1766 1 RP-1999-0001 2 3 THE ONTARIO ENERGY BOARD 4 5 IN THE MATTER OF the Ontario Energy Board Act, 1998; 6 7 AND IN THE MATTER OF an Application by The Consumers 8 Gas Company Ltd., carrying on business as Enbridge 9 Consumers Gas, for an order or orders approving or 10 fixing rates for the sale, distribution, transmission 11 and storage of gas for its 2000 fiscal year. 12 13 14 15 16 B E F O R E : 17 P. VLAHOS Presiding Member 18 S.K. HALLADAY Member 19 20 21 Hearing held at: 22 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 23 Toronto, Ontario on Friday, September 3, 1999, 24 commencing at 0906 25 26 RATES HEARING 27 28 VOLUME 10 1767 1 APPEARANCES 2 JENNIFER LEA/ Counsel, Board Technical 3 HIMA DESAI/ Staff 4 JAMES WIGHTMAN 5 J.H. FARRELL/ Enbridge Consumers Gas 6 F. CASS/ 7 T. LADANYI 8 H. SOUDEK 9 ROBERT WARREN Consumers Association of 10 Canada. 11 TOM BRETT Ontario Association of 12 School Business Officials of 13 the Metropolitan Toronto 14 Separate School Board. 15 IAN MONDROW Heating, Ventilation and Air 16 Conditioning Contractors 17 Coalition Inc., HVAC 18 Coalition 19 GEORGE VEGH Coalition for Efficient 20 Energy Distribution 21 MARK MATTSON/ Energy Probe 22 MICHAEL HILSON 23 MURRAY KLIPPENSTEIN Pollution Probe 24 DAVID POCH Green Energy Coalition, GEC 25 MICHAEL JANIGAN Vulnerable Energy Consumers 26 Coalition 27 STAN RUTWIND TransCanada PipeLines 28 Limited 1768 1 APPEARANCES (Cont'd) 2 MICHAEL MORRISON Ontario Association of 3 Physical Plant 4 Administrators 5 JOEL SHEINFIELD Enbridge Services Inc. 6 MARK ANSHAN Canadian Association of 7 Energy Service Companies 8 MARK STAUFT TransCanada Gas Services 9 DAVID BROWN/ Coalition of Eastern Natural 10 RICHARD PERDUE Gas Aggregators and Seller 11 (CENGAS) 12 PETER THOMPSON Industrial Gas Users 13 Association (IGUA) 14 BETH SYMES Alliance of Manufacturers & 15 Exporters Canada 16 LYNDA ANDERSON Union Gas Limited 17 GLEN MacDONALD Ontario Hydro Services 18 Company 19 20 21 22 23 24 25 26 27 28 1769 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 Decision 1773 5 Preliminary Matters 1774 6 SWORN: AMY-LYNNE WILLIAMS 1778 7 Examination-in-chief by Mr. Warren 1778 8 Cross-Examination by Mr. Farrell 1787 9 Upon recessing at 0948 1803 10 Upon resuming at 1018 1803 11 PREVIOUSLY SWORN: BRADLEY BOYLE 1803 12 PREVIOUSLY SWORN: ROBERT BOURKE 1803 13 PREVIOUSLY SWORN: JAMES GRANT 1803 14 Continued Cross-Examination by Mr. Mondrow 1807 15 Cross-Examination by Mr. Thompson 1813 16 Hearing adjourned at 1145 1860 17 18 19 20 21 22 23 24 25 26 27 28 1770 1 UNDERTAKINGS/OBJECTIONS 2 3 NO. DESCRIPTION PAGE 4 5 J10.1 Mr. Grant undertakes to 1815 6 compare H3, Tab 1, 7 Schedule 1, page 1 and J3.3 8 and determine if delivery 9 deficiency increased, as a 10 result of settlement conference; 11 reconcile the changes; identify 12 any gas-related costs remaining 13 in the 72 million; and if 14 there has been an increase in 15 the delivery-related deficiency, 16 explain the cause 17 18 J10.2 Mr. Grant undertakes to 1820 19 determine whether more costs 20 were allocated to the MFP, 21 and the other programs referenced 22 in column 2 of Exhibit K3.3, than 23 were removed -- in effect, how much 24 was left behind 25 26 27 28 1771 1 UNDERTAKINGS/OBJECTIONS (Cont'd) 2 3 NO. DESCRIPTION PAGE 4 5 J 6 J10.3 Mr. Grant to take under 1852 7 advisement whether the company 8 would accept a condition that 9 nothing could be collected from 10 ratepayers until the Board was 11 provided with a statement from 12 Enbridge Services Inc.'s auditors 13 that an existing obligation to pay 14 tax on account of the potential 15 unrecorded deferred tax liability 16 existed 17 18 19 20 21 22 23 24 25 26 27 28 1772 1 EXHIBITS 2 NO. PAGE 3 4 K10.1 Document entitled "Settlement 1774 5 Proposal, Cost of Short-Term 6 Debt Adjustment Mechanism" 7 8 K10.2 Page of handwritten 1804 9 calculations 10 11 K10.3 Hosting agreement proposed 1858 12 as between the utility and 13 CIS Newco 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1773 1 Toronto, Ontario 2 --- Upon resuming on Friday, September 3, 1999 3 at 0906 4 THE PRESIDING MEMBER: Please be 5 seated. 6 Before we turn to other matters, we 7 do have our decision on Mr. Thompson's request. 8 DECISION 9 THE PRESIDING MEMBER: Mr. Thompson, 10 the Board has carefully reviewed and considered your 11 request for production of certain information in this 12 proceeding. It is the Board's conclusion that in 13 nearly all respects a Board direction for the company 14 to produce the information requested would constitute a 15 partial decision on monitoring and reporting matters. 16 These matters were the subject of 17 cross-examination and it would be prejudicial to both 18 the company and the parties for the Board to decide or 19 comment on these matters prior to completion of hearing 20 the full evidence and argument. 21 The Board will not, therefore, make 22 the directions you have requested for this proceeding, 23 other than ask Board staff to obtain from the E.R.O. 24 the template of the company's filings and file such 25 template at the hearing, but no financial information 26 should be included. The E.R.O. has agreed to this 27 filing. 28 With that, any other matters? 1774 Preliminary Matters 1 MR. CASS: Mr. Chairman, I believe 2 that Mr. Farrell has some preliminary matters that he 3 would address, so perhaps I will vacate the room and 4 Mr. Farrell could come forward. 5 --- Pause 6 THE PRESIDING MEMBER: Mr. Farrell? 7 MR. FARRELL: I am just checking to 8 see whether some of the things that I was going to file 9 are here, and I have them with me. I just didn't get a 10 chance to distribute them. 11 PRELIMINARY MATTERS 12 MR. FARRELL: Yesterday or the day 13 before I mentioned that there would be no need to use 14 the adjustment mechanism for the cost of short-term 15 debt, and I mentioned that I would file, as a hearing 16 exhibit, the relevant data. I can do that now, 17 Mr. Chair. 18 Why don't I just mention all three 19 of them, we will get numbers, and then I will bring 20 them up. 21 MS LEA: The first exhibit, then, 22 will be K10.1, please. 23 What is the title of that exhibit? 24 MR. FARRELL: It is called 25 "Settlement Proposal, Cost of Short-Term Debt 26 Adjustment Mechanism". 27 EXHIBIT NO. K10.1: Document 28 entitled "Settlement Proposal, 1775 Preliminary Matters 1 Cost of Short-Term Debt 2 Adjustment Mechanism" 3 MS LEA: Thank you. 4 MR. FARRELL: The second is that 5 Mr. Mondrow yesterday, I believe, wanted another part 6 of the pamphlet that is currently marked as 7 Exhibit K6.1. He asked that this single page, which is 8 another portion of a bill insert, be added to 9 Exhibit K6.1. So I don't think we need a number for 10 it, just to have people add it to K6.1. 11 The last is an update -- this doesn't 12 need an exhibit -- it is an update of the hearing 13 schedule. We are just trying to keep it current on a 14 daily basis so we can keep up with the exhibits that 15 are added as we go, such as responses to undertakings. 16 --- Pause 17 THE PRESIDING MEMBER: The schedule, 18 Mr. Farrell. 19 MR. FARRELL: Yes. 20 By way of an update on our response 21 to Mr. Mondrow's revised prayer for relief in the HVAC 22 motion, we gave Mr. Mondrow some written material 23 yesterday. He is still reviewing it. So hopefully we 24 will be able to report back sometime today whether it 25 is acceptable and, if so, it will be filed. If not it 26 will be filed as well and then we will have a debate 27 over its efficiencies, if any. 28 I should say, Mr. Chairman, that we 1776 Preliminary Matters 1 have distributed to parties in the room, on an informal 2 basis, a proposed argument schedule and when I have had 3 input from the other parties, we will then make a 4 proposal to you. 5 THE PRESIDING MEMBER: And the 6 assumed day for completing the oral hearing is...? 7 MR. FARRELL: September 8th. It is 8 keyed off of September 8th. 9 We realize that it is premised on 10 completing Panel 10-2 today, leaving only Mr. Stevens. 11 It also assumes that after completion of Mr. Stevens 12 that we will either have time for Ms Reynolds, if 13 Mr. Mondrow wishes to examine her, and that we would 14 not call rebuttal witnesses. 15 If that changes, then the hearing 16 schedule would be keyed off a day later, because 17 hopefully we could complete everything on September 18 the 9th. 19 But currently the expectation is 20 September the 8th. 21 THE PRESIDING MEMBER: Mr. Farrell, 22 if by any chance we don't finish today with Panel 10-2, 23 I understand Mr. Bourke had another engagement next 24 week, have you turned your mind to it, in case we don't 25 finish, as to what we may do? Can we go ahead with 26 just Mr. Boyle or have Mr. Grant come forward? 27 MR. FARRELL: I'm sorry. I didn't 28 hear the last part. Mr. Ladanyi was trying to update 1777 Preliminary Matters 1 me on the fly. 2 THE PRESIDING MEMBER: Would we 3 continue with just Mr. Boyle or would there be someone 4 else coming forward? 5 MR. FARRELL: We would add Mr. Grant. 6 THE PRESIDING MEMBER: All right. 7 MR. FARRELL: I suppose, then, 8 Mr. Chair, you might consider whether, since you were 9 available on September the 7th -- if there is a 10 significant amount left for Panel 10-2, you might want 11 to consider sitting some time on the 7th to complete 12 Panel 10-2 so that we could begin with Mr. Stevens on 13 September the 8th. 14 It is just a suggestion. I haven't 15 discussed it with the witnesses, but in the interests 16 of trying to complete as quickly as we can. 17 THE PRESIDING MEMBER: Your 18 anticipation is how long that it would take with 19 Mr. Stevens on the 8th? 20 MR. FARRELL: At this point, any 21 estimate that I would make would be very speculative, 22 but it will be more than -- it will be two hours or 23 more I would guess at this point. 24 THE PRESIDING MEMBER: Yes. I was 25 just thinking of any efficiencies that we may get by 26 having Panel 10-2 come Wednesday as well so we don't 27 have to bring everybody back on Tuesday. 28 MR. FARRELL: Perhaps we could make 1778 Preliminary Matters 1 that judgment at the end of the day if we have an 2 indication if Panel 10-2 is going to be another hour. 3 That would seem to make sense. But if it is going to 4 be like three hours, then perhaps we would consider 5 another remedy. 6 THE PRESIDING MEMBER: Okay. Thank 7 you, Mr. Farrell. 8 Mr. Warren. 9 MR. WARREN: I would like to call 10 Ms Williams forward, please. 11 SWORN: AMY-LYNNE WILLIAMS 12 EXAMINATION-IN-CHIEF 13 MR. WARREN: Ms Williams, your 14 prefiled evidence has been marked as Exhibit L25.1 in 15 this proceeding and I would ask if you would turn it up 16 please. 17 MS WILLIAMS: I have it. 18 MR. WARREN: First, with respect to 19 your qualifications, Ms Williams, you are a lawyer. Is 20 that correct? 21 MS WILLIAMS: Yes. 22 MR. WARREN: Your curriculum vitae or 23 your qualifications appear at the first page of your -- 24 or a summary of them appears at the first page of your 25 evidence. 26 Your area of practice is information 27 technology. Is that correct? 28 MS WILLIAMS: Yes, it is. 1779 WILLIAMS, in-ch (Warren) 1 MR. WARREN: And that includes the 2 negotiating, drafting and interpreting of information 3 technology agreements. Is that correct? 4 MS WILLIAMS: Yes. 5 MR. WARREN: That includes data 6 services, CIS and outsourcing agreements. Is that 7 right? 8 MS WILLIAMS: Yes. 9 MR. WARREN: You testified before 10 this Board in E.B.O. 177-15, which was the Union-CIS 11 case. Is that correct? 12 MS WILLIAMS: Yes. 13 MR. WARREN: In addition, did you 14 testify in a similar proceeding in Manitoba dealing 15 with a Centra Manitoba-Enlogix agreement as well? 16 MS WILLIAMS: Yes. 17 MR. WARREN: Mr. Chairman and Members 18 and Ms Halladay, I would ask that Ms Williams be 19 qualified as an expert in the drafting, negotiating and 20 interpretation of information technology agreements, as 21 she was so accepted in the E.B.O. 177-15 case. 22 THE PRESIDING MEMBER: Mr. Farrell, 23 any objections? 24 MR. FARRELL: None. 25 THE PRESIDING MEMBER: Thank you. 26 MR. WARREN: Ms Williams, I want to 27 deal, briefly, with the testimony of Messrs. Kent and 28 McGill which was heard this week, Monday of this week. 1780 WILLIAMS, in-ch (Warren) 1 Were you present for their testimony? 2 MS WILLIAMS: Yes, I was. 3 MR. WARREN: In addition, have you 4 had an opportunity to review the transcript of their 5 testimony on that day? 6 MS WILLIAMS: Yes, I have. 7 MR. WARREN: First of all, at a high 8 level of generality, is anything that you heard in 9 their testimony, or does anything you heard in their 10 testimony change any of the positions set out in your 11 prefiled evidence? 12 MR. BOYLE: No. 13 MR. WARREN: I want to deal, then, 14 with two categories of responses to your evidence that 15 came from Messrs. Kent and McGill. 16 The first, Ms Williams, is the 17 response that the affiliate relationship between 18 Enbridge Consumers Gas and Newco is such or that the 19 fact of that affiliate relationship will address some 20 of the concerns which were articulated in your prefiled 21 evidence. 22 Now, as an example of that, 23 Ms Williams, perhaps you could turn up page 1019 of the 24 transcript. I was asking -- sorry. Beginning on 1018, 25 actually. I was asking them to comment on your concern 26 about Newco implementing changes that Enbridge could 27 not live with and the response of Mr. Kent was -- 28 quoted at the bottom of page 1018 is: 1781 WILLIAMS, in-ch (Warren) 1 "Given that the relationship is 2 between affiliates, and given 3 the other controls and 4 limitations that exist in the 5 agreement, I think that this is 6 an agreement that is acceptable 7 to the utility. I know it is." 8 And that's followed over, in like 9 fashion, on page 1019. 10 In your experience, Ms Williams, is 11 an affiliate relationship a sufficient answer to the 12 concerns that are articulated at various points in your 13 prefiled evidence? 14 MS WILLIAMS: No. What we try to 15 do -- we have done a lot of administering of parents 16 and affiliates and affiliated companies and what we 17 always advise our clients -- and for the most part, 18 it's accepted -- is that if you are going to enter into 19 an agreement with an affiliate you should enter into it 20 on the same terms you would accept from an arm's-length 21 party, if at all possible. For a couple of reasons. 22 One is to -- for certainty. The 23 parties who negotiated the agreement and are doing the 24 system now may not be the same parties two or three 25 years later when an issue arises -- even between 26 affiliates that can happen -- but, more importantly, 27 particularly in the last couple of years, if you have 28 been following the papers, a lot of companies are 1782 WILLIAMS, in-ch (Warren) 1 spinning off their affiliates, particularly affiliates, 2 like Newco will ultimately be, affiliates that own 3 valuable assets, and if their software turns out to be 4 as valuable as it's supposed to be, then it might be a 5 prime target for spin-off. We have had several major 6 clients, in the last two years only, who have sold and 7 spun off affiliated companies and they have -- there 8 have been difficulties because sometimes the agreements 9 they entered into five or six years before were very, 10 very loose and, unfortunately, on the acquisition by 11 the new party, the new party has not agreed to re-open 12 the agreements and make it light, in effect; they have 13 been stuck with the loose agreement that was entered 14 into between the affiliated companies. 15 So our advise is always: Don't 16 assume you are always going to be affiliates. And the 17 overriding argument is that the agreement should 18 reflect your deal. If it doesn't reflect your deal and 19 the parties can't, three or four years later, explain 20 to somebody else what the deal is on the face of the 21 agreement there's always a possibility you are going to 22 run into trouble later. 23 MR. WARREN: You have led, 24 Ms Williams, to my next question, which is a corollary, 25 if you wish, of the affiliate relationship argument. 26 At page 1041 of the transcript on Monday, Mr. Kent, to 27 paraphrase crudely, his response was that if there is 28 divestiture, there would, at that moment, or at that 1783 WILLIAMS, in-ch (Warren) 1 time, be an opportunity to renegotiate an agreement and 2 correct any deficiencies in it. 3 What has been your experience, on 4 that point? 5 MS WILLIAMS: In our experience, in 6 the last two major deals we did was with a public 7 company, the party acquiring the division of the public 8 company, or the affiliate, has not agreed to do any 9 renegotiation of the agreement. 10 MR. WARREN: Now, the second broad 11 category of response from Messrs. Kent and McGill, on 12 Monday, to a number of the observations that were 13 contained in your prefiled evidence, was that -- and, 14 again, this is my paraphrase -- it was modelled on the 15 Union-Enlogix agreement that was considered and emerged 16 from the E.B.O. 177-15 proceeding and that, therefore, 17 the Board should take comfort in it. 18 My first question is: Is your 19 prefiled evidence, or your testimony today, premised at 20 all on any assessment of the quality of the 21 Union-Enlogix agreement? 22 MS WILLIAMS: No. I looked at this 23 agreement as a stand-alone agreement, given the details 24 that I knew about this particular deal. 25 MR. WARREN: Now, my second question 26 in this category is: In your opinion, is the fact that 27 the agreement, in whole or in part, has been based on 28 the Union-enlogix agreement, is that an answer to the 1784 WILLIAMS, in-ch (Warren) 1 concerns which are articulated in your prefiled 2 evidence? 3 MS WILLIAMS: No. 4 MR. WARREN: Why is that? 5 MS WILLIAMS: A couple of things. 6 One of the things I did to prepare 7 for appearing here, I think at the request of Enbridge, 8 was to look at the old Order. I looked at it the other 9 night. The 177-15 Order from the Board. 10 In that Order, the Board made it 11 clear that they didn't think the existing Union Energy 12 agreement was appropriate and thought that it had undue 13 risks associated with it. So having -- anybody having 14 seen that Order, I don't know why you would then repeat 15 the error by using the same agreement. 16 But, more importantly, from the 17 evidence that I have seen in this hearing, this deal is 18 not the same as the Union Energy deal. In the Union 19 Energy deal, if I recall correctly, Enlogix was going 20 to own a good part of the hardware and run it for Union 21 Energy as, in effect, a service bureau. They were 22 going to run it for many different customers. 23 I understand from reading the 24 evidence, I think it was of Mr. Kent, that in this case 25 Enbridge Consumers Gas is owning all the hardware and 26 Newco is supposed to pay them for use of the hardware. 27 Newco is also supposed to pay for use of the software, 28 and it appears that there's only one customer. So a 1785 WILLIAMS, in-ch (Warren) 1 lot of the Union Energy agreement is just not 2 applicable to this. 3 As I said earlier, in jest, you might 4 as well sign a house lease for this deal; as the Union 5 Energy agreement, it has pretty much the same amount of 6 relevance to the deal. 7 MR. WARREN: My final question, 8 Ms Williams, is related to, I suppose in a sense, both 9 of the arguments, the Union-Enlogix analogy and the 10 affiliate relations argument. 11 At page 1011 and 1012 of the 12 transcript, I asked the panel to comment on your 13 observation that to protect a customer -- the way to 14 protect a customer is to provide that the system will 15 perform certain functions in the manner set out in a 16 set of specifications that have been provided to and 17 approved by the client. 18 When Mr. Kent responded to that, he 19 said, first, that that was a valid concern, on your 20 part, and he then went on to say, on page 1012: 21 "We anticipate that over time 22 those service level agreements 23 will become increasingly 24 comprehensive and detailed as 25 parties develop experience in 26 the use of the application." 27 What is your experience, Ms Williams, 28 with respect to the phenomenon which he describes, 1786 WILLIAMS, in-ch (Warren) 1 which is the development of comprehensive and detailed 2 service level agreements? 3 MS WILLIAMS: In our experience, it's 4 never done. The agreement says it will be done and the 5 parties put the agreement away once it's been signed 6 and they never do it. 7 MR. WARREN: Thank you, Ms Williams. 8 Those are my questions in chief, sir. 9 THE PRESIDING MEMBER: Thank you, 10 Mr. Warren. 11 Mr. Brett, do you have any questions 12 for this witness? 13 MR. BRETT: No, sir. 14 THE PRESIDING MEMBER: Mr. Thompson, 15 you don't either? 16 MR. THOMPSON: No, thank you. 17 THE PRESIDING MEMBER: Board Staff? 18 MS DESAI: No. 19 THE PRESIDING MEMBER: Mr. Mondrow. 20 I'm sorry. 21 MR. MONDROW: I was just going to 22 say, no, thank you, sir. 23 THE PRESIDING MEMBER: You changed 24 places on us. 25 MR. MONDROW: I didn't want to 26 disturb anyone on the way in. 27 THE PRESIDING MEMBER: Mr. Farrell? 28 MR. FARRELL: Thank you, Mr. Chair. 1787 WILLIAMS 1 Well, we have been stood up twice, so 2 we will see how we manage to get along today. 3 CROSS-EXAMINATION 4 MR. FARRELL: Just as a preliminary 5 matter, Ms Williams, I take it that the sample wording 6 that you have provided in the attachment to your 7 written evidence is not taken from a single contract? 8 MS WILLIAMS: No, it isn't -- and 9 it's done for two reasons. 10 First of all, most of the agreements 11 we have been involved in have been fairly high profile, 12 fairly large amounts, and giving a whole agreement 13 would identify the parties. 14 But also, the purpose of giving 15 wording from several different agreements was really to 16 show that this wording keeps coming up. There isn't 17 just one deal where we actually got somebody to agree 18 to it. We may have six agreements that have this same 19 wording in it, and it is taken from one of those to 20 show that it does come up all the time, and this kind 21 of wording is accepted all the time as a standard. 22 MR. FARRELL: The samples are taken 23 from agreements that are part of a negotiated package. 24 MS WILLIAMS: Yes. 25 MR. FARRELL: Is it fair to say, 26 based on your experience in negotiations, that when a 27 service provider gives a provision on data security of 28 the type you are recommending, he gets something in 1788 WILLIAMS, cr-ex (Farrell) 1 return? 2 MS WILLIAMS: Not always, no. 3 MR. FARRELL: He gets nothing in 4 return? The service provider just makes open offers? 5 MS WILLIAMS: Normally as part of the 6 deal, there are minimums that the customer is going to 7 require. In most of the cases we have been involved 8 in, one of the minimums is data security and data 9 segregation. It is not a price issue. You can't 10 charge me more to do it properly. This is the minimum. 11 You have to have data security. 12 It is not a case of during the course 13 of the negotiation everybody keeps leaving the room to 14 raise the price. 15 MR. FARRELL: I wasn't suggesting 16 that, and perhaps I picked a bad example. I was trying 17 to just speak generally and have your comments on it. 18 The negotiation process, in my 19 experience in any event, is one of give and take: you 20 give to get, as the expression goes. 21 MS WILLIAMS: Yes. 22 MR. FARRELL: So the fact that you 23 have taken sample wording from various packages may be 24 a give on the part of the service provider in order to 25 get something else. It may not be money; it could be 26 another provision in the contract. 27 Isn't that a fair observation? Or is 28 it all a one-way street in your experience? 1789 WILLIAMS, cr-ex (Farrell) 1 MS WILLIAMS: No, it isn't. But most 2 of these provisions are not contentious. It is not a 3 case of fighting over yes, we will give you this piece 4 because there is an understanding that yes, of course 5 we are going to ask for that and they are going to give 6 it. It is not always something that people fight over. 7 A lot of these clauses are just done; they are just in 8 there. Nobody even really negotiates them. The deal 9 is negotiated, but these clauses are very rarely 10 contentious. 11 MR. FARRELL: So their are 12 boilerplate, in your experience. 13 MS WILLIAMS: In our experience, most 14 of the agreements that we will do for data, outsourcing 15 data services, will have some form of these clauses in 16 there. 17 MR. FARRELL: You told Mr. Warren in 18 your examination-in-chief that this was a different 19 deal than Enlogix, and we are going to come back to 20 that. 21 You gave, as I read your 22 interrogatory responses in E.B.O. 177-15, similar 23 examples of sample wording. Is that fair? 24 MS WILLIAMS: Probably. 25 MR. FARRELL: Notwithstanding your 26 answers to Mr. Warren's questions, is it fair to say 27 that the critique you are making of the Services 28 Agreement in this proceeding is substantially similar 1790 WILLIAMS, cr-ex (Farrell) 1 to the critique that you made of the Services Agreement 2 in E.B.O. 177-15? 3 MS WILLIAMS: The critique is pretty 4 similar because the agreement has really just been 5 scanned in. 6 MR. FARRELL: Not only that, but some 7 of your critique also has the same typographical errors 8 that were present in your E.B.O. 177-15 testimony. 9 MS WILLIAMS: I apologize for that. 10 MR. FARRELL: I will point them out 11 to you later. 12 MR. WARREN: Only Mr. Farrell would 13 notice that. I will leave it to the Board to decide 14 whether that is a good quality or not. 15 MR. FARRELL: It depends on the typo. 16 In E.B.O. 177-15 you described three 17 deal-breakers. Do you recall that? 18 MS WILLIAMS: I am just trying to 19 find the testimony. 20 MR. FARRELL: It is page 701. 21 MR. WARREN: This is the transcript, 22 Mr. Farrell? 23 MR. FARRELL: This is the transcript, 24 the electronic version of the transcript of 25 Ms Williams' testimony in E.B.O. 177-15. 26 You were being examined by Ms Lea. 27 MS WILLIAMS: Yes. I think somewhere 28 later on we added to that list. 1791 WILLIAMS, cr-ex (Farrell) 1 MR. FARRELL: I will take you there 2 in a second. 3 In that list, you identified three, 4 at least on page 701: lack of definition of services; 5 patent infringement, the lack of a patent infringement 6 clause; and the lack of a most favoured nations clause. 7 MS WILLIAMS: Yes. 8 MR. FARRELL: The separation of data 9 you spoke of as being important but not a deal-breaker. 10 MS WILLIAMS: Yes. 11 MR. FARRELL: The lack of definition 12 of services, I take it that is your criticism in this 13 proceeding that appears in your written evidence, on 14 page 3 of 12? 15 MS WILLIAMS: Yes. 16 MR. FARRELL: Would you agree with me 17 that the Services Agreement between Enbridge and Newco 18 addresses two of your three deal-breakers? It 19 addresses patent infringement and it addresses most 20 favoured nations by including provisions that deal with 21 each? 22 MS WILLIAMS: It does, but I don't 23 necessarily agree with the wording of the most favoured 24 nations clause. 25 MR. FARRELL: Two of the three 26 deal-breakers are gone. It is now just a question of 27 quibbling over the wording. 28 MS WILLIAMS: Yes. You also have to 1792 WILLIAMS, cr-ex (Farrell) 1 understand that being asked to describe deal-breakers 2 is an exercise in my, off the top of my head, saying: 3 If somebody is going to walk away from the table, what 4 would they walk away from the table on? 5 It doesn't necessarily mean that if 6 you cover those three areas, all of a sudden the 7 agreement is comprehensive and correct. 8 MR. FARRELL: I wasn't suggesting 9 that. I was just trying to focus on your criticism of 10 the Union contract, on which this is based, in that 11 particular proceeding. 12 To be fair, I think in response to a 13 question by Mr. Robertson when he was one of the Panel 14 members, on page 742 you added -- but you didn't use 15 the term "deal-breaker" -- the similar criticism having 16 to do with negotiating in advance the price for service 17 at different levels. 18 MS WILLIAMS: Yes. 19 MR. FARRELL: I don't mean to be 20 unfair when I say this, but deal-breakers aside, is the 21 balance of your critique in effect a wish list; that is 22 to say, if you were writing the agreement, you would 23 write it your way? 24 MS WILLIAMS: No. 25 MR. FARRELL: What is it, then? 26 MS WILLIAMS: It is a discussion of 27 what is missing from the agreement and what holes are 28 in the agreement that a company trying to protect its 1793 WILLIAMS, cr-ex (Farrell) 1 interest should have. 2 MR. FARRELL: That was the same 3 purpose you had in the Union gas proceeding. 4 MS WILLIAMS: Yes. 5 MR. FARRELL: In the Union Gas 6 proceeding, you mentioned the Board's order in your 7 examination-in-chief. 8 I take it you were referring to the 9 Board's Decision with Reasons? 10 MS WILLIAMS: Yes. 11 MR. FARRELL: Do you have a copy of 12 that, Ms Williams? 13 MS WILLIAMS: Yes, I do. 14 MR. FARRELL: Could you turn to 15 page 37. 16 MS WILLIAMS: Yes. 17 MR. FARRELL: Before I ask the 18 question, Mr. Chair, I have copies of page 37. If it 19 would assist your hearing of this discussion to have it 20 front of you, I am quite prepared to distribute it. 21 THE PRESIDING MEMBER: Actually, we 22 do have a copy of the decision itself, Mr. Farrell; 23 thank you. 24 MR. FARRELL: In paragraph 3.2.4, 25 Ms Williams, the Board has summarized your evidence as 26 they saw it, and there are four bullet points in that 27 paragraph. We have talked now about each one of them: 28 the lack of specificity and definition of services; the 1794 WILLIAMS, cr-ex (Farrell) 1 most favoured nations clause; the lack of a patent 2 infringement protection provision; and the lack of 3 definition of how fees would change if service levels 4 varied significantly. 5 MS WILLIAMS: Yes, those are the most 6 serious deal-breakers. 7 MR. FARRELL: Well, three of the 8 deal-breakers and then one that you didn't describe as 9 a deal-breaker as such, but I take it that it was a 10 concern of yours, as you told Mr. Robertson on the page 11 of the transcript I referred you to just a couple of 12 minutes ago. 13 MS WILLIAMS: Yes. 14 MR. FARRELL: Would you also turn to 15 page 48. 16 MS WILLIAMS: Yes. 17 MR. FARRELL: Paragraph no. 3.2.53, 18 as I read it, sets out what the Board considers had to 19 be done or should have been done to the agreement, 20 changes which the Board said are desirable -- which is 21 underscored. 22 Do you see that? 23 MS WILLIAMS: Yes. 24 MR. FARRELL: These comments were 25 made after Union had filed language for the amendments 26 that were referred to in Mr. Leslie's 27 argument-in-chief. So it was after the hearing was 28 over and Union made some modifications to the 1795 WILLIAMS, cr-ex (Farrell) 1 agreement. 2 The comments on page 48 are, is it 3 your understanding, with respect to the agreement as it 4 then stood; that is to say, as amended? 5 MS WILLIAMS: Yes. 6 MR. FARRELL: You can see that there 7 are five bullet points there of the Board's desirable 8 amendments. 9 MS WILLIAMS: Yes. 10 MR. FARRELL: Would you agree with me 11 that they do not correspond to the four bullet points 12 that we looked at on page 37, which was the Board's 13 summary of your important provisions -- bearing in mind 14 that perhaps some of them had then been addressed by 15 Union's amendments? 16 MS WILLIAMS: Yes. 17 MR. FARRELL: Are you aware that 18 following the Board's decision, Union filed a letter 19 with the Board that addressed these five desirable 20 amendments? 21 MS WILLIAMS: Yes. 22 MR. FARRELL: Can you confirm that 23 Union's letter addressed one of them but declined to 24 make the desired amendments for the other four? 25 MS WILLIAMS: Yes. 26 MR. FARRELL: And are you aware that 27 the Board took any action to compel Union to address 28 the other four points? 1796 WILLIAMS, cr-ex (Farrell) 1 MS WILLIAMS: No, I am not aware 2 of it. 3 MR. FARRELL: I want to come back to 4 the affiliate relationship, both as you described it in 5 your written evidence and then again this morning to 6 Mr. Warren. 7 --- Pause 8 MR. FARRELL: Bear with me for a 9 second, Mr. Chair and Ms Williams. 10 Now, in your written evidence, and 11 again to Mr. Warren, you described your experience in 12 terms of contracts between affiliates. 13 MS WILLIAMS: Yes. 14 MR. FARRELL: In the Union proceeding 15 you were asked by Ms Lea questions -- well, first of 16 all, you made the same the same comments, I take it, in 17 the Union proceeding that notwithstanding an affiliate 18 relationship there should be, in effect, an 19 arm's-length type contract? 20 MS WILLIAMS: Yes. 21 MR. FARRELL: Ms Lea asked you on 22 page 676 of the electronic version of the transcript: 23 "What if they don't remain 24 affiliates?" (As read) 25 And your answer is: 26 "We haven't had an experience of 27 one where they have ceased to be 28 affiliates so I can't really 1797 WILLIAMS, cr-ex (Farrell) 1 comment on what has happened. I 2 would assume what would happen 3 is that there would be an 4 assignment of the agreement from 5 the company to the new owners 6 and the agreement would stand on 7 its own between now arm's length 8 parties. 9 Q. Have you ever had an 10 agreement between affiliates 11 that you worked on where there 12 has been a clause specifically 13 addressing this possibility? 14 A. No." (As read) 15 Has your experienced changed? Have 16 you had experiences in this area since the time you 17 gave that evidence? 18 MS WILLIAMS: It has been a long two 19 years, yes. 20 We have had several major deals where 21 large public corporations have spun off affiliates to 22 third parties and the buyer of the affiliate has taken 23 over the affiliate agreements. 24 MR. FARRELL: I see. Has there been, 25 in effect, what you described here on page 766, an 26 assignment of the agreement? 27 MS WILLIAMS: Yes. 28 MR. FARRELL: Okay. 1798 WILLIAMS, cr-ex (Farrell) 1 So it's an assignment of the 2 agreement to the third party that got spun off? 3 MS WILLIAMS: Yes. A third party can 4 get the agreements in several ways, either they buy 5 shares of the affiliate and they get the agreements as 6 part of the company or they take specific assignments 7 of the agreement. 8 MR. FARRELL: The assignment mode is 9 what you mentioned in the context of E.B.O. 177-15? 10 MS WILLIAMS: Yes. 11 MR. FARRELL: Okay. 12 Do you have a copy of the Services 13 Agreement with Newco? That's Exhibit B2, Tab 7, 14 Schedule 4? 15 MS WILLIAMS: Yes, I do. 16 MR. FARRELL: Could you turn to 17 page 35? 18 MS WILLIAMS: Yes. 19 MR. FARRELL: Section 18.1 on that 20 page has a title "Assignments" and the first sentence 21 reads: 22 "Except as expressly set out in 23 this Agreement neither party may 24 assign any of its rights or 25 obligations under this 26 Agreement." (As read) 27 Do you see that? 28 MS WILLIAMS: Yes. 1799 WILLIAMS, cr-ex (Farrell) 1 MR. FARRELL: Do you not regard that 2 as some form of protection for Enbridge in the sense 3 that Enbridge Consumers Gas has the ability to refuse 4 to assign, absent changes to the agreement at the end 5 of an affiliate relationship that involves an 6 assignment? 7 MS WILLIAMS: If the common 8 shareholder of Enbridge is looking to spin off the 9 software company on the sale to a third party, it may 10 be quite -- quite possibly could be that the buyer of 11 Newco is buying Newco because Newco has a captive 12 client as well as having software that they want, and 13 it would not be particularly good business practice for 14 the party looking to sell the company to refuse to also 15 assign the major customer. 16 So I don't very much that that would 17 be a real impediment to assignment of this agreement. 18 MR. FARRELL: So that is sort of an 19 anecdotal view of what might happen -- would preclude 20 Enbridge Consumers Gas from exercising a contractual 21 right? 22 MS WILLIAMS: Yes. I can't see that 23 they would sell the asset and say "But you can't have 24 the customers". 25 --- Pause 26 MR. FARRELL: Now, you mentioned to 27 Mr. Warren, in response to him directing you to 28 pages 1011 and 1012 of the transcript in this 1800 WILLIAMS, cr-ex (Farrell) 1 proceeding in Volume 6, Mr. Kent's comments about 2 service level agreements being developed over time. 3 You said it had never been done. 4 MS WILLIAMS: Yes. In my experience 5 the parties don't bother. 6 MR. FARRELL: Is that true of 7 affiliate relationships as well? 8 MS WILLIAMS: Yes. 9 MR. FARRELL: How far back does that 10 comment go in terms of your experience? 11 It would seem that when you testified 12 in the Union Gas proceeding you hadn't been dealing 13 with affiliate relationships so I take it this is a 14 comment you are making that has evolved over the past 15 little while? 16 MS WILLIAMS: No. When I testified 17 in Union Gas I believe the testimony was based on 18 whether we had had affiliates who have been sold, not 19 whether we had ever dealt with companies who contracted 20 with their affiliates. We have, of course. 21 MR. FARRELL: But it's obvious 22 because you are testifying here that you have never 23 represented Enbridge in an IT situation? 24 MS WILLIAMS: That's right. 25 MR. FARRELL: So you are not really 26 able to speculate, or if you were to comment I would 27 suggest to you it would be speculation as to whether or 28 not Enbridge Consumers Gas and Newco might break the 1801 WILLIAMS, cr-ex (Farrell) 1 trend you have seen as -- 2 MS WILLIAMS: They might be 3 extraordinary, I admit. 4 MR. FARRELL: They are. Thank you. 5 --- Laughter 6 MR. FARRELL: Thank you for that 7 commercial message. 8 --- Laughter 9 MS WILLIAMS: I said "They might be". 10 --- Laughter 11 MR. FARRELL: I am advised that there 12 has been a trend -- perhaps it's recent -- a trend in 13 relationship between vendors of IT services and perhaps 14 other vendor relationships and their customers, a trend 15 toward a partnership concept where parties tend to want 16 to work things out rather than to put everything hard 17 and fast in black and white in order to best protect 18 their position in litigation mode? 19 MS WILLIAMS: Yes. 20 MR. FARRELL: Have you any experience 21 with that? 22 MS WILLIAMS: Yes. It is certainly 23 talked about a lot in the negotiations, but in my 24 experience the negotiations where the parties are 25 talking about working things out in the long term go 26 hand-in-hand with an agreement that is clear on its 27 face as to what the initial deal is. 28 MR. FARRELL: But would you give me 1802 WILLIAMS, cr-ex (Farrell) 1 this, Ms Williams: If there is a trend away from 2 detailed agreements having regard to your specialty, 3 you might not be at the table? 4 MS WILLIAMS: No, I don't agree that 5 there is a trend away from detailed agreements. I said 6 there is a trend towards talking about working a 7 partnership, but they are still doing detailed 8 agreements. 9 MR. FARRELL: All right. 10 I just have one last matter I want 11 you to clarify for me. It's on page 6 of your written 12 evidence. 13 Near the bottom of the page you have 14 specified the termination fee. It's in the last line 15 above paragraph (b). 16 MS WILLIAMS: Yes. 17 MR. FARRELL: Can you confirm that 18 that $19 million amount is the termination fee in the 19 third year and that it declines thereafter? 20 MS WILLIAMS: Yes, it does. 21 MR. FARRELL: Thank you. 22 Enjoy your vacation. 23 Those are my questions, Mr. Chairman. 24 THE PRESIDING MEMBER: Thank you, 25 Mr. Farrell. 26 The Board has no questions, 27 Mr. Warren. 28 Any re-examination? 1803 WILLIAMS, cr-ex (Farrell) 1 MR. WARREN: I have no 2 re-examination, sir. 3 THE PRESIDING MEMBER: Thank you. 4 Thank you, Ms Williams. 5 You are excused. 6 MS WILLIAMS: Thank you. 7 --- Pause 8 THE PRESIDING MEMBER: Mr. Farrell, I 9 was just wondering whether this is a good time to break 10 for about a half hour and it will give you a chance to 11 bring back your panel. 12 MR. FARRELL: Yes. I was just going 13 to suggest that we have a break of some kind so that 14 Mr. Cass can bring back the Panel 10-2 witnesses. 15 THE PRESIDING MEMBER: All right. 16 We will adjourn until 10:15. 17 --- Upon recessing at 0948 18 --- Upon resuming at 1018 19 THE PRESIDING MEMBER: Good morning, 20 Mr. Cass. 21 MR. CASS: Good morning, 22 Mr. Chairman. 23 PREVIOUSLY SWORN: BRADLEY BOYLE 24 PREVIOUSLY SWORN: ROBERT BOURKE 25 PREVIOUSLY SWORN: JAMES GRANT 26 THE PRESIDING MEMBER: There is a 27 page of handwritten calculations here. 28 MR. THOMPSON: Yes, Mr. Chairman. 1804 BOYLE/BOURKE/GRANT 1 That is from the IGUA Legacy system. It is some 2 calculations that I will be putting to the cost of 3 capital panel later today. 4 If we could just have a number for 5 it, please. 6 MS DESAI: It is K10.2. 7 EXHIBIT NO. K10.2: Page of 8 handwritten calculations 9 MR. THOMPSON: Thank you. 10 THE PRESIDING MEMBER: Thank you. 11 Mr. Cass? 12 MR. CASS: Yes, Mr. Chairman. I'm 13 sorry. Just before cross-examination resumes, if I 14 might quickly address two things. 15 I understand that Mr. Boyle has a 16 correction from the transcript. I don't know what it 17 is, but he can explain it. I think it arises from 18 page 1764. 19 Also, Mr. Chairman, at the end of the 20 day you had made a comment about the intricacies of 21 some of the evidence that was given by this panel 22 yesterday. The company proposes to add Mr. Grant to 23 the panel to help the Board with the evidence. 24 The third point is, I think Mr. Grant 25 wants to make a correction in relation to a discussion 26 that occurred yesterday about instructions that were 27 given by Mr. Grant to Mr. Bourke. 28 So perhaps I could leave it with the 1805 BOYLE/BOURKE/GRANT 1 witnesses to proceed with their corrections. 2 THE PRESIDING MEMBER: Okay, 3 Mr. Cass. Just give me a second. 4 --- Pause 5 THE PRESIDING MEMBER: Mr. Cass, we 6 apologize. We took our transcripts upstairs in 7 preparation of this and we came down a little lighter. 8 Thank you, Ms Desai. 9 Go ahead. 10 MR. BOYLE: Yes. On page 1764, on 11 line 1, there is a figure quoted of $12.2 million. 12 That is the addition of two figures on the previous 13 page of 1763. That is intended to be the addition of 14 the item identified on line 25, the $11.9 million, and 15 on line 28 the incremental $1.3 million. My math on 16 the fly was somewhat lacking and the addition of those 17 two is actually $13.2 million. So the figure on line 1 18 on page 1764 should be $13.2 million. 19 THE PRESIDING MEMBER: Thank you. 20 MR. CASS: Mr. Grant, you had a 21 correction, I believe. 22 MR. GRANT: Thank you, Mr. Cass. 23 At the transcript, 1746, yesterday 24 Mr. Mondrow was cross-examining, and at that page on 25 line 3 he asked a question of Mr. Bourke in relation to 26 a statement that I had made to Mr. Bourke, and then 27 Mr. Bourke gave an answer. 28 The purpose of me being here now is 1806 BOYLE/BOURKE/GRANT 1 to clarify the record and to indicate to Mr. Mondrow 2 that it was my assumption that it would be wound down 3 at that point. Therefore, I instructed Mr. Bourke on 4 that basis to proceed to prepare the evidence. So at 5 that point it was an assumption. 6 That's all I have. 7 THE PRESIDING MEMBER: Mr. Cass? 8 MR. CASS: That's all, Mr. Chairman. 9 Thank you. 10 THE PRESIDING MEMBER: Mr. Mondrow, 11 is there anything that arises out of this latest 12 comment that you would like to follow up on? 13 MR. MONDROW: There is. Thank 14 you, sir. 15 In fact, before Mr. Thompson 16 commenced I was going to seek your leave to -- in 17 addition to what I have just heard Mr. Grant say, on 18 which I would like to ask just a couple of clarifying 19 questions, there was one other topic which with your 20 leave I would spend a couple of minutes on. 21 It is an issue that in considering 22 what certainly for me was fresh evidence yesterday I 23 have been considering what we might argue now based on 24 a different situation. In fairness to the witnesses 25 and given that they are here I would like to put the 26 proposition to them and just seek their reaction on it. 27 I don't expect it will take longer than a few minutes, 28 and I would appreciate an opportunity to do that as 1807 BOYLE/BOURKE/GRANT 1 well. 2 THE PRESIDING MEMBER: Mr. Cass? 3 MR. CASS: Yes. 4 Mr. Chairman, Mr. Mondrow spoke to me 5 about this during the break. He said it is something 6 he would be arguing anyway and he just will put it to 7 the witnesses for their comments. I think that is 8 fair. 9 THE PRESIDING MEMBER: Thank you. 10 MR. MONDROW: Thank you, sir. 11 CONTINUED CROSS-EXAMINATION 12 MR. MONDROW: First of all, 13 Mr. Grant, if I might, just on your clarification, you 14 said, as my notes from a minute ago say, at that point 15 it was your assumption. Could you just clarify at what 16 point in time we are talking about here? 17 MR. GRANT: Yes. This would have 18 been when we were putting the original evidence 19 together. Clearly, after receiving the Board's 20 decision, in any decision one has to take some time to 21 understand it and figure out what to do. 22 So I did not have any knowledge as to 23 what would or would not be done with the program at 24 that point. I simply said, "Let's go ahead and make 25 that the assumption for purposes of establishing the 26 correct amount that would go into rates for fiscal 27 2000. We will make this assumption and we will proceed 28 on that basis." 1808 BOYLE/BOURKE/GRANT, cr-ex (Mondrow) 1 MR. MONDROW: The assumption that you 2 are referring to is the assumption that, in one context 3 or another, the rental program would be wound down. 4 MR. GRANT: It would be wound down. 5 There are actually two points on this very point. 6 I think one can make an argument that 7 it doesn't matter whether it is wound down or not 8 within Consumers first. The fact of the matter is the 9 taxes due and payable are estimated and are continuing 10 to be estimated at $11.9 million as an increment. 11 Indeed it wouldn't matter what the 12 Board's decision said, whether it was $50 million or 13 $168 million, our position in this proceeding is that 14 those factors are not relevant. What is important is 15 to demonstrate what taxes are going to be due and 16 payable and be prepared to satisfy that burden of 17 proof. 18 MR. MONDROW: Just so I completely 19 understand what you are saying, the important point 20 from your perspective, Mr. Grant, is that the company 21 has to demonstrate what taxes will be due and payable 22 in the test year by whomever in order to justify 23 collection of the amount that is put forward by you in 24 this case. 25 MR. GRANT: Yes. I think that is a 26 fair comment, that we would have to be providing some 27 evidence around this. That is what Mr. Boyle is doing. 28 MR. MONDROW: Okay. Thank you very 1809 BOYLE/BOURKE/GRANT, cr-ex (Mondrow) 1 much for that clarification. 2 If I could return to you, then, just 3 for a few minutes, Mr. Boyle, on this proposition I 4 would like to put to you. Just by way of background, I 5 would like to confirm a couple of things quickly with 6 you. 7 You testified yesterday that you were 8 involved in some of the fiscal forecasting, I will call 9 it, around the affiliates business plan. Do you recall 10 that testimony? 11 MR. BOYLE: Yes, I do. 12 MR. MONDROW: Okay. 13 In the context of that involvement, 14 were you made aware, by any chance, of Union Energy's 15 fiscal situation since entering into this marketplace, 16 the fact that they are losing money consistently? Are 17 you aware of that? 18 MR. BOYLE: I am not aware in any 19 detail, no. 20 MR. MONDROW: Are you aware of the 21 general fact that Union Energy is losing money 22 consistently in these businesses? 23 MR. BOYLE: I have not seen any 24 statements or evidence of that, no. 25 MR. MONDROW: When participating in 26 the business planning and the fiscal projections 27 associated with that business planning for the 28 affiliate, did that thought enter your mind that while 1810 BOYLE/BOURKE/GRANT, cr-ex (Mondrow) 1 you are projecting to make money in fact there is a 2 risk that the affiliate will lose money in the 3 year 2000? 4 MR. BOYLE: My focus is on the 5 financing plans for the various entities. The business 6 operations people would provide the detailed numbers 7 for that purpose. So I will take the detailed numbers 8 they develop and develop the appropriate financing 9 plans and cash-flow forecasting from that. 10 MR. MONDROW: In terms of this 11 unrecorded deferred tax payable issue specifically, 12 would you agree with me at least that there is some 13 uncertainty going forward as to how the affiliate's 14 business, whatever that turns out to be in total, will 15 in fact fare in the coming year? 16 MR. BOYLE: There is always 17 uncertainty going forward. Absolutely. 18 MR. MONDROW: Okay. 19 In light of that uncertainty, and 20 here is the proposition that I wanted to put to you, 21 HVAC Coalition might well take the position in argument 22 that rather than attempting to recover from ratepayers 23 an amount based on a projection into what, in our 24 submission, is a relatively uncertain future, a better 25 way to handle the notional account and the permitted 26 drawdown would be to accumulate in this notional 27 account the taxes attributable to the rental program 28 winddown as they become payable and then collect them 1811 BOYLE/BOURKE/GRANT, cr-ex (Mondrow) 1 next year once we know what is actually to be paid or 2 what has actually been paid by the affiliate. 3 I wondered if you had any comments on 4 whether that proposition would, in your view, be a 5 workable solution. 6 MR. BOYLE: I guess I would have to 7 think about that in the context of what information 8 would need to be provided because this is a 9 non-regulated affiliate of the company, and to the 10 extent we are providing information from a 11 non-regulated affiliate that may have some commercial 12 sensitivity I would have some concern. 13 To the extent that we are satisfied 14 that there wasn't commercial sensitivity, then that may 15 be possible. But I would have to think about that in 16 that context. 17 Certainly, the process we have used 18 here is, as I understand it, the forecast test year, 19 and that is what we have provided the information on on 20 the basis of the forecast test year. My evidence is 21 that that is the amount that would be associated with 22 the deferred tax drawdown and payable in a forecast 23 test year basis. 24 MR. MONDROW: And that, as I 25 understood your evidence yesterday, there will be an 26 actual cash tax bill in the forecast test year, at 27 least equal to this amount, and your evidence yesterday 28 I believe was it would exceed this amount on a forecast 1812 BOYLE/BOURKE/GRANT, cr-ex (Mondrow) 1 basis. 2 MR. BOYLE: That is our current 3 forecast, yes. 4 MR. MONDROW: Then the information 5 that you would have to provide, were the Board to 6 accede to our arguments on how to handle this next 7 year, would be akin to the information Mr. Grant just 8 spoke of, which is some evidence that the taxes were 9 actually incurred and payable. Can you see a 10 commercial-sensitivity concern around that information? 11 MR. BOYLE: I can, yes, because it 12 may involve other aspects of our business to ultimately 13 assess that. But I would have to think about that. I 14 am just speaking based on my first thoughts of your 15 proposition. 16 MR. MONDROW: All right. 17 MR. GRANT: Mr. Mondrow, I appreciate 18 that this -- I don't want to string into argument here, 19 just like you don't want to, but it would be, as 20 Mr. Boyle has indicated, it would problematic in sort 21 of a practical sense and in a commercial sense to do 22 that. It might even be somewhat complicated from a 23 regulatory point of view, I'm not suggesting it is 24 impossible, but it might be complicated because clearly 25 what one doesn't want to have happen is a de facto 26 regulation of things outside Ontario utility 27 operations. 28 So I would just throw that out as a 1813 BOYLE/BOURKE/GRANT, cr-ex (Mondrow) 1 comment. 2 MR. MONDROW: Thank you very much, 3 sir. I think I will leave it there and consider our 4 position further. Thank you for your indulgence. 5 Thank you, gentlemen. 6 THE PRESIDING MEMBER: Thank you, 7 Mr. Mondrow. 8 Mr. Thompson. 9 MR. THOMPSON: Thank you, 10 Mr. Chairman. 11 CROSS-EXAMINATION 12 MR. THOMPSON: Panel, I would like to 13 start with this very helpful document that was 14 produced: Exhibit J6.3. I'm just going to spend more 15 time on it just to walk through the various columns to 16 make sure I understand what you are doing and to make 17 sure the points that are being made opposite I have 18 them in the right box. 19 So this is J6.3. I would like to 20 start, first of all, looking at column 17, where the 21 gross revenue deficiency there is $72.2 million. And 22 that reconciles with the gross revenue deficiency in 23 Exhibit N1, Tab 2, Schedule 5. 24 Is that correct, panel? 25 MR. GRANT: Yes, it is. 26 MR. THOMPSON: Just to help me, when 27 the -- I don't think you need to turn this up, but if 28 you look at the updated H3 exhibit, which was before 1814 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 the gas cost increase -- which was H3, Tab 1, 2 Schedule 1, page 1 -- the distribution-related 3 deficiency shown there was 68.955 million. 4 My question is: Did the delivery 5 deficiency increase, as a result of the settlement 6 conference? Or is there something here that I'm 7 missing? 8 MR. BOURKE: Can we have that exhibit 9 reference again, in the H series, please. 10 MR. THOMPSON: Yes. It's H3, Tab 1, 11 Schedule 1. Which is the revenue recovery by rate 12 class. But it shows the distribution-related 13 deficiency. And there's normally a schedule comparable 14 to that attached as part of the N exhibits, but we just 15 don't have it here -- at least I don't have it. 16 MR. GRANT: I think that's the case, 17 Mr. Thompson. We will just double-check. 18 --- Pause 19 MR. GRANT: Mr. Thompson, if it's 20 okay with you, we would like to just take an 21 undertaking just so that -- 22 MR. THOMPSON: If you could reconcile 23 the change. And, if in fact, there's still some 24 gas-related costs in the 72 million, identify them. 25 And if there's been an increase in the delivery-related 26 deficiency from the H exhibit to this exhibit, if you 27 could explain the causes of that, it would be 28 appreciated. 1815 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. GRANT: Certainly. Yes, we will 2 do that. 3 MS DESAI: Undertaking J10.1. 4 UNDERTAKING NO. J10.1: 5 Mr. Grant undertakes to compare 6 H3, Tab 1, Schedule 1, page 1 7 and J3.3 and determine if 8 delivery deficiency increased, 9 as a result of settlement 10 conference; reconcile the 11 changes; identify any 12 gas-related costs remaining in 13 the 72 million; and if there has 14 been an increase in the 15 delivery-related deficiency, 16 explain the cause 17 MR. THOMPSON: Okay. If we could 18 then go back to column 1 -- and I will try and go 19 through this quickly but there's a lot of information 20 in here. 21 What we have in column 1 is the 1999 22 test year Board-approved figures. Is that correct? 23 MR. GRANT: Yes, it is. 24 MR. THOMPSON: And the required rate 25 of return of 8.67 per cent is what is shown, I believe, 26 in the appendix to the Board's decision. 27 Would you take that, subject to 28 check? 1816 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. GRANT: Yes. 2 MR. THOMPSON: Okay. And then, in 3 column 2, as I understand it, we have the impact of -- 4 your presentation of the impact of the E.B.O. 179-14/15 5 decisions for removing the programs but not the rental 6 program? 7 MR. GRANT: That's correct. The 8 point of column 2 is to indicate what the ratepayer 9 benefit is of removing those programs, all programs 10 except the rental program -- and that stands at 11 20.2 million. 12 MR. THOMPSON: All right. Now, the 13 8.88 per cent return also appears in column 5 and also 14 appears in the N exhibit. 15 Did I understand correctly that that 16 increase in capital is tied to the removal of all 17 programs? -- Increase, sorry, in the weighted cost of 18 capital. 19 MR. BOYLE: That would be combination 20 of factors, including the changes in the cost rates of 21 the long-term debt, the short-term debt and preferred 22 shares. 23 MR. THOMPSON: Right. But, 24 primarily, it's caused by the negative short-term debt 25 costed at a short-term rate? 26 MR. BOYLE: That's one of the 27 factors, yes, but there are others in there. 28 MR. THOMPSON: Now, just to 1817 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 highlight, if we could. At line 5, we have the 2 operations and maintenance expense elimination of 3 $21.5 million and that includes, as I understand it, a 4 reduction of the non-utility elimination from 5 12 million, as shown in the E.B.R.O. 497 6 Board-approved, down to 5.1 million. That's a number 7 that was discussed with an earlier panel. 8 We really should have Exhibit K3.3 9 beside us here, just so I can highlight what I'm 10 referencing. 11 --- Pause 12 MR. GRANT: Yes, I have that exhibit. 13 MR. THOMPSON: All right. The point 14 I'm trying to make is that, for the expense -- I'm 15 referencing line 5.9, in this exhibit, where, in your 16 unbundling, the non-utility elimination was reduced 17 from 12 to 5.9. 18 MR. GRANT: Correct. 19 MR. THOMPSON: And my understanding 20 was that was as a result of, in effect, leaving behind 21 with the utility 6.1 million, being the difference 22 between the marginal and direct and fully-allocated 23 costs of the programs that were removed. Is that 24 understanding correct? 25 MR. BOURKE: If I might answer, 26 Mr. Thompson. 27 I believe, principally, that 28 reduction related to the removal of the merchandise 1818 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 finance plan; that the primary amount included in the 2 6.1, as the merchandise finance plan, the costs, are 3 removed, the need to require them -- or remove them in 4 a non-utility adjustment is also removed. So that's 5 the biggest component of the 6.1. 6 MR. GRANT: That's 5-1/2 of the 6.1. 7 MR. THOMPSON: But is the effect not 8 to leave behind, in utility rates, 6.1 million of costs 9 that had previously been allocated to the MFP program? 10 MR. BOURKE: The requirement to 11 allocate costs would be removed when the costs 12 themselves for the merchandise finance plan were 13 removed. By removing the program, there is no longer a 14 requirement to have them as a component of the 15 non-utility elimination. 16 MR. THOMPSON: Well, I'm not sure I'm 17 following you completely. 18 Let me try to put it very simply. Is 19 the difference between marginal and direct costs and 20 fully-allocated costs associated with the merchandise 21 finance program being recovered, under your adjustments 22 here, in utility rates distribution customers? Or has 23 it been removed? 24 MR. BOURKE: It would have been 25 removed in the 21.5 million. In the total of the 26 adjustments. 27 MR. GRANT: At perhaps a little 28 higher level than this, as well, Mr. Thompson. 1819 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 I think the principle is that 2 reasonably incurred utility costs that are still 3 required by the utility to run its utility business has 4 been left behind, if you will -- I'm using your 5 terminology -- in these eliminations in how we have 6 unbundled the ancillary programs. 7 So, the financial implications of all 8 of that are shown on the schedule that we have been 9 discussing, but the principle is that any reasonably 10 incurred utility costs will continue to be left in the 11 utility. 12 For instance, a portion of my salary 13 may have been allocated to either the rental program -- 14 I'm not so sure about MFP but probably the rental 15 program. My salary still remains in the utility after 16 those functions are taken out of the utility because I 17 work for the utility. So 100 per cent of my salary 18 remains back in the utility because that's what I do: 19 I work only on utility business. 20 MR. THOMPSON: Well, I think you are 21 agreeing with my suggestion that, in the bundled state, 22 more costs were allocated to the MFP than were removed. 23 So there is a difference. Am I correct? 24 MR. GRANT: I would have to undertake 25 to speak with the people that actually did the 26 calculation to know for the MFP program. I know that 27 to be the case for the rental program, but I would have 28 to undertake to speak with them about MFP. 1820 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: All right. Could I 2 have that undertaking for the MFP and other programs 3 that are referenced in column 2; which is, in effect, 4 how much was left behind? 5 MS DESAI: J10.2 6 UNDERTAKING J10.2: Mr. Grant 7 undertakes to determine whether 8 more costs were allocated to the 9 MFP, and the other programs 10 referenced in column 2 of 11 Exhibit K3.3, than were 12 removed -- in effect, how much 13 was left behind 14 MR. THOMPSON: Just so you understand 15 where I am coming from, I believed the amount left 16 behind was $6.1 million. But I may be in error. 17 I am just highlighting that that is 18 an issue of the intervenors -- 19 MR. GRANT: The reason I have taken 20 this undertaking, I think as you appreciate, is that I 21 want the facts to be clear. So we are going to study 22 it and make sure it is crystal clear on the record. 23 MR. THOMPSON: I understand that. I 24 just want to highlight that there is an issue about 25 that column in terms of IGUA. 26 MR. GRANT: Yes. 27 MR. THOMPSON: If we move to the 28 rental program, there are two columns here. Perhaps 1821 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 you could explain the derivation of these two columns, 2 Mr. Grant, column 3 and column 4. 3 MR. GRANT: Certainly. Columns 3 and 4 4 are really a breakdown of column 5. Column 5 5 represents taking the rental program out, a very large 6 program, $562 million worth of rate base. What 7 columns 3 and 4 try to do is break out into principal 8 components. 9 The first component shown in column 3 10 is the temporary impact in the rate of return change 11 that is associated with moving the rentals. That is 12 the subject matter of today's cross-examination. That 13 amounts to $11.1 million. 14 The reason that we have indicated 15 that it is temporary is because it will be in place for 16 fiscal 2000. But by fiscal 2001, we will be able to 17 put into effect plans such that we can remove that 18 effect on rates, on permanent rates beyond fiscal 2000. 19 It is a temporary situation to 20 respond to the Board's 179-14/15 decision. As 21 Mr. Boyle testified yesterday, we have done everything 22 we can in terms of our prudent financing to ensure that 23 that number is as low as it possibly can be. 24 There nevertheless is an impact 25 temporarily on rates, and that will be on fiscal 2000 26 rates. 27 Column 4 represents all other 28 impacts, revenues, expenses and rate base, of removing 1822 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 the rental program. As you can see, there is an 2 increase in rates of some $7.7 million. 3 Those two figures add up to column 5, 4 Mr. Thompson, which is the total of $18.8 million. 5 MR. THOMPSON: If I could just follow 6 up on that, in terms of the 8.88 per cent in column 5, 7 line 2, that again is the weighted cost of capital that 8 appears in the M exhibit. 9 MR. BOYLE: Yes, that is correct. 10 MR. THOMPSON: How were the costs of 11 capital in column 4 and column 3 derived? 12 MR. BOURKE: Perhaps I can assist. 13 In doing the scenario analysis to 14 determine these impacts, we began with impact statement 15 no. 1, which was 8.88 per cent. We added back the rate 16 base elements, and in so doing the cost rate became 17 8.51 in that scenario. 18 At that scenario, it indicated that 19 $18.8 million was the impact on rates. By holding the 20 cost rate at 8.51, and again removing, in effect 21 running 8.51 against M1, we determined that the 22 difference was $11.1 million, for the impact on a 23 temporary basis of the rate of return change. 24 So $562 million we showed as an 8.51 25 cost rate; the .37 difference multiplied by the rate 26 base of M1 would give you the 10.5 cost of capital 27 indicated. 28 Column 5 is the additive sum of 1823 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 column 3 and column 4. 2 MR. THOMPSON: I can see that. But 3 it sounds to me like you started with 5, then you 4 backed into 4 and backed into 3. 5 MR. BOURKE: We did the blended 6 impact, which is column 5. 7 MR. THOMPSON: Right. 8 MR. BOURKE: We held the rate of 9 return to establish column 3. Column 4 was the 10 difference. 11 MR. THOMPSON: In terms of the issues 12 with respect to this box, the increase in the cost of 13 capital is obviously one that we will be talking about 14 later today. And I assume that if the Board were to 15 find that the 8.88 per cent weighted rate is 16 inappropriate and that it is something less, you could 17 make the requisite adjustments in this schedule for us? 18 MR. GRANT: Are you talking now about 19 the Board's decision? 20 MR. THOMPSON: Yes. In other words, 21 could the decision be implemented in a schedule of this 22 nature so we could all understand its implications? 23 MR. GRANT: Well, that is really a 24 question for the Board. If at the end of the day the 25 Board wished us to do some calculations, then we would 26 certainly provide those calculations. 27 MR. THOMPSON: Just so I understand: 28 Assume at the end of the day the rate of return on 1824 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 capital is 8.67 per cent. The cost of capital 2 components of the increase in the revenue deficiency 3 shown in line 5 would disappear. 4 Is that fair? 5 MR. GRANT: In line 5? I'm sorry. 6 MR. THOMPSON: Sorry, column 5, 7 line 28. 8 MR. GRANT: I think you have lost me. 9 Could you repeat that? 10 MR. THOMPSON: If the return on rate 11 base is not 8.88 per cent at the end of the day but 12 8.67 per cent -- i.e., the same as the Board 13 approved -- then the cost of capital implications of 14 the revenue deficiency increase in this box 3, 4 and 5 15 would disappear. 16 MR. GRANT: I am getting confused, 17 because the calculations in the box are running off 18 8.51, not 8.67. 19 There would definitely be an impact 20 on column 5, there is no doubt about it. That number 21 would go down. 22 MR. THOMPSON: So the impact would 23 operate to reduce the cost of capital component of that 24 $18.8 million increase in revenue requirement. 25 MR. GRANT: That's correct. 26 MR. THOMPSON: Also at issue in this 27 box is line 5, the $21.5 million. That is the 28 eliminations with respect to the rental program that 1825 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 has been discussed previously? 2 MR. GRANT: Yes. 3 MR. THOMPSON: As being the direct 4 and marginal costs associated with the rental program. 5 We have heard in evidence that being 6 left behind are $13 million of fully allocated costs 7 associated with the rental program. We know that 8 number. 9 MR. GRANT: I would characterize is 10 slightly differently. But you are correct, we know 11 that number. Those are utility costs that are going to 12 continue to be incurred by the utility. 13 Heretofore, they had been allocated 14 to these programs. But they were always utility costs. 15 Even when these programs were in regulation, they were 16 always utility costs. 17 MR. THOMPSON: We know what they are, 18 I believe. We have discussed that previously. 19 Moving on to the next column, this is 20 the ABC T elimination in the order of $3 million, which 21 we see at line 5. 22 That, as I understand it, has been 23 done on a fully allocated cost basis? 24 MR. GRANT: That is my understanding. 25 MR. THOMPSON: Then up on line 1, we 26 have an addition to rate base of $16.4 million. That 27 is with respect to gas in storage, is it? 28 MR. BOURKE: That is correct. 1826 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: Again, in line 2 there 2 are, in your presentation, some cost of capital 3 implications in that which will change if the Board's 4 rate of return allowance is less than 8.88. 5 Is that fair? 6 MR. BOURKE: Correct. 7 MR. THOMPSON: Line 7 is a subtotal 8 line, but somehow we add another $400,000 to the 9 deficiency. 10 Can you explain how that occurs? 11 MR. GRANT: You are talking now about 12 column 7? 13 MR. THOMPSON: Yes, column 7. 14 MR. GRANT: Yes. That is the 15 equivalent of column 2, where the ratepayer benefit 16 exists of $20.2 million, plus column 5, which is the 17 ratepayer cost, if you will, of removing the rental 18 program; plus column 6, which is once again the 19 ratepayer cost of removing ABC T. 20 So what column 7 really represents is 21 that when you add it all up, the removal of non-rental 22 programs, the removal of the rental program and the 23 removal of the ABC T program, as per our proposal, the 24 overall impact on gas rates is a $400,000 increase. 25 MR. THOMPSON: Okay. I understand. 26 I misread that column as including column 2. 27 MR. GRANT: It is an important 28 column. 1827 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: It is important to 2 your argument. It may not be as important to ours. 3 But I understand it. That is all I 4 was trying to get here now, Mr. Grant. 5 The separation expense, that is the 6 3.8 of the 11.4? 7 MR. GRANT: That is correct. That is 8 the fiscal 2000 amortization of the $11.4 million. 9 MR. THOMPSON: And the recovery of 10 deferred taxes -- and we will come back to that -- that 11 is the grossed up $12 million that has been discussed? 12 MR. GRANT: That's correct. 13 MR. THOMPSON: Then column 10 is the 14 subtotal. 15 MR. GRANT: Yes. 16 MR. THOMPSON: Column 11 is removal 17 of Z-factors. And that, we discussed, would be the 18 fiscal 99 Z-factors of I believe Y2K and DSM, which 19 total $10.7 million. Then you reduce that by a rental 20 wind-down component, to arrive at the $9.8 million. 21 Do I understand that correctly? 22 MR. GRANT: That is correct. 23 MR. THOMPSON: It was my position 24 that since rental wind-down is not part of the package, 25 that elimination should be the $10.7 million rather 26 than $9.8 million. And that is an issue between us 27 obviously. 28 MR. GRANT: That is an issue; that is 1828 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 correct. 2 MR. THOMPSON: Okay. 3 MR. BOURKE: If I might, 4 Mr. Thompson, I believe that number was $10.9 million. 5 I think you quoted $10.7 million; I believe it is 6 $10.9 million. 7 MR. THOMPSON: Thank you. 8 Then column 12 again is an 9 accumulation. 10 MR. GRANT: That's correct. 11 MR. THOMPSON: And the $216 million 12 here, to the extent that we are right on the 13 $6.1 million in terms of amount and the $13 million in 14 terms of amount, and the $1.1 million in terms of the 15 Z-factor elimination in column 11, the $216 million 16 will decline to about $196 million, if we are right. 17 I am just focusing on the 18 implications of our position. 19 MR. GRANT: Yes. The whole point of 20 column 12 -- and we specifically did put this column in 21 here to highlight the PBR base, because there is an 22 awful lot of adjustments prior to that, going along. 23 What I wanted to do was to make sure 24 that if you focus on line item 5, which is O&M, and you 25 start with last year's 497 rates, that we provide the 26 Board with a column that shows where our base starts, 27 the $216.1 million. 28 Then, of course, from that columns 13 1829 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 and 14 -- I'm sorry, column 13 shows the impact of the 2 497-01 decision. 3 MR. THOMPSON: This is a very helpful 4 document, as far as I am concerned. 5 Column 13, at line 5, what you are 6 applying there is the PBR escalation factor to your 7 base of $216.1 million. 8 MR. GRANT: That's correct. 9 MR. THOMPSON: To the extent that the 10 base is lower, that number will be lower if the Board 11 is inclined to find as some suggest. 12 Column 14 is the inclusion of 13 Z-factors, including CIS, and that, as I understand it, 14 would be Y2K and DSM, is that right, for the 15 $9 million? 16 MR. BOURKE: And .4 related to 17 regulatory. 18 MR. THOMPSON: Oh, yes. Right. 19 MR. GRANT: Those being the Board's 20 costs, I believe we -- 21 MR. THOMPSON: Yes. No, I overlooked 22 that. 23 Then the impact of CIS in column 15, 24 we have in line 1 the rate base inclusion of 25 $23.8 million? 26 MR. GRANT: Yes. 27 MR. THOMPSON: The cost of capital 28 after tax, $2.0 million. 1830 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 I just wanted to confirm that -- 2 there is a number in response to an IGUA interrogatory 3 that was being discussed yesterday -- I don't know that 4 you need to turn it up, it is Exhibit I, Tab 12, 5 Schedule 44 -- where the company included in its 6 year 2000 customer costs a line item called "CIS Rate 7 Impact". It was in the amount of $4,343,000. 8 I took that to be the rate of 9 return -- the pre-tax capital depreciation associated 10 with the rate base inclusion that you are seeking. Is 11 that -- 12 MR. GRANT: That would sound to be 13 about right, Mr. Thompson. Because if you take the 14 $4.3 million and you add the $5.7 million, which is 15 line item No. 5 in column 15, I total up to roughly the 16 $10.1 million. I'm out by $100,000, but it would 17 appear that that is correct. 18 MR. THOMPSON: Okay. That's great. 19 Now, just on the temp -- so that the 20 total impact of CIS based on your current proposal 21 compared to column 1 is to increase revenue requirement 22 by $10.1 million. We see that in column 15, line 28. 23 MR. GRANT: Yes. 24 MR. THOMPSON: And 20. 25 I was having a discussion with 26 Mr. Kent yesterday and I probably misunderstood it, but 27 I was trying to identify the revenue requirement impact 28 of your original proposal and it is, as I understand 1831 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 it, $3.5 million greater than the revenue requirement 2 of your impact of your current proposal. 3 So do I understand correctly that 4 under your original proposal the revenue requirement 5 impact would have been about $13.6 million? Does that 6 sound about right? 7 MR. GRANT: That's our understanding 8 as well, yes. 9 MR. THOMPSON: Thank you. 10 MR. GRANT: I think that is about 11 right. 12 MR. THOMPSON: Then in the other 13 column, column 16, this is capturing -- in line 1, that 14 would be system expansion, would it, primarily? That 15 is the added additions to rate base? 16 MR. GRANT: Yes. That would be 17 principally system expansion -- well, it would be 18 related to all capital budget items -- 19 MR. THOMPSON: Right. Okay. 20 MR. GRANT: -- of which system 21 expansion is a major component. 22 MR. THOMPSON: Then it also captures 23 your proposals with respect to average uses, your 24 proposals with respect to capitalized overheads and the 25 like? 26 MR. GRANT: That's correct. It 27 really captures all of those things. 28 Everything prior to column 16 really 1832 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 is identifying for the Board the implications on fiscal 2 2000 rates of the implementation of the 3 Board's 179-14/15 decision, our request for relief on 4 the deferred tax issue, and the implementation of 5 E.B.R.O. 497-01 and CIS. 6 So those issues have all been 7 discrete issues, if you will, before the Board, and all 8 those columns were meant to show the Board precisely 9 what that is doing in rates. 10 That leaves column 16, which captures 11 all of the other issues in the case and, as you have 12 indicated, Mr. Thompson, you have hit on some of the 13 major ones. 14 MR. THOMPSON: Yes. Just within that 15 column in terms of what is in dispute, we have, I 16 believe, the average uses on Rate 1, the average uses 17 on Rate 6, we have the NGV issue, the HGAI issue and 18 the capitalization of overhead issue? 19 MR. GRANT: That's my understanding 20 as well. 21 MR. THOMPSON: The numbers that fall 22 out will be reflected in that column? 23 MR. GRANT: That's correct. 24 MR. THOMPSON: Okay. 25 Now, I totalled up all of our 26 responses to all of yours and it is not surprising we 27 didn't settle this case because we are about 28 $75 million apart. 1833 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 Anyway, that is very helpful. I 2 appreciate the provision of that exhibit, Mr. Grant. 3 It helps me. 4 Could I turn to, then, the 5 undertaking response, Mr. Bourke, that you mentioned 6 yesterday, the correction of the calculation of what 7 $10 million means in terms of return on equity? That 8 is Exhibit J3.3. 9 --- Pause 10 MR. THOMPSON: You had indicated 11 yesterday, as I understood you, that assuming a 35 per 12 cent equity the impact of $10 million would be about 13 60 basis points? 14 MR. BOURKE: Correct. 15 MR. THOMPSON: I worked it out. I 16 came to 57 basis points. But that is based on 35 per 17 cent equity. It will be higher, would you agree, if 18 the Board reduces the equity component of your capital 19 structure instead of acceding to this negative 20 short-term debt proposal? 21 MR. BOURKE: If your assumption is 22 that the deemed common equity level of 35 per cent 23 would be reduced. 24 MR. THOMPSON: Yes. 25 MR. BOURKE: This percentage that we 26 spoke of would be increased. 27 MR. THOMPSON: Thank you. 28 Let's turn, if we could, then, to 1834 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 capital structure. 2 Capital structure you are 3 proposing -- the one I'm looking at is at Exhibit N1, 4 Tab 2, Schedule 5. 5 --- Pause 6 MR. THOMPSON: If I could just find 7 my exhibit here. I lost my Legacy system exhibit. 8 --- Pause 9 MR. THOMPSON: Perhaps if we just 10 looked at Exhibit K10.2 it might expedite this. 11 What I have shown at the top of this 12 exhibit -- this is this handwritten exhibit, panel -- 13 is the Board-approved capital structure in E.B.R.O. 497 14 with, on the left-hand side, long-term debt 60.03 per 15 cent, short-term debt 1.82 per cent, pref at 3.15 and 16 equity at 35 per cent. 17 Would you take those numbers subject 18 to check? 19 MR. BOYLE: Yes, those are accurate. 20 MR. THOMPSON: Then below that I have 21 reproduced what you people show on Exhibit E4, Tab 1, 22 Schedule 1 for the bridge year equity structure, which 23 is a little different than the Board-approved. 24 Would you take the numbers there 25 subject to check? 26 MR. BOYLE: Yes. Subject to check, 27 yes. 28 MR. THOMPSON: Could you just explain 1835 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 why there is a difference? Perhaps a little thicker 2 and short-term debt is a little thinner than 3 Board-approved. 4 MR. BOYLE: Yes. I think the primary 5 reason there was the timing of our issuance of the 6 refinancing of preferred shares. There was redemption 7 on October 1st, 1998 and a redemption on July 5th, 8 1999. The timing of the issuance, we combined those 9 into one preferred share issuance. So that slight 10 timing difference is, I think, the main factor in that 11 change. 12 MR. THOMPSON: Okay. 13 Would you take subject to check that 14 the weighted returns for each of those capital 15 structures is, as I have shown them, 8.67 per cent in 16 the case of the Board-approved and 8.57 per cent in the 17 case of your Exhibit E4, Tab 1 presentation? 18 MR. BOYLE: I think your math may be 19 slightly off there, Mr. Thompson, in that in the second 20 case simply adding up your numbers actually comes to 21 8.67, not 8.57. 22 Slightly further to that -- that is 23 the most material change. The numbers in the first set 24 of figures, the weighted return, the 5.10 shown should 25 be 5.11 in both your first and second sets. 26 In your second set, the equity 27 component, the 3.32 shown should be 3.33, in which case 28 your sum total in your first set would be 8.68 per 1836 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 cent, and in your second set 8.69 per cent. 2 MR. THOMPSON: Okay. 3 MR. GRANT: We may have to build a 4 CIS to replace this Legacy system. 5 --- Laughter 6 MR. THOMPSON: Give me $15 million 7 and a Z-factor, I will fix it up. 8 --- Laughter 9 MR. THOMPSON: I can be had. 10 Okay. Thanks very much, Mr. Boyle, 11 for those corrections. 12 Now, in terms of the approach that 13 you have taken for ratemaking purposes in the context 14 of removal of the rental program, you have basically 15 assumed that all long-term debt remains with the 16 utility and that assumption is what creates this 17 negative short-term debt condition. 18 MR. BOYLE: I wouldn't as much call 19 it an assumption. It is the way we have applied the 20 data, not historically the way the data has always been 21 applied in the utility capital structure. 22 The utility does require the 23 long-term debt. It was raised on behalf of the utility 24 operations, and, in our views, it is certainly part of 25 the utility funding structure. 26 MR. THOMPSON: This condition is 27 temporary we are told, and that eventually you are 28 going to eliminate this short-term debt credit position 1837 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 and restore the balance that is reflected in the 497 2 approved and your EE4, Tab 1? 3 MR. BOYLE: It is temporary. In the 4 magnitude it is that on an average-of-averages basis by 5 points in the year it is positive. But certainly on an 6 average-of-averages basis it is, in this year, 7 negative. 8 As I testified yesterday, from time 9 to time we are in an investment position in any year 10 due to the lumpiness of the financing flows. 11 This year the flows are even more 12 lumpier than normal, and that has caused some greater 13 variability in that area. But this is no different, in 14 our view, than any other year where we have tried to 15 prudently finance the utility as cost-effectively as we 16 possibly can, and this is the way in which we can do 17 that in the 2000 test year. 18 MR. THOMPSON: You are not sitting 19 there with cash on the balance sheet. 20 MR. BOYLE: No, it will be invested. 21 As I testified yesterday, part of that will be a loan 22 back to Enbridge Inc. initially, because you are not 23 going to let that cash sit there. You invest it, as we 24 have done in our proposed schedule. We have invested 25 it at an investment rate, and that is producing a 26 credit to ratepayers identified here. 27 MR. THOMPSON: Would you agree with 28 me that you have never heretofore colour-coded dollars? 1838 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. BOYLE: That's correct. 2 MR. THOMPSON: Is this not 3 colour-coding dollars? 4 MR. BOYLE: I don't believe so. We 5 have debt that we have raised for the utility and 6 financed the utility as cost-effectively as we can with 7 the best mix of funds for all utility business. 8 MR. THOMPSON: Would you accept that 9 any one of these options that are shown on K10.2 is 10 open to the Board as an approach to capital structure 11 in this, as you say, temporary situation? 12 MR. CASS: Mr. Chairman, if I might 13 quickly address that. 14 The last of what appear to be four 15 presentations on K10.2 appears to show an equity 16 component of 30.63. I don't understand that as being 17 an issue in this case. By "issue" I refer to a change 18 in the equity component. 19 I have in front of me the scoping 20 document and I am looking at the scoping of the 21 particular issue we are talking about now. That is on 22 page 11 of Exhibit N1, Tab 1, Schedule 2. 23 What it says with respect to the 24 intervenors' proposal is: 25 "The other parties propose a 26 pre-separation capital structure 27 including short-term debt with 28 positive value." (As read) 1839 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 To this end, they propose the 2 Board-approved capital structure for the bridge year. 3 Then it goes on to talk about: 4 "In the event that the 5 Board-approved capital structure 6 is not to be applied for the 7 test year, the other parties 8 propose that the short-term debt 9 be treated as cost-free capital 10 and deducted from rate base." 11 (As read) 12 So this last scenario, with the 13 change to the equity component, is not something that I 14 see as being within the scoping document for this 15 hearing, Mr. Chairman. 16 MR. THOMPSON: I don't know if I have 17 the right one, Mr. Cass. Have you got the August 27 18 version? Because Mr. Vlahos actually raised this in a 19 question. At the last sentence in the August 27 20 versions it says they also wish to explore the: 21 "...thickness of the equity 22 component of the company's 23 proposed post-separation capital 24 structure." (As read) 25 So that was clearly part of this 26 problem. 27 MR. CASS: I'm sorry, then, 28 Mr. Thompson. You are one scoping document ahead of me 1840 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 because I don't have that. 2 MR. THOMPSON: All right. 3 In any event, all I am trying to 4 demonstrate -- and this is largely probably argument, 5 gentlemen, but what I am trying to demonstrate in the 6 last two of these examples is that if the short-term 7 debt is simply costed at the equity rate, we end up 8 with a rate of return of about 8.69 per cent, or if you 9 adjust equity by the amount of the so-called negative 10 position in capital structure -- in other words, reduce 11 35 by 4.37 -- you get a 30.63 per cent equity component 12 and you end up exactly at the same place. 13 I appreciate you want to cost the 14 negative short-term debt component at a number less 15 than the opportunity cost of equity. All I am 16 suggesting is that if it is costed at the opportunity 17 cost of equity, or your equity proportion of capital 18 structure is temporarily reduced to 30.63, the rate of 19 return will be 8.68 or 8.69 per cent. 20 MR. BOYLE: Perhaps a few comments, 21 Mr. Thompson, on that. 22 First of all, the two scenarios you 23 describe would not be identical by any stretch of the 24 imagination because in one case you are dealing with 25 the equity component which is an after-tax cost, in the 26 other case you are dealing with the debt component 27 which is a pre-tax cost. So while your return on rate 28 base may be the same number, in fact in the second case 1841 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 I believe that your first 5.60 should be 5.61 and it is 2 in fact the exact same number, 8.69, in terms of rate 3 of return on rate base. But by having a before-tax and 4 after-tax piece of those, it is a very, very different 5 effect. 6 Secondly, in terms of the investment 7 rate that you have identified for the short-term debt 8 component, we have identified a rate that we can go out 9 there in the marketplace and invest those funds at. 10 That is what we can actually do in the marketplace. 11 This is not a rate that would be achievable in the 12 marketplace for short-term investments. 13 MR. THOMPSON: Maybe we had better 14 just get -- your point about after-tax is a good one. 15 We should probably just get the after-tax -- I'm 16 sorry -- the pre-tax return in my scenario where we 17 cost the negative short-term debt at 9.51 per cent, we 18 then have to gross up to 3.33 for taxes. Right? 19 MR. BOYLE: That's correct, as well 20 as the 0.17. 21 MR. THOMPSON: Can you give us that 22 number? I can do it quickly, but I'm sure I will do 23 it in error. 24 --- Pause 25 MR. THOMPSON: I get eleven 26 ninety-six. 27 MR. BOYLE: I don't think so. 28 Subject to check, on a pre-tax basis, 1842 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 your third set of numbers from Exhibit N1, Tab 2, which 2 you currently show 8.69, would be 11.39 per cent on a 3 pre-tax basis. 4 Your fourth set of numbers, which 5 currently shows 8.68 per cent, on a pre-tax basis, for 6 both, again, the equity and the preferred share 7 component, would be approximately 11.06 per cent. 8 MR. THOMPSON: All right. Thanks. 9 I think I will just argue this 10 approach rather than debate it with you on the record. 11 Obviously, if the Board is going to 12 accede to our suggestions, you would prefer the third 13 case rather than the fourth case? 14 MR. BOYLE: There is certainly a very 15 substantial difference between the two, that's correct, 16 and the third would result in a difference, yes. 17 MR. GRANT: Well, in any case, it 18 would appear, at least in the third case, Mr. Thompson, 19 that the Board would have to accept that, for 20 regulatory purposes, that it was appropriate to put a 21 cost rate onto one of the components of the financing 22 of a utility that bears no relation to the marketplace. 23 MR. THOMPSON: Or they could go on 24 cases 1 or 2, which is, essentially, "We won't colour 25 code dollars for rate-making purposes", but the numbers 26 are the same: 8.69 per cent. The pre-tax return will 27 be probably a little bit less in those two cases, but 28 marginally less. 1843 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. BOYLE: I would like to stress, 2 Mr. Thompson, we have not colour coded the dollars; we 3 have simply financed the utility business as prudently 4 and as cost effectively as we can. 5 As I indicated yesterday, in my 6 testimony, we revised our financing plans once we 7 received the Board decision on this matter to ensure 8 that we were doing that appropriately and believe we 9 have done so, in this case. 10 THE PRESIDING MEMBER: If the Board 11 can just clarify. Since we are talking about a 12 hypothetical capital structure, the short-term debt 13 component is never a derivation of average of averages; 14 rather, it's a plug, as you mentioned yesterday? 15 MR. BOYLE: It is an average of 16 averages; that is, the plug average of averages. There 17 is a hypothetical capital structure each month. 18 MR. GRANT: It's a plug -- 19 THE PRESIDING MEMBER: Does it really 20 mean anything? I mean from day-to-day operations that 21 you show up. It's the treasury operations. That's my 22 point. 23 For regulatory purposes, it's a plug. 24 MR. BOYLE: Yes. 25 THE PRESIDING MEMBER: And we decided 26 on a common equity component. We have the imbedded 27 cost of long-term debt. Pref shares, as well, are 28 imbedded and we look at it as a plug, to make sure that 1844 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 the cost -- that the capital structure equals rate 2 base. 3 MR. BOYLE: Yes. 4 THE PRESIDING MEMBER: So, does it 5 mean anything back at treasury operations day to day? 6 If I were to go back to, say, an 7 actual year and if I were to ask you to calculate your 8 borrowing requirements day-to-day average of averages, 9 would it come close to anything that was allowed? 10 MR. BOYLE: In some years, you may. 11 There are other things that we do finance. For 12 example, work in progress, construction work in 13 progress is not in rate base but it's a financing 14 requirement of the company and we do incur a debt cost 15 associated with that in financing. 16 So there are other financing 17 requirements, for example, that are on top of this, for 18 the company, that indicate there are additional 19 financing needs that we operate on a day-to-day basis. 20 So, to that extent, it's not the same 21 number that we manage on a day-to-day, in treasury 22 operations, that's absolutely correct. 23 In terms of direction or what it's 24 signalling to what treasury operations are doing, it is 25 indicative of what's incurring in the day-to-day 26 operations. 27 THE PRESIDING MEMBER: Thank you. 28 Sorry, Mr. Thompson. 1845 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: No; thank you, sir. 2 Let's move to deferred taxes, panel. 3 You had this discussion with some 4 questioners yesterday about the Board's decision. The 5 interpretation we place on it is -- at least I place on 6 it -- is the company could only draw on this notional 7 account when taxes became due. To me, that means that 8 the taxpayer has an existing obligation to make payment 9 to Revenue Canada on account of unrecorded deferred 10 taxes, and payment is made. 11 Now, is that the way you, the 12 company, interprets the decision? 13 MR. GRANT: Our proposal, in this 14 proceeding, to recover $11.9 million is not tied 15 directly to any one particular overall cap number. 16 In other words, whether it's -- if 17 the Board's decision had said $168 million, the 18 request, in this proceeding, would be precisely the 19 same as it is right now. The request in this 20 proceeding is not tied to the Board's number in that 21 previous proceeding. 22 Having said that, the Board's 23 decision in 179-14/15 spoke of taxes due and payable 24 and, therefore, as I said earlier, I think it's 25 important for us to demonstrate that these taxes will 26 be due and payable. 27 MR. THOMPSON: Well, you choose your 28 words very carefully, "due and payable". We suggest -- 1846 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 or at least I suggest it goes beyond that, that, if 2 true transfer to affiliates or other transactions the 3 Enbridge Group eliminates or reduces the unrecorded 4 deferred tax exposure, my interpretation is you get 5 nothing from the ratepayers. 6 Is that your interpretation? 7 MR. GRANT: Our interpretation is 8 that the -- that is not my interpretation. 9 MR. THOMPSON: So what is your 10 interpretation? That the company recovers $50 million 11 from the ratepayers whether or not any taxes are paid 12 by the affiliate to Revenue Canada? 13 MR. GRANT: Our interpretation of the 14 Board's decision is still under active consideration. 15 MR. THOMPSON: I understand that. 16 But in terms of the claim that you are making in this 17 case -- Mr. Mondrow pressed you yesterday about payment 18 by the taxpayer and I'm trying to follow up on that 19 because you seem to be transmitting the message -- 20 whether this is fair or not, I don't know -- that you 21 are entitled to recover this money whether or not 22 anything is actually paid to Revenue Canada by your 23 affiliate on account of these unrecorded deferred 24 taxes. 25 MR. GRANT: Excuse me. 26 --- Pause 27 MR. GRANT: Well, I think we have to 28 look at the rental situation in isolation. So, the 1847 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 point, Mr. Thompson, is that, on a stand-alone basis, 2 this is our forecast of taxes payable and that's why we 3 have made this request in fiscal 2000. 4 MR. THOMPSON: Well, are there any 5 plans that the company is pursuing to either minimize 6 or eliminate the tax exposure? 7 MR. GRANT: I don't know of any 8 plans. 9 MR. THOMPSON: Could you turn up 10 Exhibit A, Tab 12, Schedule 3. This is the quarterly 11 report for the six months ended March 31. 12 MR. GRANT: Yes, I have that. 13 MR. THOMPSON: If you could go to the 14 last page, please. The third-last paragraph, in 15 Note 4, after describing the decision, there's this 16 statement: 17 "The decision, while less 18 favourable than hoped for, 19 provides a basis for finalizing 20 plans for the unbundling. The 21 company is considering 22 adjustments to those plans to 23 minimize or eliminate the 24 consequences of the less 25 favourable aspects of the 26 decision." (As read) 27 What are those plans that will 28 operate to minimize or eliminate the consequences of 1848 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 the less favourable aspects of the decision? 2 MR. GRANT: I don't know, 3 Mr. Thompson. I'm more involved in the last part of 4 that sentence, that says: 5 "And is examining options to 6 pursue more favourable 7 regulatory treatment." 8 (As read) 9 MR. THOMPSON: Has the petition to 10 Cabinet been abandoned? Is it still outstanding? 11 MR. CASS: Mr. Chairman, it is not 12 clear to me that this is really a relevant inquiry in 13 relation to the company's proposal for the test year. 14 If Mr. Thompson has some argument he 15 wants to make about remedy, such as the petition, he is 16 entitled to do that. But I am not sure how it is 17 relevant to what the company is proposing by way of 18 rates for the test year. 19 MR. THOMPSON: Well, I guess I would 20 suggest that if the petition is still outstanding, then 21 we are still faced with the prospect of a review, even 22 though the Board said no review. To me, it is a remote 23 prospect, but you never know. 24 If it is open for review, then there 25 is a scenario where the company gets nothing on review. 26 So it is inappropriate to deal with this topic in this 27 test year. 28 That would be my argument, but I 1849 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 don't know that that leads to any further questions, 2 Mr. Cass. 3 May I move on and ask you this, 4 panel: Has the unrecorded liability been recorded? 5 THE PRESIDING MEMBER: Sorry, 6 Mr. Thompson. Would you repeat your question. I was 7 just speaking to my colleague. 8 MR. THOMPSON: Has the unrecorded 9 deferred tax liability been recorded? 10 MR. BOYLE: Not to my knowledge. 11 MR. THOMPSON: Is there some reason 12 why it has not been recorded? 13 MR. BOYLE: I don't believe we have 14 released any public statements since that time. I am 15 sure the accounting group is still looking at that. 16 MR. THOMPSON: Mr. Boyle, do you know 17 what transactions are available to the company to 18 reduce or eliminate this exposure? Do you know what 19 was being referenced in this report in March? 20 MR. BOYLE: I think some of the 21 items, Mr. Grant, alluded to there were identified in 22 that note. There is a whole host of things that may be 23 available, but I am not involved in analyzing or 24 looking at those, no. 25 MR. THOMPSON: The current plan, as I 26 understand it, is to do a section 85 rollover to an 27 affiliate? 28 MR. BOYLE: Yes, that is correct. 1850 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: The section 85 2 rollover is to Enbridge Services Inc. I believe that 3 was the company. 4 MR. BOYLE: Yes, that is correct. 5 MR. THOMPSON: That rollover 6 eliminates Consumers Gas Inc.'s exposure. 7 MR. BOYLE: It doesn't eliminate it. 8 It is part of the transfer because of the nature of 9 what is required under a section 85(1) rollover. It 10 still affects the value of the asset to Consumers Gas, 11 but technically, as a result of the 85(1) rollover, the 12 actual liability for payments to Revenue Canada will 13 transfer to Enbridge Services Inc. 14 MR. THOMPSON: I should have phrased 15 it that way. The potential obligation to make payment 16 goes to the transferee. 17 MR. BOYLE: It is not potential. It 18 is a liability and must be paid at some point. 19 MR. THOMPSON: Well, only if the 20 transferee becomes taxable. 21 MR. BOYLE: Yes. But at some point 22 that will need to occur with a business of this nature. 23 MR. THOMPSON: Who are the tax 24 advisers? Are there any tax advisers in connection 25 with this transaction? 26 MR. BOYLE: I believe there are, yes. 27 MR. THOMPSON: Who are Enbridge 28 Services Inc.'s auditors? Are they the same as the 1851 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 company's? 2 MR. BOYLE: Yes, they are. 3 MR. THOMPSON: Would the company 4 accept a condition with respect to this item that 5 nothing could be collected from ratepayers until the 6 Board was provided with a statement from Enbridge 7 Services Inc.'s auditors that an existing obligation to 8 pay tax on account of this potential liability existed? 9 Would that be a process that would be 10 acceptable? 11 MR. GRANT: I would like to take that 12 as an undertaking and think about it. 13 THE PRESIDING MEMBER: I think 14 Mr. Boyle also had some comments. 15 MR. BOYLE: I think it is essentially 16 the same issue that Mr. Mondrow put earlier. I see 17 that in the same context, and I would have the same 18 response at this point. 19 MR. THOMPSON: I would be happy with 20 an undertaking from Mr. Grant to address that point. 21 There is a real concern here that nothing is payable by 22 ratepayers unless something is to be paid by the 23 affiliate to Revenue Canada. 24 I am trying to establish some sort of 25 process that can address that point if the Board agrees 26 that that is the nature of the ruling that it make. 27 MR. GRANT: Certainly. 28 MS DESAI: J10.3. 1852 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 UNDERTAKING NO. J10.3: 2 Mr. Grant to take under 3 advisement whether the company 4 would accept a condition that 5 nothing could be collected from 6 ratepayers until the Board was 7 provided with a statement from 8 Enbridge Services Inc.'s 9 auditors that an existing 10 obligation to pay tax on account 11 of the potential unrecorded 12 deferred tax liability existed 13 THE PRESIDING MEMBER: To an 14 affiliate or by the company itself, Mr. Thompson? 15 MR. THOMPSON: Sorry, sir, I didn't 16 hear. 17 THE PRESIDING MEMBER: To an 18 affiliate or by the company itself. 19 MR. THOMPSON: Actually, it is from 20 the auditors of the affiliate. 21 THE PRESIDING MEMBER: Right. But 22 suppose that nothing gets transferred out. 23 MR. THOMPSON: Yes. I am assuming 24 that the rollover is going ahead. 25 Is that assumption in some doubt? 26 MR. BOYLE: Not to my knowledge. 27 THE PRESIDING MEMBER: Okay; thank 28 you. 1853 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. MONDROW: Could I just ask for 2 that undertaking number again? I'm sorry, I missed it. 3 MS DESAI: J10.3. 4 MR. MONDROW: Thank you. 5 MR. THOMPSON: In the scoping 6 document -- and this really brings me to the conclusion 7 of my examination -- there is a suggestion that some 8 intervenors might, when the appropriate evidence is 9 available, accept collection but on the basis of a 10 10-year amortization, whereas your proposal is to 11 collect it in effect over 4.1 years. 12 Could you comment on why there is 13 objection to a 10-year amortization. 14 MR. GRANT: Well, to be specific, our 15 proposal is to collect $11.9 million in the 2000 test 16 year. We are not making any proposals as to anything 17 else. 18 MR. THOMPSON: Maybe I misunderstood. 19 You are seeking to draw down $11.9 million, grossed up 20 for taxes. 21 MR. GRANT: Correct. 22 MR. THOMPSON: And what you may seek 23 to draw down in the next test year is -- we will just 24 have to wait and see. There is no formulaic approach 25 that you are taking to this item. 26 MR. GRANT: That is correct. 27 MR. THOMPSON: And what is the 28 rationale for that, when the Board made a suggestion in 1854 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 its decision about smoothing rate shock and that kind 2 of thing? 3 MR. GRANT: The reason is that our 4 request for fiscal 2000, as I mentioned earlier, is not 5 contingent on any particular overall amount. It is 6 what taxes are due and payable in fiscal 2000. 7 MR. THOMPSON: On the due and payable 8 point and the evidence that you have adduced in support 9 of that -- these were the documents that you filed 10 yesterday -- this really pertains to a scenario where 11 the rental program remained with the utility. 12 Is that right? 13 MR. GRANT: That is correct. Those 14 documents were from 179-14/15 wherein we were proposing 15 to retain the rental program in the utility and wind it 16 down. 17 MR. THOMPSON: It really has nothing 18 to do with the taxable position of the transferee and 19 whether any tax is to be paid by the transferee in the 20 year 2000. It is sort of a notional drawdown, as if 21 the program were still in the utility in a wind-down 22 mode. 23 MR. BOYLE: That is accurate with 24 respect to those exhibits. My evidence yesterday, I 25 believe, was to the fact that that is still the same 26 effect that will occur when it is transferred to 27 Enbridge Services Inc.; that that drawdown on the 28 rentals will occur and the tax liability will accrue. 1855 BOYLE/BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: I don't think parties 2 are prepared to accept that forecast. I think parties 3 take the position that you have to demonstrate that 4 taxes are to be paid. 5 That is why we are searching for a 6 process that will solve that concern. 7 But if you are right and you are 8 going to get them whether or not they are paid, then I 9 guess the Board will determine that issue. 10 Thank you, panel. Those are my 11 questions, unless you wanted to comment on that last 12 little speech. 13 MR. BOYLE: I have no comment. 14 THE PRESIDING MEMBER: Do staff have 15 any questions? 16 Mr. Cass, the Board has no questions. 17 MR. CASS: I have no re-examination, 18 Mr. Chairman; thank you. 19 THE PRESIDING MEMBER: Thank you. 20 This panel is excused, with our thanks. 21 Mr. Brett, are you ready -- no. 22 Thank you, Mr. Cass. 23 MR. CASS: I have just one matter 24 before we break, Mr. Chairman. 25 The updated answer to Exhibit J1.3 is 26 available. 27 You will recall, Mr. Chairman, this 28 was your request for an update to reflect the new gas 1856 1 cost. So I believe that that can be passed around now. 2 MR. MONDROW: Before you rise, 3 Mr. Chairman, I have two kind of other matters I would 4 just like to address. 5 The first is just -- Mr. Farrell is 6 not here, but he essentially undertook an update on the 7 status of the information response on the HVAC motion 8 and not much has changed from his update. 9 It will take a little bit of time for 10 us to go through that. There is quite a bit of 11 information there in the format that is, in some 12 respects, unique. We will undertake to do that over 13 the weekend and if there is a further disagreement I 14 will advise -- obviously discuss it with Mr. Farrell 15 and advise the Board through staff and then we will 16 return to deal with that next week, if that is 17 required. 18 I note that there is some additional 19 information specifically on one of our pet peeves, 20 fleet services, which have yet to be provided and I 21 understand Ms Reynolds is still working on that. So it 22 is a little premature for me to give any more 23 definitive comment at this time, but we will try to do 24 that as soon as possible. 25 The second matter was, with respect 26 to the hosting agreement that is proposed as between 27 the utility and CIS Newco, with Mr. Farrell had 28 provided to me kind of off-line in response to some 1857 1 discussion I was having with the witness. 2 I have now reviewed that. It appears 3 to be the way it is, in fact, relatively short. I 4 understand that subsequent to my questions questions 5 were raised by, I believe it was Ms Halladay, and 6 Mr. Kent addressed Ms Halladay's questions in the 7 context of this hosting arrangement. 8 In light of those two facts, that it 9 is short and that the issue was addressed by 10 Mr. Kent -- or an issue was addressed by Mr. Kent in 11 the context of this agreement, I have asked Mr. Farrell 12 whether this could in fact be made an exhibit and put 13 on the record and circulated to parties. 14 When I spoke with him yesterday, I 15 think it's fair to say he did not object to that. He 16 suggested it might be covered with a sheet addressing 17 the issue that Mr. Kent was discussing subsequent to my 18 questions. 19 So I will just leave that, through 20 you, with the company because I would like that to be 21 done. Given that we are drawing somewhat to a close, I 22 realize we will be back next week, I just wanted to 23 have a record of that request. 24 I believe that is acceptable to the 25 company. So we should see that filing. 26 MR. FARRELL: I have it for filing 27 now, Mr. Chair. 28 MR. MONDROW: I could have saved a 1858 1 few words. 2 Thank you very much, Mr. Farrell. 3 Thank you, Mr. Chairman. 4 MS LEA: K10.3, please. 5 EXHIBIT NO. K10.3: Hosting 6 agreement proposed as between 7 the utility and CIS Newco 8 THE PRESIDING MEMBER: If nothing 9 else, Mr. Farrell, we cannot complain about speed in 10 this hearing. 11 MR. FARRELL: I'm trying to prepare 12 for Mr. Stevens on Wednesday. 13 THE PRESIDING MEMBER: Thank you. 14 That's it, Mr. Mondrow? 15 MR. MONDROW: Thank you very much, 16 sir. 17 THE PRESIDING MEMBER: Mr. Cass, I 18 don't expect any further updates to the financial 19 schedules. Am I right? Perhaps you can consult with 20 Mr. Ladanyi. 21 MR. CASS: I believe that is correct, 22 Mr. Chairman. 23 THE PRESIDING MEMBER: No updates on 24 deferral accounts prior to the argument phase, but 25 there will be updates prior to the issuance of the 26 order. 27 MR. CASS: Yes. I think we can 28 confirm that, Mr. Chairman. 1859 1 THE PRESIDING MEMBER: Okay. 2 The argument schedule, does anybody 3 have any suggested dates or do we want to leave that 4 for Wednesday? 5 MR. FARRELL: Yes, Mr. Chairman. I 6 had prepared a one-page table that indicated the course 7 of the argument dates for the last three proceedings, 8 E.B.R.O. 497, E.B.O. 179-14/15 and E.B.R.O. 497-01 as a 9 guide, and so the proposal that I think is acceptable 10 to intervenors for this proceeding, assuming that 11 September 8th is the last hearing day, would be 12 argument in-chief on September 22nd -- all of the dates 13 I'm going to give you are Wednesdays, I think. 14 Argument in-chief on September 22nd; 15 intervenor argument on October 6th; and reply argument 16 on October 20th. 17 THE PRESIDING MEMBER: There have 18 been no objections raised, Mr. Farrell? 19 MR. FARRELL: None that I have heard, 20 Mr. Chair. 21 THE PRESIDING MEMBER: I guess we can 22 go with that and finalize that on Wednesday if we hear 23 anything further. 24 MR. FARRELL: Thank you. 25 THE PRESIDING MEMBER: Any other 26 business? 27 I'm sorry, I'm not sure if I have 28 excused this panel. Did I? All right. 1860 1 We will break then and have a nice 2 long weekend and we will see you on Wednesday morning 3 at nine o'clock and it is half a day. 4 --- Whereupon the hearing adjourned at 1145, to 5 resume on Wednesday, September 8, 1999 at 0900