816 1 RP-1999-0001 2 3 THE ONTARIO ENERGY BOARD 4 5 IN THE MATTER OF the Ontario Energy Board Act, 1998; 6 7 AND IN THE MATTER OF an Application by The Consumers 8 Gas Company Ltd., carrying on business as Enbridge 9 Consumers Gas, for an order or orders approving or 10 fixing rates for the sale, distribution, transmission 11 and storage of gas for its 2000 fiscal year. 12 13 14 15 16 B E F O R E : 17 P. VLAHOS Presiding Member 18 S.K. HALLADAY Member 19 20 21 Hearing held at: 22 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 23 Toronto, Ontario on Monday, August 30, 1999, 24 commencing at 0903 25 26 RATES HEARING 27 28 VOLUME 6 817 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 28 818 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 28 819 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 SWORN: ROBERT BOURKE 826 5 SWORN: JAMES GRANT 826 6 Examination-in-Chief by Mr. Cass 826 7 Cross-Examination by Mr. Warren 829 8 Cross-Examination by Mr. Brett 843 9 Cross-Examination by Mr. Mondrow 862 10 Cross-Examination by Mr. Mattson 878 11 Upon recessing at 1045 892 12 Upon resuming at 1113 892 13 Cross-Examination by Mr. Janigan 892 14 Cross-Examination by Mr. Thompson 914 15 Luncheon recess at 1230 936 16 Upon resuming at 1338 936 17 Continued Cross-Examination by Mr. Thompson 938 18 Cross-Examination by Ms Lea 980 19 Examination by the Member Halladay 989 20 --- Upon recessing at 1511 993 21 --- Upon resuming at 1547 993 22 SWORN: DUNCAN KENT 994 23 PREVIOUSLY SWORN: STEPHEN McGILL 994 24 Examination-in-Chief by Mr. Farrell 995 25 Cross-Examination by Mr. Warren 998 26 Hearing adjourned at 1655 1045 27 28 820 1 UNDERTAKINGS/OBJECTIONS 2 3 NO. DESCRIPTION PAGE 4 5 J6.1 Mr. Grant to undertake to 918 6 see if they have a statement 7 of purpose in the E.R.O. 8 requirements documents 9 J6.2 Mr. Grant to advise 929 10 Mr. Thompson when the 11 decision was made to stop 12 doing an activity analysis 13 for purposes of the unbundled 14 budget 15 J6.3 Mr. Grant to show the impact 963 16 of the 179-14/15 decision on 17 the company's utility income 18 and gross revenue sufficiency/ 19 deficiency in such detail as 20 to break column 2, from Exhibit I, 21 Tab 12, Schedule 41, out into a 22 number of relevant parts that 23 would include the removal of 24 the rental program, the removal 25 of all other ancillary programs, 26 the removal of ABC T, the 27 deferred tax recovery, and any 28 other elements that are relevant 821 1 UNDERTAKINGS/OBJECTIONS (Cont'd) 2 3 NO. DESCRIPTION PAGE 4 5 J6.4 To determine whether Enbridge 1022 6 has received a warranty from 7 Pricewaterhousecoopers that 8 the software is Year 2000 9 compliant 10 11 12 - - - - - 13 14 An objection can be found on page 890 15 16 17 18 19 20 21 22 23 24 25 26 27 28 822 1 EXHIBITS 2 NO. PAGE 3 4 K6.1 Bill Inserts 971 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 823 1 ERRATA/ADDENDA 2 REFERENCE DESCRIPTION 3 RP-1999-0001 - Volume 1 4 08/23/99 P. 20 L. 2 5 "MR. FARRELL:" S/B 6 "THE PRESIDING MEMBER:" 7 08/23/99 P. 20 L. 4 8 "THE PRESIDING MEMBER" S/B 9 deleted 10 11 RP-1999-0001 - Volume 2 12 08/24/99 P. 200 L. 17 13 "We got Mr. Stevens" S/B 14 "We got Mr. Stephens" 15 08/24/99 P. 202 L. 10 16 "MR. FARRELL:" S/B 17 "MR. WARREN:" 18 08/24/99 P. 204 L. 23 19 "settlement proposal that at" S/B 20 "settlement proposal, so that at" 21 08/24/99 P. 207 L. 4 22 "be omitted" S/B 23 "be amended" 24 08/24/99 P. 267 L. 26 25 "in all aspects" S/B 26 "in all respects" 27 28 824 1 ERRATA/ADDENDA (Cont'd) 2 REFERENCE DESCRIPTION 3 RP-1999-0001 - Volume 2 4 08/24/99 P. 284 L. 11 5 role-making power" S/B 6 "rule-making power 7 08/24/99 P. 290 L. 27 8 "scoping proposal" S/B 9 "settlement proposal" 10 11 RP-1999-0001 - Volume 4 12 08/24/99 P. 593 L. 4 13 "given to Mr. Stevens" S/B 14 "given to Mr. Stephens" 15 08/24/99 P. 593 L. 12 16 "directly to Mr. Stevens" S/B/ 17 "directly to Mr. Stephens" 18 08/24/99 P. 598 L. 27 19 "If there area ny" S/B/ 20 "If there are any" 21 22 23 24 25 26 27 28 825 1 Toronto, Ontario 2 --- Upon resuming on Monday, August 30, 1999, at 0903 3 THE PRESIDING MEMBER: Good morning, 4 everyone. 5 Mr. Cass, any preliminary matters? 6 MR. CASS: No, Mr. Chairman, not on 7 my part. 8 THE PRESIDING MEMBER: Ms Lea, 9 anything? No. 10 Anybody else? No response. 11 So, Mr. Cass, over to you. 12 MR. CASS: Yes, Mr. Chairman. 13 As the Board is aware, I think, one 14 of the issues identified in the scoping document, with 15 respect to the consequences of E.B.R.O. 497-01, was 16 monitoring and reporting requirements. 17 Certain questions on this subject 18 were answered on the basis that Mr. Bourke might be 19 able to provide better information. Mr. Bourke was 20 scheduled to appear on the cost of capital panel which 21 is not until later in this week, so, in order to get 22 the monitoring and reporting issue completed, if we 23 can, we split a small panel off here, including, now, 24 Mr. Grant, to address monitoring and reporting -- and 25 only monitoring and reporting. 26 So, we have Mr. Rob Bourke and 27 Mr. Jim Grant who would need to be sworn, Mr. Chairman. 28 THE PRESIDING MEMBER: Thank you, 826 1 Mr. Cass. 2 If the witnesses would come forward, 3 please. 4 SWORN: ROBERT BOURKE 5 SWORN: JAMES GRANT 6 THE PRESIDING MEMBER: Just for the 7 benefit of parties, we intend to sit full days this 8 week unless there are particular hardships, and then 9 you will let us know. 10 MR. CASS: Mr. Chairman, because the 11 monitoring and reporting issues has already been 12 addressed, I don't think there is any pre-filed 13 evidence that needs to be adopted. 14 I will just have a very few questions 15 for examination-in-chief. 16 EXAMINATION-IN-CHIEF 17 MR. CASS: Mr. Bourke, if I might 18 just confirm with you that you are manager, regulatory 19 accounting, for the company. 20 MR. BOURKE: Correct. 21 MR. CASS: Mr. Grant, I understand 22 that you are director of regulatory affairs. Is that 23 correct? 24 MR. GRANT: Yes, that's correct. 25 MR. CASS: All right. Mr. Grant, I 26 believe you are aware that, at page 547 of the 27 transcript, the Presiding Member posed a question about 28 what the company intends to do, in the future, with 827 BOURKE/GRANT, in-ch (Cass) 1 respect to reporting, under the PBR plan. 2 Could you please respond to that 3 question. 4 MR. GRANT: Yes, certainly. 5 At transcript 547, the Presiding 6 Member asked the question Mr. Cass just summarized. I 7 am in a position to provide the response to that 8 question. 9 We, today, as a matter of course, 10 file Exhibit E5, which shows an overall rate of return 11 calculation for Ontario utility operations, including a 12 rate of return, on a weather normalized basis on 13 equity. 14 Then, further to that, at Exhibit F5, 15 we also indicate what the unnormalized return on common 16 equity is. 17 Then, of course, there is a little 18 bit further detail that is provided in the, I believe 19 it's the D5 series, which shows the regulated operation 20 and maintenance expenses for the historic year. 21 It is our intention to continue to 22 file all of those schedules over the entire three-year 23 period of the PBR. 24 I believe the Presiding Member also 25 asked about any bridge year information that would be 26 filed. That information is also filed. I believe 27 that's in the F4 series. We would continue to file the 28 F4 series. 828 BOURKE/GRANT, in-ch (Cass) 1 The bridge year estimated O&M number 2 would be a calculated number, based on updated CPI 3 forecasts for the bridge year and customer growth. So 4 we would apply those updated parameters and 5 recalculate, if you will, the bridge year estimate -- 6 and that would be done each year, as well. 7 THE PRESIDING MEMBER: Mr. Cass, do 8 we have those exhibits today? They were filed when? 9 You said today? 10 MR. GRANT: I'm sorry? 11 THE PRESIDING MEMBER: The exhibits 12 you made reference to, E5 and F5, did you say they were 13 filed today? 14 MR. GRANT: No. They are filed as a 15 matter of course. They are filed in this proceeding. 16 So, in this proceeding, we have the 1998 actuals. My 17 point is that we would continue to file those in each 18 successive rates case. 19 THE PRESIDING MEMBER: Is that it, 20 Mr. Cass? 21 MR. CASS: That's it, Mr. Chairman. 22 Thank you. 23 THE PRESIDING MEMBER: Okay. Thank 24 you. 25 Who would like to go first? 26 MR. WARREN: Mr. Chairman, I wasn't 27 here on Wednesday. This is really a derivative of Mr. 28 Thompson's cross-examination. I think, in fairness, 829 BOURKE/GRANT 1 Mr. Thompson should precede me. Unless he wants me to 2 go first. 3 MR. THOMPSON: Go ahead. 4 MR. WARREN: I was afraid he was 5 going to say that. 6 MR. THOMPSON: But if you want me to 7 go ahead, I'm quite happy to do that. 8 CROSS-EXAMINATION 9 MR. WARREN: Mr. Grant, with 10 apologies, it's just 10 past nine on Monday morning and 11 I'm not yet operating at full speed. I can't write as 12 quickly as you speak. 13 I wonder if I could get from you, 14 again -- you file in the E5 series the overall rate of 15 return on a normalized basis. You file as the F5 16 series the unnormalized rate of return data. Then 17 there was a third item. I apologize. I didn't get 18 what that third item was. 19 MR. GRANT: Yes. The third -- there 20 is really a third and fourth item. 21 The third item is at Exhibit D5. It 22 shows, as a one-line item, the O&M expense for the 23 historic year. 24 Then, in addition to that, in the F4 25 series, I believe it is, we file bridge year estimates. 26 MR. WARREN: May I conclude from your 27 answer for your observations this morning, Mr. Grant, 28 that, in future, what you intend to file is a one-line 830 BOURKE/GRANT, cr-ex (Warren) 1 O&M expense, total O&M expense. Is that right? 2 MR. GRANT: That's correct. 3 MR. WARREN: Now, I wonder, Mr. 4 Grant, do you have a copy of the Board's decision with 5 reasons in the 497-01 case with you? 6 MR. GRANT: Yes, I do. 7 MR. WARREN: I would like you to turn 8 up, if you wouldn't mind, page 26, Section 2.5.1, to 9 which reference has been made -- to which reference was 10 made in the cross-examination last Wednesday. 11 MR. GRANT: Yes, I have that. 12 MR. WARREN: This is under the 13 heading, "Monitoring and Reporting Requirements". 14 I will just read what the Board wrote 15 in that section: 16 "The Company did not prefile a 17 proposal for a monitoring and 18 reporting protocol, but during 19 the hearing a number of related 20 matters were discussed. Since 21 the proposed O&M PBR plan is a 22 peripheral plan addressing only 23 one component of the cost of 24 service, the Company indicated 25 that...`traditional' cost of 26 service filings and rate reviews 27 will continue. There would 28 therefore be an opportunity to 831 BOURKE/GRANT, cr-ex (Warren) 1 report on the Plan and respond 2 to questions about it as part of 3 rate reviews. The Company 4 expressed a view that for 5 regulatory efficiency there 6 should be an agreed reporting 7 protocol and that only if the 8 Board determined that an issue 9 should be referred to a rates 10 proceeding would this occur." 11 Now, first of all, when the Board 12 said there would be an opportunity to report on the 13 plan, what is your -- what is the company's evidence on 14 its interpretation of what the words "report on the 15 plan" mean? 16 MR. GRANT: Well, I think as I 17 indicated in that proceeding, we would be filing a 18 high-level report with respect to our performance 19 measures and how those performance measures are coming 20 along, how we are doing with those, and so I think 21 that's what the reference was. And, indeed, at 22 paragraph 3.0.22, on page 40 of the decision, the Board 23 notes, or the Board says; quote: 24 "The Board accepts that the 25 monitoring and reporting 26 requirements are related to the 27 performance and maintenance of 28 the SQIs relative to target. 832 BOURKE/GRANT, cr-ex (Warren) 1 The Board will expect to review 2 specific results and any 3 proposed changes during main 4 rates cases, and determine what, 5 if any, remedial action is 6 appropriate." 7 So, it's on that basis that I would 8 expect that we would be filing a high-level report of 9 the SQI performance in the case. 10 MR. WARREN: That's it? 11 MR. GRANT: Well, of course, there's 12 ongoing monitoring that would be -- of the financials, 13 that goes through the E.R.O. I think we discussed 14 that, as well, in the 497-01 proceeding. 15 And, in addition, as I said this 16 morning, there would be a one-line item filed on O&M, 17 in the case. 18 MR. WARREN: And then in the second 19 part of the sentence to which I referred you a moment 20 ago in 2.5.1, respond to questions about it, that is 21 the plan of corporate rate reviews, if the intervenors, 22 for example, had questions about the details of the 23 performance with respect to O&M, do I take it the 24 company's position is that they are not part of the 25 required -- first of all, that they are not part of the 26 required monitoring or reporting requirements? 27 MR. GRANT: Are you speaking with 28 respect to SQIs or -- 833 BOURKE/GRANT, cr-ex (Warren) 1 MR. WARREN: No, I am not talking 2 about that. I am talking about the O&M performance of 3 the company. 4 MR. GRANT: Financial. 5 MR. WARREN: Yes. 6 MR. GRANT: Yes. That's not 7 something that would need to take place in a hearing 8 room. I think as we move forward we have to think 9 about what the most efficient process of monitoring is. 10 In my view, that would not be efficient. 11 MR. WARREN: Well, when you talk 12 about efficiency, are you talking about difficulty 13 internally in keeping records with respect to the 14 details of the O&M budget or are you talking about 15 efficiency in terms of regulatory process? 16 MR. GRANT: I think I am talking 17 about both. I think the Board is interested in, first 18 of all, a utility that is not bound up with a lot of 19 internal complications around monitoring and reporting. 20 That would seem to run counter to an efficient PBR 21 operating in the province. 22 Additionally, I think the Board is 23 interested in efficiency, overall efficiency, with 24 respect to its own monitoring of the 250-odd MEUs on 25 the electric side and the gas, the few gas utilities on 26 the gas side. 27 The Board would be interested, I 28 believe, in efficiency in its own process. 834 BOURKE/GRANT, cr-ex (Warren) 1 MR. WARREN: Mr. Grant, I want to 2 deal, first of all, with the issue of -- you would 3 agree that it is open to the intervenors, it is open 4 indeed to anybody -- it's not restricted to 5 intervenors, it's open to anybody -- to make an 6 application to this Board saying that the circumstances 7 are such that the PBR plan ought to be revoked, do you 8 agree with that, as indeed it is the company's right to 9 do that? 10 MR. GRANT: Are you speaking with 11 respect to off ramps at this point? 12 MR. WARREN: Yes, I am. 13 MR. GRANT: I think off ramps, when 14 we were in the 497-01 proceeding, we were discussing 15 the off ramp mechanism that might be appropriate. It's 16 my recollection that we were speaking essentially of 17 some rather dramatic events that would trigger an off 18 ramp. 19 One of those obviously would be if a 20 company were to be moving to a comprehensive PBR in the 21 three year period, we would obviously need an off ramp, 22 if we achieved a comprehensive PBR that the Board 23 accepted, so I would view that as sort of an 24 administrative item to implement at the point where the 25 Board has approved a comprehensive PBR. 26 It was within that context we were 27 talking about off ramps. We were also talking about 28 the potential need, although it was quite speculative, 835 BOURKE/GRANT, cr-ex (Warren) 1 I think, as the Board indicated in its decision at the 2 time, for an off ramp if there was a dramatic change in 3 the company's financial position such that it could not 4 operate. 5 That was the scope, I believe, of the 6 off ramps that were being discussed in that proceeding. 7 MR. WARREN: Can I ask you to turn up 8 section 3.0.25 of the Board's decision with reasons in 9 497-01. It appears at page 41 of the decision. 10 MR. GRANT: Yes, I have that. 11 MR. WARREN: The Board says: 12 "While the Board accepts that 13 situations may arise which would 14 warrant the abandonment of the 15 PBR Plan, the types of 16 situations justifying such 17 action can only be viewed as 18 speculative at this time. The 19 Board therefore will not comment 20 further in this Decision in 21 respect to this issue, except to 22 note that a party --" 23 That's my emphasis. 24 "-- could request the Board to 25 consider whether a situation 26 constitutes justification to 27 abandon the PBR Plan." 28 Can we agree this far, that when the 836 BOURKE/GRANT, cr-ex (Warren) 1 Board wrote that and they used the word "a party" that 2 it is open to someone other than the company to request 3 the Board to consider whether the PBR should be 4 abandoned? Do you agree with that? 5 MR. GRANT: I think I can because 6 it's a relatively innocuous statement. I mean the 7 Board could not stop a party from making a request, so 8 I think that that's a fair comment. 9 I think that having said that, the 10 Board recognized that we are moving into a different 11 regulatory regime, and I don't believe that they were 12 implying that there would sort of be an indefinite 13 right of appeal for parties to continue to appeal or 14 attempt to repeal a Board decision. 15 MR. WARREN: Do you agree with me, 16 Mr. Grant, that it is open to a party to come to the 17 Board to ask the Board to consider abandoning the PBR 18 if the rate of return of the company were regarded by 19 that party as being unacceptably high? 20 MR. GRANT: I don't think the Board 21 was commenting at all on whatever reasons there might 22 be for a party to bring forward its request. In other 23 words, the Board was not commenting on whether certain 24 rates of return, either above or below the current 25 allowed, would in any way trigger some sort of a 26 request or appeal by a party. 27 MR. WARREN: I agree with that, Mr. 28 Grant. I agree that the Board didn't say that because 837 BOURKE/GRANT, cr-ex (Warren) 1 they said it would be speculative at the point at which 2 they wrote decision to comment on the circumstances 3 that might justify. 4 Let me get to the essence of it, Mr. 5 Grant, to get your comment on the record and it's this. 6 In light of the fact that the Board has acknowledged in 7 its decision the right of a party to seek to apply for 8 a consideration of whether the PBR plan should be 9 abandoned, do you not think -- did the company not 10 agree, Mr. Grant, that in order for that right to have 11 any substance, there has to be sufficient information 12 reported to the Board and available to the parties in 13 order to allow them to exercise their rights? Do you 14 agree with that? 15 MR. GRANT: No, I don't agree with 16 that. I think you're taking this much further than one 17 could normally expect in a PBR environment. Once 18 again, I think what you are suggesting is somehow that 19 some parties' rights are somehow diminished by not 20 having an opportunity to ask a bunch of questions. I 21 don't think that's correct. 22 MR. WARREN: All right. I have your 23 answer on the record. I want to return to an 24 observation you made about efficiencies a moment ago 25 and you said that apropos efficiencies there were 26 efficiencies in the Board's regulatory process. You 27 also talked about your own internal efficiencies. 28 I took from that answer, and please 838 BOURKE/GRANT, cr-ex (Warren) 1 correct me if I'm wrong, Mr. Grant, that what you are 2 referring to is that your own internal record keeping 3 of the costs, of your O&M costs, that it would be 4 difficult to continue to keep a record of your O&M 5 costs in the fashion in which you have been keeping 6 them in the past for years. Have I understood that 7 correctly? 8 MR. GRANT: Yes. As part of the 9 operating in a PBR environment, we are looking for 10 efficiencies back at the office. That's what it's all 11 about. So that is why I think it would be difficult 12 for us to be embarking on an extremely lengthy and 13 complicated process. 14 MR. WARREN: Let's explore that 15 extremely lengthy and complicated process. Can we 16 agree, Mr. Grant, that for purposes of its own internal 17 management -- forget about regulatory reporting -- it's 18 own internal management that the company sets annually 19 an O&M budge by which it can track its performance. 20 Correct? 21 MR. GRANT: Yes. I would venture to 22 say most companies do that. 23 MR. WARREN: Fair enough, Mr. Grant. 24 Can we agree that being a well managed company, you 25 would track your actual O&M expenditures against your 26 forecast or budget in order to measure your 27 performance. Correct? 28 MR. GRANT: Yes, against a corporate 839 BOURKE/GRANT, cr-ex (Warren) 1 budget. 2 MR. WARREN: Against your corporate 3 budget. Can we agree that that is the information 4 which you are now providing to the Board, save and 5 except for the category of non-utility eliminations? 6 In other words, that the calculation in Ontario -- 7 MR. GRANT: Yes, because we -- the 8 corporate results would include utilities outside of 9 Ontario, specifically St. Lawrence Gas, and that is 10 eliminated and then in addition we have non-utility 11 eliminations which take place from Ontario operations 12 to get to Ontario regulated operations. 13 MR. WARREN: Can I ask you to turn up 14 an undertaking response which was delivered just this 15 morning, Mr. Grant. It is Exhibit C3.4. 16 I don't know whether the Board will 17 have copies in front of it. It was just handed to us a 18 few moments ago. 19 THE PRESIDING MEMBER: We have it, 20 Mr. Warren. 21 MR. WARREN: It is not your 22 undertaking response, Mr. Grant, so I appreciate that. 23 It is that of the Gould, Mees and Reynolds panel. 24 It was in response to a question that 25 was asked last Wednesday about how long it would take 26 to prepare a 1999 estimate of regulated Ontario utility 27 O&M on a base comparable to the 1999 Board-approved 28 budget. 840 BOURKE/GRANT, cr-ex (Warren) 1 As I read that answer -- and I read 2 it as being consistent with what Ms Reynolds said last 3 week -- is that the problem that takes the time is the 4 cost allocation study that gives rise to the 5 calculation of non-utility eliminations. 6 Is that a fair summary of what is 7 being said? 8 MR. GRANT: I guess it's both the 9 time and the complexity, Mr. Warren. 10 MR. WARREN: Can you and I agree that 11 as long as the utility continues to do business with 12 affiliates, it is going to have to comply with the 13 Affiliate Relationships Code? 14 MR. GRANT: Yes, I agree with that. 15 MR. WARREN: And if, for example, a 16 complaint were made under the Affiliate Relationships 17 Code that the utility were improperly selling goods and 18 services or services to an affiliate at -- I hate to 19 use such a loaded word, but with my apologies -- at a 20 subsidized rate, in order to respond to that complaint 21 under the Affiliate Relationships Code, the company 22 would have to demonstrate to the satisfaction of the 23 Board that it had properly costed all of the services 24 that had been provided to the affiliate and charge 25 those costs out. 26 Do you agree with that? 27 MR. GRANT: No, I do not. 28 MR. WARREN: Why would you disagree? 841 BOURKE/GRANT, cr-ex (Warren) 1 MR. GRANT: Under the Code, charges 2 can be at market rate. They don't necessarily have to 3 have anything to do with cost. It is a market rate 4 that they should be charged at. And at -- 5 MR. WARREN: And if there is no 6 market? 7 MR. GRANT: Pardon me? 8 MR. WARREN: I apologize, Mr. Grant, 9 I should have let you answer the question. 10 MR. GRANT: Obviously if there is a 11 market for the service and that market rate is being 12 charged, then there is no cross-subsidy issue. 13 MR. WARREN: And if there is no 14 market for the services, how do you go about proving it 15 then? 16 MR. GRANT: I believe the process 17 would involve a costing, and I believe that the Code 18 requires some allowance for return on utility assets, 19 to the extent that they are being used in the service. 20 MR. WARREN: Just so that I 21 understand this filing, Mr. Grant, the issue for you, 22 in terms of your ability, in terms of efficiency for 23 the company, is that the difficulty for you is in the 24 costing of the services that are supplied to 25 affiliates, the non-utility eliminations. That is the 26 efficiency problem internally in providing a comparable 27 information year over year going into the PBR. 28 Is that right? 842 BOURKE/GRANT, cr-ex (Warren) 1 MR. GRANT: Yes, that's part of it. 2 Obviously, we all know that in the cost of service 3 environment there are questions that arise; that 4 intervenors ask those questions by way of 5 interrogatory. And we would be hoping to shed that 6 work as well, given that we are in a PBR regime. 7 I would include, I guess in my 8 answer, not just the costing but all of the regulatory 9 administrative activities that go around the production 10 of that number. 11 MR. WARREN: Those are my questions. 12 Thank you. 13 THE COURT REPORTER: I'm sorry, could 14 you repeat the last few words? 15 MR. GRANT: I said "around the 16 production of that number". 17 THE PRESIDING MEMBER: Thank you, 18 Mr. Warren. 19 Mr. Grant, if it helps you, you don't 20 need to push the microphone away when you finish your 21 response. 22 MR. GRANT: Thank you. 23 THE PRESIDING MEMBER: We spent quite 24 a bit of money, or the ratepayers have, on this system. 25 So you don't need to do that. 26 MR. GRANT: I guess I am remembering 27 back to the says when there were buttons; thank you. 28 THE PRESIDING MEMBER: Mr. Brett? 843 BOURKE/GRANT, cr-ex (Warren) 1 MR. BRETT: Thank you, Mr. Chairman. 2 CROSS-EXAMINATION 3 MR. BRETT: Good morning, panel. 4 Mr. Bourke, could you briefly outline 5 the reports that you make, for regulatory purposes, to 6 the E.R.O. 7 MR. BOURKE: I file a report on a 8 quarterly basis that provides a series of eight 9 schedules, four of which are prepared by myself and my 10 staff. 11 They would include an income 12 statement, an income tax schedule, a rate base, a cost 13 of capital schedule, and a revenue deficiency or 14 surplus and return calculation. That constitutes 15 Schedules 1 through 4. 16 The additional schedules that are 17 included in the quarterly reporting package are 18 accumulated and filed with my package. They are 19 generated by other personnel in the company. 20 One is a summary of volumes and 21 revenues on a normalized basis. There is a summary of 22 non-utility intra-corporate and inter-corporate 23 affiliate transactions. That is on page 2 of the same 24 schedule. 25 There is a summary of balances and 26 gas supply related deferral accounts, and the final 27 schedule would be the summary of balances and non-gas 28 supply related deferral accounts. 844 BOURKE/GRANT, cr-ex (Brett) 1 I should emphasize that this is a 2 package that is submitted quarterly. I have 3 responsibilities for a monthly reporting package, which 4 has a different series of monitoring reports, mostly 5 related to PGVA, monthly gas. The entirety of that 6 package is developed by other people. I simply 7 accumulate the schedules and file it on a monthly 8 basis. 9 MR. BRETT: And the monthly report 10 has to do, for the most part, with gas accounts? 11 MR. BOURKE: Yes, that is correct. 12 MR. BRETT: One of your quarterly 13 reports that you mentioned is an income statement, so 14 it would be a corporate quarterly income statement, as 15 we would conventionally know it -- 16 MR. BOURKE: When you say 17 "corporate", I hope you mean utility. 18 MR. BRETT: Yes. 19 MR. BOURKE: Yes, it would be a 20 utility income statement. 21 MR. BRETT: It would show operating 22 and maintenance expenses as a line item, I suppose. 23 MR. BOURKE: A single line item, yes. 24 MR. BRETT: And depreciation and so 25 on and so forth. 26 MR. BOURKE: Correct. 27 MR. BRETT: So you don't file with 28 the E.R.O. at any time, either monthly or quarterly, 845 BOURKE/GRANT, cr-ex (Brett) 1 what I would call a line by line O&M statement. 2 MR. BOURKE: That is correct. 3 MR. BRETT: Mr. Grant, you are aware 4 of the discussion that -- well, you are aware from the 5 case last time and as the company's point man for PBR, 6 if I can put it that way, of the issue of rebasing at 7 the end of the limited PBR period, after a two-year 8 period that we are going to go into. 9 Am I right in saying that the company 10 has not yet stated its position on what the new base 11 for the second generation PBR program would be? 12 MR. GRANT: That is correct. We 13 don't know what the new base would be. 14 MR. BRETT: So you haven't decided, 15 for example, as of yet that you would rebase to the 16 actual O&M expenses at the end of the three-year 17 period. 18 MR. GRANT: Correct. We have not 19 made any determination on that. 20 MR. BRETT: Do you think it is likely 21 that you would rebase to the actual O&M expenses at the 22 end of the three-year period? 23 MR. GRANT: I don't believe that it 24 would be any kind of a mechanistic rebasing. I think 25 that we would need to examine, when we are rebasing at 26 the end or the three years, any permanent reductions in 27 the cost structure that the utility has been able to 28 achieve. That is consistent with what I was suggesting 846 BOURKE/GRANT, cr-ex (Brett) 1 in the previous proceeding, in 497-01. 2 Obviously, our actual performance to 3 that point in time would be very relevant to the whole 4 consideration of rebasing, because clearly the company 5 and the Board will want to be able to see what has been 6 achieved to the end of the PBR period. 7 To the extent that there are any 8 increases or decreases from that previous historic 9 actual number, I think we ought to discuss it, and we 10 ought to be prepared to recognize that there may be 11 legitimate changes from that that we should discuss. 12 That doesn't mean that it is going to 13 be a fait accompli or anything at this point to suggest 14 that that is how we are going to move forward, but in 15 my view we all ought to have open minds at that point. 16 To be fair, as well, we are hoping 17 that we can cut out a significant portion of costs and 18 still maintain our service level. At the end of the 19 day, we all want to be in a win/win situation, that 20 being that the ratepayers are reaping the benefits of 21 that PBR period when we rebase at the conclusion of it. 22 MR. BRETT: Are you finished, 23 Mr. Grant? Is that it? 24 MR. GRANT: Yes. 25 MR. BRETT: In order to have that 26 discussion that you are talking about, do you not agree 27 with me though that to be a meaningful discussion 28 intervenors, as well as the Board, are going to have to 847 BOURKE/GRANT, cr-ex (Brett) 1 know what those actual O&M budgets have been over that 2 three-year period? 3 How else are you going to have a 4 rational discussion as to what are permanent 5 reductions, what are temporary reductions, and the 6 like, in order to arrive at a reasonable compromise or 7 win/win, as you put in, in terms of setting a rebase 8 O&M budget. 9 MR. GRANT: Well, I think at the end 10 of the PBR period there will probably be some 11 discussion of that. There may be some details that are 12 needed so that people understand the basis upon which 13 we are rebasing at the end of the three-year period. 14 As I mentioned this morning, 15 obviously the one line actual number is going to be 16 filed in each case over the next three years, so that 17 would provide an additional piece of information at the 18 time that we rebase in 2002. 19 MR. BRETT: What I think you are 20 saying, as I interpret what you have said there -- I 21 don't want to put words in your mouth -- is you are 22 making a distinction. You are saying, really, that at 23 the end of the period it would be important to have 24 that actual information available? 25 MR. GRANT: Yes. I think it would be 26 reasonable to expect at the end of the period that 27 there would be some questions upon rebasing where 28 people will want to know: How did you do and can you 848 BOURKE/GRANT, cr-ex (Brett) 1 give me a little bit more information. I don't have a 2 problem with that at the point of rebasing in 3 2000-and -- I guess it's 2003 is the rebased. 4 MR. BRETT: My understanding is -- as 5 you reminded us this morning and it was a useful 6 clarification -- that you are going to continue to the 7 file the E-series and the F-series of documents on an 8 actual and an estimated basis. It may well be that for 9 a particular period, during the PBR for example, the 10 "E" and "F" series would show that -- let's say in the 11 first year of the PBR regime the company made, on a 12 normalized basis -- and/or an unnormalized basis, for 13 that matter, but on a normalized basis -- a very large 14 return on equity, considerably higher than had been 15 sought for that year. 16 Now, if one looks at that -- first of 17 all let me just clarify. 18 In the limited PBR plan that we have 19 now, or we are going to go into, we do not have at the 20 moment an earnings sharing mechanism -- which I will 21 describe for purposes of this question as a kind of 22 self-correcting mechanism -- which would have the 23 result of effecting a sharing between ratepayers and 24 the shareholder of any rate of return, either well in 25 excess of or well below the sought after rate of 26 return. 27 Can you agree with that? We don't 28 have such an explicit energy sharing mechanism in this 849 BOURKE/GRANT, cr-ex (Brett) 1 PBR? 2 MR. GRANT: You said "energy 3 sharing". Do you mean -- 4 MR. BRETT: I'm sorry, I mean revenue 5 sharing or profit sharing I guess. 6 MR. GRANT: That's correct, we cannot 7 in this PBR. 8 MR. BRETT: Okay. 9 Absent that explicit mechanism, if 10 there is going to be an adjustment made -- if a party 11 wished to seek to have the Board make a correction to 12 the parameters of the plan to avoid, for example -- 13 let's take the case where it was a very high rate of 14 return on equity. 15 Let's assume for the sake of my 16 question that a party wished to have the Board make a 17 correction to the second year of the plan, or perhaps 18 in this example the third year of the plan -- it might 19 be midway into the second year before we have this 20 information -- but, in any event, to make a correction 21 to the remaining -- through a parameter for the 22 remaining years of the plan, that party would have this 23 "E" and "F" exhibit, but he wouldn't really know what 24 the driver was, he wouldn't know the link, what was 25 causing the higher rate of return; he wouldn't know how 26 much impact -- he wouldn't know how much the O&M 27 account was driving that rate of return, would he? 28 MR. GRANT: I guess there are two 850 BOURKE/GRANT, cr-ex (Brett) 1 points to be made in response. 2 First of all, when you say 3 "correction" to the plan, that would imply that there 4 was an error in the plan to begin with. I think the 5 Board has disposed of that on the appeal. There is no 6 error and presumably one would have to convince the 7 Board that there is an error before you argue for a 8 correction. 9 MR. BRETT: What we would be talking 10 about is -- I'm sorry, Mr. Grant, I didn't mean to 11 interrupt you. 12 I think what we are talking about 13 here rather than an error, perhaps -- it could be an 14 error, you are right, it could be an unintended 15 consequence. 16 What we are really speaking about, I 17 think, would be an off ramp situation. At least that 18 is what I am speaking about, something that might lead 19 to an off ramp. 20 MR. GRANT: As I understand your 21 question, you are asking the question as to whether 22 some ROE parameters would invoke -- some ROE 23 performance around the Board-approved number would 24 invoke an off ramp. The answer is: No, it would not. 25 MR. BRETT: In other words, in your 26 view, no, that would not be a reason in the company's 27 view to consider an off ramp? 28 MR. GRANT: That's correct. That was 851 BOURKE/GRANT, cr-ex (Brett) 1 not considered as part of the off ramps in the 497-01 2 proceeding. 3 I think some comprehensive plans -- I 4 think you started out discussing sharing mechanisms 5 around ROE and some comprehensive plans have that 6 feature to them. 7 But I guess the second part of my 8 answer is that from an arithmetic point of view the 9 schedules that I indicated we would be filing you can 10 derive -- first of all, they show the weather 11 normalized return on equity. There is enough detail 12 there, that being the one-line O&M that is shown in the 13 schedules, wherein one could arithmetically derive the 14 difference between those figures, Board-approved and 15 actual, and arithmetically make a determination of what 16 that does for -- or what impact that has on utility 17 income. 18 MR. BRETT: But it might be somewhat 19 difficult to isolate that impact, would it not? You 20 could have other impacts as well? 21 MR. GRANT: Indeed. The return on 22 equity is a function of many, many things. We have 23 gone through two years of abysmally warm weather and 24 the return on equity has been in the ditch. We know 25 all about that. 26 MR. WARREN: Perverted universe. 27 MR. BRETT: Yes. Well, I'm not going 28 to argue the weather with you, Mr. Grant. I can't 852 BOURKE/GRANT, cr-ex (Brett) 1 control the weather. 2 MR. WARREN: Don't try. 3 MR. BRETT: I guess the fact of the 4 matter is, Mr. Grant, do you not agree that most plans 5 today that have been implemented -- and you would be 6 familiar with many of these plans from your review of 7 them -- most plans do have some kind of explicit 8 profit-sharing mechanism built into them to act as a 9 kind of self-corrective vehicle. 10 Now, I am well aware that in this 11 case, in our particular case we don't and I'm not 12 debating the whys and wherefors of that. That is not 13 my point here. The point is not the merits of that 14 kind of a mechanism. 15 The point is only to say, in the 16 absence of such a mechanism it becomes important, from 17 the intervenor's point of view at least if not from the 18 company's point of view, to be able to ask the Board to 19 look at the plan, look at an off ramp in the event that 20 there is a very high return on equity achieved. 21 Now, we won't know whether the Board 22 thinks that is an appropriate reason for an off ramp 23 until we made that application. In your view it is 24 not, the Board hasn't said yet, understandably. 25 But in order to make that 26 application, as Mr. Warren discussed with you, surely 27 it is not asking too much to have the details of -- to 28 have as much information as we can, including the 853 BOURKE/GRANT, cr-ex (Brett) 1 details of the O&M budget on an actual basis, to be 2 able to understand why that has occurred, only for the 3 purpose of making that challenge. 4 In other words, I'm not suggesting 5 that we are able to examine that as a normal part of 6 the hearing and ask questions for the sake of asking 7 questions. 8 In that limited context, that is to 9 say use of the information for the possibility of a 10 request, why would you object to that information being 11 made available for that purpose, on the understanding 12 that there couldn't be a holus-bolus examination of the 13 O&M just for the sake of examining the O&M? 14 I'm sorry for the long question, 15 Mr. Grant. I was just trying to get -- 16 MR. GRANT: I think your question is 17 going to the issue of monitoring/reporting, which is 18 the subject matter for today, and I guess I have two 19 responses on this. 20 First of all, I recall this question 21 coming up in the 497-01 case where I believe it was 22 Mr. Vlahos asked me that, from a monitoring and 23 reporting point of view, from a regulatory efficiency 24 point of view, was our plan -- wherein the sharing, if 25 you will, happens at the end of the PBR period -- was 26 our plan more efficient from a monitoring point of view 27 than, say, another plan wherein there is sharing during 28 the period, and obviously there would have to be a lot 854 BOURKE/GRANT, cr-ex (Brett) 1 of discussions around numbers and calculations. My 2 answer was that our plan is more efficient from a 3 regulatory efficiency point of view. 4 So in this proceeding I'm just 5 repeating that answer: our plan is much more 6 efficient. 7 But I think in a broader context what 8 we have to do is think about monitoring/reporting in a 9 PBR regime and look at the spectrum of options that are 10 available to the Board on this issue. At the very 11 extreme end of that spectrum I would suggest, 12 Mr. Brett, that a very highly efficient process would 13 be no monitoring whatsoever. Indeed, I believe 14 Dr. Bauer mentioned that there were some regulators 15 that are in fact in this position where they are not 16 monitoring at all. That would be extremely efficient. 17 The problem with it in the Ontario 18 context is that it would run up against a couple of 19 important principles that the Board has, PBR 20 principles, of transparency and efficiency. So the 21 Board is looking for a way to balance those, and those 22 are enunciated in principles, I believe, 6 and 9. So 23 that is the one end of the extreme. 24 At the other end of the extreme you 25 have situations where there is very extensive 26 monitoring. In fact, I think in some jurisdictions it 27 is even funded, or costs are awarded to participants. 28 That is a very lengthy process. It is implemented in 855 BOURKE/GRANT, cr-ex (Brett) 1 comprehensive PBR regimes where you have this ongoing 2 sharing that has to take place. Those processes, as I 3 say, can be lengthy, months in duration. That would, 4 obviously, be inefficient from a regulatory efficiency 5 point of view. 6 So somewhere in those two extremes I 7 think is where the Board is looking for a monitoring 8 process. In fact, we proposed something, in 497 and in 9 this case, that is in the middle. 10 MR. BRETT: Mr. Grant, in the 11 interests of brevity, I can't, obviously, here in this 12 forum, take you through each of the PBR plans that have 13 been approved around the world. 14 In the Union filing, in the Union 15 consultative case filing, they have filed summaries of 16 about 40 of these plans and they have produced the 17 detailed plans in two companion volumes, so there isn't 18 time to go through one by one and try and demonstrate 19 with you how many of these plans have some sort of 20 reporting mechanism versus how many do not. In my 21 argument I think I will summarize that. 22 But I guess just by way of 23 illustration, and I can't put it any higher than that 24 at the moment, if we look at the BC Gas Plan, which you 25 will be broadly familiar with I suppose because it is 26 the first Canadian plan that went into effect and we 27 had some extensive discussion of the BC Gas Plan in the 28 497-01 case, and I think, as I recall, we filed copies 856 BOURKE/GRANT, cr-ex (Brett) 1 of the settlement agreement that was approved by the 2 BC Commission, and so on and so forth, but in the 3 approved settlement agreement in B.C., and this is at 4 page 12 of the plan, and this is the matter of the 5 B.C. utility's decision of July 23rd of 1997, Revenue 6 Requirements Application, 1998 to 2002 -- I am just 7 going to read you a paragraph here. 8 I can give you this, but you probably 9 remember this well enough. Under the title "Annual 10 Reviews and Rate Adjustments", the Commission has 11 written, or the parties have written: 12 "BC Gas will conduct an Annual 13 Review of the operation of the 14 settlement and rate adjustments 15 prior to January 1 of each year 16 of the Term with the Commission, 17 its staff and interested 18 parties." (As read) 19 And here it says: 20 "The Annual Review is a 21 `proceeding' for purposes of 22 participant cost awards. This 23 process will provide the 24 Commission and all interested 25 parties an opportunity to remain 26 informed about the activities of 27 the Company." 28 "At the annual workshop to be 857 BOURKE/GRANT, cr-ex (Brett) 1 held in November of each of the 2 years 1998 through 1999, BC Gas 3 will present projections for the 4 year that is ending in forecasts 5 for the next year. The 6 projections for the year that is 7 ending will include: 8 - projected utility volumes 9 and revenues 10 - projected utility expenses 11 - projected year-end plant 12 balances and other rate base 13 information 14 - ... 15 - projected year-end customers 16 and other cost driver 17 information 18 - projected utility earnings." 19 And then forecasts for the year with 20 similar factors. 21 MR. CASS: Mr. Chairman, if I might 22 speak up at this point. I am just a little concerned 23 about what has happened to the Board's rule that if 24 documents are to be put to witnesses on 25 cross-examination they should be provided in advance. 26 Mr. Grant may well be able to answer 27 this question, and in this instance it may not be a 28 problem. 858 BOURKE/GRANT, cr-ex (Brett) 1 In my time in this room, though, this 2 is not the first occasion that Mr. Brett, during his 3 cross-examinations, has read from a document. This was 4 a fairly extensive excerpt he read on this occasion. 5 I just wonder if I might, through 6 you, Mr. Chairman, urge parties to remember the Board's 7 practice that documents referred to on 8 cross-examination be provided in advance. It would 9 certainly be more expeditious, not to speak of fairness 10 to the witnesses. 11 THE PRESIDING MEMBER: Mr. Brett, is 12 there a question at the end of all this? 13 MR. BRETT: Yes. The question 14 really, just to close this off, is -- 15 You see here, Mr. Grant, that BC Gas 16 has a mechanism for reviewing the progress under the 17 plan and forecasts for the next year. This is 18 obviously something that was not felt by either BC Gas 19 itself, the parties, or the Commission in B.C. to be a 20 fatal blow to the operation of this five-year plan, 21 something that was going to compromise its integrity. 22 In light of that, in light of their 23 decision, why would you feel that a modest additional 24 reporting requirement here would be a big problem? 25 MR. GRANT: I guess the first 26 distinction to be made is that, as I understand it, the 27 BC Gas PBR is a comprehensive one. It is not a 28 targeted PBR; it is in operation for those years. So 859 BOURKE/GRANT, cr-ex (Brett) 1 in a comprehensive PBR regime that particular 2 jurisdiction has felt that they are prepared to 3 introduce some inefficiencies for purposes of clarity 4 and I guess for purposes of ensuring that there is 5 broad disclosure. So they have made that tradeoff. 6 That isn't really where the Ontario 7 Energy Board is heading, I don't believe. I think when 8 I reviewed the -- 9 MR. BRETT: Do you not for a 10 comprehensive PBR? 11 MR. GRANT: No. I didn't mean it in 12 that context. I don't think that is where they are 13 heading with respect to monitoring and reporting. 14 When I read the draft, and I 15 appreciate this is a draft and the Board has not 16 approved it at this point, but there is a Draft PBR 17 Handbook for the municipal electric utilities, and that 18 is not part of the monitoring process, the kind of 19 thing that you described, as I read it. 20 As I understand, it is really going 21 to the point of being efficient. Information is filed 22 with the Board and the Board will use that information 23 in the MEU PBRs to calculate rates. Indeed I believe 24 that the MEUs can put costs into that request that may 25 be outside of the formula per se, those being 26 transition costs. 27 At the end of the day, those 28 transition costs may undergo some further review. It 860 BOURKE/GRANT, cr-ex (Brett) 1 does not specify what kind of a review, whether it is a 2 public hearing or whether intervenors would be 3 involved. So I see the Board -- 4 MR. BRETT: It is a little vague on 5 that. 6 MR. GRANT: That's correct. 7 I see the Board moving in a very 8 efficient way to monitor those electric-regulated 9 utilities. 10 And I would expect the Board would 11 want to, for consistency purposes, to apply the same 12 kind of efficiency standard to the gas side, in the 13 province. 14 MR. BRETT: Well, Mr. Grant, you 15 would concede that, in the first instance, many, many 16 of those utilities are small -- and there are 270 of 17 them -- and the amounts of dollars involved may not be 18 as large as the amounts of dollars here. 19 Would you concede that? For many of 20 those utilities. 21 MR. GRANT: Certainly, for a number 22 of them, that's the case. But there are some very 23 large ones in there, as well, as you and I know. And 24 the Board is not differentiating between large and 25 small, in the context of monitoring. 26 MR. BRETT: And finally -- 27 MR. GRANT: I'm sorry. The Board 28 Staff, in their PBR Handbook, is not differentiating. 861 BOURKE/GRANT, cr-ex (Brett) 1 MR. BRETT: On the issue of 2 comprehensive versus targeted, Mr. Grant, I have never 3 understood why you make a distinction between the need 4 for some reasonable monitoring and reporting, in the 5 two cases. 6 Is it not the case that regardless of 7 whether the PBR plan is targeted and deals with only 8 some components of the cost of service or is more 9 general and deals with more of them -- and these, as 10 you know, fall along a spectrum -- why is that you 11 would need less monitoring? What's intrinsic to the 12 targeted scheme that would say that you need less -- 13 parties should have -- that you should have less 14 monitoring, less oversight of it? 15 MR. GRANT: Well, I think that, as I 16 tried to explain, I think, to a certain extent, it's a 17 philosophical approach to performance-based regulation 18 that the Board is making here, or appears to be making, 19 and that philosophical approach leans toward helping 20 things be as efficient as possible without diminishing 21 anyone's rights. And I think that, with respect to our 22 targeted PBR and our intentions to file information in 23 these upcoming rates cases, we have met that sort of 24 objective. 25 Clearly, in a targeted PBR situation, 26 many parts of the company's operation are still under 27 review and so, I -- the reason I differentiate between 28 comprehensive and targeted, because once you move into 862 BOURKE/GRANT, cr-ex (Brett) 1 a comprehensive, there are no more rate proceedings. 2 MR. BRETT: All right, Mr. Grant. 3 Thank you. 4 Those are my questions. 5 THE PRESIDING MEMBER: Thank you, 6 Mr. Brett. 7 Mr. Mondrow? 8 MR. MONDROW: Thank you, 9 Mr. Chairman. 10 CROSS-EXAMINATION 11 MR. MONDROW: Good morning, 12 Mr. Grant. 13 MR. GRANT: Good morning, 14 Mr. Mondrow. 15 MR. MONDROW: Just a couple of 16 questions, really, by way of clarification, if I could. 17 First, on your direct evidence, you 18 gave four categories of O&M information that have been 19 filed in this case and will be filed as a matter of 20 course in upcoming cases during the PBR period. With 21 respect to each of them, I just want to confirm with 22 you whether the O&M portion of that exhibit is a 23 calculated O&M or an actual O&M. So, if we could just 24 go through them. 25 The first was the E5 series, the 26 overall utility return on a weather normalized basis. 27 Will the O&M component of that 28 calculation be the actual experienced O&M of the 863 BOURKE/GRANT, cr-ex (Mondrow) 1 utility? Or will it be the O&M, as calculate,d using 2 actual inputs for the formula? 3 Do you understand the distinction I'm 4 trying to make? 5 MR. GRANT: I think so. 6 The O&M is always a calculated 7 number, and so it will continue to be a calculated 8 number. 9 MR. MONDROW: Perhaps I haven't made 10 my distinction clearly. 11 When you referred, this morning, to 12 calculated O&M, I assumed what you were referring to 13 was taking actual experience of the O&M parameters -- 14 for example, the inflation factor, the index -- and 15 applying that to the preceding kind of test year 16 calculation for O&M and truing-up the O&M calculation 17 in accord with the actual index rather than producing 18 the actual O&M. 19 MR. GRANT: Yes, I understand, now, 20 where you are going. 21 MR. MONDROW: So, just with respect 22 to the first category, the overall utility return 23 weather normalized, will that be an actual O&M 24 calculation or, sorry, an actual O&M figure? Or will 25 it be a calculated O&M figure, using the actual 26 indices? 27 MR. GRANT: With respect to the 28 actual year, the historic year, in the filings, it will 864 BOURKE/GRANT, cr-ex (Mondrow) 1 be an actual O&M number; and that is to say it will be 2 what is actually incurred with, I would suggest, 3 probably a couple of adjustments. One would be a 4 normalization adjustment. To the extent that we need 5 to make a weather normalization adjustment to O&M, we 6 will do so. And the second thing is that the 7 non-utility elimination will be a calculated number, it 8 will be, simply, the Board-approved number in the PBR 9 base, and then you apply the formula, the PBR formula, 10 to that number into the particular year because that's 11 the appropriate elimination for rate-making purposes. 12 Then, with respect to the bridge 13 year, that will be simply a calculated number. That 14 will not have any, quote, actuals in it; it will simply 15 be a re-casting of the Board's formula, with updated 16 parameters. So I would expect some minor differences 17 between what the Board-approved number is from the 18 previous case and the bridge year estimate -- and 19 that's important because that's what you are using as a 20 base, then, to set your O&M for the next text year. 21 MR. MONDROW: Early, when you file 22 your bridge year estimates, are they not partially 23 actual and partially prospective? 24 MR. GRANT: No. 25 MR. MONDROW: They are all 26 prospective estimates? 27 MR. GRANT: Yes. We filed estimates 28 that are over the years that are just that, they are 865 BOURKE/GRANT, cr-ex (Mondrow) 1 estimates. We call them "zero in twelves". 2 MR. MONDROW: So then -- perhaps I 3 can clarify this all at once -- you gave four 4 categories of information. And at least on the first 5 two, the overall utility return both on a weather 6 normalized and a non-weather normalized basis, do I 7 understand you to be advising that the historical 8 segment of those two filings will be based on actual 9 O&M numbers? 10 MR. GRANT: Subject to the 11 adjustments I spoke of. 12 MR. MONDROW: Subject to the 13 adjustments you spoke of. 14 And then there were two more. There 15 were the D5 series, the one-line O&M expense, on an 16 historic basis. That will also, then, be an actual O&M 17 expense? That one line. 18 MR. GRANT: But once again, it's 19 subject to the adjustments I -- 20 MR. MONDROW: Subject to the 21 adjustments you mentioned. 22 And with respect to the F4 series, 23 bridge year estimated, that would be an estimated 24 number rather than an actual O&M number? 25 MR. GRANT: That's correct. 26 MR. MONDROW: But will that estimated 27 number be calculated on updated PBR parameters or 28 indices? 866 BOURKE/GRANT, cr-ex (Mondrow) 1 MR. GRANT: Yes, it will. We will 2 start from the PBR base that the Board is establishing, 3 in this case. We will then increment that base, in 4 each of the years, successive years, by a fresh 5 forecast of CPI and customer growth. 6 MR. MONDROW: Okay. Thank you for 7 that clarification. 8 Now, I just want to talk to you, for 9 a couple of minutes, about the non-utility eliminations 10 tracking issue. 11 Now, one of the qualifications you 12 have given me with respect to -- 13 MR. GRANT: I'm sorry to interrupt. 14 I misspoke myself on the last question. 15 MR. MONDROW: Go ahead. 16 MR. GRANT: There's one other 17 subtlety to the calculation. 18 You take the PBR base from this case 19 and you increment it by the Board-approved formula. 20 You arrive at a Board-approved number for fiscal 2000. 21 So, then, in fiscal 2001, what we will do is take off 22 from that number and then do the further calculation. 23 Okay? Using the forecast parameters at the time. 24 I don't think I was clear when I was 25 giving my answer -- 26 MR. MONDROW: Okay. But will the 27 bridge year estimate, in that case, be, then, an 28 updated approved, as it were; that is, updated for the 867 BOURKE/GRANT, cr-ex (Mondrow) 1 new indices? 2 You will do your -- 3 MR. GRANT: Yes. 4 MR. MONDROW: -- calculation based on 5 the Board-approved, but will there be an interim number 6 that is neither the Board -- that is not the 7 Board-approved, which is derived from applying updated 8 indices? 9 MR. GRANT: Yes. Yes, because our 10 intention is to true up for differences between 11 forecast and actual achieved customer additions and 12 CPI. 13 MR. MONDROW: Okay. But the proposed 14 budget, in any given test year, will be launched off of 15 the -- well, I shouldn't mix my terms here -- of the 16 Board-approved from the previous year not this interim 17 kind of snapshot? 18 MR. GRANT: Correct. 19 MR. MONDROW: Okay. Thank you very 20 much. 21 I would like to ask you just to open 22 two documents for this next series of questions, if you 23 could. 24 The first is if you have a copy of 25 the Affiliate Relationship Codes in front of you. And 26 the second is an exhibit from the separation case. 27 You can find both of these, if you 28 have a copy of HVAC Coalition's motion materials in 868 BOURKE/GRANT, cr-ex (Mondrow) 1 this proceeding, which has been given Exhibit J2.2. 2 If you could just try to have both of 3 those documents handy. 4 MR. GRANT: Bear with me a second. I 5 have the Code in front of me. I don't have the other 6 document. 7 MR. MONDROW: The other document is 8 Exhibit B, Section 5.2, and specifically page 11, from 9 the E.B.O. 179-14/15 proceeding. 10 MS LEA: Where is that document -- 11 MR. MONDROW: In Exhibit J2.2. 12 MR. GRANT: I have something that 13 says "general criteria". 14 MR. MONDROW: That's right. Just for 15 context, I am asking you to look at page 11 of 13 from 16 Exhibit B in the separation case, section 5.2, which 17 was the segment of the evidence regarding shared 18 services. At the back end of that evidence there is 19 some discussion of transfer pricing. It's at page 11 20 that I would just like to take you to a paragraph of. 21 MR. GRANT: Yes, I have that now. 22 MR. MONDROW: Okay. Before turning 23 to that, if you could open the Affiliate Relationships 24 Code to the transfer pricing section, which is section 25 2.3 of the Code. If you could look at provision 2.3.3 26 which provides that: 27 "Where a fair market value is 28 not available for any product, 869 BOURKE/GRANT, cr-ex (Mondrow) 1 resource or service, a utility 2 shall charge no less than a cost 3 base price and shall pay no more 4 than a cost base price. The 5 cost base price shall reflect 6 the costs of producing the 7 service or product, including 8 the return on invested capital." 9 (As read) 10 Now, if you could just bear that in 11 mind and look at page 11 of Exhibit B, section 5.2 from 12 the separation case under the "general criteria" 13 heading. I just want to take you to the first 14 paragraph there where the company said -- the company 15 is describing here its then current transfer pricing 16 methodology. The first paragraph recites part of that 17 methodology as follows: 18 "Where a fair market value can 19 be reasonably determined, that 20 fair market value would be the 21 transfer price. Generally 22 speaking, a fair market value 23 can only be reasonably 24 determined for a service if 25 there is a well defined market 26 where the seller can sell the 27 exact service. Ordinarily in 28 practice, this means that the 870 BOURKE/GRANT, cr-ex (Mondrow) 1 only instance where a market 2 price is the transfer price is 3 for a service that the seller 4 usually offers in the market." 5 Now, am I correct, Mr. Grant, in 6 reference to this paragraph I have just read to you 7 from the separation case filing that the company's 8 position at the time of this filing was that most of 9 its shared services were not subject to a market 10 pricing determination because they were not services 11 generally offered in the marketplace. Is that an 12 accurate statement of the company's position at the 13 time? 14 MR. GRANT: Well, Mr. Mondrow, you 15 have got me way down the road on a rather technical 16 point. I am trying to understand how this relates back 17 to monitoring and reporting. 18 MR. MONDROW: All right. Do you 19 object to answering my question and then allowing me to 20 take you there? Do you know whether the company's 21 position at the time was that for most of its transfer 22 pricing, market value was not applicable because they 23 want services offered into the marketplace? 24 MR. CASS: Mr. Mondrow, as Mr. Grant 25 has pointed out, the purpose of this panel is to 26 address monitoring and reporting. You may well have 27 some angle in which this is relevant to that issue, but 28 if that's the case, could you perhaps get to your 871 BOURKE/GRANT, cr-ex (Mondrow) 1 questions that are relevant to monitoring and 2 reporting? 3 MR. MONDROW: Well, Mr. Chairman, 4 this is my first question in this second series and I 5 don't think it's quite fair for Mr. Cass to punish me 6 for not getting to the point. I think it's fair to 7 allow counsel a few questions. If Mr. Cass still feels 8 I'm straying beyond the pale, he can raise the 9 objection at that time. 10 I would like to get an answer from 11 Mr. Grant. Then I will move on to questions two and 12 three which will be directly on point. 13 THE PRESIDING MEMBER: Go ahead, Mr. 14 Mondrow. That's exactly what the evidence says. What 15 is the next question? 16 MR. MONDROW: Well, the evidence 17 actually doesn't say that. In most cases the company's 18 position was no market pricing. That's what I'm trying 19 to determine, whether it's the company's position that 20 in most cases market pricing is not applicable to 21 transfer pricing. 22 Do you know the answer to that, Mr. 23 Grant, whether that's true or not? 24 MR. GRANT: I don't know the answer. 25 I would have to check with the people that are most 26 familiar with this. 27 MR. MONDROW: All right. 28 MR. GRANT: In a PBR context though, 872 BOURKE/GRANT, cr-ex (Mondrow) 1 I would only note that obviously the Affiliate 2 Relationships Code wherein the transfer pricing 3 methodology is set out has been issued quite some time 4 after this material that you pointed me to over at 5 Exhibit B, section 5.2, and that obviously in a PBR 6 context the pricing of services within the PBR period 7 would be subject to the Code but wouldn't have any 8 relevance, I guess if you will, for rate making 9 purposes. That would be my only comment in the context 10 of PBR. 11 MR. MONDROW: Fair enough. What we 12 are talking about is whether you track the costs of 13 these affiliate transactions or not. Mr. Warren had 14 some discussion with you about this. Your comment to 15 him was that you would only have to track the actual 16 costs of providing the services in the event that 17 provision 2.3.3 of the Affiliate Code applied. That is 18 in the event that a market price could not be 19 determined. 20 My recollection from previous 21 proceedings is that it was the company's position that 22 that's the usual case. You have told me that you 23 really don't know whether that's true or not, we will 24 have to go back and check the records ourselves. Is 25 that fair? 26 MR. GRANT: Yes. I don't know 27 whether that's true. 28 MR. MONDROW: Okay, but you will 873 BOURKE/GRANT, cr-ex (Mondrow) 1 agree with me then, won't you, that in at least some 2 instances the company will have to track the cost for 3 services that it's providing to affiliates in those 4 instances where market price is not, for whatever 5 reason, determined. 6 MR. GRANT: Yes. I would agree with 7 that. If we are going to have a transfer pricing 8 between ourselves and an affiliate and there is no 9 market price, we must do that according to the 10 Affiliate Relationships Code. 11 MR. MONDROW: Okay. So you will in 12 fact be doing that in at least some instances on a 13 going forward basis, exacting those costs. 14 MR. GRANT: Certainly in theory that 15 would be the case for situations where we cannot arrive 16 at a market price and where we decide to go ahead and 17 have that transaction. 18 MR. MONDROW: Okay. Then if we can 19 just focus in on provision 2.3.3 of the Code then, the 20 second sentence that I read into the record, just to 21 repeat, says: 22 "A cost base price shall reflect 23 the costs of producing the 24 service or product, including a 25 return on invested capital." 26 (As read) 27 Mr. Grant, is it the company's 28 position that the cost based price is a fully allocated 874 BOURKE/GRANT, cr-ex (Mondrow) 1 cost base price or some other cost base price? 2 MR. GRANT: Well, the Board is not 3 specific as to what methodology should be used in this 4 paragraph and should be used for transfer pricing where 5 there is no market price. 6 I would think that we would have the 7 flexibility to adopt whatever cost based approach that 8 we feel is appropriate, as long it includes the return 9 on invested capital. 10 This, by the way, would apply, I 11 guess, to other gas distributors. I don't know whether 12 the Board is going to issue something for the electric 13 side or not. 14 MR. MONDROW: Okay. Well, just 15 sticking with the application of this Code to your 16 company, Mr. Grant. I take your evidence to be that in 17 at least some instances, fully allocated costs would 18 not be the appropriate approach in your view for 19 determining this cost base price. Is that what you are 20 saying? 21 MR. GRANT: Well, at the risk of 22 expressing an opinion, and I am not an expert on cost 23 allocation, I would think that that's a fair comment, 24 that we would not in some instances feel that fully 25 allocated cost is appropriate. 26 MR. MONDROW: So the costs that you 27 would track going forward for the purposes of affiliate 28 transactions might be fully allocated costs in some 875 BOURKE/GRANT, cr-ex (Mondrow) 1 instances and might be something other than fully 2 allocated costs in other instances. Is that your 3 understanding? 4 MR. GRANT: Well, my understanding of 5 this Code is that you can choose whatever method you 6 want and we would choose whatever method we feel is 7 appropriate in those instances. It would be incumbent 8 upon us to demonstrate at the point of rebasing three 9 years hence that we have been in compliance with this 10 Code and that we have done something that is reasonable 11 for purposes of establishing rates from that point 12 onward. 13 MR. MONDROW: Now, with respect to 14 the services where you are able to determine the fair 15 market price, and I understand the company is now 16 working with its accountants to develop a methodology 17 for this, but with respect to those services where you 18 can determine a fair market price, as I understand the 19 evidence in this case, there will be no tracking of 20 actual costs of performing the underlying services at 21 any point in time during the PBR period. Is that 22 understanding correct? 23 MR. GRANT: Yes. That's my 24 understanding as well. 25 MR. MONDROW: That's true then even 26 internally, you would never during the PBR period at 27 least determine whether the departmental eliminations 28 estimated at the outset in the 497 case turn out to be 876 BOURKE/GRANT, cr-ex (Mondrow) 1 accurate or not. That wouldn't be relevant going 2 forward. 3 MR. GRANT: No. It's not relevant to 4 run the business and it's not relevant for rate making 5 purposes either. 6 MR. MONDROW: Has it always been the 7 case, Mr. Grant, that there was no tracking of actual 8 non-utility eliminations? 9 MR. GRANT: I don't know what you 10 mean. 11 MR. MONDROW: Every year you would 12 provide an estimate of non-utility eliminations for 13 rate making purposes for the test year. 14 MR. GRANT: Yes. 15 MR. MONDROW: Would that estimate 16 ever be checked against actual costs incurred to 17 support activities for non-utility operations? 18 MR. GRANT: I think under a cost of 19 service that was the case, that we were applying the 20 methodology to actual numbers as well as forecast 21 numbers, so we did have variances. 22 I recall in one particular 23 year -- I'm sorry, I don't know the specific 24 year -- that there was a variance where we under. In 25 other words, the Board eliminated more costs than we 26 were actually able to eliminate in the actual, so we 27 were at risk for that variance obviously. 28 MR. MONDROW: Do you know, Mr. Grant, 877 BOURKE/GRANT, cr-ex (Mondrow) 1 at this point in time whether when it comes to rebasing 2 at the end of the three years or in the event that you 3 bring forward a comprehensive plan earlier whether 4 there will be some determination of actual costs 5 underpinning these affiliate transactions for the 6 purposes of checking the then new projection for the 7 appropriate eliminations from cost of service? 8 MR. GRANT: I think it is a little 9 speculative to say as to whether there would be -- 10 You are talking at the point of 11 rebasing now? 12 MR. MONDROW: That's right. 13 MR. GRANT: I think it is a little 14 speculative to suggest that there would definitely have 15 to be some sort of a study. We will need to 16 demonstrate in some way that these arrangements, as I 17 said earlier, are within the Code and are reasonable. 18 Clearly from a cross-subsidization 19 issue, at the point of rebasing three years hence, to 20 the extent that things are priced at market there is no 21 cross-subsidy. To the extent that things are not, I 22 suppose we will have to debate that issue at the time. 23 MR. MONDROW: Can you think of a way 24 of demonstrating the appropriateness of the pricing for 25 the second category where things are not priced at 26 market, other than providing some record of what was 27 actually spent, in terms of time and effort, on the 28 activities underpinning these services? 878 BOURKE/GRANT, cr-ex (Mondrow) 1 MR. GRANT: I think it is fair to say 2 that we would have to take a look at the actual costs. 3 MR. MONDROW: Thank you very much, 4 sir. 5 Thank you, Mr. Chairman. 6 THE PRESIDING MEMBER: Thank you, 7 Mr. Mondrow. 8 Mr. Janigan, how many minutes do you 9 need, sir? 10 MR. JANIGAN: Maybe 15. 11 THE PRESIDING MEMBER: Okay, go 12 ahead. 13 MR. MATTSON: I think I am up next, 14 Mr. Chairman. 15 MR. JANIGAN: Go ahead, if you wish. 16 THE PRESIDING MEMBER: Mr. Mattson, 17 if you would like to go ahead. 18 MR. JANIGAN: You may be right. 19 MR. MATTSON: I just thought if you 20 wanted -- and I won't be more than that. 21 MR. JANIGAN: I am happy to cede to 22 Mr. Mattson. 23 MR. MATTSON: Thank you. 24 CROSS-EXAMINATION 25 MR. MATTSON: Mr. Grant, I want to 26 focus in on the issue of monitoring and reporting as it 27 relates to regulatory efficiency. 28 You have talked about regulatory 879 BOURKE/GRANT, cr-ex (Mattson) 1 efficiency, at least today, in two contexts: first, 2 regulatory efficiency as it relates to the time, 3 expense and effort that your company would have to put 4 into an extensive reporting and monitoring; and 5 secondly, the time, expense and resources that would be 6 required of the Board and the parties to the regulatory 7 compact. 8 Is that fair? Those are the two 9 areas of regulatory efficiency that you would like to 10 focus on? 11 MR. GRANT: Yes, I think that is 12 fair. 13 MR. MATTSON: If we could focus for a 14 moment on the cost and resources as they relate to the 15 regulatory compact, would you agree with me that those 16 costs are borne by the ratepayers? 17 Is that fair? 18 MR. GRANT: Under the way that the 19 Board regulates, yes. 20 MR. MATTSON: So the ratepayers -- 21 and the Board, by inference -- have to look at the 22 costs of the monitoring and reporting of the O&M for 23 PBR and balance that, I believe you indicated earlier, 24 against the need for information or the transparency. 25 There is some benefit to that as 26 well; correct? 27 MR. GRANT: Yes. Both of those 28 concepts are part and parcel to the Board's PBR 880 BOURKE/GRANT, cr-ex (Mattson) 1 principles. 2 MR. MATTSON: And the ratepayers, as 3 represented at this hearing -- your company has been 4 party to the ADR and to the proceedings to date. It is 5 clear that the ratepayers certainly feel there is an 6 overwhelming tilt in favour of having comprehensive 7 reporting and monitoring of PBR. 8 Is that fair? 9 MR. GRANT: I'm sorry, did you say 10 ratepayers or intervenors? 11 MR. MATTSON: Do you have something 12 to say that the intervenors are not fairly 13 representative of ratepayers? 14 MR. GRANT: No. Just to be correct, 15 I think that some intervenors are taking that position. 16 MR. MATTSON: We have small customers 17 represented by CAC and the Vulnerable Energy Coalition. 18 We have large ratepayers represented by IGUA. We have 19 public interest concerns represented by Energy Probe. 20 We have small industry groups represented by 21 Mr. Mondrow's client. 22 The notice was in the paper. It was 23 in The Toronto Star. I think there was a full notice 24 throughout the province of this hearing and the issues. 25 Is there someone you would like to 26 speak on behalf of that is not being represented here 27 today? 28 MR. GRANT: I wasn't meaning to get 881 BOURKE/GRANT, cr-ex (Mattson) 1 into a big debate with you on this. 2 MR. MATTSON: All right. Then you 3 would agree that the ratepayers, as represented before 4 the Board, the ones who are paying for this balancing 5 act, they certainly clearly feel that the balance tilts 6 in favour of having comprehensive monitoring and 7 reporting of O&M expenses. 8 Is that fair? 9 MR. GRANT: No. I disagree with that 10 statement. I will agree that that is what intervenors 11 to this proceeding feel, it would appear. 12 MR. MATTSON: Is there anything that 13 you use to support your evidence today that ratepayers 14 don't feel that? 15 MR. GRANT: We would only know what 16 ratepayers feel by doing some sort of a scientific 17 survey. We are in touch with our ratepayers, our 18 customers, all the time. It is our view that they are 19 interested in efficiencies, in efficient processes. 20 I do not want to get into a big 21 debate about representation. We should leave it that. 22 MR. MATTSON: Let's just leave it, 23 then, that I will speak of intervenors -- 24 MR. GRANT: Thank you. 25 MR. MATTSON: -- as you are quite 26 sensitive to the process currently of how intervenors 27 are represented in this province with respect to costs 28 and rates in gas utilities. 882 BOURKE/GRANT, cr-ex (Mattson) 1 You have agreed that it is the 2 ratepayers who pay for this monitoring and reporting. 3 You would agree with me that the intervenors who 4 represent those ratepayers at this hearing certainly 5 feel that it is an important part of the process, and 6 they are prepared to pay for it. 7 Why is the company, who isn't paying 8 for any of this, constantly harping on the need for 9 regulatory efficiency where it doesn't seem to be a 10 problem, as it relates to this issue? There is no one 11 here who is opposing these costs. Certainly your 12 company really has nothing to do with these costs. 13 It is sort of false charity, isn't 14 it, Mr. Grant, coming here and trying to represent 15 interests that you don't represent; that is, the 16 ratepayers and the costs of reporting and monitoring? 17 MR. CASS: Mr. Chairman, this 18 question, if it is a question, seems to be rapidly 19 falling into argument. I wonder if Mr. Mattson could 20 put an appropriate question rather than arguing with 21 Mr. Grant. 22 THE PRESIDING MEMBER: Mr. Mattson, 23 could you do that? 24 MR. MATTSON: All right. 25 Mr. Grant, there seems to be a lack 26 of genuine interest on the part of your company in the 27 proposition that there is a need for regulatory 28 efficiency for denying the request to have full 883 BOURKE/GRANT, cr-ex (Mattson) 1 monitoring and reporting of PBR O&M costs. 2 Is that fair? 3 MR. GRANT: I think it is fair to say 4 that we are interested in driving out efficiencies as 5 much as we can, given that we now operate under a PBR 6 regime for a fairly large component of our cost of 7 service. 8 We think that that is laudable goal. 9 We think it is a goal that not just the company has; we 10 think the Board has this goal. 11 The Board, in my view, has moved in 12 this direction and recognizes that there will be some 13 benefits, some efficiency benefits, dollars, hard 14 dollars, to the PBR processes in this province. Every 15 policy statement that I have read from them would 16 suggest that. 17 We spend about $750,000 annually, 18 sometimes a little bit more, on intervenor costs in 19 this proceeding. And that does not include the Board's 20 costs or indeed the company's costs of conducting these 21 proceedings. 22 We hope to be able to save a little 23 bit of that, and we need intervenor co-operation to do 24 it. That is where we are coming from on this. 25 We believe that we can actually make 26 some progress in this area, and we would hope that a 27 monitoring and reporting process would be designed to 28 fulfil that objective. 884 BOURKE/GRANT, cr-ex (Mattson) 1 MR. MATTSON: Mr. Grant, on that 2 point, in terms of what is being balanced with respect 3 to the cost of regulation when we are defining 4 regulatory efficiency, the other side was the need for 5 the information and transparency. 6 I take it you would agree with me 7 that transparency certainly increases accountability. 8 Is that fair? 9 MR. GRANT: Well, I think in some 10 people's eyes, it would. Accountability is there all 11 the time. 12 MR. MATTSON: Would you also agree 13 with me that it also serves the public and the 14 ratepayer in that at times the company may ask for more 15 than what the Board or the ratepayers feel is 16 appropriate? 17 In other words, many times in the 18 last two or three years you would agree with me that we 19 have been before this Board arguing the O&M budget, and 20 the company has not always -- the Board has not always 21 found that what the company was asking was justified. 22 Is that fair? 23 MR. GRANT: We have certainly spent a 24 lot of time arguing about it, and there have been 25 differences between what we requested and what the 26 Board allowed. But what I can tell you -- 27 MR. MATTSON: In fact, Mr. Grant, 28 many times, in your own words -- 885 BOURKE/GRANT, cr-ex (Mattson) 1 THE PRESIDING MEMBER: Mr. Mattson, 2 let the witness finish the answer, please. 3 MR. MATTSON: I just asked him if 4 there had been times they have been denied, and he said 5 yes. 6 THE PRESIDING MEMBER: But he went on 7 to complete. 8 MR. MATTSON: All right. 9 THE PRESIDING MEMBER: Mr. Grant, go 10 ahead. 11 MR. GRANT: Thank you. What I can 12 tell you is that with respect to the PBR formula and 13 its application in the next three years, that is a 14 Board-approved formula and we will not be requesting 15 anything different from what the Board-approved formula 16 would give us. 17 MR. MATTSON: Mr. Grant, back to 18 where my question is leading: In your own words, there 19 have been many turkeys that this company has tried to 20 see fly but haven't. Is that fair? 21 MR. GRANT: I'm looking at 22 Mr. Warren. 23 MR. MATTSON: Those were your words. 24 MR. GRANT: I was waiting to see 25 whether you could get that in there somehow in your 26 question. 27 I'm sorry. Would you repeat the 28 question? 886 BOURKE/GRANT, cr-ex (Mattson) 1 MR. MATTSON: Well, there have been 2 many turkeys that haven't flown before this Board in 3 the last few years. Is that fair? 4 MR. GRANT: No, that is not fair. 5 THE PRESIDING MEMBER: The idea of a 6 turkey was introduced to us last year. Whether it was 7 tough or not, I'm not sure. 8 MR. MATTSON: Sir, but in terms of 9 the costs of regulation, certainly the ratepayers have 10 been well served by the Board's decisions in that 11 respect, in that there have been a number of areas 12 where there have been major savings to the ratepayers 13 due to this process and the transparency of this 14 process. 15 Would you agree with that? 16 MR. GRANT: Well, I would agree that 17 there has -- under a cost of service regulation regime, 18 the processes that you have described and the sort of 19 spin that you have put on it is something that one 20 could observe. 21 With respect to O&M in the future, we 22 are not on a cost of service regime, we are in a PBR 23 regime; and I think in terms of the benefits of that 24 regime that has been thoroughly canvassed in the 497-01 25 proceeding. So I won't get into repeating it all here. 26 But there are benefits, very 27 significant ones, when you give a utility an incentive 28 to improve its operations. 887 BOURKE/GRANT, cr-ex (Mattson) 1 MR. MATTSON: Mr. Grant, all we are 2 talking about is the reporting and the monitoring of 3 O&M expenses as they relate to PBR. The costs are 4 being paid by the ratepayers, the ratepayers want that 5 reporting and monitoring, and on the transparency side, 6 on the need for the information, certainly the Board 7 has been well served by sticking to the principle of 8 transparency. 9 Am I correct in those two statements? 10 MR. GRANT: You are correct only -- I 11 would make one correction to your statement. When you 12 said "ratepayers", I would insert "intervenors" into 13 that statement. 14 MR. MATTSON: Okay. 15 MR. GRANT: The fact of the matter is 16 that there is extensive monitoring already in place and 17 we are not suggesting any change to that. That is the 18 monitoring to the E.R.O. That goes to the Board. The 19 Board is charged with the responsibility of ensuring 20 just and reasonable rates, and there is nothing that is 21 going to change in that process. 22 We have further committed that we 23 will provide information in the rate proceedings with 24 respect to SQI performance and the O&M that I have 25 talked about this morning. 26 So I think in that context we have 27 transparency and we have efficiency. 28 MR. MATTSON: Right. We will leave 888 BOURKE/GRANT, cr-ex (Mattson) 1 that for argument. 2 The only other issue, then, I just 3 wanted to ask you a couple of questions on, is: You 4 have mentioned, and so have other witnesses before this 5 company, in terms of your rationale for not providing 6 comprehensive reporting and monitoring, you have 7 mentioned the electric utilities time and time again. 8 I just want, Mr. Grant, to get you to 9 acknowledge the fundamental differences between your 10 private utility and your responsibilities to the Board 11 and the ratepayer versus the public utilities owned by 12 the taxpayers and their relationship to the government, 13 to the Board and to their ratepayers. 14 Would you agree with me that they are 15 very different, your private utility and its regulatory 16 compact and the public utilities and their regulatory 17 compact? They are different, aren't they? 18 MR. GRANT: I don't think there is 19 any difference insofar as the regulation of the 20 utilities is concerned. I think the Board is charged 21 with the responsibility in both instances of setting 22 just and reasonable -- either gas rates, gas delivery 23 rates and gas rates in total and electricity rates. 24 That is what the Board's responsibility is. I don't 25 see a difference between MEUs, electric MEUs and the 26 gas side in that context. 27 MR. MATTSON: Well, wouldn't you -- 28 MR. GRANT: In other words, the 889 BOURKE/GRANT, cr-ex (Mattson) 1 Board -- 2 MR. MATTSON: -- wouldn't you agree 3 with me, Mr. Grant, that in the relationship with the 4 private utility -- you are not a government, you are a 5 private utility, you trade on the stock market, your 6 parent company. Is that fair? 7 Is that fair? 8 MR. GRANT: Yes. 9 MR. MATTSON: Profits. You seek 10 profits of the private utility? That's fair? 11 MR. GRANT: Yes. 12 MR. MATTSON: You are charged with 13 ownership and control of what is a monopoly service in 14 the Province of Ontario. Is that fair? 15 MR. GRANT: Yes, and -- 16 MR. MATTSON: You look to regulation 17 and you submit to regulation before this Board, 18 correct? 19 MR. GRANT: Yes. 20 MR. MATTSON: There is no government 21 control of that other than if they pass laws or control 22 you through statutory amendments. There is no 23 government influence otherwise that controls you, or 24 business or your relationship before this Board or with 25 the ratepayers. Is that fair? 26 MR. GRANT: You mean direct 27 ownership? 28 MR. MATTSON: In the setting of rates 890 BOURKE/GRANT, cr-ex (Mattson) 1 in Ontario. It is set by this Board -- 2 MR. GRANT: Yes. 3 MR. MATTSON: -- your company, with 4 the ratepayer. Now, when it comes to the public 5 utilities, they are owned by the taxpayers. Is that 6 fair? 7 MR. GRANT: Apparently. 8 MR. MATTSON: The government -- 9 MR. GRANT: With one exception. 10 MR. MATTSON: Right, with one 11 exception currently, that is right. 12 If you don't like the way your 13 electric utility is run, you vote in the next election. 14 That is how you control how your electric utilities 15 run. Is that fair? 16 MR. CASS: Well, Mr. Chairman, I have 17 to interject at this point. This is extremely 18 argumentative. 19 Mr. Mattson obviously has a point 20 that he wishes to argue and I'm sure he can full well 21 do that, as he has alluded to a couple of times 22 already. But I don't think it is really productive to 23 this process to continue this argument with Mr. Grant, 24 and I object to that type of questioning. 25 Objection 26 MR. MATTSON: Mr. Chairman, it may be 27 controversial and it may be uncomfortable for the 28 company. However, this is a major cornerstone of their 891 BOURKE/GRANT, cr-ex (Mattson) 1 argument for a level playing field and their argument 2 as to regulatory efficiency; that because of their 3 responsibilities with respect to the 214 new municipal 4 electrical utilities, the Board, for some reason, can 5 no longer require the company to commit to the 6 monitoring/reporting that the ratepayer groups are 7 seeking. 8 So it is a cornerstone to their 9 arguments at this hearing. We have heard it over and 10 over again, the level playing field, the treatment of 11 the electric utilities. We have heard Mr. Grant today 12 talking to Mr. Brett, saying that they want to be 13 treated like the electric utilities. 14 I think I have made by point that 15 they are not a public company. I don't need to argue 16 it and I won't argue it with this witness, but I don't 17 think that it is irrelevant or we are going astray by 18 questioning the company on their position with respect 19 to this issue. 20 THE PRESIDING MEMBER: Mr. Mattson, 21 it is not a question of relevancy or irrelevancy. It 22 is just that you are getting into argument with the 23 witness. 24 Do you have any more questions in 25 this area? 26 MR. MATTSON: No. 27 Thank you, Mr. Chairman. 28 That completes my questions. 892 BOURKE/GRANT, cr-ex (Mattson) 1 THE PRESIDING MEMBER: Thank you, 2 Mr. Mattson. 3 The Board will take a break now. 4 From what I can see, it is 15 minutes to 11:00. We 5 will return at five after 11:00. 6 --- Upon recessing at 1045 7 --- Upon resuming at 1113 8 THE PRESIDING MEMBER: Please be 9 seated. 10 Mr. Janigan, I believe it is your 11 turn. 12 MR. JANIGAN: Yes. 13 CROSS-EXAMINATION 14 MR. JANIGAN: Panel, I want to 15 explore the issue of monitoring under two general 16 headings: first, monitoring during the life of the PBR 17 plan; and, then, in terms of monitoring at the end of 18 the plan. 19 Now, first, in terms of monitoring 20 during the life of the plan, there are a number of 21 components of the plan that have to be monitored and 22 adjusted during the life of the plan -- or potentially 23 adjusted during the life of the plan. One of them is 24 the SQI. Is that correct? 25 MR. GRANT: No, I don't think that is 26 correct. We are committing to the SQIs for the whole 27 plan, the whole period. 28 MR. JANIGAN: I guess I should 893 BOURKE/GRANT, cr-ex (Janigan) 1 rephrase my term "adjusted". It may be responded to 2 during the life of the plan, the company's performance 3 under the SQI. 4 MR. GRANT: Yes, that's correct. We 5 will be monitoring that performance and reporting it. 6 MR. JANIGAN: And the reports go to 7 the rates case at which time there may be an issue as 8 to what steps, if any, the Board should take to ensure 9 future compliance. Would you agree with that? 10 MR. GRANT: Yes. The report 11 initially goes to the Board itself and then, as 12 indicated earlier, we will file a high-level summary of 13 what that report says in the rates proceeding. 14 MR. JANIGAN: Now, the second element 15 that will cause an adjustment during the life of the 16 plan is the customer growth number, as I understand it. 17 That is adjusted from year to year within the life of 18 the plan depending on the actuals. 19 MR. GRANT: That is correct. So, for 20 example, in this case where we are -- we may be 21 projecting a growth rate of 3.5 per cent for the test 22 year, when it comes to next year's case we will true up 23 for what we actually achieved in fiscal 2000, or, I 24 suppose, more accurately, what we are expecting to 25 achieve for the fiscal year because it won't be over at 26 that point. 27 MR. JANIGAN: It will still be an 28 estimate, but it will be an estimate based on another 894 BOURKE/GRANT, cr-ex (Janigan) 1 year of the historical experience. Is that -- 2 MR. GRANT: That's correct. And it 3 will be based on the customer additions that are before 4 the Board in that particular proceeding. 5 MR. JANIGAN: The other aspect that 6 is adjusted during the life of the plan is the CPI? 7 MR. GRANT: That's correct. 8 MR. JANIGAN: And that is adjusted 9 from year to year, I believe, based on the 10-month 10 experience of the company. 11 MR. GRANT: Yes. The CPI will be 12 set -- I think the agreement is based on input 13 parameters from the various external sources around 14 about August. So I would think that we would be doing 15 what you suggest on a ten-and-two basis at that point. 16 MR. JANIGAN: Apart from what I have 17 just gone through with you, the only other way in which 18 the plan is adjusted is by way of either an off ramp or 19 a Z-factor. Is that correct? 20 MR. GRANT: Yes. Z-factors are 21 additive or could be -- if they are credits they would 22 be subtracted from the final number that is determined 23 by the Board. I think everyone is familiar with what 24 those are. 25 Off ramps, as I indicated earlier, 26 the provision for an off ramp in the PBR is meant to 27 capture a very extreme situation. 28 MR. JANIGAN: One such situation, and 895 BOURKE/GRANT, cr-ex (Janigan) 1 I don't know if you can describe it as an extreme 2 situation, but the circumstance where the company puts 3 in place a new comprehensive PBR? 4 MR. GRANT: Yes, that's right. The 5 discussion in 497-01, that type of a situation would 6 invoke an off ramp, as I testified earlier today. That 7 would done really as an administrative kind of 8 adjustment after the Board has approved our 9 comprehensive PBR plan. 10 MR. JANIGAN: Could the financial 11 performance of the company be an off ramp? 12 MR. GRANT: No. 13 MR. JANIGAN: So the company has 14 foreclosed any possibility of an adjustment to the PBR 15 plan based on its financial performance? 16 MR. GRANT: That's correct. The only 17 instance would be if there is a complete and utter 18 failure on the part of the utility to be able to raise 19 funds to expand the system, and things like that. 20 MR. JANIGAN: Okay. Let me just, 21 then -- 22 MR. GRANT: Or an impending failure. 23 We wouldn't wait for a failure. 24 MR. JANIGAN: Let me just, then, 25 attempt to get the parameters of what that, an 26 impending failure, is. 27 You said that they would not be able 28 to raise funds. 896 BOURKE/GRANT, cr-ex (Janigan) 1 MR. GRANT: Yes. Again, that is a 2 pretty extreme situation. We haven't been in that 3 situation. But in that extreme situation that would be 4 something that we would bring forward and discuss with 5 respect to an off ramp. 6 MR. JANIGAN: Okay. 7 Now, when you say "the inability to 8 raise funds", is that essentially that your credit 9 rating would fall below a market quality standard? I 10 think that is a BBB minus, as I recall. 11 MR. GRANT: If you are speaking of 12 junk bond status, I think that that would be getting 13 very close to the situation that we would invoke this. 14 MR. JANIGAN: Are there any other 15 indicia of a financial difficulty that would provoke a 16 review of the PBR plan by the company? 17 MR. GRANT: No. 18 MR. JANIGAN: Now, in the company's 19 view, in the other circumstance, is there any positive 20 financial performance of the company that could provoke 21 a review or constitute an off ramp? 22 MR. GRANT: No, I don't believe so. 23 MR. JANIGAN: For example, if you had 24 a 30 per cent return on equity, would that be 25 permissible under the PBR plan in the view of the 26 company? 27 MR. GRANT: Well, a 30 per cent 28 return on equity for Ontario utility operations is an 897 BOURKE/GRANT, cr-ex (Janigan) 1 impossibility under the PBR plan. We have about a 2 billion dollars committed equity-wise, common equity, 3 so a 30 per cent return would imply $300 million in 4 profits. 5 The regulated return that the Board 6 allows is around $95 million at 9.5 per cent return on 7 equity. So the only way you would get to a 30 per cent 8 return or $300 millions after tax is if you could drive 9 out earnings in excess of $200 million after tax, which 10 means you have to have an O&M base of $400 million to 11 do it, and we don't. 12 MR. JANIGAN: That is impossible 13 under these parameters. 14 MR. GRANT: It is an impossibility. 15 MR. JANIGAN: The reason I cite the 16 30 per cent is that is the standard figure given for 17 what happened in British utilities when they went to a 18 PBR plan. 19 MR. GRANT: Yes. I am suggesting to 20 you that it is impossible for us to think a 30 per cent 21 return on equity as a result of the PBR. 22 MR. JANIGAN: Is there any return, 23 positive return, in the realm of possibility that you 24 believe would constitute an off ramp or could 25 constitute an off ramp? 26 MR. GRANT: No, sir. 27 MR. JANIGAN: Pardon me? No? 28 MR. GRANT: No. 898 BOURKE/GRANT, cr-ex (Janigan) 1 MR. JANIGAN: Okay. 2 I want to deal with what might happen 3 at the end of the plan when we review the company's 4 performance during the period of the plan. I want to 5 deal with two areas: one being the review of the O&M 6 base; and, secondly, a review of the productivity or 7 the X factor. 8 Now, first of all, this plan or the 9 base of this plan has been calculated on the basis of 10 the Board's approved O&M budget for E.B.R.O. 499, 11 subject to some adjustments. Do you agree with that? 12 MR. GRANT: I'm sorry. Could you 13 repeat that one? 14 MR. JANIGAN: The PBR plan uses, as 15 one of the main parts of the calculation, the O&M 16 budget which was approved by the Board in E.B.R.O. 499, 17 subject to adjustments. Do you agree with that? 18 MR. GRANT: In E.B.R.O. 497, subject 19 to adjustments, yes. 20 MR. JANIGAN: I'm sorry. 497, 21 subject to adjustments. 22 Now, if we are going to examine the 23 company's performance under the PBR plan in three 24 year's time, presumably we will want to look at that 25 performance in accordance with the E.B.R.O. 497 budget 26 and the way in which that budget was calculated, would 27 we not? 28 MR. GRANT: I don't think that the 899 BOURKE/GRANT, cr-ex (Janigan) 1 E.B.R.O. 497 budget and the E.B.R.O. 497-01 and 2 RP-1999-0001 take-off points are going to be relevant 3 in three years' time. That's just a personal opinion. 4 I don't see the relevance. 5 MR. JANIGAN: But in order to 6 determine, for example, what long-term productivity 7 measures have been implemented in the O&M budget, 8 surely we have to be able to compare apples to apples. 9 We have to start with the E.B.R.O. 497 budget, then 10 build in the efficiencies that you have been able to 11 generate during the PBR period and arrive at a number 12 which will we use to assess the performance of the 13 company. 14 Would you not agree? 15 MR. GRANT: You may want to do it 16 that way. That's fine from your perspective. 17 I was only trying to comment by 18 suggesting that, in three years' time, although one may 19 want to start with 497, we will have had three cases 20 and we will be in a position where there's a 21 significant amount of effort that's been put into the 22 PBR period. 23 But I take your point. You may want 24 to start out with the 497 rates and do some analytic 25 work. 26 MR. JANIGAN: I guess what I'm 27 concerned about is whether or not we will be able to do 28 that analytic work. 900 BOURKE/GRANT, cr-ex (Janigan) 1 In other words, will the numbers, the 2 cost categories and the calculations, be there so that 3 we can compare the performance of the company, with 4 respect to the O&M budget, from E.B.R.O. 497 and track 5 it through the various years, up until the end of the 6 plan? 7 MR. GRANT: Yes. I think that 8 information is already available: 497. 9 MR. JANIGAN: My question is: Will 10 the company be keeping track of O&M expenses in a way 11 in which we will be able to do comparisons to the 12 numbers that are in the O&M budgets for E.B.R.O. 497? 13 MR. GRANT: We may not be keeping 14 track in the same level of detail but we are certainly 15 going to have the bottom line available -- bottom line 16 O&M available. 17 MR. JANIGAN: I got a little bit 18 concerned in your discussion with Mr. Mondrow, insofar 19 as you indicated, for example, that, with relation to 20 non-utility eliminations, you may or may not be using 21 fully-allocated costing to arrive at that. 22 MR. GRANT: Right. 23 MR. JANIGAN: My concern is that by 24 the time we get to the end of the day, or the end of 25 the PBR plan, that we will have a set of numbers that 26 may not be calculated in the same way, or allocated 27 costs may not be allocated in the same way as they were 28 in E.B.R.O. 497. 901 BOURKE/GRANT, cr-ex (Janigan) 1 MR. GRANT: That may be the case. 2 I don't want to commit to having to 3 do significant amounts of work. 4 Having said that, I understand that 5 the burden of proof still rests with us, at that point, 6 to demonstrate that the base -- the re-based amount is 7 reasonable and, as part of that, we will need to 8 discuss what is happening with eliminations, if you 9 will. 10 I'm just a little reticent right now 11 to commit to a very lengthy process; studies that you 12 may wish to have at the end of the three-year period. 13 MR. JANIGAN: Well, I'm concerned 14 that we may arrive, at the end of the three-year 15 period, without having the appropriate information in 16 order to compare it to the company's performance when 17 you started off on this plan. 18 You are saying that there should be 19 enough information. You will continue to track costs 20 in the same way as you did in E.B.R.O. 497, with the 21 exception associated with non-utility eliminations? 22 MR. GRANT: Yes. I'm not precluding 23 a lengthy study. I am just suggesting that that may 24 not be the only way to handle it. 25 Yes, we will be tracking -- 26 obviously, there's a uniform system of accounts and we 27 will be tracking our costs on that basis, all through 28 the period. 902 BOURKE/GRANT, cr-ex (Janigan) 1 MR. JANIGAN: Now, in relation to the 2 productivity factor -- which, as you may recall, was 3 calculated, in part, by looking at the company's 4 historical productivity -- I would assume that we would 5 be able to calculate the productivity of the company, 6 with respect to O&M, during the period of the PBR plan, 7 at the end of the three-year period. 8 MR. GRANT: Yes, I think we could 9 probably do that calculation at the end of the period. 10 MR. JANIGAN: So it's extremely 11 important, if we are going to do that calculation, that 12 the number that we arrive at, at the end of the 13 three-year period, consists of the same components that 14 were in the mix when we did the company's historic 15 productivity. Would you agree with that? 16 MR. GRANT: Well, I'm not so sure 17 that you need all the detail to do that productivity 18 calculation. I think it's really done at a higher 19 level. What's important in those productivity 20 calculations is what the overall costs are. I think 21 that's the way the historic number was worked up in the 22 497-01 proceeding. In other words, we didn't need to 23 know line items, we just needed to know overall what's 24 the trend, what's the bottom line O&M. And I think 25 that information will indeed be available, at the end 26 of the three years. 27 MR. JANIGAN: But it's very 28 important, for example, that the -- in relation to the 903 BOURKE/GRANT, cr-ex (Janigan) 1 calculation -- that the O&M final number that's arrived 2 at, at the end of the three-year period, consists of 3 the same components that went into the O&M that was 4 used to calculate the company's historic productivity 5 to begin with. 6 In other words, you can't add 7 something else into the mix, in terms of costs, and 8 arrive at the same comparison with the company's 9 historic O&M. 10 MR. GRANT: Well, perhaps I'm not 11 understanding the question well enough. 12 I don't think that you need the 13 detail. Unless, of course, you wanted to do some finer 14 calculations of, say, labour productivity, over the 15 time, and non-labour productivity. If you were 16 interested in those two things, we would have to break 17 the number up between labour and non-labour. 18 MR. JANIGAN: Well, before we even 19 get into breaking down the -- breaking out that number, 20 what's in that number has to consist of the same 21 elements that were in the company's numbers to begin 22 with upon which they calculated historic productivity. 23 Would you not agree? 24 In other words, you have to add up 25 the same categories and they have to relate to the same 26 thing and they have to be done pursuant to the same 27 cost allocation principles. 28 MR. GRANT: Yes, you have to have the 904 BOURKE/GRANT, cr-ex (Janigan) 1 consistent way of calculating your numbers. That's 2 where the Board uniform system of accounts comes in. 3 That account structure will still exist. So we will 4 have consistency there. 5 The non-utility elimination issue we 6 just talked about, I don't want to get bound up into 7 making commitments, at this point, as to precisely how 8 that would be done. 9 MR. JANIGAN: Once again, if we 10 wanted to track what had gone into those numbers and 11 where the productivity enhancements had occurred, you 12 would need, once again, to be reporting those 13 particular O&M expense items in the same way as you 14 reported them in the E.B.R.O. 497 budget? 15 MR. GRANT: Yes. 16 MR. JANIGAN: Now, I believe in your 17 examination -- and I can't remember the counsel who was 18 examining you on this point -- but I believe you 19 indicated that your choice of plan was that ratepayers 20 would share the benefits of the PBR plan at the end of 21 the plan. 22 Did I paraphrase that correctly? 23 MR. GRANT: Yes. I was paraphrasing 24 my own testimony from 497-01, and that's correct, 25 that's one element of ratepayer benefits. 26 As you know, there are others, in 27 terms of the productivity commitment that's in the 28 formula itself and the stretch factor that the Board 905 BOURKE/GRANT, cr-ex (Janigan) 1 allowed, and so those -- but the re-basing is certainly 2 one element of ratepayer benefits. 3 MR. JANIGAN: That was my next 4 question. Can you elaborate for me how ratepayers will 5 share on the productivity benefits in your view at the 6 end of the plan? 7 MR. GRANT: Well, the plan structure 8 is such that during the PBR period, as you know, the 9 shareholder is at risk to drive out as much savings as 10 he can within the parameters of the Board's formula and 11 within the parameters of the SQI commitments that have 12 been made. 13 Upon rebasing then, any permanent 14 reductions in cost structure flow 100 per cent to 15 ratepayers. That flows in rates from that point onward 16 and presumably, hopefully, we will be into another PBR 17 regime at that point, probably a comprehensive one, 18 that would then provide further incentive to the 19 utility to get even more efficient, not just on the O&M 20 side but on all aspects of its operation from that 21 point onward. 22 MR. JANIGAN: So the benefits flow 23 from the rebasing. 24 MR. GRANT: Yes. That's the way the 25 incentive works. 26 MR. JANIGAN: Now, let me put you a 27 hypothetical, possibly from the vantage point of the 28 wary, possibly suspicious public interest intervenor in 906 BOURKE/GRANT, cr-ex (Janigan) 1 relation to the operation of the PBR plan. 2 One of the suspicions that ratepayers 3 have with respect to the PBR plan is that the company 4 in the last year of the plan increases expenses, 5 particularly it increases O&M expenses in this case, in 6 order to assert a claim for a higher O&M base at the 7 end of the plan. 8 How will intervenors in this case be 9 able to allay their fears in the monitoring process? 10 MR. GRANT: Well, I think in a couple 11 of ways. First of all, there is no benefit to the 12 company. If you are suspicious here that somehow there 13 are going to be costs in the cost structure that are 14 not required to run an efficient utility, there is no 15 incentive for the company to put costs in there that 16 wouldn't fall into that category. 17 When we rebase, we will have 18 to -- the burden of proof rests with us. We will have 19 to demonstrate that these are fair and reasonable costs 20 and we will discharge that responsibility. I don't 21 think that one should be concerned at the front end. 22 Just from a process point of view, you know that the 23 burden of proof rests with us. 24 The other point to be made is that it 25 serves no useful purpose to try to put things in that 26 don't belong there. We will be moving into a 27 comprehensive PBR at that point. It seems that all of 28 us will want to demonstrate to the Board that the 907 BOURKE/GRANT, cr-ex (Janigan) 1 targeted PBR plan worked. It gave the company an 2 incentive and it drove out benefits to ratepayers. 3 I think that everyone, including the 4 company, will be interested to make sure that we can 5 demonstrate that to the Board. If you can't 6 demonstrate that to the Board, it leaves open the 7 question as to whether you should move on to a 8 comprehensive PBR. 9 MR. JANIGAN: My question in 10 particular dealt with any differences in spending that 11 may occur in the last year of the plan, for example, 12 rather than in the first years of the plan. You 13 addressed that particular point as part of your answer. 14 MR. GRANT: Well, I guess the same 15 answer applies to the last year of the plan as it does 16 to any other year of the plan. The only cautionary 17 note that I will make is that there may be one time 18 items in the last year that we would need to review and 19 determine, and these may be credits or debits, 20 determine whether they are appropriate to go forward 21 into the next round of PBR. 22 MR. JANIGAN: It might be important, 23 however, in order to assess whether or not there is any 24 one year attribution of costs or something that is 25 significantly different in the last year of the plan to 26 have the data from the other two years of the plan, 27 would you not agree? 28 MR. GRANT: I don't think as a hard 908 BOURKE/GRANT, cr-ex (Janigan) 1 and fast rule that we should assume that you should 2 have to have that kind of information from the other 3 two years of the plan. I think if there are unique 4 circumstances in the last year of the plan that cause 5 credits or debits, we just need to examine that last 6 year. 7 MR. JANIGAN: Finally, sort of a 8 general or big picture question. You would agree with 9 me the company has had no previous experience with PBR 10 before this plan. 11 MR. GRANT: That is correct. There 12 is certainly no recent experience. This company has 13 got a long history and prior to the kind of detailed 14 costs of regulation, and indeed prior to regulation 15 itself, we operated in a competitive market. I am 16 going back decades, so with that qualifier, I would 17 agree with your statement. 18 MR. JANIGAN: To some extent this 19 plan is experimental. 20 MR. GRANT: I don't know that I agree 21 with you that it's experimental. It's certainly the 22 first one in Ontario and it is -- you know, we are all 23 trying to learn from it, but I don't think I would use 24 the word "experimental". It's too strong. 25 MR. JANIGAN: Would you agree that 26 it's important to have parameters in place to ensure 27 that all of the interests of the parties are protected 28 during the period of the PBR plan? 909 BOURKE/GRANT, cr-ex (Janigan) 1 MR. GRANT: Well, I think we have 2 those in place. I think it is important and we have 3 them with the Board's 497-01 decision. I believe that 4 that decision is complete with respect to those points. 5 MR. JANIGAN: Now, apart from the 6 potential cost of assembling this information, can you 7 suggest any difficulties that the company might have in 8 providing information along the lines of the 497 O&M 9 budget on an annual basis to the Board and intervenors? 10 MR. GRANT: Is your question apart 11 from the cost and complexity of it? 12 MR. JANIGAN: Yes, apart from the 13 cost of compiling this information, are there any other 14 objections that the company has? 15 MR. GRANT: Oh, yes. I think I have 16 been laying out some of those objections as we were 17 discussing this topic today. 18 I think really what it comes down to 19 is a shift in philosophy that has taken place or is in 20 the process of taking place at the company with respect 21 to incentives and trying to operate within those 22 incentives and within the parameters the Board has 23 given us. 24 I believe with the 497-01 decision 25 there has been a shift in the philosophy or an 26 acceptance by the Board, I should say, of this kind of 27 regulatory regime. 28 Therefore, I think that sort of 910 BOURKE/GRANT, cr-ex (Janigan) 1 brings together all kinds of information that is sort 2 of business as usual or cost of service as usual during 3 the PBR period. It is just completely missing the 4 point and missing the trend that is in Ontario. 5 I have strong philosophical reasons 6 to object to that sort of an approach. 7 MR. JANIGAN: But providing that 8 information doesn't prevent you from realizing the 9 incentives of the PBR regime, would you agree with me? 10 MR. GRANT: Oh, I think it does. I 11 think it would be basically saying "Well, the Board 12 said there's PBR, but we are just going to go ahead as 13 if there is cost of service for this line item". 14 MR. JANIGAN: No. We are talking 15 about providing the information. You may adjust or may 16 run your shop the way you like in terms of making 17 efficiencies. The fact that you have to provide 18 information doesn't stop you from initiating those 19 efficiencies and you still get the financial benefit of 20 those efficiencies. 21 MR. GRANT: Well, I think that there 22 is the element of cost and I would come back to that 23 and there is the element of philosophy. I still 24 believe that the philosophical distinctions I am trying 25 to make are very important. We need to move on. We 26 need to say "This element of cost of service is under 27 PBR" and we need to let go of some of the other 28 processes, all of us. 911 BOURKE/GRANT, cr-ex (Janigan) 1 I may be reading too much into your 2 question. I apologize if I a am, but that's certainly 3 a philosophical objection. 4 MR. JANIGAN: Thank you, Mr. Chair. 5 Those are all my questions for this panel. 6 THE PRESIDING MEMBER: Thank you, 7 Mr. Janigan. 8 Before we get to Mr. Thompson, 9 Mr. Grant, I wonder if you can just clarify something 10 in your exchange with Mr. Janigan. 11 If Mr. Janigan in three years' 12 time -- we are talking about rebasing now and you are 13 going to be here -- has asked in an interrogatory of 14 the company to provide a category of O&M, call it 15 labour expenses, over the three years from 2000 to 16 2003 -- 17 MR. GRANT: Yes. 18 THE PRESIDING MEMBER: -- that would 19 be available under the uniform system of accounts. 20 As you sit here, can you think of 21 anything that would prevent the company from responding 22 to that kind of question? 23 MR. GRANT: I think that if the 24 question is requiring us to do a lot of work that is 25 currently done, say, within the confines of the cost 26 allocation study, I think we are going to have 27 difficulty answering that question at that time unless 28 there is a thorough full-blown, if you will, cost 912 BOURKE/GRANT 1 allocation study done at the time for those elements of 2 our cost structure where it is relevant to do so. 3 THE PRESIDING MEMBER: I am not sure 4 when you refer to the cost allocation study. If the 5 question is "provide the labour-related expenses over 6 the course of the last three years", you would have to 7 go to the uniform system of accounts where that 8 information would exist readily. 9 MR. GRANT: Yes. That is not a 10 problem. 11 THE PRESIDING MEMBER: From a 12 philosophical point of view, is there anything that 13 would prevent you from supplying that information? 14 MR. GRANT: I don't think so, other 15 than -- I am trying to think of an example, such as CIS 16 where we have some services that we have contracted 17 with an affiliate on and that price has been approved 18 by the Board, let's say, and we are continuing to leave 19 that in our cost structure. 20 If somebody wanted to drill down and 21 try to get at the affiliate's cost structure, I think 22 that that would be a problem and we would not be able 23 to provide that. 24 THE PRESIDING MEMBER: I understand 25 the idiosyncrasy of that specific example. In a 26 typical subcategory of the O&M, philosophically you 27 don't see any reason for the company not to want to 28 answer questions of where that item has come over the 913 BOURKE/GRANT 1 years, in the last three years? 2 MR. GRANT: That is correct. We 3 would not have a philosophical objection to that. 4 THE PRESIDING MEMBER: If the 5 information were to exist in the uniform system of 6 accounts, and that is when you built in the cost 7 allocation process -- and I am a little lost as to what 8 you meant. 9 MR. GRANT: Perhaps I am anticipating 10 things that are not in your question. 11 Where I was trying to come from is 12 clearly if we have the uniform system of accounts, the 13 information is there, and we would provide the 14 information. If there is a breakdown within those 15 accounts that is required, such as labour, that 16 information is available as well. 17 I was anticipating that there may be 18 a question that requires us to do a lot of work and 19 that may involve -- let's say, for argument's sake, 20 that we are still operating NGV at the end of three 21 years, and we would need to do some studies around 22 that. We may not have that information readily at 23 hand. 24 That is the only thing I was thinking 25 of. 26 THE PRESIDING MEMBER: Okay. I 27 understand, Mr. Grant. 28 Mr. Thompson? 914 BOURKE/GRANT 1 MR. THOMPSON: Thank you, 2 Mr. Chairman. 3 CROSS-EXAMINATION 4 MR. THOMPSON: Could I start, 5 Mr. Grant, just picking up on a point that you were 6 making about the comparability of the company's 7 situation to municipal electrics. 8 Would you agree with me that the 9 municipal electrics are not moving from a long history 10 of a cost of service regime with a Board-allowed rate 11 of return in rates? 12 MR. GRANT: I would agree with that. 13 They have been regulated by Ontario Hydro for many 14 years. 15 MR. THOMPSON: The form of 16 regulation, as I understand it, generally speaking is 17 essentially cost and no return. 18 Is that your understanding? 19 MR. GRANT: I am not sure of the 20 details of how they have been regulated in the past. 21 MR. THOMPSON: In terms of your 22 situation, you are moving, your company is moving 23 within a rate of return regime. 24 MR. GRANT: Yes. 25 MR. THOMPSON: And you are moving 26 into a targeted PBR regime, which is simply an envelope 27 for O&M expenses, a Board-approved envelope. Is that 28 correct? 915 BOURKE/GRANT, cr-ex (Thompson) 1 MR. GRANT: Yes, a Board-approved 2 formula. 3 MR. THOMPSON: Within that envelope, 4 actuals versus Board-approved needs to be monitored in 5 order to evaluate on an ongoing basis the return that 6 the company is achieving as a result of the regime. 7 Would you agree? 8 MR. GRANT: Well, it certainly needs 9 to be monitored and will be monitored. The extent to 10 which it impacts on the overall return on equity may or 11 may not be something that is relevant, but the 12 information will be there. 13 MR. THOMPSON: In terms of uniqueness 14 in Ontario, your situation is indeed unique. We are 15 just moving into the first year of this regime; fair? 16 MR. GRANT: That's correct. It 17 starts in fiscal 2000. 18 MR. THOMPSON: I would like to follow 19 up, if I might, on getting a clear understanding of the 20 nature of information that is available and was being 21 provided before we moved to targeted PBR. 22 There are, as I understand it, three 23 types of information. One is a report to the E.R.O. 24 Is that correct? 25 MR. GRANT: Yes, that was provided to 26 the E.R.O. in confidence. 27 MR. THOMPSON: The obligation to 28 provide that information arises how, if you know? 916 BOURKE/GRANT, cr-ex (Thompson) 1 MR. CASS: Mr. Thompson, I think the 2 obligation lies in the statute. Off the top of my 3 head, I think it is section 1.06, but that is without 4 even having had a moment to look it up. 5 It is obviously a legal obligation 6 and a legal question. 7 MR. THOMPSON: I think Mr. McGill 8 referenced that section when he was here, so I took the 9 precaution of looking it up. 10 It appears to contemplate some 11 requirement from the Energy Returns Officer to provide 12 information. 13 My question is: Is there a document 14 somewhere that details the requirement that the Energy 15 Returns Officer has made of the company to provide 16 information in a certain format? 17 MR. GRANT: There probably is. The 18 E.R.O. went through a revision to its processes a few 19 years back and changed them, changed some of the 20 formats for reporting, and so on. 21 I would assume that the E.R.O. 22 documented in some way at that time these things. But 23 that is really a question for the E.R.O. 24 MR. THOMPSON: The reporting that you 25 are doing, which Mr. Bourke described in some detail to 26 Mr. Brett -- and I will come back to it -- is being 27 provided in a certain format, and Mr. Bourke listed a 28 number of schedules, as I recall. 917 BOURKE/GRANT, cr-ex (Thompson) 1 MR. GRANT: Yes, that is correct. 2 MR. THOMPSON: I presume that is 3 because the E.R.O. in that format. Am I correct? 4 MR. GRANT: Yes, you are correct. 5 MR. THOMPSON: Could we have an 6 undertaking to produce the document that contains the 7 final requirements, so we understand what they are and 8 the purpose? 9 MR. GRANT: I can't give you that 10 undertaking, other than to undertake to phone the 11 E.R.O. 12 It would be an E.R.O. document. I am 13 assuming that there is one, first of all. I don't know 14 for sure, but I am assuming there is. It is a question 15 for the E.R.O. as much as anything. 16 MR. THOMPSON: With respect, it is a 17 document that presumably was sent to the company by the 18 E.R.O. and the company is responding to it. 19 Surely the company has a copy of it 20 in its possession. 21 Would you undertake to check? 22 MR. GRANT: I can certainly undertake 23 to check to see if we have any documents that would 24 date back to the time that the E.R.O. was requesting 25 this information. 26 MR. THOMPSON: But the E.R.O. 27 requirement is something that has been in place for a 28 long period of time, as I understand it. It may have 918 BOURKE/GRANT, cr-ex (Thompson) 1 gone through some revisions recently, but it is a 2 practice that has prevailed for a number of years. Is 3 that fair? 4 MR. GRANT: I think that's fair. 5 MR. THOMPSON: What is your 6 understanding of the purpose of the report to the 7 E.R.O., based on the old scenario where we didn't have 8 targeted PBR? 9 MR. GRANT: Well, the purpose, I 10 suppose, of monitoring is to comply with the section 11 that Mr. Cass indicated in the legislation. 12 Secondly, to provide information to 13 the Board as the E.R.O. sees fit. 14 MR. THOMPSON: Is there a statement 15 of purpose in the E.R.O. requirements documents, to 16 your knowledge? 17 MR. GRANT: I don't know, 18 Mr. Thompson. 19 MR. THOMPSON: Would you undertake to 20 check? 21 MR. GRANT: Well, I would first have 22 to undertake to see if we even have the document. I 23 don't know whether we do or we don't. 24 MR. THOMPSON: Could we get a number 25 for that, please? 26 MS LEA: J6.1. 27 UNDERTAKING NO. J6.1: Mr. Grant 28 to undertake to see if they have 919 BOURKE/GRANT, cr-ex (Thompson) 1 a statement of purpose in the 2 E.R.O. requirements documents 3 MR. THOMPSON: What are the 4 directions that you are following, Mr. Bourke, when you 5 report to the E.R.O.? Who has provided you with those 6 directions? 7 MR. BOURKE: I don't have a list of 8 directions per se that I am following. I inherited a 9 format which I found I was able to continue with that 10 same format and develop information for the quarterly 11 reports as it existed. 12 MR. THOMPSON: What is your 13 understanding of the purpose of the quarterly reports? 14 MR. BOURKE: I believe Ms Gould 15 mentioned this earlier on a panel she was on, I believe 16 on day three. 17 My understanding is that it is to 18 give an indication of direction related to return on 19 equity. 20 MR. THOMPSON: I will come back to 21 the format of the report in a little more detail later, 22 but is that report using as its benchmark the 23 Board-approved utility cost of service -- 24 MR. BOURKE: That's correct. 25 MR. THOMPSON: -- rate base and 26 return? 27 MR. BOURKE: It is measured against 28 the Board-approved numbers. 920 BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: So then it does have 2 an estimate of non-utility eliminations in one form or 3 another? 4 MR. BOURKE: I hesitate around the 5 word "estimate" as we know it, "estimate" being a 6 bridge year number. 7 I do make a non-utility elimination 8 in the generation of the numbers on this report. 9 MR. THOMPSON: Could you just tell us 10 how you do it? 11 MR. BOURKE: In reference to a 12 particular element of the report or in general? 13 Because the way it is currently being 14 produced, since I do not have a utility O&M I have to 15 use Board-approved numbers for the fiscal 1999 year for 16 O&M. Where I have a traditional bridge year estimate I 17 use that where I can. 18 MR. THOMPSON: Well, let's take -- I 19 will come back to that in a second. 20 Let's just move on to the next 21 category of information that the company appears to 22 report. This is information that it provides to 23 shareholders and I believe the Securities Commission. 24 I believe we have an example of these 25 quarterly filings in Exhibit A at Tab 12. 26 Would you just turn those up, please? 27 Schedule 2. 28 Now, are you involved in providing 921 BOURKE/GRANT, cr-ex (Thompson) 1 these quarterly reports, Mr. Bourke? 2 MR. BOURKE: No, I am not. 3 MR. THOMPSON: What branch of the 4 firm or the organization produces these? Do you know? 5 MR. BOURKE: This is the 6 responsibility that would fall under Mr. Scott Player, 7 Vice-President of Financial Services. 8 MR. THOMPSON: All right. 9 Are the reports that you generate for 10 the purposes of filing with the E.R.O. reconcilable 11 with these financial reports, Exhibit A, Tab 12, 12 Schedules 2, 3 and 4. 13 MR. BOURKE: They would be 14 reconcilable for the months that I have in my reports 15 that carry the actuals. 16 My reports take an actual starting 17 point and append with a number of months to provide a 18 12-month data stream. 19 MR. THOMPSON: All right. So your 20 reports are always converting to a 12-month picture 21 versus the Board-approved? 22 MR. BOURKE: Correct. 23 MR. THOMPSON: Whereas these reports 24 are strictly quarterly financial information that is 25 not annualized in any way? 26 MR. BOURKE: Correct. 27 MR. THOMPSON: But the actual numbers 28 in your quarterly reports for a three-month period or 922 BOURKE/GRANT, cr-ex (Thompson) 1 six-month period or nine-month period would be 2 reconcilable with the numbers in the Exhibit A, Tab 12 3 exhibits? 4 MR. BOURKE: Yes, they would be. 5 MR. THOMPSON: Is the reconciliation 6 apparent on your reports? 7 MR. BOURKE: No, it's not. 8 MR. THOMPSON: Then just to get a 9 better understanding of the information that is 10 available -- or was available under the old regime -- 11 we then had, in addition to your E.R.O. reports and 12 Securities Commission and shareholder reports, we had 13 the annual filing for rate cases with the Board. Is 14 that correct? 15 MR. BOURKE: Correct. 16 MR. THOMPSON: The format for that 17 was, as Mr. Grant has discussed, so far as O&M is 18 concerned, a global one-line number and then detailed 19 line items, correct? 20 MR. BOURKE: Could you repeat the 21 question? 22 MR. THOMPSON: The format of the O&M 23 filing before we moved to PBR was we had an initial 24 global amount and then further detail on a line-by-line 25 basis in the rate case filings. 26 MR. BOURKE: In the historic filings, 27 yes. 28 MR. THOMPSON: Now, Mr. Grant, at the 923 BOURKE/GRANT, cr-ex (Thompson) 1 outset, as I understood him, said: We are going to 2 continue to make that kind of filing in the rate cases 3 but only on a single-line basis. 4 Did I understand that correctly, 5 Mr. Grant? 6 MR. GRANT: Yes, that's correct. 7 MR. THOMPSON: You cited as an 8 example Exhibit D5, Tab 1, Schedule 3, Page 1 of 2. 9 This would be for the actual fiscal 10 year ending September 30, 1998, correct? 11 MR. GRANT: I was actually referring 12 to D5, Tab 1, Schedule 1, but let us call up 13 Schedule 3. 14 --- Pause 15 MR. THOMPSON: Schedule 3 gives the 16 comparator to the Board-approved. This is actual 17 versus Board-approved. 18 MR. GRANT: Right. 19 MR. THOMPSON: Right. We see there 20 that the actual versus Board-approved in that historic 21 year was $7.8 million less than the Board-approved, 22 correct? 23 MR. GRANT: Yes. 24 MR. THOMPSON: But where those O&M 25 cost reductions were achieved compared to 26 Board-approved we do not see in this filing? 27 MR. GRANT: Correct. 28 MR. THOMPSON: Why should intervenors 924 BOURKE/GRANT, cr-ex (Thompson) 1 not see where those costs reductions were achieved in 2 order to monitor this regime as we go forward? 3 MR. GRANT: Well, I guess two 4 reasons. 5 First of all, it is not relevant for 6 establishing rates. So if intervenors are interested 7 in rates then this isn't going to help them. 8 The second thing obviously is a 9 process, one that I have talked about at some length in 10 terms of trying to be more efficient in the regulatory 11 process and save costs. 12 So, therefore, if intervenors -- 13 (a) if it's not relevant to get into that level of 14 detail and (b) intervenors don't need to and don't 15 actually do that, then we can save some money. 16 THOMPSON: Well, I will deal with the 17 relevance point a little later. 18 But just in terms of the availability 19 of the information, do I understand, Mr. Bourke, that 20 in your E.B.R.O. filings for fiscal 1998 we will only 21 see one line for O&M expenses in each quarter and at 22 the end of the year? 23 MR. BOURKE: You said fiscal 1998? 24 MR. THOMPSON: Yes. 25 MR. GRANT: I'm sorry. In the what 26 filings? E.B.R.O.? 27 MR. THOMPSON: Yes. The filings with 28 the E.R.O. 925 BOURKE/GRANT, cr-ex (Thompson) 1 As 1998 progressed you would have 2 filed four reports, as I understand it, with the E.R.O. 3 MR. BOURKE: Correct. The format of 4 my E.R.O. report is the same as it has been since 1994, 5 which was the oldest version of the report that I found 6 in my predecessor's files. It has been a one-line item 7 in that report since that time. 8 MR. THOMPSON: So if we are going to 9 get further detail on a line-by-line basis, whether it 10 is all the lines that were formally provided or some 11 segregation of them, that information is not available 12 from the E.R.O. filings? 13 MR. BOURKE: Correct. 14 MR. THOMPSON: Now, the information, 15 Mr. Grant, is available, as I understand it, on a 16 line-by-line basis internally at the company. 17 MR. GRANT: Yes. We keep the uniform 18 system of accounts; and that is available, subject to 19 my comments with Mr. Mondrow about non-utility 20 eliminations. 21 MR. THOMPSON: Just coming to that, 22 then, how internally at the company is the non-utility 23 elimination monitored on an actual basis? 24 MR. GRANT: I don't think it is 25 monitored other than each successive year when we redo 26 the study -- I am talking about the past here, we redid 27 the study under the cost of service regime. It is at 28 that point that we would know what the answer was. 926 BOURKE/GRANT, cr-ex (Thompson) 1 So it is really a once a year thing 2 and only after a lengthy study. 3 MR. THOMPSON: So critical to getting 4 the non-utility elimination component of the 5 line-by-line analysis is the annual activity analysis. 6 Correct? 7 MR. GRANT: Yes. You would have 8 to -- some of the non-utility eliminations would be 9 captured in the accounts, but there is some component 10 where we would have to do a study to get at the 11 component. 12 MR. THOMPSON: That would be 13 encompassed by what Ms Reynolds and Ms Gould have 14 testified to on previous occasions, being the activity 15 analysis? 16 MR. GRANT: I think that is only one 17 element of their study. It is quite a lengthy thing, I 18 think, as you know. But that is one element of it. 19 MR. THOMPSON: Now, that process was 20 standard fare until some point in time. Correct? 21 MR. GRANT: Yes. I think I mentioned 22 in the 497-01 proceeding that we would be -- there 23 would be no reason to do that insofar as setting rates 24 in the PBR period because other than setting rates you 25 don't do this study for any other reason. 26 MR. THOMPSON: That's fine. 27 Could you just tell me when the last 28 one was done? 927 BOURKE/GRANT, cr-ex (Thompson) 1 MR. GRANT: Subject to checking with 2 the people who conducted the study, I think the last 3 one was done in E.B.R.O. 497. 4 MR. THOMPSON: So that would have 5 been as of the autumn of 1997? 6 MR. GRANT: It would have been for 7 test year fiscal 1999. I would think that is -- yes, 8 autumn, late autumn, early winter. 9 I think it isn't until sort of 10 November, December, January, in that time period, that 11 it is done. 12 MR. THOMPSON: One was not done, 13 then, as of the autumn of 1998? 14 MR. GRANT: That's my understanding. 15 MR. THOMPSON: Who in the company 16 made the decision to stop doing that work? 17 MR. BOURKE: Excuse me. Could I have 18 a moment? 19 MR. THOMPSON: Yes. 20 --- Pause 21 MR. GRANT: Mr. Bourke is correcting 22 me. 23 He says that he thinks that we did 24 one as well for the unbundled budget, so that I may be 25 a little bit off on my timing as to when the last one 26 was done. 27 The answer to your question is I 28 don't know. 928 BOURKE/GRANT, cr-ex (Thompson) 1 Of course, insofar as monitoring and 2 reporting is concerned, that is not something that is 3 captured within the confines of that issue, I guess. 4 MR. THOMPSON: Again, I am just 5 trying to find out what is there and what isn't there 6 at the moment. 7 So I take it we did have an activity 8 analysis in the fall of 1998 for the purposes of the 9 unbundled budget? 10 MR. BOURKE: That is my recollection, 11 Mr. Thompson. 12 I believe it is in Ms Reynolds' or 13 Ms Gould's testimony. I'm not sure which panel it was 14 referred to, but I recollect that the 1999 unbundled 15 budget was predicated based on a cost allocation study 16 done in late 1998. 17 MR. THOMPSON: Then can either you, 18 Mr. Bourke, or Mr. Grant help me with who gave the 19 instructions to stop doing that work? 20 MR. CASS: Pardon me, Mr. Chairman. 21 Perhaps this is of some relevance to monitoring and 22 reporting, but it certainly escapes me how the identity 23 of the person who gave particular instructions about 24 something done in the past is going to be of any 25 assistance to this Board in determining the monitoring 26 and reporting that is appropriate for the future under 27 the PBR plan. 28 MR. THOMPSON: Well, perhaps the 929 BOURKE/GRANT, cr-ex (Thompson) 1 identity of the person is. 2 Can you tell me when the decision was 3 made, Mr. Grant, to stop doing this work? 4 MR. GRANT: I can't. 5 MR. THOMPSON: Can you undertake to 6 check? 7 --- Pause 8 MR. THOMPSON: Can we have a number 9 for that, please? 10 MS LEA: J6.2. 11 UNDERTAKING NO. J6.2: Mr. Grant 12 to advise Mr. Thompson when the 13 decision was made to stop doing 14 an activity analysis for 15 purposes of the unbundled budget 16 MR. THOMPSON: Just coming forward to 17 an appreciation of what you were saying in chief this 18 morning, you indicated that for the bridge year you 19 will continue to file, in the rate case, O&M expenses, 20 did I understand that correctly, and I thought you had 21 referred us to the D4 and either the E or F4 exhibits 22 to illustrate this? 23 MR. GRANT: Yes. We will file one 24 line item, O&M for the bridge year. That will be based 25 on what the Board has approved in the previous case 26 adjusted for our latest estimate of CPI in customer 27 growth. 28 MR. THOMPSON: All right. 930 BOURKE/GRANT, cr-ex (Thompson) 1 So just looking at Exhibit D4, Tab 1, 2 Schedule 1, page 1, there you show, at line 2, 3 "Operation and Maintenance Expenses" for the 1999 4 bridge year at $271.9 million. Correct? 5 MR. GRANT: Correct. 6 MR. THOMPSON: That is what you have 7 extracted from the Board's E.B.R.O. 497 decision? 8 MR. GRANT: That's correct. 9 MR. THOMPSON: All right. 10 Now, Mr. Bourke, you are making 11 filings quarterly with the E.R.O. and annualizing them. 12 What number are you reporting for operation and 13 maintenance expense? 14 MR. BOURKE: I would be reporting a 15 number that would be a blend of actual O&M to the end 16 of whichever quarter I was preparing, appended by the 17 Board-approved budget for the balance of the year. 18 MR. THOMPSON: All right. 19 Is the last report that you have 20 filed for the nine months actual and three months, if 21 you will, Board-approved budget? 22 MR. BOURKE: It would be. But I 23 would like to clarify: I haven't filed that report as 24 yet. 25 MR. THOMPSON: When is that due? 26 MR. BOURKE: I am behind schedule, 27 Mr. Thompson. 28 MR. THOMPSON: So the due date is 931 BOURKE/GRANT, cr-ex (Thompson) 1 past, is it? 2 MR. BOURKE: The schedule is 62 days 3 past the last day of the quarter end. So it would be 4 62 days from June 30th that it was due. It would have 5 been due earlier this month. 6 It is under construction, but it has 7 not yet been filed. 8 MR. THOMPSON: All right. 9 So the latest filing with the E.R.O. 10 has an actual for six months and a Board-approved for 11 six months? 12 MR. BOURKE: I must bear my soul 13 here. I have not filed this year. I ran into a number 14 of problems, the largest of which was I was unable to 15 procure a normalized-to-budget volume and revenue 16 package. 17 As I mentioned earlier, we became 18 aware of the priority of this recently. We have been 19 working around the clock to attempt to get these done 20 as soon as possible. 21 My last filing was the historical 22 1998 year. It was my responsibility. I did not 23 complete it. It is entirely resting on my shoulders. 24 MR. THOMPSON: All right. 25 So we missed the first-quarter, 26 second-quarter and third-quarter filings with the 27 E.R.O.? 28 MR. BOURKE: That's correct. 932 BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: All right. And 2 when -- are you planning to file three of them? 3 MR. BOURKE: Yes, I am. 4 MR. THOMPSON: And when do you expect 5 to file them, currently? 6 MR. BOURKE: I have not reviewed them 7 yet. I'm anticipating that I can begin to file the 8 first of the three within three weeks. 9 MR. THOMPSON: And the last of the 10 three within what? 11 MR. BOURKE: Certainly by the end of 12 September. 13 MR. THOMPSON: What is the actual O&M 14 and estimated O&M, to date? 15 MR. GRANT: We are not prepared to 16 respond to that. 17 MR. THOMPSON: Is it known? 18 MR. GRANT: I don't think it's been 19 calculated. As Mr. Bourke indicated, one would have to 20 be going through a process similar to what's been 21 described in Ms Gould's undertaking. 22 But apart from those procedural kinds 23 of issues, we are not prepared to file anything in the 24 public forum that we file with the E.R.O. 25 MR. THOMPSON: Well, that's puzzling 26 because you tell us that that is the information that 27 is supposed to be used to monitor the PBR regime. 28 MR. GRANT: What? The 1999 actuals? 933 BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: The filings with the 2 E.R.O. You say that's the -- that's the information 3 that should be used to monitor -- 4 MR. GRANT: That's correct. 5 MR. THOMPSON: -- performance. 6 MR. GRANT: That's correct. And it 7 will be -- it will be continued to be filed with the 8 E.R.O., so that the Board will have it. 9 Additionally, the number, the 10 bottom-line number, the one-line item number, at the 11 end of the fiscal year will be filed in the cases, as I 12 indicated. In the rates cases. 13 MR. THOMPSON: Well, in the rates 14 case for the 1999 bridge year are you suggesting, at 15 some point, we will see another number other than 16 271.9? 17 MR. GRANT: No. 18 MR. THOMPSON: We won't. That's what 19 I thought. 20 So when is it in the rates case that 21 we see how actuals are progressing versus 22 Board-approved? 23 MR. GRANT: That won't be this rates 24 case. It will be future cases. 25 MR. THOMPSON: So, the first time we 26 are going to see, based on your proposals, how the 27 regime is unfolding, it will be at the end of Year 3? 28 MR. GRANT: No. No, no, in each -- 934 BOURKE/GRANT, cr-ex (Thompson) 1 next year, in the fiscal 2001 rates application, we 2 will be filing the schedules that I indicated, and that 3 will include a 1999 actual. 4 MR. THOMPSON: Okay. So -- 5 MR. GRANT: It will not include a 6 2000 actual because the 2000 year won't be over. 7 MR. THOMPSON: All right. So it's 8 roughly 12 months from now we will see -- have the 9 opportunity to see the actual at line 2 of D4, Tab 1, 10 Schedule 1? 11 MR. GRANT: For fiscal 1999. 12 Correct. 13 MR. BOURKE: Excuse me. May I have a 14 moment? 15 --- Pause 16 MR. GRANT: Mr. Bourke is correcting 17 me, again, on the time lines. 18 He says that it will be filed -- it 19 won't be 12 months that you have to wait. It will be 20 somewhat less than that, because the filing occurs 21 earlier in the year. 22 So, presumably, sometime in the first 23 calendar quarter of 2000. 24 MR. THOMPSON: That's when the rate 25 case information is -- 26 MR. GRANT: Correct. 27 MR. THOMPSON: -- generally filed. 28 Why is it that the company's view 935 BOURKE/GRANT, cr-ex (Thompson) 1 ratepayers should only get access to this information 2 long after it's supposed to be available to the E.R.O.? 3 MR. GRANT: Well, I think -- first of 4 all, with respect to 1999, the PBR period starts in 5 fiscal 2000 and so, the monitoring will -- the PBR 6 monitoring will start up in fiscal 2000. So the 1999 7 actuals don't have any relevance, in terms of PBR 8 monitoring. 9 But with respect to the 2000 year 10 actuals, for example, that is something that is 11 provided to the E.R.O., actuals and forecasts, to the 12 extent that we can, and these are normalized numbers, 13 are filed with the E.R.O. in confidence and we, indeed, 14 don't even finalize our actuals for our shareholders, 15 for shareholder reporting, until sometime after 16 September 30th each year. 17 So we would not be releasing that 18 information until it's been released -- sorry -- until 19 it's been completed, audited, approved by our board of 20 directors and then released to the public. It's at 21 that point that we can release the historic year's 22 actuals in the public form. 23 So, that's why we have some -- a 24 period of delay, if you will, in terms of providing it 25 in the public forum. 26 MR. THOMPSON: All right. Well, 27 perhaps I will just think about that answer over the 28 lunch break. 936 BOURKE/GRANT, cr-ex (Thompson) 1 Would it be convenient to break now, 2 Mr. Chairman, for lunch? 3 THE PRESIDING MEMBER: Certainly, 4 Mr. Thompson. 5 We will break for an hour, until 6 1:30. 7 --- Luncheon recess at 1230 8 --- Upon resuming at 1338 9 THE PRESIDING MEMBER: Mr. Cass, any 10 preliminary matters? 11 MR. CASS: No, Mr. Chairman. Thank 12 you. 13 THE PRESIDING MEMBER: I just want to 14 see a couple of documents I have on my dais. We are 15 not sure what they are. One is the appearance 16 schedule. It must be an update. 17 MR. CASS: Yes. Mr. Chairman, that 18 has just been passed around. As is apparent from it, 19 it's number five of the hearing schedule dated as of 20 today. That would be the most up to date version of 21 that schedule. 22 As well, there was a covering letter 23 of today's date marked "second letter" with some 24 additional filings, including the answer to Undertaking 25 J3.2. 26 THE PRESIDING MEMBER: Okay. Thank 27 you. 28 Mr. Warren. 937 1 MR. WARREN: Mr. Chairman, I wonder 2 if I could just perhaps place the seed of an idea in 3 the minds of Enbridge and the Board Panel and the other 4 intervenors. 5 As you know, one of the issues in the 6 CIS matter is the service agreement in respect of which 7 we are calling the evidence of Ms Williams. Ms 8 Williams has been present from this morning on to hear 9 the testimony that would be given on that so that she 10 is in the position to respond to make her testimony on 11 Wednesday more efficient. 12 I'm wondering, just to leave to this 13 idea, Mr. Chairman, I'm wondering if it would be 14 possible for the next panel, the CIS panel, if we could 15 just deal with that as a discrete issue off the top. 16 Everybody who has questions on the 17 CIS Services Agreement so that the transcript record is 18 in one place so that people don't have to go running 19 around. It also, incidentally, means that Ms Williams 20 doesn't have to be here for a couple of days. She is 21 in the room but she is down the hall, certainly waiting 22 to come in. 23 I don't need direction obviously from 24 the Board on that, but if I just leave that idea with 25 Consumers Gas. It might be a more efficient way to 26 deal with that discrete severable issue which is the 27 Services Contract itself. 28 THE PRESIDING MEMBER: Mr. Cass, any 938 1 comments? 2 MR. CASS: Well, I would make the 3 preliminary comment, Mr. Chairman. I have addressed 4 this sort of issue in front of the Board before. My 5 experience has been that when panels get divided up on 6 an issue basis such as I now understand is being 7 proposed, in my experience it tends to make the panels 8 longer rather than shorter, but that's only a 9 preliminary comment. 10 I'm not responsible for that 11 particular witness panel. I wonder if I might just 12 leave it. Perhaps Mr. Farrell could address that when 13 he does arrive with the witness panel. 14 THE PRESIDING MEMBER: Okay. We will 15 leave it on that basis then, Mr. Cass. 16 Mr. Thompson. 17 CROSS-EXAMINATION, (Continued) 18 MR. THOMPSON: Thank you, 19 Mr. Chairman. 20 Panel, I just want to complete a 21 point that I didn't close off completely before we 22 broke for lunch. That is the rate case reporting in 23 this case for the 1999 bridge year amounts. 24 I wonder if you could just, Mr. 25 Bourke, turn up Exhibit E-4, tab 1, schedule 1, and 26 also put your finger on F-4, tab 1, schedule 2. Do you 27 have those? 28 MR. BOURKE: Yes. 939 BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: In each of those 2 documents we see the gross sufficiency for the bridge 3 year at $27.3 million. Correct? 4 My understanding is that reflects an 5 O&M allowance of the 271.9, I think it was, that we 6 were discussing earlier. 7 MR. BOURKE: That's correct. 8 MR. THOMPSON: So that this filing 9 does not yet reflect any impact on gross revenue 10 sufficiency that a difference between actual 1999 O&M 11 expenses and Board allowed will create. 12 MR. BOURKE: That's correct. 13 MR. THOMPSON: Now, I had asked a 14 question the other day and I can't recall whether it 15 has been answered yet or not. I think I asked what 16 would be the impact on overall rate of return on equity 17 of a $10 million difference. 18 Taking Exhibit E4, tab 1, schedule 1, 19 page 1, we see a gross revenue sufficiency of $27.3 20 million at lines 12 and 15, which translates into about 21 134 basis points increase in the return on common 22 equity at lines 16 and 17. Do you see that? 23 MR. BOURKE: I see those line items, 24 sir, but I haven't done that calculation. I believe 25 that's an undertaking that Ms Gould was going to reply 26 to. 27 MR. THOMPSON: My question was: Can 28 I take 10 over 27 and multiply it by 134 and come up 940 BOURKE/GRANT, cr-ex (Thompson) 1 with the number? 2 MR. BOURKE: The consequences would 3 be impacted by the income tax upon -- 4 MR. THOMPSON: All right. So that's 5 still coming. 6 Mr. Grant in your responses to, I 7 think it was Mr. Janigan, when he was asking about the 8 30 per cent return on equity number, you went through a 9 quick calculation as to why that was impossible. 10 MR. GRANT: Yes. 11 MR. THOMPSON: I just wondered if you 12 might have a rule of thumb as to what $10 million 13 translates into. 14 MR. GRANT: In terms of return on 15 equity?: 16 MR. THOMPSON: Yes. After tax. 17 MR. GRANT: My rule of thumb would 18 suggest that it's around 50 basis points. 19 MS LEA: Is that 50, 15 -- 20 MR. GRANT: 50 basis points, which is 21 one half of 1 per cent. 22 MS LEA: Now I understand that. 23 THE PRESIDING MEMBER: I make it two 24 thirds, Mr. Grant. 25 MR. GRANT: Two thirds? 26 THE PRESIDING MEMBER: Close to the 27 70 basis points. 28 MR. GRANT: I'm sorry, Mr. Chairman, 941 BOURKE/GRANT, cr-ex (Thompson) 1 I didn't hear that. 2 THE PRESIDING MEMBER: As I make it, 3 about 70 basis points as opposed to 50, but I guess we 4 will do the calculation on paper. 5 MS LEA: Yes. 6 MR. CASS: There is an undertaking, 7 Mr. Chairman, J3.3. 8 THE PRESIDING MEMBER: This is only 9 to assist Mr. Thompson as he goes forward with his 10 questions. 11 MR. GRANT: Basically, Mr. Thompson, 12 you multiply a before tax number by .565, assuming that 13 it's tax deductible, to get an after tax figure. Then 14 you divide that by the regulated equity base that we 15 have, which I understand is just shy of a billion 16 dollars. 17 MR. THOMPSON: Okay. Thanks. That's 18 helpful. 19 In terms of the E.B.O. 20 reporting -- sorry, the E.R.O. reporting that we were 21 discussing before the luncheon break, do I understand 22 that the reporting involves an actual return as well as 23 a normalized return or is it just normalized? 24 MR. GRANT: It contains both. 25 MR. THOMPSON: You did tell me 26 earlier that it contained a non-utility elimination. 27 MR. GRANT: Correct. 28 MR. THOMPSON: Now, could you turn 942 BOURKE/GRANT, cr-ex (Thompson) 1 up -- I just want to understand what you do to derive 2 that number compared to what Ms Gould, Mr. Mees and Ms 3 Reynolds are telling us what needs to be done in 4 Exhibit J3.4 that was filed earlier today. 5 MR. BOURKE: I have that undertaking. 6 MR. THOMPSON: In this response, 7 these witnesses are telling us it's going to take them 8 five weeks to develop a non-utility elimination before 9 the 1999 Board approved budget. Could you just explain 10 what you do, Mr. Bourke, compared to what they say they 11 would do? 12 MR. BOURKE: I will limit my response 13 to the O&M line on my report, if that's where you would 14 like to concentrate. 15 MR. THOMPSON: Yes, please. 16 MR. BOURKE: I would begin by taking 17 the actuals on a GL account by account basis, actually 18 a subtotal of GL accounts, as a starting point for 19 whatever months of actual I would have available. If I 20 am doing the second quarter report, it would be six 21 months of actuals. 22 I would append to that the 23 Board-approved six months to the end of the year. I 24 would then impact that by the Board-approved 25 non-utility elimination. 26 I would add to that by stating that 27 the process in developing the E.R.O. report, the 28 intention was that it be kept to a simple process. It 943 BOURKE/GRANT, cr-ex (Thompson) 1 was not intended to make it public. It was to give a 2 direction related to ROE on a mid-year estimate. One 3 of the underlying factors in determining the process 4 was that it be simple and quickly done. 5 My process does not include a review 6 of many of the underlying events. Part of the 7 difficulties of the process that I go through is that, 8 as you are aware, our company has undergone a 9 reorganization. So in appending six months of fiscal 10 1999 Board-approved to six months of actuals, we do not 11 do an examination to see that there is a flow, if you 12 will, of the same underlying cost drivers in the actual 13 as were in the Board-approved budget. 14 My process is intended to simplistic, 15 quick and dirty. 16 MR. THOMPSON: It also intended, I 17 assume, to provide a reasonable estimate to the E.R.O. 18 of this elimination. 19 MR. BOURKE: I believe the phrase 20 that we use is to give an order of magnitude of a sort. 21 MR. THOMPSON: So that I understand 22 the process, could you turn up Exhibit K3.3, which is 23 the Board-approved 1999 budget that was filed in E.B.O. 24 179-14/15, as well as the unbundled budget derived 25 therefrom. 26 I want to use this to have you 27 illustrate the process. 28 If I understand you, the non-utility 944 BOURKE/GRANT, cr-ex (Thompson) 1 adjustment in the Board-approved 1999 budget was 2 $12 million. Do you see that at line 5.9? 3 MR. BOURKE: Yes, I have that. 4 MR. THOMPSON: The total operating 5 and maintenance expense, excluding that $12 million, is 6 $271.9 million? 7 MR. BOURKE: Correct. 8 MR. THOMPSON: Do I understand that 9 what you do is you express the $12 million elimination 10 as a percentage of total Board-approved O&M, including 11 that $12 million, and then just use that percentage 12 applied to actual? 13 MR. BOURKE: That is not quite what I 14 do. 15 MR. THOMPSON: Explain what you do 16 with reference to this exhibit. 17 MR. BOURKE: I take the -- if you 18 will allow me to use the term grossed up, the $271.9 19 million, the subtotal of the budget on a monthly basis 20 prior to the reduction for the non-utility elimination, 21 for the six months from what would be April to 22 September, and I append that to the actuals, exclusive 23 of a non-utility elimination. 24 I conjoin those two sets of six-month 25 figures and then I reduce them by $12 million. 26 MR. THOMPSON: Just so that I follow 27 this, the 12-month number, before any actuals, would be 28 the sum of $271.9 million and $12 million? 945 BOURKE/GRANT, cr-ex (Thompson) 1 MR. BOURKE: Correct, for the 2 Board-approved numbers. 3 MR. THOMPSON: That would be 4 $283.9 million. 5 What you are saying is that at the 6 end of six months, your comparative for actuals is half 7 that number? 8 MR. BOURKE: It would be the first 9 six-months actual results of the year. 10 MR. THOMPSON: Okay. You take the 11 first six-months actual, then you take half of 12 $283.9 million, add those two numbers together and then 13 subtract 12? 14 MR. BOURKE: It wouldn't be half 15 exactly. The budget is available to me on a monthly 16 basis. So I would take the budget, as it has been 17 forecast to occur in the months April to September. 18 MR. THOMPSON: Has that been done now 19 for your 1999 first and second quarter reports that are 20 overdue? 21 MR. BOURKE: The actual conjoining of 22 the numbers has been done. However, as Ms Gould made 23 reference to in her testimony, those numbers have not 24 been subject to a review by the O&M experts for the 25 impact of the underage that has occurred in degree 26 days. 27 We would have an O&M impact related 28 to -- and I am going to speculate on these; I am not 946 BOURKE/GRANT, cr-ex (Thompson) 1 the O&M expert. 2 Overtime: when it is warm like this, 3 we would not experience, in the actual month results, 4 the overtime that would be inherent in the 5 Board-approved numbers. Board-approved, I believe, was 6 done on 4,027 degree days. The last information I have 7 for the fiscal 1999 year is that we are 13.8 per cent, 8 544 degree days behind budget. 9 So O&M would be impacted in other 10 areas: service costs, contractor and company service 11 calls. In warm weather, we wouldn't experience nearly 12 the underlying cost drivers that we would have had in 13 the Board-approved budget. 14 There are other things. We have 15 examined success sharing that is available to 16 employees, and 65 per cent of the driver of the success 17 sharing pool is related to ROE. 18 If you can accept that in actual 19 results, when we are that far below budget, the success 20 sharing pool will be at an absolute minimum; i.e., the 21 65 per cent related to ROE will be zero. We have not 22 made our target. 23 When I impact this E.R.O. report to 24 normalized for volumes, revenues and gas cost, and add 25 in that lost margin, I would have to review the driver, 26 the 65 per cent on ROE that would fall out of that. 27 I think Mr. Grant spoke earlier today 28 with Mr. Mondrow about normalization of O&M. 947 BOURKE/GRANT, cr-ex (Thompson) 1 It is that aspect that has not been 2 done as yet. 3 MR. THOMPSON: Well, you folks are 4 the ones that are telling us the reporting to the 5 E.R.O. in the usual format is supposedly adequate, and 6 I am just trying to find out what is there. 7 In order to help people understand 8 whether the format of that report and the information 9 contained in it is appropriate, is the company prepared 10 to produce a copy of the E.R.O. filing for the year 11 ended September 30, 1998 so that we can compare that to 12 Board approval? 13 MR. BOURKE: No. As I indicated 14 earlier, we are not prepared to release any information 15 that we have sent to the E.R.O. Obviously the 1998 16 actuals -- they are in a schedule that is filed in this 17 case, in any event. 18 So the bottom line, if you will, on 19 O&M is already in the public forum. 20 We are not prepared to release any of 21 the documents that we file with the E.R.O. 22 MR. THOMPSON: Presumably, you will 23 do so if you are ordered to do so by the Board in this 24 case. 25 MR. BOURKE: Well, at the end of the 26 day I guess it is something that would have to be 27 argued. I don't know whether the E.R.O. himself would 28 be involved or not. 948 BOURKE/GRANT, cr-ex (Thompson) 1 I think we all have to inspect the 2 integrity of the confidentiality of the E.R.O.'s 3 process. 4 MR. THOMPSON: Except that you are 5 putting forward this process as the answer to 6 monitoring and reporting of the PBR regime. 7 MR. BOURKE: I think, as I indicated 8 earlier, it is not the only piece of information that 9 is captured in the monitoring and reporting. It is not 10 the only document. There will be a high level document 11 filed in the cases on the question of SQIs and our 12 performance, and the O&M information, the bottom line 13 information, will be filed in due course in the future 14 proceedings. 15 So I do not agree with you that that 16 is the only process or document that I am relying on to 17 make my statements. 18 MR. THOMPSON: Let me move on to the 19 benchmark, if you will, budget on which PBR is based 20 and against which there is supposed to be monitoring 21 and reporting. 22 That again, I believe, is in 23 reference -- well, I believe the appropriate starting 24 point is Exhibit K3.3, which I made reference to 25 earlier. 26 Do you have that in front of you? 27 MR. BOURKE: Yes, we do. 28 MR. THOMPSON: This document was the 949 BOURKE/GRANT, cr-ex (Thompson) 1 unbundled budget that the company developed for the 2 purposes of the 179-14/15 decision. That is shown in 3 column 1. Is that fair? 4 MR. BOURKE: Correct. 5 MR. THOMPSON: This unbundled budget 6 was on a line-by-line basis, correct? 7 MR. BOURKE: Correct. 8 MR. THOMPSON: The starting point for 9 further adjustments to this unbundled budget is the 10 number of $250.4 million referenced on page 3 of this 11 document, line 9, column 1, correct? 12 MR. BOURKE: If unbundling had 13 occurred in fiscal 1999 that would have been the 14 budget, correct. 15 This document was to show the impact 16 of the unbundling transaction against the 17 Board-approved 1999 number. 18 MR. THOMPSON: I understand. 19 The Board directed you in the 20 179-14/15 decision to make further adjustments to that 21 unbundled budget in consequence of the decision with 22 respect to the rental program. Do you recall that? 23 MR. GRANT: Yes. 24 MR. THOMPSON: All right. 25 Somehow the company seems to have 26 construed that to mean a one line O&M unbundled budget. 27 Is there anything in the decision 28 that supports that approach? 950 BOURKE/GRANT, cr-ex (Thompson) 1 MR. GRANT: Well, I think we are 2 talking about two different things, Mr. Thompson. 3 Clearly, the Board's 497-01 decision 4 said that the PBR starting point -- there needed to be 5 some further adjustments made arising from the 6 179-14/15 decision in order to arrive at the starting 7 point. 8 But that is quite separate from the 9 monitoring. We are not monitoring the starting point. 10 What we are monitoring is the PBR plan that begins in 11 fiscal 2000. 12 I think they are two different 13 issues. I don't see the linkage. 14 MR. THOMPSON: Well, I will put my 15 suggestion to you and it sounds like you are going to 16 disagree with it. 17 My suggestion to you is that the 18 unbundled budget that was the subject of scrutiny in 19 these two cases 179-14/15 and then 497-01 was the 20 column 1 unbundled budget that resulted in the 21 $250.4 million at line 9, page 3. In directing you to 22 make further revisions to that budget, my conclusion is 23 that the Board was not eliminating the line items in 24 the benchmark, whereas your conclusion is to the 25 opposite. 26 I just wondered if you could explain 27 how you drew that conclusion. 28 MR. GRANT: My conclusion is the 951 BOURKE/GRANT, cr-ex (Thompson) 1 Board has already decided there is going to be no 2 truing-up process. So there is no -- in my view, the 3 line items within the 1999 budget have no relevance to 4 the monitoring and reporting issue, which of course 5 begins in fiscal 2000. 6 You may feel that it has relevance to 7 truing up, but I think the Board has already made a 8 decision on that. 9 MR. THOMPSON: No, I think it has 10 relevance to savings and where the savings are being 11 achieved in line items and it has relevance to 12 rebasing, because we will be rebasing to something in 13 three years time 14 But, in any event, I don't want to 15 argue this with you, I will deal with that later. 16 But could you tell me where in this 17 unbundled budget your further revisions of 18 $24.5 million should be placed in terms of line items. 19 There is one that deals with the removal of the fully 20 allocated costs of the ABC program. I presume that is 21 an adjustment to line $5.9 of $3 million. Is that 22 right? 23 MR. CASS: Mr. Chairman, excuse me. 24 I have some difficulty with this line of question. 25 According to the scoping document the 26 issue before the Board, and in particular the issue 27 being addressed by this panel is monitoring and 28 reporting. 952 BOURKE/GRANT, cr-ex (Thompson) 1 Mr. Thompson apparently is going to 2 make some argument about the base in relation to 3 monitoring and reporting. That seems to be what he is 4 saying. 5 However, I don't see how this detail 6 about numbers in the base is relevant to an examination 7 of this panel on the monitoring and reporting issue, 8 which is the matter now before us. 9 MR. THOMPSON: Well, I'm trying -- 10 THE PRESIDING MEMBER: Mr. Thompson, 11 I think we have talked about the -- you said it 12 yourself the other day that it was not an issue of 13 true-up but rather what adjustments ought to be made to 14 the going in PBR O&M base. 15 MR. THOMPSON: Yes. 16 THE PRESIDING MEMBER: So I assume 17 that you are going to zero in on those adjustments now. 18 MR. THOMPSON: Yes, I am. I'm just 19 trying to -- 20 My point is this, Mr. Cass and 21 Mr. Chairman and the panel, is that the O&M base 22 against which we are to be monitoring and reporting is 23 a base that is net of non-utility elimination. As a 24 result of the Board's decisions there are some further 25 adjustments, it appears to me, to this non-utility 26 elimination line in the base. 27 What I am trying to just understand 28 is, based on the $3 million of fully allocated costs 953 BOURKE/GRANT, cr-ex (Thompson) 1 that have now been removed with respect to the ABC 2 program, is, in the company's view, the unbundled 3 budget non-utility adjustment $5.9 million plus 4 $3 million? 5 MR. BOURKE: If we are talking about 6 fiscal 1999 and the monitoring that I am doing in this 7 year, I would be monitoring using the $12 million that 8 was inherent in the Board-approved budget in 9 E.B.R.O. 497. 10 MR. THOMPSON: Okay. So you are 11 monitoring against column 2 for 1999? 12 MR. BOURKE: The Board's decision 13 for 497. 14 MR. THOMPSON: I'm trying to 15 understand as we go forward into 2000 the 1999 16 unbundled budget, and we have a disagreement on the 17 appropriate base. But one of the components in that 18 base is a non-utility adjustment which before the Board 19 rendered its decision in 497-01 was, on your analysis, 20 $5.9 million and you are now adding in the adjustment 21 that you are making to the base, as I understand it, 22 $3 million on account of the ABC program. 23 My question is: Is the going forward 24 base net of, in your case, a further $3 million, 25 $5.9 million to $8.9 million? 26 MR. GRANT: Well, Mr. Thompson, you 27 have us at a little bit of a disadvantage because we 28 are not intimately familiar with all these adjustments. 954 BOURKE/GRANT, cr-ex (Thompson) 1 I think it was Ms Gould who was the witness on this. 2 But it is my understanding that ABC T 3 has been removed. Whether it is on this line item or 4 not, I don't know. In other words, the costs of 5 running it have been removed pursuant to the Board's 6 179-14/15 decision. I don't know whether it is on this 7 line item though. 8 MR. THOMPSON: Is Ms Gould coming 9 back? 10 MR. GRANT: I don't know. 11 MR. CASS: Not that I am aware of, 12 Mr. Thompson. 13 MR. THOMPSON: She, as I recall it, 14 deferred a lot of these -- this ties in with the 15 discussion I was having with her about the response to 16 IGUA 41. She said for regulatory detail I should speak 17 to Mr. Bourke. So that is what I'm trying to do and 18 now -- 19 MR. GRANT: Well, she was correct, 20 you should speak to Mr. Bourke about that. 21 But that is not what this schedule 22 is. That is not what this is showing you. This is 23 just simply showing you the O&M, not the overall 24 regulatory schedule. 25 MR. BOURKE: Mr. Thompson, could I -- 26 the $5.9 million -- which was the equivalent in the 27 unbundled proforma fiscal 1999 -- would have had an 28 impact based on the PBR formula. I think the number 955 BOURKE/GRANT, cr-ex (Thompson) 1 that I looked at was $6.1 million. So it would have 2 been inflated to $6.1 million in regard to the PBR 3 formula as applied to fiscal 1999. 4 I believe that the other adjustment 5 that you are talking about, the fully allocated costs 6 for the ABC program, were part of the adjustments that 7 were made in the determination of the O&M for the 8 fiscal 2000 year. 9 As to which line item, if we were to 10 try to identify a line item, I would have to discuss 11 that with Ms Reynolds and Ms Gould. 12 MR. THOMPSON: Could you undertake to 13 do so and try to respond to my question as to whether 14 that 3.0 belongs in that line? 15 My other questions here as well 16 pertain to what I call the transfer of the difference 17 between fully allocated costs with respect to the 18 rental program and direct and marginal costs with 19 respect to the rental program and I wondered where they 20 ought to appear as adjustments to the line items in 21 this document. 22 Can I have an undertaking with 23 respect to that? 24 MR. CASS: Mr. Chairman, the types of 25 questions Mr. Thompson is now getting into I think is 26 very much the subject matter of the panel that Ms Gould 27 was sitting on. When there was some suggestion by that 28 panel that Mr. Bourke could be of assistance on 956 BOURKE/GRANT, cr-ex (Thompson) 1 matters, it is my recollection that that was on matters 2 relating to the questions about what is filed with the 3 E.R.O. 4 We have heard lots of that today and 5 Mr. Bourke has tried to help with that. But these 6 types of questions are not the questions, in my mind, 7 that were deferred to this panel. There was a chance 8 to ask Ms Gould about these things when she was here 9 before. 10 THE PRESIDING MEMBER: Mr. Thompson, 11 maybe you can explain to us how the revisitation of the 12 1999 unbundled budget -- that is column 1 of the 13 exhibit that you were just referring to -- the update 14 of this to incorporate the adjustments that the company 15 has made pursuant to the Board's decision in 179-14/15, 16 how would that be relevant to setting rates in this 17 proceeding. It is not a matter that falls within the 18 monitoring issue. 19 MR. THOMPSON: Well, I will try. 20 Perhaps the way to do this is to turn 21 up IGUA 41 as well. 22 --- Pause 23 MR. THOMPSON: If you go to 24 Exhibit I, Tab 12, Schedule 41, page 6, you will see 25 there -- I had this discussion with Ms Gould, as I 26 recall it -- I don't have the transcript reference in 27 front of me, but we were discussing the impact of the 28 179-14/15 decision on revenue requirement. 957 BOURKE/GRANT, cr-ex (Thompson) 1 This document was showing that 2 against the initial filing in column 1 the adjustments 3 that the company was proposing were increasing revenue 4 requirement by $41.44 million. 5 Up at line 5 we had the adjustment 6 there for O&M, $24.5 million. That, as I recall it, is 7 the $21.5 million of direct and marginal for the rental 8 program, which the company proposes to remove; and the 9 $3 million with respect to the ABC T. 10 I had asked Ms Gould, as I recall it, 11 whether the $13 million, being the difference between 12 direct and marginal for the rental and fully allocated 13 for the rental, was encompassed in the $41.4 million. 14 The answer was, as I recall it: 15 Speak to Mr. Bourke. 16 What I'm trying to find here is where 17 that $13 million should appear in this 1999 unbundled 18 budget, categories that flow into both column 1 and 19 column 2. 20 Then I am also trying to find where 21 the $3 million that relate to the non-utility 22 adjustment for ABC should appear in this precursor 23 document. 24 Because in order to monitor where 25 savings are being achieved, whether it is in more 26 non-utility eliminations than were forecast or whether 27 it is in reduction in other categories of expense, it 28 seems to me we should have some idea on a line-by-line 958 BOURKE/GRANT, cr-ex (Thompson) 1 basis of where those adjustments belong in this 2 unbundled budget exhibit. So it is the benchmark that 3 I am trying to understand for the purposes of 4 understanding not only IGUA 41, but also what 5 Mr. Bourke will be reporting against when he files his 6 information. 7 I hope that is helpful. 8 THE PRESIDING MEMBER: The issue of 9 adjustment was I guess reviewed a number of days ago. 10 What you want to see now is those 11 adjustments to be reflected into the beginning 12 document, and that is the -- whether it is your 13 Exhibit I, Tab 12, Schedule 41, which only shows the 14 adjustments, what you would like to see is an update to 15 Exhibit B, Appendix A, Table 4 of 179-14/15. 16 MR. THOMPSON: That's correct, so 17 that we see an unbundled budget. We know that two 18 adjustments are lines 5.10 and 3.2., 6.2 and 4.7. 19 Those are discrete line items that operate to reduce 20 the 250.4, and then they go further and the company 21 ends up at $216 million and some odd. 22 We suggest that the fully allocated 23 costs have to come out, but what I am trying to find 24 out is where are they in these lines items, and I would 25 be asking for an update of that column 1 to reflect the 26 company's current position as to the unbundled budget, 27 as well as an identification of where the difference 28 between direct and marginal and fully allocated costs 959 BOURKE/GRANT, cr-ex (Thompson) 1 rest so that we will know, when we make our argument, 2 what numbers should be reduced. 3 THE PRESIDING MEMBER: Mr. Grant or 4 Mr. Bourke? 5 MR. GRANT: Thank you, Mr. Chairman. 6 I think we can help in some ways here. 7 I think it would be a lot of work to 8 try to go and eliminate these O&M items line by line -- 9 and I say that subject to check with the people who 10 would actually have to do the work -- along the lines 11 of the K3.3 schedule that Mr. Thompson made reference 12 to. 13 Having said that, however, with 14 respect to Exhibit I, Tab 12, Schedule 41, if it would 15 be helpful to the Board for us to undertake to break 16 out column 2 into its various components and provide 17 some further information to the Board and to 18 Mr. Thompson, we can certainly undertake to do that, 19 and let me be a little more specific. 20 For instance, you can see at line 21 item 27 that the deficiency is $41.4 million associated 22 with all the items in that column. Clearly, 23 $21.2 million of it is the recovery of deferred taxes 24 up in line 8. So we would show that as a separate 25 column, the recovery of deferred taxes. 26 We would then further break out the 27 $41.44 million into some other components. One of them 28 would be the removal of the rental program in its 960 BOURKE/GRANT, cr-ex (Thompson) 1 entirety, as proposed by the company. One would be 2 able to see the impact that that has on the gross 3 revenue sufficiency or deficiency. 4 Another column could be put together 5 to show the removal of all other programs excluding the 6 rental program pursuant to the 179-14/15 decision, and 7 we could exclude from that assessment, if Mr. Thompson 8 wished, ABC T. We can show that as a separate column 9 removing the ABC T. So one would be able to go step by 10 step and see all of the steps that are being used or 11 that are necessary to implement the 179-14/15 decision, 12 and you would see the impact on rates each step of the 13 way. 14 If that would be helpful to the Board 15 and Mr. Thompson, we can undertake to do that. 16 THE PRESIDING MEMBER: Mr. Thompson, 17 are you interested in -- I understand you are 18 interested only in the number 24.5 and what makes up 19 that adjustment. Are you also interested in the impact 20 of the decision on the rate base, how much of that is 21 the rental program, how much is ABC T, et cetera, or 22 are you zeroing in only on the 24.5? 23 MR. THOMPSON: I think I am zeroing 24 in on both. 25 The 24.5, I know its constituent 26 elements. One is $21.5 million direct and marginal 27 costs for the rental program; and $3 million for the 28 ABC program. I think that is described in the 961 BOURKE/GRANT, cr-ex (Thompson) 1 preceding pages. 2 What Mr. Grant is offering will be 3 probably of some assistance if it is measured against 4 the benchmark of the 1999 test year Board-approved, 5 rather than the 2000 test year initial filing -- 6 MR. GRANT: Yes. That's fine. We 7 can do that. 8 MR. THOMPSON: -- and as long as the 9 gas costs in the exhibit are constant throughout, in 10 other words, were updated to the recent impact 11 statements. 12 MR. GRANT: That's fine as well. I 13 think what we will probably do is start with 497; we 14 will show the impact of the Board's decision in this 15 case for interim rates where we will put through the 16 upstream gas cost increase; we will have a remaining 17 deficiency that is at issue for the remainder part of 18 this hearing; and, then, we will proceed to break out 19 column 2, as I suggested earlier. 20 MR. THOMPSON: I think what you are 21 saying, Mr. Grant, in terms of my request to have the 22 difference between fully allocated and marginal and 23 direct costs on the rental program redistributed 24 through the unbundled budget, I think you seem to be 25 saying the amount of -- it is a total of $34.5 million, 26 that amount would -- I'm sorry -- the elimination 27 addition is $13 million to what you have proposed of 28 $21.5 million, and you are saying those total 962 BOURKE/GRANT, cr-ex (Thompson) 1 eliminations would appear in a number of line items? 2 It would be a lot of work to -- 3 MR. GRANT: No. What will happen, 4 the $13 million -- if that is the right number -- cost 5 associated with what previously had been allocated on 6 an FAC basis to rentals, that remains behind in the 7 utility. Although I won't have a particular column 8 showing that, that will be evident in the O&M number 9 that is left on the very right-hand side of the page. 10 MR. THOMPSON: But that exhibit is 11 not going to help me as to where that $13 million -- if 12 it comes out, the line items it ought to come out of in 13 the 1999 unbundled budget shown in K3.3. 14 MR. GRANT: No. I think it would 15 be -- again, subject to check with the witnesses -- I 16 think it would be pretty onerous for us to have to 17 break it down into that level of detail. 18 MR. THOMPSON: All right. I accept 19 that. 20 If I could have the undertaken, then, 21 as we have discussed. 22 MS LEA: J6.3. I think we need a 23 clear statement on the record as to what the 24 undertaking is after all that discussion. 25 MR. GRANT: Do you want me to try? 26 MR. THOMPSON: Please. Yes. 27 MR. GRANT: Give me what I ask for. 28 MS LEA: I can't. 963 BOURKE/GRANT, cr-ex (Thompson) 1 --- Laughter 2 MR. GRANT: We will undertake, in 3 Exhibit J6.3, to show the impact of the removal -- I'm 4 sorry -- the impact of the 179-14/15 decision on the 5 company's utility income and gross revenue 6 sufficiency/deficiency in such detail as to break 7 column 2, from Exhibit I, Tab 12, Schedule 41, out into 8 a number of relevant parts that would include the 9 removal of the rental program, the removal of all other 10 ancillary programs, the removal of ABC T, the deferred 11 tax recovery -- I think that is it -- and any other 12 elements that are relevant. 13 UNDERTAKING NO. J6.3: Mr. Grant 14 to show the impact of the 15 179-14/15 decision on the 16 company's utility income and 17 gross revenue sufficiency/ 18 deficiency in such detail as to 19 break column 2, from Exhibit I, 20 Tab 12, Schedule 41, out into a 21 number of relevant parts that 22 would include the removal of the 23 rental program, the removal of 24 all other ancillary programs, 25 the removal of ABC T, the 26 deferred tax recovery, and any 27 other elements that are relevant 28 MR. THOMPSON: Thank you. 964 BOURKE/GRANT, cr-ex (Thompson) 1 Now, just, Mr. Bourke and Mr. Grant, 2 to understand the reporting for, I guess it would be 3 the year 2000, the company's PBR base net of 4 non-utility eliminations is about $216 million. Would 5 you take that subject to check? That is your proposed 6 base and we suggest that it is lower. But would you 7 accept, subject to check, it is about $216 million? 8 MR. GRANT: Yes, I will. 9 MR. THOMPSON: Assuming I am right 10 that the non-utility adjustment component of that is 11 the 5.9 plus the 3 that we have been discussing for 12 ABC, then based on what Mr. Bourke described earlier, 13 we would have to add those two numbers together to get 14 the base from which the company would be monitoring and 15 reporting in its reports to the E.R.O. Am I right? 16 MR. BOURKE: I believe I would like 17 to check that with Ms Reynolds, but I can take it 18 subject to check. Of course it would be dependent upon 19 a Board decision in the 2000 test year. 20 MR. THOMPSON: Right. Okay. 21 So just for purposes of illustration 22 assume that that is the number, that it is 23 $8.9 million. Let's make it easy. Let's assume that 24 the PBR base you are proposing is $216.1 million. So 25 that is a total of $225 million before we apply the PBR 26 formula. Right? 27 This is 1999 unbundled budget base. 28 MR. GRANT: Well, excluding the 965 BOURKE/GRANT, cr-ex (Thompson) 1 non-utility eliminations. 2 MR. THOMPSON: Right. But Mr. Bourke 3 told me in terms of reporting the non-utility 4 elimination to the E.R.O. he adds it to the unbundled 5 base and then uses that percentage as a basis for 6 future reporting. 7 MR. BOURKE: What I stated was that I 8 add the numbers together, actuals plus budgets, and 9 used $12 million as the non-utility elimination in 10 fiscal 1999. 11 MR. THOMPSON: I am talking now the 12 next year when we have a PBR base of $216 net of 13 non-utility adjustments of $8.9 million. So on the 14 reporting technique that you are currently following, I 15 thought you said we would add those two numbers 16 together. 17 MR. BOURKE: I guess I was concerned 18 when you said that if you took 9 million out you 19 referred to a PBR base that had a $3 million 20 fully-allocated cost elimination from the 2000 test 21 year now somehow impacting the 1999 base. I didn't 22 know where that was going. 23 MR. THOMPSON: Well, let's just take 24 a hypothetical. 25 What do you say the non-utility 26 elimination is that produces the 216.1 base? I'm just 27 trying to understand how this is going to work as we go 28 forward. It seems to me we have to know that number 966 BOURKE/GRANT, cr-ex (Thompson) 1 based on the reporting that you have described. 2 MR. GRANT: Well, I think there's two 3 things. 4 First of all, the reporting is the 5 final number. It's the net number that's reported. 6 The net number is reported to the E.R.O. and the net 7 number is reported in the exhibits that I referenced 8 this morning. So, that's the first thing. 9 So, all other things being equal, it 10 would be 216 at the starting point. 11 The 216 assumes the non-utility 12 elimination of around $5.9 million that's shown on the 13 reference schedule, the K3.3. 14 And, in terms of reporting format, we 15 are not proposing to get into a level of detail that 16 would go line by line and, therefore, I don't think 17 that we would include that in the protocol, if you 18 will. We are proposing that all that we need to do is 19 show the net number. 20 MR. THOMPSON: I guess I 21 misunderstood. I thought that in the current reporting 22 to the E.R.O., there is a number to reflect the 23 non-utility eliminations. Is that in the report? 24 MR. BOURKE: No. I show O&M on one 25 line. 26 MR. GRANT: There's a calculation 27 that he's doing prior to putting that one line in the 28 report that -- 967 BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: Is there any note on 2 the non-utility elimination? 3 MR. BOURKE: No, there is not. 4 MR. THOMPSON: All right. Well, 5 then, again, I still need to understand this process. 6 Let's take the number 216 and 5.9. 7 So let's make it 216.1 and 5.9. The total would be 221 8 million, for the sake of illustration. That is, as I 9 understand the company's evidence, we are going to 10 gross up both components of that number, for the PBR 11 regime, in 2000. So 216.1 becomes 240 million -- well, 12 no, it gets grossed up by 4.61 per cent. Right? 13 MR. GRANT: It's the net number that 14 gets grossed up. 15 MR. THOMPSON: And then the 16 non-utility elimination, does it get grossed up -- 17 MR. GRANT: Yes. 18 MR. THOMPSON: -- for the purposes of 19 monitoring? 20 MR. GRANT: Well, in effect, you are 21 grossing up a non-utility elimination as you do that, 22 because you apply it to the 216 base, not the 221 base 23 in your example. 24 So, virtually everything that the 25 Board has approved gets grossed up at the 26 Board-approved formula -- and that includes the 27 non-utility elimination. 28 MR. THOMPSON: All right. So the 968 BOURKE/GRANT, cr-ex (Thompson) 1 5.9, in our illustration, gets grossed up by 4.61 per 2 cent? 3 MR. GRANT: Correct. 4 MR. THOMPSON: All right. Now, as we 5 go forward into the reporting period when this amount 6 is operative -- and take the case where such is the 7 case we have before us where the company indicates that 8 it is going to be providing some services to the rental 9 program, the billing services on a temporary basis, but 10 there's nothing reflected in the O&M base for that 11 expected activity. 12 Let's assume, for the sake of 13 argument, that the value of those services that are 14 being provided to the rental program, in year 2000, is 15 $3 million, so that the actual non-utility elimination 16 is not 5.9 that was assumed but it's an incremental $3 17 million. 18 How is the gain of that $3 million 19 going to be reported? Is it going to be reported as a 20 reduction in actual O&M base of 216 million to 213? Or 21 is it going to be reported in some other fashion? 22 MR. GRANT: Mr. Thompson, this, of 23 course, is a purely hypothetical example you are giving 24 us. Is that right? 25 MR. THOMPSON: Well, is it? I had as 26 an HVAC undertaking, I think, the response of No. 11 I 27 believe it is, where we are told that the company will 28 be providing some billing services on a temporary basis 969 BOURKE/GRANT, cr-ex (Thompson) 1 to the rental program. 2 MR. GRANT: If there are direct 3 billings to an affiliate for a service that's provided, 4 it would get captured in the 729.01 -- I think it's 5 729.01 account -- which is a Board account, and that 6 would show up on the non-utility line item within O&M. 7 MR. THOMPSON: So, in terms of 8 utility O&M expenses, using our example -- let's assume 9 there's an increment $3 million -- does the actual 10 utility O&M then get reported as 213 million so that 11 the rate of return in the utility is greater? 12 MR. BOURKE: I believe the billings 13 would be in account 729, which would be an offset to 14 O&M. 15 I would have those numbers reducing 16 my actual O&M. I would continue with my non-utility 17 adjustment, as it is here. 18 MR. THOMPSON: So that, in that 19 illustration, all other things being equal, you would 20 be reporting an increased rate of return on an actual 21 basis? 22 MR. BOURKE: And a lower O&M, yes. 23 MR. THOMPSON: Thank you. 24 So that this topic came up initially 25 because Dr. Bauer and others were concerned that the 26 PBR regime might be used to transfer efficiency gains 27 to an affiliate and if you didn't report those kinds of 28 transactions as a reduction to O&M, then that would 970 BOURKE/GRANT, cr-ex (Thompson) 1 have that impact? 2 MR. GRANT: Well, I don't think this 3 falls into that category, at all, Mr. Thompson. The 4 example that you gave of some support, be it temporary 5 support, to the rental program, as I think HVAC 11 6 indicates, that very topic was discussed in ADR 7 negotiations, as I understand it, and some numbers were 8 thrown around in those negotiations. We didn't settle 9 that issue so, now, we are before the Board on that. 10 But, in any event, as HVAC 11 11 indicates, I think, this is a very temporary situation 12 and it would not be an adjustment that one would make 13 to the PBR base because it's temporary. It's a matter 14 of months. And so, at the end of the day, the only 15 basis that one could make any adjustments would be on a 16 temporary basis. 17 MR. THOMPSON: Well, I don't accept 18 your statement that numbers were thrown around in the 19 ADR. 20 MR. GRANT: Well, that's my 21 understanding, Mr. Thompson. 22 MR. THOMPSON: Yes, well, you weren't 23 there but -- 24 MR. GRANT: I appreciate that I was 25 not. 26 MR. THOMPSON: This topic was 27 deferred to Mr. McGill and I will deal with it when he 28 returns. But I did provide Mr. Cass -- just on your 971 BOURKE/GRANT, cr-ex (Thompson) 1 point "this is very temporary", I opened my Consumers 2 Gas bill on the weekend, trying to make sure I paid 3 before the deadline date, and Mr. Cass would -- let me 4 read it. This is "Energy Marketplace Changes". I 5 don't have copies but I have Mr. Ladanyi to -- if he's 6 good enough to distribute this I'd be very grateful. 7 --- Pause 8 MS LEA: Since this document is being 9 distributed, I think we had better give it an exhibit 10 number. We are on the sixth day of the hearing, so it 11 will be K6.1, please. I think these documents -- what 12 shall we call them -- Peter Thompson's gas bill? No. 13 MR. THOMPSON: Bill inserts. 14 MS LEA: Bill inserts. Thank you 15 very much. Bill inserts. 16 EXHIBIT NO. K6.1: Bill Inserts 17 MR. THOMPSON: On the back of this 18 bill insert, and I think we have probably only -- maybe 19 the whole thing has been photostatted. There are two 20 questions about in effect billing. One is: 21 "Can I still pay my HIP/HIP Plus 22 and other program payments 23 monthly and renew them?" 24 The answer to this question implies 25 that Enbridge Home Services will offer a variety of new 26 payment options which suggests some sort of different 27 billing arrangement. This is after October 1. When it 28 comes to the rental program: 972 BOURKE/GRANT, cr-ex (Thompson) 1 "Will the cost for my rental 2 water heater or furnace continue 3 to be conveniently charged on my 4 gas bill?" 5 The answer is: 6 "Yes, and you will continue to 7 receive the same excellent 8 service on your existing rental 9 equipment that you have always 10 relied on." 11 Would you agree with me that that 12 message doesn't transmit that this service for the 13 rental program is temporary? 14 MR. GRANT: I would agree that the 15 message does not say it's temporary, but the intention 16 of the company is that it will be temporary. The 17 reason for that is that we simply cannot in terms of 18 implementing the Board's 179-14/15 decision and moving 19 such a large program as rentals out to our affiliates, 20 we cannot do it effective October 1 without some very 21 temporary service that continues part way into the 22 fiscal 2000 year. 23 That was my reference. That was what 24 I meant by my statement that it was only a temporary 25 situation. 26 MR. THOMPSON: Have the fully 27 allocated costs of the utility providing this service 28 to the rental program been calculated or estimated? 973 BOURKE/GRANT, cr-ex (Thompson) 1 MR. GRANT: It's my understanding 2 that Mr. McGill did an estimate and gave that number to 3 you in ADR negotiations. 4 MR. CASS: Mr. Chairman, again, the 5 intent of this panel is to address the monitoring and 6 reporting issue. Mr. Thompson was on to some questions 7 a while ago about monitoring and reporting, but we seem 8 to have gone quite far astray from that. 9 Mr. Thompson himself has alluded to 10 the fact that the document he is now looking at was one 11 that he was told should be put to Mr. McGill. 12 I wonder if we could perhaps get this 13 panel a little closer towards the focus of its purpose 14 in this hearing. 15 MR. THOMPSON: That's fine. I will 16 resume it with Mr. McGill. 17 Now, Mr. Grant, you made a lot of 18 statements about the relevance of actual information in 19 the context of rate making. Others have drawn your 20 attention to segments of the Board's decision in 497-01 21 about information being available to ratepayers in a 22 rate case context. 23 Do you agree that actual performance 24 or actual estimated performance for fiscal 1999 has 25 relevance for deferral account relief that the company 26 is seeking with respect to costs, the bulk of which are 27 being incurred in fiscal 1999? Here I am thinking of 28 the claim for separation costs. 974 BOURKE/GRANT, cr-ex (Thompson) 1 MR. GRANT: No. I don't agree that 2 there is relevance there. 3 MR. THOMPSON: Didn't the Board in 4 effect say as much in its 497 decision in paragraph 5 5.26, that actual financial performance considerations 6 will be a factor when the company seeks end year 7 deferral account treatment? It's at page 83 and 84. 8 MR. GRANT: I'm sorry, Mr. Thompson. 9 Which decision? 10 MR. THOMPSON: 497. 11 MR. GRANT: Did you say 5.24, 12 paragraph -- 13 MR. THOMPSON: 26. 14 MR. GRANT: 26. 15 MR. THOMPSON: And 27 and 28. 16 MR. GRANT: Yes. I now recall the 17 Board making those comments in that decision. The 18 particular account at issue here, however, really 19 arises from the Board's 179-14/15 decision insofar as 20 transition costs are concerned. 21 It was on the basis of that decision 22 that we felt in reading the Board's decision that the 23 Board had not completely dismissed the potential for 24 coming back and requesting recovery of reasonable 25 incurred costs, transition costs. It was for that 26 reason that we brought that request forward in this 27 proceeding. 28 MR. THOMPSON: All right. Well, I 975 BOURKE/GRANT, cr-ex (Thompson) 1 won't argue that point with you. 2 Another aspect of the matter that you 3 were discussing with others was the fact that 4 information concerning the, if you will, going in 5 benefits of the 1999 year is relevant to an evaluation 6 of the off ramp rights that were described in the 7 Board's 497-01 decision in paragraph 3.0.25. 8 I may have misunderstood you, but I 9 thought you were saying these rights do not -- you are 10 putting forward a view that these rights are not 11 exercisable if the company has earned a return greater 12 than what the Board has allowed. Did I misunderstand 13 you? 14 MR. GRANT: No. 15 MR. THOMPSON: In other words, 16 excessive rate of return I thought you were saying is 17 not something that anybody can complain about. 18 MR. GRANT: Yes. Well, first of all, 19 I don't know what an excessive rate of return is. 20 That's in the eye of the beholder. 21 MR. THOMPSON: I appreciate that's a 22 matter of argument. More broadly -- 23 MR. GRANT: Yes, I was saying that. 24 The return on equity is not, in my view, irrelevant for 25 off ramp purposes. The reason I'm saying that is 26 because the Board's 497-01 decision at 3.0.25 was 27 speaking in the context of all of the off ramp 28 situations that were reviewed in that case. In that 976 BOURKE/GRANT, cr-ex (Thompson) 1 case, this was not one of them. 2 What we were discussing was off ramps 3 associated with implementation of a comprehensive PBR 4 or some rather significant financial events, negative 5 events, that would preclude the utility from carrying 6 out its responsibilities to its ratepayers, for 7 example, for system expansion and things like that 8 that arose from credit rating problems and things like 9 that. 10 All of those things, those financial 11 conditions, are extremely low probability events, but 12 that was the context within which we were discussing it 13 in that case. 14 The most significant off ramp really 15 had to do with the implementation of a comprehensive 16 PBR. 17 MR. THOMPSON: Well, I just wanted to 18 make it clear that what you seem to be saying is that 19 the Board's decision in this off ramp section in your 20 view precludes excessive rate of return as a situation 21 which constitutes justification to abandon the PBR 22 plan. 23 Do I understand you correctly? 24 Whether you are right or not, I can argue; but that is 25 your position, as I understand it. 26 MR. GRANT: Yes. The Board was not 27 considering earned returns to be a criteria for off 28 ramp, and that's why I am taking that view. 977 BOURKE/GRANT, cr-ex (Thompson) 1 MR. THOMPSON: That is why, 2 presumably, the company is refusing to report in any 3 public way the indicated returns. 4 MR. GRANT: That's not true at all. 5 This morning I went through the exhibits which we will 6 file in successive cases and which tell you what the 7 returns are. 8 MR. THOMPSON: Maybe I will put it 9 this way: The first opportunity that any intervenor 10 will have, if you get your way, to really evaluate 11 whether a situation constitutes justification to 12 abandon the PBR plan on the grounds of excessive return 13 is a year and a half down the road when something is 14 filed in the next rate case that tells us what 1999 15 actually was. 16 That is the first opportunity that we 17 will have to evaluate our right. 18 MR. GRANT: No, I don't agree with 19 that. I think it will be a little beyond that, because 20 1999 is not a PBR planned period. It starts in fiscal 21 2000. 22 MR. THOMPSON: Let me close, then, by 23 asking whether -- let me put it this way: What is the 24 prejudice to making timely disclosure of this 25 information in rate cases? What do you see as the 26 prejudice for the company? 27 Is there any? 28 MR. GRANT: In making timely 978 BOURKE/GRANT, cr-ex (Thompson) 1 disclosure? 2 MR. THOMPSON: Timely disclosure. 3 MR. GRANT: Well, that's what we 4 intend to do. We intend to make timely disclosure. 5 MR. THOMPSON: I am going to be 6 asking the Board to order you to disclose much of this 7 information in the context of this case. I understand 8 that that is an issue that needs to be argued, and we 9 are going to find the time to argue it. 10 My question is: What is the 11 prejudice to having that disclosed in this case? The 12 information that you are supposed to be filing with the 13 E.R.O. now, what is the prejudice to having that 14 disclosed on the public record? 15 MR. GRANT: First of all, we cannot 16 disclose it on the public record until we have gone 17 through certain internal processes ourselves and had 18 the numbers audited and received Board of directors 19 approval. 20 They have responsibility and we have 21 responsibility not to release that kind of information 22 publicly prior to that process being completed. Once 23 that process is complete, there is usually a press 24 release indicating the results. 25 Up until that time, no one publicly 26 sees this information. Hopefully, that helps to 27 explain my position. 28 In the context of PBR, disclosing 979 BOURKE/GRANT, cr-ex (Thompson) 1 this information any further than what I have committed 2 to really does prejudice the whole process of PBR. It 3 casts a chill over it for any utility in Ontario which 4 is understandably (a) trying to understand the PBR 5 rules that it has to operate under; and (b) trying to 6 operate under those rules without having to look over 7 its shoulder every once in a while wondering whether an 8 intervenor is going to demand an off ramp, make 9 submissions to the Board on this issue, and basically 10 cause the utility to undergo all kinds of in essence 11 open-ended appeal process throughout the PBR. 12 I don't think that is a way to run 13 electric and gas utilities in Ontario. I think it 14 would prejudice all of them. 15 MR. THOMPSON: There are a whole lot 16 of assumptions in that response, it seems to me. But 17 the bottom line, I guess as far as the company is 18 concerned, is that there will be no public disclosure 19 of this information without some sort of Board 20 directive. 21 MR. GRANT: No. My position is there 22 will be public disclosure of the -- 23 MR. THOMPSON: In this rate case. 24 MR. GRANT: Correct. 25 MR. THOMPSON: Thank you. Those are 26 my questions. 27 THE PRESIDING MEMBER: Thank you, 28 Mr. Thompson. 980 BOURKE/GRANT, cr-ex (Thompson) 1 Ms Lea? 2 MS LEA: Thank you. 3 CROSS-EXAMINATION 4 MS LEA: Nearly all of my questions 5 have been answered, but I have a couple of questions 6 for Mr. Bourke, I believe. 7 As I understand it, Mr. Bourke, you 8 are filing through the E.R.O. on the basis of a 9 template provided to you by the E.R.O. rather than a 10 letter of direction. 11 Would that be your understanding 12 also? 13 MR. BOURKE: Yes, that is correct. 14 MS LEA: Is this template in the 15 nature of a spreadsheet, or what is its nature? 16 MR. BOURKE: Yes, it would be a 17 spreadsheet. As I mentioned earlier, Schedule 1 is 18 related to income and income tax. There is a rate 19 base, a capital structure and an ROE calculation 20 spreadsheet. 21 MS LEA: And these templates were 22 provided to you by the E.R.O.? 23 MR. BOURKE: My understanding is that 24 the predecessor report was extended, perhaps 30 pages 25 long, and that a request came from either the E.R.O. or 26 a member of his staff that suggested alternatives that 27 could be provided of a more meaningful and a shorter 28 nature. Discussions went back and forth with my 981 BOURKE/GRANT, cr-ex (Lea) 1 predecessor, and the format that is in use today was 2 the sum total of that back and forth process. 3 MS LEA: Thank you. That is helpful. 4 I understand -- and correct me if I 5 am wrong -- that there have been no discussions with 6 the E.R.O. about whether any different information, 7 more, less, the same, whatever, needs to be filed as a 8 result of this targeted PBR program the company has 9 entered into. 10 Is that correct? 11 MR. BOURKE: That is my 12 understanding. I have had no discussions. 13 MR. GRANT: That is correct. I can 14 confirm that. 15 MS LEA: The status of things right 16 now, then, is that you are continuing to file in the 17 manner that you have when you were under cost of 18 service regulation for all of your expenditures. Is 19 that correct? 20 MR. BOURKE: That is correct. As I 21 mentioned before, this format has been in use since 22 1994. 23 MS LEA: I take it that it is your 24 position, as I understood your evidence today, that no 25 incremental information needs to be filed to recognize 26 the fact that you are now on a PBR program for O&M 27 expenses. 28 That is your position. 982 BOURKE/GRANT, cr-ex (Lea) 1 MR. GRANT: Other than SQIs. We need 2 to file the SQI results. 3 MS LEA: In what format will they be 4 filed? 5 MR. GRANT: That is still to be 6 discussed. That would be something that we would sit 7 down with the E.R.O and go through. 8 MS LEA: I am sure that you would 9 accept, however, that if the Board determined that the 10 E.R.O. should report to it in a more fulsome manner or 11 that you should file with the E.R.O. in a more fulsome 12 manner because of the change to a PBR regime for your 13 O&M expenses, of course you would obey that Board 14 direction and file additional material with the E.R.O. 15 MR. GRANT: Absolutely. 16 MS LEA: Do I understand, Mr. Grant, 17 that it is your position that anything that you file 18 with the E.R.O. is of a confidential nature and you are 19 not willing to release it? 20 MR. GRANT: Yes, that's my 21 understanding. 22 MS LEA: Is that because of the 23 nature of the material or your understanding of the 24 legislation? Or is it tradition? 25 I am trying to understand the nature 26 of your objection to releasing it. 27 MR. GRANT: Well -- 28 MR. BOURKE: May I add something? 983 BOURKE/GRANT, cr-ex (Lea) 1 MS LEA: Please, anybody. 2 MR. BOURKE: On my monitoring 3 reports, it is in the nature of the material. It 4 contains a forecast to the year end. It includes 5 financial results which have not been reviewed, as 6 Mr. Grant said, at the MT level. They have not 7 received the benefit of full audit. They could mislead 8 the financial community, and they have been filed on a 9 confidential basis. 10 If they were to become public, they 11 would need to be prepared differently. 12 MS LEA: I understand. 13 MR. CASS: Ms Lea, I assume you also 14 are aware of the confidentiality provision in section 15 111 of the Act. 16 MS LEA: Very well, Mr. Cass; thank 17 you. 18 I just want to follow up for a moment 19 on the nature of the information. 20 Mr. Bourke, I understand that the 21 information you provide in your reports is unaudited. 22 MR. BOURKE: Correct. 23 MS LEA: And not in such a state that 24 it should be released publicly merely from the nature 25 of the information provided. 26 MR. BOURKE: Correct. It also would 27 not lend itself readily to detailed examination. The 28 process was intended, as I mentioned earlier, to give 984 BOURKE/GRANT, cr-ex (Lea) 1 an indication of an order of magnitude directional 2 significance without carrying the weight and 3 consequence of evidence available for discussion and 4 disclosure in a public forum. 5 MS LEA: Yes. Thank you. 6 Is there anything that you file with 7 the E.R.O. on either a quarterly or an annual basis 8 that is audited information? 9 MR. BOURKE: No, not from my areas. 10 MS LEA: Mr. Grant? 11 MR. GRANT: Not that I am aware 12 of, no. 13 MS LEA: Okay. 14 Have you considered in your mind what 15 material you might file with respect to your O&M 16 materials if a one-line item was not sufficient? Have 17 you thought about that, what sort of information would 18 be filed? 19 MR. GRANT: If the E.R.O. wanted to 20 know a little bit more detail on a particular item 21 within the report we could certainly provide that 22 information, whatever the information is that he or she 23 would need to just discharge their duties. 24 So we would want to, I think, sort of 25 deal with it on an ad hoc basis to see what might arise 26 and if there are questions we will certainly answer 27 them. 28 MS LEA: Given the speculative 985 BOURKE/GRANT, cr-ex (Lea) 1 nature, then, of that information, we would have no 2 idea at this time as to whether it would be audited or 3 unaudited I gather? 4 MR. GRANT: That's correct, yes. 5 MS LEA: Thank you. 6 Again this is somewhat speculative, 7 but I would ask you to turn your mind to what the 8 company's position would be. Understand that I don't 9 speak for the E.R.O. in this matter, I don't know what 10 their view was, but what would the company's view be of 11 this scenario. 12 If you were asked by the E.R.O. or 13 the Board to file information with the E.R.O. that was 14 not of a nature that made the information itself 15 confidential, that is maybe it was audited information 16 or information that would not create any harm were it 17 released publicly, would not create any confusion, 18 would you object to its release because it was filed 19 with the E.R.O.? 20 MR. GRANT: If we filed information 21 with the E.R.O. that had already been released or was a 22 component of information that had been released to the 23 financial community prior to that time we would have 24 less concern over it, but once again I would want to 25 see the nature of this information before we commented 26 further on its filing publicly. 27 MS LEA: Thank you. 28 Mr. Grant, the reason I asked that 986 BOURKE/GRANT, cr-ex (Lea) 1 question is in one of your responses you spoke about 2 the integrity of the filing process with the E.R.O. As 3 Mr. Cass has pointed out, section 111 of the new 4 Ontario Energy Board Act talks about the fact that all 5 information and material furnished to or received or 6 obtained by the E.R.O. is confidential. 7 However, there are, I would suggest, 8 certain circumstances where that information can be 9 released. The first is in section 109 where the E.R.O. 10 is required to disclose to the Board all matters he or 11 she thinks relevant. 12 The second is section 110 provides 13 the procedure for that information to be released in a 14 proceeding before this Board. 15 Thirdly, another matter would be if 16 you were content that it be released, that is that you 17 would consent to its release. 18 What I am trying to do is push the 19 boundaries a little and understand what type of 20 material you might consent to be released. Is all the 21 material that you file with the E.R.O. confidential in 22 nature from its very nature? 23 MR. GRANT: I think we should start 24 out with the assumption that it all is. All of it is 25 confidential. If there was a desire to release some of 26 that information and, from our point of view, if that 27 information would be released in any event as part of a 28 proceeding, a rate proceeding, then that may have some 987 BOURKE/GRANT, cr-ex (Lea) 1 impact on our discussions with the E.R.O. 2 But again, I think we should all 3 proceed on the assumption that everything is 4 confidential and should not be released unless there is 5 consent from the parties that are involved with the 6 information. Obviously, that is the Applicant. 7 MS LEA: If, however, there was a 8 requirement to file with the E.R.O. such material as 9 you have always traditionally filed in the rate cases 10 with respect to O&M expenses, that is a line-by-line 11 accounting, what would suddenly make that material 12 confidential? 13 It has been disclosed publicly for 14 years. What suddenly makes it confidential because it 15 is with the E.R.O.? 16 MR. GRANT: Well, I think once again 17 we are back into if a party was attempting to get a 18 line-by-line review of O&M by going through the E.R.O. 19 to get it and then dump it into a regulatory 20 proceeding, we would have a lot of problems with that 21 from an efficiency point of view. Also from the point 22 of view of the kind of signal it sends to companies 23 under PBR. 24 I might add in passing that at the 25 National Energy Board we -- "we", Enbridge Consumers 26 Gas -- are intervenors in the TransCanada proceedings. 27 The TransCanada Tolls Task Force deals with issues that 28 are within the incentive envelope for TransCanada 988 BOURKE/GRANT, cr-ex (Lea) 1 Pipelines. Before we can even enter into discussions 2 with TransCanada and attend the task force we must sign 3 a confidentiality agreement, all parties must, and that 4 confidentiality agreement prohibits us from using the 5 information from that process to then go forward to the 6 NEB in some later process. 7 So it is very restrictive, and it 8 should be because that is what makes PBR work. That is 9 what is making it work at the National Energy Board 10 level with TransCanada. 11 So if, for whatever reasons, there 12 are -- through the E.R.O. there is information that we 13 consider confidential that it is going to find its way 14 into a public forum, then maybe we all ought to step 15 back and say it is time to have written confidentiality 16 agreements so we don't have to deal with this. 17 MS LEA: Okay. I think perhaps I am 18 missing in my mind two concepts here. 19 As I understood your objection to 20 other parties having access to E.R.O. material that has 21 traditionally been filed in rate cases, I understood 22 your objection to that to be the loss of regulatory 23 efficiency and the prejudice to PBR regimes. Am I 24 correct about that? 25 MR. GRANT: Yes, that's correct. 26 MS LEA: All right. Thank you. 27 So that is not a confidentiality 28 concern, that is a concern about loss of regulatory 989 BOURKE/GRANT, cr-ex (Lea) 1 efficiency and PBR benefits? 2 MR. GRANT: That's a fair 3 comment, yes. 4 MS LEA: Okay. Thank you. That's 5 helpful. 6 Thank you very much. 7 Those are my questions. 8 THE PRESIDING MEMBER: Thank you, 9 Ms Lea. 10 The Board has some questions. 11 Ms Halladay. 12 EXAMINATION 13 MEMBER HALLADAY: We have gone on a 14 long time and I really hate to belabour the point. 15 On the issue of regulatory 16 efficiency, I guess, my question is -- and I'm having a 17 really difficult time balancing all the balls in the 18 air. 19 I appreciate that as a regulated 20 industry you have a myriad of filings to do, including 21 Securities Act, income tax, this Board, et cetera, 22 et cetera. 23 My question is: What is the 24 incremental cost to the company as far as continuing to 25 file O&M expenses on a line-by-line item? In other 26 words, I understand that presumably you have to do your 27 O&M allocations for internal purposes, I understand it 28 is not audited, I understand that you have to take away 990 BOURKE/GRANT 1 the non-utility eliminations, but incrementally what 2 are we really talking about? 3 I got the list of the steps that need 4 to be taken in answer to one of the interrogatories 5 but, in my reading though, a lot of those steps would 6 have to be taken in any event for internal purposes or 7 income tax purposes or other purposes. Can you give me 8 a rough ballpark on just the incremental additional 9 regulatory burden that would be put no by this Board 10 alone? 11 MR. GRANT: I think I can. 12 I think the first thing to recognize 13 is that these studies that were spoken about in that 14 undertaking response have been part of our operations 15 for the last few years in any event. So we are 16 starting from a base where we have been doing that kind 17 of work. 18 The work is long and involved and 19 costly in terms of time. 20 In terms of overall dollar cost I 21 haven't done a study, but I wouldn't be surprised if it 22 added up to something close to $1 million in terms of 23 people's time actually filling the forms out and 24 analyzing it and so on and then testifying to it in the 25 proceeding. 26 So those are the costs that we are 27 hoping to be able to shed to a significant degree as we 28 move into PBR and drive out a benefit in the result. 991 BOURKE/GRANT 1 So incrementally from today, well, we 2 have been doing this work under cost of service for 3 awhile. If you had a PBR regime that walked and talked 4 like a cost of service we would continue to do it and 5 there wouldn't be any incremental cost starting from a 6 cost of service point. But it is really a lost 7 opportunity to try to save time and money through the 8 implementation of PBR. That's what I'm really talking 9 about here. 10 MEMBER HALLADAY: No, and I 11 appreciate that fact and I appreciate that this 12 information is not relevant in the PBR envelope except, 13 presumably, for two reasons, it seems to me. 14 One is at the end for rebasing at 15 some time. 16 Secondly, from my perspective I think 17 that there is a feeling -- at least I get this feeling 18 that the information should be available in some form 19 because one of the items that this -- one of the 20 reasons for these hearings is the testing of that 21 information as it is going along. 22 I'm not saying the testing -- I see 23 Mr. Cass is nodding -- but if that information -- and, 24 as I understand it, I think it was Mr. Janigan you 25 told, this information would be available presumably -- 26 or might be subject to interrogatories in the rebasing 27 year. Is that correct? 28 MR. GRANT: Yes, I think that is 992 BOURKE/GRANT 1 fair. I think when it comes to rebasing three years 2 hence, if the Board felt at that point in time that it 3 would be advisable to have the company do a full-blown 4 study just prior to rebasing, so that from the Board's 5 point of view when it comes along and we, the Board, 6 have to look at this thing again and try to figure out 7 the rebasing issue that the company has done a study in 8 that third year to try to help the Board out. 9 If the Board at the end of the day 10 suggested that to the company, that would in fact be 11 sort of a compromise because it would allow us to not 12 do the study for a couple of years and drive out some 13 savings, incur sort of one-time costs at the very end 14 of the PBR to do a study, and we could even capture 15 those costs separately so the Board could look at 16 those, and that would provide an information base for 17 the next generation of PBR. 18 In my view, that would be a 19 reasonable compromise to the issues that you have seen 20 debated before you today. 21 MEMBER HALLADAY: Thank you. 22 THE PRESIDING MEMBER: Mr. Cass, the 23 Board has no other questions. 24 Over to you for re-direct. 25 MR. CASS: I have no re-examination, 26 Mr. Chairman. 27 Thank you. 28 THE PRESIDING MEMBER: Thank you. 993 BOURKE/GRANT 1 This panel is excused with our 2 thanks. 3 We will take a break now. 4 Are we ready with the next panel, 5 Mr. Cass? 6 MR. CASS: Yes, I think the next 7 panel is here and waiting to go so it can be available 8 after the break. 9 THE PRESIDING MEMBER: Okay. We may 10 take a bit longer break. Let's make it a half hour. 11 We will return at quarter to 4:00. 12 --- Upon recessing at 1511 13 --- Upon resuming at 1547 14 THE PRESIDING MEMBER: Please be 15 seated. 16 Mr. Farrell, welcome back. 17 MR. FARRELL: Thank you. 18 THE PRESIDING MEMBER: Any -- 19 MR. FARRELL: I have two preliminary 20 matters. 21 One has to do with scheduling. 22 Last Friday, you indicated, 23 Mr. Chair, if we could accomplish it, that you and your 24 colleague would prefer to have all of the CIS evidence 25 sequentially which would mean Mr. Stevens would follow 26 Ms Williams. 27 I said at the time I would check to 28 see if there were any scheduling problems. There is 994 1 one for the second instalment of Panel 10. 2 Mr. Bourke must be finished this 3 week. So if as we approach the end of the week it 4 appears that we couldn't do both Mr. Stevens and the 5 second instalment of Panel 10, I would be asking to 6 bring Panel 10 so we can ensure that Mr. Bourke would 7 be finished by the end of Friday. 8 Part of the scheduling turned on 9 whether Mr. Stevens would have completed his responses 10 to our interrogatories. So I just thought I should 11 alert you that there is that one scheduling problem. 12 THE PRESIDING MEMBER: Thank you. 13 MR. FARRELL: The other preliminary 14 matter was left to me by Ms Soudek on Friday, and that 15 was Undertaking No. J5.2. She said, at transcript 16 page 814, that we would advise whether we would give 17 the response as a response to an undertaking or include 18 it in argument. 19 The answer is we will file it as an 20 exhibit, so when it is filed it will become 21 Exhibit J5.2. 22 THE PRESIDING MEMBER: Thank you. 23 MR. FARRELL: I think Mr. Kent needs 24 to be sworn. Mr. McGill was sworn previously. 25 SWORN: DUNCAN KENT 26 PREVIOUSLY SWORN: STEPHEN McGILL 27 MR. FARRELL: This panel was 28 initially to consist of three witnesses, Mr. Kent, 995 KENT/McGILL, in-ch (Farrell) 1 Mr. McGill and Mr. Willett. Mr. Willett managed to get 2 out of town before we could finalize his schedule, so 3 what I have said to the intervenors is Mr. Kent will do 4 his best to answer questions related to the IS capital 5 budget which Mr. Willett was to speak to, but if we get 6 into levels of detail where Mr. Kent becomes 7 uncomfortable, then, depending upon the questioner's 8 preference, I suppose, on how it could be most 9 expeditiously dealt with, we will either do it by way 10 of undertakings and responses, or, if necessary, we 11 will empanel Mr. Willett as a witness on Wednesday or 12 thereafter. He is out of town until late tomorrow. 13 So, in other words, we will take the 14 IS capital budget issue as it comes and if we need to 15 have Mr. Willett, then those questions we will put over 16 until Mr. Willett can appear. 17 I apologize for that. 18 The panel consists of Mr. Duncan 19 Kent, who is the company's Vice-President, Customer 20 Information Services; and, Mr. Stephen McGill, who is 21 Manager of Customer Accounting Projects. 22 EXAMINATION-IN-CHIEF 23 MR. FARRELL: Starting with you, 24 Mr. Kent, is your curriculum vitae contained in 25 Exhibit A, Tab 17, Schedule 1? 26 MR. KENT: Yes, it is. But I should 27 make one small correction to my title. It is Customer 28 Information Systems, not services. 996 KENT/McGILL, in-ch (Farrell) 1 MR. FARRELL: Thank you for that. 2 That is embarrassing on my part. 3 Are you responsible for the exhibits 4 that are listed opposite your name in Exhibit A, 5 Tab 18, Schedule 1, and that are germane to the CIS 6 issues? 7 MR. KENT: Yes, I am. 8 MR. FARRELL: Are you also 9 responsible for the interrogatory responses in 10 Exhibit I that bear your name and that are germane to 11 the CIS issues? 12 MR. KENT: I am. 13 MR. FARRELL: Was this material 14 prepared by you or under your direction and control? 15 MR. KENT: Yes, it was. 16 MR. FARRELL: Is this material 17 accurate, to the best of your knowledge or belief? 18 MR. KENT: Yes, it is, with three 19 very minor corrections that I have come across over the 20 past couple of days. Perhaps, with your permission, I 21 will just run through those briefly. 22 The first is Exhibit B1, Tab 8, 23 Schedule 2, which was updated on the 21st of July. At 24 the top of the page it says "Page 1 of 2". It should 25 actually be "Page 1 of 1". This exhibit should replace 26 the two pages that had been filed on the 5th of March. 27 Just to make that clear, there is now 28 a one-page exhibit replacing the earlier two-page 997 KENT/McGILL, in-ch (Farrell) 1 version. 2 The next correction is Exhibit I, 3 Tab 4, Schedule 13. In the paragraph at the bottom of 4 that page, on the second line, the year "1998" appears. 5 That is incorrect. It should be the year "1997". 6 MR. THOMPSON: What was that one 7 again? 8 MR. KENT: It is Exhibit I, Tab 4, 9 Schedule 13. 10 In the second line of the last 11 paragraph the year "1998" appears. It should be 12 "1997". 13 The final correction is Exhibit I, 14 Tab 19, Schedule 10. On the second page of that 15 interrogatory there is a cross-reference to an IGUA 16 interrogatory. That cross-reference should be to 17 Interrogatory 13 rather than Interrogatory 12. That 18 correction has to take place at two points. The first 19 line says "IGUA Interrogatory 12". It should be "13". 20 The schedule number that appears at the very end of 21 that sentence reads "18" and it should be "13". 22 Those are my corrections. 23 MR. FARRELL: Thank you, Mr. Kent. 24 Mr. McGill, are you responsible for 25 the exhibits that are listed opposite your name in 26 Exhibit A, Tab 18, Schedule 1, and that are germane to 27 the CIS issues? 28 MR. McGILL: Yes, I am. 998 KENT/McGILL, in-ch (Farrell) 1 MR. FARRELL: Are you also 2 responsible for the interrogatory responses in 3 Exhibit I that bear your name and that are germane to 4 the CIS issues? 5 MR. McGILL: Yes, I am. 6 MR. FARRELL: Was this material 7 prepared by you or under your direction and control? 8 MR. McGILL: Yes, it was. 9 MR. FARRELL: Is this material, as 10 corrected by Mr. Kent, accurate, to the best of your 11 knowledge or belief? 12 MR. McGILL: Yes, it is. 13 MR. FARRELL: These witnesses are now 14 available for cross-examination, Mr. Chair. 15 THE PRESIDING MEMBER: Thank you, 16 Mr. Farrell. 17 Mr. Warren. 18 CROSS-EXAMINATION 19 MR. WARREN: Panel, I propose to deal 20 this afternoon with the issue of the Services 21 Agreement, in large part, because Ms Williams is here 22 in the room. So if you could turn up, please, three 23 documents. 24 The first is the Services Agreement 25 itself, which is Exhibit B2, Tab 7, Schedule 4. 26 The second document is Ms Williams' 27 prefiled testimony, which is Exhibit L25.1. 28 The third document, if you have it, 999 KENT/McGILL, cr-ex (Warren) 1 panel, is a decision of this Board issued in December 2 of 1997 in the matter of E.B.O. 177-15, which is the 3 affiliate transaction proceeding for Union Gas related 4 to the purpose of CIS services. 5 MR. KENT: We have the first two. I 6 am not sure that we have the third. 7 --- Pause 8 MR. WARREN: Let's see how far we can 9 get -- 10 MR. FARRELL: I can get it. If you 11 just want to bear with me, I will just walk down the 12 hall and get it right now. 13 THE COURT REPORTER: Can you repeat 14 the third one, please? 15 MR. WARREN: The last one is a 16 decision of the Board issued December 24th, 1997, in 17 the case of E.B.O. 177-15, which was an application by 18 Union Gas Limited and the then Centra Gas Ontario Inc. 19 for approval of affiliate transactions related to the 20 purchase of CIS services. 21 While we are waiting for that third 22 document, gentlemen, if I could just begin with some 23 preliminary background questions about the Services 24 Agreement. 25 First of all, is this, gentlemen, now 26 a completed agreement signed by the parties? 27 MR. KENT: No, it is not. 28 MR. WARREN: Can you tell me where on 1000 KENT/McGILL, cr-ex (Warren) 1 the continuum towards completion it is? 2 MR. KENT: The entity that will 3 replace Newco in this form of agreement has not yet 4 been finalized. The company is I think close to doing 5 so and we appreciate that there is some advantage in 6 moving quickly on it, but we have simply not been able 7 to do so yet. 8 MR. WARREN: Let me, then, ask you: 9 Can you identify, Mr. Kent, who or what Newco is and 10 what its relationship is to Enbridge Consumers Gas? 11 MR. KENT: Newco will, as I think it 12 is set out in some places in the evidence, be an 13 affiliate of Enbridge Consumers Gas, an affiliate, 14 though, that will not engage in any activities that 15 might lead to a concern with respect to affiliate 16 relationships in regard to gas marketing activities. 17 It will be an affiliate, though, of 18 Enbridge Consumers Gas. 19 MR. WARREN: May I ask, Mr. Kent, who 20 negotiated the services agreement which is a pre-filed 21 exhibit in this proceeding? 22 MR. KENT: I was part of that 23 process. Mr. Willett was involved, to some degree. 24 I think, though, that, as you will 25 appreciate, it was modelled extremely closely on the 26 agreement that was made between Union Gas and Enlogix. 27 Our sense was that we should attempt to find ways to 28 use, essentially, the same format, if we possibly 1001 KENT/McGILL, cr-ex (Warren) 1 could. It was an agreement that was negotiated between 2 two parties external to Enbridge Consumers Gas, 3 negotiated -- 4 MR. WARREN: Sorry. Which one was -- 5 MR. KENT: The Union Gas/Enlogix 6 agreement was. 7 -- and given that neither party was 8 in any way associated with Enbridge Consumers Gas, to 9 the extent that those parties satisfied themselves that 10 it was a fair and equitable agreement, if we could also 11 accept the same terms and conditions, it would be the 12 closest proxy that we could find to an agreement 13 negotiated at arm's length. 14 MR. WARREN: This was an arm's-length 15 negotiation? 16 MR. KENT: I would say, in our 17 instance, that, no, it was not. 18 MR. WARREN: Who was on the other 19 side of the negotiation? 20 MR. KENT: In essence, Mr. Willett 21 was on one side and I was on the other -- to the extent 22 that we were really representing ourselves as taking 23 sides. We weren't. We were trying to see if an 24 existing model agreement could be made acceptable; it 25 could be adapted to the company's needs. 26 MR. WARREN: Should the Board, then, 27 conclude, Mr. Kent, that after Newco is finally formed 28 that there will then be an arm's-length negotiation 1002 KENT/McGILL, cr-ex (Warren) 1 with respect to some or all of the services agreement? 2 Or will it simply be taken up or assumed by Newco as an 3 appropriate agreement? 4 MR. KENT: The current intention is 5 that it would simply be taken up and assumed. 6 MR. WARREN: May I ask, Mr. Kent -- 7 and in conjunction with the following series of 8 questions, it would be helpful if you could turn up the 9 Board's decision, E.B.O. 177-15, and I am going to 10 refer you, in particular, panel -- just bear with me -- 11 to page 36 of the decision, to paragraph 3.2.1. 12 The question I have for you, 13 Mr. Kent, is whether or not Enbridge had any what I 14 might call goals or principles that formed its 15 structuring of this services agreement. That's the 16 first question. 17 MR. KENT: I think I have already 18 suggested that our overriding goal was that we felt 19 that this existing agreement between two third parties 20 to Enbridge Consumers Gas provided a model that we 21 should strive to adopt; we should strive to find ways 22 to make this an acceptable form of arrangement between 23 two affiliates within the overall family of Enbridge 24 companies. 25 MR. WARREN: But the evidence that 26 was led in the E.B.O. 177-15 case was that the 27 agreement that was struck between Union and what was 28 then known as the UEI CIS division, that that had nine 1003 KENT/McGILL, cr-ex (Warren) 1 objectives -- and they are set out at paragraph 3.2.1 2 of the Board's decision. 3 I am wondering, Mr. Kent, if you 4 would agree that those nine objectives are appropriate 5 objectives by which to measure the agreement which is 6 proposed to exist between Consumers Gas Company and 7 Newco? 8 MR. KENT: I agree that those are 9 entirely appropriate objectives. 10 MR. WARREN: Okay. Finally, just a 11 couple of just mechanical questions about the 12 agreement. 13 When is the agreement to start, 14 Mr. Kent? 15 MR. KENT: The agreement starts with 16 the 1st of October, 1999, because the software, the CIS 17 software, is already in service and functional. The 18 software is going to still be under development through 19 the course of fiscal 1999 and, for what are primarily 20 tax reasons, Newco is not going to assume ownership of 21 the CIS software in final and complete form until 22 October 1st, 2000. But services will be provided as of 23 the 1st of October this year. 24 MR. WARREN: I don't, at this stage, 25 want to go into this in any detail, but as of October 26 1st of this year, there will be a services agreement 27 under which -- let me see if I have understood this 28 correctly -- under which Consumers Gas will be 1004 KENT/McGILL, cr-ex (Warren) 1 purchasing services from Newco in respect of services 2 which were delivered by virtue of assets which are 3 still owned by Consumers Gas? 4 MR. KENT: Newco will be making 5 payments to the utility -- in effect, prepayments of 6 the capital purchase amount or the capital amount -- 7 that will be transferred to Newco. So it's an 8 arrangement that you could probably characterize as 9 a -- I was going to say "lease-to-own"; it's not quite 10 a lease type of arrangement, but there are deposits 11 being made, I suppose is the best way of putting it, on 12 the ultimate purchase of the asset, which will not be 13 completed until the 1st of October, 2000. 14 MR. WARREN: Okay. A couple of 15 further preliminary questions. 16 If you could turn up Section 1.21 of 17 the services agreement. Under the heading, "Effective 18 Date", may I conclude that's the 1st of October of 19 1999? 20 MR. KENT: Yes, and that's why we 21 need to hurry up. 22 MR. WARREN: I'm moving as fast as I 23 can, Mr. Kent. 24 MR. KENT: No, I'm sorry, Mr. Warren, 25 I wasn't implying you. I was implying the company 26 needed to get moving on it. 27 MR. WARREN: If you could turn up, 28 then, Sections 9.3 and 9.5, the calculation of the 1005 KENT/McGILL, cr-ex (Warren) 1 estimated fee. The fee is not specified in the 2 document itself nor in any schedule to it. 3 Is there any way which the Board 4 can -- any way in which the Board can determine, from 5 looking at the agreement which has been filed, what the 6 fee will be in each of the years of the term of the 7 agreement? 8 MR. KENT: Yes. The fee is filed in 9 the total form, though it's not broken down into 10 components. 11 MR. McGILL: It's on page 52 of 53 of 12 the contract document. It's entitled "Attachment 3 - 13 Activity Forecast" and it's the third line from the 14 bottom, "Total Service Fees". 15 MR. WARREN: Thank you for that, 16 Mr. McGill. 17 That leads me to clarify the question 18 I should have asked you, which is: The breakdown, if I 19 get to that, is not set out in the agreement? 20 MR. McGILL: The breakdown of the 21 unit fees themselves? 22 MR. WARREN: Yes. 23 MR. McGILL: It is set out in the 24 agreement but it is not disclosed in the copy that's 25 filed in evidence. 26 MR. WARREN: And the term of the 27 agreement, beginning October 1, is what, Mr. Kent? 28 MR. KENT: The term of the agreement 1006 KENT/McGILL, cr-ex (Warren) 1 is for five years, from October 1, 2000. 2 MR. WARREN: Now, if I look at 3 Section 2.1 of the agreement, there is a provision for 4 requirement for Board approval. 5 Can you tell me, Mr. Kent, what would 6 happen in two circumstances. 7 First of all, if the Board were to 8 conclude that the proposed fee was inappropriate for 9 purposes of -- for rate-making purposes, what impact, 10 if any, would that have on the agreement between Newco 11 and Consumers Gas? 12 MR. KENT: Though this clause does 13 reference the need for an OEB decision, I do not 14 believe that there would be any immediate or direct 15 consequences of a decision by the Board that the fee 16 structure set out within this agreement was not 17 appropriate for ratemaking purposes; there would still 18 be a requirement that the utility make payments to 19 Newco, as set out in this agreement. 20 MR. WARREN: As a practical matter, 21 what would happen if the Board were to conclude, in 22 this hearing, that the fees should not be recovered, in 23 whole or in part, through rates? 24 MR. KENT: As a practical matter, 25 given that the two companies are affiliates, with a 26 common shareholder, that shareholder would suffer the 27 loss that would be associated with a decision not to 28 allow recovery through rates of the full amount of the 1007 KENT/McGILL, cr-ex (Warren) 1 contract fees set out herein, and whether it was the 2 utility or the affiliate that suffered the loss would, 3 I think, from a shareholder's perspective, not be 4 material. 5 MR. WARREN: The union case, E.B.O. 6 177-15, in the discussion of the contract terms, one of 7 the constraints on changes to contract terms was the 8 fact that the agreement has been signed. Arm's length 9 negotiation had taken place and it had not been signed. 10 The union was, therefore, reluctant, extremely 11 reluctant, to make any changes, though it did make 12 some. 13 If the Board, having heard all of the 14 evidence of Mr. Kent, were to conclude that in the 15 interests of the protection of the ratepayers and/or 16 Consumers Gas itself there ought to be changes made in 17 the agreement, is Enbridge or is Consumers prepared to 18 make any changes that the Board feels appropriate? 19 MR. KENT: I think, Mr. Warren, it's 20 very difficult to speculate on a question as 21 hypothetical as that without having a sense of the 22 nature of the changes that you might have in mind. 23 I think, for example, if the term of 24 the agreement was to be radically altered, either 25 lengthened or shortened, that that might lead to cause 26 for concern. 27 I can't immediately think of other 28 aspects that could be changed, but certainly one could 1008 KENT/McGILL, cr-ex (Warren) 1 envisage such significant changes being required that 2 it would then result in the agreement being no longer 3 one in which the Board of Directors of the utility or 4 the Board of Directors of Newco, when it's established, 5 would be prepared to accept. 6 MR. WARREN: Fair enough, Mr. Kent. 7 We certainly can agree that it is not an impediment in 8 this case, that there is a signed agreement between the 9 parties. 10 MR. KENT: The agreement is not yet 11 signed. That is correct. 12 MR. WARREN: Can I ask you then, 13 Mr. Kent and Mr. McGill, to turn up the prefiled 14 evidence of Ms Williams, Exhibit L25.1. 15 What I would like to do, so you 16 understand where I am going directionally and perhaps 17 we can speed the process up, is I would like to have 18 you hopefully agree with areas where you can agree with 19 Ms Williams or disagree with areas where you disagree 20 with Ms Williams so we have a clear record where you 21 join issue or agree with her on the observations that 22 she has made. 23 I would like to begin at page 2 of 12 24 of the agreement. Sorry, 1 of 12 of the agreement. Ms 25 Williams was asked certain questions. Among those 26 questions which are set out in numbered item 4 on 27 page 1 is: 28 "Does the proposed Services 1009 KENT/McGILL, cr-ex (Warren) 1 Agreement reflect all the terms 2 normally expected in a 3 commercial arm's length 4 contract, having regard to the 5 fact the parties, as affiliates, 6 are unlikely to resort to legal 7 action or suits for damages in 8 the event of a dispute?" 9 Do you agree that that is a relevant 10 standard by which to assess this agreement? 11 MR. KENT: I quite agree it is a fair 12 question to pose to Ms Williams. I think, though, that 13 it could be a matter on which there would be a variety 14 of opinions. Certainly Ms Williams might have one and 15 other parties might have others. 16 MR. WARREN: Fair enough, Mr. Kent. 17 MR. KENT: But it is a valid 18 question. 19 MR. WARREN: The next sentence is: 20 "Specifically, is the Services 21 Agreement, complete, standalone 22 and comprehensive?" 23 Do you agree that those are relevant 24 criteria by which to assess this agreement? 25 MR. KENT: I'm not sure, and we may 26 be getting into too much detail here, but I'm not sure 27 what the virtue of the agreement being standalone and 28 complete might be. 1010 KENT/McGILL, cr-ex (Warren) 1 If it's clearly linked to other 2 agreements, that might be an equally valid way of 3 framing a legal relationship or a contractual 4 relationship. 5 MR. WARREN: The third question: 6 "Does it clearly set out the 7 services to be provided, 8 financial matters and the rights 9 and obligations of the parties?" 10 Do you agree that those are relevant 11 criteria? 12 MR. KENT: Yes, I do. 13 MR. WARREN: And then in B: 14 "Does the Services Agreement as 15 drafted provide sufficient 16 protection for Enbridge and its 17 ratepayers from unnecessary 18 financial risk?" 19 Do you agree that those are relevant 20 criteria? 21 MR. KENT: They are relevant 22 questions to pose to Ms Williams. Yes, I agree with 23 that. 24 MR. WARREN: Can I ask you to turn up 25 then at page 3 of 12. Under the Board heading 26 "Deficiencies", we have 1(a). Ms Williams offered the 27 observation, and I am not going to read the entire 28 thing into the record, but the observation is: 1011 KENT/McGILL, cr-ex (Warren) 1 "The Services Agreement does not 2 provide a clear definition of 3 the services to be provided by 4 Newco." 5 Do you agree with that observation 6 and, if not, why not? 7 MR. KENT: I believe that the 8 agreement sets out a sufficiently clear description of 9 the services to be provided. Again, clear to me is in 10 this context a value judgment. Ms Williams clearly -- 11 you apologize if I don't -- if you will excuse my use 12 of a pun, Ms Williams clearly believes that there 13 should be a more extensive definition. 14 While I agree that it could be more 15 extensive, I don't believe that it's necessary or 16 warranted in this case. 17 MR. WARREN: Ms Williams observes in 18 the second paragraph of heading 1(a) that: 19 "The way to protect a customer 20 is to provide that the system 21 will perform certain functions 22 in the manner set out in a set 23 of specifications that have been 24 provided to and approved by the 25 Client." 26 She goes on: 27 "That way, each party has a 28 reference to how the service 1012 KENT/McGILL, cr-ex (Warren) 1 will be provided and the ability 2 to point to a clearly defined 3 description of the service in 4 the event of a dispute." 5 Now, to the extent that -- first of 6 all, do you accept that those are valid concerns on her 7 part? 8 MR. KENT: Yes, I do. 9 MR. WARREN: And to the extent she 10 feels there is not a sufficient definition of the 11 services in the agreement, how do you feel that concern 12 will be dealt with in the circumstances of your 13 agreement with Newco? 14 MR. KENT: The agreement with Newco 15 provides for the development of progressively more 16 detailed service level agreements. Within the 17 agreement there is a form of preliminary service level 18 agreement. 19 We anticipate that over time those 20 service level agreements will become increasingly 21 comprehensive and detailed as parties develop 22 experience in the use of the application. 23 MR. WARREN: Ms Williams in heading 24 1(b) observes: 25 "-- the lack of a clear 26 definition of Services could 27 impact the effectiveness of the 28 most favoured nations clause in 1013 KENT/McGILL, cr-ex (Warren) 1 the agreement (Section 9.8), 2 which provides that the point of 3 reference for pricing is an 4 agreement for `comparable 5 services'." 6 Do you agree with that observation? 7 MR. KENT: No, I don't because I 8 think that in the event that another service was to be 9 compared to this one, I think at that time it would be 10 appropriate to do a fully detailed analysis of the 11 services that were at that time required by and a value 12 to the utility and the ability of another system to 13 provide those same services. 14 If one were at this stage to describe 15 in great detail the services that are provided by the 16 software and then conclude that those were all going to 17 be of equal value in the longer term to the utility, 18 you might preclude consideration of a system that was 19 going to be able to provide all of the services that 20 the utility needed and was in fact, from the utility's 21 point of view, entirely comparable. 22 You would lock yourself into a 23 description that might be more demanding or include 24 services that would not in the longer term be of 25 immediate value to the utility. 26 MR. WARREN: Then on page 4 of 12 in 27 (c), Ms Williams says: 28 "The agreement should also 1014 KENT/McGILL, cr-ex (Warren) 1 contain a list of the components 2 of the system used to provide 3 the Services. This will be 4 important to the Client if, as 5 suggested in Section 4.13, the 6 Client needs to run a separate 7 version of the system to avoid 8 having to implement unwanted 9 changes to the software. If the 10 Client knows what the components 11 of the system are, it can more 12 easily determine the costs to be 13 incurred in running a separate 14 one." 15 Do you agree with that observation? 16 MR. KENT: I agree that it's 17 important to understand the components of the system 18 and the functions provided by each, but I would suggest 19 to you that the utility has a very good grasp of that 20 situation now and will through the term of the contract 21 through continued business relationships with Newco. 22 MR. WARREN: The second broad heading 23 of observation of deficiencies is "Restrictions on 24 information access". That appears at page 4 of 12. Ms 25 Williams observes: 26 "Although the Services Agreement 27 does contain provisions stating 28 that the Client's information is 1015 KENT/McGILL, cr-ex (Warren) 1 confidential, the security 2 procedures to be used by Newco 3 to maintain the security of a 4 Client's data are not set out. 5 These procedures should provide 6 for the technical separation of 7 the Client's data from the data 8 of other users of the system. 9 This is particularly important 10 when persons other than the 11 Client may also be using the 12 system." 13 Do you agree with those observations? 14 MR. KENT: I believe that the 15 Affiliate Relationships Code provides a sufficient and 16 adequate basis for performance standard that must be 17 met by Newco and, indeed, the utility in protecting the 18 confidentiality of utility information. 19 MR. WARREN: Can I take you to the 20 third heading of her observations under "Support 21 services", again page 4 of 12: 22 "Newco is to provide the Client 23 with maintenance and support 24 services for the CIS but these 25 services are only vaguely 26 defined in Section 4.11 as 27 services to provide `procedural 28 workarounds for the CIS and the 1016 KENT/McGILL, cr-ex (Warren) 1 Host System required to deliver 2 and support the Services'. 3 The agreement should set out the 4 support to be provided in a fair 5 amount of detail, including the 6 frequency with which the 7 services would be provided, the 8 frequency of updates and changes 9 to the CIS; the remedies of the 10 Client if the support services 11 are not properly provided; the 12 deliverables expected from the 13 support service; and the effect 14 of the services of the uptime 15 and performance of the CIS." 16 Do you agree with those observations? 17 MR. KENT: I do not believe that it 18 is necessary to include any such provisions. 19 Mr. Warren, I don't know how long we 20 are going to spend going through this, but I would like 21 to go back to our basic principle, and that was that 22 the agreement that had been made between Union Gas and 23 what became Enlogix was one that we believed to be 24 appropriate and complete from the perspective of two 25 affiliates who were entering into an agreement for the 26 provision of services essentially identical to the 27 services that are to be provided by Newco to Enbridge 28 Consumers Gas. 1017 KENT/McGILL, cr-ex (Warren) 1 Given that the services to be 2 provided are essentially identical, we felt that the 3 terms of the agreement between Union Gas and Enlogix 4 were terms that we should also be able to accept. 5 To the extent that the utility asked 6 for more stringent provisions in the agreement, there 7 was a risk that that might have an impact on the 8 comparability of the pricing provisions of the 9 agreement and eventually get into a situation where it 10 would be necessary to have a long and complex debate 11 about whether a particular provision in the contract 12 would warrant a particular change in the pricing 13 arrangement. We sought to avoid that as much as 14 possible. 15 We are seeking to simplify this 16 arrangement as much as we possibly could, and the 17 simplest way to do it was to adopt something that was 18 already in place. 19 MR. WARREN: I appreciate your 20 observations on that, Mr. Kent. This won't take very 21 long, but I do want to, if I can, get you to comment on 22 Ms William's critique. We should be able to move along 23 reasonably quickly on it. 24 On page 5 of 12, under the heading 25 "Modifications and Critical Days", she observes under 26 heading (a) that: 27 "Section 4.12 provides that the 28 Client cannot stop changes being 1018 KENT/McGILL, cr-ex (Warren) 1 made to the System. If the 2 Client does not want a change 3 made, Newco will create a 4 separate system for the Client 5 but this will require a new fee 6 structure..." 7 In Section 4.13: 8 "The Client has no assurances 9 that Newco will not implement a 10 change that the Client cannot 11 live with, thus necessitating 12 the Client paying new fees to 13 Newco to keep the system the way 14 it was." 15 Do you agree with that observation? 16 MR. KENT: I believe, subject to 17 check, that this section is identical, word for word, 18 with the comparable section in the Union Gas/Enlogix 19 agreement. 20 MR. WARREN: And for that reason, it 21 is acceptable to you. 22 MR. KENT: Given that the 23 relationship is between affiliates, and given the other 24 controls and limitations that exist in the agreement, I 25 think that this is an arrangement that is acceptable to 26 the utility. I know it is. 27 MR. WARREN: In 4(b): 28 "The evidence submitted by 1019 KENT/McGILL, cr-ex (Warren) 1 Enbridge mentions that there are 2 critical dates for 3 implementation of the system in 4 5 separate phases..." 5 And then she references the prefiled 6 evidence. 7 "There is no mention of these 8 phases or the required dates in 9 the agreement and consequently, 10 no penalties for failure of 11 Newco to meet those dates and no 12 contingency plans set out in the 13 agreement if the dates are not 14 met." 15 Do you agree with that observation, 16 and is it a concern to you? 17 MR. KENT: The observation is 18 correct, but it is not a concern. 19 MR. WARREN: And that is because you 20 are affiliated companies, or will be affiliated 21 companies when Newco is created? 22 MR. KENT: I think, ultimately, that 23 would be the factor that would lead to this particular 24 section being acceptable in the company's view. 25 The first phase of CIS is operational 26 now and was put into service two weeks ahead of the 27 scheduled date. We are on target for delivery of the 28 next release in the first week of November, and there 1020 KENT/McGILL, cr-ex (Warren) 1 are no indications at the moment of any concern with 2 respect to the timing of subsequent releases. 3 In the event that a release is late 4 going into production, the utility will be late in 5 receiving the tangible benefits that will flow from it. 6 So to the extent that a particular 7 release of CIS would permit productivity improvements 8 and cost savings in the utility, if the release is late 9 going into service those productivity improvements will 10 be delayed, and it is the utility and the utility's 11 shareholder that would suffer from that. 12 MR. WARREN: Finally on this topic, 13 in 4(c), she says: 14 "With respect to the critical 15 issue of Year 2000 compliance, 16 Section 4.17 provides only that 17 Newco will provide 'its 18 supplier's representation and 19 acknowledgement' that the CIS is 20 Year 2000 Ready. Although 21 Enbridge prepared much of the 22 software, it would appear from 23 the evidence filed that Price 24 Waterhouse Coopers also owns 25 part of the software and there 26 should be specific warranty from 27 Price Waterhouse with respect to 28 year 2000, that Newco is 1021 KENT/McGILL, cr-ex (Warren) 1 authorized to assign to 2 Enbridge." 3 First of all, is she correct in her 4 assumption, or her conclusion, that 5 Pricewaterhousecoopers owns part of the software? 6 MR. KENT: Yes, that is correct, 7 though the company has full and unrestricted use of 8 that software and has already conducted some testing to 9 confirm that that software is Year 2000 compliant. 10 We haven't finished that testing, 11 because we haven't finished development of the -- 12 excuse me. We have finished development. We haven't 13 finished testing of the release that is going into 14 service in November. 15 So that remaining Year 2000 testing 16 is part of that process. 17 MR. WARREN: Has Enbridge received a 18 warranty from Pricewaterhousecoopers with respect to 19 Year 2000? 20 MR. KENT: With respect to this 21 specific software, I am afraid I do not recall, 22 Mr. Warren. I will have to go back and look. 23 MR. WARREN: Could I have an 24 undertaking on that point, to determine that? 25 MS DESAI: That would be Undertaking 26 J6.4. 27 UNDERTAKING NO. J6.4: To 28 determine whether Enbridge has 1022 KENT/McGILL, cr-ex (Warren) 1 received a warranty from 2 Pricewaterhousecoopers that the 3 software is Year 2000 compliant 4 MR. WARREN: In the event that in 5 completing that undertaking it is determined that you 6 don't have a warranty from Pricewaterhouse, is there 7 any reason why you cannot obtain a warranty from 8 Pricewaterhouse with respect to Year 2000 compliance 9 for this software? 10 MR. KENT: I cannot at present 11 envisage what it might be. 12 MR. WARREN: Can I turn, then, to the 13 issue of pricing which appears on page 6 of 12, heading 14 5(a). 15 "Section 9.7 permits either 16 party to re-open the agreement 3 17 months before the expiry of the 18 3rd Contract Year, if there has 19 been a 'Material Change' between 20 the third contract year and the 21 subsequent contract years. A 22 Material Change is defined as 23 'an Activity Forecast which 24 anticipates an Estimated Fee for 25 the forward Contract Year that 26 is more than 10% different from 27 the estimated Actual Fee in the 28 current Contract Year, 1023 KENT/McGILL, cr-ex (Warren) 1 calculated at the time of the 2 delivery of the Activity 3 Forecast'. 4 The effect of Section 9.7 would 5 be to allow the supplier to 6 re-open the pricing of the 7 Services Agreement if the 8 activity volume is expected to 9 change (up or down) more than 10 10% from the then current 11 contract year, for example, 12 through the purchase or sale of 13 a division of the Client's 14 business, or through unbundling 15 of services. There is no 16 guarantee that the fees for the 17 remaining transactions would not 18 be increased to replace lost 19 revenue to Newco." 20 First of all, do you agree with her 21 interpretation of the agreement? 22 MR. KENT: Yes, I believe it is 23 correct. 24 I should go on perhaps to -- and if I 25 am on the wrong track, Mr. Warren, you will head me 26 off. 27 This is again a situation where we 28 have taken, word for word, terms that were in the 1024 KENT/McGILL, cr-ex (Warren) 1 agreement between Union Gas and Enlogix, and 2 particularly in a financial area such as this, we felt 3 that it was important to use the same terminology. To 4 do otherwise would raise some questions about the 5 comparability of the two agreements and the 6 reasonableness of comparing the pricing of the two 7 services. 8 MR. McGILL: I think it is also 9 important to note that this provision is bilateral, and 10 the utility does gain a benefit in being able to 11 approach Newco and re-open the pricing if the activity 12 levels do change significantly in the future. 13 MR. WARREN: In the succeeding 14 paragraph, panel, Ms Williams observes that: 15 "...the effect of Section 9.7 is 16 to put the Client at risk in the 17 event its business changes..." 18 MR. KENT: I'm sorry, could you point 19 more clearly to that, Mr. Warren. 20 MR. WARREN: The third paragraph in 21 section 5(a), Mr. Kent. It's at the bottom of page 6 22 of 12. 23 MR. KENT: Okay. 24 MR. WARREN: Do you agree with 25 Ms Williams' assessment that it does put the client at 26 risk in the event that the business changes? 27 MR. KENT: Yes. I think I would 28 agree with Mr. McGill's earlier suggestion that this is 1025 KENT/McGILL, cr-ex (Warren) 1 something that applies equally to both parties. 2 MR. WARREN: The risk, I take it from 3 that, is acceptable because it is a symmetrical risk? 4 MR. KENT: I think that that helps in 5 making any risk acceptable to a party in negotiations. 6 MR. WARREN: Now, section 5(b) deals 7 with the most favoured nations clause for pricing. To 8 summarize Ms Williams' observation, it flows from her 9 observation about the lack of precision in the 10 definition of services. She says at the top of page 7 11 of 12: 12 "If the Services Agreement is 13 left with a vague description of 14 services, limited remedies for 15 the Client and critical dates 16 for delivery and acceptance left 17 out, it is unlikely that it will 18 be possible to determine first, 19 whether the services are 20 `comparable' and second, to find 21 another agreement, particularly 22 if services are provided in the 23 comparative circumstances to an 24 arm's length customer, that 25 contains similar terms and 26 conditions to the subject 27 Services Agreement." 28 Do I take it that your earlier 1026 KENT/McGILL, cr-ex (Warren) 1 observation, namely that in the event that you have to 2 invoke the most favoured nations clause, by the time 3 that happens you will be able to define the services 4 with sufficient precision to be able to find 5 comparables. Is that fair? 6 MR. KENT: Yes, it is fair. I think 7 we would want to at that stage review the nature of the 8 services that were relevant to the utility at that time 9 in any event. 10 MR. WARREN: On section 5(c) on 11 page 7 of 12 she observes: 12 "In Section 4.9, if it is 13 necessary for Newco to acquire 14 additional Hardware and support 15 resources to meet the Client's 16 requirements, the Client agrees 17 to pay Newco for additional 18 expenses for such Hardware." 19 THE PRESIDING MEMBER: Mr. Warren, 20 you are gaining speed. 21 MR. WARREN: I was trying to slow 22 down, sir, but I'm so anxious to get this agreement in 23 place that I am just racing along. 24 I apologize to the court reporters 25 and I will read it again. Section 5(c): 26 "In Section 4.9, if it is 27 necessary for Newco to acquire 28 additional Hardware and support 1027 KENT/McGILL, cr-ex (Warren) 1 resources to meet the Client's 2 requirements, the Client agrees 3 to pay Newco for additional 4 expenses for such Hardware. The 5 risk to the Client is that, 6 since the agreement does not set 7 out what initial Hardware will 8 be provided by Newco to begin 9 with and no minimum 10 configuration that must be 11 provided for the initial fees, 12 the Client could be faced with a 13 bill for the acquisition of 14 hardware and would have no way 15 of proving that this hardware 16 should have been provided at the 17 start. The costs to the Client 18 under the Services Agreement 19 could increase significantly." 20 Do you agree with the concern 21 articulated by Ms Williams in that section? 22 MR. KENT: No, I don't think I do 23 really, Mr. Warren, for two reasons. 24 First, this reference is to the 25 provision of hardware for test database purposes and 26 given the current stage of development of CIS and the 27 existence of the full test environment that is 28 necessary for testing purposes, we know what is going 1028 KENT/McGILL, cr-ex (Warren) 1 to be required here. 2 We used this terminology again to 3 ensure that there was, as closely as possible, a match 4 with the Union Gas and Enlogix agreement. But I don't 5 think that this particular clause has any particular 6 relevance to our situation. 7 MR. WARREN: That is because your -- 8 MR. KENT: Because the test 9 environment is in place and because of the stage at 10 which we are in testing. 11 MR. WARREN: I then go on to the next 12 deficiency, which is in section 6 on page 7 of 12. 13 She says: 14 "The Services Agreement does not 15 provide for the ability of 16 Enbridge to continue to use the 17 CIS software or any other part 18 of the system after termination. 19 If the CIS software includes 20 third party owned software (for 21 example, PwC), then Enbridge 22 should obtain written assurances 23 from the third parties involved 24 that Enbridge will continue to 25 have [the] right to use the 26 third party software to other 27 material after termination of 28 the Services Agreement". 1029 KENT/McGILL, cr-ex (Warren) 1 Do you agree that you should do that? 2 MR. KENT: This is somewhat vague as 3 a suggestion, I think, in my interpretation, but I 4 would point out that we do have that assurance with 5 respect to the PwC software and, in fact, any other 6 third party software that is currently used or needed. 7 The utility has the right to use that 8 third party software. 9 MR. WARREN: That is in a written 10 agreement between Enbridge and -- 11 MR. KENT: Well, it depends on the 12 software. But with respect to PwC it is in the 13 agreement with respect to development or completion of 14 CIS that was concluded with PwC. Other forms of third 15 party software would each be covered by other software 16 agreements. 17 MR. WARREN: She then goes on to 18 observe in the next paragraph that: 19 "The Services Agreement should 20 include wording referencing a 21 side agreement between Newco and 22 any software supplier. This 23 side agreement would contain an 24 agreement by the software 25 supplier that if the agreement 26 between Newco and the software 27 supplier was terminated, the 28 software supplier would license 1030 KENT/McGILL, cr-ex (Warren) 1 the software directly to 2 Enbridge without additional 3 charge." 4 I take it that with respect to that 5 second point you say that has already been done? 6 MR. KENT: At the moment I wouldn't 7 anticipate that it would be necessary for Newco to 8 enter into any new software agreement with any third 9 party with whom the utility does not already have a 10 services agreement. 11 In the event of something of that 12 nature occurring, I suppose this could be a useful 13 precaution, though frankly I think that the likelihood 14 of ever wanting to use it or ever needing to use it is 15 extremely slim. 16 MR. WARREN: In terms of software 17 suppliers are we only dealing with PwC or are there 18 others? 19 MR. KENT: As long as the hosting is 20 conducted on utility-owned hardware there would be, I 21 believe, no other third party software involved. But 22 should Newco choose at some future date to outsource 23 the hosting of the application to another organization 24 it is conceivable that some other software might become 25 involved in the operation of the system, perhaps the 26 monitoring of the performance of the system or 27 something of that nature. 28 MR. WARREN: In those circumstances, 1031 KENT/McGILL, cr-ex (Warren) 1 since it isn't PwC and since it wouldn't be -- or it 2 might not be PwC and there isn't an agreement -- 3 wouldn't be an agreement with a software supplier, do 4 you then agree that Ms Williams' critique is an 5 appropriate one? 6 MR. KENT: I think that Ms Williams 7 is being cautious in the extreme, if I could put it 8 that way, and I would not think that the lack of such a 9 provision should be viewed as sufficient to torpedo an 10 agreement of this nature. 11 MR. WARREN: We hadn't gotten to -- 12 MR. KENT: That's my opinion. That's 13 my opinion. 14 MR. WARREN: We hadn't gotten to 15 anything so draconian as torpedoing. We were just 16 looking for a modest amendment to the agreement at this 17 stage and I take it that you don't feel that is either 18 necessary or appropriate? 19 MR. KENT: I do not feel that this 20 particular modification is in any way necessary. 21 Again I would reiterate that we have 22 modelled the agreement on the one between Union Gas and 23 Enlogix and such a provision does not exist in that 24 agreement, it was not viewed as necessary by Union Gas, 25 and given the similarity of the circumstances of the 26 two utilities I have some trouble understanding why it 27 would be necessary for Enbridge Consumers Gas if it was 28 not necessary for Union Gas. 1032 KENT/McGILL, cr-ex (Warren) 1 MR. WARREN: Let me deal then, 2 finally, with the issue of service levels and remedies. 3 This is on page 8 of 12 in section 7. 4 Ms Williams observes that: 5 "Specific and measurable service 6 levels are important in any data 7 services agreement because, when 8 properly drafted, measured and 9 monitored, they allow the Client 10 to keep daily, weekly and 11 monthly control over the 12 provision of the services and to 13 stop problems in service 14 delivery before they become 15 chronic and start to affect the 16 performance of the Client's 17 business. In my experience, 18 financial penalties for a 19 failure to meet the service 20 levels are usually negotiated, 21 with such penalties calculated 22 as a percentage reduction in the 23 monthly fees for a specified 24 decline in the required service 25 level. The Services Agreement 26 does not provide for these 27 penalties. The only remedy 28 available to the Client is to 1033 KENT/McGILL, cr-ex (Warren) 1 terminate the Services 2 Agreement." 3 First of all, can we agree that there 4 are no penalties in the services agreement? 5 MR. KENT: Yes, we can. 6 MR. WARREN: Is there any reason why 7 you would not put penalties of the kind she describes 8 into the Services Agreement? 9 MR. KENT: I think the primary reason 10 is that the two organizations have a common 11 shareholder, so to the extent to which one side or the 12 other suffers a disadvantage or what I will 13 characterize colloquially as "pain", then that concern 14 would be passed through the management structure to the 15 management of the affiliate that was causing that pain. 16 There would be, in the interest of the common 17 shareholder, a process of remedying the pain to the 18 extent that was appropriate. 19 MR. WARREN: She observes in 20 section 7(b) -- I'm about halfway down that first 21 paragraph in 7(b) -- that: 22 "...from the start date, a 23 minimum of 12 months will have 24 passed before the Client has an 25 effective termination remedy in 26 the event service levels are not 27 met. This allows far too much 28 time to pass before the Client 1034 KENT/McGILL, cr-ex (Warren) 1 has the ability to get out of a 2 contract that is not meeting its 3 needs." 4 Do you agree with that? 5 First of all, do you agree with the 6 calculation of the time periods? 7 MR. KENT: Yes, I do. 8 MR. WARREN: Okay. Then with her 9 critique which follows that, that this is: 10 "...far too much time to pass 11 before the Client has the 12 ability to get out of a 13 contract..." 14 Do you agree with that? 15 MR. KENT: I think that if there were 16 not the relationships between the two organizations as 17 affiliates that we have discussed on several occasions 18 this might well be a concern. I agree with Ms Williams 19 that in a contract between two entirely independent 20 organizations something of this nature would require 21 very careful attention in the negotiation of a 22 contract. 23 But given the affiliate relationship 24 there are other remedies for this sort of concern, and 25 the likelihood of problems with service delivery 26 escalating and getting out of hand is, I think, 27 dramatically less in this type of affiliate 28 relationship. 1035 KENT/McGILL, cr-ex (Warren) 1 There are other ways of ensuring a 2 comfortable working relationship and the provision of a 3 good quality of services other than seeking a legal 4 remedy through the agreement or through contentions 5 around the agreement. 6 MR. WARREN: Those other ways would 7 be internal to the common shareholder? 8 MR. KENT: Yes, they would. 9 MR. WARREN: All right. 10 She observes that -- this is 11 section 7(c) at the bottom of page 8: 12 "In Section 14.5.2, Newco is 13 only liable for damages for 14 breach up to an amount covering 15 the charges paid by the Client 16 during 2 month period before the 17 claim. This is a very short 18 period and it would be more 19 reasonable for the parties to 20 negotiate a limit of perhaps 21 6 to 12 months' of charges." 22 Do you agree with that? 23 MR. KENT: All of my comments on the 24 previous point would apply to this one as well. 25 MR. WARREN: Turning over the page, 26 the top of the page under "Warranties": 27 "Newco should warrant that it 28 will promptly prepare any 1036 KENT/McGILL, cr-ex (Warren) 1 modifications to the Services 2 and the software that are 3 required to stay current with 4 advances in technology or 5 changes to the operating systems 6 and third party software used to 7 provide the Services." 8 And her concern which is then 9 articulated in the next sentence is that: 10 "Otherwise, the customer may 11 find itself at the end of 12 5 years operating on obsolete 13 technology that will then 14 require a significant amount of 15 time, money and effort to 16 replace at the end of the term." 17 Do you agree, Mr. Kent, that there 18 should be this warrant or warranty in the agreement 19 from Newco? 20 MR. KENT: If you will wait just a 21 moment, Mr. Warren, we are just checking the wording of 22 the agreement to see because this is covered in some 23 fashion in the agreement. 24 --- Pause 25 MR. McGILL: I think section 4.2 on 26 page 10 of the agreement, that is page 10 of 53 of B2, 27 Tab 7, Schedule 4, "Technical Currency". 28 MR. WARREN: I'm sorry, Mr. McGill, 1037 KENT/McGILL, cr-ex (Warren) 1 you are slightly ahead of me. Can I ask for that 2 reference again? 3 MR. McGILL: It is page 10 of 4 Exhibit B2, Tab 7, Schedule 4, and it is Article 4.2 5 entitled "Technical Currency". 6 "Newco will regularly provide 7 updates of the CIS and services 8 as necessary to maintain 9 technical currency with software 10 on which CIS depends in any way 11 for its correct operation." 12 (As read) 13 MR. WARREN: Your position, your 14 evidence, Mr. McGill, is that section 4.2. is an answer 15 to the concern which is articulated on page 9 of 12 of 16 her evidence. Is that right? 17 MR. McGILL: Yes, it is. 18 MR. WARREN: Okay. 19 MR. KENT: I would agree with that. 20 Again, Mr. Warren, I would point out 21 that to my recollection this again is exactly the same 22 as the provision in the Enlogix-Union Gas agreement. 23 MR. WARREN: Under the heading 24 "Disaster Recovery" she observes that: 25 "The disaster recovery services 26 in Section 4.7 are inadequate to 27 protect the Client from the 28 effects of an inability to use 1038 KENT/McGILL, cr-ex (Warren) 1 the CIS site. It would be 2 preferable to include more 3 detailed disaster recovery 4 procedures that do not, as in 5 this case, rely solely on the 6 supplier to declare the disaster 7 and control whether the Client 8 can participate in disaster 9 testing." 10 Do you agree with those concerns? 11 MR. KENT: I believe that the 12 agreement, as negotiated between, or as accepted, 13 perhaps is a better way of putting it, by Enbridge 14 Consumers Gas is entirely adequate to protect the 15 interests of the company. 16 MR. WARREN: Okay. She finally 17 observes, under the heading "Audit Rights": 18 "Many data services agreements 19 allow the Client to audit the 20 charges included in the monthly 21 invoices provided by the 22 supplier, to ensure that the 23 numbers are accurate and require 24 the supplier to respond to and 25 correct any discrepancies found 26 during the audit." 27 And she observers that, at the end, 28 that: 1039 KENT/McGILL, cr-ex (Warren) 1 "These provisions are not 2 included in the Services 3 Agreement". 4 Is this a concern to you? 5 MR. KENT: No, it is not. 6 MR. WARREN: Now, I want to take 7 you -- ask you, as a general observation -- if I can 8 return you to page 2 of 12. 9 Under the heading, "Conclusion", in 10 the second paragraph, she makes the following 11 observation: 12 "As a result of the gaps in the 13 terms of the agreement, the 14 Services Agreement as drafted 15 does not provide sufficient 16 protection for Consumers [gap] 17 Gas --" 18 Freudian slip: 19 "-- and its ratepayers from 20 unnecessary financial risks." 21 Do you agree with that criticism, 22 Mr. Kent, Mr. McGill? 23 MR. KENT: I do not. I mean 24 Ms Williams is entirely entitled to her opinion, but I 25 would not agree that the suggestions she is making are 26 necessary, under these circumstances. 27 MR. WARREN: Now, one of the 28 observations which you have made, in several contexts, 1040 KENT/McGILL, cr-ex (Warren) 1 this afternoon, is that the protection arises from the 2 fact of the affiliate relationship. Fair enough? 3 MR. KENT: That conveys a measure of 4 protection to, in fact, both parties in the agreement, 5 I think. 6 MR. WARREN: Now, I want to, then, go 7 to the observations which follow in the next paragraph 8 of Ms Williams' conclusion, in which she says: 9 "Even though the current parties 10 to the agreement are affiliates, 11 it has been my experience that 12 affiliate relationships can 13 change and parties that were 14 once affiliated can become arm's 15 length entities. As a result, 16 it has been my practice to try, 17 as much as practically possible 18 to ensure that the terms of any 19 agreement between affiliates 20 sets out the terms of the 21 arrangement clearly and provides 22 for unambiguous descriptions of 23 the obligations and remedies of 24 the parties, as if the 25 contracting [parties] were arm's 26 length. This will, in many 27 circumstances, prevent future, 28 non-affiliated entities from 1041 KENT/McGILL, cr-ex (Warren) 1 experiencing problems with 2 performance under an agreement 3 that was signed under different 4 conditions." 5 Now, that is -- first of all, is it 6 possible that an agreement which is entered into today, 7 between affiliates, might, for example, be assigned by 8 Newco to an arm's-length provider? Is that possible? 9 MR. KENT: I think that may be a 10 legal question that I'm not entirely confident to 11 answer. But, certainly, given the fact that both 12 entities are fully and completely owned by a single 13 shareholder, at the moment, would mean that any 14 decision by the shareholder to divest itself of one of 15 the affiliates would mean that the shareholder would 16 then have an interest in ensuring that the side of the 17 agreement that was retained in ownership was protected 18 fully so that, at the time of a very speculative 19 situation in which one of the two affiliates were to be 20 spun off to another owner, the shareholder would, at 21 that time, both have an opportunity and reasons to 22 ensure that the entity that was retained was fully 23 protected. 24 MR. WARREN: May I summarize your 25 response in this way, Mr. Kent, that Ms Williams' 26 concern about affiliate relationships changing is met, 27 in your view, by the fact of the affiliate 28 relationships and the common shareholder. Is that a 1042 KENT/McGILL, cr-ex (Warren) 1 fair summary? 2 MR. KENT: I think that that would go 3 a significant way towards providing the kinds of 4 protection that Ms Williams believes are appropriate. 5 I also believe that it is appropriate 6 to protect both entities and, in particular, the 7 utility. But I think that the provisions to the 8 agreement are sufficient to do that. 9 I think you need to remember, too, 10 Mr. Warren, that we had dual concerns in trying to find 11 an agreement that was suitable for the provision of CIS 12 services. One was to provide for all of the legal and 13 contractual protections that might be desired by both 14 parties; and the other was to provide for a simple and 15 straightforward and acceptable relationship between the 16 two parties that would not entail any undue or 17 unnecessary complexities in their development or their 18 review by this Board. 19 We were trying, as I said before, to 20 simplify the process as much as we possibly could. And 21 in simplifying it, perhaps there were some things that 22 could have been added to provide higher levels of 23 protection, but they would have also entailed higher 24 levels of complexity in developing the agreement and in 25 explaining it to this Board. 26 MR. WARREN: I anticipate -- I know 27 what the answer will be to my next question but I'm 28 still young enough to be hopeful, Mr. Kent. 1043 KENT/McGILL, cr-ex (Warren) 1 Are there any changes which Enbridge 2 Consumers Gas is prepared to make to the services 3 agreement on the basis of what -- of Ms Williams' 4 observations contained in her pre-filed evidence? 5 MR. KENT: I think on the basis of 6 what we now know, we do not see it necessary to make 7 any of those changes. 8 Ms Williams, I believe, is going to 9 be taking the stand later in this proceeding and we 10 will have the opportunity to ask some questions of her 11 and it may be that, as a result of that questioning, 12 our thinking process will change and we will see more 13 reason to accept some of the suggestions she has made. 14 But at the moment, we do not see sufficient value in 15 any of the suggestions she has made to complicate the 16 agreement that we have drafted between Newco and the 17 utility. 18 MR. WARREN: Thank you very much. 19 Those are my questions on this issue, 20 Mr. Chairman. 21 I don't know that there's a consensus 22 as formed about my initial proposal but I'm assuming 23 that one way or another, at five o'clock in the 24 afternoon, you want to shut the process down. 25 THE PRESIDING MEMBER: Yes, we will 26 do that, Mr. Warren. 27 Are there any other matters, 28 Mr. Farrell, before we adjourn for the evening? We are 1044 KENT/McGILL, cr-ex (Warren) 1 going to stand down at five o'clock. 2 MR. FARRELL: That's fine. I didn't 3 know whether the other parties wanted to examine on the 4 services agreement and then come back. My 5 understanding is that there wasn't a consensus, so 6 Mr. Warren would continue with his cross-examination in 7 the morning. 8 THE PRESIDING MEMBER: I'm sorry. I 9 missed Mr. Warren's point. I apologize. It's the 10 lateness of the day. 11 MR. WARREN: Probably not the first 12 time you have missed my point. 13 --- Laughter 14 THE PRESIDING MEMBER: Then you will 15 continue on with the rest of the questions and so on 16 tomorrow. 17 MR. WARREN: That's fine, Mr. Chair. 18 THE PRESIDING MEMBER: Any other 19 matters, Mr. Farrell? 20 MR. FARRELL: No. 21 THE PRESIDING MEMBER: Mr. Thompson, 22 when do you plan to tell us whether you plan to take a 23 ruling? 24 MR. THOMPSON: Could I deal with that 25 first thing tomorrow morning, in terms of reporting on 26 it? 27 THE PRESIDING MEMBER: Certainly. 28 MR. THOMPSON: Thank you. 1045 KENT/McGILL, cr-ex (Warren) 1 MR. MONDROW: Just before we rise, 2 sir, just to update the Board: I have had discussions 3 with Mr. Farrell and I'm advised that Ms Reynolds 4 expects to be able to provide some information in 5 response to the Amended Prayer for Relief, with respect 6 to HVAC Coalition's motion, sometime on Wednesday. 7 I know, sir, that you raised the 8 issue on either Thursday or Friday and sought an 9 update, so I appreciate that, and that's the update. 10 I know the company and Ms Reynolds 11 are working as fast as they can on that and we will see 12 what comes back -- "we" being Mr. Farrell and I -- 13 comes back on Wednesday and advise the Board further, 14 at that time. 15 Thank you. 16 THE PRESIDING MEMBER: All right. 17 Thank you. 18 We will adjourn until nine o'clock 19 tomorrow morning. 20 --- Whereupon the hearing adjourned at 1655, 21 to resume on Tuesday, August 31, 1999 at 0900