351 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 B E F O R E : 16 P. VLAHOS Presiding Member 17 S.K. HALLADAY Member 18 19 20 Hearing held at: 21 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 22 Toronto, Ontario on Wednesday, August 25, 1999, 23 commencing at 0918 24 25 RATES HEARING 26 27 VOLUME 3 28 352 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 H. SOUDEK 8 ROBERT WARREN Consumers Association of 9 Canada. 10 TOM BRETT Ontario Association of 11 School Business Officials of 12 the Metropolitan Toronto 13 Separate School Board. 14 IAN MONDROW Heating, Ventilation and Air 15 Conditioning Contractors 16 Coalition Inc., HVAC 17 Coalition 18 GEORGE VEGH Coalition for Efficient 19 Energy Distribution 20 MARK MATTSON Energy Probe 21 MURRAY KLIPPENSTEIN Pollution Probe 22 DAVID POCH Green Energy Coalition, GEC 23 MICHAEL JANIGAN Vulnerable Energy Consumers 24 Coalition 25 STAN RUTWIND TransCanada PipeLines 26 Limited 27 28 353 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 28 354 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 Preliminary Matters 359 5 SWORN: JOHN BAYKO 371 6 PREVIOUSLY SWORN: HOLLY REYNOLDS 371 7 PREVIOUSLY SWORN: SCOTT DODD 371 8 Examination-in-Chief by Ms Soudek 371 9 Cross-Examination by Mr. Mondrow 374 10 Upon recessing at 1030 416 11 Upon resuming at 1104 416 12 Cross-Examination by Mr. Mattson 439 13 Cross-Examination by Mr. Thompson 444 14 Luncheon recess at 1150 447 15 Upon resuming at 1307 448 16 PREVIOUSLY SWORN: HOLLY REYNOLDS 449 17 PREVIOUSLY SWORN: JOANNE GOULD 449 18 PREVIOUSLY SWORN: MICHAEL MEES 449 19 SWORN: STEVE McGILL 449 20 SWORN: JOHN McCLINTOCK 449 21 Examination-in-Chief by Mr. Cass 449 22 Cross-Examination by Mr. Brett 451 23 Cross-Examination by Mr. Mondrow 482 24 Upon recessing at 1414 495 25 Upon resuming at 1441 495 26 Cross-Examination by Mr. Thompson 496 27 Hearing adjourned at 1705 585 28 355 1 UNDERTAKINGS/OBJECTIONS 2 3 NO. DESCRIPTION PAGE 4 5 J3.1 Mr. Bayko undertakes to 399 6 provide the format of report 7 provided to customer re carbon 8 monoxide inspection 9 J3.2 Mr. Dodd undertakes to give 447 10 the exhibit reference for the 11 $231,000 calculation of what the 12 company says imputed revenues 13 are if this program is classified 14 as fully allocated 15 J3.3 Ms Gould to provide what 544 16 $10 million in PBR plan 17 translates into on return on 18 equity after tax 19 J3.4 Ms Reynolds to produce a 1999 576 20 Ontario utility O&M on a basis 21 comparable to the 1999 22 Board-approved amount 23 An objection can be found on page 548 24 25 26 27 28 356 1 EXHIBITS 2 NO. PAGE 3 4 K3.1 Document entitled "HGAI 418 5 Additional Allocation 6 Calculations" 7 K3.2 Undertaking J16.3 from 495 8 E.B.R.O. 497 marked 9 "E.B.R.O. 497 Bundled Budget" 10 K3.3 E.B.O. 179-14/15 showing the 496 11 Board approved bundled budget 12 from E.B.R.O. 497 and the 13 company's presentation of the 14 unbundled budget 15 K3.4 Excerpts from the 496 16 cross-examination of Dr. Bauer 17 in E.B.R.O. 497-01 proceedings 18 containing pages 1092 to 1094 and 19 pages 1111 to 1113 20 21 22 23 24 25 26 27 28 357 1 ERRATA/ADDENDA 2 REFERENCE DESCRIPTION 3 RP-1999-0001 - Volume 1 4 08/23/99 P.27 L.12 5 "I had" S/B "I have" 6 08/23/99 P.34 L.4 7 "recovering" S/B "recovery in" 8 08/23/99 P.35 L.1 9 "said" S/B "Z" 10 08/23/99 P.35 L.11 11 "said" S/B "Z" 12 08/23/99 P.39 L.12 13 "in recovery" S/B "for recovery in" 14 08/23/99 P.39 L.19 15 but" S/B "the" 16 08/23/99 P.42 L.6 17 "unawareness" S/B "awareness" 18 08/23/99 P.44 L.22 19 "imbedded" S/B "embedded" 20 08/23/99 P.45 L.14 21 "imbedded" S/B "embedded" 22 08/23/99 P.51 L.8 23 delete line "$1.3 million, or ..." 24 08/23/99 P.81 L.1 25 "$5 million" S/B "$0.5 million" 26 08/23/99 P.81 L.20 27 "ancillary non utility" S/B 28 "ancillary and non-utility" 358 1 ERRATA/ADDENDA (Cont'd) 2 REFERENCE DESCRIPTION 3 RP-1999-0001 - Volume 1 4 08/23/99 P.88 L.24 5 delete second "as" 6 08/23/99 P.90 L.9 7 "and ratepayers and" S/B "and 8 ratepayers an" 9 08/23/99 P.100 L.24 10 "as it was" S/B "as it will" 11 08/23/99 P.112 L.12 12 "MGV" S/B "NGV" 13 08/23/99 P.118 L.5 14 "cost of allocation" S/B "cost 15 allocation" 16 08/23/99 P.172 L.17 17 "with the second average uses" S/B 18 "with respect to average uses." 19 08/23/99 P.199 L.7 20 "brought towards" S/B "brought 21 forward as" 22 23 24 25 26 27 28 359 1 Toronto, Ontario 2 --- Upon resuming on Wednesday, August 25, 1999 3 at 0918 4 THE PRESIDING MEMBER: Good morning, 5 everyone. Are there any preliminary matters? 6 MR. FARRELL: Yes, Mr. Chairman. 7 PRELIMINARY MATTERS 8 MR. FARRELL: We have now distributed 9 to the intervenors the proposed revisions to the 10 settlement proposal as styled, and the one item that 11 could be seen to be an issue has now -- I think the 12 text has been resolved, so I would propose to file the 13 revised pages at the mid-morning break, and you will 14 then have a complete package as all parties, including 15 the Company, now see the settlement proposal. 16 The one outstanding item is Issue 17 6.1.4, which is the average use trend data, and we are 18 following up with Ms Fraser and hopefully she and Mr. 19 Rubin, if he is available, are going to be able to tell 20 us whether there is a settlement or otherwise of the 21 issue. So that is the status of that. 22 I have the intervenor comments on the 23 scoping proposal and hopefully that can be finalized 24 for distribution and review today, with a view to 25 finalizing it and having it for the Board in the 26 morning. 27 Yesterday, you might recall that when 28 I was indicating the changes to the settlement proposal 360 Preliminary matters 1 in relation to transactional services I indicated that 2 the last sentence of the last bullet on page 10 would 3 find its way from the settlement proposal to the 4 scoping proposal. That was a suggestion from the 5 intervenors. That caused us to look again at the issue 6 as it was framed in the Board's list of issues, and 1.4 7 was transactional services forecast. 8 Our prefiled evidence, accordingly, 9 dealt with the forecast, but not with the issue that 10 arose during the settlement conference, and that was 11 the appropriateness of continuing what is referred to 12 as a two-tiered sharing arrangement and the effect of 13 changing that existing sharing ratio on the Company's 14 incentive. 15 In other words, the prefiled evidence 16 addressed the issue as written on the issues list, but 17 not the issue as it materialized during the course of 18 settlement discussions. As a result, we proposed to 19 prepare and file some written evidence that addresses 20 the sharing ratio issue specifically. We thought that 21 was a more efficient way to do it than to have Mr. Rahn 22 and Mr. Noble empanelled and then to go through an 23 examination-in-chief where the Board and the 24 intervenors would then hear for the first time the 25 Company's evidence on that aspect of the issue and then 26 be asked to cross-examine on it. 27 We would propose to do that hopefully 28 by the end of the week. So that would mean that we 361 Preliminary matters 1 would stand down the Issue 1.4 panel until we file that 2 evidence and parties have an opportunity to look at it. 3 Before we leave the settlement 4 proposal, I would ask you, Mr. Chair, whether you have 5 had an opportunity to review the prefiled evidence on 6 the deferral account criteria and whether you and your 7 colleague would wish that issue to be examined in the 8 hearing, notwithstanding the settlement. 9 THE PRESIDING MEMBER: No, 10 Mr. Farrell, we have not had an opportunity to consider 11 that, but I can assure you that it is not an issue that 12 will come to the hearing. It is just an issue of our 13 response to that specific issue as phrased in the ADR. 14 MR. FARRELL: Very well. Thank you 15 very much. 16 If I might, before I leave and have 17 Ms Soudek, who is responsible for this panel, take my 18 place, I would like to address a couple of scheduling 19 problems that we have. 20 The panel you will hear next is panel 21 5, which deals with Issue 3.7, the home gas appliance 22 inspection program. The panel that was scheduled to 23 follow this panel was transactional services, which 24 will be stood down for the reason I have just 25 explained. 26 The next panel would then be the 27 panel dealing with Issue 3.2, O&M costs, in the context 28 of the PBR plan or the E.B.R.O. 497-01 decision. We 362 Preliminary matters 1 haven't done a canvass of everyone, but we would 2 anticipate that the O&M panel could take the balance of 3 the day. 4 The panel that would follow that 5 panel is witness panel No. 8, which deals with Issue 6 5.1.2, which is the proposed Rate 125. Ms Duguay is 7 ill today and the earliest she could appear, everything 8 going the way we expect, would be tomorrow. 9 The next panel would be panel 9, 10 dealing with Issue 2.4, the capitalization of A&G 11 overheads. One of the witnesses, Mr. Riccio, is 12 currently on vacation and will not be back until 13 Friday. So he wouldn't be available until Friday. 14 The panel thereafter is panel No. 10. 15 It deals with a number of issues, including capital 16 structure, deferred taxes and so on. Mr. Boyle is 17 unavailable until the start of the week. 18 This is all by way of saying that if 19 we go through these panels, you and your colleague and 20 intervenors should expect that we may be empanelling 21 panel No. 11 to deal with the E.B.O. 179-14/15 22 consequences as they pertain to Issues 1.3, 2.3, 3.3 23 and 3.6. For working purposes we call this the 24 separation costs panel. 25 Mr. Thompson has asked me whether the 26 separation costs panel will follow panel No. 7, which 27 is the O&M costs. I guess that is a factor of how long 28 the O&M costs panel takes. If they take up the 363 Preliminary matters 1 remainder of the day, we could move to panel No. 8, 2 unless parties wish more certainty and we decide that 3 we will move immediately into the separation costs 4 panel. 5 Would you excuse us for a moment, 6 Mr. Chair. 7 --- Pause 8 MS LEA: Mr. Chairman, Board staff 9 has one concern with the scheduling matter proposed by 10 Mr. Farrell, and that is this. 11 I think there are a fair number of 12 parties that would be interested in panel No. 11, and I 13 would be reluctant to proceed with that panel today. I 14 know that is not -- 15 MR. FARRELL: We couldn't make it 16 today, I am told by Mr. Ladanyi. 17 MS LEA: All right. That's fine. 18 Thanks. 19 But everybody should be on notice 20 that it might be on tomorrow. I think that is what I 21 understand you are saying. 22 MR. FARRELL: That's correct. 23 MS LEA: Thank you. 24 MR. FARRELL: If parties would like 25 the certainty of knowing that panel 11 will follow this 26 panel tomorrow, we are prepared to defer panel No. 8 in 27 case Ms Duguay's recovery, as we now see it, isn't as 28 speedy as we now think. 364 Preliminary matters 1 THE PRESIDING MEMBER: All right. Is 2 that all, Mr. Farrell? 3 MR. FARRELL: Yes, it is. 4 MR. MATTSON: Mr. Chairman, before 5 Mr. Farrell leaves I should address Issue 6.1.4, the 6 average trend usage data, and if Mr. Farrell has any 7 questions, then maybe we can address them now before he 8 leaves. 9 That issue -- it doesn't look like 10 there will be a settlement on it, but what I am 11 proposing is that in 1997 there was a presentation made 12 by Mr. Rubin to the DSM collaborative, which was 13 adopted by that collaborative and put forward as a 14 recommendation. If that can be used as the basis for 15 the evidence upon which we can rely in argument, we can 16 go forward on that issue without the need for 17 cross-examination and just argue on the basis of that 18 presentation. 19 In other words, that would be the 20 evidence supporting the argument. Otherwise, we will 21 need a witness from the Company to cross-examine on 22 that document. 23 But there was a proposal put forward 24 by Mr. Rubin in 1997 that was part of the ADR 25 agreement. It was part of the evidentiary basis in 26 that hearing. I guess that was 490. 27 If that is agreeable to the company, 28 then we can go forward with that resolution. 365 Preliminary matters 1 Otherwise, we can just leave it as a contested issue. 2 MR. FARRELL: I would like to see the 3 document Mr. Mattson is referring to before I agree to 4 simply accept it as an evidentiary basis for argument. 5 For example, I might wish to cross-examine Mr. Rubin on 6 it if Mr. Mattson wants to rely on it. 7 If he could give me a copy, we will 8 get back to you and to him as to how we wish to deal 9 with Issue 6.1.4. 10 MR. MATTSON: Well, maybe we should 11 just leave it as contested, Mr. Chairman, as 12 Mr. Farrell's company had ample opportunity over the 13 last three years to contest that. They were part of 14 the DSM collaborative. They have accepted it for three 15 and a half years, and this is the first time I have 16 heard now that they may have some opposition to what 17 went into that settlement which formed the basis of 18 three ADRs over the last three years. 19 I have been dealing with your 20 experts, Mr. Farrell. Maybe you should contact them 21 and see what the state of the affair is at this point. 22 MR. FARRELL: Maybe you would have 23 the courtesy to simply give me a copy of it, 24 Mr. Mattson. 25 MR. MATTSON: It is in the record. 26 It is in the agreement. 27 MR. FARRELL: Let's treat it as a 28 contested issue. 366 Preliminary matters 1 MR. MATTSON: All right. 2 MR. FARRELL: There is one other 3 matter, Mr. Chairman, and that has to do with the HVAC 4 motion -- 5 THE PRESIDING MEMBER: Excuse me, 6 Mr. Farrell. 7 What is left there now, Mr. Mattson? 8 You wish that to be a contested issue? 9 MR. MATTSON: Yes, Mr. Chairman, and 10 then we will just bring forward the -- I will 11 cross-examine the company's witness on the agreement 12 for the past three years, and we will use that for the 13 evidentiary basis for argument. 14 It has been part of the -- 15 THE PRESIDING MEMBER: I'm sorry, why 16 won't you allow Mr. Farrell to look at that document, 17 since it is about three years old, and see whether you 18 can discuss this with Mr. Farrell before you make that 19 final determination? 20 MR. MATTSON: The problem, 21 Mr. Vlahos, is that I have been coming here for the 22 last few days and trying to get the issue dealt with. 23 I tried to talk to Mr. Farrell about it yesterday. He 24 didn't want to talk about it today. I dealt with his 25 witness yesterday. There isn't an agreement. 26 I just assumed we would argue on the 27 basis of the evidence that we have gone forward with in 28 the past three years. 367 Preliminary matters 1 I will put that off, and I will come 2 back then tomorrow. But I wouldn't mind getting this 3 issue into the agreement one way or another. That is 4 my only concern. 5 THE PRESIDING MEMBER: It is still 6 open, though, whether it should be just left to 7 argument only. 8 All Mr. Farrell, I understand, is 9 asking is that he look at the document, and then he can 10 see whether he agrees that it should be left to 11 argument or he would like to cross-examine. 12 MR. MATTSON: Thank you, 13 Mr. Chairman. 14 THE PRESIDING MEMBER: Yes, 15 Mr. Farrell. 16 MR. FARRELL: Yes, the HVAC motion, 17 Mr. Chair. 18 I have discussed this with 19 Mr. Mondrow, and what the company has proposed to 20 Mr. Mondrow is that when Ms Reynolds is finished 21 testifying in this panel over the course of the next 22 day or so, or two -- because there is an amount of work 23 involved -- we will attempt to answer Mr. Mondrow's 24 request as he reframed the first paragraph of his 25 Prayer for Relief in his motion. 26 What I would propose is that we will 27 prepare the information that we think he is seeking. 28 We will discuss it with him on an off the record basis 368 Preliminary matters 1 to see whether we can have consensus, in which case it 2 would be filed. If there is not consensus, then we 3 will come back to you and I would, without trying to 4 give you a preview of what I would be arguing, attempt 5 to describe to the Board the problem that we would have 6 in giving him the information. Then he would respond 7 by presumably telling you why he was entitled to do it 8 and why we should be compelled to do it. 9 We thought if we could do it, on at 10 least first crack consensual basis, then there would be 11 no need for you to rule, at least not yet. 12 THE PRESIDING MEMBER: Mr. Mondrow? 13 MR. MONDROW: As I understand the 14 proposal, Mr. Chairman, the company will try to provide 15 a response to the reframed information request. That 16 seems to me to be exactly what I asked for, and I am 17 quite happy to wait and see what we get and take it 18 from there. 19 I gather the response will be 20 provided on the record and will form part of the 21 evidence. 22 As I understand it, in fairness to 23 Mr. Farrell, the company is not prepared today to agree 24 that the Board should consider the underlying issue -- 25 that is, the other business activities issue -- one way 26 or the other. But the information will be on the 27 record. 28 If it is acceptable to us at the end 369 Preliminary matters 1 of the day, then we can argue on it and the company can 2 argue on it. That is satisfactory to me, subject to of 3 course seeing what we get. 4 I think that is a fair way to 5 proceed. 6 THE PRESIDING MEMBER: As I 7 understand, then, if the document to be provided by the 8 company is acceptable to you, as far as the content of 9 information is concerned, the use will still be a 10 question mark, its use in the hearing. 11 MR. MONDROW: Well, it certainly 12 isn't in our minds, sir, but it may well be in the 13 Panel's mind. And I gather the company suggests it 14 should be. 15 Just to give everyone, including the 16 Board, a heads up, we will proceed to argue on the 17 basis of the information ultimately provided in line 18 with our submissions yesterday. If that raises a 19 problem for anyone, I assume they will indicate now. 20 Mr. Farrell I think has indicated 21 that the response would be without prejudice to his 22 position on that argument but that argument would be 23 fair game. I take it that that is the company's view, 24 and that's fine. 25 Hopefully, we will be able to work 26 out with the company the substance of the information 27 provided and ideally forgo any cross-examination. I 28 think we will just have to take it one step at a time 370 Preliminary matters 1 before I can say that definitively. 2 THE PRESIDING MEMBER: All right. 3 Ms Lea, did you want to add anything? 4 MS LEA: No. I was merely attempting 5 to determine I think what you were, sir; and that was: 6 We do not expect to have a panel empanelled, and we do 7 not have to take account of it in the schedule with 8 respect to this evidence. 9 Do I understand correctly, that it 10 would be in argument? 11 MR. MONDROW: Well, I'm afraid I 12 can't say that until I see the information. I'm afraid 13 I can't go any further than that today. 14 MR. FARRELL: That is acceptable to 15 us. If there is a need to bring a panel to speak to 16 it, a legitimate need, shall we say -- and hopefully 17 there won't be a dispute over that -- then we will 18 bring back a panel. 19 I think the first order of business 20 is to prepare the information and see whether 21 Mr. Mondrow is satisfied with it. It would then be 22 filed, and we would proceed from there. 23 THE PRESIDING MEMBER: Thank you, 24 gentlemen. 25 MR. FARRELL: Thank you, 26 Mr. Chairman. 27 THE PRESIDING MEMBER: Ms Soudek, 28 over to you. 371 Preliminary matters 1 MS SOUDEK: Good morning, 2 Mr. Chairman. 3 THE PRESIDING MEMBER: The witnesses 4 can come forward to be sworn, please. 5 SWORN: JOHN BAYKO 6 PREVIOUSLY SWORN: HOLLY REYNOLDS 7 PREVIOUSLY SWORN: SCOTT DODD 8 MS SOUDEK: Mr. Chairman, these 9 witnesses are here to speak to the Home Gas Supply 10 Inspection Program, which is Issue 3.7 on the Board's 11 list of issues. 12 Seated closest to you is Ms Reynolds, 13 Supervisor of Management Accounting Policy. Next to 14 Ms Reynolds is Mr. John Bayko, who is Director of 15 Engineering for the company. Next to Mr. Bayko is 16 Mr. Scott Dodd, who appeared yesterday, and is Manager 17 of Business Support Financial Studies. 18 EXAMINATION-IN-CHIEF 19 MS SOUDEK: Ms Reynolds, is your 20 curriculum vitae contained in Exhibit A, at Tab 17, 21 Schedule 1? 22 MS REYNOLDS: Yes, it is. 23 MS SOUDEK: Are you responsible for 24 the exhibits that are germane to the home inspection 25 issues that are listed opposite your name in that 26 exhibit? 27 MS REYNOLDS: Yes. 28 MS SOUDEK: Are you also responsible 372 BAYKO/REYNOLDS/DODD, in-ch (Soudek) 1 for the interrogatory responses in Exhibit I that bear 2 your name and that are germane to the issue? 3 MS REYNOLDS: Was the material 4 prepared by you or under your direction and control? 5 MS REYNOLDS: Yes. 6 MS SOUDEK: Is this material accurate 7 to the best of your knowledge or belief? 8 MS REYNOLDS: Yes, having regard to 9 the corrections to Exhibit I, Tab 11, Schedules 12 and 10 13 that I made earlier during my appearance on the 11 NGV panel. 12 MS SOUDEK: Thank you, Ms Reynolds. 13 Mr. Bayko, is your curriculum vitae 14 contained in Exhibit A, at Tab 17, Schedule 1? 15 MR. BAYKO: Yes. 16 MS SOUDEK: Are you responsible for 17 the exhibits that are germane to the home inspection 18 issues that are listed opposite your name in that 19 exhibit? 20 MR. BAYKO: Yes. 21 MS SOUDEK: Are you also responsible 22 for the interrogatory responses in Exhibit I that bear 23 your name and that are germane to the home inspection 24 issues? 25 MR. BAYKO: Yes. 26 MS SOUDEK: Was this material 27 prepared by you or under your direction and control? 28 MR. BAYKO: Yes. 373 BAYKO/REYNOLDS/DODD, in-ch (Soudek) 1 MS SOUDEK: Is this material accurate 2 to the best of your knowledge and belief? 3 MR. BAYKO: Yes. 4 MS SOUDEK: Thank you. 5 Mr. Dodd, finally, is your curriculum 6 vitae contained in Exhibit A, at Tab 17, Schedule 1? 7 MR. DODD: Yes. 8 MS SOUDEK: Are you responsible for 9 the exhibits that are germane to the HGAI issues that 10 are listed opposite your name in that exhibit? 11 MR. DODD: Yes. 12 MS SOUDEK: Are you also responsible 13 for the interrogatory responses in Exhibit I that bear 14 your name and that are germane to the HGAI issue? 15 MR. DODD: Yes, that is correct. 16 MS SOUDEK: The material was prepared 17 under your direction and control? 18 MR. DODD: Yes. 19 MS SOUDEK: The material is accurate 20 to the best of your knowledge and belief? 21 MR. DODD: Yes, that is correct. 22 MS SOUDEK: Thank you. 23 The witnesses are available for 24 cross-examination. 25 THE PRESIDING MEMBER: Thank you, 26 Ms Soudek. 27 Mr. Mondrow, I suspect you are in the 28 lead today, are you? 374 BAYKO/REYNOLDS/DODD, in-ch (Soudek) 1 MR. MONDROW: A good guess, yes; 2 thank you, Mr. Chairman. My friends have consented to 3 allow me to go first. 4 CROSS-EXAMINATION 5 MR. MONDROW: Good morning, panel. 6 Ms Reynolds, perhaps I could just 7 start with you on the correction that you made 8 yesterday. 9 Could you open up Exhibit I, Tab 11, 10 Schedule 13, which was the HVAC interrogatory response 11 that was the subject of one of your corrections. 12 MS REYNOLDS: Yes. 13 MR. MONDROW: That interrogatory and 14 its response deals with the costs of performing the 15 cost allocation study itself. 16 Just to deal with the first paragraph 17 of the response first, as I understand it and as I 18 understood it last year, in the 1999 then budgets which 19 were before the Board in E.B.R.O. 497, there was a 20 figure of $251,000 removed from utility cost of service 21 on account of the non-utility portion of the cost 22 allocation study. Is that correct? 23 MS REYNOLDS: That is correct. 24 MR. MONDROW: That study was actually 25 done prior to the 1999 year, but the costs of the study 26 were treated for ratemaking purposes as costs in the 27 1999 year. Is that correct? 28 MS REYNOLDS: The test year. 375 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: For the test year. 2 MS REYNOLDS: Yes. They were removed 3 from cost of service in the test year. 4 MR. MONDROW: Okay. 5 Then yesterday you corrected 6 paragraph 2 of the response. 7 Just to refresh my memory at least, 8 and perhaps yours as well, I will just read what you 9 have now responded to with respect to the second part 10 of your response. From what you said yesterday, the 11 second paragraph should read as follows: 12 "As a result of the PBR formula 13 applying to O&M and the removal 14 of all ancillary programs, 15 except NGV, the Company is not 16 anticipating performing a cost 17 allocation study in 2000 and as 18 such there are no costs to 19 allocate." (As read) 20 MS REYNOLDS: That is correct. 21 MR. MONDROW: Now, last year the cost 22 allocation study that was filed for 497, did not 23 identify any allocations for the HGAI program. Is that 24 correct? 25 MS REYNOLDS: That's correct. 26 MR. MONDROW: Except the direct 27 costs. 28 MS REYNOLDS: The home gas appliance 376 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 inspection service is a core utility activity and was 2 not part of last year's cost allocation study because 3 we don't identify the specific components of the core 4 utility activities in the cost allocation study. 5 A rate of return schedule was 6 prepared for that program this year as a result of last 7 year's ADR agreement. 8 MR. MONDROW: Preparing that rate of 9 return schedule for this year, that schedule is 10 prepared again as a result of the ADR agreement on a 11 fully allocated cost basis. Correct? 12 MS REYNOLDS: That is correct. 13 MR. MONDROW: So in order to prepare 14 that schedule, you had to perform a cost allocation 15 study. Is that correct? 16 MS REYNOLDS: That is correct. 17 MR. MONDROW: And presumably there 18 was a cost associated with performing that study. 19 MS REYNOLDS: That cost was incurred 20 in the 1999 fiscal year. 21 MR. MONDROW: Right. 22 But it wasn't budgeted for 1999 in 23 E.B.R. 497, was it? 24 MS REYNOLDS: It was budgeted in 1999 25 as an O&M cost of the company. 26 MR. MONDROW: Did you anticipate when 27 you filed your 497 case that you would be performing 28 this study? No, because there was no agreement on it 377 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 yet. Right? 2 MS REYNOLDS: I'm trying to think 3 back to -- when you say when we filed 497, that would 4 have been prior to the ADR agreement for 497? 5 MR. MONDROW: Right. 6 MS REYNOLDS: Is that the time line? 7 MR. MONDROW: Yes. 8 MS REYNOLDS: Yes. 9 MR. MONDROW: So, yes, you did not 10 anticipate spending this money? 11 MS REYNOLDS: I would have 12 anticipated performing a cost allocation study for the 13 2000 test year in fiscal 1999. 14 MR. MONDROW: But those costs would 15 have been dealt with subject to the PBR decision in the 16 interim in this case. You seem to be collapsing the 17 time frames here. In the case that you filed for what 18 was then the 1999 test year, you excluded costs for a 19 cost allocation study that was in fact performed in 20 1998 in preparation for the filing. Right? So the 21 costs of the 1998 study were dealt with in the 1999 22 test year. 23 MS REYNOLDS: The costs that were 24 allocated to the non-utility study in the 1999 test 25 year were costs of the 1999 forecasted O&M. 26 MR. MONDROW: You are not answering 27 my question. 28 MS REYNOLDS: Then perhaps you need 378 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 to repeat your question. 2 MR. MONDROW: The costs of performing 3 the study that were actually incurred in 1998 were 4 treated for ratemaking purposes as 1999 costs and part 5 of those costs were excluded from cost of service for 6 the 1999 test year as associated with non-utility 7 eliminations. 8 MS REYNOLDS: I don't see it as that, 9 because the cost allocation study is only allocating 10 costs of the test year. We are not increasing test 11 year costs for -- I guess perhaps you can view it as 12 accruals from 1998. We look at our 1999 O&M in total, 13 what the company expects to incur in 1999, and that's 14 what we allocate. 15 MR. MONDROW: Okay. 16 Let's try it this way. For the 1999 17 test year, the 1998 study which was the basis of the 18 1999 test year, you did not allocate any costs to the 19 ancillary programs in connection with the cost 20 allocation study. Do you recall that? 21 MS REYNOLDS: That's correct. 22 MR. MONDROW: Okay. 23 And the Board expressed a concern 24 about that. 25 MS REYNOLDS: That's correct. 26 MR. MONDROW: Since that time you 27 have in fact incurred costs with respect to performing 28 the cost allocation study for the HGAI service. 379 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 Correct? 2 MS REYNOLDS: The cost allocation 3 study was performed to meet the needs of the ancillary 4 programs. 5 MR. MONDROW: Ms Reynolds, perhaps 6 you can just answer my question. 7 You performed a cost allocation study 8 since the time of 497 for the HGAI program. Correct? 9 MS REYNOLDS: I did not perform a 10 cost allocation study specifically for HGAI. HGAI was 11 incorporated into the existing format of the cost 12 study. So there were no additional costs incurred as a 13 result of doing that. 14 MR. MONDROW: That is additional to 15 the study you were already doing? 16 MS REYNOLDS: That's correct. 17 MR. MONDROW: But you haven't 18 allocated any costs of that study to the HGAI service 19 in the rate of return schedule filed in this 20 proceeding. Correct? 21 MS REYNOLDS: That's correct. 22 Because in the 2000 test year, we are not anticipating 23 performing a cost allocation study, in which case there 24 would be no additional costs in O&M on account of that 25 study. In the 2000 test year, there is already a 26 component of the cost of study removed from cost of 27 service as a result of the removal for the 1999 O&M PBR 28 base related to the cost study. 380 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: So the result is that 2 there are never -- as you are describing this -- there 3 are never any costs that would be captured or allocated 4 to HGAI on account of the study? 5 MS REYNOLDS: It's still the 6 company's position that the rate of return schedules 7 have been developed to show the performance of these 8 ancillary programs, and we still believe that the cost 9 allocation study is performed for regulatory purposes 10 and doesn't really represent the ongoing operations of 11 these programs. 12 MR. MONDROW: Ms Reynolds, can I 13 interrupt you for a minute. 14 If the Board decided at the end of 15 this case that HGAI should be costed on a fully 16 allocated basis, am I correct that there will be costs 17 missing from that because you haven't allocated, in the 18 materials before us today, any of the costs of 19 performing the study? 20 MS REYNOLDS: I would disagree with 21 that because it is our position that the costs of 22 performing the cost study are not relevant to the rate 23 of return schedule on a fully allocated basis. 24 MR. MONDROW: And they are not 25 relevant to the rate of return schedule why? 26 MS REYNOLDS: Because they don't 27 represent the ongoing operations of the home gas 28 appliance inspection service. 381 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: But the Board disagreed 2 with you last year. Do you recall that? 3 MS REYNOLDS: They didn't 4 specifically disagree. They said that they weren't 5 entirely convinced. 6 MR. MONDROW: Well, they said, at 7 paragraph 2.4.20 of the E.B.R.O. 497 decision, that the 8 cost allocation activity is caused as much by ancillary 9 program as by non-utility activity, and in so saying, 10 in our view, the Board was dissatisfied with the 11 company's explanation that none of those costs should 12 be allocated to what were then the ancillary programs. 13 If the Board decided at the end of 14 this case that the HGAI program should be costed on a 15 fully allocated basis, it seems to me that the same 16 comments would apply. But you disagree. 17 MS REYNOLDS: If the Board decided to 18 allocate a portion of the cost allocation study 19 performed in 1999, which produced the rate of return 20 schedule in front of us, then of course the company 21 would include those costs in the rate of return 22 schedule. I believe the cost -- doing the math based 23 on last year's allocation for the non-utility 24 component, what might get allocated to the home gas 25 appliance inspection service would be around the 26 magnitude of $4,000. 27 MR. MONDROW: Ms Reynolds, perhaps 28 rather than having conjecture, could I ask you for an 382 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 undertaking to: (a) provide the total cost of the cost 2 allocation study performed in preparation for this 3 filing -- 4 MS REYNOLDS: I don't have that 5 information. 6 MR. MONDROW: Well, did you perform a 7 cost allocation study? 8 MS REYNOLDS: I did perform a cost 9 allocation study in fiscal 1999. 10 MR. MONDROW: Right. And did you not 11 track -- 12 MS REYNOLDS: But the cost -- 13 MR. MONDROW: I'm sorry. Let me ask 14 you the question. 15 Did you not track the costs of 16 performing that study as you did the last time around? 17 MS REYNOLDS: As a result of PBR 18 coming into effect, the cost allocation study was -- to 19 backtrack a bit, the cost allocation study was started 20 in anticipation of presenting filings as we 21 historically have always presented them. 22 Then, with the PBR decision, we 23 realized that that was no longer going to be the case, 24 that there wasn't a need to perform the cost allocation 25 study to develop the non-utility elimination because it 26 is a component of PBR. 27 We have already removed costs related 28 to that, therefore, there was no need to actually track 383 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 the cost of performing the cost allocation study for 2 the purposes of removing it from what would have been 3 our 2000 O&M if we weren't under a PBR regime. 4 MR. MONDROW: I am sorry. I am not 5 following you at all. 6 Last year, you performed a cost 7 allocation study and, as part of that study, you in 8 fact tracked the costs of performing the study? 9 MS REYNOLDS: We tracked the cost of 10 performing the non-utility side of the study. 11 MR. MONDROW: Well, you tracked the 12 cost of both sides and then you allocated the 13 non-utility portion. Isn't that correct? 14 MS REYNOLDS: No. We specifically 15 asked departments to accumulate the cost of performing 16 the non-utility study. 17 MR. MONDROW: All right. This year, 18 you performed an allocation -- a cost allocation study. 19 The same activity analysis process as last year. 20 Correct? 21 MS REYNOLDS: We started the study. 22 It was not completed. It was performed, to a degree, 23 to allow us to prepare the rate of return schedules for 24 NGV and the home gas appliance inspection and, prior to 25 that, ABC when it was still an ancillary program. 26 MR. MONDROW: But you were able to do 27 that without completing the study? 28 MS REYNOLDS: That is correct. 384 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: Well, how did you -- 2 can you describe for me when you stopped and what you 3 did, then, to derive the costs that you filed before 4 the Board? 5 MS REYNOLDS: We obtained allocation 6 information from all of the departments on what they 7 expected to do for NGV, for the home gas appliance 8 inspection service and ABC, at that point. 9 MR. MONDROW: That was in the form of 10 an activity analysis -- 11 MS REYNOLDS: That is correct. 12 MR. MONDROW: Okay. And then? 13 MS REYNOLDS: The same -- that 14 information was run through our access model, which 15 developed the allocations which formed the input into 16 the rate of return schedules. 17 MR. MONDROW: How is that different 18 from last year's study? 19 MS REYNOLDS: Well, last year's 20 study, we had all of the various non-utility activities 21 which were subject to review, the accumulation of data, 22 vetting of information, you know; we reduced -- I 23 think, in last year's discussion, we talked about there 24 being 40 programs as part of the cost allocation study. 25 So that meant 40 programs had to be individually 26 analyzed for variances. We were at two programs this 27 year. 28 MR. MONDROW: Okay. So, all you are 385 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 saying, as I understand it, is the scope of the study, 2 subsequent to the PBR decision, was significantly 3 curtailed because you were dealing with only a couple 4 of programs, but for those programs, you completed all 5 the steps required in the study. Is that fair? 6 You finished the allocations, with 7 respect to, for example, the home gas appliance 8 inspection service. 9 MS REYNOLDS: That is correct, the 10 allocations are complete. 11 MR. MONDROW: All right. Could you, 12 then, provide me with the undertaking to -- I am sorry. 13 I asked you for an undertaking to provide the cost of 14 that, and what you are saying is you didn't track that 15 cost? 16 MS REYNOLDS: That is correct. 17 MR. MONDROW: All right. And you 18 didn't think it necessary to track that cost. Why? 19 MS REYNOLDS: As a result of PBR, we 20 had already pulled $250,000 out of cost of service 21 related to the performance of the cost allocation 22 study. That amount is removed from cost of service for 23 the entire PBR period. 24 Since we are no longer performing a 25 cost allocation study on an ongoing basis -- we did do 26 one last year because we were kind of in a transition, 27 not really knowing what information would be needed on 28 an ongoing basis -- we have now determined that the 386 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 cost allocation study will not be required until such 2 time as we rebase for PBR. So there has been $250,000 3 removed from cost of service for each year of the PBR 4 period. 5 MR. MONDROW: I appreciate that. But 6 in terms of the rate of return schedules, then, I think 7 a minute ago you told me that if the Board wanted to 8 allocate the cost of performing the study to the rate 9 of return schedule, your figure would be approximately 10 $4,000. 11 MS REYNOLDS: If the Board wished to 12 allocate a cost of preparing the rate of return 13 schedule in fiscal 1999 to the 2000 rate of return 14 schedule, it would be in the magnitude of about $4,000. 15 MR. MONDROW: Okay. Just to be 16 really clear, when you say "preparing the rate of 17 return schedule", you are including all of the work -- 18 MS REYNOLDS: Sorry. That is 19 incorrect. It is preparing the allocations to the rate 20 of return schedule. 21 MR. MONDROW: So performing the study 22 for the HGAI portion of the study, your guess is 23 $4,000? 24 MS REYNOLDS: Yes. 25 MR. MONDROW: And for NGV? 26 MS REYNOLDS: It would be about 27 $16,000. 28 MR. MONDROW: Sixteen. 387 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 So the total costs of the studies 2 that you completed were $20,000? 3 MS REYNOLDS: The components that 4 would be allocated to NGV and home gas appliance. 5 I think it is entirely unfair to say 6 that $250,000 related to completing the study should 7 now be borne by the home gas appliance inspections and 8 the NGV programs because we were in a transition period 9 and those were the only two programs that ended up 10 requiring information out of the study. As I said 11 before, I am comfortable with that assessment because 12 we have removed $250,000 related to completing the 13 study from cost of service. 14 MR. MONDROW: Okay. Thank you for 15 that. 16 Mr. Bayko, perhaps we can talk, now, 17 about HGAI a little bit. 18 MR. BAYKO: Certainly. 19 MR. MONDROW: Would you agree with 20 me, just so we can clear this up, that this is not an 21 emergency response program? 22 MR. BAYKO: No, I don't think so. I 23 think we treat this as part of our emergency response 24 system. 25 The way we handle these calls is 26 similar to the way we would handle emergency response 27 calls. A customer calling in with fumes, an odour, or 28 any problem associated, in their home, we would 388 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 respond. 2 I guess we introduced this program 3 several years ago -- I think it was in 1997 -- because 4 of the growing awareness of carbon monoxide by 5 people -- it is odourless, colourless gas that was 6 quite poisonous -- and this growing awareness led 7 people to start buying carbon monoxide detectors -- and 8 rightly so. They were trying to protect themselves. 9 MR. MONDROW: Mr. Bayko, can I just 10 interrupt you, because I will come back to the 11 rationale of the programming and give you ample 12 opportunity to provide your evidence on that. 13 But just sticking with my initial 14 question, do I understand your evidence to be that this 15 program is part of the emergency response of the 16 company or is in addition to and complementary to the 17 emergency response of the company? 18 Do you understand the distinction 19 that I am trying to make? 20 MR. BAYKO: I would say it is a 21 complementary program, yes. 22 MR. MONDROW: All right. 23 MR. BAYKO: I would agree with that. 24 MR. MONDROW: All right. Can I get 25 you to agree, then, that the particular services 26 provided under this program -- which we will talk about 27 in a minute -- are not geared at making the situation 28 safe but, rather, at addressing concerns following a 389 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 determination as to whether the situation is safe? And 2 I am speaking of the situation in the customer's 3 premises. Is that fair? 4 MR. BAYKO: You will have to repeat 5 that. 6 MR. MONDROW: I am suggesting to you 7 that the services provided under this program are not 8 necessary services in order to make the situation safe 9 at the customer's home; rather, they are services 10 provided after it is determined that the situation is 11 safe at the customer's home. 12 MR. BAYKO: There is not a very easy 13 answer to that. I can't really answer that question 14 "yes" or "no" because it is possible what may appear to 15 be a safe situation by having the carbon monoxide 16 detector activated may require more extensive work and 17 there may be some problems in the home. 18 MR. MONDROW: But it is not an urgent 19 situation any longer. Is that fair? 20 MR. BAYKO: It is not an urgent 21 situation. I would agree with that. 22 MR. MONDROW: Okay. In response to 23 Board Staff Interrogatory No. 93, Exhibit I, Tab 1, 24 Schedule 93 -- and I will just read in the first 25 sentence of that response -- Board staff was concerned 26 about the impact of -- or the connection of this 27 service -- sorry. Let me back up. 28 Let me open it. Maybe that is the 390 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 clearest way to do it. 2 MR. BAYKO: Yes. 3 MR. MONDROW: Exhibit I, Tab 1, 4 Schedule 93. 5 --- Pause 6 MR. MONDROW: As I read the question, 7 Board staff is concerned that if the company doesn't 8 promote this service any longer, will customer safety 9 be impacted. You assured Board staff, in the first 10 sentence of the response, by saying: 11 "The HGAI service program will 12 have no impact on the company's 13 procedures for handling gas leak 14 or fumes (odour) calls." 15 (As read) 16 Then, if you flip open Exhibit I, 17 Tab 1, Schedule 94, you repeat the assurance, for Board 18 staff, that: 19 "The HGAI service program does 20 not relate to gas leaks or 21 odours. It will have no impact 22 on the company's procedures for 23 handling gas leak calls." 24 (As read) 25 I take those responses of yours to 26 indicate that this program and the lack of promotion of 27 this program by the company in the test year will not 28 compromise customer safety. 391 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 Is that what you are trying to -- 2 MR. BAYKO: That is correct. 3 MR. MONDROW: Okay. Thank you. 4 Will you agree with me that, last 5 year, this program was treated as one of six what we 6 referred to as appliance service programs rather than 7 as part of the company's emergency response system? 8 That's how this program was treated 9 in the ADR discussions last year and the agreement that 10 was altered. Correct? 11 MR. BAYKO: It was treated as one of 12 the six programs. That's correct. 13 MR. MONDROW: And those programs were 14 referred to as appliance service programs as a basket? 15 MR. BAYKO: I am not sure how they 16 were referred to. 17 MR. MONDROW: And perhaps then it's 18 time to take you to your prefiled evidence on this, 19 which is Exhibit D1, Tab 10, Schedule 1. Again, in 20 this evidence, as I read it, and specifically in answer 21 No. 5, you refer to this program as part of the 22 appliance services -- sorry, you refer to this program 23 as an appliance service program. 24 MR. BAYKO: That's correct. 25 MR. MONDROW: And nowhere in your 26 evidence is there a discussion of emergency response in 27 connection with this program. Is that fair? 28 MR. BAYKO: That's correct. 392 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: Let me then just allow 2 you, Mr. Bayko, to provide some of the information that 3 you would like to provide on this. Perhaps we can do 4 that by looking at Answer 6 on page 2 of your prefiled 5 evidence. If we can just look at the second sentence, 6 I will ask you to explain because I don't fully 7 understand it. 8 You said that: 9 "The program was originally 10 developed in response to 11 increasing numbers of carbon 12 monoxide calls and was expected 13 to offset some of the 14 incremental costs incurred by 15 the company due to these calls." 16 (As read) 17 As I read that sentence, it indicates 18 to me that the service was developed in order to 19 recover some of the costs of the company's emergency 20 response people getting out to the customer's premises 21 when there was a gas order call. Am I reading that 22 incorrectly? 23 MR. BAYKO: Yes. 24 MR. MONDROW: Maybe you can explain 25 it for me then. 26 MR. BAYKO: The program was developed 27 initially, we were seeing an increasing number of calls 28 coming in as a result of people going out and buying 393 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 carbon monoxide detectors, and we were also concerned 2 because there was pending legislation by municipalities 3 to insist that each home have a carbon monoxide 4 detector. 5 We were finding that an awful lot of 6 these calls were false, that the carbon monoxide 7 detectors at the time really weren't as sensitive as 8 they should be. 9 We were also witnessing that this was 10 occurring in other areas in North America where there 11 was an increasing number of CO calls as a result of 12 carbon monoxide detectors. What we wanted to do was 13 help defray some of those costs of responding on an 14 emergency basis to those calls. We went about and 15 developed a comprehensive program dealing with carbon 16 monoxide where we could assist our customers in getting 17 the best possible help they had. 18 We developed that program so that if 19 there were any physical symptoms we would connect them 20 directly with the fire department and the fire 21 department would respond to the carbon monoxide call, 22 since they are the ones that have the proper medical 23 equipment on their vehicles and they can get hold of 24 ambulatory people. 25 MR. MONDROW: Okay. Just to 26 interrupt you for a second, what you have just 27 described, patching them into the fire department, 28 that's not part of the HGAI program as you have 394 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 described it for the test year. Correct? 2 MR. BAYKO: It's part of how we 3 respond to carbon monoxide calls. 4 MR. MONDROW: But it's not part of 5 the HGAI home gas appliance inspection program, is it? 6 MR. BAYKO: Part of our carbon 7 monoxide response is to go through this part that I was 8 discussing and if there are physical symptoms to pass 9 that on to the fire department and have them respond. 10 MR. MONDROW: Do you charge the 11 customer for that? 12 MR. BAYKO: No, we don't charge the 13 customer for that. 14 MR. MONDROW: Okay. 15 MR. BAYKO: At the same time, if 16 there aren't any physical symptoms and customers are 17 concerned about the carbon monoxide being activated, in 18 our efforts to go out and satisfy those customers and 19 try to make sure that they feel comfortable with their 20 environment, we will respond and at that stage we have 21 offered this program to them, and that we will go in 22 and we will do the carbon monoxide ambient air. We 23 will also check each appliance if it is producing 24 carbon monoxide and we will give them some assurances 25 that their appliances are functioning properly. 26 MR. MONDROW: Okay. So let me just 27 break that down for a minute. If you get a call and 28 there seems to be physical symptoms, the customer is 395 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 reporting physical symptoms, you will react in an 2 emergency response mode and get them in touch with the 3 fire department. 4 MR. BAYKO: That's correct. 5 MR. MONDROW: And if that's the 6 situation, you then back out and leave it to the fire 7 department to take care of? 8 MR. BAYKO: No. We leave it to the 9 fire department to deal with the individual on the 10 medical aspects, but we respond on the carbon monoxide 11 issue. 12 MR. MONDROW: As well. 13 MR. BAYKO: Correct. 14 MR. MONDROW: You will send someone 15 out? 16 MR. BAYKO: Correct. 17 MR. MONDROW: And when that person 18 gets to the home what do they do? 19 MR. BAYKO: They will try to 20 determine the cause of the carbon monoxide. 21 MR. MONDROW: And if they determine 22 that there is a gas leak and they shut the gas off 23 that's the end of that response, the customer is now 24 safe? 25 MR. BAYKO: That's correct. 26 MR. MONDROW: And up to that point 27 you are not charging the customer for anything? 28 MR. BAYKO: That's correct. 396 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: And then, as I 2 understand it, you will move on or your service person 3 will move on to offer a home gas appliance inspection. 4 Is that right? 5 MR. BAYKO: It's possible at that 6 time that they could. 7 MR. MONDROW: When else would it be 8 done, subsequently? 9 MR. BAYKO: It could be done at the 10 time of the call where there are no physical symptoms. 11 MR. MONDROW: Okay. Fair enough. 12 Once that program is offered we are 13 then into what you have described in your prefiled 14 evidence, which I am going to come to in a minute, and 15 a charge for that? 16 MR. BAYKO: That's correct. 17 MR. MONDROW: And if the customer 18 doesn't want you to respond or doesn't accept the offer 19 of the service person at the time that the situation is 20 either determined to be safe or made to be safe, then 21 there is no payment to the company to defray the cost 22 of any of the preceding steps. Right? 23 MR. BAYKO: That would have been an 24 emergency call. 25 MR. MONDROW: Part of your core 26 utility responsibility? 27 MR. BAYKO: We would have responded 28 to a carbon monoxide call because there were physical 397 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 symptoms. 2 MR. MONDROW: Now, let's focus in on 3 the program then and still on Answer No. 6, and you 4 describe the program starting in the third sentence as 5 follows: 6 "It provides an inspection of 7 all natural gas appliances and a 8 test of the carbon monoxide 9 levels in the home. A written 10 report and information package 11 is provided to the customer." 12 (As read) 13 Can you describe for me what you 14 would include in the written report? 15 MR. BAYKO: There is a document that 16 is filled out when we go to the premise. It talks 17 about -- it goes through, for example, there are things 18 on it, carbon monoxide detector information, whether a 19 vehicle or other small engine has been operating in the 20 garage or basement. Was there a wood-burning stove or 21 fireplace? Was the detector exposed to cleaning 22 products or other household chemicals? Was the 23 detector exposed to high humidity? Were occupants 24 smoking in the vicinity of the detector? Is the 25 premise located at a major intersection where 26 automobile exhaust may have entered the premises? 27 We also then check the various parts 28 of the home for ambient to see if there is any carbon 398 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 monoxide -- for example, in the entrance to the 2 premise, the kitchen, the basement, the main sleeping 3 areas. 4 We then check the combustion air, the 5 ignition, the combustion, safety controls, the 6 appliance approvals, the warning stickers, the chimney 7 conditions, clearance from combustibles, the venting 8 system, the supply lines and the hot water system. 9 We also then take down the serial 10 numbers of the equipment and we determine whether it is 11 producing any carbon monoxide. 12 We then leave a copy -- 13 MR. MONDROW: Why do you take the 14 serial numbers of the equipment? 15 MR. BAYKO: That's the equipment in 16 there at the time. 17 MR. MONDROW: Why do you take those? 18 MR. BAYKO: Well, because our 19 inspection is done at that time with that equipment in 20 the premise. 21 MR. MONDROW: And? You are just 22 recording that that equipment was there? 23 MR. BAYKO: Yes, that's exactly 24 right. 25 MR. MONDROW: What do you do with the 26 serial numbers afterwards? 27 MR. BAYKO: We don't do anything with 28 them. That's the piece of equipment and that's the 399 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 serial number associated with that piece of equipment 2 that was in the home at the time we did the inspection. 3 MR. MONDROW: Does your report 4 include any recommendations on additional servicing to 5 appliances? 6 MR. BAYKO: No, it doesn't. 7 MR. MONDROW: Does it include 8 recommendations with respect to purchasing CO2 9 detectors? 10 MR. BAYKO: No, it doesn't. 11 MR. MONDROW: Would you be averse to 12 filing, just so we can review without wasting -- we are 13 spending, I shouldn't say wasting, spending more time 14 here, the format of the report that you provide to the 15 customer? 16 MR. BAYKO: Certainly. 17 MR. MONDROW: Thank you. 18 Could we have an undertaking number? 19 MS LEA: Yes. We are at J3.1 today. 20 UNDERTAKING NO. J3.1: Mr. Bayko 21 undertakes to provide the format 22 of report provided to customer 23 re carbon monoxide inspection 24 MS SOUDEK: Just to be clear, 25 Mr. Mondrow, you would like a copy of the blank form 26 that is filled in by the inspector performing the 27 service? 28 MR. MONDROW: Yes. I will refrain 400 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 from asking for all the serial numbers on file. I 2 would just like the blank report. 3 Mr. Bayko, I am just trying to 4 determine here, and I think you have responded in fact, 5 the report doesn't include -- doesn't get into the area 6 of you should fix your appliances or you should have 7 someone inspect them or you should buy new ones. None 8 of that is dealt with in the report that you are 9 talking about. Is that correct? 10 MR. BAYKO: That's correct. 11 MR. MONDROW: And none of that would 12 be dealt with by the technician providing the service 13 to the customer? That's not an area that they get 14 into? 15 MR. BAYKO: I'm not -- you mean 16 recommending something? 17 MR. MONDROW: Yes. 18 MR. BAYKO: If there is a fault they 19 will certainly recommend that it be repaired. 20 MR. MONDROW: Thank you. 21 But the company will no longer be 22 providing that kind of service in the test year? 23 MR. BAYKO: That's correct. 24 MR. MONDROW: So what would the 25 technician say to the customer then? 26 MR. BAYKO: Well, if it's a serious 27 fault he will apply what is called an "A tag". That 28 equipment will be disconnected and they will be told to 401 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 have a service provider do the repair. When that 2 repair has been completed the service provider will 3 have that tag removed. 4 If it's not what we will classify as 5 an immediate hazard, we will apply what we call a 6 "B tag" and allow the customer so many days to repair 7 that equipment, at which time he must notify us and we 8 will return and reinspect that equipment. 9 MR. MONDROW: That tagging is 10 undertaken by the utility as part of its legislated 11 appliance inspection responsibilities? 12 MR. BAYKO: That's correct. 13 MR. MONDROW: Okay. 14 The recommendation, if there is one, 15 that the customer obtain service, of course the 16 technician wouldn't be allowed to recommend any 17 particular service provider? 18 MR. BAYKO: That's correct. 19 MR. MONDROW: Okay. 20 But the question is: Which HVAC 21 person? But I appreciate your response, Mr. Bayko. 22 Now, if we could just stay with 23 answer 6, and you say in the second paragraph of that 24 answer: 25 "Until such time as there are 26 sufficient suppliers in the 27 marketplace to adequately 28 deliver the HGAI service, the 402 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 company believes it is prudent 2 to continue to provide the 3 service as part of the core 4 utility operations in order to 5 meet customer safety needs." 6 (As read) 7 As I understand it, Mr. Bayko -- 8 well, let me just ask you rather than putting words in 9 your mouth. 10 How do you support the statement that 11 there are not sufficient suppliers in the marketplace 12 to provide this form of inspection service? 13 MR. BAYKO: We are not aware of 14 anyone provide an ambient field test and a test of the 15 equipment. 16 Last week I requested that we 17 randomly select some service providers in the 18 marketplace and we phoned up and asked for this type of 19 service and no one was able to provide it. 20 Service providers will do a multitude 21 of things such as maintaining your equipment or 22 providing service on diagnostic and repairs, but nobody 23 has this particular type of service offering. 24 MR. MONDROW: Okay. Can you just 25 describe the sample that you took? 26 MR. BAYKO: You mean the -- 27 MR. MONDROW: You described a random 28 sampling and a check. 403 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. BAYKO: What we did is we phoned 2 some different service providers. That was -- 3 MR. MONDROW: Where did you get the 4 numbers? 5 MR. BAYKO: Where did we get the 6 numbers? 7 MR. MONDROW: How did you determine 8 who you were going to phone? 9 MR. BAYKO: Oh, we just randomly 10 picked some providers. 11 MR. MONDROW: From where? 12 MR. BAYKO: The phone book. 13 MR. MONDROW: Did you make a list? 14 From the phone book. 15 MR. BAYKO: Phone book. 16 MR. MONDROW: Okay. And were there 17 any -- 18 MR. BAYKO: People that we know 19 provide service in the industry. 20 MR. MONDROW: Were there any criteria 21 about size of the company that you phoned? 22 MR. BAYKO: Oh, we phoned what we 23 would have thought were major as opposed to minor 24 players. 25 MR. MONDROW: So larger companies? 26 MR. BAYKO: Yes. 27 MR. MONDROW: Okay. 28 Now, in the past, as I understand it, 404 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 this HGAI service was in fact provided by contractors. 2 Is that right? 3 MR. BAYKO: I'm not aware -- maybe 4 you can ask me more specific about that question, 5 whether we used contractors to do the service? 6 MR. MONDROW: Yes. I'm sorry. 7 MR. BAYKO: Okay. Yes, we have done 8 that. 9 MR. MONDROW: Did you use -- 10 MR. BAYKO: But that is part of our 11 infrastructure responding to service calls. 12 MR. MONDROW: Did you use contractors 13 exclusively or in combination with -- 14 MR. BAYKO: In combination. 15 MR. MONDROW: So at least those 16 contractors that you used were, at least at your 17 behest, providing that service last year? 18 MR. BAYKO: Those contractors work 19 for us and are trained by us and provided those 20 services. 21 MR. MONDROW: Those contractors are 22 not employees of the company? 23 MR. BAYKO: No, they are contractors. 24 MR. MONDROW: Are they companies that 25 you contract with or individuals? 26 MR. BAYKO: They are companies and in 27 some cases individuals. 28 MR. MONDROW: Okay. So there were 405 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 companies and indeed individuals that were able to 2 provide the service last year under your auspices? 3 MR. BAYKO: That's correct. 4 MR. MONDROW: All right. But none of 5 those companies or individuals, as far as you are 6 aware, can provide or intend to provide the service 7 this year? 8 MR. BAYKO: As far as I know, that's 9 correct. 10 MR. MONDROW: By "this year" I mean 11 the test year. 12 MR. BAYKO: Yes, I agree. Yes. 13 Right now. I'm speaking right now. 14 MR. MONDROW: Right. 15 MR. BAYKO: Maybe next year they 16 will -- or starting October they will offer it, but as 17 of last week the ones we called do not offer it. 18 MR. MONDROW: I will send the 19 transcript around and they can get back to you. 20 If you can open Exhibit I, Tab 11, 21 Schedule 36, we asked you what would be required in the 22 company's view to properly deliver a service like this. 23 The first part of your response deals 24 with -- 25 THE PRESIDING MEMBER: Mr. Mondrow, 26 was that 36? 27 MR. MONDROW: I'm sorry, sir, 28 yes, 36. Exhibit I, Tab 11, Schedule 36. 406 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 We asked you, Mr. Bayko, what is 2 required in terms of infrastructure and qualifications 3 in the company's view to properly deliver a service 4 like the HGAI service. 5 The first sentence says: 6 "The utility can respond to 7 emergencies." (As read) 8 We have dealt with the emergency 9 response protocol, which I have suggested to you is 10 distinct conceptually from the inspection service. You 11 have made a connection between the two and we have had 12 that discussion already. 13 But if we move on, then, from the 14 emergency response capability, you then say: 15 "An accessible workforce of well 16 trained service technicians." 17 (As read) 18 Am I correct that there is a 19 licensing regime in place for gasfitters and people who 20 would be trained to provide -- people that in fact 21 provided the service for you last year, they were 22 licensed? 23 MR. BAYKO: Yes. 24 MR. MONDROW: Okay. Did you 25 experience any shortage of licensed contractors, people 26 who would be qualified to provide this service? 27 MR. BAYKO: People that work for us 28 are trained to ensure that they are competent and 407 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 qualified. 2 MR. MONDROW: Including the 3 contractors you retain? 4 MR. BAYKO: Absolutely. We treat 5 this as an emergency response system and it is not just 6 a diagnostic and repair system, or repair process. 7 MR. MONDROW: I understand that. 8 Okay. If we can then just turn for a 9 few minutes to the costs and the revenues in the rate 10 of return schedule. 11 Actually, I am still in your prefiled 12 evidence. I'm sorry if I got you to turn that away. 13 Just dealing with the costs of the 14 program and the revenues of the program, you deal with 15 this in Q&A 7. 16 The price for the program is $79.95 17 which, as I understand it, is the jobbing contract rate 18 plus materials. 19 MR. BAYKO: That's correct. 20 MR. MONDROW: Can you just briefly 21 remind us what the jobbing contract rate is? I am 22 going to ask you how you got it, so you can deal with 23 both at the same time. 24 MR. BAYKO: The jobbing contract rate 25 looks at the direct cost associated with providing 26 service an also includes a certain number of overheads 27 associated with providing that service, such as 28 dispatch, supervisory components. 408 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 I can't remember all the components 2 that go into that jobbing contract at this particular 3 time. 4 MR. MONDROW: As I recall, you 5 determine the jobbing contract rate some time ago. 6 MR. BAYKO: That's correct. 7 MR. MONDROW: You have been using the 8 same figure for some number of years? 9 MR. BAYKO: With inflation. 10 MR. MONDROW: With inflation. 11 MR. BAYKO: Yes. 12 MR. MONDROW: All right. 13 Then if we look at the rate of return 14 schedule for the program, which is Exhibit C3, Tab 5, 15 Schedule 1. I think this is the most recent figure. 16 On a fully-allocated cost basis with the costs you have 17 allocated, there is a negative return on investment of 18 49.13 per cent. Is that the current number? 19 MR. BAYKO: Yes, I believe that is 20 correct. 21 MR. MONDROW: Then if I can just 22 spend a few minutes with you on the costs that you have 23 allocated to this program, and if you could open 24 Exhibit I, Tab 11, Schedule 12 where you provided us 25 with this information. If you look at page 4 of that 26 response to start with -- and this was updated, as my 27 friend Ms Soudek is pointing out, yesterday by 28 Ms Reynolds and we have been provided with a new 409 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 sheet -- 2 MS REYNOLDS: Yes, that is correct. 3 MR. MONDROW: -- which I believe the 4 panel has. 5 But what hasn't changed is the number 6 of full-time equivalents. You have just under three 7 people on an FTE-basis providing service under this 8 program? 9 MS REYNOLDS: That's correct. The 10 FTEs that are shown there are the allocated FTEs. 11 Those are incremental to the direct labour of 12 performing the service. 13 MR. MONDROW: Okay. Well, so you 14 have how many direct labour people performing the 15 service? 16 I'm sorry, let me back up because I 17 think I know what you are saying now. 18 The direct labour performing the 19 service would be the service technicians who are 20 actually responsible for providing service under the 21 program and the FTEs are a collection of the bits and 22 pieces of the other people, the support departments, 23 whose time is allocated to the program through the cost 24 allocation process. 25 MS REYNOLDS: That is correct. 26 MR. MONDROW: Okay, great. 27 How many direct labour personnel are 28 there, then, for this program? We don't have that 410 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 information, I don't think. 2 MS REYNOLDS: Well, it is based on 3 4,000 units multiplied by the cost of that direct 4 labour. So it is not captured as an FTE per se, but it 5 is developed based on the 4,000 units times the cost of 6 the time to go out there and do it. 7 MR. MONDROW: Mr. Bayko, can you give 8 us any indication of how many people are occupied with 9 this program on a full-time basis? 10 MR. BAYKO: I would just have to take 11 a guess at 4,000 units and it would only be a couple 12 associated with it. 13 MR. MONDROW: Two people? 14 MR. BAYKO: Two to three, max. 15 MR. MONDROW: With three people you 16 would have over five service calls a day. 17 MR. BAYKO: That's correct. 18 MR. MONDROW: So you have three 19 people doing this essentially full-time. 20 MR. BAYKO: Yes. 21 MR. MONDROW: That would be one way 22 to look at it. 23 MR. BAYKO: Yes. 24 MR. MONDROW: And the costs of those 25 people, then, in the rate of return schedule are 26 included where, Ms Reynolds? 27 MS REYNOLDS: They are included on 28 line 1.2.1, cost of goods sold, of $182,400. 411 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: Thank you. 2 Can we turn back, then -- and, 3 Ms Reynolds, these are probably questions for you -- to 4 page 3 of the interrogatory response? We are still on 5 Exhibit I, Tab 11, Schedule 12. 6 MS REYNOLDS: Yes, I have that. 7 MR. MONDROW: I just want to ask you 8 about a couple of the line items that you didn't 9 allocate costs to the HGAI program for. The HGAI 10 allocations under the cost allocation process are in 11 column 5 on that table? Is that right? 12 MS REYNOLDS: Yes. 13 MR. MONDROW: So, for example, 14 corporate services, there are no cost allocations to 15 HGAI? 16 MS REYNOLDS: That's correct. The 17 departments that compose corporate services, such as 18 risk management, resources protection and audit 19 services, those departments are not anticipating 20 providing any services to this program. 21 MR. MONDROW: I recall in the cost 22 allocation manual last year that the Company provided a 23 description of the activities performed by each of 24 these corporate departments. Are those descriptions 25 still relatively accurate? 26 MS REYNOLDS: Relatively accurate. I 27 would be comfortable saying that, subject to check. I 28 haven't gone through the detailed list recently. 412 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: All right. I was going 2 to try to take you through some of these and ask you 3 for a brief description of each of these departments 4 that you didn't allocate costs for, but it may be 5 faster if I just ask you if this is acceptable to you: 6 to undertake to review the descriptions in that manual 7 and advise if there are any changes that you would feel 8 more comfortable bringing to our attention. 9 The background is that we are going 10 to argue that, for some of these departments, there 11 should have been costs allocated. That is why I would 12 like to understand what they do. And I think it is 13 important that, if we are going to make the argument 14 and the Board is going to be able to consider it 15 appropriately, they are aware of what activities are 16 provided by each of these departments. 17 So, if you could do it that way, it 18 might save us some time. 19 MS REYNOLDS: I would say that we can 20 go ahead and go through it right now. I am comfortable 21 speaking to the basics of what each department does. 22 If you require more information, we can undertake to do 23 it at that point. 24 MR. MONDROW: I guess my concern is 25 that I -- there are two ways we can do this, for my 26 purposes. I either need a complete description, and 27 not just a representative description of what the 28 department does, or we can do it, as I have suggested, 413 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 by taking the descriptions, which I assume are 2 relatively complete, in last year's cost allocation 3 manual and having you update them. I am just concerned 4 about the time it will take to go through each of them 5 here today. 6 MS REYNOLDS: I am not sure that I 7 have a whole lot more time to be able to go through 8 Appendix F to the cost allocation manual. 9 MR. MONDROW: If I let you go early 10 today you will have more time. I am concerned about 11 the time -- 12 MS REYNOLDS: I am afraid there are 13 other people that may impact that -- 14 MR. MONDROW: My concern is, 15 Ms Reynolds, that if I ask you about corporate services 16 and you give me a list of three or four activities, 17 there may be others which you don't consider to be 18 central or don't come to mind which, nonetheless, might 19 dictate an allocation of some sort. I have trouble 20 being representative rather than exhaustive. 21 I would prefer to deal with it by not 22 spending the time with you here in the room -- 23 MS REYNOLDS: My problem with being 24 exhaustive is, this is a really small program and it is 25 the reality that there aren't a lot of departments 26 providing services to this program, so I am not quite 27 sure what additional information can be gained by going 28 through an exhaustive list of activities that all 414 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 departments perform. 2 MR. MONDROW: I appreciate that, 3 Ms Reynolds. Our argument will identify costs in the 4 range of $200,000 not allocated to this program, and if 5 it takes half an hour to determine costs that shouldn't 6 be borne by the ratepayers or revenue that should be 7 impeded of $200,000, then the cost benefit analysis of 8 that time is probably acceptable even for the Board. 9 I realize what your position is on 10 these departments, but the Board disagreed with you on 11 some of them last year, and that is why I am asking you 12 these questions. So you will give me the undertaking? 13 MS SOUDEK: Can I interject, 14 Mr. Chairman? 15 Mr. Mondrow, my difficulty is that if 16 you are going to be arguing that certain departments -- 17 a portion of the costs of certain departments should be 18 allocated to the HGAI program, I think it is only fair 19 that you put that to the witness and ask her to respond 20 as to her view as to why those departments are not 21 providing those services. I don't think it is fair 22 just to leave it to argument. 23 MR. MONDROW: I am happy to do that, 24 Mr. Chairman. If that is, in the end, the most 25 expeditious way to do that, I will certainly do that. 26 THE PRESIDING MEMBER: I wasn't sure, 27 Mr. Mondrow, what the plan was. If you had the 28 response of the undertaking, then what? I mean, you 415 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 wouldn't have a chance to cross-examine again. 2 MR. MONDROW: No. Based on the 3 description of the services, which was the basis of the 4 Board's deliberations last year, we would argue that, 5 just to take ballpark figures, there are obviously 6 costs that weren't allocated that should have been and 7 the Board will have to -- we will urge the Board to 8 pick a number. 9 But I am happy to have Ms Reynolds 10 start to address this and then she can update her 11 response if she feels it appropriate. I have no 12 objection to that, sir. I was merely trying to do this 13 as efficiently as possible, and this may well be the 14 best way. 15 MS SOUDEK: We can certainly -- I 16 have just sent Mr. Ladanyi to get a copy of the cost 17 allocation manual to put in front of -- 18 Ms Reynolds, do you have it? 19 All right. 20 MR. MONDROW: I can still use the 21 copy that is coming, but why don't we proceed in the 22 meantime? 23 MS LEA: Should we maybe take a 24 15-minute break, to allow that to be done? 25 THE PRESIDING MEMBER: Is this a 26 convenient time to break, Mr. Mondrow? 27 MR. MONDROW: Sure, sir. That would 28 be helpful. 416 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 THE PRESIDING MEMBER: It is half 2 past 10. We will return at 10 minutes to 11. 3 MR. MONDROW: Thank you. 4 --- Upon recessing at 1030 5 --- Upon resuming at 1104 6 THE PRESIDING MEMBER: I apologize 7 for the delay. 8 Mr. Mondrow. 9 MR. MONDROW: Thank you, 10 Mr. Chairman. 11 Actually, your delay was gratuitous 12 in the sense that I had done some calculations, which 13 Ms Reynolds was able to correct on the spot, which 14 changes the order of magnitude of the problem as we 15 perceive it in favour of the company; that it makes it 16 smaller. 17 I am just trying to determine how to 18 deal with that. Just give me a minute. 19 --- Pause 20 MR. MONDROW: Ms Reynolds, just so 21 the Board knows where we are going, perhaps I will file 22 this exhibit that I prepared and corrected as it 23 stands. I will advise the Panel of the corrections, 24 and then I will ask you about a few of the departments. 25 You now have the Cost Allocation Manual to refer to, 26 and you can help me out with those. 27 Sir, I have left copies of this one 28 sheet with Board staff, and I would ask that it be 417 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 handed out. I will explain what it was supposed to do 2 and the changes that I think have to be made to it, and 3 proceed from there. 4 I will try not to take too long on 5 this. 6 I think now we are debating about 7 $100,000, and I realize that it is not worth a whole 8 lot of time. I will just try to ask a few questions. 9 MS LEA: Could we give this exhibit 10 number K3.1, please. 11 MR. MONDROW: Although $100,000 is 12 half of the program's allocations in the grand scheme 13 of rates -- 14 MS LEA: Excuse me, Mr. Mondrow. 15 We don't have an exhibit earlier for 16 today. It is the first exhibit on the third day, so it 17 is Exhibit K3.1. Thank you very much. 18 THE PRESIDING MEMBER: For the 19 record, that is entitled "HGAI Additional Allocation 20 Calculations"? 21 MR. MONDROW: Yes. 22 THE PRESIDING MEMBER: The 23 calculations were done by? 24 MR. MONDROW: HVAC Coalition, based 25 on some of the company's numbers, and I will just 26 explain that very quickly. There are mistakes in here, 27 the most egregious of which I will point out, which 28 Ms Reynolds has pointed out to me. 418 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 EXHIBIT NO. K3.1: Document 2 entitled "HGAI Additional 3 Allocation Calculations" 4 MR. MONDROW: What we have done on 5 this exhibit is we have listed from the source in 497 6 of HVAC interrogatory response no. 70 -- which I 7 believe was Exhibit I, Tab 12, Schedule 70 -- all of 8 the corporate departments for whom allocations were 9 done in last year's study, a subset of which are listed 10 on the allocations to HGAI in this year's study, which 11 are found at Exhibit I, Tab 11, Schedule 12 of this 12 year's filing. 13 The sheet that I was going to look at 14 with Ms Reynolds is page 3 of that interrogatory 15 response. 16 There is then a Total Costs Subject 17 to Allocation column, which are the numbers from last 18 year's Exhibit I, Tab 12, Schedule 70. That is the 497 19 schedule. 20 Then the next column, Gross, is last 21 year's costs up by the PBR adjustment factor of 22 4.61 per cent. 23 Pausing there, Ms Reynolds, 24 methodologically, that would be the right way, would it 25 not, to adjust last year's cost allocations, or at 26 least the total cost subject to allocation in last 27 year's O&M budget to the now first year PBR O&M budget? 28 MS REYNOLDS: That is partially 419 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 correct. As described in my evidence at Exhibit C1, 2 Tab 6, Schedule 3, to determine the amount to allocate 3 in the 2000 test year, they were equivalent to the base 4 year amounts with the PBR formula applied. 5 To get to the base year amount, we 6 had to take the 1999 Board-approved budget and adjust 7 it for unbundling. 8 MR. MONDROW: Right. So some of 9 those O&M costs from the base amount, subject to 10 allocation, would be removed through the unbundling. 11 The balance would be grossed up. 12 MS REYNOLDS: That's right. I don't 13 know the exact amount off the top of my head. I would 14 expect it would be in the order of about $30 million. 15 MR. MONDROW: Out of a total of just 16 under $360 million? 17 MS REYNOLDS: That's correct. 18 MR. MONDROW: Then what we have done, 19 sir, is in the third column of numbers from Exhibit I, 20 Tab 11, Schedule 12 in this proceeding, the HGAI and 21 NGV cost allocation schedule, which is page 3 of that 22 interrogatory response, we have simply inserted the 23 numbers that the company in fact allocated to HGAI, 24 with two fairly egregious errors which Ms Reynolds has 25 pointed out. 26 In line 1, Corporate Affairs, our 27 number is $100,000 and it should actually be $900. 28 Here you will see the order of magnitude of the problem 420 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 diminishing rapidly. 2 In line 5, Distribution Operations, 3 Regional, where we had $200,000, it should be $200. 4 MS REYNOLDS: That's correct. 5 MR. MONDROW: I have a spreadsheet 6 here which I was able to run with those adjustments. I 7 won't take you through all the numbers, but the most 8 salient result of that change is that at the bottom of 9 the third column of numbers the total cost allocated by 10 the company becomes $317,400 rather than $616,300, 11 which is what should have tweaked me in the first 12 place, given that I had that number. So I apologize 13 for that. 14 Then what I have done in the next two 15 columns is taken the percentage of total costs, subject 16 to allocation, as grossed up for the PBR adjustment, 17 without the $30 million correction that Ms Reynolds has 18 just spoken to, and taken the actual costs allocated as 19 a percentage of the total costs, subject to allocation, 20 as adjusted through PBR. 21 So I could use an average of those 22 percentages to apply to the items that the company did 23 not allocate costs for and derive a figure that we 24 would argue should be allocated in addition. 25 That is what the Percentage Allocated 26 column and the Averages column does. 27 Then the New Allocations column 28 applies the average percentage to the total cost, 421 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 subject to allocation, to get Revised Allocations at 2 the end of the sheet. 3 That is the methodology we used. 4 The salient number changes are that 5 the average of the percentage allocations that we used, 6 of .32, actually should be .12 per cent. 7 Then the two most important numbers 8 that change are the two numbers in the box at the 9 bottom right-hand side of the page. 10 What was one end of the additional 11 allocation range of $280,000-odd should actually read 12 $105,036. The low end of the range, which allocates 13 only some of the departments that the company did not 14 allocate for, reads on the sheet before you $153,400, 15 and it should actually be $57,539. 16 MS SOUDEK: Just to confirm, 17 Mr. Mondrow, the new figures of $105,000 and change and 18 $57,000 and change do not reflect the removal of the 19 $30 million that Ms Reynolds referred to. 20 MR. MONDROW: That's correct. 21 MS SOUDEK: So we would have to have 22 some further adjustment to those figures to reflect 23 that correction. 24 MR. MONDROW: You probably would, 25 yes. 26 MS SOUDEK: And we don't know what 27 that would be. 28 MR. MONDROW: Yes. And so -- 422 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MS SOUDEK: We don't know. 2 MR. MONDROW: Well, I am not giving 3 evidence. I don't know what they would be. 4 MS REYNOLDS: Could we apply the 5 .12 per cent to the $30 million? 6 MR. MONDROW: I guess not much turns 7 on it, given that the dollar values. I think now we 8 really are splitting hairs. 9 I certainly accept for the purposes 10 of the record that there is $30 million out of 11 $360 million that I haven't adjusted downwards for. 12 In the end, sir, I think what is 13 important here is that we thought we were arguing about 14 as much as $300,000, and now the top end of the range 15 appears to be $100,000. So I don't intend to spend a 16 lot more time on it. That's the point I am trying to 17 make. 18 I would, however, just like to ask 19 Ms Reynolds about a couple of the departments that it 20 seems to me should have been allocated for and ask her 21 to explain why they weren't allocated for. Then I have 22 one follow-up question with Mr. Bayko, and I will be 23 done. 24 I am sorry to waste the time. In 25 fact, as I say, your extended break has probably saved, 26 net, a good 20 minutes. I will try to move on as 27 quickly as possible. 28 THE PRESIDING MEMBER: Thank you, 423 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 Mr. Mondrow. 2 MR. MONDROW: Thank you. 3 Ms Reynolds, if we could look first 4 at your Exhibit I, Tab 11, Schedule 12, to page 3, 5 there are three departments here, actually four 6 departments here for which you have not allocated costs 7 to HGAI. 8 I want to quickly ask you about those 9 four, three of which were addressed by the Board in 10 last year's decision. As I recall it, the Board was 11 concerned that costs had not been allocated to the 12 ancillary programs and non-utility eliminations at that 13 time from these departments. 14 So if you could (a) describe for me 15 what the services are for each of those departments, 16 and (b) why there are no allocations -- maybe it is the 17 same description -- that would be helpful. 18 Perhaps we could start with corporate 19 services on line 2. 20 MS REYNOLDS: All right. Corporate 21 services is composed of risk management, resources 22 protection, legal services and audit services 23 departments. Those are departments that would have 24 identified specific times for activities that they are 25 undertaking with respect to ancillary or non-utility 26 activities. They have identified no time to be spent 27 on the home gas appliance inspection service. 28 In my mind, that was reasonable given 424 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 that the area that risk management might deal with 2 would be ensuring that contractor insurance is in 3 place, which isn't relevant for this program. 4 Resources protection deals with 5 bigger corporate security issues. 6 Legal services did not identify any 7 time that they had to spend on this program. This 8 program is operated under an already well established 9 system. 10 Audit services, this isn't a program 11 that -- certainly it is not big enough to warrant 12 specific audit services time, even if we did identify 13 it as a distinct operation of the company. 14 MR. MONDROW: In the cost allocation 15 manual that was filed last year, this department is 16 actually referred to as administration and corporate 17 services. Is that right? 18 MS REYNOLDS: Yes. 19 MR. MONDROW: Administration was such 20 things as office services and corporate services. 21 MS REYNOLDS: They are part of legal 22 and corporate services. 23 MR. MONDROW: The department no 24 longer includes -- so this department that you are 25 calling corporate services in this year's exhibit 26 includes office services? 27 MS REYNOLDS: It was included last 28 year in legal and corporate services, and that hasn't 425 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 changed. 2 MR. MONDROW: What are office 3 services? 4 MS REYNOLDS: Mainly they are 5 designed to support our offices at ATRIA. It would be 6 the executive offices. 7 MR. MONDROW: Let's move on to 8 executive and area administration, line 6, which, as I 9 understand it, are the executive services? 10 MS REYNOLDS: The executive and area 11 admin is made up of our executive staff, as well as 12 their admin staff. There was no time identified by any 13 of the executives on this program, along the same lines 14 as I mentioned before. It is a very small program. It 15 already operates in a well established service 16 structure within the organization, so there is no need 17 for any additional executive oversight than is already 18 included by the direct management of the program. 19 MR. MONDROW: Other than the general 20 function of executive oversight of the company as a 21 whole, I presume. 22 MS REYNOLDS: Yes. There is a 23 portion of the executive time that gets pulled out of 24 executive and gets lumped into strategic planning and 25 gets allocated across all activities of the department 26 based on -- historically, I believe it was based on 27 head count. 28 That is a component of the corporate 426 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 org. sustaining cost pool, which is another item that 2 Mr. Mondrow wants to discuss, because it doesn't have 3 an allocation. So I will discuss that now. 4 Originally, in the corporate org. 5 sustaining cost pool we didn't identify an allocation 6 to the home gas appliance inspection service. That was 7 an oversight on our part. When it was identified, we 8 calculated what would have been the allocation and 9 determined that it would be $3,900. At that level, it 10 wasn't significant enough to adjust the study and the 11 rate of return schedules for that amount. 12 MR. MONDROW: How much would it cost 13 to adjust the rate of return schedule? 14 It's okay, never mind. You have 15 given us the figure, and the Board will determine 16 whether that is material or not. 17 MS REYNOLDS: If $3,900 needs to be 18 added to the rate of return schedule, it is an 19 allocation that was missed originally but was captured 20 and deemed to be immaterial. 21 MR. MONDROW: Thank you. 22 Just one more question on this sheet. 23 Mr. Bayko, this program resides 24 within operations and engineering. Is that correct? 25 MR. BAYKO: That is correct. 26 MR. MONDROW: And yet there is no 27 allocation for operations and engineering overheads to 28 the program. 427 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. BAYKO: We developed the program, 2 and that is where the costs were initially. Now the 3 program is run through the regional offices. 4 MR. MONDROW: There is an allocation 5 of -- how much is that, Ms Reynolds? 6 MS REYNOLDS: The allocation coming 7 from the regional offices is actually in the retail 8 services area. So there is $64,000 allocated to home 9 gas appliance, which covers the overheads of the 10 service business within the regions. 11 MR. MONDROW: Do those regions report 12 to you, Mr. Bayko? 13 MR. BAYKO: No, they do not. 14 MR. MONDROW: Who do they report to? 15 MR. BAYKO: They report to the -- the 16 retail services report to the Vice-President of Retail 17 Services, and the operations and engineering group and 18 the regions report to the Vice-President of Operations. 19 MR. MONDROW: Let me turn to 20 Exhibit K3.1 for just a moment and ask you about two of 21 the line items. 22 You will see, sir, that I have 23 question marks beside some of the lines rather than 24 numbers. The question marks indicate departments from 25 last year's table that were not included on this year's 26 table. 27 Ms Reynolds, if you will look with me 28 under line 16, the SIM amortization, to year 2000 428 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 program and Legacy customer systems, as I understand 2 it, you have not allocated any of the year 2000 program 3 or Legacy customer systems costs that might be incurred 4 in the test year to HGAI. 5 Let me ask you first, are there any 6 Legacy costs in the test year? 7 MS REYNOLDS: The Legacy costs, as 8 they were described here, related to the cost that 9 would be incurred to make the Legacy systems Y2K 10 compliant. I believe that was the purpose. Those were 11 one-time costs in the 1999 test year and were removed 12 from the O&M base for PBR purposes. 13 MR. MONDROW: Okay. 14 So really we are just -- I am just 15 going to ask you, then, about the Y2K costs for which 16 recovery is sought in the test year. There has been no 17 allocation of any of those costs to HGAI. Is that 18 correct? 19 MS REYNOLDS: Not to the home gas 20 appliance inspection service. 21 The $11.7 million of year 2000 costs, 22 I believe those were reduced by $5.5 million, and 23 $6.2 million were allowed in rates. 24 The $11.7 million, the total amount 25 was originally allocated in last year's study. There 26 was no reduction to the allocation for the amount that 27 was disallowed by the Board or allowed in a deferral 28 account. It was allocated to the programs that existed 429 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 in last year's cost allocation study. 2 MR. MONDROW: I would just like to 3 ask you about the test year, though. 4 As I understand it, the customer is 5 seeking recovery in the test year by way of a Z-factor 6 of Y2K costs. 7 MS REYNOLDS: Our position is we have 8 already allocated a portion of the $11.7 million to 9 various activities for which either revenue has already 10 been included or the costs have already been removed 11 from cost of service by way of the non-utility 12 elimination. 13 To the extent that our Y2K costs go 14 over $11.7 million, then any additional costs would be 15 subject to allocation, at which point there would be an 16 allocation to the home gas appliance inspection. But 17 at this point the company is satisfied that all costs 18 have been removed. 19 MR. MONDROW: Okay. I appreciate 20 that position. 21 But then just with respect to the 22 HGAI program and the rate of return schedule, and any 23 argument the intervenors might make about imputation, 24 your rate of return schedule does not assume that HGAI 25 will use any of the computers in the 2000 year. 26 MS REYNOLDS: You are then asking me 27 to adjust the rate of return schedule for another 28 program where revenue has already been imputed in the 430 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 past, it has already been decided. If I am to then 2 change my allocation of the $11.7 million and now say, 3 okay, I'm going to take away from the rental program or 4 some other activity and allocate to home gas appliance, 5 the revenue imputation of the other program would have 6 to be reduced in order for me to increase the 7 imputations to home gas. 8 MR. MONDROW: But, Ms Reynolds, if 9 home gas had been identified as a program that should 10 have been subject to fully allocated costing last year, 11 there would have been an additional removal on account 12 of that program if the Board directed that that is how 13 the program should have been treated, which wasn't made 14 last year because the Board didn't so direct because of 15 the ADR agreement and the issue being punted to this 16 year. Isn't that all fair? 17 So the question really is whether the 18 elimination last year, even on the company's terms, 19 saying that the elimination last year really accounts 20 for all this until we get above a certain threshold, 21 even last year there was no elimination for this 22 program. Do you agree with me on that? 23 MS REYNOLDS: Yes. But we are 24 talking about costs in distinct periods. The 25 $11.7 million was part of the E.B.R.O. 497 cost study 26 and was allocated appropriately in that cost study. It 27 is not part of my fiscal 2000 -- my 2000 test year cost 28 study. 431 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: I understand that. But 2 you are relying on that allocation from last year to 3 say no adjustment is needed this year because the 4 variance account isn't high enough yet. 5 MS REYNOLDS: Yes. 6 MR. MONDROW: Okay. 7 So you are the one who is applying 8 last year's adjustments to the test year period. 9 MS REYNOLDS: I'm satisfied that the 10 allocation of the year 2000 costs in last year's study 11 is appropriate. 12 MR. MONDROW: All I'm saying is in 13 last year's study there was no allocation of Y2K costs 14 to HGAI. Right? 15 MS REYNOLDS: Yes. I think you are 16 getting into an issue of adjusting revenue imputations 17 on a forecast year basis to account for things that are 18 happening in other years. 19 MR. MONDROW: You are asking the 20 Board to allow by way of a Z-factor a Y2K expense in 21 the test year, and intervenors might argue that that 22 expense should be reduced by some allocation out to 23 ancillary programs or non-utility programs, or HGAI. 24 All I'm trying to confirm with you for the record for 25 that argument is that last year you didn't allocate any 26 Y2K costs to HGAI. Right? 27 MS REYNOLDS: I would agree with 28 that. 432 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: All right. 2 So if you didn't allocate any costs 3 last year, you certainly can't rely on last year's 4 allocations to justify that lack of allocation to HGAI 5 in particular this year, can you? Unless it all comes 6 out in the wash, you can't very well argue that there 7 is already an allocation to HGAI on account of Y2K that 8 is by virtue of the PBR included in the test year. 9 --- Pause 10 THE PRESIDING MEMBER: Would you like 11 the question repeated, Ms Reynolds? 12 MS REYNOLDS: No. I'm -- 13 THE PRESIDING MEMBER: It was a long 14 question. 15 --- Laughter 16 MS REYNOLDS: No. I'm trying to 17 think this through because Mr. Mondrow is saying that 18 if the home gas appliance inspection service existed 19 last year -- or perhaps if I were doing the allocation 20 this year for the $11.7 million of Y2K costs, I would 21 be allocating something to the home gas appliance 22 inspection service, and I agree with that. 23 But the other side of that is in 2000 24 we won't have the unbundled businesses which did take a 25 portion of that $11.7 million allocation. I am just 26 wondering whether I am -- 27 THE PRESIDING MEMBER: Is it your 28 position that it is a zero sum gain? 433 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MS REYNOLDS: I think so. Or even if 2 I were to pull out the rental program allocation it 3 would be a lose. As I said, I haven't thought this 4 fully through, but I think -- I'm very comfortable 5 saying that the impact would be very close to zero. 6 Because of the size of the home gas appliance 7 inspection business it would be immaterial. 8 If I were to revise my entire 9 allocation of the $11.7 million to take into account 10 what is going to exist in the 2000 test year, we may 11 see reductions in the allocations. 12 MR. MONDROW: So there are two issues 13 there, Ms Reynolds. Just to separate them, one issue 14 is whether an allocation was or should have or should 15 be made, regardless of the amount of the allocation. 16 You are suggesting that perhaps not because of the PBR 17 mechanism in a resulting over-allocation because you 18 didn't spend as much as you thought you were going to 19 spend. That is one issue. 20 The other issue is if there is an 21 additional allocation, you are suggesting it is 22 probably immaterial with respect to this program. 23 MS REYNOLDS: I could say that off 24 the top, without getting into any of the other issues, 25 that the allocation to home gas appliance inspection 26 would probably immaterial, would have been immaterial 27 last year, though if we were preparing a rate of return 28 last year there would have been some allocation. 434 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MONDROW: Okay. 2 I appreciate what the argument is. 3 You have helped clarify that. 4 I have one more question on K3.1 and 5 that is regulatory affairs, which was a department on 6 last year's allocation. It doesn't appear on 7 Exhibit I, Tab 11, Schedule 12, so I gather your 8 assessment is there are no regulatory costs, despite my 9 taking the time here today, that are properly allocated 10 to HGAI. Is that your position? 11 MS REYNOLDS: I don't think we 12 anticipated the magnitude of where this issue would go. 13 It is a very small program and it doesn't take a lot of 14 allocated costs and we probably didn't anticipate that 15 there would be a lot regulatory time involved. 16 Historically, we have not allocated 17 the regulatory costs to the ancillary programs and we 18 are not viewing the home gas appliance inspection as an 19 ancillary program. 20 MR. MONDROW: So is this a de minimis 21 response again, essentially? 22 MS REYNOLDS: I think so. 23 THE PRESIDING MEMBER: Is it also 24 your position that because regulatory costs may be part 25 of the PBR O&M base that it should not matter? 26 MS REYNOLDS: I understand that 27 regulatory costs are a Z-factor. 28 THE PRESIDING MEMBER: I am not sure 435 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 for all of them. I thought just some incremental -- 2 MS REYNOLDS: I do have -- because 3 they were included in O&M, in my cost allocation study 4 I have rolled them forward and they have been subject 5 to some allocation. But they wouldn't have been 6 allocated to home gas appliance inspections. 7 MR. MONDROW: They wouldn't be 8 allocated to HGAI because the company's position last 9 year was you shouldn't allocate any regulatory costs to 10 ancillary programs. 11 MS REYNOLDS: This isn't even an 12 ancillary program, so -- 13 MR. MONDROW: No, I understand that. 14 But that is the rationale that you are now offering, 15 isn't it? 16 MS REYNOLDS: In addition to the fact 17 that when we had all of our discussions last year we 18 were talking about the time in the hearing room on 19 non-utility eliminations and affiliate transactions and 20 we expected that time to decrease dramatically. So we 21 really didn't revisit the full issue in performing the 22 cost allocation study this year because we expected it 23 to be a non-issue this year; and, along the same lines 24 with home gas appliance inspection, we really didn't 25 expect that there would be a whole lot of regulatory 26 cost involved in this program. 27 MR. MONDROW: Last year for ancillary 28 programs you assumed that the regulatory costs 436 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 associated with the ancillary programs debate, as 2 distinct from the non-utility programs debate and the 3 affiliate transactions program debate, you assumed that 4 the ancillary programs debate costs were costs for the 5 ratepayer. That is the basis on which you filed your 6 cost allocation study. Is that correct? 7 MS REYNOLDS: Last year, yes. 8 MR. MONDROW: Last year. 9 And the Board expressed a question 10 about that, but didn't see fit to make an adjustment -- 11 MS REYNOLDS: That's right. 12 MR. MONDROW: -- given its other 13 decisions -- 14 MS REYNOLDS: That's right. And we 15 expected with the PBR formula coming into play and all 16 of the ancillary -- all but NGV being unbundled that 17 the regulatory costs would be minimal. 18 MR. MONDROW: Just to finish this 19 off, then, the rate of return schedule for HGAI that 20 you presented to me, in this case, does not have any 21 regulatory time allocated to it? 22 MS REYNOLDS: No, it does not. 23 MR. MONDROW: Okay. Thank you very 24 much. I appreciate your patience with me. 25 Mr. Bayko, just one last question 26 and, really, an opportunity for you just to provide 27 your evidence on this. 28 As will be no surprise, HVAC 437 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 Coalition may well argue, at the end of the day, that 2 HGAI is, in fact, an other business activity and has no 3 place in the utility entity. 4 It seems to me that, based on the 5 answers you have given, you are not asserting that this 6 program is part of transmission, storage or 7 distribution; that the issue, should we argue it, is 8 really whether this is properly an emergency function 9 or not. If it is, the utility should be doing it. If 10 it is not, we would argue the utility shouldn't be. 11 I just wanted to give you a chance to 12 address that argument. 13 MR. BAYKO: Well, thank you for 14 giving me a chance on that. 15 Carbon monoxide is a very broad issue 16 that has a lot of people very concerned about it. As a 17 matter of fact, we are actively involved with the TSSA, 18 which is the Technical Standards Safety Authority, and 19 the Fire Marshall's Office, in preparing a 20 "CO Awareness Week" to try to get people clued in to 21 causes of CO and how to prevent CO in the home. 22 When you have a device that some 23 manufacturers propose or convince people it is 24 absolutely failsafe and people begin to rely on it, 25 somewhere in the marketplace -- when your CO detector 26 activates -- somewhere in the marketplace, there has to 27 be a provider that can go out and assure people that 28 there isn't or is a problem. 438 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 At this particular time, we treat 2 this as an emergency. Although it doesn't classify 3 itself as an immediate emergency, as we have already 4 discussed, we still feel that you have to provide this 5 to the customer. If there are providers on the 6 marketplace, we have said, right from the beginning, we 7 would back out of this program. To date, we haven't 8 seen those providers in the marketplace. So I think it 9 is something the customers want. It is not a large 10 program, but there are people who do want it, and we 11 feel we should provide it until such time as someone 12 else steps up to. 13 MR. MONDROW: In the test year, as I 14 understand it, you will not be marketing the program, 15 you will only be offering it in response to a customer 16 request about what the utility might be able to do to 17 address their CO concerns? 18 MR. BAYKO: That is correct. 19 MR. MONDROW: Thank you very much, 20 panel, and thank you, Mr. Chairman, and the Board, for 21 your indulgence. 22 THE PRESIDING MEMBER: Thank you, 23 Mr. Mondrow. 24 Mr. Mattson or Mr. Brett? Any 25 preference? Any questions? 26 MR. BRETT: I have no questions. 27 THE PRESIDING MEMBER: No questions. 28 Mr. Mattson? 439 BAYKO/REYNOLDS/DODD, cr-ex (Mondrow) 1 MR. MATTSON: Just a few questions, 2 Mr. Vlahos. 3 CROSS-EXAMINATION 4 MR. MATTSON: Mr. Bayko, who is 5 responsible at the company for deciding whether the 6 HGAI programs within the utility should remain within 7 the utility, in compliance with undertakings your 8 company entered into in December, or whether or not you 9 need to seek the Board's approval to keep the business 10 within the utility's core business? 11 MR. BAYKO: I am not sure if I can 12 answer your question by saying who ultimately was 13 responsible -- or who was responsible. There were 14 certainly discussions that went on when we talked about 15 unbundling the services -- and this is one that we did 16 spend some time talking about -- and we felt that, as I 17 have just explained, that it is a service that our 18 customers want. No one is providing it in the 19 marketplace; it is a serious issue when people talk 20 about carbon monoxide -- and rightly so; and we felt it 21 should remain within the core utility business. 22 MR. MATTSON: But, Mr. Bayko, that 23 sounds more like a justification for requesting the 24 Board's approval to keep it within the core utility 25 business, as opposed to a rational justification as to 26 how it complies with the undertakings that your company 27 entered into voluntarily in December. 28 MS SOUDEK: And your question is, 440 BAYKO/REYNOLDS/DODD, cr-ex (Mattson) 1 Mr. Mattson? 2 MR. MATTSON: Who made -- has the 3 company made the decision that this program complies 4 with the undertaking? Or is the company, in an 5 indirect way, seeking Board approval to keep it within 6 the utility? 7 MS SOUDEK: I mean I think you are 8 asking the witness for -- to stray into legal areas. 9 I can tell you that the company's 10 position is that the HGAI program is part of the core 11 utility and, therefore, no requests for exemption under 12 the undertakings is required. That is our position in 13 this proceeding. 14 MR. MATTSON: Then maybe if this 15 panel can't answer, maybe I could ask counsel for 16 Enbridge who among the witnesses can answer questions 17 as to how the company came up with that or made that 18 decision and on what basis they made that decision? 19 MS SOUDEK: The company sought and 20 received legal advice, in this regard, and I think 21 Mr. Bayko has also testified as to the justification 22 for characterizing this program as part of the core 23 utility function. 24 What I am telling you, Mr. Mattson, 25 is I am not sure what else we can tell you about this. 26 MR. MATTSON: Well, the undertaking 27 reads that: 28 "Consumers shall not, except 441 BAYKO/REYNOLDS/DODD, cr-ex (Mattson) 1 through an affiliate or 2 affiliates, carry on any 3 business activity other than the 4 transmission, distribution or 5 storage of gas without prior 6 approval of the Board." 7 (As read) 8 Who can tell me whether this is an 9 activity that is transmission, distribution or storage 10 of gas? Who made that decision that HGAI falls within 11 one of those three categories? 12 MS SOUDEK: Our position is clear and 13 I think, perhaps, we are straying into a matter of 14 argument, Mr. Mattson. 15 MR. MATTSON: No. The witness' 16 response is that they are providing this because there 17 is no other provider in the marketplace right now; it 18 is important for the customers to feel -- carbon 19 monoxide issues are important to customers; and unless 20 someone else steps up, they are going to keep providing 21 the service. 22 That doesn't answer the question as 23 to whether it is transmission, distribution or storage 24 of gas. 25 MS SOUDEK: Mr. Bayko, can you 26 address that? 27 MR. BAYKO: I will try. 28 We talked about -- part of the 442 BAYKO/REYNOLDS/DODD, cr-ex (Mattson) 1 distribution is responding to fumes and odours and gas 2 leaks, and we not only respond on the outside, we also 3 respond inside a customer's home. That is part of 4 our -- that is part of what we classify as 5 distribution. And this part, the home gas appliance 6 inspection, as we have talked about today, is part of 7 that process. 8 MR. MATTSON: So, in other words, the 9 company determined that this wasn't an other business 10 activity but, rather, it was part of your distribution 11 activity? 12 MR. BAYKO: That is correct. 13 MR. MATTSON: Thank you. 14 And that decision was made by? 15 THE PRESIDING MEMBER: It doesn't 16 matter, Mr. Mattson. It is the company's position. He 17 gave the answer previously -- Mr. Bayko -- that it 18 wasn't one specific person. What is the relevance? 19 MR. MATTSON: Well, the relevance is, 20 Mr. Chairman, that without an indication from the 21 company as to how they go about undertaking whether or 22 not they are in compliance with their new undertakings, 23 we have no idea how the company goes about assessing 24 whether or not it is an other business activity or it 25 is a core business activity. 26 We have not had a -- the Board has 27 not had an opportunity to delve into the definitions of 28 that undertaking or how the company, at least, is 443 BAYKO/REYNOLDS/DODD, cr-ex (Mattson) 1 defining that undertaking so as to apply to its various 2 business activities. This certainly is the first 3 opportunity that we have had since, I guess, the 4 December undertaking was first made public to really 5 find out how this company -- who voluntarily entered 6 into this contract -- is defining that undertaking and 7 so as to understand clearly why HGAI is an other 8 business activity or core business activity. 9 That is obviously a decision only the 10 company can make, at this time, because the Board 11 hasn't had the opportunity to either define those terms 12 or to hear from the company as to how did they define 13 them -- and I don't believe the Government has passed 14 regulation, as of yet, to help us define that term. 15 THE PRESIDING MEMBER: Mr. Mattson, 16 it seems to me that this is not the appropriate panel 17 to ask those questions and it does attempt -- your line 18 of questioning -- to introduce the motion from a back 19 door, if you will excuse the expression, and I just 20 don't think it is appropriate to go down that route. 21 The issue as to what may be a core 22 activity or an other business, it is an issue that 23 would stem out of the motion that is still not decided, 24 so it is not fair to put those questions to this panel. 25 MR. MATTSON: Thank you, 26 Mr. Chairman. 27 Those were all the questions that I 28 was hoping to pursue, so thank you. 444 BAYKO/REYNOLDS/DODD, cr-ex (Mattson) 1 THE PRESIDING MEMBER: Thank you, 2 Mr. Mattson. 3 Mr. Thompson? 4 MR. THOMPSON: Yes. 5 CROSS-EXAMINATION 6 MR. THOMPSON: Panel, whether it is 7 classified as core or an ancillary business, I can tell 8 you that IGUA does not object to it being retained 9 within the utility. So just look at the implications 10 of the ancillary program classification. 11 First of all, pertaining to that, can 12 you just tell me how the program is organized, in 25 13 words or less? How many people? Are they located in 14 place? This kind of thing. 15 MR. BAYKO: Well, it is a program 16 that we now have as something that has been developed. 17 It is available for customers. So, what would happen 18 is: a customer would call in with an alarming CO 19 detector and after going through a series of 20 questions -- and this would come into the call centre, 21 initially -- we would go through a series of questions 22 and if it was deemed that there were no physical 23 ailments or any physical symptoms, the customer would 24 be offered this program, over the phone. 25 If the customer chose to have this 26 program then a fitter would go out and perform the 27 inspections, as I laid out previously, and the testing, 28 and would leave the customer with a document indicating 445 BAYKO/REYNOLDS/DODD, cr-ex (Thompson) 1 that they had been there and what they have found. 2 MR. THOMPSON: Are these fitters 3 dedicated to this program or do they do other work as 4 well? 5 MR. BAYKO: They do other work. 6 MR. THOMPSON: And are these fitters 7 company employees or do you contract out some of this 8 work? 9 MR. BAYKO: In the past they have 10 been both. 11 MR. THOMPSON: At the moment? 12 MR. BAYKO: They are still both, but 13 in the forward year, until we understand the volume of 14 the regulatory work and the volume of emergency 15 response work we won't really be able to determine -- 16 MR. THOMPSON: Excuse me, I'm sorry, 17 were you finished? 18 MR. BAYKO: When it will be 19 determined whether it will be company or contractor 20 people. 21 MR. THOMPSON: Could you give me an 22 approximate percentage of how much is in-house and how 23 much is contracted out? Roughly. 24 MR. BAYKO: In the future there won't 25 be much contracted out. I can't give you that. I 26 don't have those figures right now. 27 MR. THOMPSON: But at the moment 28 there are people in the marketplace that do this work 446 BAYKO/REYNOLDS/DODD, cr-ex (Thompson) 1 for you on a contract basis? 2 MR. BAYKO: That's correct. 3 MR. THOMPSON: So it's not quite 4 accurate to say nobody in the marketplace does the 5 work? 6 MR. BAYKO: No. I said nobody 7 provides the program. 8 MR. THOMPSON: The program, okay. 9 Now, somewhere in the evidence there 10 is a calculation of what the company says imputed 11 revenues are if this program is classified as fully 12 allocated. The imputed revenues that I am referring to 13 are those necessary to bring it up to the overall 14 allowed return. The number I have is $231,000, but I 15 will be darned if I can find the reference. Can 16 somebody just confirm that number and give us the 17 reference for it? 18 MR. DODD: The number is $231,000. 19 As for the reference, I will have to check. 20 MR. THOMPSON: We asked a question 21 about it. I think it was IGUA 25, but we didn't get 22 the answer, but I know the answer is somewhere. 23 Let's not waste time. If we could 24 have an undertaking to give us the exhibit reference 25 for that calculation of $231,000 that concludes my 26 questioning. 27 MR. DODD: Yes, we will undertake to 28 do that. 447 BAYKO/REYNOLDS/DODD, cr-ex (Thompson) 1 MS LEA: J3.2. 2 UNDERTAKING NO. J3.2: Mr. Dodd 3 undertakes to give the exhibit 4 reference for the $231,000 5 calculation of what the company 6 says imputed revenues are if 7 this program is classified as 8 fully allocated 9 THE PRESIDING MEMBER: Thank you. 10 MR. THOMPSON: Thank you, sir. 11 THE PRESIDING MEMBER: Ms Lea. 12 MS LEA: No, thank you, not directly 13 on this topic for these witnesses. Thank you. 14 THE PRESIDING MEMBER: Thank you, 15 Ms Lea. 16 The Board has no questions, 17 Ms Soudek, so this panel is excused with our thanks. 18 Ms Soudek, what is next? 19 MS SOUDEK: The next panel, 20 Mr. Chairman, is the O&M Panel. 21 THE PRESIDING MEMBER: I was 22 wondering, Ms Soudek, if it's an opportune time to 23 break for lunch? 24 MS SOUDEK: This would be a good time 25 to take a break for lunch, Mr. Chairman. 26 THE PRESIDING MEMBER: It's ten 27 minutes to twelve. Why don't we make it until one 28 o'clock. 448 1 --- Luncheon recess at 1150 2 --- Upon resuming at 1307 3 THE PRESIDING MEMBER: Good 4 afternoon. 5 Yes, Mr. Cass. 6 MR. CASS: Good afternoon, 7 Mr. Chairman. 8 Mr. Chairman, just by way of one 9 small preliminary matter. 10 I believe that a letter of today's 11 date to Mr. Pudge has been passed around to everyone, 12 and attached to the letter are the final revisions to 13 the settlement proposal. I think that everyone should 14 have that now. 15 THE PRESIDING MEMBER: Yes, we 16 have it. 17 Yes, sir? 18 MR. CASS: Subject to that, 19 Mr. Chairman, I believe the company is ready to proceed 20 with the next witness panel. 21 This panel will, of course, address 22 issue 3.2, O&M costs, particularly in relation to the 23 consequences of the E.B.R.O. 497-01 decision. 24 The three members sitting in the 25 middle of the panel have already been sworn, that is 26 Ms Reynolds, Ms Gould and Mr. Mees. 27 The two members of the panel who have 28 not yet been sworn and who should come forward to do so 449 1 are Mr. McGill, sitting closest to the Board and 2 Mr. McClintock, sitting furthest away from the Board. 3 PREVIOUSLY SWORN: HOLLY REYNOLDS 4 PREVIOUSLY SWORN: JOANNE GOULD 5 PREVIOUSLY SWORN: MICHAEL MEES 6 SWORN: STEVE McGILL 7 SWORN: JOHN McCLINTOCK 8 EXAMINATION-IN-CHIEF 9 MR. CASS: Just by way of 10 introduction, Mr. McGill, I understand you are Manager, 11 Customer Accounting Projects for the company. Is that 12 correct? 13 MR. McGILL: The title is Manager, 14 Customer Support, Planning and Analysis. 15 MR. CASS: Thank you. 16 Mr. McClintock, you are Manager, 17 Distribution Information Technology. Is that correct? 18 MR. McCLINTOCK: That's correct. 19 MR. CASS: Thank you. 20 Panel, I understand as a whole you 21 are responsible for the company's evidence on O&M costs 22 and, in particular, the consequences of the 23 E.B.R.O. 497-01 decision. Is that correct? 24 MR. MEES: Yes, we are. That's 25 correct. 26 MR. CASS: That evidence including, 27 of course, answers to interrogatories? 28 MR. MEES: Yes. 450 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, in-ch (Cass) 1 MR. CASS: Was that evidence prepared 2 by the members of the panel or under your direction or 3 control? 4 MR. MEES: Yes, it was. 5 MR. CASS: Are there any corrections 6 that need to be made to the evidence? 7 MR. MEES: No. 8 MR. CASS: Okay. 9 Mr. Mees, I understand that in 10 relation to the issue around allocation of Board costs 11 that there is a brief update that you wish to provide. 12 Is that correct? 13 MR. MEES: Yes, that is correct. 14 The Z-factor in question is meant to 15 capture the company's allocation of Ontario Energy 16 Board costs. We currently have an amount for this 17 Z-factor of $400,000 included in the 2000 budget. This 18 is the amount that is incremental to the PBR base. 19 It has recently come to our 20 attention, to the company's attention, that based on 21 discussions with Board staff that this increase may be 22 higher than the $400,000 amount we currently have 23 contained in the Z-factor. 24 If more information becomes 25 available, this Z-factor will be updated. 26 That's all I have at this time. 27 MR. CASS: Is the evidence on the 28 issue 3.2 then accurate to the best of the knowledge or 451 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, in-ch (Cass) 1 belief of the members of the panel? 2 MR. MEES: Yes, it is. 3 MR. CASS: Thank you, Mr. Chairman. 4 Those are my questions. 5 THE PRESIDING MEMBER: Thank you, 6 Mr. Cass. 7 Mr. Brett, are you the chosen one 8 this time? 9 MR. BRETT: Yes, I am, Mr. Chairman. 10 Mr. Thompson is a longer cross-examination and I am 11 going to precede him. I have a more limited one. 12 CROSS-EXAMINATION 13 MR. BRETT: Good afternoon, panel. 14 Could I ask you to turn up, please, 15 Exhibit D1, Tab 8, Schedule 2, which is your additional 16 written direct testimony on the impact of 17 E.B.R.O. 497-01 and 179-14/15 on the O&M budget. 18 MR. MEES: Yes, we have that. 19 MR. BRETT: What I want to address in 20 this line of questioning is the impact on the O&M 21 budget of the removal of the rental program. 22 In question and answer 7 on that page 23 you state that you were going to adjust the 1999 -- 24 rather year 2000 base budget, as I understand, it by 25 reducing it by $21.5 million which is the direct and 26 marginal expenses -- direct expenses and marginal 27 expenses of the rental program which you are proposing 28 to transfer out of the utility effective October 1, 452 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 1999. Is that right? 2 MR. MEES: That's correct. 3 MR. BRETT: The number I gather that 4 would be there, we would find there if you were 5 transferring the rental program out of the utility 6 effective October 1st, 1999 on a fully-allocated cost 7 basis, is something in the order of $34.5 million. Can 8 you confirm that or give me the correct number? I have 9 a number of $34.5 million for that. 10 MS GOULD: Yes. If the rental 11 program remained within Enbridge Consumers Gas it would 12 have been allocated cost with the total removal being 13 $34.5 million. 14 MR. BRETT: $34.5 million, all right. 15 What you are proposing to do is -- so 16 the $34.5 million is the fully allocated cost 17 applicable to the rental program? 18 MS GOULD: Yes. I think keeping in 19 mind if it remained within Enbridge Consumers Gas and 20 it continued to receive the same level of service it 21 did as anticipated in the company's 1999 unbundled 22 budget. 23 MR. BRETT: All right. 24 What you intend to do, I gather, is 25 transfer it out, transfer the rental program out of the 26 company effective October 1, 1999, and it is being 27 transferred to Consumersfirst I understand? 28 MS GOULD: No. As noted in the 453 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 company's evidence, it is the intention to remove the 2 rental program from Enbridge Consumers Gas effective 3 October 1, 1999. It is our intention at this time that 4 it would be Enbridge Services, but that is still 5 subject to approval by our Board of Directors so it 6 will be -- 7 MR. BRETT: I'm sorry, I didn't catch 8 that name, that it would be Enbridge Services? 9 MS GOULD: Yes. But the ultimate 10 decision is still pending approval of our Board of 11 Directors. 12 MR. BRETT: Enbridge Services is 13 what, a separate affiliated company, a subsidiary of 14 Enbridge? 15 MS GOULD: Yes, it is. 16 MR. BRETT: But not Consumersfirst? 17 It's a separate company from Consumersfirst? 18 MS REYNOLDS: Enbridge Services is 19 Consumersfirst. Consumersfirst changed its name. 20 MR. BRETT: I see. All right. 21 Enbridge -- so Consumersfirst has become Enbridge 22 Services. 23 As I say, that transfer is effective 24 October 1 and, as I understand it, you are transferring 25 that out at book value? Is that the plan? 26 MS REYNOLDS: Yes. The assets will 27 be transferred out at their net book value. 28 MR. BRETT: Now, in the Board's 454 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 decision 179-14/15, the Board at paragraph 3.2.6 of 2 that decision said that the Board would: 3 "...accept the program for the 4 time being on a non-utility 5 basis within the company..." 6 (As read) 7 I'm quoting the section here: 8 "...with elimination of the 9 programs cost on a 10 fully-allocated basis." 11 (As read) 12 Do you see that? 13 MS REYNOLDS: Yes, we see that. 14 MR. BRETT: The inference from the 15 decision, although it is not stated in so many words, 16 is that the Board would be prepared -- might have been 17 prepared to have the program -- or have the business 18 continue as an ancillary business under fully allocated 19 costs. 20 Do you agree with that inference from 21 the decision? 22 MS REYNOLDS: I don't agree with that 23 inference. 24 I take from the Board's decision that 25 the Board would be prepared to allow the rental program 26 to operate within the Consumers Gas Company Limited as 27 a non-utility activity. 28 THE PRESIDING MEMBER: Ms Reynolds, 455 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 perhaps you can help Mr. Brett as to the distinction 2 between a non-utility activity and ancillary program 3 because -- 4 MR. BRETT: Maybe I am making a 5 problem here, sir, where none exists. 6 I accept the fact that the Board said 7 that the business could be contained within the 8 Company -- within the limited company, but outside the 9 regulated part of the business; that is, the 10 non-utility part of the business. That is in 3.2.6. 11 And you agree with me on that? 12 MS REYNOLDS: I agree with you on 13 that. 14 MR. BRETT: Okay. What you didn't do 15 was agree with me on the further step that I said; they 16 might also have intimated that it could stay as an 17 ancillary program, provided fully allocated costing was 18 applicable, and you are saying no to that. 19 MS REYNOLDS: Fully allocated costing 20 has applied to the ancillary programs for the last two 21 years, and the rental program was an ancillary program 22 and is an ancillary program until September 30. But 23 the Board's decision told the Company that the rental 24 program will become non-utility and there is no option 25 to have it remain as an ancillary program in the 26 utility. 27 MR. BRETT: All right. I think what 28 the Board -- to my mind, the Board seemed to say in 456 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 3.2.4 that the Board is not prepared, however, to 2 approve a proposal to run the rental program as part of 3 the core utility. 4 I don't mean to make too much of this 5 distinction, but in that case, as you will recall, your 6 proposal was to have the rental program integrated into 7 the core utility. There was to be no separate 8 accounting, no separate numbers, no way of determining 9 what the deficit or surplus was for that particular 10 business. Do you recall that discussion and debate? 11 MS REYNOLDS: Yes. We had requested 12 that the rental program be treated as a core utility 13 activity, rather than as an ancillary program. 14 MR. BRETT: I understand. 15 Then, what you did, faced with that 16 decision -- I guess what we can agree on is, the 17 Company decided it would transfer the rental business 18 out of the limited company altogether and, as you say, 19 to Enbridge Services, effective October 1, right? 20 MS REYNOLDS: The Company has made 21 the decision to transfer the rental program out, and 22 Enbridge Services is the likely destination. However, 23 as Ms Gould has pointed out, it is still subject to 24 approval by our board of directors. 25 MR. BRETT: But I take it that it is 26 fair to say that if it isn't Enbridge Services it would 27 be some other affiliate of the Company. 28 MS REYNOLDS: That is a possibility, 457 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 yes. 2 MR. BRETT: Are you saying to me 3 now -- I want to know the answer to this. Are you 4 saying to me now that one of the options you have at 5 your disposal -- that one of the options you are 6 thinking of pursuing is to sell this to an arm's length 7 third party? 8 I thought it had been decided that it 9 was going to be transferred to an affiliate, one way or 10 another. 11 MS REYNOLDS: I think the Company has 12 made a decision, which has gone forward, or will be 13 going forward, to our board of directors for approval. 14 If that approval is denied, for whatever reason, the 15 Company will have to look at other options. 16 MR. BRETT: That is fair enough. It 17 hasn't been approved by the board yet, this proposal? 18 MS REYNOLDS: It is my understanding 19 that it has not been approved by the board at this 20 time. 21 MR. BRETT: On the assumption that it 22 is and that you do transfer out the business to 23 Enbridge Services or some other affiliate of Consumers 24 Gas -- what I am having difficulty with in looking at 25 the evidence we have just discussed, your removal of 26 the $21.6 million on a direct -- removing the direct 27 costs is, why is it that if the Company remains in the 28 utility, in the non-regulated part of the utility 458 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 company, that $12 million of costs are allocated to the 2 Company -- in other words, the difference between the 3 34.5 and the 21.5 -- whereas if you transfer it out of 4 the Company altogether to a third party, to another 5 Enbridge company, that you transfer out only the direct 6 costs? 7 Why do you transfer only the direct 8 costs and the marginal costs? The marginal costs in 9 this case are a very small fraction of the total 10 allocated costs. They are about 10 or 15 per cent. 11 The remainder are simply allocated costs. Why is it 12 that those costs are left to the ratepayer? 13 MS REYNOLDS: As an ancillary program 14 operating within the utility the rental program 15 received numerous services from the utility. It 16 received billing services, it received HR services, RIF 17 services. It was integrated in the operations of the 18 Company. 19 When the rental program gets 20 transferred out of the utility it will not be receiving 21 any of these services. Therefore, the costs associated 22 with providing those services will not transfer with 23 the rental program, they will remain within the 24 utility, to the extent that they were allocable costs 25 to the rental program. 26 The marginal costs of providing 27 services to the rental program have been removed. 28 MR. BRETT: And those marginal costs 459 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 are what, in broad strokes? 2 MS REYNOLDS: The biggest component 3 of the marginal costs is insurance for the rental 4 program, to the extent of $1 million. So, once the 5 rental program is gone from the utility, the utility 6 will no longer be paying the rental program's insurance 7 bills. 8 MR. BRETT: You are going under a 9 regime of PBR in the next three years, correct? 10 MS REYNOLDS: That's correct. 11 MR. BRETT: And those fully allocated 12 costs that would have been -- the $12 million in costs 13 that would be allocated to that business if it had 14 remained in the utility company, outside of regulation, 15 are, for the most part, manpower costs, because most of 16 your O&M costs are manpower costs, and isn't it true 17 that you would, over time, be able to rationalize those 18 costs? 19 In other words, you would have 20 redundant costs or stranded costs in the utility to the 21 tune of something close to $12 million which you would, 22 over time, be able to reduce over the next few years. 23 MS REYNOLDS: I disagree with that. 24 MR. BRETT: All right. Why is that? 25 MS REYNOLDS: Not all of the 26 allocated costs are labour costs. For example -- 27 MR. BRETT: But most are, aren't 28 they? Isn't 70 per cent of your O&M costs labour 460 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 costs, as a general proposition? It seems to me that 2 is what we have been told over the years. 3 MS REYNOLDS: I can't speak to that 4 number. It would still leave 30 per cent as non-labour 5 costs, if that -- 6 MR. BRETT: All right. Sorry, I 7 didn't mean to interrupt you. 8 So you are saying that a portion of 9 your costs -- you were going to explain that there was 10 a non-labour component. 11 MS REYNOLDS: Yes. One of the 12 largest components of the allocable costs to the rental 13 program relates to the billing services that the rental 14 program received. The rental program was one line on 15 the bill. So the rental program received an allocation 16 of all costs that went into producing a bill. 17 For example, it received a share of 18 the cost of the envelopes, of the cost of the piece of 19 paper the bill is printed on. It received an 20 allocation of the postage on the bill. It received an 21 allocation of the cost to print those bills, to stuff 22 those bills in envelopes and to deliver those bills to 23 the post office. 24 That is a big example of an allocable 25 cost that is not going to go away in the utility. The 26 utility is still going to issue a bill each month. It 27 is still going to have to print that bill, put it in an 28 envelope, pay the same amount of postage for it, 461 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 deliver it to Canada Post. Those are reasonable costs 2 to be incurred in the utility. 3 MR. BRETT: Nonetheless, there are 4 $12 million worth of costs here. 5 Let me put my question this way. To 6 the extent that after this transfer takes place you 7 could rationalize those costs and reduce them, under 8 the old regime, under the pre-PBR regime, you would 9 agree with me that any reduction in those costs -- the 10 shareholder would benefit from that reduction in the 11 first year, as it were, but at the end of the year you 12 would have to justify that O&M base again. 13 Under PBR, as I understand it, if you 14 were able to rationalize those costs and reduce them, 15 you get to keep that difference for three years. 16 MS GOULD: Perhaps I can enter this. 17 By their very nature, I think, as Ms Reynolds is 18 saying, allocable costs don't go away just because one 19 particular program has been removed. 20 In looking at rationalization at the 21 utility, though, I think we need to go back to when the 22 1999 unbundled budget was prepared. The Company did go 23 through an exercise and they did look for opportunities 24 to identify cost savings and streamline its operations. 25 MR. BRETT: Yes, but at that point, 26 with the greatest of respect, you didn't have on the 27 table at that point, as I understand it, the removal of 28 the rental program. At that point the rental program 462 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 was going to stay in-house. It is only in the last two 2 or three months that you have decided to transfer the 3 rental program outside, which is by far the largest of 4 your ancillary programs, and there are very substantial 5 costs associated with that. 6 So, presumably there will be more 7 rationalization that takes place. 8 MS GOULD: When you say "large", I 9 think we have to look at on what basis we are measuring 10 large. The rental program is certainly the largest 11 from a capital or fixed asset perspective. But if you 12 look at the number of employees that are actually 13 dedicated to that program, it is actually quite 14 insignificant to the number of employees, some 600-odd, 15 that we would have taken out with respect to our 16 service businesses and other businesses. 17 So really the infrastructure or the 18 labour remaining within the utility, we captured the 19 bulk of that, if not all of it, when we did the 20 original 1999 unbundled budget. 21 I think there was an additional in 22 the neighbourhood of ten employees that would have been 23 impacted by the fact that we moved the rental program. 24 It was those ten employees, apart from service, who 25 were responsible for the ongoing operations of that 26 program. 27 MR. BRETT: It is hard to square 28 that, in my mind, with the $12 million of costs here 463 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 which seem to be scattered across all of your 2 departments, from controllers to marketing, to regional 3 administration, to systems operation, and the like. 4 I am just suggesting to you that over 5 a three-year period under PBR you are going to put some 6 money in your pocket as a result of this mechanism. 7 MS REYNOLDS: Well, you alluded to 8 one of the factors as to why additional rationalization 9 isn't anticipated, and that is because the costs are 10 spread out through various departments. Each 11 department will have its own required skill sets, its 12 own processes. There may not be an ability to cross 13 people over into different departments because of 14 different skill set requirements. 15 MR. BRETT: You are not suggesting, 16 though, that not a single person can be reduced from 17 this man-year count as a result of transferring out a 18 business with a revenue of $130 million and assets of 19 half a billion dollars? 20 MS REYNOLDS: No, I don't think 21 that's what -- 22 MR. BRETT: That defies belief. 23 MS REYNOLDS: I don't think that's 24 what we are saying at all. In think in the 25 $2.2 million marginal costs that we have identified -- 26 MR. BRETT: You have ten people. 27 MS REYNOLDS: No, no, we have direct 28 program costs, and I think they are in the 464 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 neighbourhood of $1.9 million, $2 million. In addition 2 to that, we have marginal costs, and those are the 3 marginal activities throughout the company. 4 There may be individuals dedicated to 5 financial analysis that are marginal in nature and 6 solely related to perhaps this program. They have been 7 identified. 8 MR. BRETT: Your marginal costs are 9 only about 20 per cent or 15 per cent of your total 10 allocable costs. 11 Maybe we should argue this from here 12 on in. I just find it difficult. Your marginal costs, 13 according to this table, are $2.1 million and your 14 other allocable costs, which a fully allocated cost 15 regime would pick up, are about $12 million. So one is 16 six times the other. 17 Let's move on to my next point, if 18 I may. 19 The point I wanted to come back to, 20 just to re-emphasize, is that the decision to move the 21 business to an affiliate as opposed to leading it in 22 the company, in the non-regulated part of the utility 23 company, if I make myself clear, that decision was the 24 company's decision. That was not imposed on the 25 company. 26 That was the company's decision to do 27 that. Agreed? 28 MS GOULD: I'm sorry, Mr. Brett, I 465 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 missed the beginning of your question. 2 MR. BRETT: The question was a very 3 simple one actually. 4 The company has decided to move the 5 rental business -- in its most recent filing it has 6 told us that it has decided to move the rental business 7 outside Enbridge Consumers Gas Limited to Enbridge 8 Services or to another company, another affiliate. 9 That is clear, and to my way of 10 thinking that decision was made by the company. 11 My proposition that I want you to 12 confirm is that that decision was not imposed on the 13 company. The company made that decision of its own 14 free will. 15 MS GOULD: Yes, you are right, it was 16 the company's decision. Given the Board's decision and 17 given the options available to it, it did feel that 18 that was the best course of action for the rental 19 program, and also consistent with the unbundling of its 20 other businesses and moving towards having a core 21 utility within Enbridge Consumers Gas. 22 MR. BRETT: All right. I have just 23 one last question in this area. 24 As you know -- I think it came up in 25 both of last year's cases, 179-14/15 certainly -- you 26 now have a services agreement. Enbridge Consumers Gas 27 Limited has a services agreement with Consumersfirst 28 under which it provides certain basic services; 466 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 correct? 2 MS REYNOLDS: I believe that services 3 agreement is still draft. 4 MR. BRETT: But it is in effect. It 5 was filed in a proceeding last year. 6 MS REYNOLDS: I am not sure that 7 there ever was one filed because it -- 8 MR. BRETT: There was one filed. I 9 have a copy of it. It is a public document. 10 MS REYNOLDS: So it was a draft. 11 MR. BRETT: It may have been a draft. 12 MS REYNOLDS: Okay. 13 MR. BRETT: Are you suggesting that 14 it was never signed, never executed? 15 MS REYNOLDS: I am saying that it is 16 still draft. 17 MR. BRETT: You are telling me that 18 there is no services agreement under which the utility 19 provides services to Consumersfirst or to Enbridge 20 Services. 21 THE PRESIDING MEMBER: You may be 22 talking about different documents. Are you referring, 23 Mr. Brett, to the agreement between Consumersfirst, at 24 that time Consumersfirst, and Enbridge Consumers Gas 25 relating to the service of the rental units? 26 MR. BRETT: No. That was a good 27 point to make, though, Mr. Chairman, from the point of 28 view of clarification. 467 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 There was that agreement of course 2 that was discussed at length, but there was another 3 agreement that went the other way, that actually was an 4 agreement that the utility was going to provide certain 5 services to Consumersfirst in a sort of start-up mode 6 for a period of time. 7 I can't remember off the top of my 8 head which services those were. I think they related 9 to perhaps some HR services, some financial services, 10 and one or two other components. 11 I am just asking if that agreement is 12 still in effect. Not the rental services agreement, 13 which of course would fall by the wayside with the 14 change. 15 MR. CASS: Mr. Chairman, might I ask 16 through you that Mr. Brett perhaps provide a reference 17 as to what he is talking about so that we are clear on 18 the record as to the particular document? 19 MR. BRETT: I see Ms Gould nodding 20 her head, which tells me that she recognizes something. 21 I don't have the document with me. I 22 can certainly get it and provide it to you. 23 THE PRESIDING MEMBER: Perhaps I 24 can help. 25 There is an agreement, Mr. Cass, 26 because there are affiliate transactions that were in 27 place prior to the rental issue. I do recall in the 28 last rates case there was service provided -- I'm not 468 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 sure which way, but I do remember the line with 2 Consumersfirst and Enbridge Consumers Gas. 3 Ms Gould, is that your recollection? 4 MS GOULD: Based on the evidence that 5 was filed, there was discussion of the nature of the 6 services. I personally don't have a service agreement, 7 but there were services and the cost associated with 8 those services was eliminated from the 1999 unbundled 9 budget. 10 MR. CASS: My point, Mr. Chairman, if 11 I may, is that this panel is here to address O&M costs, 12 particularly the consequences of E.B.R.O. 497-01. I 13 don't know what this service agreement has to do with 14 that. 15 Given what the panel is here to 16 address, if Mr. Brett wants to ask some questions about 17 it, surely he could do the courtesy of either having 18 the reference or even the document so that they can 19 properly respond to these questions. 20 MR. BRETT: Mr. Chairman, perhaps I 21 don't need it. I will ask the question in a different 22 way. 23 What interests me, really, is whether 24 or not you intend -- we are here to assess the impact 25 of transferring out the rental program on the O&M 26 budget. That is the focus of the discussion of course. 27 You made a reference in one of your 28 responses to me a few minutes ago about the level of 469 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 service being provided to the rental program when it 2 was within the utility, either as an ancillary 3 program -- I guess as an ancillary program. 4 My question to you is: Is the 5 utility going to be providing any services to the 6 rental program going forward, or has that been decided? 7 MS GOULD: As the company has noted, 8 it will not be providing any ongoing services to the 9 rental program. 10 MR. BRETT: Is there an interim 11 service of $500,000 for something or other? 12 MS GOULD: The company will be 13 providing some services on a transitional basis. They 14 include some plant recordkeeping and some support from 15 our call centre. 16 MR. BRETT: How long will those 17 services be offered for? 18 MS GOULD: It is the company's 19 intention to complete this transition period by 20 March 1st, 2000. So that would be no longer than a 21 six-month period. 22 MR. McGILL: March 31st, 2000. 23 MS GOULD: Oh, I'm sorry. 24 MR. BRETT: Did you put a dollar 25 number on those services? I seem to recall a figure 26 from the evidence, but I -- 27 Half a million dollars. Does it -- 28 MR. McGILL: I'm not familiar with 470 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 any specific figure that we may have or may not have 2 quoted. 3 MR. BRETT: So you don't have a 4 number for that at the moment. 5 Maybe just to shorten this up, could 6 you give us an undertaking to just specify the value of 7 the services that the company intends to provide to 8 whichever affiliate it is that is going to hold the 9 rental program, for what period of time, the dollar 10 value? 11 THE PRESIDING MEMBER: Mr. Brett, 12 before the witness answers, could you just again help 13 us understand the relevance of that issue, the answer 14 to that interrogatory to the O&M? 15 MR. BRETT: What I was trying to get 16 at was really just the transparency of the transaction. 17 I mean we know virtually nothing about this transaction 18 that has come up, you know, but that they decided to 19 do, and I am trying to see whether -- 20 If the company were going to offer 21 some services, that would indicate that there would be 22 staff dedicated in the utility to serving the 23 affiliate. That would raise the issue, then, of the 24 pricing of those services under a -- I mean it would -- 25 there is a question of -- it would raise an issue of 26 cross-subsidy potentially, and it would raise a dollars 27 issue I think in terms of the base PBR budget, because 28 if, for example -- I mean I will take an example. 471 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 If 10 people are going to be employed 2 in the utility providing some services to the affiliate 3 and there is going to be stream of income coming back 4 from the affiliate that represents 10 per cent of the 5 value of that service, then it seems to me -- unless 6 I'm missing something, and I may well be, but in theory 7 here -- that those dollars should come out of the -- 8 those dollars aren't in the base any more. Those 9 should have been transferred out. 10 MS GOULD: I think it is important to 11 clarify one thing. The continuation of these services 12 was not anticipated when the company updated its budget 13 so all direct and marginal costs associated with these 14 activities have been removed. So to the extent that 15 the company will incur any costs to continue providing 16 these services during the transition period, it will be 17 on account of the shareholder, and Ms Reynolds can 18 clarify, but they will be billed in accordance with the 19 Code. 20 MR. BRETT: So you are saying that if 21 a dollar is worth -- all right. 22 Well, maybe that is the answer, sir. 23 If it's a dollar for dollar, if it's a wash, then the 24 issue of the relevance is -- 25 THE PRESIDING MEMBER: That's fine, 26 Mr. Brett. 27 I was just concerned that -- the 28 affiliate transaction with cross-subsidy was base PBR 472 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 budget. I am just wondering how does that fit in with 2 the issue we are addressing. 3 MR. BRETT: Yes. Yes. 4 THE PRESIDING MEMBER: But if you are 5 moving on, that's fine. 6 MR. BRETT: Yes. Okay. Thank you. 7 I would like you, if you would, to 8 turn to the 497-01 decision, in particular, paragraph 9 3.0.25. The issue I want to discuss briefly here is 10 the question of, for want of a better word, the 11 reporting, how you are going to report to the Board and 12 to parties generally with respect to the progress of 13 affairs under the PBR program. 14 In that section that I just asked you 15 to look at, 3.0.25, it says: 16 "While the Board accepts that 17 situations may arise which would 18 warrant the abandonment of the 19 PBR Plan, the types of 20 situations justifying such 21 actions can only be viewed as 22 speculative at this time. The 23 Board therefore will not comment 24 further in this Decision in 25 respect of this issue, except to 26 note that a party could request 27 the Board to consider whether a 28 situation constitutes 473 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 justification to abandon the 2 PBR Plan." 3 So really what I would like to know 4 is, one of the -- what is being referred there to of 5 course is the idea that you could have a situation 6 develop where a party, and it could be the utility I 7 suppose, but a party -- I think the Board was directing 8 this to non-utility parties -- could ask the Board to 9 reconsider the PBR plan as its structured because there 10 is something out of line seriously. What comes to mind 11 of course most readily is something financially; there 12 is a financial deviation from what might have been 13 thought to result. 14 For example, it might be the case 15 that after a year of PBR or a second year of PBR it 16 transpired that the company was earning a return on 17 equity much larger than it had earned historically. I 18 think if you read the little bit about PBR, which I am 19 sure you have, you know that this has happened from 20 time to time. 21 Now, I think what this section is 22 directed at is the fact that if, for example, in the 23 first year of PBR you turn out to have a return on 24 equity of 15 per cent after everything is said and done 25 because you have been able to so aggressively reduce 26 your O&M budget because of redundant costs that may be 27 in there today, for example, then, what this envisages 28 is that an intervenor could ask to have the plan 474 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 reviewed. 2 Does that seem like a reasonable 3 interpretation of what this is about? 4 Now, of course it could work for the 5 utility as well. If it turned out that it was a very 6 low return and you couldn't get the savings that you 7 thought you might get, I think that the utility may be 8 free to raise this same -- question the plan. Is that 9 your broad understanding? 10 MS GOULD: My understanding of the 11 paragraph, and I will answer the first part first, is 12 that any party has the ability, if they have identified 13 a situation, to bring that forward to the Board on 14 whatever merits, be it financial or otherwise, and it 15 will be considered whether that constitutes an off 16 ramp. 17 MR. BRETT: Right. 18 MS GOULD: From the company's 19 perspective, it is my understanding that there were 20 certain situations that were identified that would 21 constitute an off ramp and they were fairly 22 catastrophic and out of the company's control. I don't 23 think it included that we weren't happy with somehow 24 how it was performing. 25 So I think we would need to look at 26 those conditions then to make sure that it was 27 something that -- the plan is unworkable, and we would 28 come forward if that was the case. 475 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 MR. BRETT: But you would agree that 2 the -- take my example, where the rate of return -- 3 Let's just assume for the moment that 4 given here that we have a plan that, as you know, does 5 not provide for any automatic earnings sharing, keep 6 that in the back of your mind, and just assume with me 7 that the eventuality of a rate of return being way 8 higher than forecast because of O&M, major savings in 9 O&M, would be something that an intervenor might wish 10 to bring to the Board in a rates case, first of all, 11 would I have the information, according to your 12 proposals as to how you - 13 I mean I don't really see any 14 proposals out there yet from you as to how you are 15 going to report on your progress under this plan. 16 Can you fill me in with some 17 information on how you propose to report progress on 18 the plan, on the PBR plan, in respect of your progress 19 on O&M and, in particular, your progress on your 20 ongoing profitability as a business? How are you going 21 to do that and where? 22 I take it you are going to do it in a 23 rate case, make it as part of a filing of a rate case. 24 MS GOULD: No, I don't think that is 25 the case. 26 If I could draw your attention to 27 paragraph 3.0.22. 28 MR. BRETT: I'm sorry? Could I have 476 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 that again? 3.0.22? 2 MS GOULD: That's correct. I am 3 again still in the 497-01 decision. 4 The reporting requirements and 5 monitoring that have been identified here are with 6 respect to the service quality indicators. 7 MR. BRETT: Right. 8 Also, if you look at section 2.5.1 of 9 that decision, page 26, you see here -- and I will just 10 read this quickly for you to focus everyone's 11 attention: 12 "The company did not prefile a 13 proposal for monitoring and 14 reporting protocol, but during 15 the hearing a number of related 16 matters were discussed. Since 17 the proposed O&M PBR plan is a 18 partial plan addressing only one 19 component of the cost of 20 service, the Company indicated 21 its expectation that 22 `traditional' cost of service 23 filings and rate reviews will 24 continue." 25 So, if I stop there, that is going to 26 continue, I take it? You are going to continue to have 27 annual rate cases and you would be filing, in those 28 rate cases, pretty much everything you filed today. 477 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 Correct? Or, I guess if it is different, what wouldn't 2 you file? Relative to what you filed today. 3 MS GOULD: I think the largest 4 difference in what we file is we are filing O&M as it 5 is derived based on the PBR formula, as opposed to on a 6 line-by-line basis, as we would have done -- 7 MR. BRETT: Okay. So that is your 8 difference. 9 But, aside from that, you would be 10 making the normal filings, as far as you can tell, that 11 we are accustomed to seeing today? 12 Before you answer that, you might 13 just look at the next sentence. It says: 14 "There would therefore be an 15 opportunity to report on the 16 Plan and respond to questions 17 about it as part of rate 18 reviews." 19 So, I take that to mean that, in 20 these rate reviews, we would have an opportunity to see 21 the results in sufficient detail to allow us to be able 22 to understand whether the plan is more or less on 23 target or, in some sense, off -- some fundamental 24 sense -- off the rails. Is that fair? 25 MR. CASS: Well, in fairness, 26 Mr. Brett, I think you need to read the final sentence 27 of paragraph 2.5.1 to give the context to the sentence 28 that you did read. 478 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 MR. BRETT: The final sentence. 2 "The Company expressed the 3 view --" 4 My emphasis: 5 "The Company expressed the view 6 that for regulatory efficiency 7 there should be an agreed 8 reporting protocol and that only 9 if the Board determined that an 10 issue should be referred to a 11 rates proceeding would this 12 occur." 13 So that was the view that you 14 expressed, at the time. 15 I guess the question I have is, I 16 would ask the panel to agree that if we can assign any 17 meaning to this -- and I am sure the Board, in the 18 statement I referred you to earlier, when it said that 19 a party could request the Board to consider whether a 20 situation constitutes justification to abandon the 21 plan, that what -- if we are going to assign some 22 meaning to that, the reporting in the protocol that the 23 company decides to proceed with under PBR has got to be 24 sufficiently detailed that we know enough to know when 25 to object, as it were. Otherwise, what is the meaning 26 of that? We don't know what is happening, financially. 27 MS GOULD: But I think there is 28 reference to the term "a party", and I guess the 479 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 question is who that is. 2 MR. BRETT: Well, the party -- are 3 you saying the party is only the utility? 4 MS GOULD: No, I am not. I think it 5 is referenced in here the company, in its traditional 6 cost of service, has and, under PBR, will continue to 7 report its performance to the Energy Returns Officer 8 and through that mechanism, as well, I assume, there 9 will be the opportunity to identify and forward issues, 10 as appropriate. 11 MR. BRETT: But, surely, I mean -- I 12 don't disagree that you do historical reporting to the 13 Energy Returns Officer but, surely, in this context, 14 what "a party" means is a party to the proceeding. 15 That is what it normally means, in these cases: a 16 party to a proceeding. Isn't that right? Isn't that 17 fair? 18 I mean you are not saying that that 19 "party" means the Energy Returns Officer, in that case? 20 MS GOULD: I think it could be any 21 party. But I think we need to look that there could be 22 many factors that could constitute an off ramp or some 23 of the issues where an industry may not be available or 24 there may be a change in the marketplace that perhaps 25 we feel we need to address and I -- all information may 26 not be available to all parties but, hopefully, 27 everything is being reported and monitored to allow an 28 issue to be identified. 480 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 MR. BRETT: Well, do you have any 2 particular proposals that you are making with respect 3 to how O&M expenses will be monitored, under PBR, or 4 other financial aspects of the company? 5 There are not -- I don't see anything 6 very much here in -- 7 I mean, presumably, if you are going 8 to be filing financial information, including return 9 information, cost of capital, capital expenditures, and 10 the like, you will also file something that enables us 11 to rationalize and see how that return has been 12 reached. 13 In order for us to understand how 14 that return number has been realized, there will have 15 to be some information in there on each component of 16 your cost, will there not, including your O&M costs? 17 I am speaking, here, of your actual 18 returns. Your actuals or your estimateds. 19 And if not, how is it that we will -- 20 I guess you expect us to sort of reverse engineer the 21 numbers to come up with what your actual O&M was. 22 MS GOULD: No. And, unfortunately, I 23 think the return you are referring to is calculated by 24 Mr. Bourke, for the Ontario-regulated utility. But 25 that will be done based on the O&M as it has been 26 included in rates and as it is derived based on the PBR 27 formula. 28 MR. BRETT: No, but I am speaking of 481 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 your actual returns. Your returns for periods past. 2 One of the filings that you make is a 3 degree day adjusted actual return. That, presumably, 4 is a function, in part, of what you are -- let me put 5 it this way to you. 6 As I think you know, in the early 7 years of telecommunications deregulation, in Britain, 8 returns on equity went to 20 per cent for many of the 9 telecom companies. And the reason they went to 20 per 10 cent was very simple: the costs were so high in those 11 companies, as regulated businesses, there was so much 12 O&M fluff in there that the companies were able to live 13 with almost any kind of productivity index and still 14 earn very large returns. 15 Now, the question is, you know, if 16 your -- surely, you would agree that if your return 17 soared to 20 per cent on equity, for a comparable 18 reason, that would be an off ramp. If you didn't agree 19 to that, you would be the only person, I think, in the 20 world that doesn't. 21 MS GOULD: Well, based on my 22 discussions with individuals who have done a lot more 23 research into PBR mechanics and the history of 24 development, I think comparing Enbridge Consumers Gas 25 to the telecom industry, they certainly had a lot more 26 opportunities for advances in technology and areas 27 where they did see significant strides in their O&M. 28 Looking at -- when we look at our revised base, 482 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Brett) 1 especially after unbundling our business, our O&M has 2 gone from 271.9, which was our 1999 Board-approved 3 budget, to just over $200 million. So I don't see that 4 there is even the possibility for that extent; not 5 saying that we shouldn't monitor and ensure that we 6 continue to meet our service quality indicators and 7 continue to manage the company prudently within PBR. 8 MR. BRETT: All right. Thank you. 9 Those are my questions. 10 Thank you, Mr. Chairman. 11 THE PRESIDING MEMBER: Thank you, 12 Mr. Brett. 13 Mr. Mondrow? 14 MR. MONDROW: Thank you, 15 Mr. Chairman. 16 CROSS-EXAMINATION 17 MR. MONDROW: Very quickly, panel, I 18 think Ms Gould, Mr. Brett -- and perhaps Ms Reynolds -- 19 Mr. Brett had a discussion with you about costs to be 20 removed from cost of service together with, now, the 21 transfer out of the rental program. 22 As I understand your evidence, you 23 determined direct costs and marginal costs associated 24 with that program and those have been removed -- or 25 will be removed from cost of service in the test year 26 and have been removed in this filing. And I think 27 Mr. Brett referred to $21.5 million. 28 Is that the right number? Twenty-one 483 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 point five? 2 MR. MEES: Yes, it is. 3 MR. MONDROW: My question is: When 4 you sought to determine which costs were marginal, in 5 association with that program, what time frame did you 6 use for that assessment? 7 MS REYNOLDS: A traditional view of 8 marginal costs is to look forward to at least the test 9 year to what reasonably could be reorganized in a 10 department to free up resources to be marginal 11 resources. So we look forward at least two years where 12 it is logical. To look beyond that, we do, but two 13 years is generally our bench mark. 14 MR. MONDROW: In this instance, did 15 you look -- first of all, did you look as far as two 16 years? 17 MS REYNOLDS: We would have looked, 18 at a minimum, at a two-year time frame to determine 19 marginality. 20 MR. MONDROW: I am just asking how 21 long did you look. Not what the minimum is, but how 22 long did you look. 23 MS REYNOLDS: It would have been done 24 department by department, activity by activity, so I 25 can't give you a specific time frame that we looked at, 26 other than say our historical approach to marginality 27 was to look forward two years to the test year. 28 MR. MONDROW: Okay. So you can tell 484 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 me, I think, then -- I think what you are saying, 2 Ms Reynolds, is you can tell me that, with respect to 3 the costs of the rental program, your departments, your 4 confidant looked at least at the fiscal year 2000 and 5 fiscal year 2001. Is that what you are telling me? Is 6 that an accurate paraphrase? 7 MS REYNOLDS: They would have been 8 assessing their -- what would have been their 1999 9 unbundled budget, which was to be the base for 2000. 10 So I think it would be to look at 2000, 2001, possibly 11 2002 circumstances we were in 1999 but looking at 2000. 12 MR. MONDROW: Half way. 13 MS REYNOLDS: I would say we would at 14 least have captured 2001. 15 MR. MONDROW: Well, let's say a 16 department was called upon by you on, I don't know, 17 April 1, May 1, it doesn't matter, the spring of this 18 year. You called them, "You know what, we are going to 19 remove the rental program. We need a cost study. Can 20 you tell me what marginal costs would be associated 21 with that removal?" 22 Would the department then under your 23 protocol examine the year from, let's say it was April 24 30 that you asked them, would they go from May 1, 1999 25 to May 1, 2001? 26 MS REYNOLDS: I am not sure that that 27 precise time frame would have been in their minds. 28 What we would ask them would be to assess their O&M as 485 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 it exists now, the activities that they perform for the 2 utility, for the ancillary programs and for the 3 non-utility then. As a whole, if all of the ancillary 4 and non-utility activities were to be removed from the 5 utility what would be their impact to their O&M? 6 So we ask them to assess everybody. 7 So not just what would be the impact of removing the 8 rental program, but what would be the impact of 9 removing all of the activities that you would do, 10 ancillary and non-utility activities. We do that in 11 hopes of being able to capture all potential marginal 12 costs. 13 MR. MONDROW: But you still haven't 14 given me a time frame. I appreciate that explanation, 15 but that's not really what I asked. 16 MS GOULD: I think we should maybe 17 clarify one thing. Mr. Mondrow, I get the impression 18 that it's your understanding that we undertook a 19 special study upon decision to remove the rental 20 program from Enbridge Consumers Gas and that wasn't the 21 case. 22 When we determined the 1999 unbundled 23 budget there was a full cost allocation done at that 24 time and that was the basis which all of our businesses 25 that we had originally identified to be unbundled when 26 we moved and the very same basis on which we have 27 removed the rental program. 28 MR. MONDROW: Okay. And that cost 486 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 allocation study was performed roughly when? What 2 month? 3 MS GOULD: Subject to check, it would 4 have been the fall of 1998. So at the same time we 5 were preparing evidence for 179-14/15. 6 MR. MONDROW: And in the course of 7 that study the departments would determine marginal 8 costs with respect to each of the activities it was 9 asked to look at. Right? 10 And the protocol is that those 11 marginal costs would be generally assessed on a 12 two-year basis? What costs could be reduced or 13 eliminated going forward two years from the date the 14 study is being performed? 15 MS REYNOLDS: Most departments don't 16 have a problem with having to look beyond a two year 17 time frame. Where we see issues where we need to look 18 beyond a two year time frame is when we are trying to 19 assess office space or perhaps long-term leases if we 20 have got photocopiers or things like that that may have 21 leases going out beyond two years. 22 If we are talking labour 23 reorganization that's generally achievable within a two 24 year time frame. 25 We did, I believe, look at leased 26 space as part of the unbundling adjustments and took 27 that into account. 28 MR. MONDROW: All right. Let me -- 487 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 I'm sorry, I am trying to get what may not in fact be a 2 simple answer and maybe that's why we are having -- 3 maybe I am assuming it's simple and it's really not and 4 that's why we are having a problem. 5 You did the study in the fall of '98. 6 The normal rules for -- the normal protocol for 7 determining marginal costs would take the person 8 actually crunching the numbers to the fall of 2000, as 9 a general rule. Is that fair? Is that accurate? 10 MS REYNOLDS: We asked them to look 11 at all the activities that they perform for the 12 ancillary and non-utility activities as a whole and 13 determine the labour that is dedicated to that and 14 determine whether their department could be 15 restructured to change their underlying O&M if the 16 ancillary and non-utilities didn't exist. 17 MR. MONDROW: Ms Reynolds, when you 18 asked them to determine whether there can be a 19 restructuring of the department did you give them a 20 time frame over which to work? 21 MS REYNOLDS: No, there would not 22 have been a specific time frame given to them because, 23 as the reasons I mentioned before, most departments 24 don't have issues with respect to reorganizing or 25 rationalizing staff where it is mainly labour based. 26 MR. MONDROW: So who made the 27 decision as to what time frame a particular department 28 would use? Would it be up to that department manager? 488 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 MS REYNOLDS: It would have been 2 done -- meetings were held with all of the departments 3 to go over their O&M reductions. At that point there 4 would have been a discussion of the specific department 5 costs and how those were assessed as marginal or 6 allocable. 7 MR. MONDROW: All right. 8 Were you involved in those 9 discussions? 10 MS REYNOLDS: I was not involved in 11 those discussions. 12 MR. MONDROW: Were you, Ms Gould, 13 involved in those discussions? 14 MS GOULD: No, I was not. The 1999 15 unbundled budget as was presented in 179-14/15 would 16 have been with Mr. Charleson. 17 MR. MONDROW: Can either of you, 18 Ms Reynolds or Ms Gould, then tell me what time frame 19 in general was used in deriving the allocations on a 20 marginal basis for that cost allocation study that you 21 conducted in the fall of 1998? Was it two years, 22 Ms Reynolds, roughly speaking? 23 MS REYNOLDS: Yes. As I said before, 24 that's historically how we approach marginality. We do 25 do it on a department-by-department basis and make sure 26 that we have fully identified marginal costs within a 27 department. 28 MR. MONDROW: And if you were doing 489 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 this, Ms Reynolds, how far forward in time would you go 2 to make sure that you had fully identified what you 3 call marginal costs? 4 MS REYNOLDS: If I were assessing a 5 department's costs as to whether they were marginal or 6 allocable I would look to see whether they could 7 reasonably reorganize their departments over a two year 8 time frame. That means, you know, can they reasonably 9 obtain necessary skills if they are reorganizing labour 10 and perhaps they have made one person marginal, but 11 they need to pick up certain of that individual's 12 skills to do something else. Can they reasonably 13 obtain that labour over the time frame? Are there 14 assets that need to be redeployed and would they be 15 reasonably redeployed? 16 It really is -- it is on a 17 department-by-department basis. If it's a situation 18 where things can't be redeployed over a two-year basis, 19 we are really looking at lease costs and more fixed 20 asset costs. 21 MR. MONDROW: You would agree with 22 me, however, I trust, that the farther out in time you 23 go the more costs become variable? You went three 24 years instead of two. You might have more variable or 25 marginal costs in two years? 26 MS GOULD: Yes, I would agree with 27 that. I think that's one reason, as I mentioned 28 earlier, over and above the marginal costs that were 490 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 identified as part of the cost study each manager made 2 specific commitments and built stretch into their 3 operating budgets to envision being able to streamline 4 over the longer period or over the PBR period. That 5 has been reflected in a reduction to the 1999 budget of 6 the PBR base. 7 MR. MONDROW: I'm sorry, the stretch 8 factor that was incorporated was part of this cost 9 allocation exercise? 10 MS GOULD: It was part of the overall 11 budgeting exercise. 12 MR. MONDROW: The overall budgeting 13 exercise. So your evidence today then is that that 14 stretch factor was meant to pick up any costs that 15 might be marginal over the longer term, that is longer 16 than two years? That's certainly not what the stretch 17 factor was, was it? That's not what you told us in the 18 last case it was. 19 Now you are telling me that it's 20 true that costs become variable and more costs become 21 variable the farther out you go and if you go three 22 years there may be more variable or marginal costs than 23 two years, but it's okay because that was taken care of 24 by the stretch factor. Isn't that what you are telling 25 me? 26 MS GOULD: No, I am not saying it's 27 okay. I think we went back again and asked people to 28 look at their budgets and identify opportunities where 491 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 they could reorganize and find further stretch and find 2 efficiency and process. I think that is quite a bit 3 different than just the pure marginality related to the 4 programs, but I think it also had business unit 5 managers revisit and look very closely at their ongoing 6 needs. 7 MR. MONDROW: And that revisiting was 8 specifically in the context of removal of the rental 9 program and the costs that should be removed along 10 with it? 11 MS GOULD: No. That initial 12 assessment was done at the time of E.B.O. 179-14/15, 13 but we did look at that again in performing this update 14 to ensure that it continued to be accurate. 15 MR. MONDROW: Performing this update? 16 MS GOULD: The update that we filed 17 in response to the Board's 497-01 decision and there 18 are specific -- 19 MR. MONDROW: In the 179-14/15 filing 20 you weren't going to remove the rental program, so 21 there was no stretch factor assessment with respect to 22 removal of costs associated with the rental program 23 because you weren't removing any costs associated with 24 the rental program. Right? 25 MS GOULD: That's right. 26 MR. MONDROW: Am I confusing you? 27 No. 28 But the costs that you are going to 492 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 remove, along with the rental program as you filed them 2 in this case, were derived from that initial study. 3 You didn't redo your study, you just told me. Right? 4 THE PRESIDING MEMBER: Mr. Mondrow, I 5 want to be clear as well. There was a study done in 6 the fall of 1998, a cost allocation study, and whose 7 purpose was? 8 MS REYNOLDS: The purpose of the cost 9 allocation study performed in the fall of 1998 was to 10 develop the unbundled budget. 11 THE PRESIDING MEMBER: All right. 12 By that time it was not contemplated 13 that the rental program would be out. It was 14 contemplated it would stay in. I am just trying to get 15 the history straight and -- 16 MS REYNOLDS: I believe at one point 17 it was contemplated to be out because there was a 18 letter filed with the Board in May of '98, saying that 19 the rental program will no longer be unbundled, but 20 will be in a wind-down in the utility. 21 THE PRESIDING MEMBER: Right. But it 22 was a wind-down in the utility, was not contemplated 23 that it may be sold to a third party or to an 24 affiliate. 25 In any event, I am not sure what 26 turns on it, but the first time that we saw the 27 $21.5 million was in the 179-14/15 case that number 28 came from the allocation study of the fall of 1998? 493 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 MS REYNOLDS: That's correct. 2 THE PRESIDING MEMBER: And it's the 3 same number now that is being carried forward to -- it 4 was carried forward to 497-01. Did we have the 5 $21.5 million in the 179-14/15 or the first time it 6 appeared was 497-01? 7 MS REYNOLDS: These costs would have 8 been a component of the unbundled budget which formed 9 the basis for the PBR O&M amount. 10 THE PRESIDING MEMBER: Okay. So that 11 is the 497-01. That same number is being carried 12 forward to this proceeding? 13 MS REYNOLDS: That's correct. It's 14 being removed on the same basis as all of the unbundled 15 businesses in 179-14/15. 16 THE PRESIDING MEMBER: All right. 17 Thank you, Mr. Mondrow. 18 MR. MONDROW: Thank you, sir. 19 Ms Reynolds, Ms Gould, I understand 20 the upshot of this discussion to be that the marginal 21 costs determined for removal along with the rental 22 program as a general rule are costs that can be 23 eliminated between now and the fall of 2000. 24 MS REYNOLDS: At the point that the 25 unbundled study was being performed. 26 MR. MONDROW: Just the study you are 27 relying on in presenting -- 28 MS REYNOLDS: That's right. 494 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Mondrow) 1 MR. MONDROW: -- the costs in this 2 proceeding? 3 MS REYNOLDS: As a general rule. 4 MR. MONDROW: Thank you. 5 Thank you very much, sir. 6 Thank you, panel. 7 THE PRESIDING MEMBER: Thank you, 8 Mr. Mondrow. 9 Mr. Thompson, are you ready to 10 proceed or would you want a break? 11 MR. THOMPSON: I'm in your hands, 12 Mr. Chairman. I can start now and go for a little bit. 13 I'm going to be probably the rest of the day, so if you 14 wanted me to start now, fine, if you wanted me to start 15 after a break, that's fine too. 16 THE PRESIDING MEMBER: Why don't we 17 take a 20-minute break and we will return at 20 18 to 3:00. 19 MR. MONDROW: Mr. Chairman, I'm 20 sorry. 21 Just before you rise, I will likely 22 leave at the break. I have some other matters to 23 attend to over the next day or so. I will be 24 monitoring the record and I expect to be back next week 25 for CIS. 26 Thank you very much. 27 THE PRESIDING MEMBER: Thank you, 28 Mr. Mondrow. 495 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 --- Upon recessing at 1414 2 --- Upon resuming at 1441 3 THE PRESIDING MEMBER: Please be 4 seated. 5 Mr. Thompson. 6 MR. THOMPSON: Yes. Thank you, 7 Mr. Chairman. 8 I have placed on your dias a 9 couple -- actually there are three documents you will 10 find there which I will be making reference to during 11 the course of my cross-examination. It might be 12 appropriate to mark them at the outset. 13 The first one is an exhibit from 14 E.B.R.O. 497. It is an undertaking J16.3. I have 15 marked on that on your copies "E.B.R.O. 497 Bundled 16 Budget". What I plan to refer to there is column 1 of 17 the bundled budget presented by the company in that 18 case. 19 So I would ask first for an exhibit 20 number for that document. 21 MS DESAI: Exhibit K3.2. 22 MR. THOMPSON: K3.2. Thank you. 23 EXHIBIT NO. K3.2: Undertaking 24 J16.3 from E.B.R.O. 497 marked 25 "E.B.R.O. 497 Bundled Budget" 26 MR. THOMPSON: The second document is 27 from E.B.O. 179-14/15, which shows in column 2 the 28 Board approved bundled budget from E.B.R.O. 497 and 496 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 then the company's presentation of the unbundled 2 budget. 3 Could I have an exhibit number for 4 that, please? 5 MS DESAI: K3.3. 6 EXHIBIT NO. K3.3: E.B.O. 7 179-14/15 showing the Board 8 approved bundled budget from 9 E.B.R.O. 497 and the company's 10 presentation of the unbundled 11 budget 12 MR. THOMPSON: Thank you. 13 The third document consists of two 14 excerpts from the cross-examination of Dr. Bauer in the 15 E.B.R.O. 497-01 proceedings, specifically pages 1092 to 16 1094 and 1111 to 1113. 17 Could I have a number for that, 18 please? 19 MS DESAI: K3.4. 20 EXHIBIT NO. K3.4: Excerpts from 21 the cross-examination of 22 Dr. Bauer in E.B.R.O. 497-01 23 proceedings containing 24 pages 1092 to 1094 and 25 pages 1111 to 1113 26 MR. THOMPSON: Thank you. 27 CROSS-EXAMINATION 28 MR. THOMPSON: Panel, there are 497 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 really five topics that I would like to cover in this 2 cross-examination, and I will give them to you at the 3 outset. 4 The first is some preliminaries 5 concerning the PBR regime that was approved in 497-01. 6 The second is the 1999 PBR O&M base 7 for ratemaking purposes which is to be established in 8 this case. 9 The third is the PBR formula. 10 The fourth is Z-factors. 11 The fifth is monitoring and 12 reporting. 13 If I might begin with the first 14 topic, preliminaries concerning the PBR regime that was 15 approved by the Board in 497-01. 16 First of all, can we agree that the 17 regime is a targeted PBR regime and not a comprehensive 18 PBR regime? 19 MS GOULD: Yes, that is correct. 20 MR. THOMPSON: All right. Can we 21 agree that the term of the targeted PBR regime is three 22 years? 23 MS GOULD: The term of the targeted 24 PBR is 2000 to 2002 inclusive. Yes, three years. 25 MR. THOMPSON: And that there will be 26 rebasing at the end of three years to actuals? 27 MS GOULD: Yes, that is correct. 28 MR. THOMPSON: The PBR base is to be 498 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 derived from the 1999 Board-approved budget in 2 E.B.R.O. 497? 3 MS GOULD: I'm sorry, Mr. Thompson, 4 could I ask you to repeat that? We were just 5 clarifying my response to a previous question. 6 MR. THOMPSON: Is there something you 7 want to put on the record about the previous question? 8 MS GOULD: Just one second, please. 9 --- Pause 10 MS GOULD: I'm sorry, I have just 11 been informed that I did mis-speak myself. 12 I think your question to me was: 13 Would we be rebasing to actuals? 14 For the first year following our PBR 15 we will be following our normal budget process and we 16 will be rebasing based on what is the O&M for the PBR 17 formula at that point in time to what are the O&M 18 requirements identified with respect to that budget or 19 test year. 20 MR. THOMPSON: At the end of three 21 years I said there will be rebasing to actuals. Is 22 that correct? 23 MS GOULD: No, and that's what I am 24 clarifying. It will be the company's proposed budget 25 for that particular test year. 26 MR. THOMPSON: But it will be a 27 grassroots budget? 28 MS GOULD: That's correct. 499 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MR. THOMPSON: All right. The 2 development of which will take into account actuals for 3 the historic year, actuals and estimates for the bridge 4 year and the budget for the test year. Is that 5 correct? 6 MS GOULD: The specifics at this 7 point, it will certainly take into account all relevant 8 information to come forward with a budget for that 9 year. 10 MR. THOMPSON: Historically actuals 11 for the historic year, estimates for the bridge year 12 have always been considered relevant. Are they now 13 going to be irrelevant? 14 MS GOULD: No. I'm saying to the 15 extent that they are relevant they will be taken into 16 consideration. 17 I think it is speculation at this 18 point in time to know exactly what components or what 19 will be taken into consideration at that point in time. 20 MR. THOMPSON: Why is it speculation? 21 I just don't understand that. Surely when you rebase 22 it is going to be based on the methodology that was 23 used previously for establishing a cost-of-service 24 budget. 25 MS GOULD: When I say it's 26 speculation, it will be based on the business plans and 27 the intentions of the company with respect to that 28 particular test year and to the extent that there 500 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 are -- as it is every year, to the extent that we look 2 and to the extent that there is an actual comparator we 3 will compare to that. To the extent that it is a new 4 activity or a new cost there may be other benchmarks or 5 comparators that we need to look at. 6 So I just want to make sure we are 7 clear: If it is relevant it certainly will be used as 8 a basis. 9 MR. THOMPSON: I don't want to leave 10 this. 11 Is there any reason for us to believe 12 today that actuals for the historic year, estimates for 13 the bridge year and budgeted expenses for the test year 14 will not be relevant? 15 What possible reason could we 16 conclude today that those items will not be relevant? 17 MS GOULD: As I said, I gave an 18 example where you don't have an actual comparator, and 19 I think we have an example in this particular case with 20 respect to CIS. 21 I am just saying that there may be 22 cases where you don't have an actual comparator; it is 23 actually a new cost for that test year. 24 MR. THOMPSON: The PBR base is to be 25 derived from the 1999 Board-approved budget? Do we 26 agree on that? 27 MR. MEES: Yes, I think we can agree. 28 MR. THOMPSON: I asked that and then 501 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 I got deflected. So we agree on that. With no 2 true-up? 3 MR. MEES: That is correct. 4 MR. THOMPSON: And the methodology 5 used to determine non-utility eliminations for the 6 purposes of the 1999 Board-approved budget was the 7 fully allocated cost methodology? Is that correct? 8 MS REYNOLDS: Yes. The non-utility 9 elimination that was removed from cost of service for 10 the 1999 Board-approved budget was based on a cost 11 allocation study. 12 MR. THOMPSON: And the non-utility 13 elimination for the 1999 Board-approved budget 14 encompasses, does it, transactions with affiliates? 15 MS REYNOLDS: Yes, it does. 16 MR. THOMPSON: And the methodology in 17 terms of pricing services that the affiliate provided 18 to the utility was what? Fully allocated cost? 19 MS REYNOLDS: No. The pricing 20 methodology for transactions with affiliates was one 21 based on direct labour plus associated fringe benefits 22 and any associated departmental overhead. That was our 23 general methodology. Sometimes fully allocated cost 24 applied, but not all the time. 25 MR. THOMPSON: So the provision of 26 services by the Company to affiliates was on a fully 27 allocated cost basis, and coming the other way it was a 28 little bit different? 502 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MS REYNOLDS: Oh, I apologize. I 2 thought you were talking about how we priced the 3 services we provided to affiliates. 4 MR. THOMPSON: That was fully 5 allocated -- 6 MS REYNOLDS: They were mostly fully 7 allocated costs of performing those services from cost 8 of service, and we may have priced them at something 9 different than fully allocated costs. 10 MR. THOMPSON: All right. I misspoke 11 myself. 12 The services that you provided to 13 affiliates, the fully allocated costs, were removed. 14 Is that correct? 15 MS REYNOLDS: That is correct. 16 MR. THOMPSON: The services that 17 affiliates provided to you were priced how? What was 18 the payment being made to the affiliate? What 19 methodology? 20 Was it fully allocated cost or 21 something else? 22 MS GOULD: Within the 1999 unbundled 23 budget I think the two -- 24 MR. THOMPSON: This is the bundled 25 budget. 26 MS GOULD: The bundled budget. The 27 management fee, which is one of the payments that would 28 have been made, is in there at the Board-approved 503 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 amount, and the treasury fee would be the other 2 component, the only other one that I am aware of, and 3 that would have been based again on a Board-approved 4 amount as we had filed for permission for that 5 transaction under the undertakings. 6 MR. THOMPSON: All right. So 7 Board-approved amounts. 8 All of those numbers show up in the 9 non-utility elimination. All of the transactions with 10 affiliates, to and fro. 11 MS REYNOLDS: It is only the services 12 that are provided to affiliates that are removed from 13 cost of service. The services that we purchase from 14 affiliates are considered part of our O&M, as can be 15 seen by the treasury fee and the management fee. 16 MR. THOMPSON: So they were 17 specifically identified and then Board approved. Is 18 that what you are saying? 19 The payments made to affiliates for 20 services you received from them. 21 MS REYNOLDS: That's correct. 22 MR. THOMPSON: And the methodology 23 used to determine the allocation of costs to ancillary 24 programs in the 1999 Board-approved budget was the 25 fully allocated cost methodology? 26 MS REYNOLDS: That determined the 27 allocated costs to those programs. There may be direct 28 costs that also formed a component of the rate 504 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 schedules, but the allocation of costs from the utility 2 O&M was determined by the allocation study. 3 MR. THOMPSON: All right. Let's be 4 clear. When I use the phrase "fully allocated" I am 5 talking about direct plus marginal plus the allocated. 6 MS REYNOLDS: The direct costs go 7 directly to the ancillary programs and not through the 8 cost allocation -- 9 MR. THOMPSON: It is not an 10 allocation. All right. Thank you. 11 Does the Company accept as reasonable 12 that the rules that were used to establish the 1999 13 Board-approved budget base ought to be applied to 14 determine the actuals, as we go forward, to be compared 15 to the base? 16 MS GOULD: Could I ask you to clarify 17 your question? 18 When you say "when we monitor", I 19 wonder if you could put that in context for me. 20 MR. THOMPSON: You are going to be 21 monitoring the actual O&M expenses for 1999, 2000, 22 2001, 2002, correct? 23 MS GOULD: Yes, we will be. 24 MR. THOMPSON: All I am suggesting to 25 you is: Does the Company accept as reasonable that, 26 when developing the actuals to be compared to the base, 27 the same methods that were used to develop the base 28 numbers should be used to develop the actual numbers? 505 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MS GOULD: No, I don't think I can 2 agree in principle. I think we need to distinguish -- 3 the rules that were applied or the methodology that was 4 applied in establishing the base was for ratemaking 5 purposes and we established and made the appropriate 6 adjustments to cost of service in order to do that. 7 As we compare against our actuals we 8 certainly want something that is on a comparable basis. 9 But I think we need to look at the way to most 10 effectively do that. 11 Certain things like the non-utility 12 elimination are not something that we monitor in our 13 actuals. We don't have them readily available on 14 either a monthly or a quarterly basis. 15 So I think we really need to look at 16 the nature of the adjustment being made and the purpose 17 for which it is being made. 18 MR. THOMPSON: What does that mean? 19 You are going to adopt different methods for 20 determining actual non-utility eliminations, compared 21 to the methods that were used to determine them in the 22 base? 23 MS GOULD: No, I'm not. I am just 24 saying that the method to determine actuals for the 25 purposes of monitoring may be done at a different level 26 than we would actually produce a budget -- or produce 27 rates for a particular test year. 28 MR. THOMPSON: Do you have a plan for 506 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 developing the actuals? 2 MS GOULD: Yes, and we report actuals 3 now. They are our actual numbers, taking regulatory 4 adjustments into account. 5 MR. THOMPSON: How are non-utility 6 eliminations that are budgeted determined on an actual 7 basis? 8 MS GOULD: I understand that 9 Mr. Bourke will be appearing. Mr. Bourke is 10 responsible for our regulatory reporting and monitoring 11 with E.R.O., and we have spoken about this, and as we 12 have done in the past, particularly in our interim 13 reporting, our practice is to do that on a budgeted 14 basis, and we will continue to do that; continue to 15 modify, ensuring that the results are comparable to the 16 Board-approved budget that we are reporting against. 17 MR. THOMPSON: But the question I 18 asked you -- I am not talking about reporting to the 19 E.R.O., I am just talking about the process that is 20 used internally to develop actuals for non-utility 21 eliminations compared to budget. 22 Let's take 1999 as an example. Tell 23 me how the actuals for 1999 for non-utility 24 eliminations will be developed. 25 MS GOULD: I think we had significant 26 discussion last year on this. If we are looking at 27 actuals for internal purposes, the Company does not 28 monitor the non-utility eliminations. It is a 507 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 regulatory adjustment that is made subsequent to the 2 determination of the budget. And it is the corporate 3 budget that we would monitor against. 4 Once the non-utility elimination is 5 determined, that is then an adjustment to the overall 6 total Company budget, which would be then removed from 7 cost of service as part of determining rates for that 8 year. 9 So we have not changed our practice. 10 It has never been our practice internally to monitor 11 against the non-utility elimination. 12 MR. THOMPSON: That surprises me. 13 Let's just take a for instance. 14 In 1999 the Board in its budget made 15 a non-utility elimination of $12 million; correct? 16 MS REYNOLDS: Yes, that is correct. 17 MR. THOMPSON: If in fact people 18 within the company in their activities spent 19 $20 million of time on non-utility activities, you are 20 telling me that you don't monitor that? 21 MS GOULD: Perhaps I should clarify. 22 There are two components of the 23 non-utility elimination, and one part of that is an 24 element of O&M; and that is the billing of services to 25 affiliates. That is captured and recorded in our O&M 26 on an ongoing basis. 27 The remaining element of the 28 non-utility elimination, which is done as a regulatory 508 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 adjustment, doesn't necessarily have direct O&M or 2 resource implications. That would include some of the 3 political donations that the company would make. We 4 had a 20 per cent increase to our non-utility 5 elimination last year that isn't directly attributable 6 to any particular one of our business units that we 7 would monitor and manage on an ongoing basis. 8 MR. THOMPSON: I am talking about the 9 non-utility elimination in the base O&M. That is 10 monitored for actuals. Do I understand that correctly? 11 MS REYNOLDS: As Ms Gould was trying 12 to explain, there are some components of the 13 non-utility elimination, such as donations; there is 14 one-third of special executive compensation which is 15 removed from cost of service based on a Board 16 directive. 17 Those would be monitored against 18 actuals within their own O&M accounts. We pulled those 19 out as separate numbers. So there is no monitoring of 20 that as part of the non-utility eliminations. 21 And I think it is important -- 22 MR. THOMPSON: Try to give me a clear 23 answer. 24 The Board allowed $12 million for 25 1999; okay? You are doing estimates. There are 26 actuals to date for your O&M budget in 1999 and perhaps 27 two months of estimates, internally. Right? 28 MS REYNOLDS: Yes. 509 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MR. THOMPSON: All right. So you 2 know -- or do you know what is recorded on an actual 3 estimated basis against that $12 million? Is it the 4 same? Is it higher? Is it lower? 5 MS GOULD: No, we don't. As I 6 mentioned, that is not something that is accounted for. 7 It is an adjustment made for ratemaking purposes. 8 The $12 million is an adjustment made 9 in coming up with the total allowed operating and 10 maintenance expense in rates. The company will manage 11 operating and maintenance expense with that in mind. 12 There are certain expenses that we 13 are going to continue to incur that aren't recoverable 14 and manage the balance that we incur and that are an 15 element of cost of service. 16 So no, we don't know. As I said, it 17 is a regulatory adjustment. It is not something we 18 monitor as part of the ongoing management of our 19 operating and maintenance budget. 20 MR. THOMPSON: Your O&M base that you 21 are claiming here for the purposes of PBR is a 1999 22 Board-approved budget number net of a non-utility 23 elimination; right? 24 MS GOULD: That's correct. 25 MR. THOMPSON: So if you report, for 26 the sake of argument, one number -- let's say your base 27 is $200 million and you report $199 million to the 28 Board. I will not be able to tell, and you will not be 510 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 able to tell, I guess you are telling me, whether the 2 $200 million, which is net of a non-utility elimination 3 of let's say $10 million, and the $199 million reflects 4 actual non-utility expenses of $10 million, 5 $12 million, $20 million. 6 We won't know if you are assigning 7 some dollars that ought to be recorded against 8 non-utility businesses to the utility. 9 Is that what you are telling me? 10 MS GOULD: No, I don't think that is 11 right. 12 Any resources that are used to 13 provide services to affiliates will be billed in 14 accordance with the Code, and those services will be 15 recorded in our actual books of record as a reduction 16 to operating and maintenance expense. They are done 17 today. 18 MR. THOMPSON: The Code had nothing 19 to do with the development of the base, the Affiliates 20 Code; right? 21 MS GOULD: No. But what I am saying 22 is that we will continue to monitor and record the 23 billing of services to affiliates within our O&M. 24 MR. THOMPSON: Then you should know 25 at the end of the period whether $12 million was actual 26 or not. 27 MS REYNOLDS: Well, we expect that 28 the $12 million will form the base through the PDR 511 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 period for -- in the 1999 budget, we have forecasted to 2 recover $4.2 million from affiliates. That is budgeted 3 within our O&M. Those were cost recoveries. 4 We do monitor that amount. It is 5 budgeted on a pooled basis, and we expect that there 6 will be services that fluctuate up and down. Some 7 services will be incurred. Some may not be performed. 8 We do try to manage the $4.2 million in total. 9 MR. THOMPSON: I think we have 10 shifted ground here. I was talking about the services 11 the utility provides to affiliates. I thought you told 12 me: We don't record those; we can't check. We don't 13 know if it is $12 million, $20 million, $30 million. 14 MS REYNOLDS: We know the amount that 15 we expect to recover from affiliates, or at least on a 16 forecast test year basis we calculate what we expect to 17 recover from affiliates. 18 From the 1999 test year we expected 19 to recover $4.2 million, to monitor our performance 20 against that amount. The other component of the 21 $12 million, as Ms Gould was referring to, donations, 22 political contributions, the one-third executive 23 compensation, those amounts all reside within our O&M 24 and are never recoverable from the rate base. 25 THE PRESIDING MEMBER: These are 26 relatively small amounts, Ms Reynolds? 27 MS REYNOLDS: They total close to a 28 million dollars, those three components that I just 512 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 mentioned. 2 The other big component of the 3 $12 million is the finance program, which is removed at 4 $5.5. million. 5 MR. THOMPSON: Let's move on. I will 6 come back to trying to get a better understanding of 7 this when we get to monitoring and reporting. 8 Let's turn to the second topic, the 9 O&M base for EBR. That is to be established in this 10 case; correct? 11 The amount of the base is to be 12 established in this case for ratemaking purposes? 13 MR. MEES: The amount of the base was 14 determined as a starting point in E.B.O. 179-14/15. 15 Per that decision and per the 497-01 decision, we are 16 updating the PBR base for the 179-14/15 decision. That 17 is what we have done in adjusting for the removal of 18 rentals and ABC. 19 MR. THOMPSON: Well, I may argue with 20 you about your first point, but let's get to the facts. 21 What I would like to do is to try and 22 track from the claim you made in the E.B.R. 499 case in 23 O&M expenses to the Board decision, to your 24 E.B.O. 179-14/15, and to the amount of O&M costs, net 25 of O&M revenues, that are actually currently being 26 recovered in rates from distribution customers, and 27 then to your PBR-based claim in this case. 28 That is why I provided you with these 513 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 first two exhibits, K3.2 and K3.3, to see if you can 2 help me here. 3 Now, in the E.B.R.O. 497 decision 4 there was a lot of confusion created because some of 5 your O&M line items included revenues and costs and the 6 revenues weren't shown. It was only a net number. Do 7 you agree with that? 8 And what is produced at K3.2 is a 9 response that you gave after the hearing closed, an 10 undertaking response, which showed every line item with 11 its revenue and cost components. Do you accept that? 12 MR. MEES: I would accept that we did 13 provide this undertaking, yes, during that hearing. 14 MR. THOMPSON: But the point I'm 15 trying to make is that it broke down once and for all 16 the various line items that had revenues and expenses 17 in them initially, both revenues and expenses. Would 18 you take that, subject to check? 19 MR. MEES: It broke down the expenses 20 and the revenue or cost recovery mechanisms, yes. 21 MR. THOMPSON: If you would be good 22 enough to turn up in the Board's decision, the 23 E.B.R.O. 497 decision, page 35. You will see the Board 24 has produced a schedule of your 1999 budget that 25 equalled $280 million. Do you see that? 26 MR. MEES: Yes, we do. 27 MR. THOMPSON: If you look at 28 Exhibit K3.2, on the third page at line 9 the total 514 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 operating and maintenance budget claimed was 2 $280 million. Correct? 3 MR. MEES: Yes, we see that. 4 MR. THOMPSON: All right. 5 Can I take it that what the Board has 6 presented at 35 and what is presented in column 1 of 7 this exhibit are the same numbers. Yours have more 8 revenue and expense items, but they are the same 9 numbers? 10 MR. MEES: Yes, I would agree with 11 that. 12 MR. THOMPSON: All right. 13 Then the Board, in its decision, 14 compared to that $280 million, made an allowance on 15 account of O&M of $264.2 million. I find that in 16 paragraph 3.2.15 of the decision. Do you accept that, 17 subject to check? 18 MR. MEES: The 1999 Board-approved 19 budget was $271.9 million as per this decision. 20 MR. THOMPSON: Turn to page 38 of the 21 decision, paragraph 3.2.14. The Board-approved number, 22 compared to your 280 claim, was $264.2 million. 23 Correct? 24 MR. MEES: No. My interpretation of 25 that paragraph, looking at the last line, is that there 26 was a net adjustment of $8.1 million to the company's 27 requested 1999 O&M expense. Therefore, the resulting 28 math would be that it is a 1999 Board-approved budget 515 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 of 271.9. 2 So what the Board has done is 3 indicated the 264.2, plus the additional $7.7 million 4 in -- it has restated the HIP revenues at that time. 5 MR. THOMPSON: I think what the Board 6 did, if you will bear with me, is that they removed 7 $7.7 million of revenue that you were showing in this 8 undertaking response, marked as Exhibit K3.2, as a 9 revenue item in one of the O&M lines. So that based on 10 Exhibit K3.2, where that amount is in column 1, the 11 claimed budget was 280, and if you left that amount 12 below the line, the allowed amount would be 264.2. 13 MS GOULD: No, I don't think -- if I 14 could draw your attention, Mr. Thompson, just to 15 Appendix B of the 497 decision, and if we look under 16 page 1 of 2 -- 17 MR. THOMPSON: What page is that on? 18 MS GOULD: It doesn't have a page 19 number, I'm sorry. 20 MR. THOMPSON: Oh, I'm sorry. 21 MR. CASS: Mr. Thompson, it is two 22 pages after the final page number, 88, of the decision. 23 MR. THOMPSON: Oh, yes. I'm sorry. 24 I have it. Thank you. 25 What is this? 26 MS GOULD: If we look at the 27 operating -- 28 MR. THOMPSON: Appendix B, is it? 516 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MS GOULD: Yes, it is, Appendix B. 2 MR. THOMPSON: Appendix B, page...? 3 MS GOULD: 1 of 2. 4 MR. THOMPSON: Okay. 5 MS GOULD: I think we can see the O&M 6 as the company had requested in E.B.R.O. 497 of the 7 $280 million adjusted by the 8.1 that Mr. Mees made 8 reference to to come to a Board number of 271.9. 9 You know, I think as we work through 10 all of the numbers, the primary adjustment there is 11 ancillary program expense anyway, and I think by the 12 time we move to unbundling it isn't in our PBR base for 13 the purpose of determining 2000 rates anyway. But I 14 still think the 271.9 is the appropriate number. 15 MR. THOMPSON: You are missing my 16 point here. 17 The 280 that you claimed was a number 18 that included as a revenue item $7.7 million. The 19 Board allowed, on that basis, $264.2 million, but then 20 it said put that 7.7 above the line. So I think it is 21 encompassed in the 16.1 million footnoted at (1) and 22 you will see footnote (1), "$7.7 million restatement 23 HIP revenues", which they took out of O&M. 24 I don't want to dwell on this, but I 25 think the 280 and the 264.2 are comparable. The 271.9 26 restates a line item of revenue that was in your 280 27 above the line. 28 Do you want to undertake to check 517 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 that? 2 MR. MEES: I don't agree that the 3 264.2 that you referred to is comparable to the 280. 4 No, I don't agree. 5 MR. THOMPSON: All right. Let's move 6 forward, then. 7 Then we come forward to 8 E.B.O. 179-14/15. I am looking now at page 3 of this 9 exhibit. You present an unbundled budget of 10 $250.4 million compared to the Board-approved of 11 $271.9 million. 12 I am looking at Exhibit K3.3, 13 Appendix A, Table 4, page 3, line 9. 14 MR. MEES: Yes, we see that. 15 MR. THOMPSON: Okay. 16 If we go to your testimony in 17 Exhibit D1, Tab 8, Schedule 1, question/answer 8, we 18 get there how you got to the $250.4 million. It was 19 reduced by $21.5 million related to the transfer of 20 programs other than the rental program. Right? 21 MR. MEES: That is correct. 22 MR. THOMPSON: So, that got us to 23 $250.4 million, which is what we see in column 1 on 24 page 3 of Exhibit K3.3. And we see that number recited 25 in the sixth line of this answer. Correct? Two 26 hundred and fifty point four million dollars. 27 MR. MEES: Yes. And then, further in 28 the answer, it goes to show the adjustments that were 518 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 made to get to the company's proposed based O&M of 2 $240.6 million. 3 MR. THOMPSON: And it is the proposed 4 base -- emphasize the "proposed". And the 5 adjustments -- 6 MR. MEES: Which was -- sorry, 7 Mr. Thompson. 8 Which was accepted by the Board, in 9 their decision in 497-01, subject to the adjustments 10 for E.B.O. 179-14/15. 11 MR. THOMPSON: Just relax. We will 12 get to that, in a minute. 13 MR. CASS: Well, in that regard, 14 Mr. Chairman, I have been patient. I have been waiting 15 for Mr. Thompson to tie this, in some way, into the 16 issue before us today but I am missing it, I must say, 17 and perhaps Mr. Thompson can explain and set my mind at 18 rest. 19 My understanding is that the issue 20 before us today is the adjustments. It is not the 21 history of examination of the base that could have or 22 did occur in previous cases like 179-14/15 and 497-01. 23 It is my understanding that the issue before us now is 24 the adjustment and I wonder if perhaps Mr. Thompson 25 could address some questions to that. 26 MR. THOMPSON: Well, I am getting 27 there. I will be there in a moment. 28 Let's get to the 250.4. Then you say 519 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 you made adjustments to it of $9.8 million, which were 2 the 6.2 million for Y2K, DSM of 4.7 and, on the next 3 page, a rental wind-down credit of $1.1 million, for a 4 net of 9.8. Correct? 5 MR. MEES: Correct. Giving us a 6 total PBR base of 240.6 -- 7 MR. THOMPSON: But the rental 8 wind-down credit is now academic -- 9 MR. MEES: It is not a credit. 10 Sorry. It is an increase to our base. 11 MR. THOMPSON: All right. But it is 12 now academic because the rental wind-down didn't 13 proceed. 14 So, departing from the 250.4, my 15 first point is the deduction should be not 9.8 but it 16 should be 6.2 plus 4.7: 10.9. Do you agree? 17 MR. MEES: No. No, I don't. 18 What we have done in setting out our 19 evidence -- and I think we were fairly clear -- is that 20 we started with what was the ending part in 497-01. So 21 we started with the $240.6 million. And we have made 22 adjustments to reflect the removal of the rental 23 program and we have made sure -- in calculating this 24 adjustment, we made sure to not include what had 25 already been in the PBR base. We are just removing the 26 costs that are in the PBR base, including the 27 adjustment for the rental wind-down. So we are 28 consistent with what is in the PBR base. 520 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MR. THOMPSON: Well, okay. I think 2 what you are telling me is that $1.1 million you have 3 accounted for in adjustments from 240.6? 4 MR. MEES: That is correct. 5 MR. THOMPSON: All right. Well, let 6 me take you through it my way as to how I think we get 7 to the PBR base. 8 So, whether -- you are telling me it 9 is in there. So you won't be troubled if I say we go 10 from 250.4 and then, after deducting for DSM and Y2K, 11 we get to 239.3. You won't be troubled by that. 12 Because you say that is in your proposal, in any event. 13 MS GOULD: No. I think we just 14 should clarify one thing. 15 The adjustments that were made to the 16 PBR base and the unbundled budget for the rental 17 wind-down represented certain activities associated 18 with the fact that in a wind-down mode the rental 19 program would no longer be acquiring capital, and that 20 has had implications throughout the company as to what 21 activities or costs would be incurred. So we adjusted 22 the budget for that one particular activity, and the 23 balance of the cost allocation would have been done 24 taking that in mind. So, when we did the subsequent 25 adjustment, it was really just to take the remaining 26 costs for the activities, as they were then defined, 27 for the rental program in a wind-down mode. 28 So, they are two very separate and 521 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 distinct adjustments. 2 MR. THOMPSON: Well, are you telling 3 us that the $1.1 million that we were talking about to 4 reduce the reduction from 10.9 to 9.8 is not taken into 5 account in the PBR base that you are presenting? 6 Are you contradicting Mr. Mees? 7 MS GOULD: No, I don't think so. 8 MR. THOMPSON: Well, then, just stick 9 with me here because we won't -- we are not offside if 10 we get to 239.3 if that 1.1 is already in your PBR 11 base. Okay? Hang tough. 12 Now, one item in the PBR base that 13 shows up in Exhibit K3.3 I don't think anybody 14 recognized at the time is an item at line -- at page 2, 15 the item at line 5.9, where you reduced, in the 16 unbundled budget, the deduction for the non-utility 17 adjustments in the Board-approved unbundled -- sorry -- 18 the Board-approved bundled budget by $6.1 million and, 19 in effect, added that, in your proposal, to regulated 20 distribution rates. 21 Why was that reduction made? 22 MS REYNOLDS: Included in the 1999 23 Board-approved non-utility elimination was an 24 elimination for the MFP program. In the unbundled 25 budget, the MFP program is being unbundled, removed 26 from the utility, so the non-utility elimination was 27 reduced by the MFP program. 28 MR. THOMPSON: Well, does that amount 522 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 represent the fully-allocated cost with respect to MFP? 2 MS REYNOLDS: It does. It is the 3 main component. There may be some other small 4 adjustments. Off the top of my head, I can't come up 5 with them. But the biggest portion of it is the MFP 6 adjustment. 7 MR. THOMPSON: Okay. So that based 8 on the E.B.O. 497 bundled rates, $6.1 million of 9 fully-allocated cost with respect to the MFP was not 10 being recovered from distribution customers and this 11 proposal transferred that burden to distribution 12 customers. Right? 13 MS REYNOLDS: No, it did not, because 14 the costs of operating the MFP program have also been 15 removed. There is no cost -- 16 MR. THOMPSON: It looks to me like 17 you have slipped out the MFP program on a marginal cost 18 basis. Is that what happened? 19 MS REYNOLDS: We would have removed 20 from the unbundled budget the costs of all of the 21 ancillary programs that were being unbundled: the MBU; 22 the MFP program. It would have been -- the adjustments 23 made to O&M would have been the reduction in O&M that 24 we would have seen as a result of no longer 25 participating in those activities. 26 MR. THOMPSON: But what I have 27 suggested to you is true, that $6.1 million which you 28 have shifted into the unbundled budget was not in the 523 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 bundled budget being recovered from distribution 2 ratepayers. It was outside of the ambit of utility 3 rates. 4 MS REYNOLDS: Yes, the MFP program 5 would have been allocated fully-allocated costs and 6 those costs would have been removed from cost of 7 service for the 1999 Board-approved budget. 8 MR. THOMPSON: So that if the Board 9 accepts my position -- which is that the use of the 10 1999 Board-approved bundled budget to derive the PBR 11 base means we use the component of O&M expenses in that 12 budget that was being recovered from utility 13 ratepayers, at that time -- we need a deduction of 14 $6.10 million. 15 I know you don't accept it but I have 16 the amount right? 17 MS GOULD: No, I don't agree with 18 that. I think we have to go back to the unbundled 19 budget as it was presented and reviewed in 179-14/15. 20 All of the programs were removed eliminating our direct 21 and marginal costs and, at that time, any ongoing 22 services that were to be provided were evaluated and 23 the non-utility elimination was updated to reflect 24 that; and that is what has been reflected and recorded 25 in the non-utility elimination, at that point in time. 26 MR. THOMPSON: Well, I just want to 27 make sure I have the amount right. 28 I appreciate your argument, but if 524 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 this ought to come out, then in addition to the $10.9, 2 we take out $6.1 million, which brings me down to 3 $233.2 million and that does not include fully 4 allocated costs for the rental program. We haven't yet 5 excluded those amounts and that number of 6 $233.2 million does not exclude the $3 million of fully 7 allocated costs for the ABC program. Right? 8 MR. MEES: We don't understand where 9 you are going, Mr. Thompson, sorry. 10 MR. THOMPSON: The fully allocated 11 costs for the rental program are $34.5 million in the 12 1999 budget, the Board approved budget. Right? 13 MR. MEES: I do believe the number 14 you are referring to is what was in the PBR base, which 15 was including the rental wind-down, as we suggested. 16 You are being inconsistent in your adjustment. 17 As per our evidence, we shouldn't be 18 removing the fully allocated cost anyway. 19 MR. THOMPSON: I know you propose to 20 remove direct and marginal which total $21.5 million, 21 just for the rental program. 22 MR. MEES: A reduction of 23 $21.5 million to the PBR base, yes. 24 MR. THOMPSON: And you propose to 25 remove $3 million, which are the fully allocated costs 26 of the ABC. Right? 27 MR. MEES: That's correct. 28 MR. THOMPSON: For a total of 525 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 $24.5 million. 2 MR. MEES: For a total advised O&M 3 PBR base of $216.1. 4 MR. THOMPSON: I just want to get the 5 amount of the reductions. So yours is $21.5 which is 6 direct and marginal for rental and $3 million for ABC 7 which is fully allocated. The difference between 8 direct and marginal for the rental and the fully 9 allocated for the rental is $10 million. The total is 10 $34.5 million. Would you confirm that, please? We 11 have been told that. 12 MS GOULD: Yes, based on the 1999 13 budget and the services that were anticipated to be 14 provided when rentals was a component of the regulated 15 utility. 16 MR. THOMPSON: And those two numbers, 17 $34.5 million and $3 million total $37.5 million? We 18 can agree on that. 19 MS GOULD: Yes, we can. 20 MR. THOMPSON: And we can agree that 21 if you subtract $37.5 million from the $233.2 million 22 that I was discussing with you, the base -- the net 23 number becomes $196.7 million. We can agree on the 24 math? 25 MS GOULD: Well, we can agree on the 26 math, but then I think we are asking that we go revisit 27 the entire PBR base that has already been reviewed as 28 part of 179-14/15 and approved as a starting point for 526 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 the proceeding. I think that's the only way. 2 MR. THOMPSON: Don't hang your hat 3 too much on that decision because we are here for 4 ratemaking purposes. I accept your argument as an 5 argument, but all I am trying to establish is that 6 based on the O&M budget, the 1999 Board approved 7 bundled budget, that of the O&M expenses in that budget 8 recoverable from distribution customers in rates based 9 on that budget, the amount is $196.7 million, not the 10 $216.4 that you claim, $216.1? 11 MS REYNOLDS: By doing that, 12 Mr. Thompson, you have removed allocable costs related 13 to services that we used to provide the MFP program, to 14 the rental program, to the merchandise sales program 15 that don't go away in the utilities. They remain. 16 They are required costs to operate the utility business 17 and you can't deduct them from the O&M base as you have 18 just done. 19 MR. THOMPSON: You folks wanted the 20 1999 bundled budget as the point of departure. Our 21 camp was pressing for an up-to-date unbundled budget. 22 You wanted that budget and all I am trying to 23 demonstrate to you is that the amounts in rates 24 recoverable from distribution customers on account of 25 O&M expenses in that budget, the base which you wanted, 26 is $196.7 million, and the base you are seeking of 27 $216.1 million is $19.4 million greater than the 28 amounts currently being recovered in the Board approved 527 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 rates from distribution customers. 2 MS REYNOLDS: We no longer have the 3 ability to share our overheads with our ancillary 4 programs. 5 MR. THOMPSON: Don't cry on my 6 shoulder. This is your base. 7 MS GOULD: No, and I think it is 8 important, nothing has changed since the time of the 9 1999 Board approved budget. We started with that as 10 our bench mark and we have applied the costs 11 consistently throughout the process to get us where we 12 are today as our base for the year 2000. 13 We went through. We had a 1999 14 bundled budget which was based on an integrated 15 utility. We went through the process then of 16 unbundling that budget to look at what services would 17 be shared with the unbundled businesses post-unbundling 18 and account for that on the same basis that the costs 19 were developed in the 1999 budget. I think we have 20 applied that consistency throughout and that was the 21 basis for the adjustments that were made in coming out 22 of E.B.O. 179-14/15. So I don't think we have changed 23 our proposal. 24 MR. THOMPSON: I am not suggesting 25 you have changed your proposal. I am suggesting the 26 base that you are proposing is $19.4 million too high. 27 That's what I am suggesting. 28 You are aware, I assume, that in 528 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 determining the harm to ratepayers' principal or 2 applying that principal in the Union Gas case that the 3 Board used currently Board approved distribution rates 4 applicable to utility customers as the bench mark from 5 which to measure harm. Are you aware of that? 6 MS GOULD: Yes, I am, but I think 7 even based -- when we look at the deficiency in E.B.O. 8 179-14/15, comparing our 1999 bundled budget to our 9 proforma unbundled budget that with a PBR base or O&M 10 of the $250.4 that there was a net benefit to 11 ratepayers and, if I remember correctly, it was 12 approximately $18 million. 13 MR. THOMPSON: Well, what are you 14 trying to say, that you should be permitted to increase 15 the amounts recoverable from distribution customers in 16 rates compared to what's recoverable in distribution 17 customer -- in rates for O&M expenses based on the 18 Board's 1999 approved budget because there are benefits 19 in excess of $19 million. Is that what you are trying 20 to say? 21 MS GOULD: No, it wasn't. I am 22 saying I don't think we have increased the O&M costs 23 that we are asking for. We have reduced all of the 24 direct costs associated with those programs and then 25 reflected and updated the non-utility elimination on a 26 proforma basis to look at what 1999 would have looked 27 like if we had been unbundled at that point in time. 28 So the two will never be directly comparable, in the 529 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 sense that they are two very different businesses. 2 MR. THOMPSON: I suggest what you 3 have done and what you are trying to do is depart from 4 the methodology that the Board applied in deriving 5 ratepayer responsibility for costs associated with the 6 1999 O&M budget. You are trying to shift once again 7 from fully allocated to direct and marginal and the 8 impact of that shift is $19.4 million. 9 MR. McGILL: I think, Mr. Thompson, 10 it was made very clear in 179-14/15 that the allocated 11 costs would not leave the utility when programs did 12 leave the utility. I have got the transcript 13 references here. That's not the nature of them. 14 The way we have removed the rental 15 program is consistent with the way Union Gas removed 16 theirs in their unbundling proceeding two years ago. 17 MR. THOMPSON: Except the point of 18 departure for Union was not a bundled budget based on 19 fully allocated cost methodology. You folks didn't 20 want to go in the unbundled budget direction. You hung 21 your hat on the bundled budget which recovered only a 22 certain amount from ratepayers and I think I have 23 quantified the amount of the different correctly, but 24 this amount, this $19.4 million that I have identified, 25 I suggest is a major contributor to the delivery 26 deficiency of almost $70 million that's reflected in 27 this rate application. Would you agree? 28 MS GOULD: I can't agree, 530 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 Mr. Thompson. I guess my hesitance is I don't have all 2 of the deficiency calculations in front of me right 3 now. 4 But as I mentioned before, with the 5 original unbundling I think it was demonstrated that 6 the deficiency actually went down as a result of the 7 company's proposal. Given our removal of the rental 8 program on a marginal-cost basis, and based on analysis 9 that I have seen it was earning on a marginal-cost 10 basis its required rate of return, that actual removal 11 did not have any further impact on the deficiency. 12 MR. THOMPSON: Well, I will argue 13 that later. 14 Let's turn to perhaps the fifth topic 15 which flows from this really which is monitoring and 16 reporting of actuals. 17 Now, perhaps the best way to start 18 this is to take you to Exhibit K3.4. 19 This topic of the monitoring and 20 reporting of the actual O&M was the subject of some 21 examination and cross-examination in the 22 E.B.R.O. 497-01 proceeding. Can we agree? 23 MS GOULD: Yes, we can. 24 MR. THOMPSON: One of the witnesses 25 there for the intervenors was Dr. Johannes Bauer. Do 26 you accept that? 27 MS GOULD: Yes, I do. 28 MR. THOMPSON: What we have before us 531 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 here are some excerpts from Dr. Bauer's examination by 2 Ms Lea and Mr. Vlahos. These were provided to you at 3 the break. I don't know if you have had an opportunity 4 to review them. 5 MS GOULD: I have had a brief 6 opportunity to review these specific pages. 7 I will say I am not intimately 8 familiar with Mr. Bauer's evidence so I won't be in the 9 best position to put these comments in context, but I 10 will do my best. 11 MR. THOMPSON: Well, all I am trying 12 to do here is to take his evidence as to the importance 13 of reporting in the context of rebasing, monitoring 14 over earnings and ensuring efficiencies are not be 15 transferred to affiliates to give context to the 16 questions I am going to ask you about monitoring and 17 reporting. 18 So if you will bear with me, I will 19 just take you through this briefly. 20 MR. CASS: Mr. Chairman, I just want 21 it to be clear on the record that of course the company 22 does not accept that bringing into this case an excerpt 23 from the transcript of the examination of a witness in 24 another case makes this Exhibit K3.4 evidence here. 25 Dr. Bauer could be called in this 26 case if the intervenors had seen fit to do that and he 27 has not been called. 28 I have no problem with Mr. Thompson 532 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 asking the witnesses to comment as best they can on 2 this evidence, but I don't believe that that gives us 3 the status of evidence in this case. By that I mean 4 evidence of Dr. Bauer. 5 THE PRESIDING MEMBER: Thank you, 6 Mr. Cass. We note that. 7 MR. THOMPSON: I will perhaps make an 8 appropriate application later for permission to 9 incorporate excerpts from a prior case into this case, 10 but for the purposes of my cross-examination I can 11 proceed as Mr. Cass has indicated. 12 Panel, the first segment that I 13 wanted to draw your attention to was pages 1092 14 to 1094. 15 Ms Lea, starting at line 16, asked 16 Dr. Bauer about reporting requirements. 17 The question she asked on that topic 18 runs to line 1 of page 1093. 19 In response to this inquiry Dr. Bauer 20 said: 21 "I think two aspects need to be 22 weighed here. One is certainly 23 the question of administrative 24 simplicity of the PBR plan which 25 would speak for more aggregated 26 types of reporting. 27 The other aspect, though, is 28 the question of what approach 533 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 would facilitate the learning 2 process that is necessary to 3 learn to use PBR techniques, and 4 I think it's interesting to see 5 what other regulatory agencies 6 again have done. 7 Those who try to come up 8 with meaningful PBR plans have 9 in general established 10 relatively detailed reporting 11 requirements to allow an annual 12 evaluation of the process. In 13 other words, in order to create 14 information necessary to 15 understand what the implications 16 of PBR are, they have required 17 relatively detailed reporting." 18 Then he goes on and refers to a 19 B.C. Commission case and a U.K. case and at page 1094 20 he says: 21 "My view is that in the initial 22 phase of the PBR experiment -- 23 let me use the term `experiment' 24 here because I think all the 25 stakeholders involved need to 26 learn how to live in this new 27 world in several ways because, 28 on one hand, we need to learn 534 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 how to give up micro-management 2 of the process. This is, in my 3 view, incompatible with PBR. 4 On the other hand, one has 5 to understand the different 6 implications for risk for costs 7 and benefits of a PBR plan. And 8 in this initial phase, I think 9 more detailed information 10 reporting seems justified. 11 In my view, it will be 12 appropriate to essentially 13 maintain the existing 14 information filing requirements 15 that this, you know, on a 16 line-by-line basis. 17 But I wanted to highlight 18 this straight off between 19 administrative simplicity on the 20 one hand and the meaningful 21 learning experience, how to 22 effectively use PBR on the other 23 hand." 24 Then the second excerpt that I wanted 25 to draw your attention to starts at page 1111 and runs 26 through to 1113. 27 Here the questioner is Mr. Vlahos and 28 what he is questioning Dr. Bauer about is the extent to 535 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 which "efficiencies that can be had in the utility will 2 be exported, if you like, to the affiliated companies." 3 That phrase is used by Dr. Bauer -- 4 I'm sorry, by Mr. Vlahos at lines 10 and 11. 5 Dr. Bauer, in response to that 6 question -- I won't read it in its entirety, but the 7 paraphrase of the response is that when you are in a 8 targeted PBR more information is necessary than in a 9 comprehensive PBR. 10 There was a similar discussion about 11 the need for information in the context of rebasing. 12 So I wanted to give you that to put 13 in context this topic of monitoring and reporting of 14 actuals. 15 To kick it off could you just tell us 16 what the company plans to do in the context of 17 monitoring actuals and reporting them? 18 --- Pause 19 MS GOULD: I will just really 20 reiterate what I said before. I think it was discussed 21 at length in the 497-01 hearing, the company does plan 22 on implementing reporting associated with its service 23 quality indicators. 24 At this point in time the company 25 also plans on continuing the monitoring the way it is 26 established with the E.R.O. and at this point has no 27 plans to alter that. But we will respond to any 28 information requests that are brought forward. 536 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MR. THOMPSON: I should have been 2 clearer. 3 What does the company plan to do in 4 reporting O&M expenses, actual? How does the company 5 propose to report them? To whom does the company 6 propose to report them? What information is the 7 company prepared to provide to intervenors in the rate 8 case review? Could you just give us your proposal? 9 MS GOULD: Yes. The company's 10 proposal is to continue its current practice and report 11 to the E.R.O. with its actuals, O&M expenditures. 12 MR. THOMPSON: That reporting is 13 required by legislation, is it? 14 MS GOULD: I would have to -- 15 MR. McGILL: I believe it is 16 section 109 of the Ontario Energy Board Act, 17 Mr. Thompson. 18 MR. THOMPSON: All right. 19 MR. McGILL: That issue was discussed 20 in 497-01. 21 MR. THOMPSON: Well, Mr. Cass doesn't 22 want me to refer to the evidence in that case so I will 23 have to ask questions. 24 All right. So it is a statutory 25 responsibility. 26 Is that information available to 27 parties in a rate case? 28 MS GOULD: Again, I think perhaps 537 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 some of the questions I will need to defer to 2 Mr. Bourke when he gets up, but it is my understanding 3 that this information is filed in confidence with the 4 E.R.O. 5 MR. THOMPSON: All right. 6 Is the format of the report 7 consistent with the format of Exhibits K3.3 and K3.2? 8 In other words, line-by-line? 9 MS GOULD: No, the format isn't 10 consistent. It is my understanding that the format has 11 developed over the years and in consultation with the 12 E.R.O. and it has been adjusted over time to meet the 13 information needs. 14 MR. THOMPSON: So is it one line or 15 more than one line, or do you know? 16 MS GOULD: It's my understanding it 17 is reported on a one-line basis. 18 MR. THOMPSON: One-line basis. 19 So the company's proposal -- and I'm 20 paraphrasing it -- for the purposes of the PBR regime 21 established by the Board is to report -- I'm sorry, to 22 continue to report O&M expenses as required by statute 23 to the Board -- I'm sorry, to the E.R.O. on a one-line 24 basis. That's the proposal? 25 MS GOULD: That is our plan at this 26 point in time and we are not aware of a need to revisit 27 or change that at this point in time. 28 MR. THOMPSON: All right. Can you 538 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 appreciate the point that intervenors will have great 2 difficulty in evaluating the performance of the PBR 3 plan in rate cases if they are precluded from having 4 any access to any information relative to the 5 performance of the plan, which seems to be implicit in 6 your proposal? 7 MS GOULD: I think it gets back -- 8 and I think there was significant discussion of this 9 previously -- to what is the appropriate vehicle to 10 monitor O&M. 11 One of the objectives in moving 12 forward in PBR was to improve the regulatory 13 efficiency, and line by line monitoring within the rate 14 hearing, to me, is really just past practice, and I am 15 not really sure that achieves our objective. 16 MR. THOMPSON: The difference between 17 line by line monitoring -- you seem to be assuming that 18 it is going to lead to great inquiries in rate cases. 19 I think that what intervenors are looking for is a 20 trail, a record, from the 1999 Board-approved, which is 21 the base for PBR, to 1999 actuals to 2000 PBR numbers 22 to 2000 actuals, and so on, so that they can evaluate 23 the impact of the program toward either enhancing or 24 reducing returns on equity and so they will have a 25 trail that is applicable to help them when it comes to 26 rebasing. I cannot for the life of me understand why 27 the Company is so obstinate in refusing to provide that 28 kind of information. 539 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 Why won't you provide that trail, on 2 the record, so that people can get some confidence in 3 this regime? 4 MS GOULD: I think it comes down to 5 two reasons. I think, one, we have to look at what are 6 the ratemaking implications of that information and, 7 secondly, again, we have had considerable review over 8 the past few years of O&M and, again, I guess I would 9 question the appropriate review mechanism and what the 10 material needs and where it should be provided. 11 MR. THOMPSON: The scope of the 12 review of the information in a rate case can be 13 controlled by the Board. The disclosure of the 14 information is what we are talking about, and the 15 Company, a public utility, regulated, refuses to 16 disclose this information in rate cases, and, for the 17 life of me, I don't know why, unless you are trying to 18 hide something. 19 Are you trying to hide something? 20 MS GOULD: No, Mr. Thompson. Again, 21 I think it is an area that I may have to defer to 22 Mr. Bourke. We are getting into regulatory filing and 23 policy, and I think that would fall more into his area. 24 MR. THOMPSON: So when do we see 25 Mr. Bourke? What panel is he on? 26 MR. CASS: Mr. Bourke is on the panel 27 addressing cost of capital, Mr. Thompson. 28 MR. THOMPSON: All right. I will 540 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 save some of these for Mr. Bourke. 2 Just in terms of format and what is 3 going on internally at the Company, does the Company 4 continue to scrutinize operating and maintenance 5 expenses on a line by line basis in a format similar to 6 what we see in Exhibits K3.2 and K3.3 internally at the 7 Company? 8 MS GOULD: We do monitor O&M 9 internally by the Company, but not in a format that is 10 directly comparable to K3.2. 11 MR. THOMPSON: K3.2 is the reworking, 12 I guess, of the internal company information to put it 13 in a utility context. Is that what you are saying? 14 MS GOULD: That is correct. I think, 15 as we spoke last year, ancillary program expenses, 16 which are considered a component of O&M for ratemaking 17 purposes, we monitor separately as part of the program. 18 So there are some slight differences 19 in the way we present this information. 20 MR. THOMPSON: But you can continue 21 to present O&M expenses for the utility in this kind of 22 format, if you are directed to do so. That is not a 23 big problem. It is business as usual, really. 24 MS GOULD: With one exception, and 25 that would be if you look at line 5.9 -- 26 MR. THOMPSON: You are looking at -- 27 MS GOULD: K3.2, I'm sorry. 28 Line 5.9. 541 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MR. THOMPSON: Yes. 2 MS GOULD: This is the non-utility 3 adjustment, and I think, as Ms Reynolds mentioned 4 yesterday, that is not something that we are currently 5 calculating, largely because it doesn't have ratemaking 6 implications for the 2000 test year. 7 The non-utility elimination is a 8 component of our PBR base and was determined at that 9 point in time. 10 Given that it is a regulatory 11 adjustment, one that we don't use for internal 12 management purposes, at this point we have not 13 identified a need to do so. 14 MR. THOMPSON: Just to nail it down, 15 if that line is to be included in a filing to which 16 there will be access in a rate case, the Board will 17 need to direct the Company to carry on its activity 18 analysis. Is that what it boils down to? 19 You can do that if you continue to 20 conduct your activity analysis. 21 MS REYNOLDS: Or to identify the best 22 way that it could be provided. I would anticipate that 23 we could provide the 1999 unbundled amount, rolled 24 forward, for the PBR formula. That would be -- 25 non-utility elimination. 26 MR. THOMPSON: In the Board's 497-01 27 Decision -- and Mr. Brett, I think, may have referred 28 you to this earlier. I can't remember whether it was 542 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 this passage or not. 2 I would like to draw your attention 3 to paragraph 2.5.1, where the Board said: 4 "The Company did not prefile a 5 proposal for monitoring and 6 reporting protocol, but during 7 the hearing a number of related 8 matters were discussed. Since 9 the proposed O&M PBR plan is a 10 partial plan addressing only one 11 component of the cost of 12 service, the Company indicated 13 its expectation that 14 "traditional" cost of service 15 filings and rate reviews will 16 continue. There would therefore 17 be an opportunity to report on 18 the Plan and respond to 19 questions about it as part of 20 rate reviews." 21 Now, would you agree with me that one 22 of the aspects of the plan in which intervenors are 23 interested is the extent to which it operates to enable 24 the Company to achieve savings in O&M expenses below 25 the PBR base, and thereby enhance return on equity? 26 That is one aspect of monitoring the performance of the 27 plan. 28 You are looking puzzled. 543 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 Is that sheerly -- 2 MS GOULD: Yes, I think that is one 3 component of the plan, and I think that is where the 4 monitoring -- we talk about traditional rate reviews 5 and filings, and that is one area where the monitoring 6 will continue, as I mentioned before, with E.R.O. 7 MR. THOMPSON: You will continue with 8 somebody, but whoever is monitoring it, assuming that 9 intervenors are going to have access to some 10 information in rate cases, what they are interested in 11 knowing, for example -- if the PBR base is 12 $200 million, for example, and if you report 13 $190 million to someone, then the plan has produced a 14 benefit of $10 million to enhance rate of return on 15 equity. In that example, would you agree? 16 MS GOULD: Yes, I would. 17 MR. THOMPSON: And that $10 million 18 will translate into some increment in percentage return 19 on equity. 20 MS GOULD: Yes. 21 MR. THOMPSON: What does $10 million 22 translate into on return on equity? Can you give us 23 a -- 24 MS GOULD: Ms Reynolds had a good 25 point, all other things staying equal, because O&M 26 really is just one component of regulated return. 27 MR. THOMPSON: I understand that. 28 But we are looking at the benefits of this plan in 544 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 isolation. 2 --- Pause 3 MS GOULD: Before or after tax? 4 MR. THOMPSON: After tax. 5 --- Pause 6 MR. CASS: Could we perhaps provide 7 an undertaking on that, Mr. Thompson? 8 MS GOULD: Yes. I need my rate base 9 numbers and a few other things if I was to do that. 10 MS LEA: Thank you. I think that is 11 Undertaking J3.3. 12 UNDERTAKING NO. J3.3: Ms Gould 13 to provide what $10 million in 14 PBR plan translates into on 15 return on equity after tax 16 MR. THOMPSON: At the moment, under 17 this plan that has been approved by the Board, there is 18 no upper limit to the return on equity that you might 19 achieve through the operation of the plan. Do you 20 agree? 21 MS REYNOLDS: I don't believe there 22 is any upper limit, nor is there any lower limit. 23 MR. THOMPSON: Right. That's fair. 24 Now, are you familiar with the 25 proposals in the draft PBR handbook that the Board 26 staff has circulated with respect to electricity in 27 terms of parameters on permitted returns? 28 MS GOULD: No, I'm sorry. I haven't 545 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 reviewed that. 2 MR. THOMPSON: In this decision that 3 I was making reference to earlier, the Board gave 4 parties a right -- I am looking at page 41 -- parties a 5 right to request the Board to consider whether a 6 situation constitutes justification to abandon the PBR 7 plan. That is paragraph 3.0.25. We are to have that 8 right. 9 MR. McGILL: It is in the 497-01 10 decision? 11 MR. THOMPSON: Yes, page 41, under 12 the "Off Ramps" heading. 13 MR. McGILL: We are confused about 14 your electric PBR handbook, so I wasn't sure whether 15 you are referring to that or -- 16 MR. THOMPSON: Going back to 497-01. 17 I apologize. 18 MS GOULD: I'm sorry. Could you 19 repeat the question, please? 20 MR. THOMPSON: Yes. 21 Can you accept that the Board gave us 22 this right to request the Board to consider whether the 23 situation constitutes justification to abandon the PBR 24 plan? 25 MR. McGILL: I believe that is what 26 Ms Gould said earlier was that any party can come 27 before the Board to make a motion to question the 28 company's rates. 546 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MR. THOMPSON: But if we don't have 2 any access to how the plan -- information as to how the 3 plan is performing, on what factual basis do we 4 exercise that right? 5 MR. McGILL: We are going to be 6 reporting our service levels. The rates will be set 7 subject to the formula, the PBR formula. 8 I would suppose that if we weren't 9 meeting our service commitments that would be cause for 10 a party to come forward to the Board. 11 MR. THOMPSON: But you could be 12 making 30 per cent return on equity and have all this 13 in secret and we are stuck I guess. Is that your 14 concept as to the way this plan works? 15 MR. McGILL: And we could be making 16 1 per cent on equity and be stuck. 17 MR. THOMPSON: Well, I'm not 18 concerned about your rights to plead off ramp. You 19 have the info, buddy, we don't have it, and I can bet 20 you $25,000 you will be in here when it drops one 21 percentage point crying like you can't believe. 22 But coming back to my question about 23 information, would you agree with me, we can't really 24 exercise that right if we don't have any information? 25 MR. McGILL: I guess it comes down to 26 a question of relevance. If the Board is determined 27 that the company's rates shall be based on the formula 28 for the duration of the PBR, I just question whether or 547 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 not the reporting of the actual O&M is relevant during 2 the PBR period. 3 MR. THOMPSON: All right. Well, we 4 will argue this -- 5 THE PRESIDING MEMBER: Mr. McGill, 6 can you clarify something for me. 7 In future years, would the company 8 not include an historical year rate of return analysis? 9 I do not think that would have changed, although O&M 10 may be just one line. 11 MR. McGILL: Again, I think with 12 respect to the details of what we would report, I think 13 we should be deferring that to Mr. Bourke. 14 THE PRESIDING MEMBER: Okay. That's 15 fine. But you may take note of that, because I am also 16 interested as to what will be reported in the future, 17 whether the historical year or bridge year's financial 18 performance through the rate of return calculations 19 will continue to be available. 20 MS GOULD: We will follow up on that. 21 MS LEA: Could that be given an 22 undertaking number. 23 MS GOULD: I think just to speak with 24 Mr. Bourke and make him aware of the issue. 25 MS LEA: All right. Thank you. 26 MR. THOMPSON: Another aspect, panel, 27 that I suggest is important to our opportunity to 28 obtain a report on the plan and respond to questions 548 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 about it as part of rate reviews is some idea of the 2 difference between the going in base and actuals. 3 Here we come to a question. It is 4 just an informational question. I am not trying to 5 reopen 497-01, as Mr. Farrell suggested yesterday, but 6 I believe intervenors are entitled to know, as part of 7 the information about the performance of the plan, the 8 difference between 1999 Board-approved and your 9 estimated actuals, because that relates to an 10 evaluation of the going in benefits of this plan. 11 Now, I have asked the question in our 12 interrogatories "Give me that difference?" and you have 13 refused to answer the question. I am asking it again 14 on the record: What is the difference between the 1999 15 O&M budget approved by the Board and the actuals and 16 estimated for 1999? 17 MR. CASS: Mr. Thompson, I object to 18 that question. I don't think that is an appropriate 19 question for the issues that are now before the Board 20 in this proceeding, which are, as I understand it, the 21 consequences of the 497-01 decision and, particularly, 22 as far as the base is concerned, the appropriate 23 adjustment that must be made because of removal of 24 rentals. I don't think it is now before the Board to 25 go back and relook at the types of numbers that you are 26 requesting. So I do object to that. 27 Objection 28 MR. THOMPSON: This comes back to, 549 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 Mr. Chairman, the remarks I was making yesterday when I 2 was speaking to Mr. Mondrow's motion. It is my 3 submission that the public record, for the purposes of 4 monitoring and reporting the performance of PBR, the 5 public record in a rate case has to be the place where 6 the actual information is going to be provided. 7 I don't intend to conduct a 8 line-by-line examination on this information, but it 9 has to be provided on the public record so that the 10 trail will be there to measure on an ongoing basis this 11 cross-subsidization potential and the performance of 12 the program potential. 13 So, as I indicated yesterday, the 14 1999 estimates are part of the information base that 15 parties should have access to for the purposes of 16 monitoring this regime. It is a very limited purpose. 17 THE PRESIDING MEMBER: Mr. Thompson, 18 are you referring to future rate cases or this specific 19 rate case? 20 MR. THOMPSON: I am referring to this 21 rate case as to when the information should be 22 disclosed, I am referring to our rights at any time to 23 apply to the Board to determine whether a situation 24 constitutes justification to abandon the PBR plan, and 25 I am referring to our rights in subsequent cases to 26 seek similar information to evaluate how the plan is 27 going year by year, so that when we get to the end of 28 year three there is a trail from which parties can 550 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 evaluate rebasing. 2 So it is relevant to monitoring and 3 reporting of the PBR regime which the Board has 4 established, in my respectful submission. It is 5 critical to it. If this information is not made 6 available, nobody is going to have any confidence in 7 this regime, as Dr. Bauer indicated, to help parties 8 through the learning experience. You have to have full 9 disclosure of relevant information. If everything is a 10 big secret, everybody is going to be very, very 11 suspicious. 12 THE PRESIDING MEMBER: Mr. Thompson, 13 before I turn to Mr. Cass, there are two issues. One 14 is as to what is the monitoring issue, and that's the 15 future. 16 There is the current issue for this 17 proceeding, and that is you would like some way to test 18 the reasonableness of the base budget, the O&M base 19 budget going to PBR. 20 Am I correct? 21 MR. THOMPSON: That's not where it 22 stops. We are developing a base and we are also 23 developing monitoring and reporting rules. 24 THE PRESIDING MEMBER: And I am 25 saying that the second one is going forward, and 26 presumably you can argue about this at the end of the 27 day. 28 As to the first part, isn't this a 551 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 revisitation of what the Board has heard about what 2 ought to be the appropriate base going in? 3 I will tell you my disadvantage here, 4 or our disadvantage. We have no idea what the scoping 5 document says on this specific issue. That is the only 6 issue for which we were not provided anything. That is 7 why I have been hesitant to interrupt you earlier in 8 the day, as to where we were going with this. 9 I was expecting Mr. Cass to say 10 something, and he hasn't been very vocal. So we went 11 on. 12 Yes, Mr. Cass. 13 MR. CASS: Mr. Chairman, I do share 14 your concern about where it was going. As I did say at 15 one point in time, I was hoping to hear Mr. Thompson 16 tie his cross-examination into what I think is the real 17 issue in terms of the base, and that is the adjustment 18 that is appropriate. 19 I think the base issue has been 20 examined repeatedly by the Board, and the Board I think 21 has made its position very clear. 22 Mr. Thompson has come back to this 23 point about a need for a trail, and he is asking for 24 this number because of a need for a trail. 25 Mr. Chairman, in line with what you 26 have said, that is what we will argue, I think, at the 27 end of this case. 28 Mr. Thompson appears to be saying 552 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 that a certain level of monitoring and reporting is 2 needed because he wants to argue in favour of a trail. 3 We can argue that at the end of the case. I don't 4 think that gives him the right to get the first number 5 now before, in argument, the Board has heard as to 6 whether it is appropriate to embark on this trail. 7 In terms of the future, as you put 8 it, Mr. Chairman, I think that remains to be argued in 9 this case. I don't think Mr. Thompson should be able 10 to get the first number until it has been argued. 11 In terms of Mr. Thompson's point 12 about developing a base, I agree completely with what 13 you said, Mr. Chairman, that this has been addressed in 14 the past and Mr. Thompson is trying to readdress it. I 15 apologize that I didn't speak up sooner and voice that, 16 but I certainly did exhort Mr. Thompson to try to tie 17 his questions into what the real issue is here, as I 18 understand it, and that is the adjustment that is 19 appropriate to the base that has already been 20 determined. 21 MR. THOMPSON: I have tried to do 22 that in the first topic that I examined on. My 23 position on the base is $196 million and some odd. 24 If my friend didn't understand that, 25 I can't help him. 26 The other topic that the parties -- 27 and I can't explain why you don't have this scoping 28 document. We gave Mr. Farrell our comments on it two 553 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 days ago. So what is holding him up, I have no idea. 2 Monitoring and reporting requirements 3 is a topic that parties accepted would be part of this 4 O&M expense issue. It is a topic -- and you can tell, 5 I guess, from my exuberance about it -- of great 6 concern to intervenors like IGUA and the CAC and the 7 Schools. 8 The provision of the information, 9 whether it is now or later doesn't matter for the 10 purposes of setting rates in this case. So if that is 11 what you are asking, I agree with that comment. 12 The provision of the information now, 13 in my opinion, is very important because you have said 14 in your decision that this is the place where we get to 15 ask questions about the plan. All I am trying to 16 establish is that the going-in benefit, that there is 17 one, comparing the 1999 Board-approved to the 1999 18 actuals is something that should be on the table now -- 19 not later, now -- so that parties can at least consider 20 their right under 3.0.25 as to whether that is too big 21 a cushion. 22 I can't put it any stronger than 23 that. 24 THE PRESIDING MEMBER: I understand 25 what you are saying, Mr. Thompson. There is a Board 26 decision that speaks of this matter, that sets the 27 base. And there is the ruling on a motion that dealt 28 with exactly the same issue. 554 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 I am just not sure how further ahead 2 we are going to be by asking for the provision or 3 production of that information. 4 Be that as it may, perhaps we should 5 break now. I would like to ask you how much you have 6 left on the remaining two issues, Issues 3 and 4: PBR 7 formula and Z-factors. 8 MR. THOMPSON: I can finish up 9 before 5:00. 10 Can I just respond to your last 11 point? 12 THE PRESIDING MEMBER: Certainly. 13 MR. THOMPSON: I am not trying to 14 true up. I want you to understand that. To suggest 15 that this is a true-up is incorrect. We are not trying 16 to true up anything. We are just trying to get a 17 process for the provision of information. It is a 18 disclosure issue, plainly and simply a disclosure 19 issue, and the timing of disclosure. That is the 20 position that the intervenors wish to put to you. 21 THE PRESIDING MEMBER: Mr. Cass. 22 MR. CASS: Again, Mr. Chairman, if I 23 may, the process is the issue. The process is the 24 issue that we presumably will have a right to argue at 25 the end of this case. 26 In my submission, Mr. Thompson 27 shouldn't be entitled now to get the answer to a 28 question that assumes he succeeds on the argument as to 555 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 the process. We should have that argument first at the 2 end of this case, and then that will lead to what 3 happens in the future. 4 We shouldn't presume the result of 5 that argument and give him a number that he thinks is 6 part of the process that he is contending for. 7 THE PRESIDING MEMBER: Mr. Thompson, 8 if it is not a true-up issue that you require the 1999 9 actuals, or I guess it would be estimates at this 10 stage, if it is a question of what should be the 11 correct number, not because of a true-up exercise, but 12 rather has the company translated what the Board has 13 said in those past two decisions into this proceeding, 14 that is fair. 15 I think you have asked a number of 16 questions on this, and you are free to argue that the 17 true budget is not what the company says; it is 18 something different, because here are the calculations. 19 You have done that, and I don't think 20 Mr. Cass has stopped you from doing that, and I have 21 not. If it is a true-up, that is where the problem 22 begins. 23 MR. THOMPSON: No, he didn't, but he 24 is saying that we can't have this information now; that 25 we have to wait for your ruling, and we may get it 26 later. 27 All I am suggesting to you is that 28 for us to have this right that we could request the 556 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 Board to consider whether a situation constitutes 2 justification to abandon PBR, and for us to have the 3 right or the opportunity to respond to questions about 4 the plan as part of its rate review, these questions 5 should be answered now so we could in argument, if we 6 wish, proceed to exercise those rights. 7 We ought not to be required to wait 8 until the next case, or some other process for filing 9 this information, to have those rights made available 10 to us. 11 That is why it is important in terms 12 of now rather than later. Those are my submissions on 13 that point. 14 I could, as I say, probably finish 15 up. But if we break, I might have a little difficulty. 16 I know it has been a struggle. 17 Do you want me to carry on? 18 THE PRESIDING MEMBER: Yes. I am 19 just not sure where we left it. 20 Ms Lea, do you have anything to 21 assist us? 22 MS LEA: As I understand it -- and I 23 don't want to put words in anyone's mouth -- this is a 24 question, in part, of the off ramp paragraph that is in 25 your decision. I don't think it is a question of 26 true-up. 27 As I understand Mr. Thompson's 28 submissions, he is asking: How are the intervenors to 557 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 exercise any rights to query or bring a motion to the 2 Board to exercise that off ramp option, or to argue 3 that it should be exercised by the Board, if they can't 4 get the information? 5 As I understand it, he needs the 6 information now or in this case in order to assess 7 whether he wishes to exercise that option or argue for 8 the exercise of that option as part of his argument in 9 this case. 10 That's how I understand his argument, 11 and he will excuse me if I have not put it forward 12 accurately. 13 MR. CASS: Mr. Chairman, it would be 14 the company's position -- and I didn't speak up. I 15 didn't want to argue until argument comes. It will be 16 the company's position that this doesn't have anything 17 to do with what the Board said on off ramps. 18 And so, to give this information or 19 to allow Mr. Thompson to have this information because 20 it has something to do with paragraph 3.0.25 of the 21 497-01 decision on off ramps I think is quite 22 inappropriate. 23 As Ms Gould said, in her testimony, 24 what was contemplated by off ramps was fairly 25 catastrophic events that were not akin, at all, to the 26 type of thing Mr. Thompson is now talking about. 27 So, again, I think this is a matter 28 for argument. It is not accepted, in any way, by the 558 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 company that this is an off ramp or is within 3.0.25 of 2 that decision. 3 THE PRESIDING MEMBER: Thank you, 4 Mr. Cass. 5 Mr. Thompson, we will leave it on the 6 basis that if we are talking of monitoring in the 7 future, I guess that is fair game and it can go to 8 argument. If we are talking about a true-up, we have 9 considered that is not your purpose 10 MR. THOMPSON: No, it is not. 11 THE PRESIDING MEMBER: And if it has 12 to do with the calculation going in and moving forward 13 on the PBR plan and you have asked a number questions 14 and then that is left to argument as to what should be 15 the right number. But I am not sure how further we can 16 take the production of 1999 estimates towards meeting 17 all those goals. 18 MR. THOMPSON: The question I asked 19 was for the difference between the 1999 O&M estimates 20 and the estimated actuals to date which the company has 21 refused to answer. 22 I am asking that an answer to that 23 question be put on the record and that is an 24 access-to-information request that I believe should be 25 responded to, in this case, so that we can consider it, 26 as Ms Lea says. It is purely an access-top-information 27 disclosure issue and so, I will leave that with you. 28 THE PRESIDING MEMBER: So you want us 559 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 to rule on this in this proceeding before we finish? 2 Or an issue to be argued at the end of the proceeding. 3 MR. THOMPSON: Well, I am asking you 4 to rule on it in this proceeding and if you are not 5 prepared to do that, then allow us to argue it at the 6 end. 7 MS LEA: I think one thing that may 8 assist the Board in coming to its decision on this 9 matter -- and I throw this out as two cents' worth -- 10 would it assist the Board to hear from the company what 11 the prejudice is to the company in releasing this 12 information? 13 Or perhaps Mr. Cass has already 14 explained that and I haven't understood it, but I 15 haven't understood the prejudice to the company in 16 releasing the information that Mr. Thompson seeks. 17 MR. CASS: Well, if you wanted to 18 hear that Ms Lea, I think that would have to come from 19 the mouths of the witnesses. I couldn't give evidence 20 about the prejudice. 21 I just think it is an inappropriate 22 request, aside from whether any prejudice exists or 23 not. 24 MS LEA: Thank you. I will save it 25 for questions. 26 THE PRESIDING MEMBER: Mr. Thompson, 27 we have noted that your request, your earlier request, 28 and I guess we will get back to you -- 560 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MR. THOMPSON: Thank you, sir. 2 THE PRESIDING MEMBER: -- as soon as 3 possible. 4 In the meantime, it is 4:30. You 5 have two sub-issues -- sub-categories. Did you wish to 6 continue for a half hour? 7 MR. THOMPSON: If that is acceptable 8 to the Board. I think I would probably be even a 9 little bit less if you would just give me a moment 10 to -- 11 THE PRESIDING MEMBER: That is fine. 12 I am just starting to worry about the reporters. And 13 the witnesses. 14 --- Pause 15 MR. THOMPSON: Yes, I can finish up 16 fairly quickly. 17 Let's turn to the PBR formula. Now, 18 the customer growth component. Do I understand 19 correctly that that has been resolved by the agreement 20 on customer additions? 21 MR. MEES: Yes, that is my 22 understanding. 23 MR. THOMPSON: And the productivity 24 component was determined by the Board in its 25 E.B.R.O. 497-01 decision? 26 MR. MEES: Yes, that is correct. 27 MR. THOMPSON: And the inflation 28 component is to be determined on the basis of 561 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 bench-mark information. 2 MR. MEES: Yes, that is correct. It 3 is my understanding that the company will be bringing 4 the Board that corroboration, the revised inflation 5 rate, shortly. 6 MR. THOMPSON: Just in terms of the 7 calculation that was in your Exhibit D1, Tab 8, 8 Schedule 2, testimony, using your base of 216 million 9 you developed a total going in PBR O&M base of 240.7 10 million, which I calculated to be a 6.1 per cent 11 increase on the base. Is that right? 12 --- Pause 13 MR. THOMPSON: I just took the 14 increment and divided into 216.1, but I might have done 15 it improperly. 16 --- Pause 17 MR. MEES: I am sorry, Mr. Thompson. 18 How did you calculate your 6 per cent? 19 MR. THOMPSON: Well, tell me what it 20 works out to be, in terms of the percentage increase. 21 I guess I might -- 22 MR. MEES: The difference between 23 240.7 and 216.1 is 24.6, which is roughly 11 per cent 24 increase, which includes the Z-factors -- 25 MR. THOMPSON: So I should deduct the 26 Z-factor. 27 What is the percentage increase for 28 the PBR formula? 562 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 MR. MEES: It just increases the 2 base, as shown in this exhibit, approximately 4.61 per 3 cent. Although that has been adjusted downward with 4 the ADR agreement. 5 MR. THOMPSON: Your initial 6 calculation was 4.61 per cent. So I did that 7 incorrectly. All right. 8 MR. MEES: Again, it will go down 9 further, I believe, when the revised CPI forecast 10 becomes available. 11 MR. THOMPSON: When was the last time 12 you got a 4.61 per cent increase under the old 13 methodology? 14 MR. CASS: Mr. Chairman, I don't know 15 whether that is really a question or an argument. 16 Again, I don't know what the relevance of that is to -- 17 THE PRESIDING MEMBER: I have the 18 advantage of looking at Mr. Thompson's face. It wasn't 19 a question, no. 20 --- Laughter 21 MR. THOMPSON: Going to end on a high 22 note. 23 Z-factors. Now, there are four of 24 them, I believe, addressed in your testimony. The 25 first one is the Y2K. That has been covered by a 26 previous panel. Is that correct? 27 MR. MEES: Yes, it is. 28 MR. THOMPSON: The CIS Z-factor will 563 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 be covered by a panel yet to come? 2 MR. MEES: Yes, it will be. The 3 details of the CIS Z-factor, yes. 4 MR. THOMPSON: Okay. DSM is covered 5 by the DSM settlement? 6 MR. MEES: That is my understanding, 7 yes. 8 MR. THOMPSON: Okay. And then we 9 have the rate hearing expense Z-factor which is, at the 10 moment, presented at $400,000. But you have told us 11 you may increase it. Is that -- 12 MR. MEES: As I indicated earlier, 13 there is -- we have information, I believe, it will be 14 slightly higher. 15 MR. THOMPSON: Now, we discussed, 16 earlier, that your -- your position is that the PBR 17 increment O&M expenses is 4.61 per cent of 216 million, 18 which works out to be ball park $10 million. 19 MR. MEES: Nine point nine million 20 dollars, that is correct. Although, again, that has 21 been revised, with the ADR agreement. 22 MR. THOMPSON: But the concern that 23 intervenors have is, when you get that amount of an 24 increment with your PBR, should there not be some sort 25 of materiality threshold with respect to Z-factors? 26 What is the company's response to that position? 27 MR. MEES: I believe in 28 E.B.R.O. 497-01 the company said, at that time, that it 564 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 had a threshold amount of half a million dollars, on a 2 cumulative basis, for all Z-factors. I don't believe 3 that position has changed since then. 4 MR. THOMPSON: So, the company's 5 position is if an amount falls within the scope of a 6 definition of a Z-factor, even if it is a dollar, you 7 can claim it. Is that -- as an additive to the PBR 8 formula increment? 9 MR. MEES: I believe, in the 10 E.B.R.O. 497-01 decision it said that it would -- the 11 Board indicated that it would look at Z-factors after a 12 quantum -- or it would look at each individual -- 13 MS GOULD: If I could just add to 14 that. I think there are two tests that a Z-factor 15 would have to pass: one, that it met the criteria of 16 the Z-factor; and, secondly, that it may meet some type 17 of materiality or threshold amount. 18 So I think the first test, which is 19 really probably the more stringent of the two, would be 20 going to the criteria that were examined in 497-01 and 21 making sure that this was one time out of management 22 control and it would only be then would we look to the 23 threshold. So I think it is important to keep that in 24 mind. 25 MR. THOMPSON: Well, just on that 26 point, I don't think intervenors quarrel with the 27 contention that OEB rate hearing expenses are a proper 28 Z-factor. It's the amount issue that troubles them. 565 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 They suggest there should be a threshold of at least 2 $500,000, a materiality threshold, and the company 3 disagrees with that position. 4 MR. MEES: As I indicated, it is 5 $400,000 right now. It is my understanding that it 6 will be higher and it will be above the half a million 7 dollar amount. 8 MR. THOMPSON: Okay. Well, selective 9 updates we will leave to argument. 10 The only other point I wanted to make 11 on Z-factor is when costs are going down, that is when 12 you take the CIS, for example, and assume that in the 13 base amount there are costs related to CIS functions 14 for the sake of argument of $10 million. I want to 15 just find out how you people approach the Z-factor. 16 If a base was $200 million and 17 $10 million was coming out by way of Z-factor and 18 "x" million was going back in, you could do one of two 19 things. You could apply the PBR formula to the 20 $200 million and then back out the $10 million, or you 21 could back out the $10 million first and then apply the 22 formula. 23 If you do it the second way you 24 arrive at a reduced formula based O&M allowance 25 compared to the former way. What way do you folks 26 do it? 27 MR. MEES: I guess I can address that 28 when it comes to the rate hearing expenses. What we 566 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 have done is tried to be as simple as possible, so in 2 this case the 1999 budget was put together for rate 3 hearing costs assuming an assignment of 25 per cent. 4 We have put together the Z-factor on 5 an assignment of 33 per cent, so we have not escalated 6 or we didn't escalate the 1999 Board approved amount to 7 the 2000 amount. We were conservative and just said if 8 it was now and a change in allocation from 25 per cent 9 to 33 per cent this is the impact. 10 So if we had done it the way you 11 suggested, Mr. Thompson, it would be higher, but we 12 were conservative in this case and tried to keep it as 13 simple as possible. 14 MR. THOMPSON: Do you know how they 15 did it on the CIS side? 16 MR. MEES: The CIS is based on market 17 prices. 18 MR. THOMPSON: No, no, but there was 19 an exclusion -- there was an allowance. My question 20 is: Is the CIS component only incremental, as you have 21 described it, or is the CIS component based on an 22 application of a formula to the PBR base, then 23 deducting some CIS expenses and then adding some 24 further? Do you know? 25 MR. McGILL: The CIS Z-factor is 26 calculated based on the total of five amounts. Some of 27 them are debits and some of them are credits and for 28 the 2000 test year they net out to a net sum of 567 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK, cr-ex (Thompson) 1 $5.7 million, so that's the way it's calculated. There 2 are some things that are reductions and some things 3 that are an addition. We have added through and come 4 to a total and that's what is applied as the Z-factor. 5 MR. THOMPSON: But it's applied to a 6 base that has been escalated by the PBR formula? 7 MR. McGILL: My understanding of the 8 way the PBR formula is calculated is that the factors 9 are applied to the base and then the Z-factor is either 10 added or removed from the product of that calculation. 11 MR. THOMPSON: I will follow it up 12 with some numbers when I get to CIS. 13 Thank you very much, Mr. Chairman. 14 Those are my questions. 15 THE PRESIDING MEMBER: Thank you, 16 Mr. Thompson. 17 Ms Girvan, would the CAC have any 18 questions? No. 19 The answer was no, just for the 20 record. 21 Ms Lea. 22 MS LEA: Thank you. 23 I have a few questions. I believe 24 all of them relate to monitoring and reporting. Most 25 of my other questions have been covered by other 26 parties. 27 These all arise out of questions from 28 other parties however. The first one reveals a little 568 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 bit of my ignorance. Can you tell me, in your 2 reporting to the E.R.O. on the O&M expenses in the PBR 3 plan, would the E.R.O. have enough information to tell 4 the Board, "Oh, they are only a 30 per cent return and 5 you had better do something about it." Can you help me 6 with that? 7 MS GOULD: I am sorry, I don't think 8 any one of us would be the best person to do that. 9 MS LEA: Who should I ask? 10 MS GOULD: Mr. Bourke would explain 11 all the elements of that report. 12 MS LEA: In fact, all of these 13 questions may be more appropriate for Mr. Bourke, but I 14 will keep going. 15 The second thing, Mr. Thompson was 16 asking you about what he termed the benefit that you 17 would be going into your first year of PBR with. I 18 believe I understood that to be the difference between 19 the Board approved O&M budget and the actual 1999. 20 Have you considered whether, if in 21 fact this benefit, as he has put it, exists, whether 22 the existence of magnitude of such a benefit might be 23 relevant to the frequency with which you reported to 24 the E.R.O. or to whoever else the Board decides you 25 should report to? That is, the larger the magnitude 26 the more it would indicate you should report more 27 frequently rather than annually. Have you considered 28 that? 569 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 MS GOULD: Yes. Well, currently, we 2 do report quarterly. 3 MS LEA: You report quarterly, yes. 4 MS GOULD: That's right. As far as 5 the frequency would go, I think that even quarterly 6 reporting is really just giving you an indication of 7 direction and that the gross quantum or any actual 8 difference between an actual and a Board approved is 9 really only verifiable on an annual basis. So the best 10 we can do is give our best indications as to our 11 reporting as we go along, but there are variances, 12 timing differences and we do our final review and audit 13 on an annual basis. So that I think still would be the 14 best indicator of that performance. 15 MS LEA: But on a quarterly basis at 16 least directionally we can see to some degree what is 17 going on on a directional basis. 18 MS GOULD: That's right. From just a 19 gross order of magnitude that's correct. 20 MS LEA: Thank you. 21 As you heard, I asked Mr. Cass to 22 speak to the question of prejudice. Now, I understand 23 and there may be many arguments of relevance for the 24 information that Mr. Thompson seeks, but just dealing 25 with the questions of prejudice for a moment, if you 26 can answer this question, what would be the problem or 27 the prejudice to the utility in providing the 28 information that Mr. Thompson is saying that he needs? 570 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 MS GOULD: I will address it at least 2 as best I can today. I think your first comment on 3 relevance would be the first thing I would consider. 4 The information that we would have 5 comparable to a Board approved number is not something 6 we would have readily available. 7 MS LEA: I'm sorry, it wouldn't be? 8 MS GOULD: It's not something we do 9 have readily available, so I would question the time 10 and effort to produce it for the value that it may 11 ultimately result in. So I don't think it is a matter 12 of prejudice. 13 At this point I am not sure that 14 there has been a need identified. It sounds like the 15 policy and process will be argued and if there is a 16 need then perhaps I need to revisit that. 17 MS LEA: Thank you for your comments 18 with respect to need, but help me further with respect 19 then to the difficulty that you would have in producing 20 these numbers. You say that it would require 21 significant effort to produce or time? What is the 22 problem to produce these numbers? 23 MS GOULD: Again, it comes down to 24 the purpose. 25 MS LEA: Well, I am not asking you 26 about purpose. 27 Presuming that we have agreed that 28 there is a purpose. We will probably never agree on 571 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 that, but suppose we had. Is it a lot of work? What 2 are we talking about in terms of your efforts? That's 3 what I need to know. 4 MS GOULD: To produce a utility O&M 5 that would be comparable to a Board approved number, we 6 have estimated it would take us in the neighbourhood 7 and perhaps Ms Reynolds can help me with this because 8 we would need from cost allocation information we would 9 need to determine a non-utility elimination. It could 10 take us four or five weeks in order to produce that 11 number. 12 MS LEA: I see. Is there any other 13 difficulty or prejudice in asking for these numbers to 14 be produced? 15 MS GOULD: I think we would also need 16 to look at the numbers and make sure that they are in a 17 comparable basis from the perspective of service 18 levels, weather assumptions and other variances that 19 may be within those numbers, so that they can be 20 reviewed and interpreted in the appropriate context. 21 MS LEA: In your estimate of four to 22 five weeks, just listening to Mr. Thompson's 23 cross-examination, it sounded to me and I don't know 24 how much time you spent on it, that he did produce 25 these numbers fairly quickly I suppose in preparation 26 for cross without a lot of undue effort. Are you not 27 assuming a great deal more detail is required than I 28 understood him to be seeking? 572 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 MS GOULD: Well, I think the ease of 2 Mr. Thompson in pulling together his numbers, he 3 assumed that the services that are underlying those 4 amounts are remaining constant, and that's one thing in 5 going from an unbundled to an unbundled utility, those 6 services don't remain constant and that's what we have 7 captured in updating our budget at that point in time. 8 So I think if we were to do this and 9 update it based on actuals we would want to have a full 10 review. 11 MS LEA: Thank you. 12 One moment. 13 --- Pause 14 MS LEA: Thank you. Those are my 15 questions. 16 THE PRESIDING MEMBER: Thank you, 17 Ms Lea. 18 Ms Gould or Ms Reynolds, just one 19 question. The 1999 estimate, is it available now? 20 MS GOULD: We don't currently have a 21 1999 estimate for the Ontario utility, no. 22 THE PRESIDING MEMBER: What is the 23 most recent work that has been done on it? 24 MS GOULD: It would be our original 25 1999 Board-approved budget -- unbundled. I'm sorry. 26 THE PRESIDING MEMBER: Right. That 27 is the information that came to the Board and the Board 28 ruled on it. There is nothing since then? Nothing 573 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 else has been produced? 2 MS GOULD: Not on a comparable basis. 3 We do have an estimate that we do use for our own 4 internal monitoring and reporting. 5 THE PRESIDING MEMBER: To do it on a 6 comparable basis, then, what kind of time estimate are 7 we talking about? 8 MS REYNOLDS: In order for the budget 9 department to complete the O&M on a comparable basis, 10 they would need a non-utility elimination, and that is 11 not determined on an estimate basis. At this point, I 12 am not anticipating to do anything beyond what is in 13 the Board-approved -- the 1999 unbundled budget. 14 THE PRESIDING MEMBER: All right. 15 Suppose they had to do it. 16 MS REYNOLDS: Oh, I'm sorry. I could 17 not do a full-blown cost allocation study. I would 18 have to come up with some other methodology to do it. 19 So depending on the time frame that was required to 20 produce -- that we had to produce this information, I 21 would simplify the study to meet that time frame. 22 THE PRESIDING MEMBER: So changing 23 the internal document to something that would be 24 comparable? 25 MS REYNOLDS: I don't have an 26 internal document or a calculation for the non-utility 27 elimination. 28 THE PRESIDING MEMBER: No, I 574 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 understand that. I'm sorry. Let me go back. 2 There is a document that was prepared 3 for internal purposes for O&M? 4 MS GOULD: Yes, that's correct. 5 THE PRESIDING MEMBER: All right. 6 And that date is what? How long ago? 7 MS GOULD: Back in probably the 8 January time frame at the point that we were putting 9 together the balance of the 2000 budget for the rate 10 filing, so over the October to December time frame that 11 we would normally prepare the information underpinning 12 our rate application. 13 THE PRESIDING MEMBER: So it would 14 have a couple of months of actuals maybe, and the rest 15 would be forecasts. 16 MS GOULD: Yes. And for this 17 particular year it would also have reflected 18 potentially some weather impacts at that point in time, 19 so we would have seen some actual performance. 20 THE PRESIDING MEMBER: So that 21 document, in order to be translated to be comparable to 22 what the E.R.O. may say, what the Board may see, then 23 what is the time requirement? Is it still four to five 24 weeks? 25 MS GOULD: As I said, I assumed that 26 we would do a full-blown study, so I will defer to 27 Ms Reynolds how long that would take. 28 --- Pause 575 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 MS REYNOLDS: A lot of the 2 information that I would need to produce for the budget 3 department to do it, I will be attempting to produce 4 for Mr. Mondrow in hopefully an acceptable format in an 5 acceptable level of detail. So I'm hoping to have that 6 for him by the end of this case, this hearing, and then 7 budgets could take over from there. 8 THE PRESIDING MEMBER: All right. So 9 it is not producible within five days, not by the end 10 of next week? 11 MS REYNOLDS: Including the weekend? 12 --- Laughter 13 THE PRESIDING MEMBER: I'm sorry? 14 What was the question? 15 --- Laughter 16 MS REYNOLDS: Are you including the 17 weekend? 18 THE PRESIDING MEMBER: Are there 19 weekends? 20 --- Laughter 21 MS REYNOLDS: I don't think -- 22 THE PRESIDING MEMBER: Okay. What is 23 the answer? Is it producible before the scheduled 24 completion of this proceeding? 25 --- Pause 26 MS GOULD: Could we undertake to 27 report back tomorrow? We will be back. I would like 28 to just evaluate what is involved, in that it would 576 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 produce something that we would feel comfortable with? 2 THE PRESIDING MEMBER: All right. 3 Why don't you get back to us tomorrow. 4 MS LEA: Just let me see if I can 5 find the undertaking. 6 Thank you, Ms Desai. 7 J3.4. That will be a time estimate 8 to produce...? 9 MS GOULD: A 1999 estimate on a basis 10 comparable to the Board-approved budget. 11 So I have that correct. 12 MS LEA: Thank you. 13 THE COURT REPORTER: I'm sorry, could 14 you just repeat that? 15 MS GOULD: To produce a 1999 Ontario 16 utility O&M on a basis comparable to the 1999 17 Board-approved amount. 18 UNDERTAKING NO. J3.4: 19 Ms Reynolds to produce a 1999 20 Ontario utility O&M on a basis 21 comparable to the 1999 22 Board-approved amount 23 MR. THOMPSON: Mr. Vlahos, could I 24 just ask a question about your inquiry? I just wanted 25 to understand. 26 You file as Exhibit A, Tab 12, 27 Schedule 4, actual financial results for the nine 28 months ending June 30, 1999. So these have been 577 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 reported publicly to the securities commissions and 2 elsewhere. What is it you have to do to those numbers 3 that takes five weeks to update the filings here? 4 MS REYNOLDS: Ms Gould was referring 5 to the time it would take to not do a comprehensive 6 cost allocation study, but to try to do something to 7 update the non-utility elimination. The non-utility 8 elimination isn't a component of our external report -- 9 MR. THOMPSON: Is that the line you 10 are talking about? That was if you assumed non-utility 11 eliminations at $12 million, and all the other numbers 12 could be produced tomorrow, kind of thing? 13 MS GOULD: No, I don't think it is 14 quite that simple because the non-utility elimination, 15 as we mentioned before is a function of the services to 16 be provided, so it is very difficult to assume 17 something stays constant when perhaps something above 18 the point of elimination may not have. So there is 19 some analysis and work that needs to be done. 20 MR. THOMPSON: Thank you. 21 THE PRESIDING MEMBER: Where are we? 22 MR. THOMPSON: Back to you, 23 Mr. Chair. 24 THE PRESIDING MEMBER: I asked my 25 questions. 26 Mr. Cass, any redirect? 27 MR. CASS: No, Mr. Chairman. 28 Thank you. 578 REYNOLDS/GOULD/MEES/McGILL/McCLINTOCK 1 THE PRESIDING MEMBER: The panel is 2 excused. Some of them will be back I guess. 3 Thank you very much and we will see 4 you tomorrow at 9:00. 5 Mr. Cass, before you go, just to 6 confirm what we are doing tomorrow. 7 I guess we do have Mr. Farrell's 8 comments this morning. I don't believe anything has 9 changed since this morning. Mr. Farrell did give us 10 the order of the issues for the balance, so perhaps we 11 can live with that, we can read the record. 12 MR. CASS: Yes, Mr. Chairman. I 13 believe the next panel would be the one that 14 Mr. Farrell referred to loosely as the separation 15 panel. I think it is more accurately called 16 E.B.O. 179-14/15 consequences. 17 Now, the only qualification I would 18 want to add to that is I believe in the scoping 19 document that that panel is shown as directing the 20 deferred tax issue. My understanding is that the 21 deferred tax issue would require witnesses who are on 22 the cost of capital panel later on. 23 So I think the company is prepared to 24 move to that panel loosely called separation costs with 25 the exception of the deferred tax issue. 26 MS LEA: Is there any update? I 27 think Panel No. 8, there was some question as to 28 whether that panel would be able to appear tomorrow due 579 1 to the illness of one of the members? 2 MR. CASS: Yes. I'm told that 3 Ms Duguay's situation is continuing and therefore it is 4 looking like Friday for that panel. 5 MR. BRETT: Mr. Chairman, was that 6 the only panel tomorrow, then? Just the one panel? 7 THE PRESIDING MEMBER: Mr. Brett, let 8 me just clarify something that may help you. 9 On Panel 11, Mr. Cass -- I have my 10 version of the schedule -- it has four categories, four 11 topics, that is: the operating revenue -- that is one; 12 rate base and deferral accounts, UBADA in brackets; 13 and, cost of service. You are saying that it was 14 contemplated the deferred tax issue -- it was 15 originally contemplated that it would be part of that? 16 MR. CASS: I may have misspoken, 17 Mr. Chairman, because now looking at what you are 18 talking about, deferred taxes is shown on the very 19 panel I was talking about, which I call the cost of 20 capital panel. 21 So I may have misspoken myself. The 22 separation cost panel, with the very issues that you 23 have now identified, will be ready for tomorrow. I'm 24 sorry if I -- 25 THE PRESIDING MEMBER: It gets 26 complicated because I don't have, probably, the same 27 version as you have. You have an updated version and I 28 have the very first one, and I am just making notes as 580 1 I go along. 2 According to mine, panel No. 11 had 3 those four issues I spoke of. You do not have deferred 4 tax. So those are the four issues that we are going to 5 visit tomorrow. 6 MR. CASS: That is correct. 7 THE PRESIDING MEMBER: For the 8 separation costs, is this just the deferral account, or 9 is there more to that? 10 Can anybody assist? 11 MS GOULD: I can, I think, because I 12 am a witness on the separation costs. 13 The deferral account mechanism is 14 being proposed by the Company to record costs 15 associated with separation and the costs we have 16 identified to be amortized over a three-year period. 17 So it is the recovery of $11.4 million of costs. 18 THE PRESIDING MEMBER: And perhaps I 19 can ask Mr. Brett or Mr. Thompson to give us a bit of a 20 scoping of the rest of the issues appearing here: 21 operating revenue, rate base and cost of service, under 22 panel 11. Can someone help us so we can focus our 23 reading tonight? 24 MR. THOMPSON: I can try, 25 Mr. Chairman. I am working from a document that we 26 gave to Mr. Farrell, so I think the substance of what I 27 am saying is reasonably accurate. 28 The way this thing is set up in the 581 1 scoping document is that it is under "Consequences of 2 the E.B.O. 179-14/15 Decision". So dealing with panel 3 11, I think, really, the only topic there is the 4 separation costs topic. In other words, this attempt 5 to recover the $11.4 million, amortized over three 6 years. 7 I may be mistaken, but looking at it, 8 that would be my understanding of the scope. 9 Panel No. 10, I believe, will be 10 dealing with the question of capital structure that is 11 discussed in the settlement agreement and the 12 appropriate capital structure, having regard to the 13 Company's proposal to transfer out the rental program, 14 and whether the capital structure to be used is 15 pre-separation -- used for ratemaking purposes -- or 16 whether -- if negative capital is included in capital 17 structure, whether that is to be costed at zero and 18 treated as a deduction from rate base. 19 So that is the topic that is tied up 20 with capital structure. 21 On the deferred taxes side, what that 22 is dealing with is the Company's proposal to recover a 23 portion of the $50 million, and the question there 24 is -- the intervenors had proposed an amortization 25 period of 10 years. The Company's imputed amortization 26 period is about 4.17 years. And on the ratemaking 27 side, intervenors have taken the position that any 28 portion of the principal recovered in rates which is 582 1 not needed to pay down taxes in the test year should be 2 a deduction from rate base, i.e., zero-cost capital. 3 I believe that covers those two 4 panels, if I am not mistaken. 5 The other aspect of consequences of 6 E.B.O. 179-14/15 is this appropriate adjustment for 7 removal of the rental program, and that is the 8 difference between the $34.5 million and the 9 $24.5 million that I was discussing today. So there is 10 overlap there. I don't expect that topic will be 11 canvassed further tomorrow, but there may be some 12 people who have some questions. 13 THE PRESIDING MEMBER: And on this 14 clarification on the capital structure, is the fitness 15 of equity an issue? 16 MR. THOMPSON: I'm sorry -- 17 THE PRESIDING MEMBER: Fitness of 18 common equity. Is that an issue? 19 MR. THOMPSON: Yes. You can come at 20 it in many ways, but I would say, yes, that is wrapped 21 up in that topic. 22 THE PRESIDING MEMBER: Thank you, 23 that really helps. 24 Ms Lea? 25 MS LEA: Sir, I was just going to 26 clarify: We go from panel No. 11, if that is completed 27 tomorrow, to panel No. 10? Am I right? 28 No, I am not right. I do beg your 583 1 pardon. 2 MR. CASS: My current understanding 3 is that panel 11, as you have referred to it, is the 4 panel we have tomorrow. We have problems around the 5 other panels, as described by Mr. Farrell this morning. 6 I think we were anticipating that panel 11 might be a 7 lengthy one, although, of course, that is more in the 8 hands of the intervenors than ours. 9 But that is the panel that we have 10 for tomorrow. 11 MR. THOMPSON: Mr. Farrell indicated 12 that Mr. Boyle wasn't available until the beginning of 13 next week, and capitalization of A&G overheads is also 14 sort of linked to that 179-14/15 decision. But he 15 indicated that Mr. Riccio was not available until 16 Friday. 17 So it looks like panel 11 is all we 18 can do tomorrow, if I am not mistaken. 19 MR. CASS: That's correct. 20 THE PRESIDING MEMBER: I guess the 21 issue here, Mr. Cass, is that we want to use as much of 22 the day as possible. I don't know what can be done at 23 this late stage, with the intervenors not having 24 adequate notice as to what else may be on. 25 MR. CASS: Yes, that is a problem, 26 Mr. Chairman. I was going to say that we could revisit 27 it over the evening and see what we could do if we 28 finished panel 11 tomorrow, but then the problem would 584 1 be making intervenors aware of that on a timely basis. 2 THE PRESIDING MEMBER: On Friday, 3 Mr. Cass -- and, again, it may not be fair to ask you 4 this because you may not have the information, but your 5 advisor may have it. What is contemplated for Friday? 6 MR. CASS: Mr. Ladanyi will correct 7 me, I am sure, if I speak too quickly here, but my 8 understanding is that we hope Ms Duguay will be 9 available on Friday, so we will have the rate design 10 issue that can be dealt with then. 11 I believe that Mr. Riccio will be 12 back in town on Friday, so we will have capitalization 13 of A&G overheads that can be dealt with then. 14 THE PRESIDING MEMBER: Is there any 15 possibility for panel 8, the cost allocation redesign, 16 to be available tomorrow? Or does it depend on the 17 health of Ms Duguay? 18 MS CASS: That is what I was 19 thinking, that we could check with her over the 20 evening. But, then again, it is the issue of people 21 being aware -- if her health does permit it, of people 22 being aware that that is going to happen tomorrow. 23 THE PRESIDING MEMBER: Well, they 24 have been advised to check the hot-line, and that is 25 one of the purposes that we have this hot-line, so we 26 can accommodate the schedule. So perhaps, Mr. Cass, 27 you can ask whether this panel can be available 28 tomorrow, in case we get to that panel tomorrow. We 585 1 would like to finish this as soon as possible. We 2 don't want to take any chances because there is a 3 period of time that we cannot sit at all. 4 MR. CASS: I understand that. 5 Thank you. 6 THE PRESIDING MEMBER: Is there 7 anything else? 8 Thank you very much. We will see you 9 tomorrow at 9:00 a.m. 10 --- Whereupon the hearing adjourned at 1705, 11 to resume on Thursday, August 26, 1999 at 0900