q. Yes. Based on hypothetical scenarios, yes. A. Right. So I think all the table is saying is that if you accept his assumptions, arithmetically these are the numbers that come out. Q. There aren't any assumptions about actual numbers here. This is just, this is just an illustration of-- Seal,Charleson, 378 deJongh,Grant,McGill cr-ex (Lawson) A. I see. Q. --an incentive that exists. A. I see. Well, I guess you have to accept, if you accept all of his assumptions, then you accept his numbers. I think that what the utility is going to be trying to do in terms of driving out efficiencies, it's quite legitimate for the utility to attempt to outsource some of its activities if, in doing so, there's a benefit to the utility to do that. That's quite legitimate. And in my view, outsourcing does not need to exclude affiliates; it can include affiliate. The utility within the PBR period should be free to outsource whatever it sees as reasonable and at prices that it sees as reasonable to affiliates and non-affiliates alike with the express purpose of trying to drive out whatever productivity it can in that period. Now, when it comes to rebasing at the end of the three-year period, it's incumbent upon the utility to demonstrate to the Board that that outsourcing, be it with an affiliate or a non-affiliate, results in just and reasonable rates and is consistent with the Board's previous decisions on pricing. So that is something that we would have to be able to address and we would have to discharge that burden of proof at the point of rebasing. Q. Mr. Grant, are you disagreeing with me then, to come back to my original question, that there is an Seal,Charleson, 379 deJongh,Grant,McGill cr-ex (Lawson) incentive for regulated companies under a holding company structure to outsource activities to their unregulated affiliates at premium prices, which is what Dr. Norsworthy's table is premised on? A. Well, I don't think it matters one way or the other from the overall company's point of view in the PBR period what you're outsourcing and what you're pricing at between the regulated entity and the affiliate. Q. I think we are getting off-track. I just want you -- I want to know if you agree with me that there's an incentive the holding company gains at the expense of the regulated company through this type of outsourcing? A. The answer is no, the holding company does not. The company that holds the unregulated affiliate in your example and the regulated affiliate in your example, to the extent that there is any premium that flows from one entity to the other within that holding company structure, it doesn't matter. It's all consolidated at the holding company level. So from the holding company's point of view, it doesn't matter. Q. Let me try a different approach which follows up on your previous responses, Mr. Grant. Assuming that there is such an incentive for companies to outsource uneconomically, so to speak, would you agree that the PBR plan does nothing to mitigate that? Seal,Charleson, 380 deJongh,Grant,McGill cr-ex (Lawson) A. I don't agree with that for the reasons I stated earlier. When you rebase, you have to make sure that all the decisions you have made as a utility make sense. So you're not going to engage in uneconomic decision-making as a utility that you cannot justify to the regulator when you rebase. Q. Mr. Grant, we have heard about the unbundling that you plan to do in the context of the EBRO 179 proceeding. Is there a possibility of further unbundling during the during the life of the PBR? MR. McGILL: A. I think most of the parties here are aware that there has been work ongoing for over three years now that started off with the 10-year market review that has evolved into the market design task force. We are still reviewing drafts of the task force's report to the Board. I think there is a great deal of uncertainty around where that is going to lead. I think there are numerous versions and visions of what the end state of this process may lead to, and there is certainly no consensus as to what that is going to amount to and no consensus with respect to how quickly that is going to unfold. I think we indicated earlier that there will be change, but I don't think we're in a position to prejudge how that is going to affect the utility. Q. Right. So we don't know -- my question was, Seal,Charleson, 381 deJongh,Grant,McGill cr-ex (Lawson) is it possible? A. To some extent, it's possible and another point that I tried to make out on Wednesday or make clear on Wednesday is that there's going to be costs associated with moving to that end state. And to a great extent under the PBR, the company is going to be at risk for those costs. Q. Through the rebasing. That's your position? A. Well, until the rebasing in terms of their potential impact on O&M. To the extent they're not recoverable through any other mechanism, the shareholder will be at risk. Q. Okay. And to the extent that the costs are just shifted between affiliate companies, I understand Mr. Grant's previous response to be that it's the rebasing that provides reassurance to ratepayers that they will be properly treated at the end of the day by this PBR plan? A. Well, I think what provides reassurance to the ratepayers is that the company must demonstrate prudency in all costs that it incurs in order to pass them through rates. And under our proposal, that will happen at the time we rebase. MR. GRANT: A. The other thing I will add is, you know, that's one aspect of the ratepayer benefit that happens at the end of the -- at the PBR period. And, of course, that's what we are talking about now, this rebasing process. The ratepayer, though, in respect of these issues Seal,Charleson, 382 deJongh,Grant,McGill cr-ex (Lawson) that you raise has another book end, and that book end is the starting process. At the start of the PBR, I think the ratepayer has to be satisfied; indeed, one of the Board's objectives, policy objectives around PBR is that there's no cross-subsidization. And as long as that is the case when you go into PBR; that is to say, there's no cross-subsidization going in and you can demonstrate that there's no -- you, the utility, can demonstrate that there's no cross- subsidization coming out at the end of the process, that ensures to the ratepayer that there is some fairness to the process. Q. It seems like it could be quite an interesting proceeding at the time of the rebasing. In any case, let's move on. You seem to take issue with Dr. Norsworthy's observation that O&M expenses account for only 19 per cent of total company costs, but you're not disputing his numbers, are you? A. I'm disputing his point. Q. Exactly. A. His arithmetic -- Q. You think that gas costs, for example, should be excluded because you can't control them; correct? And you think capital costs should be excluded because largely you can't control them? A. Well, I think what our analysis is showing Seal,Charleson, 383 deJongh,Grant,McGill cr-ex (Lawson) that I have put in evidence at Exhibit I, tab 1.3,, is just that point; that if you look at the delivery component of the revenue requirement which for this utility is $750-million, and you conduct your analysis and you break that down and you ask yourself to what extent is O&M a component of that, and then further to that, to what extent is O&M and the ROE formula a component of that, that's what my analysis shows. And so I take issue with Dr. Norsworthy's conclusions. You know this is a very important point for him that it's a relatively minor amount. And then he goes on and makes assertions from that point onward and I have a problem with his initial analysis. That's why I put this other piece of evidence together. Q. Thank you. I would like to just pursue this dispute that you have with Dr. Norsworthy. Let's turn to Dr. Norsworthy's evidence and I'm just going to quote from the last sentence on page 29. He says: 'Gas costs are about two-thirds of total costs so that a relatively small savings there can have a large impact on customer welfare.' Do you dispute that statement? A. Well, I don't dispute it as a general comment but I don't know how it applies in this particular case. It's a big number so I think his point is if it's a big number and it's a small savings, it's still is big savings Seal,Charleson, 384 deJongh,Grant,McGill cr-ex (Lawson) amount -- it's a big number that results. Arithmetically I don't disagree with his calculation but I don't think it has any relevance here. I guess that's my point. Q. And why doesn't it have any relevance? A. Well, for the last now 13 years the province has been operating with deregulated -- the molecule side of the business has been deregulated so there are all kinds of people out there who are - brokers - who are providing this component to end-use customers. In fact, when you look at our gas costs, a very large component of those gas costs are buy/sell arrangements for those brokers. So really that whole area of the business has been deregulated. Now, we are still in the commodity business. We are still offering that service to customers who wish it, obviously, and there's great debate as to how the evolution of that side of the business will continue and when we will reach an end state and what that end state is. So in my view all of that is quite a separate process from PBR. Q. Are you saying that you don't have any opportunity to improve efficiencies on your gas costs, gas supply part of your business? A. That's correct. It's a straight pass- through. We purchase gas for customers who request it, who want system gas, and we pass it through into rates. Q. So you have no opportunity to drive a harder Seal,Charleson, 385 deJongh,Grant,McGill cr-ex (Lawson) bargain on your gas contracts? A. I suppose if the whole industry structure was different and the ABMs and everybody else wanted us to be aggressively in that business, there would be a different situation but that's not the situation in Ontario. Q. You have no opportunity to obtain more favourable long-term supply arrangements? MR. McGILL: A. Well, I think our evidence over a number of years with respect to gas costs is that the company makes every effort to ensure that it's acquiring gas commodity for its customers at the lowest possible price it can and we pass that through rates with no mark- up so that I don't see that there are significant opportunities to reduce that cost. Q. You have in your view no opportunity to avoid gas wastage? A. Well again, the company does everything that it possibly can do to avoid gas wastage in any way, shape or form. I'm not quite certain what you mean by the gas wastage and I don't know if you can define that any better for me. Q. Let me move on. Do you feel you have no opportunity to reduce staff in the gas supply area? I guess I should ask first: Do you have staff whose costs are attributed to gas supply? MR. GRANT: A. You mean in the rate-making context? Q. Mm-hmm. Seal,Charleson, 386 deJongh,Grant,McGill cr-ex (Lawson) A. No, those costs are found in O&M. The costs of the staff are found in O&M. Q. So staff reductions among your employees who work on gas supply would have no impact on your gas costs? A. That's correct. Q. Now, if you turn to page 15 of Dr. Norsworthy's evidence, in the last paragraph he says: 'Even with gas costs excluded, O&M expense is less than half of non-gas cost.' And I take it from your Exhibit I1.3 that you have no issue with that statement? A. Yes, I think we should stick with the numbers at I1.3. Those are the number; those are the right numbers. Q. And your number there when gas cost is excluded is 36.24 per cent? A. That's the O&M component as a proportion of the 750.3, that's correct. Q. Now, Dr. Norsworthy goes on to say that: 'The proposed plan would strengthen the company's already existing incentive to substitute capital for labour beyond the point where it reduces overall costs, that is, there would be an additional bounty for substituting capital for labour in the amount of the incentive to reduce O&M costs.' I'd like to hear your response to Dr. Norsworthy's point which is about the incentive and opportunity for you to Seal,Charleson, 387 deJongh,Grant,McGill cr-ex (Lawson) substitute capital for labour? A. I think I can respond by referring once again to the material that I handed out the other day which is the company's capital budget. I took everyone through that and indicated the areas of the capital budget that there was some interplay between O&M and capital. If you wish I can do that again. Q. No. Let me just see if I can summarize that correctly. Your point at the end of that discussion was ultimately that it was only the items under C, General and Other Plants and Meters, where capital substitution is really possible; is that correct? Those are the technology intensive aspects of your capital budget? A. I think -- yes, that's correct in the context of automatic meter reading if we had automatic meter reading. We don't have automatic meter reading on this schedule so our budget -- we don't budget for -- we budget for a small amount of automatic meter reading. I don't have the figure but it's a relatively small amount so we're not a utility that is actively pursuing that automatic meter reading technology. We find it difficult to make it pay. I think my testimony the other day was in the context of rates application that will come before the Board even if we did find that it was going to pay for itself there would be a burden on us to ensure that in the long run the ratepayer was benefiting from such an Seal,Charleson, 388 deJongh,Grant,McGill cr-ex (Lawson) expenditure. Q. I'm interested in just how that's going to work under the PBR plan. Just a general point, Mr. Grant, would you agree with me that a total company approach comprehensive PBR runs no risk of encouraging uneconomic substitution among inputs by the company, everything else being equal? A. Well, I think that's the case under the current way that we're regulated by the Board and that's the case under a comprehensive PBR. Q. Okay. But it's not necessarily the case under the targeted PBR? A. Oh, and the targeted PBR. It's the case regardless of the approach taken. My point is that under cost of service and under targeted PBR we go through a process where we ensure that the dollars we're spending are prudent. That occurs and that also will occur under a comprehensive PBR plan. So when you compare and contrast targeted PBR to comprehensive PBR or to the existing cost of service situation insofar as it relates to capital, I don't see a difference. What's prudent is prudent. Q. Because as you said earlier the capital is still going to be subject to review and approval under the cost of service regulation; that's your position? A. Yes. It's also subject to the comments I made around specific -- under comprehensive PBR, a specific need to deal with some of the issues I talked Seal,Charleson, 389 deJongh,Grant,McGill cr-ex (Lawson) about the other day, in particular the implications on system expansion and so on. Q. I would just like to pursue a couple of possibilities with you in relation to this issue of capital expenditure. Am I right that you could -- under your proposed PBR plan you could reduce your O&M costs without reducing your overall revenue requirement simply by increasing your capitalized overhead? A. Well, if you were to change your capitalized overhead you'd have to have a reason and because it would affect capital, you would have to bring that reason forward to the Board and discharge that burden of proof, so I don't foresee a need to change the capitalization policy in the period. And I think that perhaps, you know, you're touching on a point that in other jurisdictions that has sometimes become an issue. For instance, in the B.C. Gas situation, it's my understanding that at the front end of their PBR they wanted the Commission to deal with a change in the capitalization policy and so that was dealt with -- I think it actually ended up being negotiated. But in any event it was dealt with at the front end of the PBR. We're not proposing that, which means that we're not proposing a change in our capitalization, our energy capitalization. Q. Okay. I wanted to come back to B.C. Gas, but just to be clear then, what you're saying is that any Seal,Charleson, 390 deJongh,Grant,McGill cr-ex (Lawson) increase, no matter how minor, to your capitalization rate would be subject to Board approval and intervenors would have an opportunity to comment on it? A. Well, I think you've got to impose some rational thought on the issue. I mean, if it's not significant or not material I don't think it's an issue. In other words, if it was $100,000, I don't think it would matter one way or the other, if it was 100,000 increase or decrease. Q. What is the threshold that you would apply for significance or materiality? A. The Board's threshold is $100,000. Q. So anything over $100,000 would be subject to -- A. I think that's fair, yes. Q. Now, you've discussed a little bit automatic meter reading. There are I'm sure you would agree a number of ways in which the company can substitute labour with capital and still meet its needs or its goals? A. Can you give me those ways? Q. Well, automatic meter reading might be one. I would suggest perhaps interactive voice response telephone, a more technological capital-intensive method of dealing with customer inquiries, your whole customer information system is technology-based. Would it not be possible, Mr. Grant, for the company to reduce its operations and maintenance costs by making capital investments in some of these areas and others, there are Seal,Charleson, 391 deJongh,Grant,McGill cr-ex (Lawson) many that I haven't mentioned, that reduce your labour costs? A. Yes, that's possible. Thank you for-- Q. And -- A. --the examples. I think that helps me to answer the question. It is possible. IVR technology, we have IVR technology today, and of course, if we were to pursue further IVR technology, it would be a capital item and we would bring that forward and once again, to discharge the burden of proof on that particular point, we would have to demonstrate that in the long run it had a benefit to ratepayers. MR. McGILL: A. But I don't think you can simply go forward with the assumption that you can always trade off labour for capital. Q. No, I don't mean to. I don't mean to make that assumption. A. Because with respect to IVR in particular, we brought forward evidence, and part of the evidence in this proceeding indicates that one of the things we found is that when you introduce that, the nature of the inquiry that you end up taking because you've screened out the simple ones with the IVR, you're -- the experience is, is that our average call handle time has increased because now the calls that do make it through to the live CSR are much more complex and difficult to deal with, so that's an example where you can't just look at replacing labour with capital without delving into all the details of each Seal,Charleson, 392 deJongh,Grant,McGill cr-ex (Lawson) particular situation. Q. Okay. I didn't really want to get into it in that much detail. Thank you very much, in any case. But Mr. Grant, when these capital expenditures come before the Board for approval-- MR. GRANT: A. Yes. Q. --is it your expectation that the Board would also at that time review the PBR formula to determine whether any substitution effect between labour and capital had occurred and had effected that formula? A. No. No, that's not my expectation. I think I laid out the other day a process that I think is a reasonable one. If you bring a capital item before the Board that has a, let's say for example, an economic life of 10 years, you should be able to demonstrate to the Board that over that, on a present value basis, over that 10-year period it makes sense for the ratepayer; that is to say, it saves dollars overall. And as part of that analysis, you may be suggesting to the Board that we are going to invest in this technology, we know that for the first three years the benefits do not flow to the ratepayers, we know that when we rebase the benefits will flow to the ratepayers in year 4, and then from then on. So really I've got a stream of benefits from a present value point of view from a ratepayer perspective that run from year 4 to year 10 and we would have to demonstrate that that stream of benefits on a present value basis makes sense Seal,Charleson, 393 deJongh,Grant,McGill cr-ex (Lawson) for the ratepayer. Q. Okay. And let's say you do that. A. Yes. Q. Let's say you do that, that you do find some technologies, maybe not IVR, but somewhere significant further expenditure on them makes sense, and you prove that to the Board, is it not the case that should those expenses on capital directly lead to reductions in O&M expense, without effecting the overall revenue requirement, that the company under the PBR formula would get the bonus at the reduced O&M - well, ratepayers aren't getting anything. A. I don't agree with that statement. Q. And why don't you -- A. You prefaced your question by saying let's say you can demonstrate to the Board that that makes sense. Well, to demonstrate to the Board that it makes sense you have to demonstrate that the ratepayers are getting something on a present value basis. Q. And you would be looking at the PBR formula at that time? A. No. No, no. Q. Just the capital expenditure? A. Yes. You look at the capital expenditure and you have a stream of benefits to the ratepayer that start in year 4 and go to year 10. And you present value those benefits all the way back to time zero, the time that you're asking the Board to rate base the item. Seal,Charleson, 394 deJongh,Grant,McGill cr-ex (Lawson) And if you meet that hurdle, it makes economic sense from the ratepayers' perspective to do that. And I thought that was the premise of your question so that's why I had to disagree with your conclusion. Q. Okay. I just want to get your position straight then. You agree that you do have an opportunity to improve efficiencies through increased capital expenditure? A. We have very limited opportunities. Q. But they are very limited? A. Yes, they are. Q. And that's why you're excluding capital from your targeted plan? A. No, that's -- I think my point is that it's twofold. First of all, we have limited capabilities if you go down that list that I went through the other day, that's the first point. But my second point is, to the extent that we have any capabilities, limited as they are, and we bring forward something to the Board in that period of time, the next three years, we've got a burden of proof to discharge and I would expect that we'd have to demonstrate that the ratepayers overall benefit from this expenditure. And if we can't meet that then -- well, first of all, if we can't meet that, we won't even bring it forward. It won't be a capital budget item. We've got to justify it internally and that's how we do it. Q. Okay. And I'd like to move on. Seal,Charleson, 395 deJongh,Grant,McGill cr-ex (Lawson) Am I right that under your proposed PBR plan the company is not rewarded for finding ways to complete system expansions at lower cost? A. The company is not rewarded...? Could you be more specific; I don't know what you mean. Q. Well, the point of the PBR is to reward the company for improving efficiency, but because it excludes capital, it's not rewarding the company for improved efficiency on the capital side; correct? A. You mean in terms of the average cost to add a customer from a capital expenditure point of view? That's right, that item is excluded from PBR because it forms part of the capital budget. THE PRESIDING MEMBER: Ms. Lawson, do you know how much longer you'll be? MS. LAWSON: About five minutes at most. I just want to turn to the BC examples and that will be it. Thank you. THE PRESIDING MEMBER: Okay. MS. LAWSON: Why don't we do that, gentlemen. Let's turn to your evidence. It's section 2, page 9, which is the table of PBR program details and this has the Canadian companies. Q. And on page 9 you summarize the PBR programs adopted in BC. First, for BC Gas, and secondly for West Kootenay Power. First, would you agree that both of these cases are in the nature of a cost cap PBR as opposed to price cap PBR? Seal,Charleson, 396 deJongh,Grant,McGill cr-ex (Lawson) MR. deJONGH: A. I would agree with that. Q. And that's the same as your plan, you're not asking for a price cap, you're asking for a cost cap on O&M? A. We're asking for a targeted O&M incentive mechanism, yes. Q. And if we look at the terms for these two- year plans, we see that West Kootenay started first with the PBR plan, ran from 1996 to '98; and subsequently, the same regulator approved a PBR plan for BC Gas running from 1998 to 2000. A. Yes, as that regulator approved the targeted O&M incentive for BC Gas prior to that. Q. And if we look at the first experiment of the BC Utilities Commission with PBR and West Kootenay, we see that capital was excluded? A. That's not really the first experiment by the BCUC with PBR -- Q. Well, between these two. Sorry, I'm just looking at these two, West Kootenay and BC Gas. The prior one is West Kootenay-- A. Well, actually -- Q. --and in that case capital was excluded, correct? A. No. Q. No. Can you explain? A. Well, BC Gas was sort of the first utility in BC to bring forward a PBR plan and it targeted O&M Seal,Charleson, 397 deJongh,Grant,McGill cr-ex (Lawson) expenditures and that was, I believe, from 1994 to 1997. Q. Okay. That's fine. And then was West Kootenay the next one? A. I believe that's correct, yes. Q. Okay. So let's just look at the two we have before us, right now on page 9. West Kootenay. Am I right when I read there that the West Kootenay Power formula excludes capital? A. No, you're not correct. Q. Okay. That's then what I'm asking you to explain because it looks to me like the targeted cost categories do not include capital? A. No, there are very specific targeted cost categories in West Kootenay's plan which include both O&M and capital. If you take a look at the evidence that we filed in response to Schools interrogatory which included a copy of all of the decisions that are summarized in this table. There's a little more detail with respect to West Kootenay's plan. Q. Did everyone get those decisions or were they just copied on schools? A. No, actually I don't believe they were even copied to schools, they were filed with the Board and available in the library here. MR. BRETT: Can I just comment on that? They were -- they were not filed or at least not provided to schools and I had earlier searched for them in the library and they were not there. And I was told the Seal,Charleson, 398 deJongh,Grant,McGill cr-ex (Lawson) only copy that was actually -- the only copy that was in existence was with the Board Staff so that was the status of it as far as I'm aware. MS. LAWSON: Q. Okay, so what's the interrogatory number, sir? MR. deJONGH: A. It's Schools, Exhibit D, tab 4, 35. Q. Schools interrogatory No. 35. Well, I'm not sure of what the correct procedure is, Madam Chair, once a document has been filed with the Board, but no one else. Are you claiming confidentiality of these? A. No, I don't think so. I think these are publicly available documents. Q. So your position is they're publicly available and that's why you're not providing them to everyone else? A. No. I just think it was really a question of the size of the binder that we would have had to have distribute to everybody. It's quite a weighty tome. Q. Now, what I'm interested in are these two specific cases - BC Gas and West Kootenay - and I'm really only interested in the final decision, the final approved PBR formula in each case. I would like you to provide on the record in this proceeding for all interested parties copies of those, and I do not believe that they are very large or lengthy. A. No. I can undertake to do that for you. Seal,Charleson, 399 deJongh,Grant,McGill cr-ex (Lawson) MS. LAWSON: Thank you. MS. LEA: H3.1, please. ---UNDERTAKING NO. H3.1: Enbridge Consumers Gas undertakes to provide the final approved PBR formula for BC Gas and West Kootenay. MS. LEA: I should indicate that Board Staff does have a copy of the entire binder and we were of the impression that it was also filed on the public record. So if people want to look at more of these cases, we can certainly make them available, and they may well be in the public record, also. MS. LAWSON: Okay. Q. So just turning back to the information we have on page 9 of Exhibit C, section 2, these two examples, I just want to clarify what exactly the West Kootenay plan covered. What aspects of capital did it cover? MR. deJONGH: A. To the best of my recollection, there were different treatments of different components of capital. I would have to go back and review the details of the plan, but typically they exclude such components as safety-related -- Q. Include or exclude? A. Exclude. Q. Exclude. Is it the case that the BC PBR. formula includes much more in the way of capital than the West Kootenay plan? A. I haven't done that analysis or comparison. Seal,Charleson, 400 deJongh,Grant,McGill cr-ex (Lawson) Q. You don't know? A. I don't know. Q. In the table I'm looking at here at page 9, it would appear to me that the BC Gas proposal covers more capital. A. No. I think BC Gas' formula also excludes safety-related capital. Q. Okay. Well, since you're now providing them to us, I think we'll be able to review them and follow up in argument. MS. LAWSON: Thank you very much. Thank you, Madam Chair. I am sorry if I went on longer than expected. And thank you, Panel Members. THE PRESIDING MEMBER: Thank you, Ms. Lawson. We will take a break, returning at eleven-thirty. ---Recessed at 11:09 a.m. ---On resuming at 11:45 a.m. THE PRESIDING MEMBER: Before we begin again, could I just ask for some clarification on the matter of the Motion that's before us, please? Mr. Cass, through you, could I ask for some clarification from the witnesses of the exact nature of the documents we're discussing, a little bit further description of the documents that are under consideration? I haven't had a chance to read the transcript from the day before. I looked at my notes and I have a pretty good idea, but it would help us if we had a little more clarity. Witness clarification on 401 Motion for the Board MR. CASS: Madam Chair, did you want the witnesses to do that? THE PRESIDING MEMBER: Yes, if they could, please. MR. GRANT: I'm going from recollection, Madam Chair. I don't have the document in front of me, but I think I can describe what the document entails. The document was put together at the conclusion of our analysis of the models, the PBR models, that being comprehensive model and targeted PBR model. It included some financial analysis of both of those models from the point of view of analyzing the financial implications on the company of the two different models. There were discussions of strategy including regulatory strategy as to how we would proceed and when we would proceed to bring an application. There were conclusions from the analysis and I believe there were also recommendations in the document. THE PRESIDING MEMBER: Thank you, Mr. Grant. That's helpful. Do you have any questions? DR. HIGGIN: Just on the question of the two obstacles that you have identified including capital in the plan, was there any further expansion other than the anecdotal evidence that you have given us? Was there any analysis? MR. GRANT: Yes. There was some financial Witness clarification on 402 Motion for the Board analysis that included capital expenditure plans that went out a number of years and the implications on revenue requirement, and there was a discussion of how we might deal with that situation. DR. HIGGIN: Like how you deal with the O&M deficit problem in the first early years; that kind of...? MR. GRANT: Oh. I am misunderstanding your question. I was speaking in the context of capital, the analysis on capital, the number of years. DR. HIGGIN: You cited as one reason that those projects produce a O&M, I'll call it an O&M deficit; i.e., revenue does not equal expense in the early years. That was one of the reasons you cited as not progressing. MR. GRANT: Yes. I understand now, yes. That's correct. DR. HIGGIN: And was that done in the context of 188 or did it precede the 188 guidelines? MR. GRANT: I believe it preceded the final 188 guidelines. DR. HIGGIN: Thank you. MR. VLAHOS: Yes. Mr. Grant, the PBR models that went to the executive committee, was the analysis included as support of that or was this absent the analysis? MR. GRANT: No. The analysis, the results of the analysis in tabular form and some discussion of that analysis was all included as part of the document. MR. VLAHOS: So there are working papers somewhere else on the company? Witness clarification on 403 Motion for the Board MR. GRANT: Yes. That's right. MR. VLAHOS: And the discussion of the regulatory strategy, that included, under either scenario, targeted or comprehensive? MR. GRANT: I think it was a rather generic discussion. I can't recall whether it was specific. The conclusion obviously was that we move forward with the targeted application, targeted PBR application. So I can't remember whether we were differentiating. I think it was regulatory strategy in general. MR. VLAHOS: Mr. Pratte, can you clarify for me the -- what you're seeking is the production of that document that went to the executive committee or any other work sheets that may have been in support of that analysis, in support of the document that did not go to the executive committee? MR. PRATTE: I guess what I'm seeking, whether it was incorporated into the document that went by way of an appendix or some part of the document. What I'm seeking at the minimum is the actual analysis comparison of the two approaches. I understand from the discussion that you just had, Mr. Vlahos, with the witness, that some of that analysis may have been on working papers and then incorporated some way or other into the document. I would like the analysis that was incorporated into the document, although as I said, I'm not interested in whatever part of the document was truly strategic Witness clarification on 404 Motion for the Board planning, but there was a foundation and I imagine that those would have been distinguished in the document that went between the analysis, the conclusions from the analysis and then where do we go from here. And perhaps the witnesses could review the document to see to what extent one is severable from the other. Could I just have a moment, sir? ---Off the record discussion. MR. PRATTE: Yes. When I say "analysis", sir, as well as the foundation, what I mean by it is I had understood, when we first visited this issue, that there was a cost/benefit analysis comparing the approaches. And it's at least that analysis, whether it was integrated into the ultimate document or the basis, the basic documents that I should like to have and be produced. THE PRESIDING MEMBER: Thank you, Mr. Pratte. MR. CASS: Madam Chair, might I just say just a couple of things? I think we're approaching onto an issue that was of some concern to me after the argument of the Motion this morning, and I discussed it with Ms. Allan at the break. When the motion was framed by Mr. Pratte this morning, I didn't get a good note of what he said, but it seemed like a very broadly-framed motion. By the time Mr. Pratte got to his reply argument, it seemed to have narrowed considerably in terms of what Witness clarification on 405 Motion for the Board he was asking for. So I came away from it with great uncertainty as to what was being requested. And the original framing of the motion, if that's what the Board has under consideration, I think was a very broad request. I just want to remind the Board of that. Secondly, in relation to the Board's question about the report itself and what it contains, I have never seen this document, but I thought it was important to bring out, and Mr. Grant can correct me if I'm wrong, I think it is very clearly marked as a confidential document. MR. GRANT: Yes. It is marked confidential. ---Off the record discussion. THE PRESIDING MEMBER: Mr. Cass, just to clarify, I didn't understand you could be claiming confidentiality as the main reason why this shouldn't be produced. This seems to be a different ground than I've heard before. Is it a matter that you would claim confidentiality and that we need to go through the procedures set out in our Practice and Procedures Manual to deal with it? MR. CASS: I apologize, Madam Chair. I guess I did not make myself sufficiently clear in that regard. When I was discussing this as a strategy document, it was in that context that I was trying to make a confidentiality point. I'm sorry that I didn't do that as explicitly as I should have. Yes, it is a confidential document. I'm told, Witness clarification on 406 Motion for the Board without having seen it, that it's very clearly marked as a confidential document. THE PRESIDING MEMBER: I guess I'm not entirely persuaded that marking a document "confidential" makes it so. MR. CASS: Granted, Madam Chair. That was why I was more focused on the purpose of explaining to you the purpose of the document and the rationale behind why I thought there should be some protection for it, rather than on the label "confidentiality". MS. LEA: Madam Chair, perhaps it might assist the Board to determine first if the document is relevant to your decision-making, whether it's needed for your decision-making, and then if it is, we can determine how to preserve whatever degree is confidentiality is appropriate. There are various things that we can do. We can keep it off the public record, but use it in the record of this hearing and just make sure that it's not disclosed. There's a procedure for that. But I think the first question is: Is it relevant to your decision-making? THE PRESIDING MEMBER: Thank you, Ms. Lea. I think our questions in relation to the exact nature of the document were intended to assist us in trying to decide that. MR. PRATTE: May I just make one comment, Madam Chair? I'm sorry we're a bit helter-skelter over this. Witness clarification on 407 Motion for the Board But on this confidentiality point that is now labeled as such by my friend Mr. Cass, what is very troubling about this is that the witnesses are selectively telling us what is in that document. And I just -- at least, I say "selectively" because not knowing the full scope of the document, it's difficult to know whether everything that is material to your inquiry is being discussed. But I have trouble with the notion that you can claim confidentiality over the contents of a document, but that some aspects of it can be discussed as the witnesses decide to discuss them. It's like a privileged document. You can't just select parts of it and say, you know, 'But we're not going to give you other parts we don't want to give you.' So I just wanted to make that point on this confidentiality. THE PRESIDING MEMBER: Thank you, Mr. Pratte. Mr. Cass? MR. CASS: I am sorry for prolonging, Madam Chair, but I feel I must respond to that. Madam Chair, it's not as if the witnesses are selectively bringing forward parts of this document. The cross-examining counsel have been asking questions and the witnesses have been doing their best to oblige without breaching any confidentiality or other concerns. They have not been selective in any way. I don't recall a single question by cross-examining counsel where a witness said, 'No, sorry. Witness clarification on 408 Motion for the Board You've gone too far. As I can't answer that question because of the confidentiality.' There has been no selectivity at all. THE PRESIDING MEMBER: Thank you. MR. VLAHOS: Mr. Cass, just a question I guess through you, if that document is helpful to the company's case, position, then the only reason that it's not been produced is because of the confidentiality characterization of that document? MR. CASS: I don't personally know the answer to the question, Mr. Vlahos. MR. VLAHOS: No, I'm just saying through you maybe -- MR. CASS: I've never seen the document. MR. VLAHOS: Mr. Grant, sorry. MR. GRANT: I'm sorry, Mr. Vlahos, could you phrase the question again? MR. VLAHOS: I guess to the extent this document is helpful to the case of the company, to the application of the company in this proceeding, and it has not been filed to support the application, is the obstacle the confidentiality characterization of that document? MR. GRANT: I think that's fair. ---Off the record discussion. THE PRESIDING MEMBER: I think at the risk of causing further delay the Board would like another opportunity to consider this matter so we won't be able to give you our response until Monday and if at that time we Witness clarification on 409 Motion for the Board have to make further arrangements one way or the other, we'll do that. MS. LAWSON: Madam Chair, just before we launch back into cross-examination, the company has provided the undertaking, the documents which they undertook to provide me with just before the break, but one of the two documents which form a single exhibit is not what I was expecting to receive. It doesn't have the information. In particular the Reasons for Decision relating to West Kootenay Power merely makes reference to a settlement agreement and provides no information or detailed information on what that agreement was, so it's of no help to me. What I need is that settlement agreement. So I'm wondering if I could maybe get a further undertaking from the witnesses to provide the settlement agreement referred to in these Reasons for Decision related to West Kootenay Power. THE PRESIDING MEMBER: Yes. Ms. Lawson, to what extent is this part of the package that the Board Staff have said that they could make available. MS. LAWSON: I would ask the company. I haven't seen that. THE PRESIDING MEMBER: Go ahead. MR. deJONGH: If that settlement agreement was part of the public record we will undertake to provide that. MS. LAWSON: And, Madam Chair, I also note in Procedural Matters 410 these Reasons for Decision reference to an annual review of the West Kootenay PBR mechanism and I would like to ask the company to provide that as well, together with the settlement agreement, any annual review documents. MR. deJONGH: The company isn't an intervenor in those cases and does not as a normal course receive any of the annual filings of the utilities. We did include in one interrogatory response part of the annual filing that B.C. Gas provided but that was not part of the public record. I did seek special clearance from B.C. Gas to be able to include that information which we thought was relevant to our discussion. I can undertake to find out what West Kootenay files on an annual basis and if that, too, is part of the public record we will include that in the other undertaking. THE PRESIDING MEMBER: I think that should depend on the size of the filing. From our experience here that would take several trucks to produce. I'm not quite sure I know what it is you're after when you say an annual review, all of the documents filed in an annual review? MS. LAWSON: I certainly was not contemplating a large volume of material, Madam Chair. I just noticed in this very brief document West Kootenay that the company's performance -- I'm just quoting from it: 'The company's performance under the incentive mechanism is subject to an annual review with Procedural Matters 411 involvement of the public in that process.' I'm certainly not looking for transcripts and evidence and so forth. Again I was thinking that there would be some kind of relatively brief document that summarized the outcome of that annual review. MR. CASS: Madam Chair, if I may? THE PRESIDING MEMBER: Yes, Mr. Cass? MR. CASS: We seem to be talking about a document that I would assume Ms. Lawson has the same access to as the company. Might I respectfully suggest through you that maybe it would be better if she tried to get the document or whatever material it is and then she can extract from it what she thinks is relevant for this hearing rather than leaving us to try to follow-up on this potentially very large filing and determine what needs to be brought back to this hearing. THE PRESIDING MEMBER: I think to the extent that these documents she's requesting are already in the package that you have, it would make sense for you to produce them to her. MS. LAWSON: That's what I was originally thinking, Madam Chair, but it appears from the response that the annual review documents are not part of the package, am I correct? MR. deJONGH: That's correct. THE PRESIDING MEMBER: Is that satisfactory then, Ms. Lawson? They will produce to you what they have in the package that is relevant which is a package I Procedural Matters 412 understand to be with Board Staff as well; am I right about that? MS. LEA: Yes, that is correct. It's not only with the Board Staff but it's on the public records of the Board itself also so access is easy to get. THE PRESIDING MEMBER: One way or another, Ms. Lawson, I think you can see those documents. MS. LAWSON: Thank you. One final question, Madam Chair, could I, please, have the opportunity to ask questions on the documents that the company has provided to me by way of this undertaking in the next round? THE PRESIDING MEMBER: So do these relate to the scope of this application? MS. LAWSON: Yes, it would relate to scope but it probably would also relate to formula, but to the extent it relates to scope that's what I'm asking your permission on. Since I haven't had time to review them and there's one that I haven't received yet, I'm asking for the opportunity to ask those questions in the next round. THE PRESIDING MEMBER: Well, I think that if there's new information there that you need to clarify with these witnesses that should have been available to you then I guess you can ask those questions. I think we really are interested in moving forward from the scope argument on to the rest of this panel. MS. LAWSON: I understand. THE PRESIDING MEMBER: To the extent that we can Procedural Matters 413 we'd like to do that now or as soon as the next people are finished with their scope questions. Mr. Pratte? MR. PRATTE: Madam Chair, I'm sorry but you indicated that the Board wished to deliberate over the production of this material and in that light I wonder if I might leave with you this thought: My recollection is that when production of this document was first requested by Mr. Warren, Mr. Grant indicated that he would not object to filing the document with the Board on a confidential basis. I think that was one of the things he said. I could find that transcript reference. And, of course, if the ground now of objection is fundamentally confidentiality which as I understand it to be, the rules would permit a procedure whereby the document would be filed and then in absence of the public but with the presence of counsel if they gave the requisite undertaking, they could look at the document. We could decide how material it is, which parts are truly strategic and need to be excluded and which parts are helpful and should otherwise be... So I just wanted to indicate on my client's behalf that we would be perfectly willing to have that kind of process so that the document is produced confidentially, we give the requisite undertakings and then we can see what we're really talking about rather than trying to decide from Mr. Grant's recollection what the document really is, what could be produced, not Procedural Matters 414 produced, what is truly confidential. THE PRESIDING MEMBER: Thank you, Mr. Pratte. I think, Mr. Pratte, we would like to first consider whether we think we should go any further at all with this matter. MR. GRANT: Madam Chair, I'm wondering if through my counsel I could just comment one little bit more on this issue? THE PRESIDING MEMBER: Yes, Mr. Grant. MR. GRANT: I'm sorry, it's not the proper procedure. I'm going from memory in my responses to the questions and in our discussions. I'm going to review the document this weekend as well to make sure I'm completely up-to-date as to what it says and what it doesn't say and I'll review the transcript as well, so if there's any reason for me to add anything to the discussion on Monday I'd be prepared to do that. THE PRESIDING MEMBER: And conversely, if on your review you find that there is information there that you could easily share, you will let us know. MR. GRANT: Indeed I will. THE PRESIDING MEMBER: Now, Mr. Mattson? MR. MATTSON: Thank you, Madam Chair. THE PRESIDING MEMBER: Oh, Mr. Cass, you have something more to say? I'm sorry, Mr. Mattson. MR. CASS: I had another preliminary matter, Madam Chair, hopefully very much shorter. Procedural Matters 415 At the outset of this hearing on the first day as reflected at page 4 of the transcript, the Board indicated that it was in the process of obtaining a full understanding of the mechanics of the SSM. In consultation with Board Staff, the company has prepared a document explaining the mechanics. The document has been passed around. I believe it's available on the window sill for anyone who does not have it. THE PRESIDING MEMBER: We do. MR. CASS: Additionally, Madam Chair, because Mr. Klippenstein and Mr. Poch are not here, the document will be faxed to them. THE PRESIDING MEMBER: Thank you, Mr. Cass. Should we give this an exhibit number just to keep it straight. MR. CASS: I think that's appropriate. MS. LEA: Yes, I3.1 please. ---EXHIBIT NO. I3.1: Document from Enbridge Consumers Gas explaining the mechanics of SSM. THE PRESIDING MEMBER: Thank you. My apologies, Mr. Mattson, you can try again. MR. MATTSON: Thank you, Madam Chair, and again I apologize for being absent earlier in the week, but as I indicated last week I was away on another hearing and I thank you for allowing me to be away and I have reviewed the transcripts so I hope not to cover some of the same ground that others have done. PANEL; Resumed Seal,Charleson, 416 deJongh,Grant,McGill cr-ex (Mattson) CROSS-EXAMINATION BY MR. MATTSON: Q. Mr. Charleson, if I could I'd just like to go back to an issue my friend had raised earlier. As a result of the transferring of the ancillary businesses out of the core utility, Mr. Charleson, isn't it fair that the company reduced some of its office space? MR. CHARLESON: A. Yes, that's correct. Q. And in doing so you had to consider whether to reduce office space that you owned or office space that the company leased; is it fair? A. Yes, that's correct. And I believe there was an interrogatory asking for clarification on how that was done and I think you would find the rationale for that in response to the energy program in Interrogatory No. 3 which would be Exhibit D, section 16.3. Q. Okay. And that's correct, it's the interrogatory number, but in terms of what, in fact, the company ended up reducing, is it fair to say that the company reduced lease space by some $1.7-million but did not reduce any of its owned space; is that fair? Owned. A. Yes, that's correct. Q. And in looking at the interrogatory response, you tell my client how you did the evaluation but you don't provide the analysis itself, correct? A. That's correct. Q. And wouldn't you expect, certainly in light of some of the issues some of the other intervenors have raised with respect to cost shifting, that the company Seal,Charleson, 417 deJongh,Grant,McGill cr-ex (Mattson) would have to provide a fairly detailed analysis of why it would reduce in terms of its impact from a separation, why it would reduce all or only lease space which would be an O&M component and not reduce any of its rate base which would be its owned buildings? A. No, I don't believe any further analysis was necessary. I think the rationale for the choice of reduction has been laid out in the response to that interrogatory where it indicates that the owned space meets certain strategic needs and that it, you know, from a very preliminary analysis, it was fairly easy to determine that the reduction in lease space was the most effective means of addressing office space. Q. But is it the strategic needs of the corporation that really should be the factor that determines whether leased space or owned space should be reduced? Isn't it really what the impact is on the customer that should be used as the standard? A. I believe the need to continue to service the customer through the provision of construction and maintenance activities, which were some of the strategic operational issues that I referred to, are in the interest of the customer and were factored into the decision. Q. Yes, but, Mr. Charleson, just is -- when the company determines whether or not to reduce rate base or to reduce O&M on an issue such as you have too much space for all your employees, should the company be determining what's in the best interest of the customer in terms of Seal,Charleson, 418 deJongh,Grant,McGill cr-ex (Mattson) what the impact on the ratepayer is or should the company also be concerned about its strategic needs? A. I believe the strategic needs that I'm referring to do address the needs of the customer. Q. And do you think that the company should provide some analysis as to why that is so to the Board and to the parties, or do you think just the fact that the company indicates that that's so, that ultimately you've met your onus? A. I believe it was felt that it was necessary to go through a full financial evaluation of the various alternatives for something that on the surface appears to be a fairly straightforward decision, if that was deemed that that was necessary, then yes, I suppose it could be provided. Q. If your performance-based regulation plan with respect just to targeted O&M, so that narrow PBR plan is approved, that wouldn't be an opportunity for intervenors to critically review decisions such as this; is that fair, in the future? We wouldn't have the opportunity to review decisions such as this, would we? A. No, I disagree with that. I believe there would be opportunities-- Q. How so? A. --in the future. As has been discussed over the past few days, each time we go to rebase the O&M, there's going to be have to be a justification on the company's part as to Seal,Charleson, 419 deJongh,Grant,McGill cr-ex (Mattson) some of the changes that have occurred. Also, there's additional, say, capital that needs to be invested to meet some of the operational needs of the organization, whether it be expanded office space, that would be subjected to an annual review of capital through the normal ratemaking process. Q. I understand when there's additional capital required, but a situation like this where the choice is between reducing capital or reducing O&M, I take it your answer then is the opportunity for ratepayers to review that decision will come about in the rebasing of O&M? A. Yes, that's correct. Q. And is it your position, Mr. Charleson, at this time that the Board does not require the analysis as to why the company decided that it would reduce office space solely by reducing its leaseholds as opposed to reducing any of it's owned property at this time? A. It's my opinion that the rationale that we've laid out in response to the Energy Probe interrogatory should be sufficient. Q. And that is that you tell us how the evaluation was done, but you don't provide the numbers; fair? A. In that I tell you the basis that would be used for evaluating a decision such as this, yes. Q. Thank you. Now, we've heard a lot of discussion, Mr. Grant, about comprehensive PBR as opposed to targeted PBR and I Seal,Charleson, 420 deJongh,Grant,McGill cr-ex (Mattson) just wanted to ask you, ideally should PBR be designed to incent changes in rate design as well as capital and O&M? MR. GRANT: A. You're speaking on a comprehensive PBR context? Q. Yes. A. It may incent changes in rate design, yes, but it may not be the only thing that or the only reason why we are -- we may be changing rate design in a particular period. We may have to change rate design for market reasons which have nothing to do with the particular formula that you're -- that we are using in a comprehensive PBR situation. Q. But, Mr. Grant, would you agree with me that when you begin scoping a comprehensive PBR plan, that you would also consider rate design in addition to capital and O&M issues as well? A. Yes, I think we have to do that. I guess, I was only trying to indicate in my previous answer that that isn't only reason for changing rate design, but I think that that would -- that's legitimate. We should look at rate design when we move forward with comprehensive PBR. Q. Thank you. And again, another issue quickly, if I can find it. Mr. Grant, I know there's some, I'm not sure if it's confusion or if the evidence just isn't clear on this issue, but if, from the rate impact point of view, would you agree that should the company's proposal be approved Seal,Charleson, 421 deJongh,Grant,McGill cr-ex (Mattson) the impact on small customers would be approximately a 1.5-million decrease in O&M per year; is that fair? A. Are you speaking in terms of applying the formula? Q. Yes. A. I don't think that the application of the formula is going to result in a one-and-a-half-million- dollar decrease. You're speaking of Rate 1 customers, I presume? Q. Yes. A. No, I don't think it will. When you apply the formula, there's actually an increase in rates because of applying all aspects of the formula. The productivity component of the formula gives a guaranteed productivity to the customers of roughly one-and-a-half-million per year but... Q. I should have been clear, that's correct. If the productivity on numbers would give the small customers a one-and-a-half-million decrease in O&M per year, that's the evidence, is it? A. The small customers, Rate 1 customers would get the majority of it. Some would flow to Rate 6 customers and a lesser amount would flow to contract customers. Q. All right. And but would you also agree that, and we are just talking about those O&M costs there, but isn't it possible as well that given the trade-offs between capital and O&M, that even if the external factors Seal,Charleson, 422 deJongh,Grant,McGill cr-ex (Mattson) such as taxes and interest rates remain unchanged, the rate base could expand to such an extent that despite the O&M reductions, rates could still increase; is that fair? A. Overall rates? Q. Yes. A. Yes. Q. Thank you. Now, one final point, Mr. Grant, and just from reviewing the transcripts and the detailed cross exam, I've derived that there are a number of factors that are driving your company's proposal to shift from the current cost of regulation on procedures to the proposed PBR process; is that fair? A. Yes. Q. And they include government policy around these issues: Board initiatives, company interest, ratepayers interest. They have all been touched upon, fair? A. Yes. Q. Would you agree with me that in the final analysis, that the Board should not adopt a PBR plan unless it is in the Consumers' ratepayers' interests? Is that the ultimate determining factor, that the PBR plan has to be in the Consumers' ratepayers' interest? A. Well, I think at the end of the day, the Board will have to be satisfied that the PBR proposal - and I suppose this applies to any PBR proposal in front of it - satisfies all of its principles that have been laid Seal,Charleson, 423 deJongh,Grant,McGill cr-ex (Mattson) out. And in that regard, principle No. 2 talks about a framework that protects customers and results in prices for regulated services that are just and reasonable. Q. All right. But let's say that the PBR plan completely fits with the Ontario Energy Board draft policy on performance-based regulation, it meets all the principles that the Board set out, but in the final analysis, it isn't in the interests of the Consumers' ratepayer as a cost of service regulation may have been a better option for the ratepayer than the proposal you're putting forward. Should the Board's policies supersede the Consumers' ratepayer interest? A. Well, I believe the Board's policies are in line with ratepayers' interests. So if you're satisfying the Board's requirements, then you're satisfying the ratepayer interests. Q. Well, if the Board finds, though, that the PBR proposal that you're bringing forward, while it meets with their policies, is not in the interest of the Consumer ratepayer; in other words, it's not bettering the Consumer ratepayers' interests, but, in fact, is lessening their protection, would you agree with me that the Board should reject the PBR application? A. Could you explain to me what the term "Consumer ratepayer" refers to? Q. Yes. Those ratepayers who purchase gas from Seal,Charleson, 424 deJongh,Grant,McGill cr-ex (Mattson) Consumers or Enbridge. A. Gas ratepayers? Q. Yes. A. Okay. Well, I think if the Board concluded that it wasn't in the interests of gas ratepayers to approve a proposal, then by definition the proposal would have failed one of their policies. Their policy says "just and reasonable rates". If it's not just and reasonable for the ratepayer, it's not going to get approved. Q. Correct. Okay. So ultimately then we're agreeing here that the Consumer ratepayers' interest is what's paramount in terms of the Board's decision as to whether or not to approve the PBR proposal? A. I didn't say that it was paramount; I said it was -- the Board has to decide what is just and reasonable and in doing so, it has to take into account ratepayers. But in addition, it's my view that in deciding upon just and reasonable rates, the Board needs to also consider the shareholders of the utility that's before it. So there's -- both of those groups are within the just and reasonable standard. Q. Mr. Grant, we have heard and it has been on the record a number of times in proceedings over the last few months that the Board is under very onerous administrative requirements which are pressuring their ability to maybe continue with cost of service regulation. Seal,Charleson, 425 deJongh,Grant,McGill cr-ex (Mattson) Are you familiar with that? A. Yes. The Board is very busy. There's an awful lot going on. Q. And the degree to which the PBR proposal reduces that administrative burden; how should that be factored against the degree to which the Consumers' ratepayer benefits from the new form of regulation? How do those two weigh against one another? A. I may be misunderstanding your question, but I don't think they weigh against each other. I think that one of the benefits to ratepayers and the Board is a simplified process, and to the extent -- a regulatory process. And to the extent that PBR, our PBR plan simplifies that process, then I think both ratepayers and the Board are benefiting. Q. And, Mr. Grant, how many of the ratepayer interest groups before you accept that position of the company; that this PBR proposal is in the ratepayers' interest? How many of the parties to the regulatory forum here who represent ratepayers agree with you that this PBR proposal you're putting forward is in their interest? A. Well, there's two things. First of all, I haven't read your arguments, so I don't know. I don't know what your argument is going to be. Q. Mm-hmm. A. But the second thing is, the intervenors in Seal,Charleson, 426 deJongh,Grant,McGill cr-ex (Mattson) this proceeding, yes, they do represent different interests. They don't necessarily represent all ratepayers. Q. And to what degree were your ratepayers or the parties to this regulatory process, to what degree were they consulted and ultimately included in your decision to bring forward this PBR proposal prior to coming with the ADR and the settlement negotiations? A. Yes. I think I answered this question yesterday. We did not have a formal consultation process prior to filing our evidence in this proceeding. Of course, once it was filed, then we had, in my view, a good technical conference and, in fact, we were a little bit innovative in our approach; that is to say, there was no transcript and it meant that there could be a much more free-wheeling discussion with people. I recall we gave a discussion at that technical conference, handed out material to people, asked people to phone us if they had any questions prior to the interrogatory process, were very open to receiving any questions from people at that point in time. After that process, of course, then we proceeded through to the interrogatory phase wherein we answered all of the questions and then into negotiations which gave a further opportunity for consultations. Q. And is it fair to say, Mr. Grant, that it was the failure on the part of the company to convince the ratepayers' interest groups at least in this regulation Seal,Charleson, 427 deJongh,Grant,McGill cr-ex (Mattson) that they were acting in their best interests which ultimately required the hearing before -- A. I don't accept that at all and I cannot divulge confidential discussions that took place in ADR negotiations. Q. I'm not asking to divulge any of the confidential negotiations. A. Well, I don't expect your -- Q. You can't infer that from the fact that we're having a hearing? A. No. The Board cannot infer that whatsoever. You know, you're putting me in a very difficult spot. I cannot divulge discussions, but it is not the company's -- I don't accept your proposition. MR. MATTSON: Thank you, Madam Chair. Those are all my questions. THE PRESIDING MEMBER: Thank you, Mr. Mattson. Does Board Staff have questions? MS. LEA: No, thank you. THE PRESIDING MEMBER: The Board has some questions. EXAMINATION BY DR. HIGGIN: Q. Mr. Grant, can you just go along with me on a sort of hypothetical at the moment, and that is the Board, in looking at your application, your proposal, really is not being asked to choose between that proposal and a comprehensive plan. We don't have a comprehensive plan before us? Seal,Charleson, 428 deJongh,Grant,McGill ex (Higgin) MR. GRANT: A. Yes. I agree with that. Q. Now, the Board has been asked to, in essence, approve or disapprove of your proposal, which means staying with the status quo of cost of service regulation versus approving your proposal for a partial PBR plan. Would you agree with that hypothetical? A. Yes, I do. Q. Therefore, in looking at the benefits of the plan, we should try to assess what the ratepayers will receive under continuing cost of service regulation over the next three years versus what they may receive under the proposed partial PBR plan. Would you agree that's a reasonable way to look at this? A. Yes. I do agree with that approach and that way of thinking. In some of my previous answers, I was trying to address that issue, but in general I agree with that rationale. Q. Well, let's just explore that. You have laid out certain benefits which relate to benefits to ratepayers, and that's where I'm going to focus on, and you have estimated a guarantee of $4.7-million due to productivity savings which are identical to the ones you have achieved in the past at 0.63 per cent. So in the past, you have achieved 0.63 per cent productivity savings; correct? Seal,Charleson, 429 deJongh,Grant,McGill ex (Higgin) A. Yes. Q. And so there's no reason to believe that they wouldn't have continued over the next three years to be received by the ratepayers? A. I think that's a fair assumption; that it becomes more and more difficult to drive out the utility, but it's still a fair assumption. Q. Secondly, you have cited reduced regulatory burden? A. Yes. Q. And, also, importantly, a focus on certain performance standards which are now the explicit as opposed to implicit in the regulatory proceeding; correct? A. That's correct. Q. Are there any other benefits that you have cited relative again to continuing cost of service regulation that you would like to put before the Board in summarizing why the scope of this plan and focusing on scope as opposed to detail is something that will benefit ratepayers more than the status quo? A. I think the most significant thing that I would add from a financial point of view is the concept that an incentive plan incents the utility, gives incentive to the utility to act differently from its past and to search out new ways of doing things and to hopefully at the end of the day give something back to the ratepayers. So if I were to compare and contrast that Seal,Charleson, 430 deJongh,Grant,McGill ex (Higgin) situation which we will have, if you approve this PBR plan, to a cost of service regime, if you will, then I think that's something that's added. That's something that is new and that is important from a ratepayer point of view. Clearly, we're going to have to, as a company, re-think a lot of things and re-think them in ways that we haven't in the past. And we're hoping that we can deliver that benefit at the point of rebasing. We have not testified as yet on monitoring, but I believe that the whole area of monitoring, as well, is important in the sense that we're committing to these service standards and there will be greater communication between the Board and the company on how things are going in meeting these service standards. Q. All right. Well, in that respect, that is an additional burden, if you like, on the Board Staff for which offsetting that is the reduced regulatory burden of having to examine the O&M budget every year both by the staff, which is not an inconsiderable amount of time, and also in the proceeding as well; correct? A. Yes. I agree with that, yes. Q. Now let's look at some of the potential disbenefits or risks, and I use the word "potential". If you were, for example, to get approval the Board, as you may seek in Year 2000 rate case, for a new CIS system that costs $60-million, based on the return on the rate base, the cost of that would be approximately Seal,Charleson, 431 deJongh,Grant,McGill ex (Higgin) $5-million a year; correct? A. In your example, yes. Q. So in your proposal, that cost would not be offset by any O&M costs in the short term, correct; any reduction in O&M costs in the short term? A. That's correct. Incrementally I don't believe that there will be significant cost reductions resulting from that initiative. To the extent that there are, of course, we're proposing to flow them to ratepayers but I don't believe that on an incremental basis from a cost reduction point of view they will be substantial. Q. The cost reductions if they are O&M cost reductions don't flow to ratepayers for the first three years? A. Oh, no, our proposal is that they will. We'll "Z" factor it. We'll "Z" factor those cost reductions in the base O&M resulting from CIS to ratepayers. Q. So that would be a "Z" factor. What are the other 'Z' factors that the company has proposed that affect the funds flowing to ratepayers as opposed to those designed to protect the company from exogenous or other events? A. I think that's the only one, subject to check here in our evidence. Dr. Higgin, I'm making reference here to section 6.0, page 1 where we list them. And I think that is the Seal,Charleson, 432 deJongh,Grant,McGill ex (Higgin) only one that falls into that category. Q. So if in the event another capital expenditure came forward that was in a similar category, i.e., increased the return component of cost of service then at the moment those would not be 'Z' factors and you're telling the Board you don't see any of those to be significant; is that right? A. Yes, there's two things. I don't see any significant expenditures in that area and I know I keep repeating myself in terms of an example but I do keep coming back to AMR as an example. But to the extent that there are any expenditures on the capital side that will impact rates in that PBR period, we will have to demonstrate that in the long run it's beneficial. Q. Yes, you went through the fact you have to leave out the first three years of savings and do your DCF analysis on Years 4 through 10 or whatever you left that out. So are you concerned that there may be should we say constraints or opposition to capital expenditures, particularly the discretionary ones, in this period of the plan because of that single fact that any reduced O&M that goes along with making that expenditure will not flow to ratepayers? Are you concerned about that factor? A. I'm not concerned from a ratepayer point of view in the long run because we will demonstrate -- we will need to demonstrate that. Seal,Charleson, 433 deJongh,Grant,McGill ex (Higgin) Q. I did ask you in the context of the company that you might expect a more difficult time with those capital expenditures (a) from the fact of your DCF cash flow hurdle and (b) from the fact that I would expect ratepayers not to be too keen on supporting capital expenditures that are going to not result in cost savings in the short term? A. There's a possibility that we would have some more difficulty and I would hope that we would make every effort to tackle the issue head on so that we can make sure that the regulatory process itself is as efficient as possible in dealing with those issues. Q. So once the plan is set though you would not be willing to propose a "Z" factor treatment of any of those additional capital expenditures; is that my understanding, once the plan is set? A. That's not our proposal. If the Board felt in its decision on this matter that it was a significant stumbling block to its acceptance of this PBR proposal, then we're flexible enough to look at other means of dealing with the issue including a "Z" factor on capital items that directly impact O&M. Q. Just to be fair to you, on balance you feel that relative to the cost of service, continuing with cost of service, that from a ratepayer perspective the benefits will outweigh the costs in terms of your partial PBR proposal? A. Yes; yes, that's correct. Seal,Charleson, 434 deJongh,Grant,McGill ex (Vlahos) THE PRESIDING MEMBER: Thank you, Dr. Higgin. Mr. Vlahos? MR. VLAHOS: Thank, Madam Chair. (Vlahos) EXAMINATION BY MR. VLAHOS: Q. Mr. McGill, I can start with you. On a couple of occasions in the last three days you spoke of the MDTF, that's the Market Design Task Force, and the associated costs that may arise from the deliberations or conclusions or implementation of the recommendations of that committee, of that task force rather. And I noted both times the company at risk; do you recall that? MR. McGILL: A. Yes. Q. And I would invite you to perhaps go back to Ms. Holder's testimony just to ensure that you're of the same mind on this issue? A. I will undertake to do that and I just want to make sure that I made the point clearly. I think there's a whole host of issues that are being reviewed there. There's issues around stranded assets and things of that nature that are all being debated in the context of MDTF and at this point in time there's not a full consensus on all of the issues, so what I'm trying to make clear is that there is no real certainty as to what the end state will be and how quickly we're going to get there. Q. I was more interested in the -- and I thought Seal,Charleson, 435 deJongh,Grant,McGill ex (Vlahos) you spoke of the costs that would flow out of this and whether the company is at risk or the ratepayer may be at risk in terms of consequences but if you just go back to that testimony of Ms. Holder's in the previous proceeding I would appreciate it. MS. LEA: That would be undertaking H3.2, please. ---UNDERTAKING NO. H3.2: Enbridge Consumers Gas undertakes to review the testimony of Ms. Holder in terms of the risk to the ratepayers and the company. MR. VLAHOS: Q. Mr. Grant, a couple of areas. I'm still trying to understand in a very high level there are rate-making implications of a PBR proposal, targeted or non-targeted. And there may be no difference in terms of the rate-making implications from the large picture. The depreciation rates, capitalization rates that we touched on today, now is the assumption the expectation that whether there's a three-year PBR or a five-year PBR, targeted or non-targeted, that the understanding is that those things will not change for the duration of the agreement - or not the agreement, sorry - of the plan? MR. GRANT: A. Yes, I don't expect the A&G capitalization rates to change in the period. With respect to depreciation rates I think that there will probably be a need to review the depreciation rate on the rental program. That, of course, is subject to the Board's 179-14 -15 decision, assuming the Board approves of the company's wind-down strategy. Seal,Charleson, 436 deJongh,Grant,McGill ex (Vlahos) Over the next few years that market will obviously be -- there will be certain dynamics in that market and it may require us to review and revise our depreciation rates for the rental program. Q. Okay. But generally for the remaining utility would it be workable to instead of having periodic reviews on depreciation or capitalization, which reviews may fall in the middle of the planned term, could it be worked out that no studies, no changes until the next time before the Board on the renewal if you like of the PBR term, say, whether it's three years or five years; is that something that is workable? A. Yes, it is, subject to the rental qualification I made. Q. Okay. Now, for rate-making purposes, cost allocation rate design -- so for rate-making purposes we're going to have an O&M budget - I can call that as a deemed O&M budget - which will drive the revenue requirement for, say, first, second, third year of the PBR term? A. Yes, I envision it as a -- well, it really it would be acting in a very similar way to the ROE in the sense that it would be formula driven and there's a result that comes out and that simply gets factored in in the final rate-making -- sorry, the Board's final decision and then rate order. Q. So from the revenue requirement perspective I can see how that can work or how that will work. Seal,Charleson, 437 deJongh,Grant,McGill ex (Vlahos) From a cost allocation to the rate classes and rate design that's what I need a bit of help to understand because the costs in your accounting books will be different from the O&M that has been reflected in the revenue requirement. Have you turned your mind as to how that will work out? Obviously there would be different numbers. A. We will continue to run the cost allocation and rate design portion of the proceeding on the basis of what the regulated costs are so I would be running the cost allocation off of the Board's -- of the O&M that results from the Board's formula. I don't think that there are significant distortions that would occur over a three-year period and that's why I would propose to continue in that way, distortions meaning differences between -- Q. I understand that but I thought that it may be the other way around that you would start from the actual costs booked into the accounts and then any differences there would be the plug number if you like and that plug has to be allocated in some fashion? A. That's certainly an alternative. I would really like to consult with Ms. Duguay and get the expert's view on that particular question so if I haven't answered your question completely I could take an undertaking and respond in that way? Q. That's fine. At the end of the hearing you may want to just speak to that matter, just for a general Seal,Charleson, 438 deJongh,Grant,McGill ex (Vlahos) understanding on my part as to any problems that may arise that we have to address at this time. MS. LEA: Shall we mark that as an undertaking for administrative purposes just so we don't forget? Thank you. H3.3. ---UNDERTAKING NO. H3.3: Enbridge Consumers Gas undertakes to consult and return with an answer on how it will work out according to the different numbers, re from a cost allocation to the rate classes and rate design, the costs in the accounting books will be different from the O&M that has been reflected in the revenue requirement. MR. VLAHOS: Q. My last area, Mr. Grant, if you can turn to Exhibit C, section 8. Now, I want to have your input as to whether there are any changes to this part of the application in light of developments in the last little while specifically with respect to the undertakings. Are there any changes to that part of the application? I can perhaps leave that with you as well if you haven't turned your mind to it and you may want to speak to your colleagues as well. MR. GRANT: A. That would be helpful, Mr. Vlahos, if I could take that as an undertaking. MS. LEA: I'm sorry, could we just have a statement of what that undertaking is, please. MR. VLAHOS: The undertaking is for the company or for Mr. Grant to review appendix C section 8 of the application and inform the Board as to the applicability on your revisions to that section of the application. Seal,Charleson, 439 deJongh,Grant,McGill ex (Vlahos) MS. LEA: Thank you. H -- MR. VLAHOS: In light of the undertakings, the recent undertakings. THE PRESIDING MEMBER: Okay. It's Exhibit C, not appendix C. MR. VLAHOS: I stand corrected. MR. LEA: All right. Undertaking H3.4 ---UNDERTAKING NO. H3.4: Enbridge Consumers Gas (Mr. Grant) to review Exhibit C, section 8, of the application and inform the Board as to the applicability on the revisions to that section of the application. MR. VLAHOS: Q. And within that, Mr. Grant, I had just one question. You responded today that out-sourcing should include affiliates and the appropriate pricing should drive the efficiencies and regardless of whether it's an affiliate or non affiliate. MR. GRANT: A. Yes. Q. And it should not matter to the ratepayer for the duration of the term as to what the ultimate price would be to the affiliate, whether it's providing the service or receiving the service? A. That's correct. Q. But are there any other cross-subsidy issues that may arise from that position that wouldn't impact the comparative aspects of that service or product and therefore it may lead to other issues with respect to your comparatives this. I shouldn't say your comparatives, I should say the comparatives of the affiliate? A. Yes. From that perspective, I suppose the Seal,Charleson, 440 deJongh,Grant,McGill ex (Vlahos) best -- if we were to frame a sort of a methodology to use during the PBR period, perhaps the best methodology would be transactions occurring at market price. Q. Right. And when you review Exhibit C, section 8, you may want advise as to whether there will be any changes to the what prevails today, what applies today in terms of appropriate pricing, whether it is good services or assets for that matter? A. Certainly. MR. VLAHOS: Thank you. Thank you, Madam Chair. Mr. Grant, I understand that the draft affiliate code may be released very shortly, whether it's today or Monday or Tuesday. You may want to look at that document and reflect that in your response. MR. GRANT: Yes, thank you. THE PRESIDING MEMBER: I just have one short follow up to Dr. Higgins question. EXAMINATION BY THE PRESIDING MEMBER: Q. Mr. Grant, he was asking you about possible changes, I think, in the approach to new capital expenditures and the Z factors? MR. GRANT: A. Yes. Q. And my understanding is that the company has said the plan as proposed is neutral with respect to any changes in the risk to the shareholder? A. Yes. Q. And would that be changed in any way by being Seal,Charleson, 441 deJongh,Grant,McGill ex (Presiding Member) as flexible as you suggest you could be in response to Dr. Higgin's question? A. I'll have to qualify my answer a bit because I'm not a return on equity expert, but on the face of it, I don't think that it would have a material impact on risk. THE PRESIDING MEMBER: Thank you. I think we intended to sit until one. I think we are very close to that. Mr. Cass, can you use the following, the five minutes that's left. MR. CASS: I think so, Madam Chair, I have a few questions. Thank you. RE-EXAMINATION BY MR. CASS: Q. Mr. Grant, I think a number of times during the cross-examination there's been some discussion of the assumed $5-million number that you've referred to. I don't know whether you have the transcript from day 1, but if you have that and you look at page 51, for example. MR. GRANT: A. Yes, I have that. Q. Bottom of page 50 over to the top of page 51, you were talking about the $5-million per year and you say that was in relation to an O&M base equal to what we had filed in EBRO 495? A. Yes. Q. Do you recall the number for the O&M base that was filed in 495? A. I believe it was in the neighbourhood of Seal,Charleson, 442 deJongh,Grant,McGill re-ex (Cass) $260-million. Q. Thank you. Mr. Charleson, there were some questions about the -- when budgets were prepared and there were questions about the unbundling adjustment number that is shown on Exhibit C, section 4, page 4. Now, you may have covered this in your clarification that you did today in which case there may not be much more for you to say, but I wanted to ask you if you can explain how the number was built up from a budgeting point of view when you came up with the unbundled adjustment that I just referred to. MR. CHARLESON: A. First, I assume you're referring to section 4.1, page 4? Q. That's correct. A. The way in which the unbundling adjustment was determined was, and I describe this in EBO 179, 14- 15 proceeding, we went through essentially the same process that we use for developing the budget that was filed in EBRO 497 where we went back to the people who prepared those budgets, had them assess the impact of what was being proposed for unbundling and reflect that within their individual budgets. It then went through a review process up through the executive management team and ultimately getting their approval of the budget level. So in essence, we followed a process that we are accustomed to. Seal,Charleson, 443 deJongh,Grant,McGill re-ex (Cass) Q. Thank you, Mr. Charleson. Mr. Grant, during Ms. De Marco's cross-examination, you were taken to the material at Exhibit I1.2 and specifically the Board's draft policy on PBR. During the course of Ms. De Marco's questions you indicated that you believed that the proposal before the Board achieved all 9 objectives set out in that document. Now, since then, I think you came back to one or more of those objectives, but in any event, can you elaborate on why you believe that all 9 objectives are met? MR. GRANT: A. Certainly. Take a look, first of all, at objective number 1 on page 3. And this is the way I read it. It's a general statement and quite obviously what it's meant to do is to ensure that any PBR before the Board is consistent with the Board's mandate and with its legislative and regulatory requirements, and I believe that ours falls into that category. In other words, it meets that requirement. It's a step wise approach from what the Board has known for many years and the way in which of the Board has regulated things for many years and so there is nothing that is inconsistent with our proposal, in our proposal, with respect to legislative or regulatory requirements. And similarly, for the same reasons, if we look at item number 2 on the next page, PBR framework should protect customers and result in prices for regulated services that are just and reasonable. There's been Seal,Charleson, 444 deJongh,Grant,McGill re-ex (Cass) considerable discussion on those points what is just and reasonable and I won't repeat it now. So that, I believe, the record is complete on that. Discouraging cross subsidization is point number 3 and I think I was giving some answers earlier that talked to the point that going into the PBR period, there is no cross subsidization because we are starting from Board approved rates and then, of course, when we exit the PBR period and we are rebasing, it will be incumbent upon us to once again demonstrate that there is no cross subsidization when we are exiting PBR in the fourth year, in other words. Item 4 talks about the framework encouraging economic efficiency by providing appropriate price signals and a system of incentives; clearly, that's our evidence, that this does give us proper incentive and will result in appropriate pricing signals because it will provide that incentive to management in the three-year period. It also talks about maintaining the appropriate level of reliability. So we are -- our performance measures maintain that quality of service mentioned in item 4. Item 5 is that it should permit the utility an opportunity to earn a fair and reasonable -- sorry, earn a reasonable return in shareholder capital and maintain financial viability, I just gave a series of answers on that earlier today, and therefore, we meet that objective. The next objective is a good one and in that it Seal,Charleson, 445 deJongh,Grant,McGill re-ex (Cass) should be transparent and as simple as possible. I believe that our formula is transparent in that when you look at the elements of our formula and you also look at some previous Board decisions on the question of O&M, and in particular 497, the way in which the Board has approached this item within our cost to service is very consistent with what our formula is proposing; that is, to consider customer growth inflation and productivity. So it's transparent in that respect. It's transparent to any of the intervenors, I believe, in this proceeding. And simple, it keeps it simple. The Board has for -- in the last two cases regulated O&M on the basis of an envelope approach and that's a simple approach and we're consistent in that regard. The cost of administering PBR including costs imposed on all participants, the regulated entity and the regulator, should not exceed the benefits and I think that we've demonstrated that through our testimony so far. Allocating benefits fairly; I have given quite extensive testimony on that area, Mr. Cass. Item No. 8; flexibility, enable to handle changing and varied circumstances. Once again, I think in that regard, we are proposing Z-factors and, indeed, we're proposing an off-ramp that addresses the comprehensive PBR situation. We have an off-ramp that will allow us, if it's appropriate, to move forward with a comprehensive PBR even within the targeted PBR period of the next three years. Seal,Charleson, 446 deJongh,Grant,McGill re-ex (Cass) So that really means it's very flexible to respond to varying circumstances in the industry. Finally, Item No. 9; facilitate the use of an efficient process. I still believe we will be able to, in this process, reduce hearing time by four to five days. We will probably have a little bit of offset against that because we have to spend a little bit more time on capital, but I believe that in the end, we will save hearing days and make an efficient regulatory process. MR. PRATTE: Madam Chair, I wonder if I might be excused, so that I could try and make my plane. I understand that my friend is not done yet and, on the other hand, I will be I guess first to bat on Monday morning with the formula. THE PRESIDING MEMBER: Of course, Mr. Pratte. MR. PRATTE: Thank you very much, Madam Chair. ---(Mr. Pratte withdraws) MR. CASS: I do have just a couple more questions, Madam Chair. Q. Also during Ms. De Marco's cross-examination, Mr. Grant, you gave some evidence about what the shareholder gets, so to speak, from the company's proposal and you referred to the fact that, in your view, there was no material change in risk. What would your view be as to whether there's a material change in risk in the case of a comprehensive PBR? Seal,Charleson, 447 deJongh,Grant,McGill re-ex (Cass) MR. GRANT: A. I think by the time you move to a comprehensive PBR situation, it will be advisable to review the Board's ROE formula. It will depend on the formulation obviously of a comprehensive PBR plan, but I think it's still advisable to review the Board's ROE formula in that context, the reason being that in the comprehensive PBR, you're taking everything in, everything that the utility does and putting at risk the utility for some period of time all of the elements of what it does. And I'm using, let's say for example, if there were a comprehensive PBR plan that were somewhere between three and five years in length, that's quite a period of time that the shareholder is placing funds at risk and is at risk for variances in that horizon. So I think that it's advisable and it's legitimate for the Board to review the ROE formula at that time. MR. CASS: Thank you, Mr. Grant. Madam Chair, I said I had a couple of more questions. I have eliminated the last one, so that completes my re-examination. Thank you. THE PRESIDING MEMBER: Thank you, Mr. Cass. ---Off the record discussion. THE PRESIDING MEMBER: We will stand down now until Monday morning, starting again at nine o'clock, and I believe Mr. Pratte will go ahead with the second round then of cross-examination of this Panel. 448 MS. SYMES: Madam Chair, I ask that I be excused. This delay in the hearing has conflicted then with a trial I have beginning Monday. Thank you. THE PRESIDING MEMBER: Thank you, Ms. Symes. ---Whereupon, the hearing was adjourned at 1:10 p.m., to be reconvened at 9:00 a.m. on Monday, February 1, 1999, at 9:00 a.m. 449 I N D E X o f P R O C E E D I N G S Page No. Preliminary Matters . . . . . . . . . . . . 329-330 Motion brought by Mr. Pratte: Submissions: by Mr. Pratte 330-336 by Mr. Warren 336-337 by Ms. DeMarco 337 by Mr. Cass 338-342 by Mr. Pratte in reply 343-346 BOARD DECISION (reserved) 347 Witness clarification on Motion for the Board 400-409 Preliminary Matters . . . . . . . . . . . . 348-350 DARRYL SEAL, DAVE CHARLESON, DAVID J. deJONGH, JAMES C. GRANT, STEPHEN McGILL; Sworn. 348 Cross-Examination by Ms. DeMarco 350 Cross-Examination by Ms. Lawson 371 Cross-Examination by Mr. Mattson 416 Examination by Dr. Higgin 427 Examination by Mr. Vlahos 434 Examination by the Presiding Member 440 Re-examination by Mr. Cass 441 450 L I S T O F E X H I B I T S No. Description Page No. I3.1 Document from Enbridge Consumers Gas explaining the mechanics of SSM. 415 451 L I S T O F U N D E R T A K I N G S No. Description Page No. H3.1 Enbridge Consumers Gas undertakes to provide the final approved PBR formula for BC Gas and West Kootenay. 399 H3.2 Enbridge Consumers Gas undertakes to review the testimony of Ms. Holder in terms of the risk to the ratepayers and the company. 435 H3.3 Enbridge Consumers Gas undertakes to consult and return with an answer on how it will work out according to the different numbers, re from a cost allocation to the rate classes and rate design, the costs in the accounting books will be different from the O&M that has been reflected in the revenue requirement. 438 H3.4 Enbridge Consumers Gas (Mr. Grant) to review Exhibit C, section 8, of the application and inform the Board as to the applicability on the revis- ions to that section of the application. 439 LJ/LL/BV [ Copyright 1985]