1046 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 Tuesday, August 31, 1999, 24 commencing at 0900 25 26 RATES HEARING 27 28 VOLUME 7 1047 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 Coalition Inc., HVAC Coalition 16 GEORGE VEGH Coalition for Efficient 17 Energy Distribution 18 MARK MATTSON/ Energy Probe 19 MICHAEL HILSON 20 MURRAY KLIPPENSTEIN Pollution Probe 21 DAVID POCH Green Energy Coalition, GEC 22 MICHAEL JANIGAN Vulnerable Energy Consumers 23 Coalition 24 STAN RUTWIND TransCanada PipeLines 25 Limited 26 27 28 1048 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 1049 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 PREVIOUSLY SWORN: DUNCAN KENT 1054 5 PREVIOUSLY SWORN: STEPHEN McGILL 1054 6 Preliminary Matters 1054 7 Continued cross-examination by Mr. Warren 1065 8 Upon recessing at 1015 1100 9 Upon resuming at 1105 1101 10 Board ruling 1101 11 Continued of cross-examination by Mr. Warren 1101 12 Luncheon recess at 1230 1148 13 Upon resuming at 1333 1148 14 Continued cross-examination by Mr. Warren 1150 15 Cross-examination by Mr. Brett 1161 16 Upon recessing at 1525 1223 17 Upon resuming at 1550 1223 18 Cross-examination by Mr. Mondrow 1224 19 Hearing adjourned at 1705 1275 20 21 22 23 24 25 26 27 28 UNDERTAKINGS/OBJECTIONS 1050 1 NO. DESCRIPTION PAGE 2 3 J7.1 Mr. Kent undertakes to 1138 4 attempt to segregate any cost 5 impacts that may have resulted 6 from schedule changes or changes 7 in estimated costs 8 J7.2 Mr. Kent undertakes to provide 1147 9 estimate of the split of 10 $10.4 million between BPR 11 phase and analysis phases of CIS 12 J7.3 Mr. Kent undertakes to tell the 1152 13 Chairman where the $10.4 million 14 and its components has made its 15 way to the filings of the company 16 before the Board in previous cases 17 and the same thing for the indirect 18 costs 19 J7.4 Mr. Kent undertakes to report 1206 20 the why and the when for the 21 difference between paragraph 22 9.2 of the Union Gas-Enlogix 23 agreement and the Enbridge 24 Consumers Gas services agreement 25 26 27 28 1051 1 UNDERTAKINGS/OBJECTIONS (Cont'd) 2 3 NO. DESCRIPTION PAGE 4 5 J7.5 Mr. Kent undertakes to 1220 6 indicate for every dollar 7 or million dollars of closing 8 in to rate base the associated 9 depreciation expense and 10 accumulated depreciation 11 J7.6 Mr. Kent undertakes to 1241 12 inquire of the IS department 13 and advise as to who hosting 14 charge telephone inquiries 15 were made of other than IBM, 16 and whether the work involved 17 in the inquiries was more 18 extensive than by telephone 19 J7.7 Mr. Kent undertakes to provide 1244 20 a breakdown of the attribution 21 of costs involved for the 22 hosting charges 23 24 25 26 An objection can be found on page 1086 27 28 1052 1 EXHIBITS 2 NO. PAGE 3 4 K7.1 Document entitled "Ontario 1054 5 CPI Forecast for the PBR 6 Formula" 7 K7.2 Decision re Boston Gas 1224 8 Company, D.P.U. 96-50 (Phase I), 9 174 PUR4th 200, Massachusetts 10 Department of Public Utilities, 11 dated 29 November 1996 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1053 1 ERRATA/ADDENDA 2 REFERENCE DESCRIPTION 3 RP-1999-0001 - Volume 5 4 08/26/99 P. 727 L. 10-11 5 "customer service" S/B 6 "cost of service" 7 08/26/99 P. 28 L. 4 & 24 8 "imbedded" S/B 9 "embedded" 10 08/26/99 P. 739 L. 13 11 "I can answer that" S/B 12 "I can't answer that" 13 08/26/99 P. 740 L. 15 14 "right away" S/B 15 "right of way" 16 08/26/99 P. 740 L. 20 17 "as cheaply the" S/B 18 "as cheaply as the" 19 08/26/99 P. 740 L. 22 20 "bypass trunks" X/B 21 "bypass threats" 22 08/26/99 P. 747 L. 18 23 "at the six projects" S/B 24 "out of the six projects" 25 26 27 28 1054 1 Toronto, Ontario 2 --- Upon resuming on Tuesday, August 31, 1999, 3 at 0900 4 THE PRESIDING MEMBER: Good morning, 5 everyone. 6 PREVIOUSLY SWORN: DUNCAN KENT 7 PREVIOUSLY SWORN: STEPHEN McGILL 8 THE PRESIDING MEMBER: Any 9 preliminary matters, Mr. Farrell? 10 PRELIMINARY MATTERS 11 MR. FARRELL: Yes, Mr. Chair. First, 12 on day three, August 25, at transcript pages 560 and 13 561, Mr. Mees indicated that we would be filing the CPI 14 forecast for the PBR formula. Copies should be on the 15 dais. The document is entitled "Ontario CPI Forecast 16 for PBR Formula". If not, we can make copies 17 available. I suggest this be marked as Exhibit K7.1. 18 EXHIBIT NO. K7.1: Document 19 entitled "Ontario CPI Forecast 20 for the PBR Formula" 21 MR. FARRELL: I think Mr. Kent is in 22 a position to respond to undertaking No. J6.4 and he 23 would prefer to do it on the transcript as opposed to 24 in writing. It's just simpler that way. 25 MR. KENT: Yesterday we were asked to 26 determine whether or not Enbridge had received a 27 warranty from PriceWaterhouseCoopers that the 28 software's year 2000 compliant. That warranty does 1055 KENT/McGILL - Preliminary Matters 1 exist in the completion agreement between PWC and the 2 company. It exists at page 15 of 78 of Exhibit B2, tab 3 7, schedule 3. It's section 8.2 entitled PW 4 Warranties. 5 THE PRESIDING MEMBER: For the 6 record, the undertaking appears at transcript page 1021 7 and 1022. 8 Any other matters? Anyone else? 9 MR. WARREN: Good morning, Mr. 10 Chairman. Yesterday we had delivered to us an 11 undertaking response which is Exhibit J3.2. If the 12 Board has it, I would appreciate if they could turn the 13 undertaking up. 14 THE PRESIDING MEMBER: Yes, we have 15 it, Mr. Warren. 16 MR. WARREN: This was an undertaking. 17 The original undertaking arose from an exchange that my 18 friend, Mr. Thompson, had with the panel consisting of 19 Bayko, Reynolds and Dodd. It appears at page 446 and 20 447 of the transcript. 21 The undertaking was to give the 22 reference for a figure of $231,000 of imputed revenues 23 if the program were classified as fully allocated. The 24 undertaking response which was delivered to you 25 yesterday confirmed that it was a notional amount, 26 subject to potential imputation on the fully allocated 27 costs of the home gas appliances inspection program 28 were not part of the core utility safety offerings. 1056 KENT/McGILL - Preliminary Matters 1 The response to the undertaking on 2 the factual part is not controversial. However, added 3 to it was the following second paragraph: 4 "The disclosure of this 5 information during 6 cross-examination, without the 7 Company's consent, is contrary 8 to Rules 38.10 and 38.11 of the 9 Board's Rules of Practice and 10 Procedure and, as well, the 11 Board's Settlement Conference 12 Guidelines. The Company is not 13 prepared to disclose similar 14 information in the future unless 15 participants comply with these 16 provisions." 17 I observe, Mr. Chairman, at the 18 outset that I think it's regrettable that the second 19 paragraph was added by way of editorial comment. The 20 unfortunate aspect of it is it requires, in my 21 submission, a response. 22 In it, Mr. Chairman, the assertion 23 that this was confidential information is, in my 24 submission, not true. This was factual information, 25 the computation of a number, factual information that 26 was elicited during the course of the settlement 27 conference guidelines. 28 There was a specific allocation that 1057 KENT/McGILL - Preliminary Matters 1 this information was disclosed in violation of the 2 settlement conference guidelines and, in my respectful 3 submission, an implicit general submission or statement 4 that the intervenors are guilty of this kind of thing 5 on a regular basis. Neither of those, in my respectful 6 submission, is accurate. 7 It raises, however, a difficult 8 problem and since it has been raised, it requires 9 comment. The difficult problem, Mr. Chairman and Ms 10 Halladay, is that the settlement conference is now an 11 amalgam of the old technical conference and the classic 12 settlement conference. 13 As the Board is aware, there is no 14 longer a technical conference process which means that 15 some part of the settlement conference is simply the 16 eliciting of information. Now, information is in a 17 number of categories. One is pure information. What 18 is the figure, for example, if revenue were imputed to 19 such a program? Pure information. 20 A second is information which is 21 elicited but which may be offered as part of a 22 settlement package. The number is "X" and we are 23 prepared to stay with "X" as part of a larger package. 24 A third category of information is 25 the number is "X" but we will give you "Y" as part of a 26 settlement package. 27 Now, the difficulty comes with the 28 first category. The information is this. If 1058 KENT/McGILL - Preliminary Matters 1 intervenors are provided that information as part of 2 the general disclosure of information, which is not 3 part of the settlement process but part of the 4 discovery process, this information is in that 5 category. 6 The difficulty the intervenors have 7 is that they must be able to use that information as 8 part of their case. If there is to be a blanket rule 9 that any information, regardless of its character which 10 is disclosed within the four walls of the settlement 11 conference, can't be used, then the intervenors are at 12 a considerable amount of difficulty in presenting their 13 case. 14 This information, the $231,000 is in 15 the first category and is, in my respectful submission, 16 entirely innocent and should not have elicited the 17 comments in paragraph 2. No relief is requested in 18 this undertaking response. 19 However, I want the Board to be aware 20 of the difficulty we are having, all of us, and I 21 appreciate that Mr. Farrell and his client may 22 sometimes feel we are violating something which we're 23 not, but we need the Board to be aware that this is a 24 difficulty that we are at least in this respect 25 innocent and we believe generally we have adhered to 26 the settlement conference guidelines, but there is this 27 problem. 28 If it is going to continue to be a 1059 KENT/McGILL - Preliminary Matters 1 problem, then we may have to revert to the old 2 technical conference with a strict delineation between 3 information which is provided which is purely 4 informational and information which is given by way of 5 an offer of settlement. 6 Thank you, sir. 7 THE PRESIDING MEMBER: Thank you, Mr. 8 Warren. 9 Mr. Farrell. 10 MR. FARRELL: A part of Exhibit J3.2 11 that Mr. Warren didn't read was the last sentence of 12 the first paragraph. 13 "The information was also 14 included in the Company's 15 counterproposal to settle 16 outstanding issues, other than 17 CIS, as a package." 18 When you look at rules 38.10 and 19 38.11, 38.10 imposes a confidentiality requirement on 20 admissions, concessions, offers to settle and related 21 discussions. 38.11 says that admissions, concessions, 22 offers to settle and related discussions shall not be 23 admissible without the consent of the affected parties. 24 The first sentence of the second paragraph makes it 25 clear that our consent was not asked for. 26 I don't doubt that there may be an 27 informational problem in a settlement conference 28 context. Maybe in the future the informational stage 1060 KENT/McGILL - Preliminary Matters 1 can be identified clearly as such, but our complaint is 2 that this figure and the figure that Mr. Thompson 3 mentioned last Thursday, I believe it was, in relation 4 to the rental program were both referred to in our 5 counterproposal and it's to that we object. 6 We object for it being used without 7 our consent. 8 MR. WARREN: Mr. Chairman, may I 9 respond to that. 10 The difficulty we have is that it is 11 still a pure number. This is what the figure would be 12 if you imputed revenue. It can't be given a different 13 character if it becomes part of an offer to settle. 14 Otherwise the result is that, for example -- let me 15 take an extreme example. 16 Our information services budget is 17 $19 million. We are prepared to stay with $19 million 18 as part of our overall settlement package. Does that 19 mean that we can't use the $19 million figure in the 20 hearing? Surely not. Surely not. I am aware of the 21 second sentence, the last sentence in the first 22 paragraph. 23 The difficulty is that this is a pure 24 information number. It's not a number which is changed 25 as a result of the offer to settlement, so the problem 26 I have alluded to remains. 27 THE PRESIDING MEMBER: Ms Lea, do you 28 have anything to add? 1061 KENT/McGILL - Preliminary Matters 1 MS LEA: I don't think so; thank you, 2 sir. It doesn't appear that anyone is asking for the 3 Board to do anything about this difficulty at present. 4 Mr. Warren was noting it so that the 5 Board would be aware of the difficulty and might 6 perhaps consider it in its procedural orders in future 7 cases, or perhaps that intervenors and the company and 8 other folk who may be reading this transcript would be 9 aware of this difficulty and perhaps respond to it in 10 some fashion. 11 I don't think I need to comment on 12 the merits of either of the submissions at this time. 13 THE PRESIDING MEMBER: Mr. Warren and 14 Mr. Farrell, I am not sure what else the Board can say 15 at this stage, other than to note that at first glance 16 at that answer to the interrogatory, it seemed to me 17 anyway, when I read it last night, that it was simply 18 information which the Board would have to have if the 19 Board was persuaded by arguments to impute some 20 revenue. 21 As to the second paragraph, we will 22 note the comments by parties, and hopefully in the 23 future it will not put the whole idea of process in 24 jeopardy. 25 Are there any other preliminary 26 matters? 27 MS LEA: I was wondering whether 28 Mr. Thompson was going to speak to the time as to which 1062 KENT/McGILL - Preliminary Matters 1 he might address any argument that he might be making, 2 merely because I have certain commitments over the next 3 few days and needed to know when to come back. 4 MR. THOMPSON: I didn't want to 5 interrupt the CIS cross-examination, but I was going to 6 indicate that I will be requesting a direction from the 7 Board -- 8 THE PRESIDING MEMBER: Sorry, 9 Mr. Thompson, would you repeat that. 10 MR. THOMPSON: Yes. I will be asking 11 the Board to direct the company to file evidence 12 pertaining to the 1998 actuals. What I will be asking 13 the Board to direct the company to file are the reports 14 that it filed with the E.R.O. for 1998. 15 The reason I will be seeking that is 16 that that information, in my submission, is historic. 17 There can be no prejudice to the company, and it will 18 enable intervenors to at least scrutinize the format of 19 the reporting that the company says is appropriate for 20 monitoring under the PBR regime. 21 The other information that I will be 22 asking the Board to direct the company to provide is 23 with respect to the 1999 financial results. I am aware 24 that the company is concerned about this, but in my 25 submission the financial results in 1999, on a 26 normalized basis, are relevant for ratemaking purposes 27 in the context of deferral accounts, in the context of 28 the change that is proposed by intervenors to the 1063 KENT/McGILL - Preliminary Matters 1 transaction services deferral account. 2 For one, it is relevant to 3 determination by intervenors and evaluation of their 4 rights under the E.B.R.O. 497-01 decision. It is the 5 type of information that the Board has required of the 6 company in the past. There are many indicators that 7 the financial performance in 1999 is much greater than 8 what is shown in the "E" and "F" exhibits where the 9 sufficiency normalized is in the $27 million figure. 10 That is what I will be asking the 11 Board to provide. 12 I would suggest perhaps that we just 13 set a time to make that submission. I don't intend to 14 add a whole lot more, but perhaps at the conclusion of 15 this panel, or at some convenient time to the Board, 16 sir. 17 THE PRESIDING MEMBER: Mr. Farrell, 18 do you have anything to say? 19 MR. FARRELL: Mr. Cass will be 20 responding on behalf of the company. So as long as we 21 have a time certain so that he can be here, that should 22 be satisfactory. 23 In terms of his next appearance, it 24 will be when we have the second instalment of panel No. 25 10, which at this point looks like it will be this week 26 before Mr. Stevens' appearance. 27 I hate to guess when that will be, 28 but it looks like Thursday to me at this point, or 1064 KENT/McGILL - Preliminary Matters 1 perhaps Wednesday. 2 If you would like to set a time 3 certain, Mr. Chair, so that you have the argument on 4 Mr. Thompson's request for direction -- 5 THE PRESIDING MEMBER: It would 6 appear that Thursday morning would be an appropriate 7 time. 8 MR. FARRELL: Thank you very much. 9 MS LEA: I don't know, Mr. Chairman, 10 if you wanted me here. The only time I cannot be here 11 for certain is first thing Thursday morning, because I 12 have to have ten minutes over in the other hearing 13 room, or maybe 20. That is the only time I can't be 14 here. 15 THE PRESIDING MEMBER: Can we make it 16 Thursday then, first thing after the lunch break? Is 17 that satisfactory? 18 MS LEA: That is fine with me. 19 THE PRESIDING MEMBER: So Thursday, 20 the first thing after the lunch break. 21 We have to accommodate a number of 22 parties this week, so we will try to move as 23 expeditiously as possible. 24 Mr. Thompson, in that regard, I would 25 ask you to be brief in your comments. There has been 26 quite a bit of discussion on the record. I would 27 assume that the other parties would rely on 28 Mr. Thompson's remarks rather than add their own. 1065 KENT/McGILL - Preliminary Matters 1 Is that satisfactory? 2 Perhaps you could advise Mr. Thompson 3 from now until Thursday morning. I don't see the whole 4 thing taking more than 20 minutes to half an hour 5 maximum. Thank you. 6 Mr. Warren. 7 MR. WARREN: Thank you, sir. 8 CONTINUED CROSS-EXAMINATION 9 MR. WARREN: Panel, having dealt 10 yesterday afternoon with the details of the Services 11 Agreement, I would like to return this morning to the 12 CIS topic generally, and I would like to begin with a 13 review of the chronology of the CIS matter just so that 14 I can try and put a context on the current proposal 15 which is before the Board. 16 Mr. Kent, I don't need to deal, for 17 purposes of this hearing, in any detail at all with the 18 history of the project, but I wanted to touch briefly 19 on some of the points. 20 The CIS proposal, as I understand it, 21 Mr. Kent, has some part of the SIM proposal, and that 22 was introduced to the Board first in the E.B.R.O. 473 23 proceeding in fiscal 1992. Is that right? 24 MR. KENT: Yes, that is correct. The 25 CIS project has over time changed to some degree. I 26 think the initial concept for CIS that was put forward 27 in E.B.R.O. 473 was for a more limited system. At that 28 time we were talking about a very large number of 1066 KENT/McGILL, cr-ex (Warren) 1 projects. 2 Over time, and particularly as a 3 result of the BPR work, it seemed more effective to 4 aggregate some of those projects together into larger 5 units, and CIS was one of those projects that grew in 6 the process. 7 MR. WARREN: At the time it was 8 introduced to the Board in E.B.R.O. 473, am I correct 9 in my understanding that CIS in its then form was going 10 to be implemented internally within Consumers? 11 MR. KENT: The overriding principle 12 that I believe the SIM project was trying to accomplish 13 was that where it was possible to find a package 14 solution, a prebuilt solution that could meet the 15 company's needs or could be adapted to meet the 16 company's needs, we would adopt that solution. 17 It was at that time our view that the 18 ongoing maintenance cost of that kind of purchased 19 application would over time likely be lower than the 20 costs of developing and subsequently maintaining an 21 in-house developed application. 22 MR. WARREN: Was the plan in 473 to 23 purchase CIS or to develop it internally? 24 MR. KENT: At that stage, my 25 recollection is that there was no decision made. The 26 general principle was that if there was a package that 27 was appropriate, that would be used. 28 At the time that 473 took place, 1067 KENT/McGILL, cr-ex (Warren) 1 there had been only very preliminary scoping work done 2 and no detailed investigation of packages that might 3 meet the company's needs. 4 MR. WARREN: As I understand it, in 5 473 the SIM proposal generally, including CIS, was 6 supported in that -- first of all, it reflected in part 7 the work of a consultant called Nolan-Norton Canada. 8 Is that right? 9 MR. KENT: That is correct. 10 Nolan-Norton did work with the company to help us 11 understand our information technology needs and to 12 think strategically about how those needs could be best 13 met over the longer term. 14 The attempt was to get away from 15 tactical short-term decisionmaking in regard to 16 information technology and get a better long-term view 17 of where the company needed to be. 18 That's why we ended up calling it 19 SIM, or Strategic Information Management. 20 MR. WARREN: In addition, as I 21 recollect, in addition to Nolan-Norton's work there was 22 also a review of the plan filed in the 473 proceeding 23 by Coopers & Lybrand. Is that correct? 24 MR. KENT: I know that Coopers & 25 Lybrand was involved in some early studies, but I do 26 not recall the specific study you are referring to. 27 MR. WARREN: Okay. Can you take it 28 from me, subject to check, that at least the Board's 1068 KENT/McGILL, cr-ex (Warren) 1 decisions refer to a supporting document that was filed 2 by Coopers & Lybrand. The decision in the succeeding 3 proceeding 479 refers to the Coopers & Lybrand report, 4 and perhaps can you take that subject to check? 5 MR. KENT: Yes, I can. 6 MR. WARREN: Okay. 7 Now, in 479 and 485 -- 479 was for 8 fiscal 1993 and 485 -- for the record that is 9 E.B.R.O. 479 and E.B.R.O. 485 -- the SIM plan generally 10 was again discussed before the Board in those 11 proceedings and the CIS component of it was still to be 12 developed internally or to be purchased externally or 13 what. Do you recall? 14 MR. KENT: The CIS project was not 15 one of the earliest projects undertaken in SIM. There 16 was, I think, a realistic appreciation that we needed 17 to gear up for some of the very challenging projects 18 that lay ahead. 19 As a result, the initial SIM projects 20 that were started were fairly small in scope and 21 projects that -- in effect, the company was almost 22 practicing on those initial SIM projects, trying to get 23 the methodologies down straight, trying to understand 24 the implications of what was being undertaken and 25 getting ready to undertake some of the larger projects 26 later on. CIS, as one of the largest projects, was one 27 that was set at a later date on the schedule. 28 So I think, if I recall correctly, 1069 KENT/McGILL, cr-ex (Warren) 1 that it wasn't until fiscal 1994 that we really started 2 to even do any of the preliminary BPR work on CIS and 3 CIS-related processes in the company. 4 MR. WARREN: So in answer to my 5 question, for purposes of E.B.R.O. 479, which is fiscal 6 1993, and 485, which is fiscal 1994, am I correct in 7 understanding that no decision had been taken by the 8 company as to whether it would be developed internally 9 or purchased externally? 10 MR. KENT: That is correct. 11 MR. WARREN: Now, the Board in 12 E.B.R.O. 487, can we agree, Mr. Kent, that the Board in 13 that case ordered an independent audit of SIM to, in 14 the words of the Board, verify that the costs incurred 15 were reasonable, the benefits proposed were achievable 16 and that the company's plans are reasonable and within 17 its capability? 18 MR. KENT: That is my recollection, 19 yes. 20 MR. WARREN: As a result of the 21 Board's decision to require that audit, EDS -- all 22 12 or 15 of them, they appeared in the hearing -- 23 conducted an audit and the results of that audit were 24 considered in a second and separate phase of the 25 E.B.R.O. 490 proceeding, correct? 26 MR. KENT: That is correct. I 27 believe the independence of the audit was assured 28 through having the Energy Returns Officer act as the 1070 KENT/McGILL, cr-ex (Warren) 1 sponsor, really, of the audit. 2 MR. WARREN: If at the time of the 3 EDS audit and the 490 proceeding, was the plan that CIS 4 would be developed internally or that it would be 5 purchased externally from somebody? Do you know, 6 Mr. Kent? 7 MR. KENT: I don't know. I have a 8 copy of the audit here. I could review that, if you 9 don't mind my taking the time, Mr. Warren. 10 But certainly the principle was still 11 that we would, as much as we could, seek out externally 12 developed software that could act either as a complete 13 solution for the company's needs in each of these 14 projects, or the basis upon which the company and 15 external partners could develop a solution that met the 16 needs of the company and its customers. 17 MR. WARREN: Which leads me, 18 Mr. Kent, to the 492 proceeding, by which time there is 19 evidence recited in the Board's decision in that case 20 that there had been an agreement with Price Waterhouse 21 for provision of the balance of the CIS tasks. 22 Do you recall, Mr. Kent, when it was 23 that Price Waterhouse was retained and the purpose for 24 which it was retained? 25 MR. KENT: Price Waterhouse was 26 retained initially for a BPR exercise, and my 27 recollection is that it was the consolidation of BPR 28 work that had been done under the title of various SIM 1071 KENT/McGILL, cr-ex (Warren) 1 projects, consolidation of those into a single BPR 2 result that looked at the entire span of the processes 3 the company used in dealing with its customers. 4 So Price Waterhouse was first 5 involved in that stage. 6 There was then a request for proposal 7 process and one of the vendors evaluated in that 8 process was Price Waterhouse. Subsequent to that Price 9 Waterhouse was selected as the partner with whom the 10 company was going to develop a CIS solution. 11 So I think there were really two 12 engagements with Price Waterhouse. I gather it is the 13 second of the two that is of primary interest to you, 14 though, Mr. Warren. 15 MR. WARREN: Well, the reason that I 16 am inquiring about it is because the reference in the 17 Board's 492 decision is to a dispute with Price 18 Waterhouse over the ownership of the final product, 19 which suggests to me, testing my memory of it, that 20 Price Waterhouse had in fact been retained at that 21 point to design, build, whatever, the CIS system. Is 22 that a fair summary of it? 23 MR. KENT: Yes, it is. 24 My recollection of the matter -- and 25 again we are going back a number of years, but my 26 recollection is that at that stage we were working with 27 Price Waterhouse on some of the preliminary stages of 28 developing CIS, but there was not, at that stage, a 1072 KENT/McGILL, cr-ex (Warren) 1 signed contract covering the completion of that 2 software between the company and Price Waterhouse. 3 MR. WARREN: Now, the decision of the 4 Board in E.B.R.O. 490 on the second phase, which was 5 the one that considered the audit performed -- the 6 audit that had been order by the Board in 487, 7 conducted, as you say, under the auspices of the Energy 8 Returns Officer by EDS that had been the subject of the 9 second half of the proceeding 490, the decision of the 10 Board in 490, the final decision or the reasons were 11 issued December 27, 1995. 12 Mr. Kent, the decision of the Board 13 in 492 recited the fact that in January of 1996 -- that 14 is almost immediately after the issuance of the Board's 15 report in 490 -- that Coopers & Lybrand was retained to 16 address in part a discovery by the company that there 17 had been an increase in the CIS costs of approximately 18 $12 million since the Board's decision in E.B.R.O. 490. 19 Do you recall that? 20 MR. KENT: I don't recall it in 21 detail, Mr. Warren, but I will take it subject to 22 check. 23 MR. WARREN: The Board found -- can 24 you take this subject to check -- in E.B.R.O. 492 that 25 the engagement of Coopers & Lybrand was unnecessary in 26 light of the recent EDS audit and disallowed the 27 recovery of the EDS -- I'm sorry, the Coopers and 28 Lybrand consulting fee of $185,000, disallowed it from 1073 KENT/McGILL, cr-ex (Warren) 1 recovery in rates? 2 MR. KENT: I do recall that 3 disallowance, yes. 4 MR. WARREN: Okay. 5 Now, at this point, which is 6 chronologically roughly the first half of 1996, as I 7 recollect it, Mr. Kent, subject to your, no doubt, 8 better memory, we have Price Waterhouse which has been 9 engaged to build, I will put it that way, the CIS, your 10 acquiring CIS from Price Waterhouse. Is it not the 11 case that you began to run into delays, problems of 12 delays with Price Waterhouse and the completion of the 13 project, even as far back as 1996? 14 MR. KENT: In the design stage, which 15 I think would have been through probably the latter 16 half of 1996, it became increasingly apparent that it 17 would be more complex to develop or to make available 18 using the base Service 2000 product provided by Price 19 Waterhouse the full functions that the company needed 20 in order to meet its customers' needs. 21 As the detail design work was done 22 and more detailed estimates were being developed of the 23 manpower, the effort required to get the software 24 functional, the initial preliminary cost estimates for 25 the project had to be revised to show that additional 26 effort and that additional cost. Yes, all of that is 27 correct. 28 MR. WARREN: At a high level of 1074 KENT/McGILL, cr-ex (Warren) 1 generality what was occurring through 1996 into 1997 2 was: (a) the complexity of the project was increasing; 3 (b) the costs of completing the project were 4 increasing; and, (c) the time for delivery of the 5 finished product was slowing down. 6 Are those propositions fair? 7 MR. KENT: I don't think the 8 complexity of the project was increasing. I think that 9 in doing the detailed analysis of exactly how things 10 were going to be done, based on the Service 2000 11 product, it became apparent that some things that 12 seemed at first glance to be straightforward or 13 reasonably easy would in fact be a great deal more 14 complex to execute, more time consuming and requiring 15 either more people on site or a longer period of time 16 for their completion than had been anticipated in 17 earlier preliminary design work. 18 MR. WARREN: Now, by the time we get 19 to E.B.R.O. 497, which was the last main rates case 20 preceding this case, CIS was not addressed at all in 21 that case, as I recollect it, because the company was 22 dealing with the problem of delays, and, as it turns 23 out, was undertaking a fundamental review of what it 24 was going to do with the CIS program. Is that right? 25 MR. KENT: Yes, that is the case, and 26 that is described -- we have now caught up with my 27 evidence, Mr. Warren. 28 I think if you go back to my evidence 1075 KENT/McGILL, cr-ex (Warren) 1 at B1, Tab 8, Schedule 1, what Mr. McGill and I were 2 attempting to do at that point was to provide a 3 chronology starting from E.B.R.O. 495, which, as you 4 point out, had been the last time that the company had 5 really reported to any great extent on CIS to this 6 Board. 7 MR. WARREN: As ever, Mr. Kent, you 8 are ahead of me, so if you could turn up your original 9 prefiled evidence, which is B1, Tab 8, Schedule 1. 10 This was filed in February of 1999. As you pointed 11 out, this contained a summary of the events or referred 12 to the events from late 1997 on. 13 Now, as I understand it, looking at 14 page 3 of -- I'm sorry -- looking first at the first 15 page, then going to the second page, sometime in late 16 1997 the company -- that is, Consumers -- concerned 17 about that the testing was taking longer than planned, 18 took a decision that it was going to carry out a 19 complete review of the CIS project plan. Correct? 20 MR. KENT: The system testing began 21 in approximately either September of October of 1997, 22 and the initial portion of testing was taking longer 23 than anticipated. 24 Maybe I should explain that in 25 testing the process involves establishment ahead of 26 time of a whole series of categories of tests and types 27 of tests and a very detailed listing of the things that 28 have to be done in testing, together with an estimate 1076 KENT/McGILL, cr-ex (Warren) 1 of the average time that would be required to conduct 2 each one of those tests. 3 When the testing began in September 4 and October the initial time required on average for 5 each of those tests was substantially more than had 6 been anticipated in Price Waterhouse's schedule for the 7 project. 8 Now, initially, there was a thought 9 that this may be part of the learning curve; it may be 10 something that can be resolved over time. But in 11 November of 1997 Price Waterhouse reported to a 12 steering committee of the company's executives that the 13 testing metrics were still at a much longer time span 14 per test than had been anticipated in the budget. 15 Potentially, there was a problem and they were having 16 great difficulty in bringing the average time per test 17 down to a level that had been anticipated in the 18 budget. 19 The Price Waterhouse team was 20 instructed to redouble their efforts -- 21 MR. WARREN: Can I just interrupt 22 you. 23 MR. KENT: Sure. 24 MR. WARREN: I will get you to 25 continue in a moment. 26 But the testing, as I recollect it, 27 and as referred to here in evidence, the testing 28 involved work with South Carolina Electric and Gas. Is 1077 KENT/McGILL, cr-ex (Warren) 1 that right? 2 MR. KENT: South Carolina Electric 3 and Gas is another client site for Price Waterhouse 4 where Service 2000 is being installed. 5 But the two systems are not 6 identical. Obviously, there are a number of 7 differences in climate and tax and a number of other 8 things that meant that the version of Service 2000 that 9 is being developed and installed for their use differs 10 from the company's system. There was testing going on 11 at South Carolina as well, and it was somewhat earlier 12 in the year that Price Waterhouse had reported that 13 testing at South Carolina was going more slowly than 14 had been anticipated. 15 MR. WARREN: And the reason for my 16 interruption was that I wanted to understand. Was the 17 delays in Price Waterhouse's testing the South Carolina 18 iteration of this product or in the year 2000 -- I'm 19 sorry -- the System 2000 product, whatever it is, in 20 the Consumers Gas iteration? 21 MR. KENT: There were testing delays 22 at both sites. Price Waterhouse I think initially 23 believed that those delays encountered at South 24 Carolina could be overcome and resolved and would not 25 have an impact on our project. But the experience was 26 that we did encounter comparable effects, I think is 27 the better way to put it. 28 The unit time required for each test 1078 KENT/McGILL, cr-ex (Warren) 1 at our site was longer than it should have been, and 2 that was the case at South Carolina as well, as I 3 understand it. 4 MR. WARREN: Was the fault in the 5 testing delays that of Price Waterhouse? 6 --- Pause 7 MR. KENT: Price Waterhouse had 8 accountability for the development of the detailed 9 project plan and the provision of estimates for the 10 duration of different tasks. The fact that the actual 11 experience in our project differed from that estimate 12 or forecast exists. I guess that is the only thing I 13 can say. 14 I don't know whether we have 15 sufficient information to say that Price Waterhouse was 16 at fault in providing the initial estimates or whether 17 other circumstances, beyond their control perhaps or 18 influenced by other things, led to the actual tests 19 taking longer than they had anticipated. 20 MR. WARREN: You and Mr. McGill 21 observe on page 3 of your original prefiled evidence in 22 question and answer sequence 6 that management of a 23 project by Price Waterhouse had not provided a high 24 level of confidence in their ability to complete CIS in 25 a timely manner and for a cost close to estimates. 26 That is what you concluded on the basis of what Price 27 Waterhouse had done for you. Correct? 28 MR. KENT: That is certainly what we 1079 KENT/McGILL, cr-ex (Warren) 1 said in our evidence. I think that is a very 2 forthright way for us to put it. 3 MR. WARREN: By the time we get to 4 February of 1998 when you begin your review, what is 5 required, to use your words, is a rescue effort. 6 Correct? 7 I take those words from page 4 of 22 8 of your original prefiled evidence where you observe 9 apropos a company called Computer Sciences Corporation 10 that they had successfully completed this type of 11 "rescue effort" on other CIS projects. 12 So is it fair to say that in February 13 of 1998 what the company was looking at was the need 14 for a rescue effort? 15 MR. KENT: The terminology may be 16 unfortunate. I don't know exactly what you associate 17 with "rescue". 18 But clearly the company was aware 19 that the project was off its original course. Maybe we 20 will stick with a seafaring set of analogies here. We 21 needed -- 22 MR. WARREN: Not the Titanic, is it? 23 --- Laughter 24 MR. WARREN: I'm sorry, Mr. Kent, I 25 couldn't resist that. 26 MR. KENT: The project was not on 27 course to deliver as had been anticipated. Something 28 had to be done to bring it back on course and to bring 1080 KENT/McGILL, cr-ex (Warren) 1 it to a successful conclusion. 2 I think I would prefer to think of it 3 as a significant course correction being required at 4 that point rather than a rescue effort. 5 We appreciated that we had to do 6 something substantial. We could not continue with the 7 project in the form that it was in at that point and 8 have any expectation that we would be able to meet the 9 original project deadlines and budget. We had to do 10 something. 11 MR. WARREN: Now, beginning in 12 February of 1998, with your complete review of the CIS 13 project, was that review taken by you alone or was it 14 in conjunction with Computer Sciences Corporation? 15 MR. KENT: It was in conjunction with 16 Computer Sciences Corporation. I believe there is some 17 discussion in some of the interrogatory responses in 18 regard to that. 19 MR. WARREN: As your original 20 prefiled evidence indicates, and we don't need to 21 review it in detail, you have considered some five 22 alternate alternatives for this. I am looking, 23 beginning at page 3 of 22 of your original prefiled 24 evidence, at B1, Tab 8, Schedule 1. 25 You rejected completing the original 26 project with Price Waterhouse because you had lost 27 confidence in them. 28 The second alternative was to 1081 KENT/McGILL, cr-ex (Warren) 1 complete the project with the South Caroline Electric 2 and Gas Code with Price Waterhouse as the vendor and 3 you rejected that. Is that correct? 4 MR. KENT: I think, Mr. Warren, it's 5 probably better to say that we looked at five 6 alternatives and selected the best one, rather than 7 saying that we outright rejected any one of them 8 without looking at the overall package of potential 9 alternatives. 10 MR. WARREN: Now, what is not clear 11 to me from the pre-filed evidence is just the 12 chronology. 13 If I look at page 8 of 22 of the 14 original pre-filed evidence, it says, just before 15 question-and-answer sequence 9, that the CIS project 16 restarted on January 4 of 1999. 17 Am I to conclude, from that, that 18 that was a year-long or, sorry, 11-month-long review of 19 the CIS project? 20 MR. KENT: No. I think elsewhere in 21 the evidence it will be clear that we went through 22 various stages, first, trying to assess whether Price 23 Waterhouse's concerns and roughly restated estimate for 24 completion of the project was valid. 25 We wanted to get a sense of whether 26 their suggestion, in early 1998, that the project was 27 going to take a full two more years to complete and 28 substantially more money -- we wanted to get an 1082 KENT/McGILL, cr-ex (Warren) 1 assessment as to whether that was reasonable and fair. 2 That was the first stage in the process. 3 MR. WARREN: Who provided that 4 assessment? Was that Computer Sciences Corporation? 5 MR. KENT: Computer Sciences assisted 6 in that review, yes. 7 MR. WARREN: Okay. Go ahead. I 8 interrupted you. 9 MR. KENT: Having received advice 10 from CSC, we concluded that Price Waterhouse's 11 assessment of the state of the project, at that point, 12 was not unreasonable, that it was going to take a great 13 deal more time, effort and cost to complete, in the 14 original plan, than we had anticipated. 15 So that was the first stage, I guess, 16 then, in the review of alternatives. We knew that 17 there really was a problem, that it wasn't an 18 overstatement of the situation by Price Waterhouse. 19 At that stage, we needed to try to 20 develop alternatives and we ultimately came up with the 21 five alternatives -- I guess four more is a better way 22 of looking at it -- during the course of, probably, 23 April, May, June, of 1998. 24 By the end of June, we had developed 25 the in-house completion alternative to the point where 26 we felt, internally, that that solution was the right 27 one; it was the one that was in the best interests of 28 ratepayers and the company. 1083 KENT/McGILL, cr-ex (Warren) 1 We then submitted that concept to 2 review by CSC, and then by PricewaterhouseCoopers, to 3 get other objective evaluations of the risks and the 4 benefits of our proposed in-house solution. 5 In the very beginning of September of 6 1998, PricewaterhouseCoopers responded to us that they 7 did believe that it was a viable and, essentially, 8 sensible way to finish the project. But we were aware 9 that there were some risks associated with it. We were 10 aware of technical risks and we were aware that it was 11 going to be very important to understand the full 12 magnitude of the work required. 13 It was for that reason that we 14 conducted, through, essentially, September, October, 15 November, a proof of concept exercise and a very 16 detailed planning exercise for Phase I of the 17 completion of CIS. That was completed in late 18 November. 19 We made the decision that that was 20 what we wanted to do, what we needed to, in the 21 interests of ratepayers and the company, and we geared 22 up, through December, for a full-scale start on the 4th 23 of January, 1999. 24 MR. WARREN: In that last phase, the 25 testing phase, in September, October, November, was 26 that done by you? Or was it done by you with Computer 27 Sciences Corporation? 28 MR. KENT: Computer Sciences 1084 KENT/McGILL, cr-ex (Warren) 1 Corporation assisted us in that process, through 2 September, October, November. 3 MR. WARREN: Now, before I get to the 4 choice of the alternatives, can you tell me, Mr. Kent, 5 first of all, what was the cost of Computer Sciences 6 Corporation's involvement, throughout 1998, in the 7 rescue effort. Do you know? 8 MR. KENT: Well, as I mentioned 9 before, it wasn't a rescue effort -- at least I 10 wouldn't characterize it as such. But I don't have 11 that number separated out. I think if I did, there 12 would be some concerns about providing it in this 13 context. 14 We have provided information about 15 the cost of the project, as a whole, and the costs of 16 the work that was done by CSC are included in the 17 estimated cost to complete CIS. 18 Those costs, of course, as you are 19 aware, Mr. Warren, will be assumed by Newco, the 20 affiliate, when the asset is transferred to that 21 organization. 22 MR. WARREN: The costs of Computer 23 Sciences Corporation are included in the 119 million? 24 MR. KENT: That's correct. 25 MR. WARREN: And the reason for the 26 claim for confidentiality, in respect of the cost of 27 the Computer Sciences Corporation involvement, is what? 28 MR. KENT: I think we would have some 1085 KENT/McGILL, cr-ex (Warren) 1 concern about disclosure of those amounts. I think 2 that's something I would like to discuss with Computer 3 Sciences Corporation before we were prepared to make 4 those figures available. 5 But, again, I would point out, 6 Mr. Warren, that those costs will be costs incurred by 7 the affiliate, by Newco, and have no bearing whatsoever 8 on rates that will be paid by Consumers Gas customers. 9 MR. WARREN: We will get to that 10 point a little later. 11 But if I wonder if, at this stage, I 12 could get an undertaking from you to determine from 13 Computer Sciences Corporation whether there is any 14 problem in releasing the amount that they were paid for 15 their work, for you, in 1998 -- and, depending on the 16 answer to that, we may have to ask for a Board ruling 17 on disclosure. 18 Can I get that undertaking? 19 MR. KENT: Mr. Warren, I don't mean 20 to be argumentative but, until I'm clear, or until we 21 have some resolution on the question of whether or not 22 this has any bearing on the issues before the Board, at 23 this time, I would be reluctant to give that 24 undertaking. 25 MR. WARREN: I think Mr. Farrell 26 wanted to make submissions. I see -- 27 MR. FARRELL: I was just going to 28 re-emphasize Mr. Kent's point is that this is not a 1086 KENT/McGILL, cr-ex (Warren) 1 cost that the company is seeking to recover in its 2 revenue requirements so I fail to see its bearing in 3 this proceeding. 4 Objection 5 MR. WARREN: Our position, 6 Mr. Chairman, which we want to explore in 7 cross-examination down the road, is whether or not in 8 fact it is going to be indirectly recovered through 9 these service fees, whether in fact this is simply 10 transforming into another guise a way to get the $119 11 million from the ratepayers. 12 One of the arguments we may want to 13 make, very well may want to make, at the end of the day 14 is that if this is going to be recovered, albeit 15 indirectly, from the ratepayers, that we want certain 16 costs separated out of that, which is the cost of, for 17 example, rescue efforts. That's the reason we want the 18 information. 19 MR. FARRELL: My response to that, 20 Mr. Chair, is that this is an affiliate transaction and 21 the Code requires the pricing to be on fair market 22 value and if there's fair market value, costs aren't 23 relevant. 24 --- Pause 25 MR. JANIGAN: Mr. Chair, just before 26 you give your ruling on this -- I apologize for not 27 intervening sooner -- I think that this is an important 28 point that relates to a number of different matters 1087 KENT/McGILL, cr-ex (Warren) 1 that may come up in the context of the CIS examination. 2 I think that it is not simply the 3 costs that the company proposes to move to the 4 affiliated company and the chargeback of fees and the 5 assessment of whether or not those fees are reasonable 6 that is at stake at this hearing; it is the prudency of 7 the activities of the company throughout the CIS 8 period, and there are a number of references in the 9 decisions of the Board that the prudency of the CIS 10 plan will be examined by the Board at the conclusion of 11 the CIS activities. 12 This relates to matters such as 13 delays, and that relates to matters such as benefits. 14 It relates to matters such as the effectiveness of the 15 BPR process. It relates to the separation of 16 expenditures into appropriate categories. It relates 17 to a whole range of issues, but I don't think the 18 company can successfully avoid examination simply by 19 saying that because now the affiliate is taking over 20 the costs we don't have to account for the prudency of 21 our activities during the last six-year period. I 22 would respectfully request that the motion for 23 disclosure, or the request for disclosure, be granted. 24 MR. MONDROW: If I may add, sir, 25 before you continue; I have been listening with 26 interest to this exchange and, with great respect, this 27 system was developed over the course of many years with 28 the risk of development entirely on the ratepayers' 1088 KENT/McGILL, cr-ex (Warren) 1 shoulders. The company now seeks to dump all of the 2 costs into cost of service and it is disingenuous, with 3 great respect, to now say that because it is an 4 affiliate transaction the Board need not examine any of 5 those cost elements. 6 This is not a typical affiliate 7 transaction. We have been told repeatedly over the 8 years that the development costs will be good for the 9 ratepayers and, just by taking it out, the utility, 10 with great respect, can't avoid scrutiny of the 11 prudency of those costs over the years. 12 It is well within the Board's purview 13 to determine that some of those costs, through whatever 14 mechanism, should not end up with the ratepayers, 15 regardless of what the transfer price for the services 16 is. 17 MR. KENT: Mr. Chairman, I am sorry, 18 I have to jump in at this point because I am afraid 19 that Mr. Mondrow has seriously misrepresented the 20 company's position throughout, and I think, 21 particularly, comments to the effect that costs are at 22 the risk of ratepayers is a complete misunderstanding 23 of this entire process. 24 If that is what you believe, Mr. 25 Mondrow, then I think you need to go back and read the 26 evidence. 27 THE PRESIDING MEMBER: I want to 28 follow up. Mr. Farrell, just before you begin, I want 1089 KENT/McGILL, cr-ex (Warren) 1 an opportunity to ask a question of the parties who 2 have just spoken. 3 I am looking at the scoping document. 4 There are three issues that are laid out there. I will 5 give you a chance to turn it up. 6 --- Pause 7 THE PRESIDING MEMBER: As I 8 understand it, gentlemen, the first one is direct costs 9 of $10.5 million, and that has to do with the business 10 process re-engineering work and the analysis phase 11 work. I have read the evidence as those costs being 12 incurred from 1992 to 1996. Perhaps Mr. Kent can 13 correct me if I am wrong on this. 14 MR. KENT: That is correct. 15 THE PRESIDING MEMBER: That is the 16 first issue. 17 The second issue is the direct costs 18 of $13.4 million that relates to the allocation of the 19 SIM startup costs, and those, I would assume, would be 20 some many years. Mr. Kent, can you give us a -- 21 MR. KENT: That is also correct. 22 THE PRESIDING MEMBER: All right. So 23 it would be prior to what? 24 MR. KENT: I think approximately 1995 25 or 1996. 26 THE PRESIDING MEMBER: And then, of 27 course, there is the associated issue of the interest 28 during construction. 1090 KENT/McGILL, cr-ex (Warren) 1 I also understand from the evidence 2 that the company no longer seeks to recover any of the 3 capital expenditures associated with CIS in its rate 4 base; rather, it is going to pay a fee for services 5 received from the affiliate. 6 So those are the facts, as I read 7 them, in the evidence. 8 Mr. Warren, back to you: What does 9 the relevance of having the costs associated with 10 Computer Sciences Corporation have to do with the issue 11 at hand? Help me to understand. 12 MR. WARREN: In two respects, sir. 13 First of all, the $30 million which is going into rate 14 base. The claim from the company is that that $30 15 million arises from business process re-engineering, 16 which they say was antedated the development of CIS, 17 was the necessary base for the development of CIS, and 18 I do not know the extent to which -- 19 First of all, I need to explore the 20 extent to which, in fact, the chronology is correct, if 21 it was four or five years ago, as they allege. 22 Secondly, the question of whether or not those $30 23 million -- to what extent they may have been affected 24 by the various delays and what we will suggest is 25 mismanagement of the CIS project over time. 26 To that extent, I need to know what 27 are the costs of the various consultants, 28 PricewaterhouseCooper, and Coopers & Lybrand and, most 1091 KENT/McGILL, cr-ex (Warren) 1 recently, Computer Sciences Corporation, because I do 2 not take it at face value that the chronology, as set 3 up by the company, is correct, that all of those $30 4 million were incurred in a geological time years ago. 5 The second issue, Mr. Chairman, is 6 that while I now appreciate that the company's 7 position, boldly stated, is that the Board doesn't need 8 to look at the prudency of anything other than the $30 9 million worth of expenditures because it has been hived 10 off to an affiliate, in my respectful submission that 11 $30 million is going to be -- I'm sorry, the remaining 12 $90 million is going to be recaptured from the 13 ratepayers in new service fees and that they go to the 14 reasonableness of the service fees. 15 For that reason, it is open to the 16 intervenors to explore the reasonableness, the prudency 17 as my friend Mr. Janigan puts it, of these expenditures 18 over the years, including the expenditures on Computer 19 Sciences Corporation. 20 THE PRESIDING MEMBER: Mr. Warren, 21 that is where I have a problem. I don't see the 22 connection between the remaining capital costs or 23 capitalized costs of $90 million and the recovery of 24 those amounts through a fee. 25 Mr. Farrell pointed out that the fee 26 is subject to the code, as to the pricing of the 27 service, and I just have difficulty making that 28 connection. 1092 KENT/McGILL, cr-ex (Warren) 1 MR. WARREN: The evidence, Mr. 2 Chairman, is that -- we haven't got the evidence, but 3 what was implied yesterday in the testimony of Mr. Kent 4 was that this fee was negotiated between he and Mr. 5 Willett, and I don't know the extent to which it 6 reflects fair market value. It may simply be a number 7 that they have come up with, and it may be a number 8 they have come up with in order to recapture the costs 9 of the $90 million which is being paid by the 10 affiliate. I don't know that yet. That is something I 11 need to explore. 12 If it isn't, it may reflect an 13 attempt, indirectly, to recover the $90 million from 14 the ratepayers. 15 THE PRESIDING MEMBER: Are you 16 suggesting that the test of the reasonableness of the 17 fee depends on how much money the company has spent, 18 has capitalized, over the years, or is the test 19 something different, as to whether there is a 20 reasonable fee based on the services received in light 21 of analyses with other companies in the province or 22 elsewhere? 23 MR. WARREN: It may be both, sir. 24 THE PRESIDING MEMBER: Mr. Farrell? 25 MR. FARRELL: Mr. Kent has told you 26 the time period over which the three items in the 27 scoping proposal arose, and he has also told you when 28 Computer Sciences Corporation was retained. So unless 1093 KENT/McGILL, cr-ex (Warren) 1 Mr. Warren is suggesting that Mr. Kent is not telling 2 the truth, the CSC fees could not possibly be included 3 in the $30 million. 4 I also note, Mr. Chair, that in the 5 scoping proposal, at page 9 of 13, dealing with the 6 cost of service implications of CIS, the following 7 sentence appears: 8 "The issues are scoped, in 9 effect, by the Company's 10 evidence and the evidence on 11 behalf of CAC, IGUA and 12 VECC." (As read) 13 My reading of that evidence doesn't 14 indicate the issue that Mr. Warren is now seeking to 15 address. 16 But, in any event, the Affiliate 17 Relationships Code provides that in purchasing a 18 service -- and this is section 2.3.2 -- in purchasing a 19 service, resource or product from an affiliate, the 20 utility shall pay no more than fair market value. It 21 goes on to say: "For the purpose of purchasing a 22 service, resource or product developed, tendering 23 process shall be evidence of fair market value." That 24 is not to say it is the only evidence. 25 Fair market value is defined as the 26 price reached in an open and unrestricted market 27 between informed and prudent parties acting at arm's 28 length and under no compulsion to act. So it was in 1094 KENT/McGILL, cr-ex (Warren) 1 that context that I made the comment that the price 2 that the affiliate is willing to pay, and the costs 3 that may be included in that purchase price, is 4 independent of the determination of fair market value. 5 I would also note that ratemakers 6 such as this Board and others, in my experience anyway, 7 do not determine prudence in a vacuum. They determine 8 whether costs that the company or a utility seeks to 9 recover in its revenue requirement for ratemaking 10 purposes were prudently incurred. 11 In my submission, it is a stretch to 12 say that a service fee determined on the basis of fair 13 market value needs to have examined as part of the 14 process the elements of cost that make up the purchase 15 price by way of an examination of prudence. I just 16 don't see that Mr. Janigan's submissions hold water 17 when one examines the real purpose of a prudence 18 review. 19 THE PRESIDING MEMBER: Thank you, Mr. 20 Farrell. 21 Mr. Janigan, just a couple of 22 minutes. 23 MR. JANIGAN: Just by way of new 24 matters. There are two additional matters to which the 25 disclosure and review we are seeking relate to. One 26 involved the Y2K costs associated with the update to 27 the legacy systems. 28 I believe the company is seeking to 1095 KENT/McGILL, cr-ex (Warren) 1 recover $1.5 million of Y2K costs. We would be 2 seeking, obviously, to oppose the inclusion of those 3 costs on the reason of delay and the way in which the 4 program has been executed. 5 As well, there is the matter of the 6 benefits that are attributable to CIS as part of the 7 V-factor adjustments in the PBR formula. Of course, 8 the examination of the benefits with respect to CIS 9 must include what, if any, adjustments should be made 10 for foregone benefits associated with the delay in 11 bringing into completion or on service CIS in time and 12 what may be attributed as part of those factors. 13 I think that it is inescapable that 14 the conduct of the CIS plan has to be reviewed by the 15 Board in order to determine those issues as well as the 16 matters referred to by Mr. Warren. 17 MR. KENT: Mr. Chairman, if I might 18 just clarify one point. Mr. Janigan's reference to the 19 Y2K costs, the company is not seeking to recover any of 20 the Y2K costs associated with remediation of the legacy 21 customer systems. Those costs are in the amount that 22 would be transferred to the affiliates. 23 With respect to benefits and the 24 timing of delivery of benefits, I would agree with Mr. 25 Janigan that that is an entirely valid topic for 26 discussion before this Board. I would not view the 27 question of costs as precluding, or your determination 28 on the question of costs as precluding extensive 1096 KENT/McGILL, cr-ex (Warren) 1 discussion of the delivery of benefits. 2 THE PRESIDING MEMBER: All right. 3 Mr. Brett. 4 MR. BRETT: Mr. Chairman, other than 5 to observe Mr. Kent's notion that we can discuss 6 benefits but not costs seems a little bit asymmetrical. 7 My real point of intervening here is that I think you 8 mentioned at the outset that the scoping document 9 should be viewed as a guide but not, as I recall, as a 10 restriction. 11 Now, I have to go back and check the 12 actual transcript, but I certainly for one during all 13 the time we were involved in looking at this scoping 14 document did not view it as something that somehow 15 would be interpreted very narrowly and might be used to 16 exclude the exploration of an issue that otherwise 17 could be explored. 18 I thought it was to be a rough guide 19 for everybody, sort of a heads up as to what the 20 essence of the issue was that was going to be 21 discussed. 22 I would be a bit concerned if the 23 company or the Board were to have the view that you 24 ought to take an overly literal interpretation of the 25 scoping document. That's my only point. I think it's 26 more of a guide than a restraint. 27 Thank you. 28 THE PRESIDING MEMBER: Thank you. 1097 KENT/McGILL, cr-ex (Warren) 1 This is a matter we have to turn our 2 minds to. We need more than two minutes. 3 I would like to give the opportunity 4 to the other parties to speak to this matter, if they 5 wish, and then Mr. Farrell to respond and then we can 6 take that with us over the break and come back to you. 7 Mr. Mattson and Mr. Thompson, 8 anything to add? I believe, Mr. Mondrow, you spoke, 9 sir. 10 MR. MONDROW: Thank you, sir. I 11 will, of course, cede the microphone in just a moment. 12 Mr. Kent's comments were fair with respect to mine. I 13 was over-broad and over-general. 14 There is an issue of $30 million at 15 play and the precise scope and timing of those 16 expenditures has not yet been resolved through 17 cross-examination, so I certainly stand corrected or 18 toned down, let's say, with respect to Mr. Kent's 19 comments. 20 I do nonetheless believe that the 21 early phase of this project where all the risks are 22 incurred is a serious issue for the Board to consider 23 in respect of the dollar figure sought to be recovered. 24 I accept Mr. Kent's correction in 25 that respect. I apologize for flying off a little too 26 strenuously. 27 THE PRESIDING MEMBER: Mr. Mattson. 28 MR. MATTSON: Yes, Mr. Chairman. I 1098 KENT/McGILL, cr-ex (Warren) 1 really don't have anything to add on this issue at this 2 time. I am still sort of in a state of shock about 3 your comments earlier that I can't add to Mr. 4 Thompson's motion on Thursday. I might have to speak 5 to that later. 6 On this issue, I support my friends 7 in their arguments for full disclosure of this issue 8 and I will leave it at that. 9 THE PRESIDING MEMBER: Thank you. I 10 didn't realize Mr. Thompson was filing a motion. 11 Mr. Thompson. 12 MR. THOMPSON: Like Mr. Mattson, I 13 really don't have a great deal to add. You are quite 14 right, the capital that the company is seeking to close 15 the rate basis, the thirty million and a quarter, there 16 may be a prudency issue related to that issue. Mr. 17 Warren's questions may be directed to that. 18 The other topic though, total capital 19 costs, is relevant to the fair market value assessment 20 because our evidence indicates that the company's total 21 project costs are virtually double others, if not more. 22 I agree with Mr. Farrell that there 23 is primarily the fair market value issue for the 24 remaining dollars, but you have these peripheral topics 25 that relate to each of the claims. 26 I guess my only suggestion is that 27 care be taken not to foreclose examination too early, 28 but I appreciate your concern that we don't want to get 1099 KENT/McGILL, cr-ex (Warren) 1 too far down the road on a premise that this is the 2 normal claim to include everything in the cost of 3 service. 4 THE PRESIDING MEMBER: Thank you. 5 Mr. Farrell. 6 MR. FARRELL: I don't have much to 7 add to what I said previously, Mr. Chair. 8 The debate started over whether Mr. 9 Warren should be entitled to disclosure of the fees 10 paid to Computer Sciences Corporation and quickly 11 expanded into discussions of prudence and the like. I 12 just repeat Mr. Kent's initial caution to undertaking 13 to produce that amount that is probably viewed by 14 Computer Sciences Corporation as commercially sensitive 15 information. 16 I think that the bigger point is the 17 point that the intervenor submissions seemed to range 18 into and that's a far ranging examination of the 19 prudence of expenditures made that are now going to be 20 part of a purchase price paid by an affiliate. 21 I just repeat my remark that economic 22 regulators such as yourself usually don't examine 23 prudence in a vacuum. Expenditures which a utility 24 seeks to claim in its revenue requirement can be 25 examined to see if they are prudently incurred. 26 My point is that the purchase price 27 or the costs that make up the purchase price for the 28 CIS software that will be moved to Newco is not part of 1100 KENT/McGILL, cr-ex (Warren) 1 the claim. 2 Certainly the $30 million in rate 3 base is a claim and that's fair game, but the balance 4 is not, in my view. 5 MR. WARREN: I should observe, Mr. 6 Chairman, not by way of argument, that when you are 7 looking at my request, you are not looking at the tail 8 of an elephant. All I want is that number and I had a 9 few questions about the costs related to PWC's 10 involvement, but that route was really in terms of 11 factual inquiry. The end of my examination of the 12 historic prudence of their activities related to that. 13 It's a little bit of information that 14 I want. 15 THE PRESIDING MEMBER: Okay. Thank 16 you. 17 We will break now and we will return 18 at ten minutes to eleven. 19 --- Upon recessing at 1015 20 --- Upon resuming at 1105 21 BOARD RULING 22 THE PRESIDING MEMBER: The Board is 23 ready to pronounce on its ruling. 24 Based on the company's revised 25 proposal, the company no longer seeks inclusion in rate 26 base of all amounts relating to CS expenditures. The 27 CIS assets will be transferred to an affiliate and the 28 company will receive services from the affiliate for a 1101 KENT/McGILL - Board Ruling 1 fee. 2 The company proposes to include in 3 rate base only $30.3 million, consisting of the 4 business process re-engineering costs, allocation of 5 SIM start-up costs, and associated interest during 6 construction. 7 Based on the Board's understanding of 8 the company's proposal, Mr. Warren's request for 9 disclosure of consulting fees charged by Computer 10 Sciences Corporation is not relevant in assessing the 11 reasonableness of the proposed fee. The onus is on the 12 company to establish that the fees to be paid to the 13 affiliate are reasonable for the services that the 14 company will receive. 15 The Board's ruling in this respect is 16 solely on the basis of relevance. The Board has not 17 considered the issue of confidentiality alleged by the 18 company. 19 The Board has also considered the 20 comments by other intervenors. The Board expects 21 intervenors to limit their examination to matters that 22 directly pertain to the expenditures the company 23 proposes to include in rate base and the reasonableness 24 of the proposed fee to be paid to the affiliate. 25 With that, Mr. Warren, back to you. 26 CONTINUED CROSS-EXAMINATION 27 MR. WARREN: Thank you. 28 Where we had reached, panel, was the 1102 KENT/McGILL, cr-ex (Warren) 1 reconsideration of the CIS beginning in February and 2 concluding in January of this year. 3 Historically, Price Waterhouse has 4 been involved in various ways. The Price Waterhouse 5 involvement, as I understand it -- and correct me if I 6 am wrong with this summary of it: Price Waterhouse was 7 involved in the early phases in what you describe as 8 business process, or the BPR phase. 9 Is that right? 10 MR. KENT: That's correct. 11 MR. WARREN: The expense of Price 12 Waterhouse's involvement in that is captured, 13 presumably, in the $30 million which you are proposing 14 to move into rate base. Is that right? 15 MR. KENT: Yes, it is. 16 MR. WARREN: The second aspect to the 17 Price Waterhouse was as a vendor to you, a contract 18 party with you, of a CIS system. Is that right? 19 MR. KENT: That's correct. 20 MR. WARREN: Am I right that Price 21 Waterhouse's involvement in that respect has been 22 terminated? 23 Is that right? 24 MR. KENT: No, that is not correct. 25 When the company decided that the 26 appropriate course correction for CIS was to complete 27 it as what we have termed an in-house project, there 28 was nevertheless a very important role for 1103 KENT/McGILL, cr-ex (Warren) 1 PricewaterhouseCoopers in the completion. 2 In fact, the terminology we used in 3 describing as in-house was really more in reference to 4 the effective overall day to day project management 5 role that the company assumed from 6 PricewaterhouseCoopers in completing the project. 7 There is the Completion Agreement 8 between PricewaterhouseCoopers and the company that 9 sets out their role and responsibilities through to 10 delivery of the finished CIS product, and it remains 11 based on service 2000 largely; not completely, because 12 we have incorporated the company's batch billing system 13 within the overall application. But it is still 14 heavily based on service 2000, and Price Waterhouse has 15 a role in delivering those service 2000 related 16 components. 17 MR. WARREN: Will they be delivered 18 to Newco or to Enbridge Consumers Gas? 19 MR. KENT: The software will not be 20 transferred to Newco until October 1, 2000. So in the 21 interim, and through to the completion of the CIS 22 project, it is Enbridge Consumers Gas that has 23 responsibility for management of the CIS project. 24 MR. WARREN: There is a fee charged 25 by PricewaterhouseCoopers for that ongoing involvement. 26 Is that correct? 27 MR. KENT: The Completion Agreement 28 covers payment to PWC in a variety of ways; some of 1104 KENT/McGILL, cr-ex (Warren) 1 which are fixed price, some of which are time and 2 material basis, representing the extent of their 3 exclusive responsibility for some aspects of the work. 4 Where it is possible to clearly 5 define accountability for PricewaterhouseCoopers and 6 set a fixed price, that has been done. Where that is 7 not possible, the agreement has been that 8 PricewaterhouseCoopers would provide expert staff on a 9 time and material basis. 10 MR. WARREN: What I am trying to get 11 at, Mr. Kent, is this transition to a new proposal. As 12 I understand the new proposal, there is $30 million 13 that will go into rate base; secondly, that there is a 14 transfer to Newco of the CIS system. 15 Is that correct? 16 MR. KENT: That is correct. 17 MR. WARREN: And that there will be 18 certain fees that are charged back from Newco to 19 Enbridge Consumers Gas for the use of the CIS; correct? 20 MR. KENT: Yes, that is correct, and 21 also hosting agreement payments that result in an 22 offsetting transfer in the other direction. 23 MR. WARREN: What I am trying to 24 figure out is where in that arrangement the ongoing 25 relationship with PWC is located. That is number one. 26 And number two, the charges which PWC 27 makes to Enbridge, where do I find that in that ongoing 28 relationship? 1105 KENT/McGILL, cr-ex (Warren) 1 MR. KENT: We are not currently 2 anticipating an ongoing relationship with PWC with 3 respect to CIS after the completion of the CIS project. 4 The agreement provides for the company to acquire an 5 irrevocable, loyalty free, perpetual -- and there is 6 one other qualifiers. But essentially we get the 7 software, and we own the software now. 8 PWC is -- and when I say "we own", it 9 is for our own usage, for the usage of Enbridge 10 Consumers Gas and its affiliates. 11 We are getting from PWC some further 12 services to assist in the completion of the full 13 package. But once complete, we are going to own the 14 CIS system, and we will no longer need to retain 15 PricewaterhouseCoopers to do anything with it. 16 We may choose to do so, but we don't 17 need to. 18 MR. WARREN: Are there fees being 19 paid now to PricewaterhouseCoopers? 20 MR. KENT: There are fees being paid 21 consequent to the Completion Agreement. On completion 22 of the project, there is no requirement for the company 23 to pay any further fees to PWC with respect to CIS. 24 MR. WARREN: For purposes of this 25 rate case, looking to fiscal 2000, will there be 26 ratemaking implications of the fees which are being 27 paid to PricewaterhouseCoopers in fiscal 2000? 28 MR. KENT: I do not believe that 1106 KENT/McGILL, cr-ex (Warren) 1 there will, because the fees that are being paid to 2 PricewaterhouseCoopers are all being charged to the 3 account of the CIS project. That capital will be 4 moved, transferred to Newco in its entirety, on 5 October 1, 2000. 6 MR. WARREN: The original proposal 7 reflected in your February filing with the Board was 8 that the total of direct and indirect costs of 9 $119 million was going to be moved into rate base. 10 Is that correct? 11 MR. KENT: That is correct. 12 MR. WARREN: Then subsequent to that, 13 there was a change in the proposal to the current one. 14 Can you tell me when that decision 15 was made to change the proposal? 16 MR. KENT: I can't tell you the exact 17 date. It came subsequent to the Board's decision in 18 E.B.O. 179-14/15, and a review on our part of the 19 implications of that decision. 20 It came after we concluded that 21 because the rental program was being removed from the 22 regulated entity, it made more sense than to move the 23 CS billing software out of the regulated entity as 24 well. At least in the transition period we were going 25 to have to use the CIS system to provide billing 26 services with respect to rentals. That's at least how 27 we saw it at that point. 28 MR. WARREN: I don't recollect when 1107 KENT/McGILL, cr-ex (Warren) 1 the decision was made in the 14/15 case. My 2 recollection is sometime in April. 3 Is that -- Mr. Farrell is reaching 4 for the decision itself and he can help me with the 5 timing. 6 MR. FARRELL: It's dated March 31st, 7 1999. 8 MR. WARREN: Thank you, Mr. Farrell. 9 So sometime after March 31st and 10 before May 31st a decision was taken to come up with 11 this new proposal. Is that correct? 12 MR. KENT: Yes. I would say it is 13 probably about halfway through that period. It took us 14 some time to think through the implications of the 15 decision and to try to reach a conclusion as to the 16 best approach. 17 When we had reached a conclusion, we 18 then had to draft the evidence and the associated 19 schedules for filing with the Board and that filing 20 took place on the 31st of May. 21 MR. WARREN: Now, we touched on this 22 yesterday, Mr. Kent, and I just want to go over it 23 briefly again. 24 Newco does not yet exist. Is that 25 right? 26 MR. KENT: That's correct. 27 MR. WARREN: The agreement to 28 purchase the CIS assets -- first of all, the total cost 1108 KENT/McGILL, cr-ex (Warren) 1 of the CIS, the $119 million, has been divided up with 2 $30 million that will go into rate base and the 3 balance -- is the balance, let's say $90 million for 4 purposes of discussion today -- that is going to be 5 paid by Newco. Is that right? That's what they are 6 paying for the CIS? 7 MR. KENT: Yes. The asset is going 8 to be transferred to Newco. I don't know that there is 9 actually going to be a cheque cut for whatever that 10 amount -- the remains might be. 11 I'm not sure exactly how the 12 financing arrangement is going to work, but the asset 13 will be owned by Newco and ratepayers will not see any 14 implications from that capital expenditure. It does 15 not flow to rates as such. 16 MR. WARREN: I understand that. But 17 what I want to know, what I am interested in is how the 18 split, the $90-$30 million split, was arrived at. 19 My starting point is: Who negotiated 20 that split, if it was negotiated, that $30 million was 21 going to go into rate base and $90 million was going to 22 be "paid for" by Newco? 23 MR. KENT: I was very much involved 24 in the analysis and I think what you have to think of 25 is not in terms of dollars but in terms of what the 26 assets are. 27 The software is the asset really that 28 Newco is going to acquire. So we wanted to make sure 1109 KENT/McGILL, cr-ex (Warren) 1 that we clearly distinguished all of the costs that 2 were associated with that tangible asset. 3 When we reviewed what had been done 4 and what had been done in accordance with the overall 5 principles of accounting for SIM projects with respect 6 to CIS, we realized that there were costs included in 7 what we were calling the CIS project that were really 8 utility costs that were not comparable to costs that a 9 software company would incur in developing and 10 marketing a product like CIS. 11 For example, Union Gas in their 12 work -- and there are a lot of parallels between what 13 Union Gas went through and what we did -- Union Gas did 14 not carry out a business process re-engineering 15 exercise in the way that we did. They weren't involved 16 in the same kind of strategic information review 17 process. 18 I think in their case it didn't make 19 sense to do a BPR. They were much more concerned with 20 how to efficiently amalgamate the operations of the old 21 Centra Gas business with Union Gas. It made sense to 22 do that amalgamation first. So they did that and they 23 didn't do a BPR. 24 We did do a BPR, but it is not 25 related to the CIS software as such. 26 MR. WARREN: Am I correct in 27 understanding that when the purchase price for the CIS 28 asset was arrived at, that that was not the result 1110 KENT/McGILL, cr-ex (Warren) 1 of -- first of all, it was clearly not the result of 2 arm's length negotiation between a purchaser and a 3 vendor, correct? 4 MR. KENT: Yes. I think that's fair, 5 but I should caution you that we have not really 6 determined -- the value of the asset at transfer will 7 be whatever the net book value is on October 1st, 2000 8 when the software is finished. 9 If it costs an extra $10 million to 10 finish it, that would be the price that the affiliate 11 would pay. If it cost $10 million less, that is what 12 the affiliate would pay. 13 MR. WARREN: So to follow through on 14 that, this is not a circumstance where somebody in the 15 parent company, acting as a kind of surrogate for 16 Newco, said, "You know, this thing isn't worth 17 $120 million, all we are going to pay for it is 18 $90 million." That is not the circumstance, is that 19 right? 20 MR. KENT: That's correct. 21 MR. WARREN: It was a decision that 22 was taken principally by you that $30 million of the 23 overall cost was attributable to what you call roughly 24 business process re-engineering and that that should be 25 brought out of rate base. Is that right? 26 MR. KENT: There are a number of 27 components. Business process re-engineering is part of 28 it, the SIM start-up cost and an allocation of SIM 1111 KENT/McGILL, cr-ex (Warren) 1 overhead is also part of it, as is IDC. 2 These are all cost elements that are 3 appropriately, in our view, borne by the utility rather 4 than by a software company that would be in the open 5 marketplace developing software of this nature. 6 We tried to make sure that the 7 categories of costs that were associated with the move 8 to Newco were as closely matched as possible to the 9 categories of costs that we understood that Enlogix was 10 having to bear in developing and providing that CIS 11 service to Union Gas. 12 MR. WARREN: Can I ask you to turn up 13 your new prefiled evidence, which is Exhibit B1, Tab 8, 14 Schedule 3, beginning on page 5. 15 The issue I want to deal with, panel, 16 is this $30 million. I want to deal with it first from 17 the point of view of chronology. 18 Now, there is an exhibit in this 19 proceeding, it is an interrogatory response to an 20 interrogatory delivered by my friend Mr. Brett's client 21 and it is Schools Interrogatory No. 18. Exhibit I, 22 Tab 19, Schedule 18. 23 MR. KENT: We have that. 24 MR. WARREN: On page 3 of 7 of that 25 interrogatory response, under heading "E" you indicated 26 that: 27 "The CIS BPR work focussed on 28 core customer-related processes. 1112 KENT/McGILL, cr-ex (Warren) 1 The work was carried out in 2 fiscal 1993 and 1994 in order to 3 fully understand how the company 4 could change its processes to 5 better serve customer needs." 6 (As read) 7 Now, with that answer in mind, 8 returning to your prefiled evidence -- I'm sorry, I 9 should say your new prefiled evidence, Exhibit B1, 10 Tab 8, Schedule 3. 11 On page 6 you have BPR and analysis 12 phase costs. As I look at them will you agree with me 13 that of the $30 million total the single largest annual 14 expenditure was made in 1995 of $9.9 million? 15 MR. KENT: Yes, that's correct. 16 Though the largest indirect cost was in 1992. 17 MR. WARREN: Would you agree with me 18 that least on the surface, subject to whatever 19 explanation you are no doubt going to give me now, that 20 the largest single cost in 1995 is inconsistent with 21 the answer given in Schools Interrogatory No. 18 that 22 the work was carried on in fiscal 1993 and 1994. 23 Apparently inconsistent is a fair way to put it. 24 MR. KENT: The costs that are 25 included in the schedule on page 6 -- or the table on 26 page 6 are the aggregate of all of the costs associated 27 with that BPR work. 28 There are significant expenditures in 1113 KENT/McGILL, cr-ex (Warren) 1 1993 and 1994. I cannot immediately explain why the 2 number in fiscal 1995 is higher than the others. I 3 could undertake to go back and do what research I can 4 to find out. 5 I was not personally directly 6 involved in that. 7 I know that in 1995 there was a 8 considerable amount of work done by staff, our internal 9 staff. It may also be -- it's possible, I'm not 10 sure -- that some of the consulting fees may have been 11 paid in 1995 though they may have referred to work that 12 was begun in previous years. 13 I'm just hypothesizing at this point, 14 Mr. Warren. If it is material to you we can go back 15 and find out. 16 MR. McGILL: Another related issue 17 around this is that the BPR work came ahead of what we 18 describe as the analysis phase. 19 So the BPR was the best practices 20 work, trying to determine how we should change the 21 business. Then the next phase of that was the analysis 22 work which PwC was contracted to assist in. Much of 23 that took place following the BPR work, and, as far as 24 I can recollect, that was the major activity in 1995. 25 MR. KENT: You will forgive us, 26 though, Mr. Warren, if we can't be sure of this. This 27 is now some four years ago. But, as I say, if it is 28 material we can go back and do some further 1114 KENT/McGILL, cr-ex (Warren) 1 investigations. 2 MR. WARREN: The chronology, Mr. Kent 3 and Mr. McGill, the answer which is given in Schools 18 4 that the work was carried out in fiscal 1993 and 1994, 5 as I say, is seemingly at odds with the answer in B1, 6 Tab 8, Schedule 3, page 6. What I would like to get to 7 on this issue is, first, can you tell me in 1995, when 8 this $9.9 million was being expended, what was the 9 state of the development of CIS itself at that point, 10 first of all? 11 To give you some specifics on that, 12 at that point, in 1995, had PwC been contracted to 13 provide CIS for you? 14 MR. KENT: The design work on CIS 15 commenced in the fall of 1995. 16 So the initial agreement with PwC 17 with respect to the use of their Service 2000 product 18 and the development of CIS on that basis would not have 19 been until the fall of 1995. Now, that takes us into 20 our -- essentially into our 1996 fiscal year. 21 MR. McGILL: And I believe that is 22 what happened. That is why, if you take a look at the 23 table on page 6 of B1, Tab 8, Schedule 3, you will see 24 that in 1996 the amounts are much smaller. That is 25 because that analysis phase work carried on I believe 26 until sometime in November of 1995, which would have 27 been into the first couple of months of our 1996 fiscal 28 year. 1115 KENT/McGILL, cr-ex (Warren) 1 MR. WARREN: Now, can we step back 2 from this. 3 If you look at Schools 18, the 4 answer: 5 "The CIS BPR work focussed on 6 core customer-related processes. 7 The work was carried out in 8 fiscal 1993 and 1994 in order to 9 fully understand how the Company 10 could change its processes to 11 better serve customer needs." 12 (As read) 13 What processes are we talking about? 14 MR. KENT: We are including 15 everything from the initial inquiry by a customer about 16 gas service through processes of establishing an 17 account, of setting up billing for that customer, for 18 providing for inspections of new installations, for 19 service work, for reconciling billing questions that 20 might arise at a later stage for credit and collection, 21 how do you best get money from customers who are 22 reluctant to pay their bills, all of that kind of 23 process was involved in the BPR work, all the way 24 through to how do you finalize an account with a 25 customer. 26 MR. WARREN: Just trying to get at it 27 generically, if you wish, this re-engineering of these 28 processes was followed by a CIS that was designed to 1116 KENT/McGILL, cr-ex (Warren) 1 assist in you carrying out those processes. Is that 2 fair? 3 MR. KENT: Yes, that's fair, because 4 the work was undertaken with the idea that we should 5 not be limited in our thinking by the nature of the IT 6 systems that we had at that time. 7 We wanted to say: Okay, if you had a 8 clean sheet of paper, what would be the best way, from 9 the company's perspective and from the customer's 10 perspective, for going through all of these processes? 11 How can we make it most efficient, from a customer's 12 perspective, without locking them into bureaucratic 13 processes that we might have developed over years and 14 have become engrained in our thought processes? How do 15 you get away from the constraints of thinking in terms 16 of how the business has been done to that point? How 17 do you think of it from a customer's perspective and 18 how do you make it easy for the customer to do business 19 with us? 20 Then once we have gone through that 21 thought process and figured out how it should look from 22 a customer's perspective, we then have to translate 23 that idea into a description of a new information 24 technology system that would support that new process 25 in the most efficient and effective way. From that, 26 once you have that description of the system, it is 27 possible to then create a document that can be used in 28 a request for proposal process, put it out to potential 1117 KENT/McGILL, cr-ex (Warren) 1 vendors and see what they can provide to match those 2 concepts of an ideal information technology system to 3 support new processes. 4 MR. WARREN: I just want to deal with 5 various elements of that. 6 But, again, looking at a high level 7 of generality, what we have is a rethinking, if you 8 wish, or a re-engineering of the business processes in 9 order to arrive at what, I take it, Mr. Kent, would say 10 is a kind of -- I apologize for the use of this 11 business cliche, but a cutting edge delivery of 12 services to your customers. 13 MR. KENT: I guess I am reluctant to 14 accept the terminology "cutting edge". But certainly 15 we wanted to take advantage of what we felt were the 16 most effective ways of dealing with our customers. 17 Now, that might, in many instances, be cutting edge, 18 but there is a risk in trying to adopt the most modern 19 technologies, that they may be somewhat optimistically 20 described by the vendors and they may not be able to 21 deliver everything you want. 22 So there was an attempt on our part 23 to be realistic about what could be provided by 24 software vendors. 25 MR. WARREN: You certainly felt, as a 26 result of this business process arrangement, that you 27 had improved the processes by which you serve your 28 customers. 1118 KENT/McGILL, cr-ex (Warren) 1 MR. KENT: We believed that and I 2 think we have been able to demonstrate that that was 3 the case through the cost savings that are already 4 flowing to customers in rates. 5 MR. WARREN: As I understand it, 6 Newco will be selling CIS services to whomever is 7 willing to buy it. Correct? 8 MR. KENT: Yes. I presume that that 9 is the case. 10 MR. WARREN: Can I fairly conclude 11 that -- is it reasonable for me to conclude that in the 12 process of selling to third parties, one of the things 13 that it will be selling is the fact that this is built 14 on very good business processes for serving customers? 15 Fair enough? 16 MR. KENT: Very good business 17 processes for serving the customers of Enbridge 18 Consumers Gas in Ontario, Canada, with all that that 19 entails in the way of the structure of the marketplace, 20 tax requirements, the history of the company, the 21 expectations of our customers, climate, and many other 22 things of that nature. 23 I would expect that any other utility 24 that would consider buying from Newco the same kind of 25 services that Enbridge Consumers Gas intends to buy 26 would want themselves to go through a business process 27 re-engineering exercise to determine what they really 28 needed in the way of IT systems, and then an analysis 1119 KENT/McGILL, cr-ex (Warren) 1 phase to develop specifications that could be put out 2 essentially for tender, to be put out and then used as 3 a way of evaluating an offering from Newco or any other 4 potential provider of a CIS. 5 You have to have an idea of what you 6 want, Mr. Warren, before you go out in the software 7 marketplace. If you just go out there and say, "What 8 have you guys got?" you have no comfort that what you 9 are providing is ultimately what you need. It may be 10 the thing with the most attractive bells and whistles, 11 but if you go and look at the bells and whistles first 12 before you figure out what you need, you may be 13 seduced, if you don't mind my use of that term, by some 14 of the flashy aspects of new software and pay more than 15 you really need to serve your customers. 16 MR. WARREN: Just my last question on 17 this area, though, is: Is it not fair for us to 18 assume, Mr. Kent, that in Newco's selling of CIS 19 services to a third party one of the advantages it has 20 is that it is built on, the CIS is built on, an 21 extensive and expensive business process re-engineering 22 at the single largest gas utility in Ontario? Fair? 23 MR. KENT: I'm sure that is a selling 24 point that Newco would want to make. Whether it is 25 valid to a potential purchaser of that service or not, 26 I don't know, because it may well be that a business 27 practice that makes sense in Ontario for a customer of 28 Enbridge Consumers Gas has no relevance whatsoever to a 1120 KENT/McGILL, cr-ex (Warren) 1 customer of Pacific Northern Gas or any other utility. 2 MR. WARREN: Can I ask you to turn 3 up -- actually, the text of it isn't all that critical, 4 but I am going to refer here in passing to two Board 5 staff interrogatories, 164 and 165. They are 6 Exhibit I, Tab 1, Schedules 164 and 165. 7 MR. KENT: By the way, Mr. Warren, 8 before we turn away from Exhibit I, Tab 19, 9 Schedule 18, as we were talking I noticed that the work 10 done by Andersen Consulting in the best practices study 11 is listed as taking place in November 1994, which would 12 put it into our 1995 fiscal year. 13 There is, then, a contradiction 14 within our answer. We may have been in error when we 15 said fiscal 1993 and 1994. It may have been calendar 16 1993 and 1994. Again, if it is material I can go back 17 and investigate that. 18 MR. WARREN: Looking at 164 and 165, 19 the issue which is put to you is a technical issue in 20 that question, which is the CICA Handbook and the 21 treatment of research costs. Your answer to both 22 questions is to say that the $30 million in costs 23 related to BPR and analysis phase costs are not 24 research and development costs. In various forms, 25 that's the answer you gave to both questions. 26 Is it not fair to say, given that the 27 CIS that was ultimately developed was built on the 28 business process re-engineering, is it not fair to 1121 KENT/McGILL, cr-ex (Warren) 1 characterize those business process re-engineering 2 costs as, in part, development costs for CIS? 3 MR. KENT: If you will excuse me, 4 Mr. Warren, these do not appear to be our interrogatory 5 responses. I will just have to find them here. 6 MR. WARREN: They are Mr. Bourke's 7 and Ms Reynolds'. 8 MR. KENT: They have, as I'm sure you 9 realize, much better expertise than us, with respect to 10 the CICA Handbook. But it's my understanding that 11 there was an investigation made as to whether or not it 12 might be possible to obtain tax advantages through 13 viewing this work as research and development and we 14 were -- we very rapidly concluded that it was not. It 15 does not fit the definition of research and development 16 -- and I'm afraid I'm unable to help you very much with 17 exactly what that definition might be. 18 But what we were doing was looking 19 not in terms of developing new technologies but we were 20 trying to understand the best way of applying current 21 best practices and current technologies to the gas 22 utility operations of the company. So it was a more 23 applied research, if that makes sense. 24 MR. WARREN: The one point of 25 continuity in this -- and correct me if I'm wrong -- is 26 that Price Waterhouse was doing work for you on the 27 business process re-engineering and also, then, selling 28 you this -- developing and selling you the CIS. 1122 KENT/McGILL, cr-ex (Warren) 1 Correct? 2 MR. KENT: Both IBM and Anderson 3 Consulting also did work for us in the business process 4 re-engineering phase. I think it's -- my recollection 5 is that both of those companies were also considered as 6 vendors of CIS systems, as well. They were certainly 7 both, at that time, actively selling systems. 8 MR. WARREN: Am I right, though, in 9 my statement, am I not, Mr. Kent, that 10 PricewaterhouseCoopers worked with you in the business 11 process re-engineering and then, ultimately, was 12 contracted to deliver a CIS that was built on that 13 business process re-engineering? Correct? 14 MR. KENT: That is correct. 15 MR. WARREN: Okay. Given that nexus, 16 would you still disagree with the proposition that the 17 business process re-engineering was, in some part at 18 least, the development phase for CIS? 19 MR. KENT: Yes, I would disagree with 20 that, Mr. Warren. 21 MR. WARREN: And your reasoning is? 22 MR. KENT: They were entirely 23 independent pieces of work. The first was looking at 24 how the company did business. It was looking at our 25 operational processes. It looked at things that, 26 ultimately, gave rise to ideas, like the consolidation 27 of the call centre. The consolidation of the call 28 centre led to dramatic productivity improvements in 1123 KENT/McGILL, cr-ex (Warren) 1 that area but had no linkage to the CIS software 2 itself. It's for that reason that we were able to 3 implement that change independent of the CIS software. 4 If the company had decided, at the 5 end of the BPR phrase, you know, in essence, "That's 6 it. We are done. We are not going to go any further. 7 We are not going to buy a CIS", the productivity 8 improvements associated with the BPR would still have 9 been available; we would still have been able to make 10 those changes; and we still would have been able to 11 bring, for the benefit of ratepayers, cost reductions 12 through the BPR work. 13 MR. WARREN: Is it your evidence, 14 today, Mr. Kent -- sorry. Just a moment. 15 --- Pause 16 MR. KENT: Mr. McGill has just 17 reminded me that they were entirely separate contracts 18 with PWC: one for the BPR consolidation exercise that 19 they were involved in; and the other work for the 20 design and development that's CIS. 21 MR. WARREN: Is it your evidence, 22 today, Mr. Kent, that the results of the business 23 process re-engineering would have been delivered in 24 their entirety even without CIS? 25 MR. KENT: No. I think it's clear in 26 our evidence that there were significant benefits that 27 could be achieved in advance of the delivery of the 28 software itself, but there are other benefits that were 1124 KENT/McGILL, cr-ex (Warren) 1 contingent upon the software. There's some things you 2 couldn't do without new IT systems. 3 We did make the changes that were 4 independent of the software, essentially, immediately. 5 As soon as we appreciated the impact of those ideas 6 that had come out of the BPR, we implemented those 7 changes and were able, by doing so, to save ratepayers 8 significant amounts of money, over the years. Other 9 things could only be done when the software was in 10 service, and those are the benefits that are now going 11 to flow as a result of completing CIS. 12 MR. WARREN: Those business process 13 re-engineering costs that are independent, benefits 14 that are independent of CIS, can you tell me why it is, 15 if they are independent of CIS, they were not moved 16 into rate base at the time? 17 MR. KENT: Essentially, the strategic 18 information management plan had associated with it a 19 number of principles about how to account for costs. 20 There were, initially, costs that could not be 21 associated with any individual projects -- and those 22 are the costs that are viewed as SIM's start-up costs 23 and overhead costs. 24 As soon as the project -- the SIM 25 project, at this point -- had proceeded far enough that 26 we had clearly identified individual software projects, 27 the idea was that you would associate with each of 28 those software projects any costs that could clearly be 1125 KENT/McGILL, cr-ex (Warren) 1 linked to them individually. 2 An overall principle of SIM was that 3 we would do business process re-engineering before 4 either purchasing or developing new software. We 5 didn't want to re-pave the cow paths; we wanted to 6 think through how we were doing things before we made 7 any software purchase decision. 8 So, we generally -- so I think, not 9 always, but I think generally we did business process 10 re-engineering exercises of various styles and 11 magnitudes, depending on how complex the project might 12 be, on each area of the company's business before 13 making any kind of software purchase decision. And 14 those costs of those BPRs were included with each one 15 of the SIM projects. 16 It was envisaged, from the start, 17 that the SIM projects, as large expenditures, would be 18 capitalized, would be closed to rate base on delivery 19 of the software and would be amortized over a period of 20 years. 21 So we were simply following, with 22 CIS, exactly the same process as we used for all the 23 other SIM projects. 24 In the case of the smaller projects, 25 there wasn't an appreciable delay in -- delay between 26 delivery of the benefits and the inclusion of the costs 27 in rate base. CIS, primarily, I think, because of its 28 magnitude, certainly because of the length of time 1126 KENT/McGILL, cr-ex (Warren) 1 between the BPR work and the delivery of a software 2 solution, resulted in a mismatching of the delivery of 3 benefits and the ultimate inclusion of the cost of that 4 work in rates. 5 MR. WARREN: Well, I understand your 6 answer is this, Mr. Kent, that you followed the 7 practice of moving into rate base those BPR -- those 8 aspects of BPR that were related to various aspects of 9 SIM as the SIM aspects were completed? 10 MR. KENT: That's correct. 11 MR. WARREN: And does it not follow 12 from that that your decision to delay, until now, 13 moving the $30 million into rate base reflects the fact 14 that the business process re-engineering is intimately 15 related to CIS? 16 MR. KENT: That accounting 17 convention, or process, was one that made sense, I 18 guess, to the Board, and it made sense to us, for the 19 average SIM project, if you can put it that way, 20 because there is a relationship between improved 21 business processes and the delivery of software. 22 In the case of CIS, there are some 23 benefits that are independent and some benefits from 24 the BPR that are dependent upon the software. So there 25 is a linkage. It's not a 100 per cent linkage; it's a 26 partial linkage. 27 So, some of the ideas that came out 28 of the BPR, ultimately, resulted in ideas that can only 1127 KENT/McGILL, cr-ex (Warren) 1 be delivered through the software -- and we have laid 2 out what those benefits are. 3 There were many other benefits that 4 were independent, but the idea of segregating the BPR 5 costs into two categories -- some that would be linked 6 to benefits that are only achievable through the 7 software and others that are independent of the 8 software -- is a complexity that was not envisaged at 9 the beginning -- at the outset of the process. 10 And, frankly, I don't know how you 11 would do that now. It would have to be some relatively 12 arbitrary allocation of the BPR costs between benefits 13 that are already flowing and benefits dependent on the 14 software. 15 MR. WARREN: Could you turn up 16 Exhibit B1, Tab 8, Schedule 3, page 5, question and 17 answer sequence 7. 18 The $30 million which you propose to 19 move into rate base, Mr. Kent, consists of BPR and 20 analysis phases of CIS for $10.4 million. Then we have 21 a category of SIM startup costs of $13.3 million. 22 There is an enormous volume of evidence in this case, 23 but I don't find anywhere where there is an explanation 24 of what those SIM startup costs are and why they have 25 been delayed. 26 First of all, those SIM startup costs 27 and how they are related to CIS. Can you tell me, 28 first of all, what they are and, secondly, how they are 1128 KENT/McGILL, cr-ex (Warren) 1 related to CIS? 2 MR. KENT: We did respond to an 3 interrogatory. Perhaps Mr. McGill can help while I am 4 looking for it. 5 We are both looking for it at the 6 same time. 7 There was an interrogatory and I 8 don't now recall -- it may have been HVAC. I am not 9 sure if Mr. Mondrow -- 10 MR. MONDROW: Yes. If you will bear 11 with me just for a second, I think what you are 12 thinking of is Exhibit I, Tab 11, Schedule 25. 13 MR. KENT: Yes. Thank you very much, 14 Mr. Mondrow. That is the response I was thinking of 15 and it does, on page 2 -- 16 MR. WARREN: Could you just bear with 17 me, panel, to see if I have it in my often 18 re-shuffled -- 19 --- Pause 20 MR. WARREN: I have it, thanks; 21 courtesy of Mr. Farrell. 22 MR. KENT: At page 2 of that response 23 there is a table that sets out by year and by category 24 the costs that are included in the SIM startup costs, 25 $13.4 million. 26 MR. WARREN: I see that, gentlemen. 27 Can you tell me how it is related to CIS? 28 MR. McGILL: I think if you go to the 1129 KENT/McGILL, cr-ex (Warren) 1 top of page 5 of B1, Tab 8, Schedule 3 there is a 2 description there of what the SIM startup costs 3 included and how they are apportioned to the various 4 SIM projects. 5 MR. WARREN: In the middle of the 6 page on page 5 it says: 7 "The amounts that remain to be 8 recovered were calculated on the 9 basis of the proportion 10 represented by CIS estimated 11 costs of the total SIM software 12 projects." (As read) 13 MR. McGILL: That is correct. 14 MR. WARREN: That is how you got to 15 the number? 16 MR. KENT: That calculation was done 17 in each year because the allocation was done in each 18 year. So the CIS project account would in each year 19 have received an allocation of a portion of the overall 20 SIM costs that were not identifiable with any specific 21 project in that year. 22 So in 1994 there would have been an 23 allocation of some part of the SIM overhead and startup 24 costs, for example. And the same process would have 25 been followed in 1993 and even in 1992. 26 MR. WARREN: Is it fair for me to 27 conclude, panel, that that $13 million, given that it 28 was spaced over a number of years, would have reflected 1130 KENT/McGILL, cr-ex (Warren) 1 the additional costs that were associated with the 2 various delays that were the subject of comment by the 3 Board in its decisions, particularly in the 497 4 decision and the EDS audit? 5 MR. KENT: In fact, I don't think 6 that is the case at all, Mr. Warren, because in 1992, 7 for example, when the allocation was made at that time, 8 it would have been based on the estimate that was 9 before the company and before this Board of the 10 proportion that CIS would represent of the direct 11 project costs associated with each of the SIM projects. 12 So that if, hypothetically at that stage, CIS was 13 expected to cost $25 million and the other SIM projects 14 were expected to cost, in aggregate, another $50 15 million, for a total of $75 million, then CIS would in 16 that year have been assigned 33 per cent, one-third of 17 the SIM overhead in that year. And then in subsequent 18 years, as the estimated costs of each of the projects 19 changed, the CIS project would get a different 20 allocation of the SIM overhead, but following the same 21 methodology. 22 MR. WARREN: That methodology -- and 23 correct me if I am wrong -- is a calculation of a 24 proportion of the cost as it increases over time. 25 MR. KENT: I am not sure I follow 26 you, Mr. Warren, because the allocation is done in each 27 year. Overhead costs that are incurred in 1993 are, in 28 the calculation, ascribed to CIS in 1993. They are 1131 KENT/McGILL, cr-ex (Warren) 1 locked into the CIS project estimate in 1993. 2 MR. WARREN: And in each year where 3 the costs increase as a result, for example, of delays, 4 you are going to get a proportion attributed to CIS 5 which reflects, in part, the increase due to the cost 6 of the delays. 7 MR. KENT: But only with respect to 8 the overhead in that year. You don't go back and 9 recalculate -- or we didn't go back and recalculate 10 previous years' allocations. 11 MR. WARREN: Fair enough. 12 MR. KENT: It would only be for that 13 particular year. 14 MR. WARREN: I understand. But is it 15 not fair for me to conclude, Mr. Kent, that in some 16 portion of the amount allocated each year to the CIS 17 account -- the SIM startup cost allocated to the CIS is 18 a reflection of the costs in that year and may reflect 19 costs due to delays? Fair enough? 20 MR. KENT: Yes. I would take you 21 back, though, if I could, Mr. Warren, to Exhibit I, Tab 22 11, Schedule 25, where you can see the way in which the 23 costs were incurred year by year, and the SIM startup 24 costs were primarily in 1992. The overhead costs 25 continued through until 1996, while there were still 26 other SIM projects under way and costs that were 27 properly viewed as overhead for the SIM project as a 28 whole, not ascribable to individual projects. 1132 KENT/McGILL, cr-ex (Warren) 1 But by 1996 all of the projects were 2 pretty well established and understood, so there were 3 very small costs that were of a general nature 4 remaining to be allocated. Almost everything could be 5 allocated directly to a project by then. 6 So, for example, in 1996, when the 7 estimated cost of CIS would have been considerably 8 higher than in previous years, the allocation of 9 overhead was only $223,000. 10 MR. WARREN: If I look at this 11 interrogatory response, of the total cost of $13.3 12 million which is being allocated to SIM startup costs, 13 the largest single category is administration. 14 MR. KENT: Yes, that's correct. 15 MR. WARREN: What does that relate 16 to? 17 MR. KENT: My understanding is that 18 it was related to management time associated with the 19 establishment of the SIM projects and the establishment 20 of management processes that could then be used to 21 monitor and control the projects. 22 So, for example, the development of 23 specific processes or management software to track the 24 costs being incurred in each of the SIM projects, to 25 the extent that there were costs of that nature, that 26 would go into this administration line. 27 The cost of the EDS audit would 28 appear in that category as administrative costs 1133 KENT/McGILL, cr-ex (Warren) 1 associated -- I believe they would, in any event -- 2 administrative costs associated with SIM as a whole 3 because the EDS audit was not specific to CIS, but 4 rather SIM as a whole and had to go somewhere and then 5 subsequently be allocated to each of the projects. 6 MR. WARREN: So is it not fair to 7 conclude in the administration category that some of 8 these costs reflect the increase in costs that are 9 attributable to the delay and cost overruns that gave 10 rise to the Board's concern, warranting the audit? Is 11 that not fair? 12 MR. KENT: I'm sorry, Mr. Warren, I 13 just don't understand how you reach that conclusion. 14 Perhaps if you can explain it a bit further I can 15 follow you. 16 MR. WARREN: In the time leading up, 17 for example, to the decision in 497 by the Board to 18 order the EDS audit, it was concerned about whether or 19 not the SIM project as a whole was being well managed, 20 about whether or not the costs were out of control, 21 about whether or not the targets could be achieved on 22 time and at the costs. 23 MR. KENT: Yes, I think that is a 24 fair assessment of my understanding of the Board's view 25 of it. The Board, at the conclusion of that case, as I 26 recall -- and it may have been on the basis of a 27 recommendation by the company or the Board's 28 decision -- decided that SIM audit costs, the EDS audit 1134 KENT/McGILL, cr-ex (Warren) 1 costs, should be included in the overall overheads of 2 SIM and then brought forward for recovery with each of 3 the remaining SIM projects as they were concluded. 4 MR. WARREN: I am looking at a larger 5 point. My point is that, in this administration cost, 6 do you not agree with me that embedded in that cost are 7 some of the cost overruns, for example, attributable to 8 the delays that were the subject of the Board's 9 criticism in its 487 and 490 decisions? 10 --- Pause 11 MR. KENT: I am sorry for the delay, 12 Mr. Warren. We were just trying to understand your 13 question better. 14 I think perhaps my interpretation 15 would be that if the Board had felt that the audit was 16 something that the company should be held accountable 17 for, that the shareholders should pay for the audit -- 18 which I gather is what you are suggesting -- I think 19 that decision would have been made at the time that 20 that audit was delivered, and that the Board's decision 21 with respect to the costs of the audit would at that 22 stage have set out that the shareholders should pay for 23 the audit. But that was not the Board's decision. 24 MR. WARREN: I don't want to be more 25 obscure than I ordinarily am, Mr. Kent, but one of the 26 issues which the Board repeatedly said in its decisions 27 over the past four or five years about CIS was that the 28 prudency -- I am told by Mr. Ladanyi that that word 1135 KENT/McGILL, cr-ex (Warren) 1 doesn't exist. So, with apologies to Mr. Ladanyi, 2 whether or not your expenditures were prudent was an 3 issue that remained to be determined when the costs of 4 CIS were moved into rate base. 5 MR. KENT: Yes, and we were fully 6 prepared for that discussion on the basis of our 7 originally filed evidence. We were prepared to bring 8 the project before the Board and go through that test. 9 The decision to move rentals out of 10 the utility has led to a changed approach with respect 11 to CIS, which, in our view, in essence, converts the 12 question of whether costs are prudent or not to -- the 13 question remains with respect to the BPR and analysis 14 phase work and the SIM overheads. I quite agree with 15 that, the $30.3 million. 16 The question has now evolved into one 17 as to whether or not the pricing to be charged by Newco 18 to the affiliates represents fair market value. If 19 Newco or if the company spent more than was necessary 20 to develop that software, then frankly, that's tough. 21 The company has accepted already responsibility for the 22 capital costs associated with that software through the 23 decision to move the software to Newco. The company 24 has accepted whatever costs consequences there may be 25 for the shareholder of expenditures that have been made 26 on that software. 27 If the software could have been 28 developed for $10 million and that's all that Newco had 1136 KENT/McGILL, cr-ex (Warren) 1 to spend to acquire the software, they could be then 2 sold at a fair market value of $10 per customer per 3 year, then that would be wonderful for Newco. If the 4 cost is $100 million, then that's terrible for Newco. 5 In any event, it's something that the shareholder has 6 to deal with and from which the ratepayer is protected. 7 MR. WARREN: I'm certainly -- I first 8 agree I'm not very quick, but I did understand what Mr. 9 Vlahos's ruling was all about this morning. 10 MR. KENT: Okay. Sorry, Mr. Warren. 11 I didn't mean -- 12 MR. WARREN: I'm going at a really 13 small target at the moment. Okay? I'm going at the 14 $30 million which you want to move into rate base and I 15 am trying to get at whether or not some portion of that 16 $30 million is fairly attributable to imprudent 17 management of the SIM project from the get-go. 18 My category and my sub, sub, 19 subcategory is administration. As I understood it, the 20 administration cost was a proportion of the overall 21 administration of the SIM project. I got that. 22 MR. KENT: Thank you, Mr. Warren. 23 Yes, you do. I do apologize for going on at such 24 length. 25 MR. WARREN: Now, of that, what I 26 want to know is whether or not it is fair for me to say 27 that some portion of just that little category 28 administration is fairly attributable to an imprudent 1137 KENT/McGILL, cr-ex (Warren) 1 management reflected in delays and cost over-runs that 2 were the subject of the Board's critical comments in 3 various decisions. 4 MR. KENT: I think that there may be 5 a very small amount of costs for which it is fair to 6 make that kind of statement, but at the moment, it's 7 very difficult for me to identify what it might be. 8 As the cost estimates for CIS and the 9 other projects changed, it would have been a different 10 allocation of costs to each. As the cost estimates for 11 CIS became larger, it would have attracted a larger 12 proportion of the overhead, as you pointed out. 13 Now, knowing the chronology of events 14 and the changes in the cost estimates for CIS, we can 15 probably track it. It probably has an impact on the 16 allocations, I would guess, in 1995 and 1996, but how 17 much of the increased estimated costs of CIS is the 18 fault of the company as opposed to a natural evolution 19 of the cost estimates as we appreciated better the 20 effort involved in creating that software, how much of 21 that is from improved accuracy of estimates and how 22 much of that might be due to what you view as 23 management negligence, I really don't know. 24 MR. WARREN: We can agree that there 25 is some portion of it attributable to management 26 negligence. Your words, not mine. Fair enough? 27 MR. KENT: No. I don't think that's 28 a fair characterization, Mr. Warren. 1138 KENT/McGILL, cr-ex (Warren) 1 MR. WARREN: But you used the words 2 "management negligence". 3 MR. KENT: Well, I was attempting to 4 paraphrase what you were saying. I apologize if I have 5 done it in a way that has lead you to that inaccurate 6 conclusion. 7 I think it is fair to say that 8 changes in the estimates and changes in the schedule 9 may have had a small impact on the allocation in 10 probably 1995 and 1996. If it's useful for you in 11 preparation of your argument, we could attempt to 12 segregate somehow any cost impacts that may have 13 resulted from schedule changes or changes in estimated 14 costs. 15 MR. WARREN: I think it would be 16 helpful if I could get your estimate. Whether or not I 17 am going to agree with your estimate at the end of the 18 day is a different matter, Mr. Kent, but if you could 19 do that for me, I would appreciate it. 20 Could we have an undertaking? 21 MS DESAI: Undertaking J7.1, please. 22 UNDERTAKING NO. J7.1: Mr. Kent 23 undertakes to attempt to 24 segregate any cost impacts that 25 may have resulted from schedule 26 changes or changes in estimated 27 costs 28 MR. KENT: Just to clarify if I 1139 KENT/McGILL, cr-ex (Warren) 1 could, Mr. Warren, what it is that we will attempt to 2 do for you. 3 MR. WARREN: Oh, boy. 4 MR. KENT: It's better now than after 5 the fact. If you are disappointed in the results, I 6 would be disappointed too. 7 MR. WARREN: What I am looking for, 8 Mr. Kent, is the company's estimate of that portion of 9 the CIS costs which are found in the administration 10 line on Exhibit I, tab 11, schedule 5, which the 11 company attributes to the result of company 12 mismanagement. You don't accept that term, but I'll 13 use it. 14 MR. KENT: I think if that's the way 15 the undertaking is phrased, the answer will come back 16 as zero, but if you would like us instead to do a 17 calculation that would demonstrate the impact of the 18 changed estimates of the total cost of CIS, we can do 19 that and you would be perfectly free to argue that 20 change in cost is as a result of company mismanagement. 21 MR. WARREN: Change, estimates and 22 delays. Can you build in that? 23 MR. KENT: I think to the extent that 24 there were delays in anticipated delivery date, they 25 were all fully reflected in cost and given that the 26 cost allocation is based on the cost estimates, I think 27 we would have to assume that. 28 MR. WARREN: Right. Now, as our pens 1140 KENT/McGILL, cr-ex (Warren) 1 are poised over that, can you also do that for the 2 other category, which is $4.4 million of the $13 3 million expense? I am going to ask you what is in the 4 "other category". 5 MR. KENT: We can do it for all the 6 categories, if you like. By the time we get the 7 information that's sufficient to do one, we can 8 probably do all of them equally. 9 MR. WARREN: And I would expand J7.1 10 to cover all of the categories that are listed on page 11 2 of 2 on Exhibit I, tab 11, schedule 25. Have you 12 done that, Mr. Kent? Can you tell me what's in the 13 other category, the $4.4 million? 14 MR. KENT: If you turn back to page 1 15 of that interrogatory response, the description there 16 itemizes in particular furniture and miscellaneous 17 infrastructure items. Miscellaneous infrastructure 18 items would be things like shared printers and probably 19 also the network wiring for the individual PC work 20 stations, things of that nature. 21 MR. KENT: All right. 22 MR. WARREN: Now, of the -- 23 --- Pause 24 MR. KENT: Sorry. Mr. McGill and I 25 were just talking about the mechanics about it to 26 provide the undertaking response. 27 MR. WARREN: Panel, finally, in the 28 category of questions dealing with what the $30 million 1141 KENT/McGILL, cr-ex (Warren) 1 consists of, there is a third category which is 2 interest during construction to which the number $6.4 3 million is attached. 4 MR. KENT: That's correct. 5 MR. WARREN: Now, the $6.4 million, 6 Mr. Kent, I don't see explained in the prefiled 7 evidence. Can you tell me what it consists of? 8 MR. KENT: It has been calculated for 9 each of the SIM projects according to exactly the same 10 methodology that's used for pipeline construction 11 projects or any other capital works that are 12 constructed over a period of time and then subsequently 13 closed to rate base. 14 I don't remember the exact process, 15 but there is an interest rate that is used. I'm not 16 sure if it is a blended rate or the company's short 17 term balling rate, but it's applied to the outstanding 18 balance in that capital account, the work in progress 19 account each month while it's outstanding. 20 MR. WARREN: And this is on the 21 construction of the SIM project as a whole or just CIS? 22 MR. KENT: The process I believe to 23 be identical for each of the SIM projects; for our 24 pipeline construction projects, for the construction of 25 buildings, any other capital project that is initiated, 26 built over a period of time and then closed to planned. 27 MR. WARREN: Again, getting back to 28 the earlier point, Mr. Kent. Is some portion of thus 1142 KENT/McGILL, cr-ex (Warren) 1 $6.4 million fairly attributable to the delays and 2 increased costs of the SIM project as a whole and, if 3 so, what proportion? 4 --- Pause 5 MR. KENT: Sorry. We were just 6 getting our evidence references straight here. 7 The IDC that the government's 8 requesting be closed to rate base is shown on page 6 of 9 13 of our updated evidence. That's B1, tab 8, schedule 10 3. It shows in each year the amount of IDC that is 11 associated with those costs. 12 I'm sorry if I have lost your 13 original question, Mr. Warren, in looking for the 14 evidence. 15 MR. WARREN: My question on this 16 issue of IDC was what proportion, if any, of the IDC 17 costs are attributable to delays and cost over-runs in 18 the management of the SIM project? Any? 19 MR. KENT: I would say none, but let 20 me clarify how the IDC that is shown here has been 21 calculated and perhaps that will help. 22 The IDC in each year is based on the 23 costs that are outstanding at that time. The IDC 24 associated with 1996 is small because the expenditures 25 in that year on items that the company proposes to 26 include in rate base were fairly small. 27 The expenditures through 1997, 1998 28 and 1999 on IDC represent the costs to the company of 1143 KENT/McGILL, cr-ex (Warren) 1 carrying essentially that capital amount on the books 2 through each of those years. 3 So I think you could, Mr. Warren, 4 argue that, for example, if CIS had closed in 1998, the 5 IDC amount in 1999 would have been avoided. I think 6 that is a reasonable claim. 7 My counter argument, or the thing 8 that counterbalances that, is that the BPR expenditures 9 have been producing benefits through each of these 10 years at no cost to ratepayers. So the company was in 11 effect carrying the costs of the BPR work that is 12 generating benefit to ratepayers through each of those 13 years and in 1999 incurred expenditures of 14 approximately a million dollars for carrying that 15 capital while benefits were flowing to the benefit of 16 ratepayers. 17 In my simple mind, it is a time/value 18 of money issue. The company was funding this. It was 19 generating benefits for ratepayers. If they started 20 paying for it earlier, they would have started paying a 21 lesser amount. But because the payments didn't kick in 22 until now in our proposal, there has been extra 23 interest on that outstanding amount to this time. 24 MR. WARREN: I want to get back to 25 two questions on this general category of $30 million 26 before we leave it. 27 As I understand your evidence, again 28 at a high level of generality, the business process 1144 KENT/McGILL, cr-ex (Warren) 1 re-engineering is related to or is notionally sort of 2 anterior prior to CIS. You re-engineer the way you do 3 business, some of which you say doesn't require CIS for 4 delivery of benefits, some of which does require CIS 5 for delivery of benefits. 6 MR. KENT: Yes, I agree with you so 7 far, Mr. Warren. 8 MR. WARREN: If I look at that table 9 on Exhibit B1, Tab 8, Schedule 3, page 6, I see costs 10 which go up and down: $6.2 million in 1992 dropping to 11 $4 million in 1993; it goes up to $6 million in 1994 12 and then rises to $9.9 million in 1995. 13 It seems to me at a crude level of 14 analysis, intuitively, that the BPR costs, given how 15 you have described them, should be heavily front-end 16 loaded to the beginning of this process in 1992-93. 17 have I missed something? 18 MR. KENT: Well, I think through your 19 earlier cross-examination we demonstrated that the BPR 20 costs were in 1993 and 1994 and may in fact also have 21 been in fiscal 1995 as the Andersen Consulting 22 expenditures would seem to be. 23 The indirect costs are the SIM 24 start-up and overhead, and they are heavily front 25 loaded. The SIM start-up costs are primarily in 1992, 26 and then there were overhead costs in subsequent years 27 allocated to CIS and to other projects. 28 The start-up costs were front-end 1145 KENT/McGILL, cr-ex (Warren) 1 loaded. BPR was sort of in the middle and rising. And 2 if you look at the Total Direct Costs line, which would 3 include the BPR and analysis phases costs, you will see 4 that that increases through to 1995 and then tails 5 right off in 1996 as the project moved into the design 6 and development stage. 7 MR. WARREN: I'm sorry, I should be 8 looking at which line? 9 MR. KENT: Line 6, Total Direct 10 Costs, is the line that shows the BPR and analysis 11 phases costs for CIS. 12 MR. WARREN: And not consulting? 13 MR. KENT: Consulting costs are 14 included in the overall category of BPR, because 15 Andersen, IBM and PWC all did work in the BPR process. 16 MR. WARREN: There is a separate line 17 for consulting. That's all I am driving at. Line 4 18 has -- 19 MR. KENT: Yes, that is correct. 20 Line 6 is the total of the five lines above. 21 MR. WARREN: My final question is 22 this: Looking at this just at an intuitive level, it 23 would seem that in overall project costs of 24 $119 million for CIS, an amount which is set at 25 $10 million seems an extraordinarily high amount of 26 money for business process engineering for simply 27 reorienting the way you deliver your services to your 28 customers. 1146 KENT/McGILL, cr-ex (Warren) 1 MR. FARRELL: Mr. Warren keeps 2 referring to BPR analysis. This table includes BPR 3 costs and analysis phase costs. If there is a 4 distinction between the two, Mr. Kent is referring to 5 two of them and Mr. Warren is referring to only one. 6 MR. WARREN: I am looking at page 5 7 of 13 of your fresh evidence, in which there is a 8 number for BPR and analysis phases of CIS, at 9 $10.4 million. 10 Do you see that number? 11 MR. KENT: Yes. And that, as 12 Mr. Farrell has pointed out, is inclusive of both BPR 13 and analysis phases. 14 MR. WARREN: I didn't understand 15 there to be a distinction. I thought that the business 16 process re-engineering and analysis phases were 17 essentially the same function: analysis of the way you 18 deliver your services. 19 MR. KENT: No. I apologize. I 20 attempted to describe before, but maybe I didn't do a 21 very good job. 22 The BPR looked at the processes. 23 Analysis was really trying to figure out how software 24 could implement those process changes. It was a 25 precursor to the Request for Proposal process. 26 We had to describe how software could 27 implement or be used to implement those processes. 28 The BPR looked at the overall 1147 KENT/McGILL, cr-ex (Warren) 1 business processes, and then analysis looked at how 2 could ACIS software assembly, made up of whatever, 3 effectively support those new processes, and what 4 should we really put in a Request for Proposal going 5 out to vendors saying what we wanted. 6 We needed to be able to describe what 7 we wanted. We needed to understand that fully before 8 we were swayed by vendors' explanations of the many 9 wondrous things their software could do. 10 The analysis phase then was linked to 11 BPR and overlapped, to some degree, with a separate 12 process. 13 MR. WARREN: Is it possible to divide 14 up the $10.4 million into the two: which is BPR and 15 which is analysis phase? 16 MR. KENT: They did overlap to some 17 degree, and people worked on both. They even have 18 worked on both simultaneously. 19 I could provide some kind of estimate 20 of the split, but it would be somewhat subjective. It 21 would be our best estimate. 22 MR. WARREN: Could I ask for an 23 undertaking to deliver that, please? 24 MS DESAI: Undertaking J7.2, please. 25 UNDERTAKING NO. J7.2: Mr. Kent 26 undertakes to provide estimate 27 of the split of $10.4 million 28 between BPR phase and analysis 1148 KENT/McGILL, cr-ex (Warren) 1 phases of CIS 2 MR. WARREN: As I understand it, you 3 say that there were some folks doing this who were 4 doing both, both BPR and the analysis phase 5 simultaneously? 6 MR. KENT: Well, because they 7 overlapped to some degree, and because it was important 8 to have continuity of knowledge, continuity of 9 understanding of what the new process should consist of 10 so that someone could then write specifications for the 11 software, the same people flowed from one process to 12 the other. 13 We can put together an estimate. 14 MR. WARREN: Thank you. 15 Mr. Chairman, I am about to move on 16 to another area, which will take probably 10 or 15 17 minutes, dealing with the question of the fees that are 18 being charged. 19 I wonder if this would be an 20 appropriate time to break for lunch. 21 THE PRESIDING MEMBER: This is a good 22 time to break, Mr. Warren. 23 We will break for an hour and will 24 return at 1:30. 25 --- Upon recessing for lunch at 1230 26 --- Upon resuming at 1333 27 THE PRESIDING MEMBER: Good 28 afternoon. 1149 KENT/McGILL, cr-ex (Warren) 1 Mr. Warren, before you proceed I just 2 had a question if I can ask of Mr. Kent or Mr. McGill. 3 The information on Exhibit B1, Tab 8, 4 Schedule 3, page 6. 5 MR. KENT: Yes. 6 THE PRESIDING MEMBER: Is this table 7 a breakdown -- the number that appears here, is this 8 the first time it appears before the Board? Did this 9 table have to be constructed for the purpose of this 10 rate hearing or is it something that can be traced back 11 to previous filings? Can someone assist me with that? 12 MR. KENT: I don't believe, sir, that 13 we have provided this breakdown before. 14 The total of direct costs has 15 probably appeared at least through to 1995 fiscal year 16 in previous evidence, but I don't immediately know 17 where. 18 The indirect costs have been 19 presented in total in the past. We haven't presented 20 the allocation to the individual projects. 21 I don't believe we have presented the 22 IDC before, but we can undertake, if you wish, to 23 research that matter. 24 THE PRESIDING MEMBER: I would 25 appreciate it if you could do so, Mr. Kent, if you can 26 just tell us where the $10.4 million in its components 27 has made its way to the filings of the company before 28 the Board in previous cases. The same thing for the 1150 KENT/McGILL, cr-ex (Warren) 1 indirect costs. 2 By the way, can you tell us now what 3 is the total SIM start-up costs of which $13.4 million 4 is allocated to CIS? 5 MR. KENT: There was an 6 interrogatory, and I think again it was one of 7 Mr. Mondrow's. 8 MR. MONDROW: It was the same 9 interrogatory, sir, that was referred to before the 10 luncheon break, Exhibit I, Tab 11, Schedule -- I'm 11 sorry, the previous one, Schedule 24, which has a 12 reconciliation on it and a breakdown. I believe the 13 total start-up costs can be derived from that. It's 14 Exhibit I, Tab 11, Schedule 24. 15 MR. KENT: Yes, that is correct, 16 Mr. Mondrow. 17 Thank you very much. 18 THE PRESIDING MEMBER: All right, 19 thank you. 20 Mr. Warren. 21 First of all, any other matters 22 before we proceed with Mr. Warren? 23 MR. FARRELL: I have none. 24 THE PRESIDING MEMBER: No, okay. 25 Mr. Warren. 26 CONTINUED CROSS-EXAMINATION 27 MR. WARREN: Just as a corollary to 28 the exchange with Mr. Vlahos, could you turn up Board 1151 KENT/McGILL, cr-ex (Warren) 1 Staff Interrogatory No. 69, which is Exhibit I, Tab 1, 2 Schedule 69? 3 --- Pause 4 MR. KENT: Yes, Mr. Warren, we have 5 that. 6 MR. WARREN: In the question itself 7 Board staff summarized constant benefits with respect 8 to CIS as they had appeared in every proceeding since 9 E.B.R.O. 473 and you, in your response, quarrelled with 10 the presentation saying it was not consistent and then 11 set out saying that it didn't include -- the early 12 filings didn't include indirect costs and the later 13 filings did. 14 Leaving aside that disagreement, when 15 I look at the representations of the total costs as 16 they appeared in 473 and 479 with respect to CIS and I 17 compare that to Exhibit B1, Tab 8, Schedule 3, page 6, 18 would some portion of the $10.4 million in direct costs 19 have been reflected in the top line of the breakout as 20 it appears in 69? 21 MR. KENT: For cases prior to the 22 current case I believe that that is the case, 23 Mr. Warren, that those direct costs were within the 24 direct costs of CIS and would therefore appear in -- 25 for example, the number for E.B.R.O. 495 where it shows 26 total costs of $59.8 million, the BPR analysis phase 27 costs, direct costs, would have been within that 28 number. 1152 KENT/McGILL, cr-ex (Warren) 1 Now, what I will do is see if we can 2 find the breakdown of that. 3 MR. WARREN: Okay. Thanks. 4 I would like to turn -- 5 MS DESAI: Do we need a new 6 undertaking or should we just add that to J7.2? 7 THE PRESIDING MEMBER: Ask 8 Mr. Warren. 9 MR. WARREN: Fine with me. Add it 10 to 7.2. 11 MR. FARRELL: Did you give J7.3 to 12 the undertaking to the Chair? 13 MS DESAI: That's what I was 14 wondering. 15 J7.3. 16 UNDERTAKING NO. J7.3: Mr. Kent 17 undertakes to tell the Chairman 18 where the $10.4 million and its 19 components has made its way to 20 the filings of the company 21 before the Board in previous 22 cases and the same thing for the 23 indirect costs 24 THE PRESIDING MEMBER: All right. 25 So there will be one undertaking. 26 All right. 27 MR. WARREN: I want to turn to the 28 question, panel, of the fees that will be charged by 1153 KENT/McGILL, cr-ex (Warren) 1 Newco to Enbridge Consumers Gas under the new or the 2 proposed dispensation. 3 As I understand it, those fees are in 4 an amount for the fiscal 2000 of $15.8 million. Is 5 that right? 6 MR. McGILL: Yes, I believe that is 7 correct. 8 MR. WARREN: Now, Mr. McGill, if you 9 are the person to answer the question, can you tell me, 10 do these fees result from the equivalent of an arm's 11 length negotiation between a representative of Newco 12 and a representation of Enbridge Consumers Gas? 13 MR. McGILL: No, these fees are the 14 result of the application of the fee schedule contained 15 in the draft contract that we have presented in 16 evidence. As we described yesterday, that is a 17 contract that we have modelled after the Union-Enlogix 18 agreement. 19 MR. WARREN: The numbers that give 20 rise to these fees, Mr. McGill, were they developed by 21 you? 22 MR. McGILL: Yes, I was involved in 23 developing the fees for that service. 24 MR. WARREN: Do they reflect, 25 Mr. McGill -- let me ask the question: What do they 26 reflect? What are they based on? 27 MR. McGILL: Well, if you turn to 28 page 52 of Schedule B2, Tab 7, Schedule 4, there are a 1154 KENT/McGILL, cr-ex (Warren) 1 number of features or functions or things that are 2 described in the Newco contract as activities and each 3 of those activities have a different fee that is driven 4 by different volumes of activity. 5 As you can see from the table on 6 page 52 that there are a number of activities starting 7 on the left-hand side in the column there described 8 there as "Set Up", so to set up an account, a customer, 9 a meter, a premise record. 10 Then "Service Activities", which are 11 described previously in the contract, such things as a 12 customer profile on the database, the ability to manage 13 meter readings, the ability to calculate and build 14 delivery charges, commodity charges, the number of 15 bills produced. 16 Then also "Functionality" pertaining 17 to rentals and finance contracts and miscellaneous 18 items. You will note those things there is no activity 19 forecast for them based on our unbundling activity. 20 So when you add through all the 21 amounts under the 2000 column, they add up to the 22 $15.8 million. 23 MR. WARREN: Thanks for that, 24 Mr. McGill. 25 What I was trying to get at was 26 something different, it's how you came up with the 27 amounts for each of those categories. 28 Let me premise the question by saying 1155 KENT/McGILL, cr-ex (Warren) 1 this: Would you accept that at least notionally one 2 way to arrive at a set of fees to be charged by Newco 3 to Enbridge Consumers Gas for these services would be 4 for Newco to decide how much money it needed to recover 5 its investment in the company and to base its fee 6 structure on that. That is hypothetically one way to 7 go about it? 8 MR. McGILL: That is hypothetically a 9 way fees could be derived, but that wasn't the way they 10 were derived in this case. 11 MR. WARREN: Okay. The way they were 12 derived in this case was for you, I take it, 13 Mr. McGill, to decide what the appropriate fee was for 14 the appropriate service, correct? 15 MR. McGILL: Yes, based on the value 16 of each service component. 17 MR. WARREN: The way you derived 18 those numbers was how? 19 MR. McGILL: By assessing the 20 complexity and the value of each service component 21 under the contract and assigning that a value and using 22 that to develop a fee schedule to cover all the 23 different components of a service in a way that was 24 comparable to the way that Union Gas had developed 25 their fee schedule, or at least to the extent that I 26 could view that information. 27 MR. WARREN: Do I understand your 28 answer to be that you looked at the Union-Enlogix fee 1156 KENT/McGILL, cr-ex (Warren) 1 schedule and took numbers for each of these categories 2 -- your starting point was the numbers in each of these 3 categories from that agreement. Is that right? 4 MR. McGILL: I wasn't using the Union 5 fee schedule as a starting point because I don't know 6 what the unit fees in that contract are. They were 7 never made public. 8 What I based it on was my assessment 9 of the relative value of each component of the service. 10 MR. WARREN: In all of that -- were 11 you driven by a desire to arrive at a fee, a total fee, 12 which was as close to Union-Enlogix as you possibly 13 could, or reasonably could, as a fair modifier? 14 MR. McGILL: What I did know with 15 respect to Union and Enlogix was the total forecast 16 fees that Union had indicated that they were going to 17 pay for the service they were acquiring. That was 18 viewed as a benchmark. 19 But I wasn't trying to calculate or 20 develop a fee schedule that was going to equal their 21 fee structure or be particularly higher or lower. What 22 I was trying to do was come up with something that 23 reflected the relative value of the service components. 24 MR. WARREN: Were you driven, 25 Mr. McGill, by a desire to satisfy this Board that the 26 fees for the services were at fair market value using 27 the Union-Enlogix contract as your comparator? 28 MR. McGILL: Yes, I think we do view 1157 KENT/McGILL, cr-ex (Warren) 1 the Union-Enlogix contract as a reference point that 2 can assist parties in determining what a fair market 3 value is for a service of this type. 4 MR. WARREN: Also filed in this 5 proceeding and the subject of testimony subsequently is 6 the evidence of Mr. Diamond. 7 MR. McGILL: Yes. 8 MR. WARREN: If I could ask you just 9 to turn up Mr. Diamond's prefiled evidence which 10 appears at Exhibit B2, Tab 7, Schedule 5. 11 MR. McGILL: Yes, I have that. 12 MR. WARREN: On Table 4 we have a -- 13 as I understand it, I may have misread it, but as I 14 understand it we have in Table 4 on page 8 of -- I'm 15 sorry -- 9 of 15 -- boy, my eyes are getting 16 terrible -- page 9 of 15 we have a comparison of the 17 Union Gas CIS fee per customer and yours. Is that how 18 I am to read the table? 19 MR. McGILL: Yes, I think that is a 20 fair description. 21 MR. WARREN: Chronologically, was 22 Mr. Diamond's evidence produced at the same time as you 23 produced your fee schedule? 24 MR. McGILL: This evidence was 25 produced after we had developed our fee schedule. 26 MR. WARREN: When you say "this 27 evidence" you are talking about Mr. Diamond's evidence? 28 MR. McGILL: Mr. Diamond's evidence. 1158 KENT/McGILL, cr-ex (Warren) 1 MR. KENT: I should mention, though, 2 Mr. Warren, if I could break in, that Mr. Diamond had 3 done some work for us about a year previous to give us 4 some sense of the pricing in the marketplace for CIS 5 software services. What Mr. Diamond was asked to do in 6 preparation for this case was essentially to update 7 that material. So this evidence results from his 8 updating exercise, but there had been prior work 9 available to us. 10 MR. WARREN: Now, when the comparison 11 is done for purposes of your presentation to this 12 Board, and you say we are -- this is my gloss on what 13 you are saying, correct me if I'm wrong, that the CIS 14 fees globally are reasonable and using the fair market 15 value comparison they are at fair market value, you are 16 predicating that on the assumption that Union's CIS 17 services that it gets from Enlogix and the ones that 18 you would get from Newco are roughly comparable. Fair? 19 MR. McGILL: Well, I believe the 20 services are comparable and I believe that the fees are 21 roughly comparable. 22 MR. WARREN: Just so that I have this 23 on the record, panel, the answers are no doubt 24 stunningly self-evident, but I would like to get them 25 on the record notwithstanding that, is that I take it 26 that your concern is -- the test you feel you have to 27 meet and your concern therefore is to demonstrate that 28 the fees are at fair market value rather than that they 1159 KENT/McGILL, cr-ex (Warren) 1 are the best deal you can get for your ratepayers. Is 2 that fair? 3 MR. McGILL: I think we are trying to 4 achieve both things. We know that we need to 5 demonstrate that the fees are reasonable given market 6 alternatives. That is what our Affiliate Code 7 dictates. 8 The other aspect of it is that we are 9 endeavouring to provide value to our ratepayers. I 10 think if you look at the comparisons in Mr. Diamond's 11 evidence you will find that when you look at our 12 overall customer support costs and the costs of our 13 application and the service we are acquiring, they all 14 fall within a range of reasonableness. 15 MR. WARREN: Okay. 16 The final question I have, gentlemen, 17 and I hope you can answer the high level of generality, 18 is just with respect to your information services 19 capital budget. I think you said you were going to try 20 to answer questions on that. 21 MR. KENT: I will give it a shot, 22 Mr. Warren. 23 MR. WARREN: Okay. 24 Can I ask you to turn up the prefiled 25 evidence of Mr. Willett, which appears at Exhibit B1, 26 Tab 2, Schedule 2. 27 --- Pause 28 MR. KENT: Excuse me, Mr. Warren. 1160 KENT/McGILL, cr-ex (Warren) 1 What was that reference again? I'm sorry. 2 MR. WARREN: Exhibit B1, Tab 2, 3 Schedule 2. While you are at it, gentlemen, if you 4 could also turn up Exhibit B2, Tab 6, Schedule 1. 5 "B" for my friends on the bench 6 behind me whose hearing is beginning to slip with the 7 passing of the years. 8 --- Pause 9 THE PRESIDING MEMBER: Which one, 10 Mr. Warren? 11 --- Laughter 12 MR. WARREN: Whoever wants to rise to 13 the occasion. 14 The total IS capital budget for the 15 2000 fiscal year is $18.9 million. Is that right? 16 MR. KENT: That is the number that is 17 shown on column 3 on B2, Tab 6, Schedule 1, page 1, 18 yes. 19 MR. WARREN: Is there any component 20 of the CIS cost which is in that number? 21 MR. KENT: No, there is not. 22 MR. WARREN: Those are my questions 23 of this panel. 24 Thank you very much. 25 THE PRESIDING MEMBER: Thank you, 26 Mr. Warren. 27 Mr. Brett, do you want to go next? 28 MR. BRETT: Yes. Thank you, 1161 KENT/McGILL, cr-ex (Warren) 1 Mr. Chairman. 2 CROSS-EXAMINATION 3 MR. BRETT: Good afternoon, panel. 4 For purposes of my questions if you 5 would have your direct evidence, both pieces of your 6 prefiled evidence. Also, I am going to refer to the 7 Schools Interrogatory No. 17, that is I, Tab 19, 8 Schedule 17, which you were discussing a little earlier 9 with Mr. Warren; and, in addition, the Exhibit B2, 10 Tab 7, Schedule 1. That last document, B2, Tab 7, 11 Schedule 1, is simply your prefiled evidence Summary of 12 CIS Costs and Benefits. 13 My initial questions are really going 14 to be rather informational in nature. I just want to 15 make sure that I have a correct fix on these categories 16 of costs that we have been discussing. 17 I think the best starting place is 18 B2, Tab 7, Schedule 1, page 1 of 4. Do you have that? 19 MR. McGILL: Yes, I do. 20 MR. BRETT: Okay. 21 That breaks down the current CIS 22 forecast of total costs of $119.9 million, and that is 23 composed of $81.1 million direct costs and indirect 24 costs of 38.8. Right? 25 MR. KENT: Yes. 26 MR. BRETT: What percentage of the -- 27 if I can just get this out of the way initially -- what 28 percentage of the total SIM direct costs does the 81.1 1162 KENT/McGILL, cr-ex (Brett) 1 constitute? 2 MR. KENT: I think that is best 3 answered by going back to Mr. Mondrow's interrogatory, 4 No. 24. 5 --- Pause 6 MR. KENT: If you will excuse me for 7 a moment while I turn it up. 8 MR. BRETT: Yes. 9 --- Pause 10 MR. KENT: On the second page of that 11 interrogatory response, there are a number of costs 12 shown, including line 1, which would be "Total Direct 13 Project Costs", and that number is close to the full 14 amount of the total direct costs of all SIM projects 15 other than CIS. 16 MR. BRETT: Okay. 17 MR. KENT: There is, within the early 18 deliverables number, on line 6, some further direct 19 costs, but I don't know what degree of precision you 20 need in your answer. 21 MR. BRETT: Okay. I think that's 22 satisfactory, for my purposes, at the moment. 23 So, the 39.5 is really comparable to 24 the 81.1 million of direct CIS costs? 25 MR. KENT: Yes, that's essentially 26 correct. You should probably think of it as a number 27 slightly larger than 39.5. 28 MR. BRETT: Now, the next thing I 1163 KENT/McGILL, cr-ex (Brett) 1 would like you to look at is the Schools' Interrogatory 2 17 -- that's I19, 17 -- on page 3 of 4. 3 What I am getting at here is the 4 breakdown of the indirect costs of CIS. I had asked 5 you that question and you had given that answer under 6 Section E, that's in Paragraph (e), on page 3 of 4. 7 You summarize the indirect costs of 8 that table. Correct? 9 MR. KENT: Yes, that's correct. 10 MR. BRETT: Then it has -- it has 11 three components to it: the indirect costs -- there's 12 a number that's labelled "Indirect Costs", which is the 13 19.7; there's a number, in the middle, "Y2K 14 Remediation", which is 2.29; and then "IDC" of 16.6 15 million. The total of those is the 38.7 million of 16 indirect costs, and that's the number -- or 38.8 -- 17 that's the number that we see on B2, Tab 7, Schedule 1, 18 labelled "Indirect Costs". Right? 19 In other words, that table that I 20 just referred you to on Schools' Interrogatory 17 is 21 the breakdown of the 38 million in indirect costs which 22 we were talking about? 23 MR. KENT: The 38.8 million, yes. 24 MR. BRETT: Yes. Okay. 25 Now, the three components of that, 26 again, that indirect costs, are: Y2K Remediation; IDC; 27 and then what you have labelled "Indirect Costs". 28 IDC we have discussed. I think we 1164 KENT/McGILL, cr-ex (Brett) 1 know what that is. I will come back to that. 2 Y2K remediation. I take it that that 3 -- I mean I know what that represents, in broad terms, 4 but could you just tell me why it appears in this 5 particular column, in this particular table. What is 6 that? That was a cost to -- we discussed this cost in 7 previous rate cases, I believe. That was a cost 8 associated with updating or remediating certain Legacy 9 systems. 10 MR. KENT: That's correct. It's the 11 Legacy customer systems that were to have been replaced 12 by CIS, and the initial concept -- or one of the 13 outcomes of completing CIS on its original schedule 14 would have been that we would not have had to incur 15 this expenditure. So because CIS was delayed, we had 16 to spend money to upgrade the Legacy customer systems 17 to make them Y2K compliant. 18 The reason it's shown as an indirect 19 cost rather than a direct cost is really just our 20 internal convention. It was external to the CIS 21 project itself that was done by the Y2K project team so 22 that, from a perspective of the CIS project group, it 23 was an external cost and, therefore, indirect to the 24 project itself. 25 MR. BRETT: This cost is not yet -- 26 this is not yet in rates anywhere? 27 MR. KENT: It will never be in rates 28 because that cost is one that's included in the CIS 1165 KENT/McGILL, cr-ex (Brett) 1 project costs and will be transferred, as a cost, to 2 the affiliate when it assumes ownership of the 3 software. 4 MR. BRETT: Put another way: it will 5 be part of the indirect project costs that will not be 6 closed to rate base? 7 MR. KENT: Yes, that's correct. 8 MR. BRETT: All right. And then, the 9 indirect costs themselves, of 19.7, you have a 10 definition in the paragraph under the table: 11 "Include overhead and allocated 12 costs". Allocated costs are the 13 proportion of overall SIM's 14 start-up costs attributed to 15 CIS. Overhead costs include 16 items such as rent, which is 17 variable, based on project team 18 size and other miscellaneous 19 expenses, such as 20 stationery." (As read) 21 I take it, for the purpose of this 22 discussion, allocated costs and overhead costs can be 23 viewed together. There's no particular distinction; 24 they are both indirect SIM start-up costs or SIM 25 ongoing costs? 26 MR. KENT: I think that's the nub of 27 the distinction, Mr. Brett. There were a number of 28 costs incurred in starting up SIM, essentially, before 1166 KENT/McGILL, cr-ex (Brett) 1 there were any direct -- any identified direct 2 projects. 3 As soon as projects were identified 4 and estimates were first presented for those projects, 5 some costs could then be attributed directly to those. 6 That was after, then, the start-up phase. But there 7 were some costs, such as the EDS audit costs, as I 8 mentioned earlier, that were still not identifiable or 9 linked to any one specific SIM project. Those would go 10 under the overheads and be allocated. 11 The same principles were followed in 12 allocation of all of the costs, but the start-up was 13 really just to kick the thing off, and there were some 14 further overhead costs that were incurred thereafter. 15 MR. BRETT: So, of the 19.7, roughly 16 what percentage would be in each box? Would most of it 17 be start-up costs? 18 MR. KENT: Roughly, I would say that 19 the costs in columns 2 and 3, the 1992 and 1993 costs, 20 were probably primary start-up. Thereafter, I would 21 think that they are probably overhead costs -- 22 MR. BRETT: I understand. Those have 23 been incurred over a period of years, you are saying? 24 MR. KENT: Yes. 25 MR. BRETT: Okay. This was -- and 26 this links back to the discussion you had, this 27 morning, with Mr. Warren about what accounts those 28 costs were? 1167 KENT/McGILL, cr-ex (Brett) 1 MR. KENT: Yes. The indirect costs 2 that are shown in later years, 1998 and 1999, for 3 example, are primarily space costs for the rent for the 4 space that's occupied by the CIS project team. 5 MR. BRETT: Okay. Now, if we just 6 leave that, for a moment, keeping in mind that number 7 of 19.7, I would like to now go back to the table that 8 you discussed this morning, in your evidence-in-chief 9 -- sorry -- that you discussed with Mr. Warren in your 10 pre-filed evidence, B1, Tab 8, Schedule 3, page 6. 11 Now, that's the table that lays out what you are 12 proposing to close to rate base? 13 MR. KENT: Yes. 14 MR. BRETT: And if I could direct you 15 to the number opposite -- in line 7 -- opposite 16 "Indirect Costs" you are going to close -- you are 17 proposing to close to rate base. Do you have that 18 table? I should let you turn it up. It's B1, Tab 6, 19 Schedule 3. 20 MR. KENT: Yes, I do. I'm just 21 having a bit of difficulty, in this pile of paper, of 22 comparing the two tables. 23 MR. BRETT: Okay. Well, with one 24 finger on the 19.7 figure in Schools' No. 17, you are 25 going to clear -- you are proposing to close to rate 26 base 13.3 million in indirect costs. 27 The first thing I would -- the next 28 thing I would like to understand is that's a part but 1168 KENT/McGILL, cr-ex (Brett) 1 not all of your 19.7 of indirect costs. 2 In addition, of course, you are 3 closing to rate base. I understand you are closing to 4 rate base $10.4 million of direct costs, and we will 5 get to that in a moment. That is the BPR/analysis 6 costs, and also $6.4 million of IDC. But just 7 focussing on the indirect costs at line 7, the $13.3 8 million, that is a subset, I take it, of the $19.7 9 million. How was that subset arrived at? 10 MR. KENT: The project continues 11 today to attract some costs that are indirect. The 12 rent cost is a very good example of that. Because that 13 expenditure is being made to support the development of 14 the CIS software it is properly related to the software 15 itself and properly a cost that should be ultimately 16 borne by Newco rather than by the utility. 17 So the indirect costs that were 18 accumulated that were directly associated with the BPR 19 and analysis phase work were segregated off and 20 included in the 13. -- rounding up to $13.4 million. 21 So the indirect costs that remain and 22 the difference between that number and $19.8 million 23 are indirect costs associated with the software itself 24 and, therefore, flowing to Newco. 25 MR. BRETT: And where did you draw 26 that line temporally between those two categories? 27 MR. KENT: At the end of the analysis 28 phase and before Price Waterhouse, at that stage, 1169 KENT/McGILL, cr-ex (Brett) 1 started work on the design phase. 2 MR. BRETT: So, broadly speaking, at 3 the end of 1995. 4 MR. KENT: Yes. There was a small 5 amount of profit in 1996, but, broadly speaking, at the 6 end of fiscal 1995. 7 MR. BRETT: I would like to address 8 briefly with you the principles by which you seek to 9 allocate the indirect costs to rate base, and to do 10 that I want to refer you to two passages in your 11 evidence-in-chief which I am going to note. The first 12 is at page 12 of your first piece of evidence: B1, Tab 13 8, Schedule 1, page 12 of 22. You say there in the 14 large paragraph in the middle of the page: 15 "In addition to direct project 16 costs and Interest During 17 Construction..., the CIS project 18 was allocated a share of the 19 indirect costs associated with 20 SIM as a whole. The methodology 21 for this allocation was based on 22 an apportionment of SIM start-up 23 costs, and other costs that 24 could not be directly attributed 25 to specific projects, and to all 26 SIM projects based on their 27 share of project specific SIM 28 capital expenditures. As each 1170 KENT/McGILL, cr-ex (Brett) 1 SIM project was closed to plant 2 upon completion, that project's 3 share of indirect costs was 4 closed as well." 5 Now, would you agree with me that in 6 this situation you are not going to close -- you are 7 only going to close to rate base approximately, 8 ballpark, $10 million out of total direct CIS costs of 9 $81 million? 10 MR. KENT: Yes, I think that is fair. 11 Yes. 12 MR. BRETT: Following this principle, 13 then, the portion of indirect costs that should be 14 closed to rate base should reflect the same ratio that 15 10 is of the total volume of SIM direct costs. Is that 16 fair? 17 MR. KENT: As a matter of fact, Mr. 18 Brett, funnily enough, I think that is correct, because 19 CIS is the only remaining SIM project and, therefore, 20 would attract the full amount of whatever remaining 21 indirect costs are not yet closed. 22 MR. BRETT: I may have used the 23 adjective "remaining" in front of the wrong noun, Mr. 24 Kent, but what I really am trying to suggest to you is 25 that there is a pool of SIM direct costs which have 26 been over the years closed to rate base, and as you 27 have closed those costs to rate base you have also 28 closed out a proportionate amount of indirect costs. 1171 KENT/McGILL, cr-ex (Brett) 1 Now, your initial plan that you told 2 us about earlier was that you had a total of $81 3 million worth of direct costs which you would have 4 under your original plan closed to rate base. You 5 decided not to do that, to only close a portion of 6 them; something in the order of 12 per cent, 15 per 7 cent ballpark. Doesn't that mean that only a portion 8 of this remaining indirect cost should be closed to 9 rate base? 10 Following this notion that you would 11 only close these indirect costs when you closed all of 12 the direct costs, in this case you are only proposing 13 to close a very small fraction of the direct costs of 14 CIS to rate base. So why should you be entitled under 15 these principles to close all of the remaining indirect 16 costs? 17 In other words, if you do what you 18 are proposing to do, you will be closing more indirect 19 costs in respect of CIS to rate base than you are 20 direct costs, which is surely a perversion, given how 21 this process has worked in the past. I would have 22 thought you would have some difficulty pointing me to 23 any circumstance earlier in the history of SIM where 24 you have actually closed a larger amount of indirect 25 costs than you have direct costs to a specific SIM 26 account. 27 MR. KENT: I do understand your 28 question, Mr. Brett, and I think that you are correct 1172 KENT/McGILL, cr-ex (Brett) 1 in saying that we have not previously encountered a 2 situation like this, where the indirect costs would be 3 higher than the direct. But I think that maybe the 4 flaw in your logic is that you are looking at it as a 5 pool of direct costs first. What this really 6 represents is a pool of indirect costs. They were 7 costs that had to be incurred to set the project up; 8 the overall SIM project. They include things like the 9 EDS audit that spanned every element of SIM at the time 10 that the EDS audit was conducted, and it is that pool 11 of costs that we now have to find a fair and reasonable 12 way of recovering. 13 Now, the recovery of those costs was 14 always intended, in the way that the SIM project was 15 set up, to be through rate base, because they were 16 envisaged as fairly large expenditures that needed to 17 be spent to start up the SIM project, that had value, 18 in that they were supporting the initiation of SIM and 19 the administration and control of the SIM project, and 20 that the fairest and simplest way of recovering them, 21 with the concept that all projects would ultimately go 22 to rate base, would be to distribute them as a function 23 of direct costs, as we have discussed. I think that 24 made a great deal of sense. 25 The world, though, has changed since 26 the original SIM concept was initiated. It doesn't 27 change the validity of those expenditures and their 28 value to ratepayers, but they remain really utility 1173 KENT/McGILL, cr-ex (Brett) 1 costs and not costs of software. 2 So, ultimately, the fair way to bring 3 them back into rates and to recover them is through 4 their being added to rate base. 5 MR. BRETT: I guess what is fair is 6 something that we will ultimately argue about, Mr. 7 Kent, but surely they are derivative in some sense. 8 I mean, if I were looking at page 5 9 of your new prefiled evidence, B1, Tab 8, Schedule C, 10 where this topic is touched on again, it says: 11 "The methodology followed in 12 allocating these costs assumed 13 that all projects would 14 ultimately be included in rate 15 base and that costs could, 16 therefore, be proportionately 17 split among them." (As read) 18 Let me put it to you this way. Have 19 you had a chunk of costs, direct costs, associated with 20 this SIM program in some other phase of it that 21 produced something that didn't work, just for the sake 22 of argument, and, therefore, the Board declined to 23 permit you to close that piece, that particular set of 24 direct costs, in the rate base? You would not have 25 been able to argue in that instance that you should be 26 able to close the proportion that amounted to indirect 27 costs in the rate base, would you? Is that not 28 reasonably fair? Is one not contingent on the other? 1174 KENT/McGILL, cr-ex (Brett) 1 MR. KENT: I believe that if the 2 Board had determined that some part of the SIM direct 3 costs were to be disallowed, that they were not of 4 value to ratepayers and they should not in any way be 5 recovered, I would think that a proportionate share of 6 the indirect costs might also be argued to be 7 appropriately disallowed. 8 MR. BRETT: With respect to the $10.4 9 million you have been discussing earlier with Mr. 10 Warren, that's the direct costs, $10.4 million, which 11 is a combination. I gather where we left off 12 essentially was that you gave an undertaking to provide 13 your best estimate of the breakdown of this 10.4 14 between the two components, the BPR and the analysis 15 components. 16 MR. KENT: Yes. 17 MR. BRETT: I just wanted to, without 18 trying to in any way pre-empt what you come back 19 with -- if I look at page 4 of 13 of your most recent 20 prefiled evidence, B1, tab 8, schedule 3, you discuss 21 what analysis means at the bottom of the page. You 22 say: 23 "The costs of the CIS analysis 24 phase represent work conducted 25 to determine the specifications 26 that should be used in 27 requesting software proposals. 28 These costs are consistently 1175 KENT/McGILL, cr-ex (Brett) 1 incurred by software purchasers 2 in the pre-acquisition and 3 tendering stages and are not 4 included in the market price of 5 software." 6 You go on to say: 7 "As a result, it is appropriate 8 to include analysis phased costs 9 as a rate base addition since 10 they are properly a cost to 11 ratepayers." 12 First of all, I take it that these 13 analysis costs represent something more than simply 14 production of an RFP. These would be detailed system 15 analysis work that you would do within the company in 16 order to prepare yourself for moving forward to develop 17 a detailed software system. Is that a fair way of 18 putting it? 19 MR. McGILL: The goal is to develop a 20 set of requirements that would support the new business 21 processes that the BPR has identified. Then you take 22 those requirements out as part of your request for 23 proposals so that vendors can determine or indicate to 24 you how closely their applications meet your 25 requirements. 26 MR. BRETT: Did you do a tender offer 27 for this software? 28 MR. KENT: There was an RFP process 1176 KENT/McGILL, cr-ex (Brett) 1 conducted and the vendors to whom the RFP was sent 2 included PriceWaterhouse, Anderson, I believe IBM. I'm 3 not sure if there were others. 4 MR. BRETT: Okay. Just in passing, 5 if I turn you back to the table at B1, tab 8, schedule 6 3, which shows how your directs costs were incurred 7 over the years, I take it, and I am going back to your 8 discussion with Mr. Warren this morning about where you 9 discussed that part of the school's interrogatory 10 wherein you stated that the BPR costs were incurred in 11 1993 and 1994, if you recall. 12 The reason that the 1995 number in 13 that table is $5.78 million, in other words, the 14 rationalization of those numbers is that 1995 is when 15 you did your analysis work. 1993 and 1994 was when you 16 did your BPR work, broadly speaking. 17 MR. KENT: I think, as I mentioned 18 earlier, Mr. Brett, we also stated in that 19 interrogatory response that the Anderson consulting 20 work was done in November 1994. 21 MR. BRETT: Right. 22 MR. KENT: So that would have been a 23 number that appeared in fiscal 1995. There may be a 24 little bit of confusion about when exactly those costs 25 were incurred. I would hope to be able to clarify that 26 in our undertaking response. 27 MR. BRETT: All right. That would be 28 helpful. This table, I take it, is in fiscal years. 1177 KENT/McGILL, cr-ex (Brett) 1 MR. KENT: Yes, it is. Yes. 2 MR. BRETT: Okay. 3 THE PRESIDING MEMBER: Is that an 4 undertaking? 5 MR. BRETT: I think it was the 6 previous undertaking, Mr. Vlahos. I think he said he 7 was going to do it as part of the one he already gave. 8 Now, I guess based on what you have 9 told us about the -- based on your discussion with Mr. 10 Warren this morning, what you have just told me now, my 11 estimate on a very rough basis is that that $10.4 12 million is probably divided roughly 50-50 between those 13 two categories of costs. 14 MR. KENT: My sense is that a 15 significantly higher proportion is associated with the 16 BPRs just from the timeframe in which I know it was 17 done, but without fully understanding how many staff 18 were on it at different stages, I'm not sure. 19 MR. BRETT: All right. Well, we will 20 have to await your response. Again, it would seem to 21 me that the division between those two numbers -- those 22 two numbers represent quite different categories of 23 activity, as you have described them. You have laid 24 them out in separate areas of -- you have described 25 each of them separately a couple of times in your 26 evidence. 27 Is not the second category, the 28 analysis category, intrinsically linked to the software 1178 KENT/McGILL, cr-ex (Brett) 1 creation itself? I mean even assuming that 70 per cent 2 of your costs were BPC, 70 per cent of the $10 million, 3 which I would have thought as a stretch, but let's say 4 it's 60 or 70 per cent. That means three or four 5 million dollars. It doesn't really take three or four 6 million dollars to draft an RFP. 7 Is not a good part of those dollars 8 the front end system analysis that properly belongs 9 with the software itself as opposed to continuing to 10 reside in the utility? 11 MR. KENT: What I did in reviewing 12 this and trying to think it through, Mr. Brett, was to 13 compare it to acquisition of another software solution. 14 I have been involved in a number of those in other 15 aspects of the SIM project. 16 In each of those cases, you have to 17 think through what you want before you go out and ask 18 people to bid on it. The work that was done through 19 the analysis phase was that kind of thinking through 20 what you want in a software package and getting it down 21 on paper in condensed form in an RFP so that it can be 22 provided to potential vendors. 23 It was done in drawing an analogy or 24 a comparison with a number of other projects that I 25 have personally been involved in. 26 MR. BRETT: If I can just go to the 27 item of IDC for a moment, interest during construction. 28 If I can turn you back to the same table at school's 1179 KENT/McGILL, cr-ex (Brett) 1 interrogatory 17, page 3 of 4, that's the summary of 2 indirect costs. 3 MR. KENT: Yes. 4 MR. BRETT: In there you see total 5 interest during construction of $16.7 million. 6 MR. KENT: Yes. 7 MR. BRETT: Which I think is 8 self-explanatory. 9 MR. KENT: Perhaps, Mr. Brett, I 10 could expand on that. 11 MR. BRETT: All right. 12 MR. KENT: That number is 13 significantly larger than the IDC that is attributable 14 to the BPR analysis, the BPR analysis phase costs 15 alone, because it represents the carrying costs on all 16 of the software design and development investment. 17 MR. BRETT: Yes, all right. 18 MR. KENT: That amount goes with the 19 software to Newco. 20 MR. BRETT: Yes. You anticipated my 21 next question there, Mr. Kent. 22 So the six four two four million, 23 which is what you had in D1, tab 3, schedule 3, the 24 amount of IDC that you are proposing to close to rate 25 base, as Mr. Warren touched on this morning, a large 26 part of that IDC occurs in years 1997, 1998 and 1999. 27 Can you just tell me, to make sure we 28 understand this table: You go from an IDC amount of 1180 KENT/McGILL, cr-ex (Brett) 1 $1.2 million in 1997 -- let me back up a little bit. 2 The work seems to stop on what you 3 are accruing IDC in the year 1996. 4 MR. KENT: That is correct. 5 MR. BRETT: You then show an IDC of 6 $1.2 million in 1997, then you drop down to $516,000 in 7 1998, and you come back up to $1,032,000 in 1999. 8 Why the 100 per cent fluctuation 9 there in 1998? 10 MR. KENT: When the company decided 11 -- and it was approximately March of 1998 that we 12 needed to make a substantial course correction with the 13 CIS project. 14 The charging of IDC was suspended 15 until the project recommenced at the beginning of 1999. 16 So the company's shareholders were funding that 17 outstanding amount of capital through that period as we 18 were reviewing what direction to take with the project. 19 The number for 1998 represents only a 20 part year of IDC. Ratepayers then essentially had an 21 IDC holiday until the decision was made to recommence 22 and the project was restarted in January of 1999. 23 MR. BRETT: Would you concur with me, 24 as a general proposition, that if the Board decided -- 25 again, this gets to the question of the prime driver in 26 these costs and which costs are followed or triggered 27 by those drivers. 28 If the Board, for example, were to 1181 KENT/McGILL, cr-ex (Brett) 1 decide in its wisdom that instead of having you close 2 or allowing you to close $23 million in direct and 3 indirect costs to rate base that they would allow you 4 to close half that, $11.5 million, it would also be 5 appropriate in that circumstance that you would not be 6 able to close any more than half of the interest during 7 construction; that that follows along with the earlier 8 decision. 9 Is that fair? 10 MR. KENT: I am not sure that I am 11 able to put myself into the Board's shoes to that 12 extent. 13 All I can do is reiterate that IDC 14 represents -- again speaking as a layman in these 15 matters -- the costs to the shareholders of having that 16 money on loan in essence during the development of the 17 project. So the shareholders were funding this project 18 during its development, and IDC represents their costs 19 of providing that funding. 20 It's a real cost to shareholders to 21 have that money outstanding until the project is 22 complete and it's closed to rate base. So there are 23 real costs associated with it. 24 I am not sure if that is helpful. 25 MR. BRETT: Well, it is your answer, 26 Mr. Kent. 27 Let me just talk a little bit more 28 about these direct costs of $10 million and your 1182 KENT/McGILL, cr-ex (Brett) 1 recovery of them in rate base. 2 I would like you to turn up Schools 3 interrogatory 18 for a moment. 4 MR. KENT: Yes. 5 MR. BRETT: I am sorry, Mr. Kent, I 6 have misled you. It is back to Schedule 17, page 3 of 7 4. 8 I want to talk a little bit about the 9 BP, business process engineering costs. 10 This table here, the first table on 11 page 3 of 4, shows the direct costs. So it breaks down 12 the $81 million, of which the $10.4 million is a part, 13 into its various components. Right? 14 MR. KENT: Yes, that's correct. 15 MR. BRETT: It is a functional 16 breakdown. This answers the question I had posed 17 earlier. 18 Along the left-hand side it has IS 19 labour, and it gives you a total of $11 million; 20 business labour, $7 million -- this is over the 21 eight-year period; consulting, $58 million; other, $3.4 22 million, for a total of $81.2 million. 23 Can you tell me briefly what the 24 "Other" represents? Is that some kind of equipment 25 cost or software package cost? 26 MR. KENT: I'm not sure, Mr. Brett. 27 I believe that this includes things like printer paper 28 and other things that are used that can be linked to 1183 KENT/McGILL, cr-ex (Brett) 1 this specific project. 2 It would be those kinds of 3 administrative costs that can be directly attributed to 4 this project. 5 MR. BRETT: Could you briefly 6 distinguish IS labour and business labour? 7 MR. KENT: Yes. 8 MR. BRETT: I assume, reading your 9 table, that IS labour meant labour and benefits of 10 people working in the IS department, and business 11 labour meant anywhere else in the utility. 12 MR. KENT: That is essentially 13 correct, although it may also include, to some degree, 14 contractors with IS background. So the company is 15 hired to work on the project in lieu of providing 16 employees to do the work. 17 But your breakdown is correct. It is 18 essentially people with information technology 19 backgrounds and roles as distinguished from people who 20 understand the business and can explain what the 21 software has to do. 22 MR. BRETT: The Consulting line would 23 be payments to consultants. In the years 1993, 1994 24 and 1995 you have the BPR consultants in there, 25 including Price Waterhouse and their incarnation as a 26 BPR consultant. 27 Not to put too fine a point on it, 28 but from 1996 on, I take it that the bulk, all if not 1184 KENT/McGILL, cr-ex (Brett) 1 close to all, of those costs are payments to Price 2 Waterhouse. 3 MR. KENT: Well, CSC costs I think 4 would be in there as well. There may be some other 5 consulting costs that I can't think of just at the 6 moment. 7 MR. BRETT: Right. But broadly 8 speaking, I am correct? 9 MR. KENT: I believe so, yes. 10 MR. BRETT: You make the assertion 11 just before you did that table, which I find 12 interesting. I may be the only person who finds it 13 interesting. 14 You say at the end of section (c): 15 "All of these costs are capital 16 expenditures." 17 Mr. Kent, I would have thought, 18 looking at those costs that we just discussed, which 19 are salary and benefit costs of people in the company, 20 and consultants' fees, that with the possible exception 21 of the line labelled "Other", none of those costs are 22 capital expenditures. They are all what you and I 23 would call operating costs, O&M expenditures. 24 MR. KENT: I really don't have any 25 accounting qualifications, Mr. Brett. The way that the 26 company has traditionally handled things of this nature 27 is that if something is to become a capital asset, then 28 labour employed in creation of that asset is also 1185 KENT/McGILL, cr-ex (Brett) 1 capitalized. 2 I am thinking of things like pipeline 3 construction, with which I am quite familiar. If 4 someone works on a pipeline construction project and 5 that project ultimately is to be included in rate base, 6 the labour of the people who are directly involved in 7 building the pipeline, the welders, the backhoe 8 operators, everybody who is involved in directly 9 building that pipeline, their labour is capitalized and 10 included within the capital asset when it is closed to 11 rate base. 12 The same principle would apply here, 13 given that the concept behind the SIM project was that 14 these individual projects, such as CIS, would be built 15 over a period of time and then capitalized. 16 MR. BRETT: In doing that 17 capitalization exercise that you are describing for 18 plant construction, you would be guided, presumably, by 19 the Ontario Energy Board's -- the proper word for it 20 always escapes me -- statement of accounts for Class A 21 gas utilities. 22 MR. KENT: I believe that to be the 23 case, yes, Mr. Brett. 24 If you want to get into a great deal 25 of detail on this -- 26 MR. BRETT: No, I don't. 27 MR. KENT: I'm not sure I am the 28 right person and I am not sure that this is material. 1186 KENT/McGILL, cr-ex (Brett) 1 It kind of falls a little along the lines of the 2 questions that Mr. Warren was asking earlier. 3 MR. BRETT: I'm not -- I'm sorry, you 4 have a comment. 5 MR. FARRELL: I was just going to say 6 that the $81 million is part of the purchase price the 7 affiliate is going to pay so I don't know what turns on 8 this discussion in any event. 9 MR. BRETT: No, actually it's not, 10 Mr. Chairman, with the greatest respect for my friend. 11 Ten million of the $81 million is 12 going directly in the rate base. That is the reason 13 for my questions here. The other $71 million I don't 14 care about, they can deal with that the way they want. 15 But with respect to the $10 million, 16 it is clearly germane in my view, and I guess my 17 question to you is: As I understand it there are 18 principles set out that talk about what percentage of 19 labour it is appropriate to capitalize in the context 20 of a project, whether that is a pipeline project or 21 something else. 22 In the normal case, if I can put it 23 that way, the amount of labour that you would be 24 capitalizing into a construction project would bear 25 some relationship to the value of the total 26 construction project. It wouldn't presumably exceed in 27 value the value of the hard assets themselves. 28 MR. KENT: I am not familiar with any 1187 KENT/McGILL, cr-ex (Brett) 1 guidelines or limitations in that regard, Mr. Brett. 2 MR. BRETT: Okay. Well, that's fine. 3 But your point is that according to 4 some convention that you understand to exist with 5 respect to capital projects, these costs are eligible 6 to be capitalized. Is that fair, just to tie that up? 7 MR. KENT: Yes, that is my 8 understanding, Mr. Brett. 9 Perhaps if it is helpful, we are 10 aware of a situation in another jurisdiction where BPR 11 costs were accepted by a regulatory authority as an 12 item that could be capitalized and recovered through 13 rates amortized over a period of years as a means of 14 recovering the investment in those BPR expenditures. 15 It was a case that Boston Gas was involved in. 16 MR. BRETT: I'm sure you would like 17 to give me that reference. 18 MR. KENT: If it's not overly 19 troubling to you, Mr. Brett, I would be very 20 pleased to. 21 MR. BRETT: Why don't you do that, 22 Mr. Kent. 23 MR. KENT: Okay. Thank you. 24 MR. BRETT: This, I take it, is not 25 in the prefiled evidence. 26 MR. KENT: No, it's not. It's 27 something that we have come across quite recently. 28 MR. BRETT: Right. Well, I think if 1188 KENT/McGILL, cr-ex (Brett) 1 you could give me the reference to the case what I 2 would like to do is go and look at the case. Because I 3 have that case, as it happens, somewhere in my files, 4 but I don't have it here. 5 MR. KENT: Yes. 6 MR. BRETT: I would like to see how 7 relevant it is and what the categories of costs are, 8 and so on, have an opportunity to ask you about that if 9 there is some kind of -- 10 MR. KENT: By all means. 11 The material I have here refers to 12 "Boston Gas Company" and it is then referenced as 13 "D.P.U. 96-50 (Phase I)". It goes on to say, in the 14 following line, the number "174 PUR4th" and then the 15 number "200", "Massachusetts Department of Public 16 Utilities, November 29, 1996". 17 In that proceeding, as I understand 18 it, Boston Gas was seeking recovery of the costs of a 19 BPR exercise, which I gather was not dissimilar from 20 ours. 21 MR. BRETT: Was it linked to a CIS 22 exercise as well? 23 MR. KENT: No, it was not. 24 MR. BRETT: All right. 25 Yours is though, is my point, 26 isn't it? 27 MR. KENT: Well, I think, Mr. Brett, 28 our point is that it is not, that it is an exercise 1189 KENT/McGILL, cr-ex (Brett) 1 that resulted in benefits entirely independent of the 2 software itself. 3 There was a link -- 4 MR. BRETT: I thought your evidence 5 this morning to Mr. Warren was something a little 6 different then that, that there were linkages and they 7 weren't 100 per cent one-on-one linkages but that the 8 two were tied together to some degree. 9 MR. KENT: Yes, I apologize, 10 Mr. Brett. I think that is a fairer description of it. 11 What I was attempting to convey was 12 that it was not fully and tightly linked to a CIS. 13 Some of the benefits in our case come through the new 14 software but others were independent. 15 I believe in the case of the Boston 16 Gas concept the BPR resulted in benefits that were 17 achieved entirely without the acquisition of software, 18 but the regulatory authority in that instance approved 19 the recovery of costs over a period of time, amortized, 20 I believe, over five years. 21 The project was known as a project 22 quest and its goals were to enhance business 23 opportunities, lower costs and improve services to 24 customers. It goes on to describe the nature of the 25 work that was done. 26 MR. BRETT: Do you have a page 27 reference there by any chance? 28 MR. KENT: I believe that this is a 1190 KENT/McGILL, cr-ex (Brett) 1 copy of the Board's decision, or the authority's 2 decision in that case. 3 MR. BRETT: Right. What page are you 4 at on that decision? 5 MR. KENT: The transcript or the 6 portion I am reading from is just numbered pages 1 7 through 3, but I believe this is obtained 8 electronically and may not match the numbering of the 9 pages in the decision. 10 MR. BRETT: All right. Well, we 11 can -- perhaps what you had better do is -- maybe that 12 should be made an exhibit, Mr. Chairman, so we know 13 what we have here anyway. 14 THE PRESIDING MEMBER: The whole 15 decision, Mr. Brett, or just the page? 16 MR. BRETT: I think enough of it. 17 The relevant passage, enough that we know whether we 18 are talking about something that is on all fours with 19 what we have here. I would have thought that -- 20 MR. FARRELL: We can give Mr. Brett a 21 copy and he can then indicate what pages he would like 22 to have. 23 MR. BRETT: Maybe that's better. I 24 could look at that and report back. 25 MR. WARREN: Could I also ask -- 26 Mr. Chairman, I'm sorry to interrupt, but if Mr. Kent 27 has a way of getting it electronically if he could let 28 us know what that is so we can get it ourselves off the 1191 KENT/McGILL, cr-ex (Brett) 1 Net? 2 MR. KENT: Certainly. 3 Ms Reynolds was the one who actually 4 found this and provided it to me at the end of last 5 week. 6 THE PRESIDING MEMBER: I thought 7 Ms Reynolds was busy doing other things. 8 MR. KENT: She and I met on Friday 9 afternoon I believe, after she was finished here. She 10 is a very busy person. 11 THE PRESIDING MEMBER: We gathered 12 that. We made sure of that. 13 Mr. Farrell. 14 MR. FARRELL: Mr. Brett made 15 reference to the uniform system of accounts and to be 16 helpful he might want to look at the text for 17 account 491, which is computer application software 18 which includes customer information system as one of 19 the four instances. 20 Also, Appendix A includes plant 21 accounting instructions which deal with, among other 22 things, labour. 23 MR. BRETT: I have a feeling 24 Mr. Chairman is familiar with that document, but I will 25 look it up and make sure that I understand how it 26 applies here. 27 I would like to maybe switch gears 28 here for a moment and ask a few questions about the 1192 KENT/McGILL, cr-ex (Brett) 1 services agreement. 2 Mr. Kent, you mentioned yesterday in 3 discussing this subject with Mr. Warren that the 4 software package, which is what is being transferred, I 5 take it, or the software system, to Newco is not being 6 transferred until the 1st of October, 2000 for what you 7 thought could be reasonably described as tax reasons. 8 Could you just elaborate a little bit 9 on that? What tax reasons are we speaking about? 10 MR. KENT: My understanding is that 11 when an asset is transferred it is important to arrive 12 at a value for that asset. I believe that our 13 understanding is that it would be very difficult to 14 properly determine a value for the unfinished software. 15 So that if the asset were to be 16 transferred under construction, so to speak, it would 17 be very difficult to decide what the true value of that 18 asset was at that stage. 19 I mean, if it success -- 20 MR. BRETT: In other words -- 21 I'm sorry. 22 MR. KENT: -- successfully completed 23 it might have one value, if it's abandoned at that 24 point it would have a very different value. 25 So it is far simpler to wait until 26 the asset is completed and the software is fully 27 delivered, at which point it is much more 28 straightforward to determine its value. 1193 KENT/McGILL, cr-ex (Brett) 1 MR. BRETT: This would be important 2 from the point of view of the company purchasing, I 3 suppose, because they would need to show that they had 4 effectively gotten value for what they paid for, among 5 other things. 6 MR. KENT: I would think that it 7 would be important to both parties. 8 MR. BRETT: Right. 9 Now, as I understand it, Newco is -- 10 did I understand the gist of your conversation with 11 Mr. Warren yesterday and again today that Newco is 12 likely to be an existing operating company of the 13 Enbridge Group. 14 MR. KENT: It is possible, though, we 15 have excluded Enbridge home services from -- 16 MR. BRETT: Right, because you are in 17 the business of marketing the commodity -- 18 MR. KENT: That's correct. 19 MR. BRETT: -- and you made that 20 clear yesterday. 21 But that aside, there are a lot of 22 operating companies in the group, as you are well 23 aware. Is it your anticipation that it would go to one 24 of those operating companies? 25 MR. KENT: My anticipation is that we 26 would set up a new company for the purpose. But that 27 is currently being considered by others in our company 28 and I believe in Calgary as well. 1194 KENT/McGILL, cr-ex (Brett) 1 MR. BRETT: Okay. Just one last 2 question on the software. 3 Schools had asked in an IR about the 4 capital cost rates for software, for IS assets 5 generally. I believe it was No. 20. 6 While we are searching for it here, I 7 just wanted to -- yes. Here it is, No. 20. This is 8 listed as -- it lists computer software with a capital 9 cost allowance of 100 per cent; and hardware, general 10 purpose hardware it looks like, Class 10, with a 11 percentage of CCA at 30 per cent. 12 So I took it from your comments this 13 morning that what is being transferred is not hardware. 14 Hardware resides in utility and will continue to reside 15 there. What is being transferred is a software -- for 16 want of a better word -- a software package or a 17 software system on which presumably this 100 per cent 18 capital cost allowance would apply. 19 MR. KENT: My recollection is that a 20 small part of the expenditures are viewed as Class 10, 21 though I couldn't tell you now why. I'm just going by 22 my recollection of seeing some of the material passed 23 over my desk. 24 I think you are correct in saying 25 that by far the largest majority is Class 12. 26 MR. BRETT: Okay. Thank you. 27 Now, this was touched on, but I 28 wasn't too clear. 1195 KENT/McGILL, cr-ex (Brett) 1 The transfer price, the asset is 2 going to be transferred at net book value. I think you 3 said you weren't entirely certain that the actual 4 pricing or payment arrangements had been worked out. 5 Can you give us any help at all on 6 how this works, from a rather simple point of view? I 7 mean, are we looking at cash changing hands here 8 between the affiliate and the utility, or is it simply 9 a -- is there compensation being paid or consideration 10 being given at the time of the transfer? 11 MR. KENT: The asset, because it is 12 in work-in-progress today, isn't in rate base. 13 MR. BRETT: Right. 14 MR. KENT: How exactly it is 15 accounted for on the company's books I'm not sure, 16 other than to know that it is not in rate base. 17 MR. BRETT: Right. 18 MR. KENT: So how the actual transfer 19 to the affiliate would take place I also cannot answer. 20 MR. BRETT: Okay. 21 Would it be possible to just advise 22 us of that? 23 MR. KENT: I believe that the 24 transfer mechanism is such that there is absolutely no 25 impact on ratepayers. Given that it is not in rate 26 base now and it won't be in rate base in the future, I 27 don't think that there is any impact at all. But I'm 28 not expert in this. 1196 KENT/McGILL, cr-ex (Brett) 1 MR. BRETT: Yes. 2 My thinking was running more just to, 3 for purposes of clarification, how would it work in the 4 company's own accounts. Perhaps you could give an 5 undertaking to just have someone explain, from an 6 accounting point of view, how this takes place. 7 MR. McGILL: I am not sure that we 8 even know exactly how we are going to facilitate the 9 transfer as of yet. I don't think we would be in a 10 position to answer that question at this time. 11 MR. BRETT: When you say "facilitate 12 the transfer", Mr. McGill -- 13 MR. McGILL: Structure the 14 arrangement, I guess. 15 MR. BRETT: I guess that is what 16 interests me, the structure of the arrangement. 17 MR. KENT: It may be, Mr. Brett, that 18 subsequent witnesses would be better able to answer 19 that. I'm not sure what witnesses are coming up after 20 us. 21 MR. BRETT: Mr. Boyle, perhaps. 22 MR. KENT: I don't know. 23 Perhaps, Mr. Brett, we could perhaps 24 ask Mr. Ladanyi or Mr. Farrell to advise after the 25 break whether somebody in a better position to answer 26 this might be appearing later. 27 MR. BRETT: That's fine. 28 MR. KENT: If not, we could give an 1197 KENT/McGILL, cr-ex (Brett) 1 undertaking to do the research. 2 MR. BRETT: That's fine. Thank you. 3 Now, you have talked about the 4 negotiation process or the implementation process of 5 this. 6 If I can turn you to your new 7 evidence, your recent evidence, B1, Tab 8, Schedule 3. 8 You set out there a summary of the ratemaking 9 implications of this transaction, for want of a better 10 word, and -- 11 MR. KENT: This is the table on 12 page 11, is it, Mr. Brett? 13 MR. BRETT: Right. I'm sorry. 14 Page 11 of 13. 15 MR. KENT: Yes. 16 MR. BRETT: Now, I think as you have 17 said earlier to -- by way of preface, as you said 18 earlier to Mr. Warren, at page 52 of 53 of the exhibit 19 in which your agreement, the Services Agreement, 20 appears -- that is B2, Tab 7, Schedule 4 -- you lay out 21 the service fees payable over the next five years from 22 Consumers Gas to the affiliate, they are estimated to 23 be $107 million, and they start off in the year 2000 at 24 $15.8 million in the year commencing October 1, 1999. 25 Now, as I understand it -- and then 26 they go up by the rate of inflation, the Consumer Price 27 Index, for the next five years, as I understand it. 28 MR. KENT: They are also driven, 1198 KENT/McGILL, cr-ex (Brett) 1 Mr. Brett, by changing volumes, anticipated volumes in 2 each transaction category. 3 MR. BRETT: Right. 4 MR. McGILL: Each activity level. 5 MR. BRETT: I see that on the top 6 under -- yes, I see, under service activity and under 7 set-up. 8 Well, then, I guess the first 9 question that flows out of this is you are going to 10 begin to get paid on the first of October 1999. As I 11 understand it, there are several classes of this 12 software yet to come. There are five I believe in 13 total, if memory serves me right from your prefiled 14 evidence, of which one is out and in service now. 15 MR. KENT: That's correct. 16 MR. BRETT: And you expect subsequent 17 ones in the fall, October-November time frame, 18 something in February, and two more in August of 2000. 19 Now, you are charging the full 20 $15 million in the first year. You have something 21 called a phase-in credit of $4.126 million. 22 MR. McGILL: Yes, that's correct. 23 MR. BRETT: Is that meant to 24 compensate for the fact that you haven't got a fully 25 functioning system for the better part of the first 26 year? 27 MR. McGILL: Yes, exactly. That is 28 the purpose of the phase-in credit, to reduce the fees 1199 KENT/McGILL, cr-ex (Brett) 1 payable for fiscal 2000 in recognition of the fact that 2 the system won't be fully functional for the entire 3 fiscal year. 4 MR. BRETT: How did you arrive at 5 that figure? That is about 25 per cent odd of the 6 total. How did you arrive at that? 7 Effectively, put another way, you are 8 going to be charging them about $11 million -- closer 9 to 12, I guess. 10 MR. McGILL: The way the phase-in 11 credit was derived was to give consideration to the 12 nature or the functionality that would be delivered in 13 each phase of the implementation. 14 So, for example, release 1 gives our 15 CSRs access to the new CIS data inquiry screens. We 16 acknowledge that we are getting some benefit from that, 17 and we are going to have that functionality for the 18 entire 2000 fiscal year, so in the fee we should be 19 paying for that functionality for the entire fiscal 20 year. 21 The second phase, which is converting 22 the database over to DB2, that provides certain 23 benefits to us. We are going to have access to that 24 early in the 2000 fiscal year. I assume it is going to 25 be in November. So we are paying for that 26 functionality, the customer profile capability for 11 27 months out of the 12 of the fiscal year; and so on with 28 the other phases. 1200 KENT/McGILL, cr-ex (Brett) 1 That is how the value of that 2 phase-in credit was assessed. 3 MR. BRETT: I take it that under your 4 agreement you don't have to make any of these payments 5 to the extent that you don't accept the software 6 deliveries, that they are not of a quality that meet 7 the acceptance tests in the agreement? 8 MR. McGILL: Yes, there are 9 requirements in the agreement with respect to the 10 functionality of the application and that those 11 requirements need to be met and that there's processes 12 in the agreements with respect to resolving disputes in 13 and around that type of issue. 14 MR. BRETT: Now, can you tell me, 15 this is becoming a sort of a three-cornered game here 16 because you have -- the utility, as I understand it, 17 has an agreement with Price Waterhouse as to completion 18 agreements under which the remaining parts of this work 19 is going to be completed? 20 MR. KENT: Yes, that is correct. 21 MR. McGILL: I think a more accurate 22 way of just stating that is that Enbridge Consumers Gas 23 has an agreement with Price Waterhouse. 24 MR. BRETT: Enbridge Consumers Gas 25 Limited? 26 MR. McGILL: Yes. 27 MR. BRETT: The company that holds 28 the utility? 1201 KENT/McGILL, cr-ex (Brett) 1 MR. McGILL: Yes. 2 MR. BRETT: But it's not the parent 3 company; it's the utility company? 4 MR. McGILL: It's Enbridge Consumers 5 Gas. 6 MR. BRETT: Correct. Which is the 7 company that owns the utility? 8 MR. McGILL: But it is not 9 specifically the utility. 10 MR. BRETT: No, the utility is not a 11 company; it's a division -- 12 MR. McGILL: Yes. 13 MR. BRETT: -- of Enbridge Consumers 14 Gas? All right. 15 But what has to happen here, I 16 gather, is that the affiliate is going to, ultimately, 17 inherit this contract, as it were. 18 The affiliate is going to have to 19 deal with Price Waterhouse, is it not, ultimately, to 20 ensure that everything continues to be -- that the 21 proper amount of assistance is continued to be given 22 over the longer term, or the medium term, to make sure 23 all of the bugs are out of this. And how is that going 24 to -- how is that going to work? 25 MR. KENT: Are you thinking of the 26 period post October 1, 2000? 27 MR. BRETT: Yes. I'm thinking of the 28 period -- that's right. 1202 KENT/McGILL, cr-ex (Brett) 1 MR. KENT: Okay. The software will 2 be completed and delivered in finished form to Newco on 3 October 1st, 2000. We are anticipating that the final 4 phase will, in fact, be completed in August and there 5 will be some period for breaking in or shaking down any 6 minor problems that might appear in production for that 7 final phase. 8 You have to remember that each phase 9 has a break-in period of its own. The Phase IA that we 10 delivered in the spring did have some initial problems 11 during the first three weeks to a month, but since then 12 has been running in a very stable form in production, 13 essentially, without problem. It, essentially, has not 14 required any maintenance since it was first put in. 15 And as each set of features is 16 delivered with each release to CIS, we will go through 17 the same kind of shakedown phase. 18 But the deliverable that's coming in 19 August of 2000 will have, again, some problems of its 20 own, but all the other problems with the software 21 should be well sorted out by then. 22 MR. BRETT: But the agreement that 23 the utility has -- rather, that Enbridge Consumers Gas 24 has with Price Waterhouse continues, does it not? It 25 doesn't terminate -- or at least certain provisions of 26 it have continuing effects? 27 MR. KENT: The obligations of Price 28 Waterhouse, through Phases II and III of the project, 1203 KENT/McGILL, cr-ex (Brett) 1 include the provision of certain staff for whom Price 2 Waterhouse will be paid on a time and material basis 3 and, there's a provision for a maximum number of hours 4 under that agreement. 5 I'm sure, though, that Price 6 Waterhouse would be happy to provide further services 7 for further compensation, if that should be necessary. 8 MR. BRETT: Right. 9 MR. KENT: Our anticipation, though, 10 Mr. Brett, as I pointed out earlier, is that we will be 11 in a position to support and maintain the software 12 ourselves without reliance on PWC and we will achieve 13 that position before the end of fiscal 2000. 14 MR. BRETT: And is the -- I will come 15 back to the PWC contract, in a moment, but I want to 16 just go on with the servicing agreement. 17 You have a provision for hosting 18 revenue. That's a payment from the affiliate to the 19 utility company, on an ongoing basis, for the use of 20 their hardware facilities. Is that what that 21 represents? 22 MR. KENT: Yes, that is correct. 23 MR. BRETT: Okay. Now, can I ask you 24 to turn up Section 9.3 of the Union Gas agreement. 25 This is the agreement between Union Gas and Enlogix, 26 which is the model for your agreement -- I'm sorry. 27 Section 9.2. That's at page 14. 28 MR. KENT: If you will hold on a 1204 KENT/McGILL, cr-ex (Brett) 1 minute, Mr. Brett, it could take us a moment to find 2 it. 3 MR. BRETT: That's fine. 4 THE PRESIDING MEMBER: Mr. Brett, is 5 this a document that you were directed by the company 6 that you can go to the web site? Or do we have a hard 7 copy of it? 8 MR. BRETT: We have a hard copy, sir. 9 This was filed in the previous case, 177-15 -- 10 THE PRESIDING MEMBER: I was just 11 wondering whether we have a hard copy here as part of 12 this filing. 13 MR. BRETT: I think they made a whole 14 series of copies just recently. 15 Did you make copies of that? 16 MR. FARRELL: I made a copy as a 17 courtesy to Mr. Warren and his witness. But I didn't 18 make copies for the room. 19 If you can indicate the section that 20 you are going to examine on, maybe we can have copies 21 made for the panel so they can follow this. 22 THE PRESIDING MEMBER: Well, it 23 depends how many questions -- 24 MR. BRETT: This is a fairly short 25 question, Mr. Chairman, on one particular section -- 26 and I will read it out and -- 27 THE PRESIDING MEMBER: That's fine. 28 MR. BRETT: -- I can give it to 1205 KENT/McGILL, cr-ex (Brett) 1 anybody who wants to look at it. No problem. 2 It's on fee for services -- fees for 3 service; and it says -- I must say, Mr. Kent, I looked 4 carefully at these two agreements, on Sunday morning, 5 and I notice that you were not exaggerating when you 6 said that you followed the Union document very, very 7 carefully. There were only two places in the document 8 that I found differences; one of which I'm going to 9 read to you. 10 In 9.2, it says: 11 "Client shall pay fees for the 12 services as set out in this 13 agreement. All service activity 14 fees have been expressed in 1998 15 dollars. Service activity fees 16 will be increased January the 17 1st, 1999, and annually 18 thereafter, on January the 1st 19 in each year, to reflect 20 increases in the All Items 21 Consumer Price Index for Canada 22 published by Statistics Canada, 23 less 1 per cent for productivity 24 improvement at UEI." (As read) 25 Now, when I go to your agreement, the 26 services agreement, and read the same section, it reads 27 the same except that it ends at the phrase -- at 28 "Statistics Canada", and there's no 1 per cent credit 1206 KENT/McGILL, cr-ex (Brett) 1 for productivity increase. 2 Is that because you don't anticipate 3 being able to be more productive, as time goes on, in 4 the affiliate? 5 MR. KENT: I don't think -- I'm 6 sorry, Mr. Brett, but I'm not sure that Mr. McGill and 7 I are in a position to answer that, just at the moment, 8 without going back and checking some of our notes and 9 trying to figure out what happened. 10 You are correct in pointing out that 11 there is a discrepancy -- and I can't remember the 12 background to it. 13 MR. BRETT: Are you suggesting that 14 you might insert that same phrase into this clause? 15 MR. KENT: It is possible that it was 16 inadvertently missed, but we need -- I need to go back 17 and check. 18 MR. BRETT: All right. Could you 19 give us an undertaking just to report on that and when 20 you have done that and the reason for that is? 21 That will be undertaking what? 22 MS DSAI: J7.4. 23 MR. BRETT: Thank you. 24 UNDERTAKING NO. J7.4: Mr. Kent 25 undertakes to report the why and 26 the when for the difference 27 between paragraph 9.2 of the 28 Union Gas-Enlogix agreement and 1207 KENT/McGILL, cr-ex (Brett) 1 the Enbridge Consumers Gas 2 services agreement. 3 MR. KENT: By the way, Mr. Warren, 4 there are more than two changes and perhaps I can 5 challenge you to look for a couple of the others -- 6 MR. BRETT: That was "Mr. Brett", 7 Mr. Kent -- 8 MR. KENT: I apologize. 9 MR. BRETT: -- but Mr. Warren 10 probably knows -- 11 MR. WARREN: I'm not sure which one 12 of us is more insulted by that observation. 13 --- Laughter 14 MR. KENT: You seem to be more 15 occupied, Mr. Brett, at the moment, perhaps Mr. Warren 16 can make good use of his time by -- 17 MR. BRETT: I would like to just -- I 18 don't want to go through this in great detail, 19 obviously. That's not -- we don't have time for that. 20 But if we look at your agreement, 21 that's the Consumers agreement, at Section 17.10 -- 22 unlike my previous question, I don't think I can claim 23 authorship of this; I think there's a reference to this 24 point in Ms Williams' testimony. But Section 17.10 is 25 a notwithstanding clause and, basically, what it says 26 is, if I can paraphrase: notwithstanding anything else 27 this agreement says, your client can't cancel it until 28 the expiration of the third contract year. 1208 KENT/McGILL, cr-ex (Brett) 1 So it's locked in. My understanding 2 of that is that the utility is locked in to this deal 3 for three years. 4 Now, as I think you know, I could not 5 find that same clause in the Union agreement. That's 6 another innovation. 7 It seems to me that that -- do you 8 not agree with me that that tends to place a lot 9 of -- that that removes from the utility quite a lot of 10 bargaining power in terms of trying to correct problems 11 that may arise if, no matter what happens, you can't 12 get out of the agreement for three years? 13 MR. KENT: I think, Mr. Brett, there 14 is the same effect to the Union-Enlogix agreement, 15 particularly through the early termination fee 16 provision. But as a practical matter, when we thought 17 about the length of time that would be necessary to 18 develop an alternative to this CIS, it didn't seem to 19 us that it was reasonable to foresee being able to do 20 that in less than three years. 21 So even if the utility was 22 dissatisfied with the provision of services, it was 23 going to take a period of time, on the order of three 24 years, before the utility could have in place an 25 alternative to this CIS. 26 So we didn't, for that reason, regard 27 it as an issue that would be a detriment to the 28 utility. 1209 KENT/McGILL, cr-ex (Brett) 1 MR. BRETT: Are you saying it would 2 take three years for the utility to bring onstream some 3 kind of a packaged software solution along the lines 4 that some of these other utilities appear to have done? 5 MR. KENT: Yes. I think if you look 6 at the length of time it has taken other utilities to 7 implement solutions, three years is not an unreasonable 8 timeframe. 9 MR. BRETT: And you would agree with 10 me that it is not a question of all or nothing, it is 11 not necessarily a question of what your alternative 12 supplier is, it is a matter of general business 13 leverage in your discussions with your supplier. If 14 you are locked in to buy from them come hell or high 15 water for three years, you might say "Well, it is 16 academic, because we can't go somewhere else for three 17 years", but you could certainly start to plan to go 18 somewhere else well in advance. 19 MR. McGILL: The other thing that 20 17.10 does give the utility is the ability to try to 21 come to some kind of arbitrated resolution to the 22 dispute or other event which would give rise to any 23 right or procedure relating to termination in favour of 24 the client prior to such date. So, within the first 25 three years, such event shall be referred by the 26 parties to the dispute resolution procedures. 27 So there still is, even though there 28 is a three-year requirement -- minimum contract term 1210 KENT/McGILL, cr-ex (Brett) 1 requirement -- there is still the ability for the 2 utility to arbitrate or have an arbitrated resolution 3 to the dispute. 4 MR. BRETT: Can I ask you to turn up 5 the Price Waterhouse agreement? That would be B2, Tab 6 7, Schedule 3. That is the completion agreement that 7 you had with Price Waterhouse. 8 I would like to turn you for a moment 9 to pages 9 and 10. This has to do with, basically, how 10 free you are to use third parties in improving your 11 system. I am looking at section 4.1.3.6. If you go to 12 the top of page 10, there is a long paragraph there. 13 Do you see that? 14 MR. KENT: I believe it is the one 15 that starts -- 16 MR. BRETT: I'm sorry. Page 11 of 17 78. 18 MR. KENT: Yes. "Enbridge Consumers 19 Gas shall be entitled to utilize third parties", et 20 cetera? 21 MR. BRETT: Yes, that's it. There is 22 a section that talks about direct competitors, and then 23 it says -- and I am going to read this part: 24 "Notwithstanding the limitations 25 set forth in this Section ..., 26 if after the completion of the 27 Project and PW's 28 responsibilities under this 1211 KENT/McGILL, cr-ex (Brett) 1 Agreement --" 2 that is after you are all finished with PW: 3 " -- Enbridge Consumers Gas 4 wishes to cause the Client 5 System to interface with a 6 proprietary product of a Direct 7 Competitor of PW --" 8 and you have listed those above: 9 " -- then so long as Enbridge 10 Consumers Gas otherwise 11 satisfies the terms of this 12 Section 4 ... Enbridge Consumers 13 Gas may provide access to 14 persons employed by a Direct 15 Competitor of PW on a need to 16 know basis to the output data 17 formats of the Client System and 18 to no other information 19 regarding the Client System." 20 Now, here is the part that I would 21 like you to look at: 22 "If Enbridge Consumers Gas 23 believes that disclosure of 24 additional information is 25 required to complete such 26 interface, PW will in good faith 27 and for a reasonable period of 28 time seek to work out an 1212 KENT/McGILL, cr-ex (Brett) 1 arrangement with Enbridge 2 Consumers Gas, acceptable to PW, 3 that would further the 4 completion of the interface." 5 My layman's view of that is, what 6 that is saying is that PWC has some control over 7 whether or not you can bring in another supplier of 8 software to enhance this product if that supplier is 9 classified as a direct competitor of PWC. I guess my 10 question to you is: Does this not place a constraint 11 on you and, through this agreement, the affiliate in 12 seeking to do things they might wish to do to optimize 13 that software over the longer term? 14 MR. KENT: It is possible, Mr. Brett, 15 that that could be a limitation that Newco would have 16 to live with. But I was advised in working through 17 this contract, by people far more familiar than I with 18 how to develop that kind of interface and what is 19 required, and I was informed at that time that the 20 output data formats of the client system should be 21 sufficient information to enable the design of an 22 interface. 23 The last sentence was put in there 24 really as a precaution, just in the event that there 25 was some unexpected difficulty. 26 But you should also be aware that it 27 would only be in the event that one of those direct 28 competitors was involved in the development of the 1213 KENT/McGILL, cr-ex (Brett) 1 interface. Other third parties can be involved in the 2 development of interfaces without this restriction. 3 MR. BRETT: I understand that, Mr. 4 Kent, but I noticed that that list of direct 5 competitors looks like -- it contains within it many of 6 the names of the prominent companies in this business 7 that were referred to in some of the material filed in 8 some of the other intervenor evidence. It looks like a 9 sort of "Who's Who" of major computer system suppliers. 10 In any event, that completes my 11 questions, save for one, and that is -- if you turn up 12 page 7 of 22 of your original evidence, B1, Tab 8, 13 Schedule 1 -- 14 MR. KENT: Yes, I have that. 15 MR. BRETT: I just want to ask you 16 briefly about your in-house alternative which you have 17 developed. You say here -- and I am looking at answer 18 A.8, in the middle of the last paragraph -- and we are 19 getting close to the break time and I apologize for 20 running this late. 21 In the middle of that paragraph it 22 states: 23 "During the review of the CIS 24 project plan, the team developed 25 the idea of merging the 26 Company's proven and reliable 27 batch billing system with the 28 on-line and database elements 1214 KENT/McGILL, cr-ex (Brett) 1 from Service 2000 as adopted to 2 the Company's requirements." 3 As I understand it -- well, let me go 4 one step further. 5 If you look at Schools' Interrogatory 6 11 -- Tab I19, Schedule 11 -- I have asked you a 7 question about that passage, about the previous 8 paragraph, where you explained that in its most 9 simplified form -- and I am reading here from my IR-11, 10 Schools IR-11, which quotes from the previous paragraph 11 of your direct evidence on page 7 that I just talked to 12 you about. 13 "In its most simplified form, 14 the CIS system includes three 15 main elements: a database 16 storing information on each 17 customer meter --" 18 That is number one. Number two: 19 " -- an on-line system that 20 allows access by employees to 21 this information in order to 22 respond to customer inquiries 23 and enter data changes --" 24 That is number two. Number three: 25 " -- a billing system that uses 26 updated meter and account 27 information to generate billing 28 statements for customers." (As 1215 KENT/McGILL, cr-ex (Brett) 1 read) 2 Essentially, what you are saying 3 here, as I take it, in your direct evidence is that you 4 got two-thirds of that. You got the first two, but you 5 didn't get the third, really, and you are going to use 6 your own system in conjunction with the first two items 7 from PW. 8 I asked you about that in Schools 11 9 and you replied, and I want to take you to two points 10 of your response. 11 Your reply on Schedule 11 is a short 12 reply. You say: 13 "Service 2000, an integrated 14 CIS --" 15 and you go on to say that all of the parts are 16 interrelated -- and I am paraphrasing -- like a word 17 processing package. 18 The last sentence in that paragraph: 19 "In the same manner, the Service 20 2000 product includes a billing 21 component that comes with the 22 package whether it is used or 23 not." (As read) 24 Then, going over the page, the first 25 paragraph of the subsequent page, you say: 26 "The reasons for not continuing 27 the test --' 28 The last sentence of the first 1216 KENT/McGILL, cr-ex (Brett) 1 paragraph: 2 "The reasons for not continuing 3 the test for Service 2000 4 billing engine were associated 5 with the fact that the required 6 timing effort was substantial 7 and a better alternative for 8 ratepayers was available through 9 integration of the company's 10 legacy billing engine." 11 Now, the company's legacy billing 12 engine, I assume, is something that you paid for, the 13 company has paid for, the ratepayers have paid for. 14 It's in rates. It's part of rate base. 15 MR. KENT: Yes. It was developed 16 over a number of years, but essentially expensed as 17 billed, as I understand it. 18 MR. BRETT: Okay. What we have got 19 here, as I read this -- I mean this essentially 20 is -- am I right in thinking this is the deal that you 21 worked out? This was your solution to use your own 22 system and put it together with two of the first three 23 components of the Service 2000 system. 24 MR. KENT: At a very high level, Mr. 25 Brett. Yes, that's the case. 26 MR. BRETT: Okay. At a very high 27 level then, you have not gotten value for that year 28 2000 system. You haven't got the value you paid for 1217 KENT/McGILL, cr-ex (Brett) 1 that system unless your completion agreement 2 substantially reduces the costs that you would have 3 otherwise paid to PriceWaterhouse. Fair? 4 MR. KENT: The completion agreement 5 was a result of the comprehensive negotiation. There 6 were a lot of issues between the company and PWC. When 7 we were in the process of deciding what to do going 8 forward, we had some very hard discussions with PWC 9 about who was responsible for what, who had what 10 obligations and who should do what at this point in 11 order to come to a satisfactory resolution. 12 That was a packaged negotiation that 13 lead to the completion agreement. It lead to 14 PriceWaterhouse's acceptance of their obligation to 15 stay and complete the project. 16 The form that we chose to complete it 17 in was not the original form, but it was a form that 18 was at that stage the one that was most satisfactory to 19 the company and provided the most benefit to 20 ratepayers. 21 We chose the direction of how to 22 finish it. We felt that there could be a role for PWC 23 in finishing it. We negotiated an agreement that 24 encompassed the completion and the settlement of 25 outstanding differences between the two organizations. 26 MR. BRETT: And did you end up paying 27 less than you would have paid otherwise to PWC? 28 MR. FARRELL: What does it matter? 1218 KENT/McGILL, cr-ex (Brett) 1 PWC will be included in the transfer price to the 2 affiliate. 3 MR. BRETT: Well, I don't know if I 4 am going to get the answer to that question, but I 5 guess it matters in the sense that in assessing the 6 overall arrangement that the company has made with 7 respect to closing moneys to rate base and striking an 8 arrangement with the affiliate -- 9 I emphasize in assessing what's fair, 10 for example, to close to rate base and in assessing the 11 level of those fees, the union fee structure, as we 12 have heard, puts a cap on that fee, but it doesn't 13 really -- I guess what I'm saying is it seems to me 14 that the level of those fees -- let's put it this way. 15 If it cost you half as much to build 16 that system, we wouldn't be looking at fees today of 17 $15 million a year. We would be looking at fees of $7 18 million a year. Is that not fair? 19 MR. KENT: Why not? 20 MR. FARRELL: Not if it's fair market 21 value. That's the test in the Code. 22 MR. BRETT: It's not a cost based 23 exercise. 24 MR. FARRELL: Fair market value is 25 related to the functionality of the machine that you're 26 getting. 27 MR. McGILL: And the application we 28 are acquiring delivers 100 per cent of the 1219 KENT/McGILL, cr-ex (Brett) 1 functionality that we require and that the original 2 application would have delivered. 3 MR. BRETT: Those are my questions, 4 Mr. Chair. 5 THE PRESIDING MEMBER: Thank you, Mr. 6 Brett. 7 We will take a break now until a 8 quarter to four. Before we do that, Mr. Kent or 9 McGill, one of the tasks that I have as a Presiding 10 Member, I have to look ahead as to what parties may 11 wish to argue and make sure that all the information is 12 on the record. 13 In anticipation, to the extent of the 14 Board being inclined to make any adjustments to the 15 expenditures that propose to be close and to rate base, 16 what I would like to know through an undertaking is 17 what is the assumption the company has used in terms of 18 when it is being closed in to rate base. 19 Is it first of the year, middle of 20 the year or is it end of the year? Associated with 21 that, what is the treatment and accumulated 22 depreciation and depreciation expense? 23 MR. KENT: Subject to check, I am 24 virtually certain that the proposal encompasses closure 25 of the rate base components on the 1st of October 1999, 26 at the beginning of the fiscal year because these are 27 all expenditures from some time ago and are already 28 delivering value. 1220 KENT/McGILL 1 Our view is that we should close them 2 at the earliest possible opportunity. 3 THE PRESIDING MEMBER: Okay. Perhaps 4 then you could confirm that through an undertaking and 5 also indicate for every one dollar or million dollars 6 of closing in to rate base, what is the associated 7 depreciation expense and accumulated depreciation. 8 MR. KENT: I'm afraid I'm not 9 competent to do so myself, but I'm sure Mr. Bourke 10 could help us. 11 THE PRESIDING MEMBER: That was my 12 intention, Mr. Kent, that through you, perhaps I can 13 ask the company. So that would be Mr. Bourke. 14 MR. KENT: By all means, sir. 15 THE PRESIDING MEMBER: All right. 16 MS DESAI: J7.5. 17 UNDERTAKING NO. J7.5: Mr. Kent 18 undertakes to indicate for every 19 dollar or million dollars of 20 closing in to rate base the 21 associated depreciation expense 22 and accumulated depreciation 23 THE PRESIDING MEMBER: Okay. We will 24 adjourn until a quarter to four then. 25 MR. WARREN: Mr. Chairman, just 26 before you break. Mr. Kent was kind enough to point 27 out to me that I am underemployed sitting here. 28 THE PRESIDING MEMBER: Sorry, Mr. 1221 KENT/McGILL 1 Warren? 2 MR. WARREN: Mr. Kent was kind enough 3 to point out that I am underemployed sitting here and 4 listening to him and maybe other things listening to 5 him as well, but the current schedule, Mr. Chairman, 6 has the witness, Ms Williams, testifying tomorrow 7 morning at the beginning of proceedings. It looks now 8 as though we are not going to get through this panel 9 and the succeeding panel before tomorrow afternoon at 10 least. 11 I discussed this briefly with Mr. 12 Farrell. I'm wondering if I could get a direction from 13 you as to when she might testify. My suggestion is 14 that we fix a time for her at two o'clock tomorrow 15 afternoon so that she wouldn't be subject to the same 16 suggestion from Mr. Kent if she were here tomorrow, 17 that she was underemployed as well. 18 Is that acceptable, Mr. Chairman? 19 THE PRESIDING MEMBER: Yes. 20 MR. WARREN: Either that or Thursday 21 morning. I am really in the Board's hands. If 22 tomorrow at two, I could have her here for then. 23 THE PRESIDING MEMBER: If Mr. Farrell 24 is agreeable to that, we will go with it. Others are 25 busy. It's a difficult week. There are a lot of 26 constraints on people, people who wished to come this 27 week for a number of reasons, and also Monday being a 28 holiday. It's probably best to see if we can complete 1222 KENT/McGILL 1 the whole hearing by Friday. 2 Mr. Farrell, is that a problem, two 3 o'clock certain? 4 MR. FARRELL: No. The only thing 5 that's running that's running through my mind is that 6 Mr. Diamond may not be finished. If we thought we 7 could complete -- 8 THE PRESIDING MEMBER: That's 9 assuming he gets started. 10 MR. FARRELL: -- before two o'clock, 11 if we could complete him in 30 to 45 minutes or 12 something like that, it's proposed that he be completed 13 and then we start with Ms Williams. On that type of a 14 time schedule, I think we would be -- she wouldn't need 15 to come back on Thursday. 16 THE PRESIDING MEMBER: Can we get an 17 indication as to who has questions for Ms Williams 18 other than the company? No one. Mr. Farrell, you 19 would need how long with Ms Williams? 20 MR. FARRELL: Mr. Warren asked me 21 that very question and I told him it depended on her 22 answer to my first series of questions. I will stick 23 with my estimate. 24 At the outside, I would suspect an 25 hour to maybe an hour and fifteen minutes. It could be 26 significantly shorter than that. 27 THE PRESIDING MEMBER: Okay. Mr. 28 Warren, perhaps you can have Ms Williams come on 1223 KENT/McGILL 1 Wednesday at two o'clock and then we will find the most 2 opportune time for her to testify, but she will 3 probably be out by Wednesday, another day. 4 MR. WARREN: Thank you very much, and 5 thanks to Mr. Farrell as well. 6 MR. FARRELL: I should note, Mr. 7 Chair, that we now have copies of that Boston Gas 8 decision. I will leave copies with Mr. Brett and 9 others and maybe they could advise when they come back 10 whether they would like to have it marked. 11 THE PRESIDING MEMBER: Okay. We will 12 return at ten to four then. 13 --- Upon recessing at 1525 14 --- Upon resuming at 1550 15 THE PRESIDING MEMBER: Mr. Farrell. 16 MR. FARRELL: Yes, Mr. Chair. I left 17 on the dias Hearing Schedule No. 6, which has started 18 to add to the exhibits the various undertaking exhibits 19 that have been, or will be filed, through each panel. 20 This is to keep it current. So I am 21 not waiting for the responses actually to be filed to 22 put the numbers on here. There should be a complete 23 set when it is finished. 24 As you can see, on the last page, at 25 least for the moment, we have slotted the second 26 instalment of Panel 10 before Mr. Stevens, for the 27 reasons that I mentioned earlier. We will just see how 28 the week plays out. Maybe we can get everything done 1224 KENT/McGILL 1 by close on Friday. 2 The other document I left up there 3 was the decision that Mr. Kent referred to involving 4 Boston Gas. I understand from Mr. Brett that he would 5 like to have it marked. 6 MS DESAI: Exhibit K7.2. 7 EXHIBIT NO. K7.2: Decision re 8 Boston Gas Company, D.P.U. 96-50 9 (Phase I), 174 PUR4th 200, 10 Massachusetts Department of 11 Public Utilities, dated 29 12 November 1996 13 THE PRESIDING MEMBER: Thank you. 14 Mr. Mondrow. 15 MR. MONDROW: Thank you, sir. 16 CROSS-EXAMINATION 17 MR. MONDROW: Good afternoon, 18 gentlemen. 19 I am going to briefly -- and my 20 examination will be relatively brief, I think -- step 21 back and try to get an understanding with you, for the 22 most part, of the way the transaction is going to work, 23 so that it will be easier for me at least to evaluate 24 the charges that will impact on the cost of service and 25 the agreement that has been filed. 26 If you could allow me to run through 27 this relatively quickly, I want to first talk about the 28 situation as it stands today and then I want to talk 1225 KENT/McGILL, cr-ex (Mondrow) 1 about the situation as it will stand following the 2 completion of all the transfers. Then I am going to 3 just ask a few questions about the interim period. 4 If you could bear that in mind that I 5 am going to come to the interim period, that is the way 6 I would like to approach that. 7 Starting with the current situation, 8 it is my understanding that the utility owns some of 9 the CIS software and licenses the rest from Price 10 Waterhouse. 11 MR. KENT: Yes, that is essentially 12 correct. 13 MR. MONDROW: The utility owns all of 14 the hardware on which the CIS system will at the end of 15 the day be run. Is that correct? 16 MR. KENT: As we currently propose 17 it, yes. In the longer term, it is possible for Newco 18 to change the hosting arrangement, if it is beneficial 19 for them to do so, to find another party to host the 20 application. 21 We don't foresee that. We foresee it 22 remaining with the utility. 23 MR. MONDROW: On October 1, 2000, the 24 transfer date, I understand that the utility's rights 25 on the software, both the ownership rights and the 26 licensee rights, are to be transferred to Newco. 27 Correct? 28 MR. KENT: Yes, that is the 1226 KENT/McGILL, cr-ex (Mondrow) 1 intention. 2 MR. MONDROW: And I also understand 3 that none of the hardware that will be used in the 4 foreseeable future to run the system will be 5 transferred. That will all stay with the utility. 6 MR. KENT: That's correct. 7 MR. MONDROW: So after October 1, 8 2000 the affiliate, which we are calling Newco for 9 today's purposes, will actually run the system on the 10 utility's hardware. 11 MR. KENT: Yes, and compensate the 12 utility for doing so. 13 MR. MONDROW: Right, the hosting 14 charge. 15 MR. KENT: Yes. 16 MR. MONDROW: I will talk to you 17 about that. 18 If you could open with me your new 19 prefiled evidence, Exhibit B1, Tab 8, Schedule 3, 20 Mr. Kent, I just want to take you to the top of page 3. 21 MR. KENT: Yes. 22 MR. MONDROW: The first sentence 23 there reads as follows: 24 "The Company will pay an annual 25 fee to the affiliate for the 26 licence to use the CIS software 27 based on an annual charge per 28 customer for the functions that 1227 KENT/McGILL, cr-ex (Mondrow) 1 must be carried out by the core 2 utility and a fee per bill 3 rendered for the functions 4 associated with generating 5 monthly bills for customers." 6 (As read) 7 Focusing on the first part of the 8 sentence, I just want to understand it. 9 Again, you say: 10 "The Company will pay an annual 11 fee to the affiliate for the 12 licence to use the CIS 13 software..." 14 Does that mean that the company will 15 license the software and run the software using company 16 or utility people, or does it mean that the company 17 will pay the affiliate to run the software? 18 MR. KENT: The company will pay the 19 affiliate for use of the software and for hosting of 20 that software in effect. Bundled within the fee, to 21 show to the maximum extent possible comparability with 22 the Union Gas-Enlogix arrangement, the company will pay 23 the affiliate for the right to use the software and for 24 the operation of that software. 25 In the company's situation it doesn't 26 make sense for Newco to go elsewhere for the hardware 27 and the cost associated with operating that hardware. 28 The hosting fee will be paid back by the affiliate, by 1228 KENT/McGILL, cr-ex (Mondrow) 1 Newco, to Enbridge Consumers Gas for performing those 2 services and for the provision of that hardware, again 3 trying to seek, to the maximum extent we could, a 4 clearly comparable situation. 5 MR. MONDROW: The people that will be 6 operating the software, will they be Newco people or 7 affiliate -- let me step back. 8 Will they be Newco employees or 9 utility employees, the people who will be running the 10 software system? 11 MR. KENT: The actual running of the 12 application requires very little human intervention. 13 It is very largely automated within the data centre. 14 What does require human intervention 15 is attending to any disruptions in the normal operation 16 and fixing things that go wrong. If the software stops 17 running, somebody has to attend to it, figure out what 18 went wrong, fix it and get the software running again. 19 That work will be done by Newco 20 employees, and they are the FTEs that will be avoided 21 by the utility. That number increases over the course 22 of fiscal 2000 and plateaus in fiscal 2001 as the 23 software is fully operational. 24 MR. MONDROW: In order for those 25 Newco employees to monitor and ensure that the software 26 system runs properly, will they be physically located 27 where the hardware is on the utility's premises? 28 MR. KENT: We haven't determined that 1229 KENT/McGILL, cr-ex (Mondrow) 1 at present. I don't think that that is necessary. It 2 may be convenient, but I don't believe that it is in 3 any way necessary. 4 MR. MONDROW: But you haven't 5 determined yet whether they will be running the system 6 remotely or on site. 7 MR. KENT: My expectation is that it 8 will over the course of fiscal 2000 migrate to an 9 off-site situation, but we have not finalized that. As 10 I say, I don't think that it has any great -- I don't 11 think there are great reasons for doing it one way or 12 the other. I think it could equally well be done off 13 site and on site. 14 MR. MONDROW: The Newco employees in 15 any event, whether they operate the system or monitor 16 the system on site or off site, will have access to the 17 utility site in the event that they need to come in and 18 do something on site. 19 MR. KENT: They will have to have 20 sufficient access to the system to keep it operational. 21 It is possible that that access can be provided 22 entirely remotely. I don't know. 23 MR. MONDROW: If a computer trips and 24 has to be rebooted, they will have to come on site to 25 do that; right? 26 MR. KENT: Not necessarily. It is 27 becoming increasingly possible to do that sort of thing 28 remotely. 1230 KENT/McGILL, cr-ex (Mondrow) 1 MR. MONDROW: I understand from your 2 interrogatory responses that these Newco employees may 3 well be transferred utility employees. That has not 4 been determined, but that is a possibility. 5 MR. KENT: Yes, it is. And it would 6 make sense, I think, from the company's perspective, 7 that they should be transferred utility employees, 8 because these are the people with the best knowledge of 9 the system as it exists, and in fact people with the 10 best knowledge of the development work that is 11 currently under way. 12 It is possible that those employees 13 may not feel comfortable with a role with the affiliate 14 and may prefer to work with the utility. If there are 15 roles for them within the utility, the company would 16 try to respect their preferences in that regard and 17 would then source the appropriate Newco employees 18 externally. 19 MR. MONDROW: Of course, if and when 20 Newco provides CIS services to other affiliates or 21 other companies in the foreseeable future, the same 22 arrangement will apply; that is, the utility's hardware 23 system will be used by Newco to provide those services. 24 Is that fair? 25 MR. KENT: It is conceivable that it 26 could function in that manner. I don't know that the 27 hardware would have sufficient capacity to take on any 28 large additional customer. 1231 KENT/McGILL, cr-ex (Mondrow) 1 If such capacity was available on the 2 system, then there would have to be some process 3 whereby the utility was compensated for the additional 4 usage being made of that hardware. 5 If new hardware had to be purchased, 6 it might well make sense for that to be done externally 7 rather than at the utility. We would have to look at 8 it when the time arose. 9 MR. MONDROW: Or for the utility to 10 purchase it and reflect it in an increase to the 11 hosting charge. 12 MR. KENT: Yes, that is entirely 13 possible. I don't know which alternative would be the 14 best economic decision. 15 MR. MONDROW: Let me talk to you for 16 a minute about the interim period, which, as I 17 understand it, runs between March 2000 and October 18 2000. 19 Is that right? Have I got the dates 20 right? 21 MR. KENT: No. The rate is really 22 for the full span of fiscal 2000. Because the first 23 phase of CIS is operational now. 24 There are no costs reflected in rates 25 for the use of this first release of CIS, but 26 commencing at the beginning of fiscal 2000 there will 27 start to be charges properly reflected in rates 28 reflecting -- I have used the word "reflecting" too 1232 KENT/McGILL, cr-ex (Mondrow) 1 many times here. 2 But because the software will be 3 operational and will be delivering value to the company 4 and the ratepayers as of October 1, 1999, it is 5 appropriate that there should be some mechanism whereby 6 ratepayers start to pay for the costs of those 7 services. 8 MR. MONDROW: Okay. So between 9 October 1999 and October 2000 the utility will still 10 own the software rights. They won't be transferred 11 until October 2000, right? 12 MR. KENT: The asset itself is not 13 intended to be transferred until October 1st, 2000, 14 essentially for the tax reasons that I mentioned 15 earlier to Mr. Warren. 16 MR. MONDROW: Okay. During the 17 interim period Newco will pay the utility for the use 18 of the CIS software and self-services that it will 19 deliver by using that software back to the utility? 20 MR. KENT: It seems absurdly 21 circular, but yes, that is the right way of doing it. 22 MR. MONDROW: Okay. Now, the fees 23 that Newco will pay to the utility for use of the 24 software between October 1999 and October 2000, as I 25 understand it those fees are not included in 26 calculation of the Z-factor. 27 MR. McGILL: Just to make it clear, 28 those fees wouldn't be paid to the utility, they would 1233 KENT/McGILL, cr-ex (Mondrow) 1 be paid to Enbridge Consumers Gas. 2 The CIS work-in-progress is not part 3 of the utility rate base right now and it won't be 4 throughout 1999. It never will become part of rate 5 base. 6 MR. MONDROW: Okay. 7 MR. McGILL: Okay? 8 MR. MONDROW: Right. So it is 9 completely outside the Z-factor calculation because it 10 is not part of the utility operation. 11 MR. McGILL: Exactly. 12 MR. MONDROW: Okay. Fair enough. 13 The payments to be made to the 14 company but not the utility, as I understand it, are 15 payments kind of on account of the transfer price? 16 They are instalments essentially? 17 MR. KENT: Yes, that is the right 18 concept. 19 MR. MONDROW: Okay. But the net flow 20 of funds from the perspective of the utility, that is 21 the fees to be paid to Newco net of the hosting charge, 22 are captured in the Z-factor payment which nets out as 23 a payment to the affiliate in the test year of 24 approximately $5.7 million? 25 MR. KENT: That is precisely correct. 26 That is laid out in the table on page 11 of the 27 evidence you just referred to, B1, Tab 8, Schedule 3. 28 MR. MONDROW: During this interim 1234 KENT/McGILL, cr-ex (Mondrow) 1 period will it be the Newco employees running the 2 system? 3 MR. KENT: There is a credit to the 4 utility for five full-time equivalents during the 5 course of fiscal 2000, representing a ramping up or a 6 transition from essentially zero staff at the beginning 7 of the year to 10 at the end of the year. 8 The concept is that those 10 staff 9 will be required in the affiliate for the full period 10 of fiscal 2001 and thereafter to provide the kind of 11 monitoring and break/fix support for the application 12 that we discussed earlier. 13 MR. MONDROW: So I understand, then, 14 your answer to imply that the people running the system 15 in the interim period in your test year will be utility 16 employees and built into the Z-factor there is a credit 17 to the utility for the affiliate essentially using 18 those employees. Is that right? 19 MR. KENT: Yes. It is possible that 20 the best mechanism would be to eliminate from utility 21 costs the salaries of utility employees that are doing 22 that work over the first period of time, until such 23 time as we can set up the Newco affiliate and enter 24 into the appropriate discussions with employees and 25 negotiate with them the right kind of arrangements 26 whereby they would be comfortable in transferring their 27 employment status to the affiliate rather than the 28 utility. 1235 KENT/McGILL, cr-ex (Mondrow) 1 They will need to be doing the work 2 in support of the application starting on October 1, or 3 a few people will, but that will ramp up as more and 4 more phases of the application come into service. 5 MR. MONDROW: Fair enough. 6 I am just trying to nail down two 7 things I guess. 8 One is, these people will actually be 9 employed, it is anticipated, by the utility. They will 10 be utility employees? 11 MR. KENT: I don't think that it 12 would be practical to do anything else in the immediate 13 term. So I anticipate that for the remainder of 14 calendar 1999 that is likely to be the case. 15 But my expectation is that early in 16 calendar 2000 we will be able to finalize the right 17 kind of arrangements, ones that are acceptable to 18 employees so that they could transfer to Newco early in 19 calendar 2000. 20 MR. MONDROW: Okay. Part way through 21 the year -- part way through the fiscal year. 22 MR. KENT: Yes, part way through the 23 fiscal year but at the beginning of the calendar year. 24 That way there is less impact on employee benefits and 25 things like that. 26 MR. MONDROW: Okay. 27 MR. KENT: Now, if employees are not 28 comfortable with making that transition, then Newco 1236 KENT/McGILL, cr-ex (Mondrow) 1 would be in a hiring mode early in calendar 2000 and 2 would start to staff in that fashion and we would ramp 3 down the usage of employees in the utility. 4 MR. MONDROW: Okay. How then is this 5 five FTE allowance treated in your test year filing? 6 Where is it credited to? 7 MR. McGILL: In the table on page 11 8 of B1, Tab 8, Schedule 3, the column 1 "Test Year", the 9 fourth item down is ISO&M reduction of $437,000. That 10 reflects the removal of the wages associated with those 11 individuals. 12 MR. MONDROW: As part of the Z-factor 13 calculation as we see it here. 14 MR. KENT: That's correct. 15 MR. MONDROW: All right. Thank you. 16 Of course the hosting charge is also 17 caught -- is a big part of the Z-factor? 18 MR. KENT: That's correct. 19 MR. MONDROW: That charge is to be 20 roughly $3.6 million, just under $3.6 million in the 21 test year? 22 MR. KENT: Yes. 23 MR. MONDROW: Okay. 24 If you could open, then, with me one 25 of our interrogatory responses, Exhibit I, Tab 11, 26 Schedule 29, which describes a bit about the hosting 27 charge and the derivation of the charge. 28 Maybe just for the sake of 1237 KENT/McGILL, cr-ex (Mondrow) 1 completeness I will read the first three lines of the 2 response. We asked essentially about the derivation of 3 the charge and the supporting evidence and you say in 4 your response: 5 "The hosting charge was 6 calculated based on IS 7 department costs and information 8 in the CIS capacity forecast." 9 That is essentially the activity 10 levels, the CIS capacity forecast? 11 MR. KENT: It was translated into 12 terms that are more relevant for hardware sizing 13 purposes, but yes, the activity forecast has an impact 14 on it. 15 MR. MONDROW: As translated into -- 16 and then you go on in the next sentence: 17 "... the number of users of the 18 application, estimated peak 19 transactions per second, 20 database growth, network 21 traffic, etc." 22 MR. KENT: Yes. 23 MR. MONDROW: Then you say: 24 "These requirements translate 25 into hardware capacity needs 26 (MIPS, DASD, bandwidth) and 27 associated software." 28 Now, the reference to "software" 1238 KENT/McGILL, cr-ex (Mondrow) 1 there is not a reference, as I understand it, to the 2 CIS software, it is an operating software of some sort. 3 Is that correct? 4 MR. KENT: That's correct. 5 The mainframe -- maybe I should 6 explain some of these other acronyms. 7 "MIPS" stands for millions of 8 instructions per second and is a way of measuring the 9 processing capacity, largely of mainframe computers. 10 "DASD" stands for direct access 11 storage devices and they are essentially very large 12 capacity hard disks that are available on the network. 13 "Bandwidth" is a reference to the 14 throughput capacity of the network wiring that connects 15 all of the users to the mainframe and the storage 16 devices. 17 The "associated software" referenced 18 here is operating software for the mainframe and for 19 the storage devices. 20 The licensing arrangements for that 21 kind of software are, generally in the industry, a 22 function of the size of the machine on which you 23 run it. 24 It's not like buying a copy of 25 WordPerfect and installing it on your PC, it's almost 26 like the price you pay for WordPerfect would vary 27 according to the processing capacity and the speed of 28 your PC, to relate it in that fashion. So that the 1239 KENT/McGILL, cr-ex (Mondrow) 1 operating software on the mainframe costs you more as 2 you have a larger machine. 3 What we have done is tried to 4 associate the cost -- the proportion of that operating 5 system software that is driven by CIS requirements. 6 MR. MONDROW: Right. 7 So you have tried to take a 8 proportion of the software and a proportion of the 9 utility's hardware that the CIS system or Newco will be 10 using -- 11 MR. KENT: That's correct. 12 MR. MONDROW: -- and allocate those 13 costs to Newco and recover them in the hosting charge. 14 And the balance of the costs of the hardware and 15 operating software will be used by the utility as they 16 have been to date. 17 MR. KENT: Yes. 18 MR. MONDROW: Okay. 19 Then we see in your response 20 $3.5 million for the mainframe and $100,000 for the 21 Unix part of the hardware/operating system. So the 22 hosting charge was essentially derived based on the 23 costs as you have just described it to me, Mr. Kent? 24 MR. KENT: Yes. That's a fair 25 description. 26 MR. MONDROW: Then what you did, as I 27 understand it, is you discussed the charges with IT 28 industry consultants to confirm for yourself that the 1240 KENT/McGILL, cr-ex (Mondrow) 1 charge is comparable with prices being charged 2 essentially at a market value inquiry. Is that right? 3 MR. KENT: Yes. We also talked in 4 particular with IBM with respect to their estimated 5 charges for that kind of service. 6 The difficulty is that vendors such 7 as IBM are very reluctant to give a quote for 8 informational purposes. It does cost them some money 9 and effort to put together a detailed quote, and they 10 are reluctant to do that unless they have a fairly high 11 probability of getting some business. So they were 12 reluctant to give us a detailed estimate or a pricing 13 behind which they would stand. 14 MR. MONDROW: So I gather that the 15 evidence that the Board has as to the equivalent to a 16 fair market value of the hosting charge that the 17 utility will be charging to the affiliate is 18 essentially your recounting of the information that you 19 gleaned through inquiries of IT professionals and IT 20 consultants in IBM? 21 MR. KENT: Those inquiries were made 22 really to confirm that attributing to CIS a proportion 23 of the company's IT operating costs as we had would 24 produce a comparable number. We needed to do a check 25 to confirm that what was a level of costs attributed to 26 CIS reflected reasonably well what could be expected in 27 the open marketplace. 28 MR. MONDROW: Right. 1241 KENT/McGILL, cr-ex (Mondrow) 1 And the evidence that we have with 2 respect to what could be expected in the open 3 marketplace with respect to this charge is your 4 recounting in this response of discussions had with IT 5 industry consultants and, as you have advised us today, 6 IBM? 7 MR. KENT: Yes, that's correct. 8 MR. MONDROW: No written 9 documentation was provided by the people you made 10 inquiries of. Is that right? 11 MR. KENT: As I mentioned, IBM in 12 particular was reluctant to go to any great effort or 13 expense without some assurance that they would -- some 14 reasonable prospect of some business out of it. 15 MR. MONDROW: Can you tell us who, 16 other than IBM, you made this inquiry of? 17 MR. KENT: No, I can't. I wasn't 18 personally involved in it. I asked staff in the IS 19 department to make these investigations on my behalf. 20 MR. MONDROW: Could you undertake 21 just to advise who else you made the inquiry of? 22 MR. KENT: I can certainly ask them 23 who they made inquiries of, yes. 24 MR. MONDROW: May we have a number 25 for that, please? 26 MS DESAI: That is J7.6. 27 UNDERTAKING NO. J7.6: Mr. Kent 28 undertakes to inquire of the IS 1242 KENT/McGILL, cr-ex (Mondrow) 1 department and advise as to who 2 hosting charge telephone 3 inquiries were made of other 4 than IBM, and whether the work 5 involved in the inquiries was 6 more extensive than by telephone 7 MR. MONDROW: I gather these 8 inquiries were essentially telephone inquiries? 9 MR. KENT: I know that the IS 10 department was, at that stage, doing some work to 11 understand the comparability in pricing of services 12 that they were proposing be offered to others. So 13 there may have been more extensive work behind it. 14 MR. MONDROW: Perhaps in the 15 undertaking response you can give a brief description 16 if there was some work, other than a telephone inquiry, 17 of what that work was. 18 MR. KENT: Okay. By all means. 19 MR. MONDROW: Do I understand 20 correctly, then, that there is no margin or mark-up 21 placed on the hosting charges or within the hosting 22 charges, it is merely an allocation of costs. 23 MR. KENT: That is correct, though 24 the allocation -- you know, I am somewhat in 25 trepidation in using the term "allocation" because I 26 know it has a lot of different meanings. We tried -- 27 MR. MONDROW: In terms of how you 28 described the process -- 1243 KENT/McGILL, cr-ex (Mondrow) 1 MR. KENT: We tried to make sure that 2 all costs that would be involved in any way whatsoever, 3 including things like the costs of employee labour 4 involved in deciding what kind of mainframe capacity 5 level was needed. A portion of the employees' time and 6 costs involved there was also included here. 7 We tried to put in everything that 8 could possibly be associated with this because we 9 wanted to make sure that it was a fair and complete 10 attribution of costs. 11 MR. MONDROW: Does someone have a 12 breakdown of that attribution which would describe the 13 items that you included? 14 MR. KENT: I have seen it. I don't 15 have it with me. But we could provide another 16 undertaking to give that information if it would be 17 useful. 18 MR. MONDROW: That would be 19 appreciated. 20 The issue here, sir, is just the 21 transfer pricing of this and the fair market value 22 equivalent. So if you could provide that information, 23 Mr. Kent, I would appreciate that. 24 MR. KENT: Yes. I have come to 25 understand that through our discussion. I think it 26 would be useful to the Board and useful to the company 27 to be able to provide that information. 28 MR. MONDROW: Great. 1244 KENT/McGILL, cr-ex (Mondrow) 1 So that would be Undertaking J7.7. 2 MS DESAI: J7.7. 3 UNDERTAKING NO. J7.7: Mr. Kent 4 to provide a breakdown of the 5 attribution of costs involved 6 for the hosting charges 7 MR. MONDROW: Thank you very much. 8 You have also saved me a couple more questions for 9 which you are going to provide the response, so I will 10 just skip ahead. 11 Could you open up Schedule 45 of 12 HVAC's responses, so Exhibit I, Tab 11, Schedule 45. 13 --- Pause 14 MR. KENT: Yes, I have that. 15 MR. MONDROW: During the course of 16 asking this question and getting your response, we 17 identified the hosting agreement as a distinct 18 document, which we are advised in the last paragraph is 19 being drafted, and, after disclaiming their materiality 20 to the Board the company said that the agreement could 21 be filed at a later date if necessary. 22 I was going to ask you if you could 23 do that to allow us to examine how the agreement 24 handles such things as data security issues and various 25 other matters that HVAC, at least, is interested in. 26 Would you object to filing that agreement? 27 MR. KENT: It is still in draft form. 28 It hasn't been finalized. I can't recall whether or 1245 KENT/McGILL, cr-ex (Mondrow) 1 not data security is covered off given that it is an 2 agreement for the provision of services to Newco. 3 I'm not sure that it would be part of 4 that hosting agreement to specify therein what the 5 utility was going to do to provide security to Newco. 6 The obligation is more in the reverse, that Newco has 7 to assure the utility that data will be kept secure. 8 But, in any event -- 9 MR. MONDROW: Yes, and I would like 10 to see if there are any provisions in the agreement 11 dealing with that, by way of example. 12 MR. KENT: It is by no means final, 13 but we can provide a copy of the draft form of that as 14 it now exists. 15 MR. MONDROW: Analogous to the 16 Services Agreement that you have filed. 17 MR. KENT: I think it is in a 18 somewhat less developed form than the Services 19 Agreement. 20 MR. MONDROW: All right. 21 Well, if we could see that it might 22 save some questions in the dark and we can have a look 23 at that off line. 24 MR. KENT: I think, though, 25 Mr. Mondrow, it really is the cost consequences of that 26 that are of concern. Though I'm prepared to do it, I 27 am not sure what value it has to the Board. 28 MR. FARRELL: Perhaps we could make a 1246 KENT/McGILL, cr-ex (Mondrow) 1 copy of the document available to Mr. Mondrow, and then 2 he can decide, having reviewed it, whether he needs to 3 have it part of the record, at least just as a first 4 step. 5 MR. MONDROW: I would be happy with 6 that, sir. 7 I just want to evaluate it as against 8 some of the provisions of the code of conduct, and that 9 would be satisfactory to me. 10 THE PRESIDING MEMBER: That's fine. 11 MR. MONDROW: That's fine. We will 12 leave that informal for now. Thank you very much. 13 --- Pause 14 MR. MONDROW: If I could turn, then, 15 for a few minutes, gentlemen, to the services 16 agreement, which is Exhibit B2, Tab 7, Schedule 4. 17 THE PRESIDING MEMBER: Mr. Mondrow, 18 before we go to the other topic, can I just follow up 19 with one -- I have one question of the panel. 20 MR. MONDROW: Yes. 21 THE PRESIDING MEMBER: There was some 22 mention of some charge going to -- something going from 23 the affiliate to the company but not to the utility and 24 I wasn't quick enough to jot it down as to what it was, 25 and there was no reflection of the Z-factor. Can 26 someone just repeat that, please? 27 MR. McGILL: I think the point is 28 that right now the software asset is sitting as a 1247 KENT/McGILL, cr-ex (Mondrow) 1 work-in-progress in the accounts of Enbridge Consumers 2 Gas, it has never been close to rate base, so that any 3 payments that the Newco makes to Enbridge Consumers Gas 4 for the acquisition of that software asset wouldn't be 5 reflected in the utility costs at all. 6 THE PRESIDING MEMBER: Right. I 7 understand that. 8 But did it go beyond the transfer 9 payment? Was there anything else that went to the 10 company as opposed to the utility? Maybe I just 11 misheard. Maybe you were referring to the -- 12 MR. McGILL: No. That is what I was 13 referring to. 14 THE PRESIDING MEMBER: Just to the 15 asset transfer. 16 MR. McGILL: That's correct. 17 MR. FARRELL: I think it was the 18 instalment payments or the payments on account that the 19 witnesses were speaking of. In other words, payments 20 in advance on account of the purchase price. 21 THE PRESIDING MEMBER: All right. 22 MR. MONDROW: As I understand it, 23 sir, prior to the transfer of the software during the 24 test year there will be payments made along the way, 25 for some reason, by the affiliate, and then the balance 26 owing will be paid at the end of the year when the 27 transfer occurs. 28 Is that correct? 1248 KENT/McGILL, cr-ex (Mondrow) 1 MR. KENT: That is correct. 2 THE PRESIDING MEMBER: That's fine. 3 That clarifies it. I just wanted to make sure there 4 was nothing else other than the transfer of the asset. 5 MR. MONDROW: Gentlemen, if we could 6 look at the services agreement, and if I could also, at 7 the same time, ask you to turn up Exhibit I, Tab 11, 8 Schedule 41. And on the services agreement I am going 9 to start at page 3. 10 We ask in the interrogatory for an 11 explanation of three particular provisions of the 12 services agreement, all of which are found on page 3, 13 the first being the definition of client facilities, 14 which included facilities controlled by affiliates, 15 agents, contractors or dealers. And the second 16 provision, 1.12, client hardware, has an analogous 17 definition which includes affiliates, agents, 18 contractors or dealers. And, finally, client software, 19 provision 1.13, has again an analogous definition. 20 In the interrogatory response, after 21 advising that -- essentially, as I understand it, this 22 comes from the Enlogix agreement format. You advised 23 in the last paragraph of the response: 24 "The Company does not at present 25 contemplate any transactions 26 with contractors or dealers that 27 would be impacted in any way by 28 the definitions of terms set out 1249 KENT/McGILL, cr-ex (Mondrow) 1 in paragraphs --" (As read) 2 and then you recite the paragraphs we asked about. But 3 you didn't include in your response transactions with 4 affiliates. Was that just an oversight, or are there 5 some transactions contemplated with affiliates to which 6 these definitions would apply? 7 Just for the sake of clarity, the 8 transactions that we envisioned when we asked the 9 question that I am asking you about now are 10 transactions whereby affiliates, contractors or dealers 11 would gain access to the CIS system through the utility 12 under this agreement, rather than directly with Newco 13 through whatever agreement they devise with Newco. 14 MR. KENT: The words are, as you 15 suggest, absolutely identical with the terms of the 16 Union Gas-Enlogix agreement. I think my answer would 17 remain as it stands in the interrogatory response. 18 I don't know if Mr. McGill would -- 19 --- Pause 20 MR. McGILL: I think we would stand 21 by the response that we don't anticipate any 22 transactions that would be in violation of the 23 agreement. 24 MR. KENT: But I don't think that the 25 term "affiliates" was deliberately excluded. I think 26 we just took a shortcut, maybe, in answering it. I 27 don't think there are any transactions with affiliates 28 that would be impacted by this. 1250 KENT/McGILL, cr-ex (Mondrow) 1 MR. MONDROW: If you removed the 2 words "affiliates, agents, contractors or dealers" from 3 your agreement, I take your evidence to be that won't 4 affect your anticipation for operations under this 5 agreement. 6 MR. KENT: Not in the near term. It 7 might in the longer term. Again, we wanted to ensure 8 that the agreement was, as near as we could, an exact 9 match with the terms and conditions under which CIS 10 services would be available to Union Gas. 11 MR. MONDROW: Okay. We have, of 12 course, got another set of affiliate transaction rules 13 now -- 14 MR. KENT: Yes. 15 MR. MONDROW: -- since the time that 16 the Enlogix agreement was entered into. As these terms 17 are defined, the services agreement under which the 18 utility will get services from Newco contemplates the 19 utility being able to piggyback, as it were, other 20 parties -- third parties -- including affiliates, 21 agents, contractors or dealers. But I understand your 22 evidence to be that that is not your intention with 23 this agreement; that your intention is not to provide 24 through the utility access to anyone else to Newco's 25 system. Newco will be competing in the marketplace and 26 can sell access to others directly if it wants to. 27 MR. KENT: Yes. 28 MR. McGILL: I think there are forms 1251 KENT/McGILL, cr-ex (Mondrow) 1 of access from outside entities to the utility that are 2 valid. For example, we use an automated feature right 3 now to dispatch the meter reading contractors to 4 locations where a special reading is required. Let's 5 say that someone has advised us that they are move out 6 of a house on a certain date. We have to get a meter 7 reader out there to take a final reading at that 8 location, and we use a mechanism now whereby we 9 electronically send that work order to the meter 10 reading contractor. They send someone out and they can 11 actually input the meter reading up into the system, 12 remotely, from their site. 13 So that kind of access to the system 14 would be something that we would want to maintain and 15 that sort of falls into this category, that there would 16 be access of the software to a contractor of the 17 utility. 18 Although we don't anticipate broad 19 access, it would be for limited purposes where it makes 20 sense to do that. 21 MR. MONDROW: Can you think of any 22 other instances, Mr. McGill, other than the one you 23 have given? 24 MR. McGILL: That is the best one I 25 can think of at the moment. I think up until 26 now -- and it is not an issue for the 2000 fiscal year 27 because we will be unbundled, but a similar process is 28 involved for dispatching dealers on service calls. 1252 KENT/McGILL, cr-ex (Mondrow) 1 That won't be done after the end of September, so that 2 is not going to be a valid example within the context 3 of the test year. 4 But there could be other things that 5 arise in the future that we don't anticipate at this 6 point in time, so I wouldn't want to close it right 7 off. 8 MR. KENT: Do you, Mr. Mondrow, have 9 in mind any particular usage that would be of concern 10 to you? 11 MR. MONDROW: No, I don't, Mr. Kent. 12 It is just the concept. And I was wondering what was 13 contemplated. 14 At first I understood your evidence 15 to be that it was just in there because it was the form 16 of the contract and you didn't anticipate any, but I 17 understand Mr. McGill's comment, that we have one 18 example of what may be anticipated and he can't at 19 present think of others. 20 MR. McGILL: Another example would be 21 payment processing, where we contract that work out and 22 an electronic file of payments comes back to us that 23 includes the customer's account number and the fact 24 that the account has been paid, and the amount, and the 25 date it was paid. Those things are posted back into 26 the system electronically. So you are providing access 27 to a contractor of the utility. 28 MR. KENT: I think, though, to be 1253 KENT/McGILL, cr-ex (Mondrow) 1 more precise about it in technical terms, Mr. McGill, 2 we would actually be providing an interface to somebody 3 else's system -- 4 MR. McGILL: Yes. 5 MR. KENT: -- rather than providing 6 access to CIS. 7 MR. MONDROW: Let's talk about 8 facilities. Hardware. 9 MR. McGILL: Yes. How you define 10 access, I guess, is maybe at issue here. 11 MR. MONDROW: What I understand you 12 are attempting to provide for, as I now hear your 13 evidence, is access through a terminal and perhaps a 14 software and cable link or hardware link for, 15 essentially, agents of the utility; contractors that 16 are fulfilling duties contracted for by the utility and 17 on behalf of the utility. 18 MR. KENT: I don't think we are even 19 talking about their access to the system in the sense 20 of being able to use a terminal to see what is on the 21 system, or to do anything on the system. We are 22 thinking more in terms of automated data transfer from 23 the CIS system to somebody else's system. Essentially 24 both of the examples that Mr. McGill has described 25 would constitute that kind of electronic data transfer 26 between two systems, rather than access, as such, to 27 CIS. 28 MR. MONDROW: The definitions I have 1254 KENT/McGILL, cr-ex (Mondrow) 1 raised, of course, as worded, are a lot broader than 2 that, so I am just trying to pin down what it is that 3 you contemplate and wish to provide for. 4 I may well argue at the end of the 5 day that that should be more specifically set out, and 6 that is really the purpose of these questions. 7 MR. KENT: I didn't contemplate 8 anything. Mr. McGill has since raised a couple of 9 examples that could be useful. 10 MR. McGILL: I raised those examples 11 because I wanted to make it clear that we wouldn't want 12 to completely shut off access to some parties. 13 MR. KENT: It wouldn't be in the 14 interests of ratepayers to do so, because you can gain 15 efficiencies through that kind of electronic data 16 transfer. 17 MR. MONDROW: All right. I 18 appreciate that. And it is also, I would suggest, not 19 in the interests of ratepayers or other people in the 20 industry to have affiliates, for example, having access 21 to the system, like piggybacking on your services 22 agreement, which this would provide for. 23 So I understand what it is that you 24 are after. Essentially, you are talking about data 25 transfer down to a contractor or agent and up from a 26 contractor or agent into the system that will be used 27 to deliver to the utility customer information. 28 MR. KENT: Those are the only things 1255 KENT/McGILL, cr-ex (Mondrow) 1 that we can think of here today. But, again, I would 2 go back to our desire to be on a level playing field 3 with Union Gas and the system that they are going to 4 have access to from Enlogix. 5 I think that our perspective has been 6 throughout that we should make it comparable. We 7 should make it as close as we can to identical to that. 8 Because that, then, is the best way to have a fair 9 comparison of pricing and the best way to have a level 10 playing field for both utilities. 11 MR. MONDROW: Yes. If all lawyers 12 had clients like you we would only draft agreements 13 once in a lifetime. Things change and agreements are 14 modified, but I understand what your evidence is, Mr. 15 Kent, and I appreciate that, and it certainly would 16 smooth the passage of this through this process, if 17 that were accepted, and that is what you are 18 requesting, so that's fine. That's fair enough. 19 Just on the services agreement, one 20 more area akin to this -- and if you can flip up 21 Exhibit I, Tab 11, Schedule 43, we essentially asked a 22 similar type of question with respect to references in 23 a number of provisions which are listed there at the 24 outset of the interrogatory. I won't take the time to 25 take you through them right now, but the activities 26 anticipated by the agreement included rental 27 transactions, financing transactions and delivery and 28 installation of products. I have singled those three 1256 KENT/McGILL, cr-ex (Mondrow) 1 things out from my original list in light of your 2 response and description of, for example, sales and 3 service leads/orders which could be a new connection to 4 a customer and a meter. 5 So I am really focussing in, for the 6 purposes of this question, on rental transactions, 7 financing transactions and delivery and installation of 8 products. 9 Again, as I understand it, this came 10 from the Enlogix template that you used, but given the 11 separation of these competitive businesses, it's no 12 longer anticipated that any such activities will be 13 required from the CIS system. Is that a fair 14 paraphrase of the response? 15 MR. KENT: Yes, it is. 16 MR. McGILL: From the utility. 17 MR. MONDROW: From the utility. 18 MR. McGILL: Well, there is still the 19 company's non-utility agent doing a collection activity 20 that will be making use of the system on an interim 21 basis, as we indicated in HVAC-11. 22 MR. MONDROW: And that would be 23 pending and should it happen, unbundling as it were of 24 the billing function or the emergence of a competing 25 function, it would be as long as you operated ECT or 26 the ABC service. 27 MR. McGILL: Well, what we were 28 indicating is that it would be for a six months 1257 KENT/McGILL, cr-ex (Mondrow) 1 transition period. 2 MR. MONDROW: That's with respect to 3 ABC as well? I'm sorry. 4 MR. McGILL: No. ABC in its current 5 state is billing for the gas commodity and we 6 anticipate that we will continue to offer that for the 7 foreseeable future. 8 MR. MONDROW: Right. 9 MR. McGILL: So what I am talking 10 about is using ABC within the context of -- 11 MR. MONDROW: Rental transactions. 12 Okay. I will ask you about that. That's fair enough. 13 Save for that, what we are now told is an interim 14 exception. There are no activity needs for the three 15 types of transactions I have singled out here: rental 16 transactions, financing transactions, delivery and 17 installation of products. 18 MR. McGILL: That's correct, and if 19 you take a look at the table on page 52 and if you 20 follow down the service activities, you will see that 21 for the category of rentals, finance contracts and 22 miscellaneous, at least for rentals and finance 23 contracts, there is nothing indicated and for 24 miscellaneous there's a small amount shown there. 25 That's with respect to some DSM activities that we 26 anticipate carrying forward. 27 MR. MONDROW: Subject then to the six 28 month exception for rentals, would there be any 1258 KENT/McGILL, cr-ex (Mondrow) 1 objection from the company for adjustment of the 2 provisions that we have identified in our interrogatory 3 to remove reference to those types of transactions? 4 MR. KENT: Again, it takes us away 5 from full comparability with the Union Gas-Enlogix 6 agreement and the CIS system does have the capacity to 7 bill for those things. It seems to us much more 8 straightforward to simply make sure that the utility is 9 not anticipating use of that feature, not paying for 10 it. 11 Then we have got a good match with 12 the Union Gas-Enlogix agreement. 13 MR. MONDROW: Just if you get on your 14 way, we won't have access to any of this information 15 any more, so I am a little nervous about it. I take 16 your evidence to be that since you won't be doing it in 17 any event, that it is not included in the charges for 18 the test year, there is no reason to adjust the 19 agreement. 20 MR. KENT: It would be our 21 expectation that the Z factor for CIS would be subject 22 to annual review by this Board. 23 MR. MONDROW: Including the charges 24 for the CIS services. 25 MR. KENT: Yes. 26 MR. MONDROW: And the details behind 27 what services are being similar to what you filed in 28 this proceeding. 1259 KENT/McGILL, cr-ex (Mondrow) 1 MR. KENT: That would be my view of 2 it, yes. 3 MR. MONDROW: Okay. That would help. 4 Let me just talk to you for a few minutes then about 5 this Enlogix-Union agreement comparison that you are 6 relying on. 7 I would just suggest that a number of 8 things have changed. I will just list them for you and 9 then ask you a question about it. 10 First of all, would you agree that 11 one thing that has changed is the separation of the 12 competitive or what used to be called ancillary 13 businesses that would have used the system under the 14 old regime. 15 MR. KENT: I am not sure to what 16 extent, for example, water heater rentals were part of 17 the Union Gas utility offering at the time that their 18 original agreement was negotiated. It may not have 19 been part at that stage as well. I don't know the 20 history. 21 MR. McGILL: My recollection of 22 177-15 was that that proceeding and Union's unbundling 23 proceeding were occurring almost at the same point in 24 time and that although Union was providing for the 25 capability to bill rentals and finance arrangements in 26 that contract with the affiliate for CIS services, that 27 it was anticipated that they would not require that 28 capability for the duration of the arrangement. 1260 KENT/McGILL, cr-ex (Mondrow) 1 MR. MONDROW: So they're not using it 2 either. 3 MR. McGILL: I can't speak for them, 4 but I wouldn't anticipate that they are right now. 5 MR. KENT: But these are functions 6 that can be carried out by the system. In the 7 interests of underemploying lawyers, it would be 8 possible for Newco then to use this same service 9 agreement as a model for an agreement with another 10 client should such an opportunity arise. 11 MR. MONDROW: From that respect, 12 that's true. Give me a moment, if you could. 13 You also anticipate at this point, 14 and I don't think it was as clearly anticipated during 15 the, I guess it was 177-15 proceeding, removal of the 16 billing function from the utility, or at least 17 unbundling of the billing function. Again, that's a 18 change since the Union-Enlogix agreement. 19 MR. McGILL: I would say that's a 20 fair assessment, yes, but at this point in time we 21 still don't know exactly what that means. 22 MR. MONDROW: Right. But we have a 23 target date. 24 MR. McGILL: We have a target date 25 for something. I'm not sure how firm it is. 26 MR. MONDROW: Okay. It's also clear, 27 I think, since the time of 177.15 that there are other 28 large energy services players entering the marketplace, 1261 KENT/McGILL, cr-ex (Mondrow) 1 including those that might potentially offer a 2 competing billing service. Is that fair, Mr. McGill? 3 MR. McGILL: Well, I wouldn't 4 characterize it as a competing billing service. I 5 think even if the retail bill for distribution and 6 commodity was to come from an energy marketer that 7 wouldn't negate the need for the company to maintain 8 customer data. 9 MR. MONDROW: Right, but you might 10 not have to go to Newco to send your bill. You might 11 be able to go to Sunoco or Visa to send your bill. 12 MR. McGILL: Well, that's true, and I 13 guess what I want to try and clear up is any confusion 14 between outsourcing a function and unbundling it. 15 There are various things that we outsource now, meter 16 reading, for example, payment processing. 17 Bill printing is something that could 18 be outsourced, but I wouldn't suggest that that's 19 outsourcing the billing function. 20 MR. MONDROW: Once the CIS system is 21 up and running, will it be Newco that will be 22 processing and sending the utility bill? 23 MR. McGILL: At this point in time, I 24 believe for at least the first half of the 2000 fiscal 25 year it will be the utility. At the moment we have 26 discussions under way with third party vendors with 27 respect to bill printing and it may be that the bill is 28 printed and inserted in mail by the third party under 1262 KENT/McGILL, cr-ex (Mondrow) 1 contract to the utility, but again that's outsourcing, 2 it's not unbundling a function. 3 MR. MONDROW: That's fair enough. I 4 guess I'm just speaking around the contract provisions 5 that were raised earlier, for example, with respect to 6 termination rights or lack of termination rights and 7 the utilities locked in here for the first three years. 8 MR. KENT: Locked in with respect to 9 the provision of the software and in essence 10 outsourcing the hosting of that application, though 11 that outsourcing is kind of a circular thing that comes 12 back to the utility. 13 The bill printing is not a Newco 14 responsibility. Newco provides software that is able 15 to provide an electronic output that a printer can turn 16 into a bill, but Newco itself does not print that bill. 17 MR. McGILL: Newco will convey a bill 18 print file to the utility. The utility will print the 19 bills and mail them. Newco could just as easily convey 20 that print file to a contractor that's printing the 21 bills for the utility. 22 MR. MONDROW: If on October 1, 2001, 23 Visa wants to buy Newco's CIS rights, the utility will 24 have to deal with Visa for two years. Right? 25 MR. KENT: The common shareholder of 26 the utility and Newco would have to think through very 27 carefully what the implications were of any kind of 28 arrangement of that nature. 1263 KENT/McGILL, cr-ex (Mondrow) 1 MR. MONDROW: Well, from the common 2 shareholder's perspective, you might be interested in 3 selling the CIS system, having the utility locked into 4 an agreement. It would maximize the value of that 5 sale, wouldn't it? 6 MR. FARRELL: You are assuming the 7 utility gives a consent to the assignment because 8 section 18.1 doesn't necessarily require that. 9 MR. MONDROW: I'm assuming the parent 10 gives consent to the consignment or directs the utility 11 to, that's right, but my point really is that a 12 provision that might not favour the utility in an arm's 13 length agreement might well favour the shareholders' 14 interest in maximizing value for the system were it to 15 be transferred. Is that not true? 16 MR. KENT: I'm not sure I could get 17 my mind around that at this hour of the afternoon. 18 MR. McGILL: I think the point that 19 we tried to make yesterday with regard to the issue of 20 assignment of this contract is that if Enbridge does 21 something that is damaging to the utility, that is 22 damaging to Enbridge. That's just not a practical 23 suggestion. 24 MR. MONDROW: Okay. I should be 25 another ten minutes or so, sir. With your leave, I 26 will try to make it as fast as possible and try to 27 finish up. 28 THE PRESIDING MEMBER: Go ahead. 1264 KENT/McGILL, cr-ex (Mondrow) 1 MR. MONDROW: Thank you. 2 I'm not going to drill down into the 3 costs which have been exhaustively dealt with, the 4 costs for a rate base which have been exhaustively 5 dealt with. I just want to ask you a few kind of high 6 level questions just to clarify it for myself and on 7 the record. 8 First of all, in 1992, gentlemen, 9 when you started the SIM CIS project, and I am sure 10 this is on the record somewhere in a previous hearing, 11 when did you expect the CIS to come online? What was 12 the initial expectation? 13 MR. KENT: There was a date put 14 forward for the completion of SIM as a whole, but I 15 don't think that CIS at that stage had been 16 specifically identified. 17 MR. MONDROW: Well, what was the date 18 for SIM as a whole? 19 MR. KENT: My recollection is that it 20 was the end of fiscal -- either fiscal or calendar 21 1997. I'm not sure. I would have to go back and 22 check. No, excuse me. I think it was 1998. 23 MR. McGILL: Yes. I think that's 24 correct. I think in 473 the target date was some time 25 in fiscal 1998. I believe it was March of 1998. 26 MR. MONDROW: Okay. So if we went to 27 473, we could find out what that target date was. 28 MR. KENT: Yes. 1265 KENT/McGILL, cr-ex (Mondrow) 1 MR. McGILL: Well, in 492, the target 2 date was April to June 1998. 3 MR. MONDROW: And by the time we got 4 to 492, you would have in fact expressly anticipated 5 CIS. 6 MR. KENT: That is correct. 7 MR. McGILL: That's right. 8 MR. KENT: That was the anticipated 9 completion date for CIS at that time. 10 MR. MONDROW: And in your 11 recollection -- 12 MR. McGILL: Actually, I have a 13 reference to that, if you like. There is a table on 14 page 13 of D1, Tab 8, Schedule 1, the original CIS 15 evidence. 16 MR. MONDROW: Page 13? 17 MR. McGILL: Yes. 18 THE PRESIDING MEMBER: Mr. McGill, 19 you will have to speak up. 20 MR. McGILL: Sorry. There is a table 21 on page 13 of B1, Tab 8, Schedule 1, and that 22 summarizes some of the aspects of our CIS filings in 23 492, 495 and RP-1991-01. 24 The in-service date is summarized in 25 the table. 26 MR. MONDROW: That would have been, 27 Mr. McGill, in your recollection, the earliest 28 projected in-service date during the history of this 1266 KENT/McGILL, cr-ex (Mondrow) 1 entire matter for CIS? 2 MR. KENT: No. There were, I think, 3 earlier dates. I am just trying to find references. 4 CAC asked an interrogatory which 5 included a somewhat earlier hearing process. 6 Excuse me, that just referenced costs 7 and benefits that were projected at that time and not a 8 delivery date. 9 If it is useful, we can, I am sure, 10 go back and research this. I hate to offer another 11 undertaking at this hour of the afternoon. 12 MR. MONDROW: I guess it goes to the 13 issue of delays and the cost consequences of delays. 14 That is why I am interested in finding out what you 15 originally said would be the deliverable date for CIS 16 and what in fact will be the functional delivery date 17 for CIS. That is really the point of this. 18 MR. KENT: I think if you go back any 19 further than approximately E.B.O. 492, you are talking 20 about a different project, one that was smaller in 21 scope than the CIS that was ultimately embarked on. 22 So I don't think comparisons to any 23 earlier dates would be useful anyway. 24 MR. MONDROW: Okay. 25 MR. KENT: I think the date that we 26 are discussing here, March 1998, is probably about 27 right. 28 MR. McGILL: That is the earliest 1267 KENT/McGILL, cr-ex (Mondrow) 1 date that was quoted in E.B.R.O. 495. We are 2 indicating March 1998; and then in 492, which was 3 earlier, was April to June 1998. It is in and around 4 that point in time. 5 MR. MONDROW: Thank you. 6 I would ask you to open your new 7 prefiled evidence, Exhibit B1, Tab 8, Schedule 3, to 8 page 4. I just want to get some of the terminology 9 straight under A6, and I will just try to go through 10 this quickly. 11 First of all, in the first paragraph 12 of Answer 6, you talk about the BPR phase costs, and 13 that is a portion of the roughly $10.4 million, as I 14 understand your evidence from earlier today. You will 15 be providing an undertaking response to advise what 16 portion of those direct costs were BPR associated 17 costs. 18 Is that right? 19 MR. KENT: Yes, that is correct. 20 MR. MONDROW: That was business 21 process re-engineering, obviously, that process. 22 MR. KENT: Yes. 23 MR. MONDROW: Then in the next 24 paragraph you refer to the analysis phase, which you 25 have discussed also today. 26 Does the analysis phase activity 27 refer to the balance, then, of that $10.4 million of 28 direct costs? 1268 KENT/McGILL, cr-ex (Mondrow) 1 MR. KENT: Yes, it does. 2 MR. MONDROW: Essentially, that was 3 specifying the CIS system required by the utility? 4 MR. KENT: Yes. That is quite a 5 brief summary of it; but yes, that is good. 6 MR. MONDROW: I don't mean to over 7 simplify actually. But the activities you described 8 earlier, I would suggest, were specifying the system 9 needs. 10 MR. KENT: Yes, that's a fair way to 11 put it. 12 MR. MONDROW: Was all that work done 13 in-house? 14 MR. KENT: There was assistance 15 provided by a number of consultants: IBM, Andersen 16 Consulting and PricewaterhouseCoopers -- or Price 17 Waterhouse at the time. 18 There may also have been some other 19 consulting work provided too, but they would be small 20 in caparison to those first three. 21 MR. MONDROW: Is that the lion's 22 share of those direct costs, Mr. Kent, or some portion 23 you can -- 24 MR. KENT: Is what the lion's share? 25 MR. MONDROW: The contracting costs. 26 MR. KENT: I think -- 27 MR. McGILL: Schools' 17. 28 MR. KENT: Or there may even be a 1269 KENT/McGILL, cr-ex (Mondrow) 1 quicker way of getting there. If you go on to page 6 2 of our original evidence, there is a breakdown into 3 categories of direct costs that includes IS labour, 4 business labour, consulting and other. 5 MR. MONDROW: That consulting would 6 be all on the specification or the analysis phase 7 activities rather than the BPR? 8 MR. KENT: No. The majority of it, 9 to my recollection, was on the BPR. 10 MR. MONDROW: That is what I am 11 asking really. In the spec activity or the analysis 12 phase activity, were there significant contracting or 13 outsourcing costs? 14 MR. KENT: Not to my recollection. 15 We will be breaking this cost out into the two general 16 areas, in any event. So I think it will be apparent in 17 that breakout. 18 MR. MONDROW: You will break out that 19 line; that's right. 20 MR. KENT: Yes. 21 MR. MONDROW: That's true; thank you. 22 Then Price Waterhouse was 23 subsequently retained, as we have heard countless 24 times, to build and provide you with the CIS system. 25 When they were retained and began to 26 do that, did they do additional work on specifying the 27 CIS system to be provided? 28 MR. KENT: They embarked upon a 1270 KENT/McGILL, cr-ex (Mondrow) 1 design process, which meant taking the performance 2 specifications for the system to a much greater level 3 of detail so that you could decide how the Code should 4 actually be written. 5 There was a design phase that 6 followed analysis, and then subsequent to that there 7 was a development or construction phase. 8 MR. MONDROW: So Price Waterhouse 9 picked up where you left off in terms of specifying the 10 system. 11 MR. KENT: Yes. And again, we were 12 trying to match it to the way that you would work with 13 any other large software vendor. You would tell them 14 what you wanted, and then when they were coming in to 15 do the implementation of that system, the system 16 integration stuff, they would have to go through a 17 detailed design phase to figure out how their software 18 would actually have to be adapted to fit into the 19 company's system and to meet the company's 20 specifications. 21 MR. MONDROW: Then still in Answer 6 22 but I guess now flipping over to page 5, in that first 23 paragraph on page 5 you use two terms: SIM overhead 24 costs and SIM start-up costs. Those are the same 25 thing? 26 MR. KENT: No, they are not. We 27 explored them a bit earlier today. I'm afraid I forget 28 now whether it was with Mr. Warren or Mr. Brett. 1271 KENT/McGILL, cr-ex (Mondrow) 1 The SIM start-up costs were 2 essentially the very early costs before there were any 3 identifiable SIM capital projects as a subset of SIM as 4 a whole. Then, thereafter, there were still some 5 overhead costs that continued, like the EDS audit 6 costs, that were not properly associated with any 7 individual project but were overhead and had to be 8 allocated out to each. 9 MR. MONDROW: The combination of 10 those two categories results in the $13.3 million 11 amount that you are also proposing to rate base. 12 MR. KENT: Yes, that is correct. 13 MR. MONDROW: And those have also 14 been referred to on the table at page 6 as indirect 15 costs. That is the same thing. 16 The indirect costs are the sum of the 17 overhead costs and start-up costs that you are seeking 18 to rate base. 19 MR. KENT: Yes. 20 MR. MONDROW: With respect to both of 21 those amounts, the direct costs and the indirect costs, 22 has there been any allocation, before providing the 23 number that you provided in this exhibit, to ancillary 24 or non-utility activities or businesses out of these 25 costs? 26 --- Pause 27 MR. KENT: Mr. McGill and I are not 28 aware of any allocation in that manner. 1272 KENT/McGILL, cr-ex (Mondrow) 1 The total of the SIM start-up and 2 overhead costs is larger than is seen here, and they 3 will have been allocated to other SIM projects which 4 may, as they have been closed, have resulted in some 5 allocation to ancillary programs. 6 MR. MONDROW: Right. But for these 7 remaining indirect costs and the BPR phase and analysis 8 phase costs, you haven't done any allocation to the 9 programs and businesses that were in the utility at the 10 time that the costs were incurred. 11 MR. KENT: To the best of my 12 knowledge and belief, yes, that is the case. 13 MR. MONDROW: Yes, you have not done 14 any allocation. 15 Yes, we have no bananas, as 16 Mr. Farrell says. 17 MR. KENT: We have not done any 18 allocation of that nature. 19 MR. MONDROW: Okay; thank you. 20 With respect to these -- that's okay, 21 I will leave that there; thank you. I think that is an 22 area that has been appropriately canvassed. 23 I have one more area which I will 24 just try to take a couple of minutes on, and that is 25 with respect to the rental program billing issue, 26 Mr. McGill, that you raised. 27 As I understand it, the utility will 28 continue to bill for the rental program until 1273 KENT/McGILL, cr-ex (Mondrow) 1 March 31, 2000 on the utility bill. 2 Is that correct, Mr. McGill? 3 MR. McGILL: The proposal as it sits 4 right now is that Enbridge Consumers Gas would bill 5 rental charges on behalf of its affiliate as a 6 non-utility activity as part of its ABC service. 7 MR. MONDROW: The current ABC per 8 bill charge, as I recall it at least from previous 9 years, is not set to recover fully allocated costs for 10 that activity, it is rather set with reference to what 11 the market will bear? 12 MR. McGILL: No. At this point in 13 time the ABC charges that we have in place are designed 14 to recover the 1999 fully allocated costs of the 15 program. 16 MR. MONDROW: Okay. 17 I'm happy to have misspoken myself on 18 that one. That's great. 19 But this interim arrangement is to be 20 discontinued, currently anticipated to be March 31st, 21 2000. After that date will the rental program be 22 billed through Newco's CIS system? 23 MR. McGILL: We are still trying to 24 determine how we are going to bill -- we are -- 25 Enbridge is still trying to figure out how it is going 26 to bill rentals after the transition and we are hopeful 27 that we will be able to change the arrangement within 28 the six months. We see the six months as the end of 1274 KENT/McGILL, cr-ex (Mondrow) 1 the transition time horizon. 2 MR. MONDROW: The CIS functionality 3 associated with billing will be deployed or rolled out 4 by March 31st, 2000. Is that correct? 5 MR. KENT: Yes. 6 MR. MONDROW: Is that the reason that 7 the March 31st, 2000 date was set as the end of this 8 transition period date? 9 MR. KENT: Not to my knowledge. 10 MR. McGILL: No. 11 MR. KENT: Not that I'm aware of. 12 MR. MONDROW: How did you set that 13 date? It was just six months out? 14 MR. McGILL: I think we just wanted 15 to have up to six months in order to try to come to 16 grips with what we had to deal with and give time for 17 our affiliate to put some type of billing arrangement 18 in place. 19 MR. MONDROW: Okay. Thank you for 20 those answers, gentlemen. 21 Thank you very much, Mr. Chairman, 22 for your indulgence. 23 THE PRESIDING MEMBER: Thank you, 24 Mr. Mondrow. 25 We will have to adjourn now until 26 tomorrow. 27 Any matters, Mr. Farrell? 28 MR. FARRELL: No, sir. 1275 KENT/McGILL, cr-ex (Mondrow) 1 MR. MONDROW: Just to advise, sir, 2 before you rise, I will likely bow out for tomorrow, 3 but Mr. Farrell has agreed to keep me advised of the 4 information to be provided by Ms Reynolds which is 5 still anticipated for tomorrow. I will be back on 6 Thursday and we can, to the extent any issues remain, 7 deal with them during the course of that day. So I 8 just thought I would let you know that. 9 THE PRESIDING MEMBER: Thank you, 10 Mr. Mondrow. 11 Mr. Hilson, will Energy Probe have 12 any questions of this panel? 13 MR. HILSON: Could Mark ask them 14 tomorrow morning? 15 THE PRESIDING MEMBER: I'm sorry? 16 MR. HILSON: Can Mark Mattson ask 17 them tomorrow morning? 18 THE PRESIDING MEMBER: That's fine. 19 All right. 20 The answer is he does have some 21 questions. 22 I'm sorry, I couldn't hear you. 23 Okay. Anything else? 24 We will adjourn until tomorrow at 25 nine. 26 --- Whereupon the hearing adjourned at 1705, 27 to resume on Wednesday, September 1, 1999 at 0900