1276 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 Wednesday, September 1, 1999, 24 commencing at 0947 25 26 RATES HEARING 27 28 VOLUME 8 1277 1 APPEARANCES 2 JENNIFER LEA/ Counsel, Board Technical 3 HIMA DESAI/ Staff 4 JAMES WIGHTMAN 5 J.H. FARRELL/ Enbridge Consumers Gas 6 F. CASS/ 7 T. LADANYI 8 H. SOUDEK 9 ROBERT WARREN Consumers Association of 10 Canada. 11 TOM BRETT Ontario Association of 12 School Business Officials of 13 the Metropolitan Toronto 14 Separate School Board. 15 IAN MONDROW Heating, Ventilation and Air 16 Conditioning Contractors 17 Coalition Inc., HVAC 18 Coalition 19 GEORGE VEGH Coalition for Efficient 20 Energy Distribution 21 MARK MATTSON/ Energy Probe 22 MICHAEL HILSON 23 MURRAY KLIPPENSTEIN Pollution Probe 24 DAVID POCH Green Energy Coalition, GEC 25 MICHAEL JANIGAN Vulnerable Energy Consumers 26 Coalition 27 STAN RUTWIND TransCanada PipeLines 28 Limited 1278 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 1279 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 Preliminary Matters 1282 5 PREVIOUSLY SWORN: DUNCAN KENT 1282 6 PREVIOUSLY SWORN: STEPHEN McGILL 1282 7 Cross-Examination by Mr. Janigan 1286 8 Cross-Examination by Mr. Thompson 1319 9 Upon recessing at 1106 1331 10 Upon resuming at 1137 1331 11 Luncheon recess at 1250 1380 12 Upon resuming at 1355 1380 13 Upon recessing at 1547 1456 14 Upon resuming at 1610 1456 15 Hearing adjourned at 1704 1492 16 17 18 19 20 21 22 23 24 25 26 27 28 1280 1 UNDERTAKINGS/OBJECTIONS 2 3 NO. DESCRIPTION PAGE 4 5 J8.1 Mr. Kent undertakes to advise 1295 6 whether there are confidentiality 7 provisions in the contracts 8 associated with the BPR work from 9 IBM, Andersen Consulting and 10 Pricewaterhousecoopers and whether 11 they have an objection to filing 12 the documents 13 J8.2 Mr. Kent to reconcile nineteen 1321 14 and some odd million in IS 15 capital budget claim 16 J8.3 Undertaking given by Mr. Kent 1392 17 to explain the drop in IDC from 18 1995 to 1996 and the increase in 19 IDC from 1996 to 1997 20 J8.4 Undertaking by Mr. McGill to 1433 21 provide the FTE number reference 22 in the previous year's evidence 23 J8.5 Undertaking by Mr. Kent to 1475 24 determine how the figure of 25 $8.32 per customer was derived 26 27 28 1281 1 EXHIBITS 2 NO. PAGE 3 4 K8.1 Appendix F from E.B.R.O. 492 1319 5 Decision with Reasons 6 K8.2 Package of documents containing 1327 7 IGUA Interrogatory No. 37 in the 8 E.B.O. 179-14/15 case; transcript 9 reference 962 to 965; undertaking 10 response Exhibit H6.4; undertaking 11 response H4.2 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1282 1 Toronto, Ontario 2 --- Upon resuming on Wednesday, September 1, 1999 3 at 0947 4 PREVIOUSLY SWORN: DUNCAN KENT 5 PREVIOUSLY SWORN: STEPHEN McGILL 6 THE PRESIDING MEMBER: Good morning. 7 We apologize for the delay even beyond 9:30, as 8 announced by staff, but there were some emergency 9 matters and the Panel had to be part of the 10 deliberations. We apologize. 11 Mr. Farrell, do you have any matters? 12 PRELIMINARY MATTERS 13 MR. FARRELL: Yes, Mr. Chair. 14 You and your colleague should have a 15 package of responses to undertakings. The package, for 16 the record, consists of Exhibit J1.2, J1.3, J1.4, J1.5, 17 J3.3, and J6.1. 18 To our count so far, there have been 19 26 undertakings. We have now filed responses to 12 and 20 one additional response was put on the record by 21 Mr. Kent yesterday. He will put a response to a second 22 undertaking on the record now. 23 When we update the hearing schedule, 24 we will indicate the transcript references for the 25 undertakings that are responded to in the hearing room 26 as opposed to on paper so people will know that they 27 are not looking for a piece of paper for a particular 28 undertaking response. 1283 KENT/McGILL - Preliminary Matters 1 THE PRESIDING MEMBER: Before we do 2 that, are there any other matters by way of a 3 preliminary nature? 4 MS LEA: I have a minor matter to 5 raise in regard to scheduling. 6 THE PRESIDING MEMBER: Ms Lea, 7 perhaps you could deal with that now. 8 MS LEA: Thank you. 9 I was asked by one or more 10 participants, and I thought it might be useful to have 11 it on the record, to confirm that we are sitting a half 12 day this Friday. 13 THE PRESIDING MEMBER: That was the 14 intent, yes. 15 MS LEA: The second matter is that if 16 we have to have Mr. Stevens come to testify next 17 week -- and we don't know whether that will be 18 necessary or not -- I understand that it is difficult 19 for him to be here on the 7th of September due to the 20 fact that it is the Labour Day Weekend the day before. 21 If he could travel on the 7th and 22 appear on the 8th, I gather that would facilitate 23 matters greatly. 24 Am I correct? 25 MR. THOMPSON: Yes. 26 MS LEA: Thank you. If it becomes 27 necessary for his testimony to be heard next week, I 28 understand the request is to do that on the 8th of 1284 KENT/McGILL - Preliminary Matters 1 September. 2 --- Pause 3 THE PRESIDING MEMBER: Ms Lea, on the 4 8th, I believe there is a scheduled Board meeting, but 5 I believe it is in the afternoon. So to the extent 6 that we can start with the witness in the morning, then 7 we will see how it goes. 8 We will probably have to have a half 9 day on the 8th. 10 MR. THOMPSON: Or the 9th, if that 11 makes it more convenient. 12 THE PRESIDING MEMBER: We want to 13 finish before Christmas. 14 MS LEA: I don't know that it is 15 going to take that long. I don't know. 16 MR. FARRELL: I would make two 17 observations at this point, just in terms of picking 18 the 8th or the 9th. 19 One is that we won't know whether 20 Ms Reynolds' response to Mr. Mondrow's motion on behalf 21 of HVAC will be satisfactory; and even if it is, we 22 don't know whether he would want to ask Ms Reynolds 23 some questions. 24 That is the first point. 25 The second point is that until 26 Mr. Stevens has testified, we won't be able to make a 27 decision on whether we want to call any rebuttal 28 evidence. So it may be more than just one day. 1285 KENT/McGILL - Preliminary Matters 1 I am not saying that it will be, but 2 it could be. 3 THE PRESIDING MEMBER: That's fine. 4 That is more of a reason to plan for the 8th for 5 Mr. Stevens. But we will sit a half day on the 8th. 6 Mr. Kent? 7 MR. KENT: We were asked yesterday to 8 review, in J7.4, the differences between paragraph 9.2 9 of the Union Gas-Enlogix agreement and the comparable 10 clause in the Enbridge Consumers Gas-Newco Services 11 agreement, that is also 9.2. 12 Mr. McGill and I discussed that last 13 evening and jogged our memories about the circumstances 14 and the reasons for this. We recall that it was not an 15 inadvertent removal of that section. We decided to 16 take it out, and we decided to take it out for two 17 primary reasons. 18 The first was that given the nature 19 of Newco and the scale of Newco's operations, we 20 couldn't envisage how Newco could reasonably achieve a 21 1 per cent productivity improvement per year. We felt 22 that with something in the order of 10 staff it wasn't, 23 in our view, feasible to achieve that kind of 24 improvement. 25 The second reason that led us to 26 conclude that we should take it out was that when we 27 calculated out the impacts of the fee schedule over the 28 course of the contract, we realized that the fees that 1286 KENT/McGILL - Preliminary Matters 1 would be charged to Enbridge Consumers Gas by Newco 2 would, throughout the term of the contract, be below 3 the fees that would be charged by Enlogix to Union Gas, 4 even with the productivity improvement factor in their 5 contractual arrangements and absent from ours. 6 So because the Newco-Enbridge 7 Consumers Gas agreement started out at a lower level, 8 it would remain at a lower level throughout the term. 9 That appeared to us to be a suitable resolution of the 10 matter. 11 That was the company's thinking in 12 removing that particular section. 13 THE PRESIDING MEMBER: Thank you. 14 MR. FARRELL: I have nothing further. 15 THE PRESIDING MEMBER: Mr. Mattson is 16 not here this morning yet. 17 Has anybody seen Mr. Mattson this 18 morning? 19 No. 20 Mr. Janigan. 21 MR. JANIGAN: Thank you, Mr. Chair. 22 I have been able to review most of yesterday's 23 transcript and accordingly have been able to 24 considerably pare down the questions for this panel. 25 CROSS-EXAMINATION 26 MR. JANIGAN: I would like, first, to 27 turn up the E.B.R.O. 492 decision and Appendix F of 28 that decision. 1287 KENT/McGILL, cr-ex (Janigan) 1 This is the table entitled "Strategic 2 Information Management Plan Project Costs". 3 MR. KENT: Yes, we have that, 4 Mr. Janigan. 5 MR. JANIGAN: I am going to try to 6 deal with the two cost categories that make up the 7 $30 million that you are proposing to add to rate base 8 and where they appear in this particular schedule. 9 I take it that the SIM start-up costs 10 appear under the title of "Other Start-Up Costs". Is 11 that correct? 12 MR. FARRELL: Excuse me for a second. 13 Mr. Chair, would it assist you and 14 Ms Halladay if you had a copy of this appendix? We 15 could quickly run down the hall and photocopy it so you 16 can follow it. 17 I would like to get one so I can 18 follow. 19 THE PRESIDING MEMBER: Ms Desai just 20 left the room to probably get us a copy. 21 MR. FARRELL: Okay. 22 MR. JANIGAN: I think it might be 23 useful for the Panel to have that. I'm sorry I did not 24 provide it. 25 THE PRESIDING MEMBER: But I had 26 memorized it, Mr. Janigan. 27 MR. KENT: In that case, sir, you are 28 ahead of us. 1288 KENT/McGILL, cr-ex (Janigan) 1 --- Pause 2 THE PRESIDING MEMBER: For once, 3 Mr. Farrell, the Board has moved faster than the 4 company. 5 MR. JANIGAN: While we are waiting 6 for that -- are you waiting for a copy of that 7 particular chart? 8 MR. KENT: No, it's okay. We have 9 that, Mr. Janigan. 10 MR. FARRELL: We have it. 11 MR. JANIGAN: Okay. 12 MR. KENT: I gather, Mr. Janigan, you 13 are speaking about the column that is entitled "Costs" 14 for the period 1992-95. 15 MR. JANIGAN: That's correct. 16 MR. KENT: Towards the very bottom of 17 that column, just above "Total SIM Costs", in the 18 bottom line, there is a row entitled "Other Start-Up 19 Costs"? 20 MR. JANIGAN: Yes. 21 MR. KENT: The figure there of 22 $12,896,124 is, to our understanding, the total of 23 other start-up costs. 24 It appears, as well, in our evidence 25 in this current case, in the response to HVAC 24. 26 --- Pause 27 MR. JANIGAN: Just so I understand 28 that, as I understand the component of the $13 million, 1289 KENT/McGILL, cr-ex (Janigan) 1 there are CIS -- I'm sorry, SIM start-up costs and an 2 allocation of O&M. 3 MR. KENT: An allocation of SIM 4 overheads? 5 MR. JANIGAN: Yes. 6 MR. KENT: Yes, that's correct. 7 MR. JANIGAN: Now, you are saying 8 that the other start-up costs represent that component 9 that is associated with SIM start-up costs? 10 MR. KENT: Yes, it does. 11 In fact, I believe it would be 12 helpful to go to HVAC 24, Mr. Janigan, because it lays 13 out there the full calculation. 14 MR. JANIGAN: I have that before me. 15 It's on page 2? 16 MR. KENT: Yes, that's correct. 17 MR. JANIGAN: Okay. 18 The indirect costs, I take it, would 19 be the O&M allocation from SIM? 20 MR. KENT: Mr. Janigan, you referred 21 to it twice as O&M. 22 MR. JANIGAN: I'm sorry. 23 MR. KENT: I believe that these are 24 more properly viewed and have been viewed from the 25 outset as capital expenditures. 26 MR. JANIGAN: Okay. 27 MR. KENT: But they were amounts 28 associated with two elements. 1290 KENT/McGILL, cr-ex (Janigan) 1 In the case of start-up they were the 2 costs involved in getting the SIM project off the 3 ground. 4 MR. JANIGAN: Yes. 5 MR. KENT: The overhead costs were 6 associated with overall management of the SIM project, 7 establishment and maintenance of reporting processing 8 and other miscellaneous items such as the costs of the 9 EDS audit. 10 MR. JANIGAN: That is included in the 11 direct cost item that appears on the chart here for 12 1992 to 1995. 13 MR. KENT: I'm sorry, which chart? 14 MR. JANIGAN: Appendix F. 15 MR. KENT: Yes. 16 Part of those other start-up costs 17 end up being included in the $13,370,000 that is 18 represented in the indirect costs associated with or in 19 our application to include in rate base some portion of 20 that capital. 21 But not all of it is. Part of that 22 $12,896,000-odd has already been included in rate base 23 in association with other SIM projects because it was 24 allocated to essentially each SIM project and spread 25 out among them. 26 All the other SIM projects have now 27 been closed and, as a result, a portion of those other 28 start-up costs is already in rate base. 1291 KENT/McGILL, cr-ex (Janigan) 1 MR. JANIGAN: What I'm trying to do 2 is just to track it back, what it looked like as of the 3 date of the E.B.R.O. 492 decision, these last 4 categories. 5 MR. KENT: Okay. 6 MR. JANIGAN: As of the date of this 7 decision in your other start-up costs this represented 8 the SIM start-up costs. In the indirect costs, that 9 represented the indirect costs associated by the 10 attribution of the SIM overhead? 11 MR. KENT: Yes, that's fair. 12 MR. JANIGAN: Okay. 13 MR. KENT: I'm sorry, I misunderstood 14 your question before I think. 15 MR. JANIGAN: Okay. 16 Now, what I'm trying to locate here 17 are the direct costs or the costs associated with the 18 BPR and analysis phases. Where would they show up? 19 MR. KENT: The direct costs would be 20 associated with the CIS project, and I'm just looking 21 down this list for the CIS project. 22 --- Pause 23 MR. KENT: I'm not sure -- oh, yes. 24 I'm sorry. 25 Mr. McGill has pointed out to me 26 there is a row entitled "Outstanding After Test Year, 27 Customer Information System". 28 MR. JANIGAN: Yes. 1292 KENT/McGILL, cr-ex (Janigan) 1 MR. KENT: So expenditures through to 2 the end of 1995 were at that time $11,236,000-odd. 3 That is about four lines up from where we were just a 4 moment ago. 5 MR. JANIGAN: Okay. So we find the 6 BPR and analysis phase expenses -- which I think were 7 during the period of 1992 to 1996 -- in these two 8 columns here with the $11,236,103 and the $14,900,000 9 number. 10 MR. KENT: Yes, that's correct. 11 That's where the direct costs of the BPR and analysis 12 phase would be. 13 MR. JANIGAN: Okay. 14 Now, I understand that -- I will ask 15 the question: Were the costs of the BPR and analysis 16 phase confined to the customer information system? 17 MR. KENT: There were BPR exercises 18 conducted in conjunction with a number of SIM projects, 19 not, I think, all, but a very large number of them 20 because we were trying to make sure we had thought 21 through how processes could work better before we 22 bought software to support those processes. 23 In each case the BPR costs would have 24 been included as a convention with the software product 25 or the projects that would ultimately deliver a 26 software product. 27 MR. JANIGAN: The costs of the BPR 28 for each of the individual SIM projects would be 1293 KENT/McGILL, cr-ex (Janigan) 1 recorded as a direct cost, going back to Appendix F 2 beside each of the projects? 3 MR. McGILL: Yes. I believe they 4 would be in the 1992 to 1995 column for each of the 5 projects identified. 6 MR. JANIGAN: I believe you 7 indicated -- I think it shows up in Exhibit B1, Tab 8, 8 Schedule 3 -- that you engaged consultants to assist in 9 the BPR process? 10 MR. KENT: That's correct. 11 MR. JANIGAN: The consulting work 12 that was done was separate and apart from the 13 development of the CIS software? 14 MR. KENT: That's correct. 15 MR. JANIGAN: I believe Mr. McGill 16 indicated that the Price Waterhouse contract for BPR 17 was a separate contract from the development of the 18 software. 19 MR. KENT: That is also correct. 20 MR. JANIGAN: Do you have any 21 objections to producing the contracts associated with 22 the BPR work? 23 MR. FARRELL: We would have to check 24 to see whether there is a confidentiality provision in 25 that contract. 26 MR. JANIGAN: If you could advise on 27 that? 28 MR. FARRELL: Yes, we can advise on 1294 KENT/McGILL, cr-ex (Janigan) 1 that, whether there is a confidentiality provision. 2 MR. JANIGAN: If there is not a 3 confidentiality provision, can you produce it? 4 MR. McGILL: If we can find it. I 5 think that is why we are at a bit of a loss here. It 6 is some time ago. 7 MR. KENT: I don't think either 8 Mr. McGill or I have ever seen these contracts. I'm 9 sure they exist somewhere in the company. 10 I think, though, we would still want 11 to confirm with each of IBM, Andersen Consulting and 12 Pricewaterhousecoopers if they had no objection to the 13 filing of those documents. 14 I would be surprised if they did 15 because it is from such a long time ago. 16 MR. JANIGAN: Okay. Possibly you can 17 advise us on that. 18 MR. KENT: Yes, we can do that. 19 By the way, Mr. Janigan, perhaps to 20 assist you further, we did respond to an interrogatory 21 put forward by the Schools with respect to the nature 22 of the consulting work done by each of those 23 consultants. That is Exhibit I, Tab 19, Schedule 18 on 24 page 3 of 7. 25 MR. JANIGAN: I'm sorry, could I just 26 have that reference again. 27 MR. KENT: Exhibit I, Tab 19, 28 Schedule 18 on page 3 of 7 under sub-part (e), there is 1295 KENT/McGILL, cr-ex (Janigan) 1 a paragraph in the middle of the page describing the 2 work that was done under each of those consulting 3 agreements. 4 MR. JANIGAN: Okay. 5 MS DESAI: Just before we move on, I 6 think we should just give that request an undertaking 7 number, just to keep track of it. 8 J8.1. 9 UNDERTAKING NO. J8.1: Mr. Kent 10 undertakes to advise whether 11 there are confidentiality 12 provisions in the contracts 13 associated with the BPR work 14 from IBM, Andersen Consulting 15 and Pricewaterhousecoopers and 16 whether they have an objection 17 to filing the documents 18 MR. JANIGAN: Thank you. 19 Now, I believe you explored with 20 Mr. Brett yesterday the reason why these expenses were 21 put into the capital asset category or put into an 22 account for clearance as a capital asset. 23 I'm just looking at the transcript on 24 page 1184 and at the bottom of the page you qualified 25 the fact that you weren't an accountant or didn't have 26 any accounting qualifications. 27 But, in essence, if something is to 28 become a capital asset, then the labour employed in the 1296 KENT/McGILL, cr-ex (Janigan) 1 creation of that asset is also capitalized. 2 I take it that same circumstance 3 applies to the other expenses that we are talking about 4 in both the BPR and analysis phase and SIM start-up and 5 the allocation of SIM overhead categories. Would you 6 agree with me? 7 MR. KENT: I am not sure I follow you 8 completely, Mr. Janigan, but certainly it was our 9 understanding that the Board had accepted the company's 10 view that such a major overhaul of IT systems, as was 11 contemplated in the SIM project, was best dealt with by 12 capitalizing the expenditures and amortizing them over 13 a period of time in order to spread the rate impacts 14 and match benefits with costs. 15 MR. JANIGAN: It is primarily because 16 you were developing a capital asset. Is that not the 17 case? 18 MR. KENT: The only reason I have any 19 concern in agreeing with you is that I am not quite 20 certain what the definition of a "capital asset" is. 21 Again, it goes to my lack of accounting qualifications. 22 MR. JANIGAN: I would suggest that 23 the reason why these are capital expenses is because 24 they were associated with the developing of the capital 25 asset of the SIM program. 26 MR. KENT: Again, I do know that 27 previous information technology development work by the 28 company had been carried out under O&M and had been 1297 KENT/McGILL, cr-ex (Janigan) 1 expensed as it had been done. But when the time came 2 that it became apparent we had to undertake such a 3 major effort in renovating systems, at that stage the 4 costs of doing so, if they had been viewed as an O&M 5 expenditure, would have resulted in a very substantial 6 change in O&M costs and, consequently, in gas rates. 7 Rates would have gone up quite 8 substantially to reflect recovery of those costs as 9 incurred. The benefits would not have flowed for a 10 period of time thereafter, and rates would have come 11 down very dramatically when the projects were finished 12 and those expenditures were complete and the benefits 13 were flowing. 14 My understanding of the discussions 15 at the time of 473 was that that was not a desirable 16 situation, that it would be much better to try to 17 smooth the rate impacts of the necessary expenditures 18 on information technology and to match those 19 expenditures or the recovery of those costs in rates 20 with the timing that the benefits would flow. 21 MR. JANIGAN: But you will agree with 22 me, Mr. Kent, that rate shock is not a reason why O&M 23 expenses can be treated as capital expenditures. There 24 has to be a relationship with the development of a 25 capital asset. 26 MR. KENT: I'm sorry, Mr. Janigan, I 27 just don't know enough to be able to agree or disagree 28 with you on that. 1298 KENT/McGILL, cr-ex (Janigan) 1 My understanding again from a very 2 lay perspective is that there may be some circumstances 3 in which accounting for regulatory purposes may differ 4 from generally accepted accounting practice. This, as 5 I understand it, is one of those circumstances. 6 MR. JANIGAN: Before we get into the 7 circumstances of undertakings, let me develop this 8 further and then maybe I can roll -- if it is necessary 9 for you to refer to someone else to answer the 10 question, then I can perhaps roll it into one general 11 undertaking. 12 I want to get to the allocation of 13 these costs initially to CIS and these include -- I am 14 including -- first of all, the BPR and analysis phase 15 work are all direct costs and were allocated directly 16 to the CIS program. 17 MR. KENT: That is correct. 18 MR. JANIGAN: Yes. And they were to 19 be capitalized when the CIS program came in service. 20 MR. KENT: That was the practice that 21 was followed for all of the SIM projects, and the 22 intent I think was consistently applied. 23 MR. JANIGAN: In terms of these 24 particular costs, if they were capitalized, as I would 25 suggest they were because development of the CIS 26 software was development of a capital asset, can you 27 suggest what might happen to those costs when they are 28 transferred out of the company -- when the asset is 1299 KENT/McGILL, cr-ex (Janigan) 1 transferred out of the company? 2 MR. McGILL: I think, Mr. Janigan, 3 even though the asset, the software asset, is to be 4 transferred out of the company, the stream of benefits 5 that flowed from the BPR work is an asset that stays 6 with the company. That is the rationale behind 7 capitalizing the BPR and the indirect costs and 8 the IDC. 9 MR. JANIGAN: I take it, Mr. McGill, 10 that initially you have expended costs to create the 11 CIS software, which are the direct costs associated 12 with the BPR. That expenditure has created a stream of 13 benefits that is independent of the CIS software so 14 that when the software is transferred out of the 15 company we can take those expenses and capitalize them 16 anyway even though the asset is gone. 17 MR. KENT: No. I think, Mr. Janigan, 18 as I recall the first part of your question, you said 19 that the BPR was undertaken to develop the CIS software 20 and I think that is where the fundamental flaw is in 21 the logic. 22 The BPR work was undertaken to 23 understand what processes the company should in future 24 adopt in dealing with its customers. How could we best 25 serve our customers? How could we break away from our 26 old approaches that were limited by our old IT systems 27 and our traditional perspectives on things? How could 28 we do things better from a customer's perspective? 1300 KENT/McGILL, cr-ex (Janigan) 1 The end result of that was a number 2 of changes to our business processes, which we made 3 immediately and delivered immediately significant 4 savings to customers, and then led to ideas that could 5 be included through the analysis phase in 6 specifications for a CIS system. 7 But there were really two outputs 8 from BPR. One was, as I said, the basic improvements 9 in systems and processes that could be made without 10 software, and those were delivered. The other was 11 information that was valuable in setting out the 12 specifications for a new software. But they are two 13 independent things. 14 MR. JANIGAN: I understand what may 15 be accomplished with BPR and the analysis phase but, as 16 a matter of cost allocation, you have elected to treat 17 those costs as capital expenses. Would you agree? 18 MR. KENT: Again, lacking accounting 19 qualifications, my understanding was that since the 20 expenditures were intended to provide for a stream of 21 ongoing benefits over a period of time, not just a 22 one-year benefit but something that would continue over 23 a period of time, there was a good and sound argument 24 for capitalizing those expenditures. 25 I think that is what the Board 26 approved in approving the process of capitalizing IT 27 expenditures generally on software in the initiation of 28 the SIM project in E.B.R.O. 473. 1301 KENT/McGILL, cr-ex (Janigan) 1 MR. JANIGAN: Can we not draw a 2 distinction, Mr. Kent, between possibly the amortizing 3 of expenses, as was done in the Boston Gas case, and 4 the capitalization of expenses that you have proposed 5 throughout the SIM program for the BPR expenditures? 6 MR. KENT: I am not sophisticated 7 enough, Mr. Janigan, to understand the difference given 8 that the period of time over which the expenditures are 9 recovered is five years in the case of our SIM projects 10 and five years in the case of the Boston Gas BPR. 11 There may be a distinction. I just 12 don't know what it is. 13 MR. JANIGAN: Would you agree with me 14 that in general terms it is preferable for the company 15 to capitalize expenses such as this? It is preferable 16 for the shareholders of the company. 17 MR. McGILL: Not necessarily. I 18 think it depends on the nature of the expenditure and 19 the life of the asset or service that has been 20 acquired. 21 THE PRESIDING MEMBER: Mr. Janigan, 22 capitalized as opposed to expense it or as opposed to 23 amortize it? 24 MR. JANIGAN: That's correct. Well, 25 of the three alternatives I would say that it would be 26 preferable to add it to rate base and capitalize it in 27 the circumstance than it would be to apply it as a 28 current expense. 1302 KENT/McGILL, cr-ex (Janigan) 1 THE PRESIDING MEMBER: Or amortize 2 it -- 3 MR. JANIGAN: Or amortize it, yes. 4 MR. McGILL: I think there are a 5 number of criteria that one considers when they make a 6 decision between expensing something and capitalizing 7 it. The difference between capitalizing an expense and 8 amortizing it over the same period of time, subject to 9 the same cost recovery rules, I don't think it would 10 have an effective difference in the company's cost of 11 service. 12 MR. JANIGAN: Now, I don't know, 13 panel, whether or not you are the best panel to ask 14 this question, but if I could ask: What was the reason 15 for the capitalization of the CIS expenditures, the 16 BPR -- I'm sorry -- what was the reason for the 17 capitalization of the BPR and analysis expenses in CIS? 18 MR. KENT: We can take a stab at it, 19 Mr. Janigan. 20 Because CIS was part of SIM we were 21 following the same accounting conventions and practices 22 that were used for all of the SIM projects. As I think 23 I said yesterday, where projects were fairly short in 24 duration the expenditures could be made over a fairly 25 short period of time and the benefits that could be 26 achieved through the BPR work in terms of process 27 improvements were probably delivered within the same 28 fiscal year or close to it as the delivery of the 1303 KENT/McGILL, cr-ex (Janigan) 1 software itself. 2 So there would be a good matching of 3 the onset of recovery of the capital expenditures 4 through rates and the beginning of the benefit flow. 5 What's happened with CIS, primarily 6 because of the magnitude of the project and partly, I 7 think, in all fairness, because of the delays involved 8 in actually delivering the software, is that there is 9 quite a substantial time difference between the 10 commencement of the benefit flow from the BPR and the 11 completion of the software, so that the benefits are 12 there, the benefits have been delivered since the first 13 BPR process improvements associated with CIS were made. 14 But the software itself is only, now, coming before 15 this Board for the final decisions about how those 16 costs should be recovered. 17 MR. JANIGAN: So, if I can summarize 18 your answer, Mr. Kent, from what I understand, the 19 reason why these expenditures -- and, now, we are 20 talking about the BPR and the analysis phase 21 expenditure and the SIM start-up and the allocation of 22 SIM overhead -- were treated as capital expenditures it 23 was the best way to match the expenses with the stream 24 of benefits. Is that what you are saying? 25 MR. KENT: I think, in general, in 26 473, that was the fundamental reason for the Board's 27 decision to approve that approach. I, obviously, can't 28 speak for the Board but that certainly seemed to be the 1304 KENT/McGILL, cr-ex (Janigan) 1 outcome of the Board's decision, and it seemed to make 2 sense. 3 If we were, today -- let's get very 4 hypothetical about this -- but if we were, today, to 5 come before the Board, absent a PBR arrangement, and 6 say to this Board that we wanted to spend a further 7 $10 million on another business process improvement 8 exercise and put forward a business case that we could 9 achieve benefits three times the cost of the BPR, as 10 has been the case with this particular BPR, and the 11 Board were to say, "Well, that's good", there will be 12 an increase in rates if this is expensed in the test 13 year, and then a precipitous decline in rates, 14 subsequently, because there would no longer be the 15 costs of the BPR to be recovered, they would have been 16 recovered in the test year, plus all the benefits would 17 be flowing, I can well imagine that a decision might be 18 made that it would be best to spread that cost over a 19 period of time to smooth the impact on ratepayers and 20 to match the recovery of costs with the flow of 21 benefits. 22 MR. JANIGAN: But we can do that by 23 amortization, though, could we not, rather than by 24 capitalization? 25 MR. FARRELL: Define what you mean, 26 precisely, by "amortization". Do you mean amortized 27 but not part of rate base? Is that -- 28 MR. JANIGAN: That's correct. 1305 KENT/McGILL, cr-ex (Janigan) 1 MR. FARRELL: Thank you. 2 MR. KENT: I think this is a matter 3 we would have to discuss with others more expert than 4 ourselves, in the company, but, to me, it would have an 5 approximate equivalent effect. There might be some 6 rate-making implications that I'm not aware of. 7 MR. JANIGAN: Well, let's take the 8 supposition -- 9 THE PRESIDING MEMBER: Mr. Janigan, 10 just a minute. 11 In your questions, are you assuming 12 that in an amortization scheme there would be no 13 carrying costs? 14 MR. JANIGAN: No; there would be 15 carrying costs. 16 But it has relevance to this 17 particular circumstance where, if we look at -- if we 18 take my supposition that the reason that the expenses 19 are capital expenses rather than amortized O&M, if you 20 look at the total costs of the program which we used to 21 develop the SIM software, including the CIS program, if 22 you take out and transfer out the CIS program and 23 assign it a market value, as you assigned it, then it 24 is the rest of that program that has to bear the 25 additional costs? 26 MR. KENT: The other SIM projects, 27 though, are already closed to rate base. 28 I agree that if they were only, now, 1306 KENT/McGILL, cr-ex (Janigan) 1 coming to completion, it might be feasible to do 2 something like that, to redistribute the costs among 3 those other projects, though I'm not sure why you would 4 want to do it. It would be possible to do so. But 5 given that this is the last project and has attracted, 6 over the course of its development, an allocation of 7 those overhead costs, the SIM start-up costs and its 8 own direct costs, to us, the appropriate way to recover 9 it is to bring it forward for inclusion in rates. Our 10 proposal is to put it in rate base. It may be that an 11 amortization scheme of the type you have described 12 might have a similar advantage in smoothing the impact 13 on customers, but I'm not sure how exactly that would 14 work. 15 MR. JANIGAN: Well, let's take an 16 ordinary commercial situation where you are spending 17 money to develop a line of products -- and let's assume 18 that the SIM program was a line of products -- and you 19 have spent 180 million to develop those line of 20 products, one particular product for which you have 21 spent and allocated $120 million. Unfortunately, you 22 can only sell it, now, to recover 90 million of your 23 costs, so you are left with a $30 million deficit. You 24 are going to have to recover that amount from the rest 25 of the products of your company. Or take a loss. 26 MR. KENT: I think I'm following you, 27 Mr. Janigan. 28 MR. JANIGAN: Well, in the 1307 KENT/McGILL, cr-ex (Janigan) 1 circumstance here, what you have is a capital 2 expenditure program in which you have allocated 3 $30 million more to CIS than you are going to recover 4 from your transfer. 5 MR. KENT: But I think you are being 6 misled, perhaps, Mr. Janigan, by the SIM accounting 7 convention which had all costs lumped together, in a 8 fashion, under a single work-in-progress number for 9 both process improvement type work and the software 10 itself. 11 But all of that -- that was a 12 sensible approach, given the anticipation that the end 13 result would be capitalization of the whole thing. 14 But if the -- if the company had 15 known, when E.B.R.O. 473 was before this Board, that 16 this type of affiliate relationship might make sense, 17 in the future, I'm convinced that we would have 18 segregated costs of work directly associated with 19 utility process improvements from any costs associated 20 with the software. We would have used different 21 accounts if we had been able to envisage, at that time, 22 the type of arrangement we have today. 23 What we are trying to do, now, is to 24 go back and reconstruct that kind of separation. 25 MR. JANIGAN: But if you had, in that 26 circumstance, would you agree with me, Mr. Kent, they 27 wouldn't have been capital expenses? 28 MR. KENT: But I think that this 1308 KENT/McGILL, cr-ex (Janigan) 1 Board -- as I suggested earlier, in my hypothetical 2 example, if we had come before this Board and said, "We 3 want to spend $10 million on BPR work" -- well, it 4 would have been more if you had aggregated all the 5 other BPR projects together. If we had said, "We are 6 going to spend the money this year and it will result 7 in process improvements that would drive down rates in 8 subsequent years but the impact on rates is going to be 9 a big increase this year and then a significant 10 decline, a bigger decline, in the following year", the 11 Board would have felt that that's not a good way to 12 handle it, from a customer's perspective. There would 13 have been a desire to smooth the rate impact that would 14 have led to either the rate base treatment or the 15 amortization proposal that you suggested. 16 MR. JANIGAN: And it might not 17 have been associated with the particular assets, such 18 as CIS? 19 MR. McGILL: Well, it would have been 20 associated with SIM. 21 I think another way to look at this 22 is to say, what would have happened if, in 1996, we 23 decided to just stop the BPR work, at that point in 24 time, take the benefits that are derived from that. We 25 would have had $10.4 million of direct costs and 26 13.3 million worth of SIM allocation to that project 27 that would have gone into rate base, in 1996. 28 MR. KENT: And we would have 1309 KENT/McGILL, cr-ex (Janigan) 1 delivered, over the course of a reasonable amortization 2 period for that expenditure, we would have delivered, 3 according to our evidence, something close to 4 $90 million in benefits to ratepayers. 5 MR. JANIGAN: Gentlemen, you must 6 understand my problem. I look at a balance sheet that 7 shows me that you spent approximately $30 million more 8 on capital expenditures for CIS than you are going to 9 get back in your fair market value transfer. I mean 10 that's what your cost allocation shows, at this point 11 in time. 12 MR. KENT: But, Mr. Janigan, what we 13 did was to look at the assets that should go to the 14 affiliate. What -- if you try and look at it from the 15 affiliate's perspective, what would the affiliate buy? 16 The affiliate would buy the software, because that is 17 what has value. A business process re-engineering 18 expenditure by Enbridge Consumers Gas on improving its 19 business processes leads to benefits for Enbridge 20 Consumers Gas and its ratepayers, not to Newco. 21 MR. JANIGAN: But the asset -- I mean 22 that, essentially, is the asset that you are 23 transferring. 24 MR. KENT: What is the asset? 25 MR. JANIGAN: The CIS software. 26 MR. KENT: Correct. So what we have 27 done is to segregate out the costs of developing that 28 CIS software. 1310 KENT/McGILL, cr-ex (Janigan) 1 MR. McGILL: The only way it would 2 make sense to transfer the $30 million in BPR would be 3 also to transfer the benefits that derive from that as 4 well to the Newco. 5 MR. JANIGAN: But you have accounted 6 for it by way of putting it in the CIS program. 7 MR. FARRELL: This is becoming a 8 debate or an argument, I think, Mr. Chair. 9 MR. JANIGAN: I think you are 10 correct. Let me move on. 11 With respect to the fees that you are 12 proposing to charge the utility for the services 13 agreement, can you tell me what you are proposing to 14 have approval in this proceeding? Are you proposing 15 only the fee associated with the Year 2000? 16 MR. FARRELL: Do you mean 17 fiscal 2000? 18 MR. JANIGAN: Fiscal 2000, yes. 19 MR. KENT: It is our understanding 20 that the Board has ruled that Z-factors like the CIS 21 Z-factor would be subject to review in each year. So, 22 for that reason, I think the ratemaking impacts that we 23 are talking about here are only for fiscal 2000. 24 MR. JANIGAN: So the quantum of the 25 fee would be reviewed in each rate case, as you 26 understand it. Or, it may be reviewed in each rate 27 case. 28 MR. KENT: Yes. It would be my 1311 KENT/McGILL, cr-ex (Janigan) 1 interpretation of the Board's decision in the PBR case 2 that that was the intent, yes. 3 MR. JANIGAN: You have touched on the 4 issue of delay with a number of my friends, and I don't 5 want to revisit it, but am I correct in my 6 understanding that, apart from the expenses associated 7 with the Y2K remediation of the Legacy systems, there 8 have been no adjustments to the expenses as a result of 9 delay? 10 MR. KENT: There have been no 11 impacts -- we foresee no impact on ratepayers as a 12 result of the delay, because what we are asking for 13 inclusion in rates for is the BPR and analysis phase 14 work that was done at an early stage before design and 15 development of the project itself began, and because 16 the market-based fee that is being charged to the 17 utility, and ultimately to be recovered through rates, 18 is something that is independent of the cost of the 19 asset being transferred to Newco. 20 So if Newco ends up paying a larger 21 amount for the software than would have been possible 22 had the project been delivered earlier, it is the owner 23 of Newco that suffers that loss. 24 We talked very briefly yesterday 25 about the situation where, if it had been possible to 26 deliver CIS for $10 million, then the owner of Newco 27 would be making out very nicely, thank you. But if the 28 costs are much higher than that, then it is the owner 1312 KENT/McGILL, cr-ex (Janigan) 1 of Newco that has a problem. 2 MR. JANIGAN: But there has been a 3 delay in the stream of benefits that were to be 4 provided by CIS. 5 MR. KENT: Yes, that is correct. 6 Although the BPR benefits were all delivered 7 immediately, the benefits that are contingent on the 8 software itself have been delayed as a result of the 9 delay in the in-service date for CIS. That is correct. 10 MR. JANIGAN: And the actual cost 11 consequences, in terms of expenditures that have had to 12 be made as a result of delay, in terms of the Y2K 13 remediation, those are being picked up in the transfer, 14 as I understand it. 15 MR. KENT: The Y2K costs are going to 16 be borne by Newco, yes. 17 MR. JANIGAN: But there is no 18 adjustment for the delay in the stream of benefits for 19 the CIS program. 20 MR. KENT: The NPV calculation and 21 the cost benefit calculation have been adjusted to show 22 the timing of the realization of those benefits. But, 23 to the extent that the organization might have been 24 able to reassign some people earlier, if CIS had been 25 delivered earlier, and to the extent that that might 26 have resulted in lower operating costs, for example in 27 fiscal 1998 or 1999, that has not been reflected in the 28 calculation. 1313 KENT/McGILL, cr-ex (Janigan) 1 MR. JANIGAN: And the reason that has 2 not been reflected in the calculation is? 3 MR. KENT: I don't know how you 4 would. How would you suggest that it be reflected? 5 It is in the cost benefit analysis, 6 but -- 7 MR. JANIGAN: Yes. It is a natural 8 consequence of delay. 9 MR. KENT: Yes, it is. There is a 10 delay in realization of benefits and there is a delay 11 in the costs of CIS flowing to ratepayers. 12 Ratepayers weren't getting the 13 benefits from CIS, but, equally, they weren't paying 14 the costs because it was still an unfinished work in 15 progress. 16 MR. JANIGAN: But the benefits -- as 17 I understand your testimony, the benefits are to exceed 18 the costs. 19 MR. KENT: They do. We would have to 20 go back and look to see what the impacts would be of 21 the incremental benefits that are not flowing, as 22 opposed to the costs of CIS. In fact, we could get an 23 idea of it by looking at our table -- looking at the 24 Z-factor in our new evidence. 25 You are nodding, Mr. Janigan. You 26 must have been ahead of me. 27 MR. JANIGAN: That is what I was 28 going to suggest. 1314 KENT/McGILL, cr-ex (Janigan) 1 MR. McGILL: It is B1, Tab 8, 2 Schedule 3, page 11. 3 MR. KENT: What happens is, because 4 there is a phase-in of the system, there is also a 5 ramping up of the benefits. 6 But if you look at the test year, for 7 example, the incremental O&M savings that will flow 8 from the existence of the CIS software are just under 9 $2 million, and $3.5 million is forecast for 2001. 10 Now, this chart can't be used 11 completely to show the costs, but you can get an idea 12 of the net cost of CIS coming into operation from the 13 amount of the CIS fees less a hosting revenue. 14 I guess what this is saying is that 15 the incremental benefits delivered by the software 16 itself would be less in the test year than the costs 17 of CIS. 18 MR. JANIGAN: But down the line, I 19 would assume that the benefits would increase. I guess 20 they would never subsume your fees. 21 MR. KENT: Certainly the benefits 22 continue to increase over the term of this chart, and 23 we have provided elsewhere in our evidence some other 24 forecasted benefit flow that we could use to forecast 25 out to about 2006, I think. 26 MR. JANIGAN: If you turn up B2, 27 Tab 7, Schedule 1, you have listed there a number of 28 different categories of benefits for CIS. 1315 KENT/McGILL, cr-ex (Janigan) 1 MR. KENT: Yes. 2 MR. JANIGAN: I don't want to explore 3 all of these with you, but as I understand it the 4 benefits that are associated with reduced and avoided 5 labour costs in information services are based on a 6 supposition established earlier in the program that 7 without CIS, IS costs would increase by 6.75 per cent 8 per year. 9 MR. KENT: I believe that number is 10 correct, yes. 11 MR. JANIGAN: So it is based on 12 avoiding that expenditure that we see the benefits in 13 the information services category in reduced and 14 avoided labour, in part. 15 MR. KENT: Yes, they would be 16 contributors to it. 17 We may be going back a long way here, 18 Mr. Janigan, but the benefits forecasting processes 19 that were used by the company were reviewed in the EDS 20 audit, as I am sure you recall, and at that time EDS 21 did feel that it was appropriate to adjust the benefits 22 forecast that the company had made and to make a 23 downward adjustment in it. We have included that 24 downward adjustment in our cost benefit analysis 25 looking at the BPR work. 26 I don't think it appears here because 27 of the -- I think probably it was the timing of events. 28 But even if we did take that downward adjustment 1316 KENT/McGILL, cr-ex (Janigan) 1 suggested by EDS into account, the cost benefit ratio 2 still looks extremely good. 3 MR. JANIGAN: As well, on Exhibit B2, 4 Tab 7, Schedule 1, page 3. 5 MR. KENT: Yes. 6 MR. JANIGAN: We have information 7 services staff that would be required to implement 8 enhancements to the existing Legacy systems without CIS 9 and we have an annual cost of almost $5 million 10 associated with that. 11 MR. KENT: That's in a table entitled 12 "Current CIS Benefit Flow". The reason it appears 13 there is that when the company embarked on SIM, there 14 was a decision taken that we would scale back to the 15 absolute minimum the amount of work that was done on 16 modifying and enhancing the existing Legacy systems. 17 The people were moved to work on developing the new 18 systems. 19 We tried to accommodate or 20 incorporate all of the improvements that were needed 21 into the new system rather than making them 22 simultaneously in both the old and new systems. We 23 scaled right back on the cost of maintaining the older 24 systems while the new ones were being developed and 25 that resulted in an immediate and direct decrease in 26 O&M costs and a benefit to ratepayers. 27 MR. JANIGAN: And that represents 28 what it would have cost to implement the enhancements 1317 KENT/McGILL, cr-ex (Janigan) 1 to the Legacy systems. 2 MR. KENT: This represents the 3 difference between the actual costs incurred in the IS 4 group to maintain the Legacy systems and the cost that 5 would have been incurred if we continued to maintain 6 them and keep them up to date essentially. 7 MR. JANIGAN: But there's no netting 8 out against any benefits that might have accrued as a 9 result of the enhancements to the Legacy system. 10 MR. KENT: Well, the enhancements to 11 the systems were all focused on the new systems. 12 MR. JANIGAN: I realize that, but 13 this is an amount that you would have had to spend. 14 You haven't netted that out against any benefits that 15 would have accrued if you had spent this money in the 16 Legacy system. 17 MR. KENT: Yes, I suppose that's 18 correct, but I'm not sure that it would be easier to 19 quantify the extent of those benefits during that 20 interim period while the new software was under 21 development. 22 MR. McGILL: Plus any of those 23 benefits would have been short-lived. 24 MR. JANIGAN: A couple of clean-up 25 questions. 26 I note in the evidence somewhere that 27 Computer Sciences Corporation had been retained on and 28 off for computer services over the past few years. 1318 KENT/McGILL, cr-ex (Janigan) 1 MR. KENT: I would say it's probably 2 the last two years, yes. 3 MR. JANIGAN: And does it continue to 4 be retained for any services by the company? 5 MR. KENT: I don't believe so. Not 6 to my knowledge, other than, of course, Mr. Diamond's 7 appearance here as an expert witness. 8 MR. JANIGAN: Yes. 9 Thank you, Mr. Chair. 10 Those are all my questions for this 11 panel. 12 I intend to withdraw until tomorrow. 13 That does not mean that I am not interested in the 14 evidence that I am proffering in the form of 15 Ms Williams, but I trust that she will be amply 16 defended by my colleagues here. To paraphrase 17 Harry Truman, if you can't stand the heat, stay out 18 of the hearing room. 19 I might be happy to engage in other 20 matters this afternoon and put my time to use. I will 21 return for the capital one. 22 THE PRESIDING MEMBER: Thank you, 23 Mr. Janigan. 24 MR. FARRELL: Before Mr. Janigan 25 leaves, Mr. Chair, I'm wondering whether it might be 26 useful for reference purposes to mark Appendix F from 27 the E.B.R.O. 492 decision with reasons just so it's 28 available. 1319 KENT/McGILL, cr-ex (Janigan) 1 MS DESAI: That would be 2 Exhibit K8.1. 3 EXHIBIT NO. K8.1: Appendix F 4 from E.B.R.O. 492 Decision with 5 Reasons 6 THE PRESIDING MEMBER: Mr. Thompson, 7 when you are ready. 8 MR. THOMPSON: Thank you, 9 Mr. Chairman. 10 CROSS-EXAMINATION 11 MR. THOMPSON: Panel, there are three 12 main topics to this cross-examination. There's an 13 introductory section where I just want to clarify, if I 14 can, the precise plans that the company is making in 15 terms of costs recoverable and rates. 16 The second is really an analysis 17 section of those claims and their implications and 18 their reasonableness which is a very complex topic. 19 The third is a topic for Mr. McGill 20 which is the impact on distribution rates of the rental 21 program's use of the billing system in the test year 22 which was referred from Ms Gould, I believe it was. 23 If I could just move firstly then to 24 the introduction portion. On the rate base side of the 25 ledger, as I understand it, there are two items related 26 to IS and CIS. The first is your request to close to 27 rate base the $30.25 million of costs heretofore 28 associated with the CIS project. You have discussed 1320 KENT/McGILL, cr-ex (Thompson) 1 that at length with other questioners. 2 MR. KENT: Yes. 3 MR. THOMPSON: And the second item is 4 the IS budget, capital budget, for the test year which 5 is, I believe, a $21 million item. 6 MR. KENT: It is Mr. Willett's 7 evidence, but I will do my best to speak to it. My 8 belief is that it's approximately $19 million in the 9 test year. 10 MR. THOMPSON: Well, I took the 11 $21 million from the B exhibit which I assumed the 12 major component was information services. Let's just 13 turn it up to make sure we are focusing on the right 14 number. 15 MR. KENT: Mr. Thompson, I'm looking 16 at Exhibit B2, Tab 6, Schedule 1. 17 MR. THOMPSON: I'm not. I'm looking 18 at Exhibit B3, Tab 2, Schedule 1, line item 1.3.5 where 19 we have computers and communication equipment, 20 $21 million. 21 MR. KENT: We will pull that other 22 one up. If you could perhaps check the reference I 23 just gave you too while we are pulling this other 24 one up. 25 --- Pause 26 MR. KENT: I think, Mr. Thompson, the 27 distinction is that the line 1.3.5 on B3, Tab 2, 28 Schedule 1, page 1, includes in addition to computer 1321 KENT/McGILL, cr-ex (Thompson) 1 equipment, it includes things like meter reading 2 equipment, the hand-held equipment that's used by meter 3 readers, automatic meter reading technology and some 4 other items of that nature. 5 MR. THOMPSON: So that reconciles the 6 number you are referring to. 7 MR. KENT: I believe that it does. 8 It's a discrepancy that we discussed on other occasions 9 in other cases. 10 MR. THOMPSON: Would you just 11 undertake to check the -- well, reconcile the 12 $21 million with the nineteen and some odd million that 13 is in the IS capital budget claim. 14 MR. KENT: Yes. I can undertake to do 15 so. The IS capital budget is shown as $18,953,000 and 16 that's in B2, Tab 6, Schedule 1, page 1. 17 MS DESAI: Undertaking J8.2. 18 UNDERTAKING NO. J8.2: Mr. Kent 19 to reconcile nineteen and some 20 odd million in IS capital budget 21 claim 22 MR. THOMPSON: In terms of the O&M 23 claims that you are seeking as part of the proposal, 24 essentially what you are proposing is a Z-factor 25 adjustment, which is a combination of a number of 26 items. 27 In the test year, this increases the 28 O&M base by $5,707,000; correct? 1322 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: My understanding, 2 Mr. Thompson, is that it has no impact on the O&M base 3 as such. But perhaps I am misunderstanding. 4 MR. THOMPSON: It increases O&M 5 expenses over and above the base which has been bumped 6 up by the 4.61 per cent. 7 MR. KENT: It represents a cost that 8 needs to be recovered from ratepayers in the test year. 9 It is a cost that shows up in this category, and there 10 is an offsetting and in fact greater reduction in the 11 rate base carrying costs. Instead of putting CIS in 12 rate base, as had been initially proposed, the costs 13 would be recovered through this fee. 14 The net effect for ratepayers, as was 15 shown in the response to one of your interrogatories, 16 Mr. Thompson, is a reduction of approximately 17 $3.5 million in the revenue requirement in the test 18 year. 19 MR. THOMPSON: I will come to that in 20 a moment. I am just trying to get -- the O&M component 21 of the cost of service related to your proposals will, 22 if they are accepted, increase by $5,707,000 above the 23 PBR base which has been moved up by 4.61 per cent. 24 Is that correct? 25 MR. KENT: Well, just so we are clear 26 here, Z-factors are part of the PBR formula. The CIS 27 Z-factor for 2000 is $5.7 million. To that extent, 28 those costs would be reflected in 2000 O&M. 1323 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Thank you. Again, the 2 test year is a little unusual, the test year 3 Z-factor -- I am looking at B1, Tab 8, Schedule 3, 4 page 11 -- because in that year we have a temporary 5 phase-in credit. 6 MR. KENT: That is correct. 7 MR. THOMPSON: So to get a reasonable 8 view of the impact on the O&M claim, we really should 9 look at Forecast 2001, which gives us the full year 10 impact of your proposals, including the phase-in 11 credit. 12 MR. KENT: That is correct. But 13 again, the phase-in credit essentially matches the 14 phase-in of closings of the capital amount of CIS to 15 rate base that had been anticipated in our earlier 16 evidence. 17 So there is essentially the same 18 effect on ratepayers of the phase-in credit as there 19 would have been from a staged closing of the CIS 20 project cost to rate base. 21 MR. THOMPSON: Just try and stick 22 with -- don't try and anticipate something that I 23 haven't asked. 24 I am just asking: What is the impact 25 on the O&M component of your claim when the phase-in 26 credit is eliminated and it is approximately a Z-factor 27 of $8.5 million? 28 MR. KENT: That is correct, 1324 KENT/McGILL, cr-ex (Thompson) 1 Mr. Thompson. That is set out in our evidence. 2 MR. THOMPSON: That is a Z-factor 3 about $2.8 million greater than the Z-factor in the 4 year where we have a phase-in credit. That is the 5 mathematical result of subtracting one from the other. 6 MR. KENT: Yes, I follow you, 7 Mr. Thompson. 8 MR. THOMPSON: Am I correct that this 9 Z-factor is being applied after the O&M base has been 10 grossed up by 4.61 per cent? 11 MR. KENT: I'm afraid I am not in a 12 position to answer that, Mr. Thompson. I believe that 13 that is the case. But if you need a more definite 14 answer in that respect, we will have to confirm it with 15 others. 16 MR. THOMPSON: Are you in a position 17 to confirm it, Mr. McGill? 18 MR. McGILL: Well, I think we 19 reviewed the workings of the PBR formula last 20 Wednesday. My understanding of the way the formula 21 works is that the Z-factors are either added or 22 subtracted to the product of applying the gross factor, 23 the productivity factor, and the CPI factor to the O&M 24 base in any particular year. 25 So yes, as far as I understand the 26 way the PBR formula works, that would be the effect: 27 that you would go through the exercise of applying the 28 factors and then add or subtract Z-factors from the 1325 KENT/McGILL, cr-ex (Thompson) 1 formula. 2 MR. THOMPSON: All right. So that 3 then brings me to -- 4 MR. FARRELL: Just a second. I 5 should note for the record that the percentage that 6 Mr. Thompson is quoting may or may not be affected by 7 the exhibit that I filed yesterday that has the updated 8 CPI consensus forecast. 9 MR. THOMPSON: Yes, I accept that; 10 thank you. 11 That then brings me to the exhibit 12 that was filed that shows the unbundled budget in 13 E.B.O. 179-14/15, which was marked as Exhibit K3.3. 14 Do you have that? 15 MR. KENT: Yes, we do. 16 MR. THOMPSON: When we were before 17 the Board in 179-14/15, there was a discussion as to 18 the line items in this budget that contain costs 19 pertaining to CIS. The discussion was with Mr. Grant, 20 and I have provided your counsel and the company with 21 the various excerpts of information where this was 22 discussed. I will get to them in a moment. 23 Have you had an opportunity to review 24 those items? 25 MR. KENT: Yes, we have. 26 MR. THOMPSON: To try and move this 27 along, before I get to the documents, we were told that 28 CIS costs are included in line 4.2, Customer Support. 1326 KENT/McGILL, cr-ex (Thompson) 1 Can you confirm that? 2 MR. McGILL: Do you mean CIS costs or 3 assets, or the impact of the Z-factor, just to be 4 clear? 5 MR. THOMPSON: This budget includes 6 costs associated with providing customer support 7 functions in the test year; correct? 8 MR. McGILL: Yes, it does. 9 MR. THOMPSON: Within the customer 10 support functions covered in this unbundled budget 11 approved by the Board there are the CIS functions, 12 which involve data storage, on-line inquiry, billing 13 and then there are related functions that are described 14 in your prefiled evidence. 15 MR. McGILL: Just to be clear, what 16 we have here is the 1999 unbundled budget. 17 MR. THOMPSON: We have the bundled 18 and the unbundled; right? 19 MR. McGILL: Yes, that is correct. 20 In that line 4, the total Customer 21 Support Services cost, there are no information 22 technology costs related to CIS or the Legacy system. 23 MR. THOMPSON: Maybe I will just have 24 to do it by filing these documents. 25 MR. KENT: We are prepared to follow 26 with you, Mr. Thompson, if you care to ask us another 27 question. 28 MR. THOMPSON: Let me just file 1327 KENT/McGILL, cr-ex (Thompson) 1 these. This will be the best way to do it. 2 --- Pause 3 MR. THOMPSON: What I have provided, 4 Mr. Chairman, I would like to mark it just as a 5 package. 6 MS DESAI: That would be K8.2 for the 7 whole package of material. 8 MR. THOMPSON: A description of the 9 documents: They consist of IGUA Interrogatory No. 37 10 in the E.B.O. 179-14/15 case; transcript reference 11 962 to 965; undertaking response Exhibit H6.4; and 12 undertaking response H4.2. 13 EXHIBIT NO. K8.2: Package of 14 documents containing IGUA 15 Interrogatory No. 37 in the 16 E.B.O. 179-14/15 case; 17 transcript reference 962 to 965; 18 undertaking response Exhibit 19 H6.4; undertaking response H4.2 20 THE PRESIDING MEMBER: Have the 21 witnesses had an opportunity to look at this 22 beforehand, or not? 23 MR. FARRELL: Yes, they have. 24 Mr. Thompson alerted us to this yesterday. 25 MR. McGILL: Well, we have seen parts 26 of this, not the package in its entirety. 27 THE PRESIDING MEMBER: Mr. Thompson, 28 maybe for our benefit as well, maybe we can take a 1328 KENT/McGILL, cr-ex (Thompson) 1 break now so that the Board will have an opportunity to 2 just glance at this. 3 MR. THOMPSON: Well, you don't need 4 to look at it all. 5 Perhaps I could just highlight what I 6 am focusing on here. 7 THE PRESIDING MEMBER: Okay, but we 8 still need a break. 9 MR. THOMPSON: Pardon? 10 THE PRESIDING MEMBER: We still need 11 a break, but go ahead. 12 MR. THOMPSON: No, I understand. But 13 I don't want you to read it all because there are 14 segments of it that are important. 15 First of all, if you look at the -- 16 the documents should be arranged in the following 17 order, IGUA 37, then the transcript, then 18 Undertaking H6.4, followed by Undertaking Exhibit H4.2. 19 You will see what we were seeking in 20 item (e) of Interrogatory 37 was an identification by 21 line of all of the costs in the Board-approved O&M 22 expense allowance which relate to functions which will 23 be performed by the CIS system when it is implemented. 24 That is the first section that you 25 should look at. 26 Then if you go to page 3, at the 27 bottom, the company's response to that question was 28 that line items 4.2, 4.4, 4.5, 5.7 and 5.11 encompass 1329 KENT/McGILL, cr-ex (Thompson) 1 costs relating to the CIS system. 2 Then the cross-examination of 3 Mr. Grant. If you look at page 963, starting at 4 line 24, I directed his attention to this segment of 5 the interrogatory and asked him, on page 964, whether 6 in effect these line items were strained by the PBR 7 formula or whether they were open items when we got to 8 this case. 9 You will see the answer that he gave 10 at the bottom of the page and it carries on over 11 to 965. 12 So we have identified those line 13 items. We have also identified Y2K and DSM. That was 14 left on the basis that if there was any change in that 15 summary of the line items that were not caught by the 16 PBR formula they were to report. 17 The undertaking response that was 18 given for that report was Exhibit H6.4. 19 If you go to page 2 of that document, 20 question 3, you will see the question was: 21 "Are Y2K, DSM and the line items 22 described at pages 3 and 4 of 23 Exhibit D, Section 10.37 all of 24 the line items that are not 25 constrained by the PBR formula?" 26 The answer was: 27 "No. For a discussion of ..." 28 this see the company's response to Exhibit H4.2. 1330 KENT/McGILL, cr-ex (Thompson) 1 That was an exhibit that had been 2 filed, as I recall it, prior to the filing of the -- or 3 filed on the same day actually, but it referenced an 4 undertaking given earlier. So I think you should 5 really read all of Exhibit H4.2 to get the complete 6 picture. 7 But my only point here is that from 8 IGUA's position these line items were to be open items 9 that we were to deal with deductions from them, if 10 appropriate, before we applied any PBR formula 11 4.61 per cent. 12 So that is why I am taking the 13 witnesses in this difficult way to this information. 14 THE PRESIDING MEMBER: Thank you, 15 Mr. Thompson. That helps. 16 A little break for 20 minutes. We 17 will return at 11:30. 18 MR. FARRELL: Before you break, 19 Mr. Chair -- if I could just interrupt your 20 departure -- I am now wondering if Mr. Thompson could 21 give us some sort of estimate of his time. 22 I am now thinking about Mr. Warren 23 and Ms Williams appearing at two o'clock or after the 24 luncheon break, perhaps with the expectation that she 25 would be empanelled. Our preference would be that this 26 panel finish before her. 27 Our second preference would be that 28 our witness, Mr. Diamond, follow these witnesses, which 1331 KENT/McGILL, cr-ex (Thompson) 1 may or may not mean that Ms Williams would be put over 2 until tomorrow. 3 Perhaps we could think about that 4 over the break and then if we can get some sense of 5 timing then we could alert Mr. Warren accordingly. 6 THE PRESIDING MEMBER: Perhaps you 7 can touch base with Mr. Thompson, Mr. Farrell. 8 MR. FARRELL: Thank you, Mr. Chair. 9 --- Upon recessing at 1106 10 --- Upon resuming at 1137 11 THE PRESIDING MEMBER: Please be 12 seated. 13 Mr. Farrell. 14 MR. FARRELL: I think we have settled 15 on the scheduling problem. My understanding from 16 Ms Girvan who has spoken to Mr. Warren is that 17 Ms Williams would prefer to appear in the morning 18 rather than this afternoon. So with some luck we may 19 finish this panel and Mr. Diamond as well. 20 If we don't finish Mr. Diamond, I 21 would propose we finish him in the morning, then 22 Ms Williams can testify and then we will be bring back 23 the second instalment of Panel 10. 24 THE PRESIDING MEMBER: If we finish 25 with this panel early today, then Mr. Diamond will come 26 on this afternoon? 27 MR. FARRELL: Yes. 28 THE PRESIDING MEMBER: All right. 1332 KENT/McGILL, cr-ex (Thompson) 1 Mr. Thompson. 2 MR. THOMPSON: Yes. Thank you, 3 Mr. Chairman. 4 Panel, you have had an opportunity to 5 look at the segments of Exhibit K8.2 that I discussed 6 before the break. Do you accept what we were told in 7 the portion of IGUA 37 at page 4 the last time that the 8 line items in which costs pertaining to CIS are 9 contained are 4.2, 4.4, 4.5, 5.7 and 5.11? 10 MR. McGILL: What we said in the 11 interrogatory response was that those items relate to 12 functions which will be performed by the customer 13 information system when it is implemented, so that -- 14 and we do accept that response. 15 MR. THOMPSON: All right. 16 Are we quibbling -- the functions are 17 being performed now in some fashion. The functions of 18 data collection, the inquiry, billing and the other 19 related functions are being performed and the costs are 20 in the 1999 budget. 21 MR. KENT: That's correct, with 22 respect to the cost of performing those functions using 23 the old systems. But you are absolutely correct, 24 Mr. Thompson. 25 MR. McGILL: And they are also in the 26 PBR base. 27 MR. THOMPSON: Are they in these line 28 items -- that is really all I want to nail down -- or 1333 KENT/McGILL, cr-ex (Thompson) 1 am I missing some of the line items? 2 For example, line item 4.3. I would 3 have thought some of the costs associated with 4 performing the functions would be in that line item. 5 MR. McGILL: I think various parts of 6 the company's operation will be affected by the 7 implementation of CIS and, to a large extent, those 8 functions are in the area of customer support. 9 MR. THOMPSON: Right. Which is 10 booked in the line items that we have discussed. Is 11 that right? 12 MR. McGILL: They are set out in 13 those line items in the 1999 unbundled budget that is 14 appended or part of that interrogatory response. 15 MR. THOMPSON: All right. 16 Do you accept that we were told last 17 day that these line items in which CIS costs appear 18 would not be affected by the PBR formula? 19 MR. KENT: No, I don't. 20 MR. THOMPSON: You don't accept that. 21 What do you say we were told in the last case? 22 MR. McGILL: I would take you back to 23 the transcript where Mr. Grant says, at page 964, 24 beginning at line 21, his response to you was: 25 "No, no, any incremental cost 26 reductions from the PBR base 27 that result from the delivery of 28 CIS will be flowed to ratepayers 1334 KENT/McGILL, cr-ex (Thompson) 1 by way of `Z' factor and all of 2 that information..." 3 End quote. 4 MR. THOMPSON: I see. That is 5 interesting. 6 You are suggesting that when we asked 7 these questions -- let's just pick it up starting at 8 964 at line 4, where after describing the interrogatory 9 response I said: 10 "And we were told that these 11 line items may be affected by 12 the Customer Information System 13 when it is implemented. 14 Do I correctly understand 15 that that means that those line 16 items are not constrained by the 17 formula?" 18 And then Mr. Grant went on: 19 "A. I think I can answer the 20 question, that particular 21 question, now and I won't take 22 long. 23 In the transcript over the 24 last couple of days we've 25 indicated, Mr. Thompson, and you 26 don't have the benefit of this I 27 appreciate, but any incremental 28 cost reductions associated with 1335 KENT/McGILL, cr-ex (Thompson) 1 delivery of CIS..." 2 He was talking about cost reductions: 3 "...we're proposing be `Z' 4 factored back to ratepayers. 5 And I would presume that it 6 would be affecting some of the 7 five areas that are shown here 8 in this response." 9 My question: 10 "Q. So if these go up or down, 11 that'll be tested in the next 12 case? My understanding is that 13 these lines are not constrained 14 by the formula? 15 A. No, no, any incremental cost 16 reductions from the PBR base ... 17 from the delivery of CIS will be 18 flowed to ratepayers by way of 19 `Z' factor and all of that 20 information, that amount will be 21 brought forward in the next 22 case." 23 Are you saying that the line items 24 were constrained, that's what he was telling us? 25 MR. McGILL: No. What I am saying is 26 that these line items would not be tested in the next 27 case. 28 MR. KENT: Mr. Thompson, we may be 1336 KENT/McGILL, cr-ex (Thompson) 1 somewhat at a disadvantage because, from my perspective 2 at least, I was not closely involved in the PBR case. 3 You have been very effective in the 4 past in telling us what point you want to make and then 5 having us understand that and then we can go through 6 the evidence and see where it contributes to it or not. 7 I don't understand where you are 8 going with this and it would help me, perhaps, in 9 finding helpful answers, if you could tell us what your 10 objective is through this line of questioning. 11 MR. THOMPSON: I tried to outline it 12 before the break and if you didn't hear me then I don't 13 intend to repeat it. 14 Let's move on to try and find out the 15 CIS costs within the 1999 -- the CIS-related costs 16 within the bundled and unbundled budget. 17 If you would turn to, first -- 18 MR. FARRELL: Are we back into the 19 O&M base? 20 MR. THOMPSON: Well, this will help 21 us I think. 22 If you would turn to Exhibit I, 23 Tab 12, Schedule 44. 24 THE PRESIDING MEMBER: What is the 25 reference again, Mr. Thompson? 26 MR. THOMPSON: I, Tab 12, 27 Schedule 44, page 2. Page 2 of 33. 28 THE PRESIDING MEMBER: Thank you. 1337 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: Yes, we have that. 2 MR. THOMPSON: This question arose 3 out of the analysis that was being done of the 4 company's customer care costs. Correct? 5 MR. KENT: That's correct. 6 MR. THOMPSON: What we see on page 2 7 are the customer care costs for 1999 and then those 8 that are included for 2000. 9 MR. KENT: What we were asked was to 10 give a breakdown of the costs that were used for the 11 purpose of comparing the company's total customer care 12 costs to other utilities, and that is what we have 13 thrown in there for that comparison purpose. 14 MR. THOMPSON: Let's just take the 15 1999 numbers. 16 MR. KENT: Okay. 17 MR. THOMPSON: These are presumably 18 encompassed within the 1999 Board-approved budget. 19 MR. McGILL: I believe that the 20 numbers indicated in the top five lines were from the 21 company's -- yes, the 1999 approved budget. 22 The sixth line, "Customer 23 Communication and Informations Expense", is an 24 allocation of IS costs that are attributable or 25 associated with the customer support functions. 26 MR. THOMPSON: All right. 27 MR. KENT: But those costs were also 28 within the total span of our 1999 budget. 1338 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Thank you. 2 So that in response to this 3 interrogatory you indicated that the customer 4 communication and informational expenses within 5 customer care were $16.6 million approximately. Is 6 that correct? 7 MR. KENT: No, I don't think that is 8 what we said, Mr. Thompson. 9 We said that the total -- all of 10 these numbers that add up to just shy of $67 million 11 were in the company's 1999 Board-approved budget in 12 different categories -- some appeared in the customer 13 care category, some appeared in information services 14 categories but were associated with the provision of 15 customer care services -- so that in order to provide a 16 proper comparison with other utilities we have 17 aggregated all of those costs to compare it to a 18 similar basket of costs from other utilities. 19 MR. THOMPSON: Let's move on from 20 there. 21 If you would then turn up, please, 22 Mr. Stephens' testimony, which is Exhibit L25.2, at 23 Appendix 5, Tab 5. 24 MR. McGILL: We have that. 25 MR. THOMPSON: You have those 26 numbers? 27 You will see the bottom reference is 28 to the total CSS. Those are the same numbers that were 1339 KENT/McGILL, cr-ex (Thompson) 1 provided in response to IGUA 44? 2 MR. KENT: Yes, they are. 3 MR. THOMPSON: All right. And 4 Mr. Stephens informs me that he asked you to break out 5 the information technology costs of 16,632,657 that's 6 shown in your response to IGUA 44 between CIS and these 7 other categories. Is that right? 8 MR. McGILL: I'm aware that we did 9 give Mr. Stephens a different breakout of those totals. 10 I'm just trying to find it. 11 MR. THOMPSON: Well, I think it's 12 shown in Appendix 5. 13 MR. McGILL: It may very well be. 14 MR. THOMPSON: That's what I want to 15 draw your attention to. It's based on the information 16 you provided to him. The breakout of the 16,632,657 17 was, in the existing budget, about 14.465 million for 18 CIS and the rest for call centre and communications. 19 Do you recall providing that 20 breakout? 21 MR. McGILL: Well, what that 22 14.4 million -- 23 MR. THOMPSON: Did you provide that 24 information, first of all? 25 MR. McGILL: Yes, we did. 26 MR. KENT: Yes. I, in fact, was the 27 one who provided Mr. Stephens, in an attempt to give 28 him additional information that would help his 1340 KENT/McGILL, cr-ex (Thompson) 1 understanding of what's going on. 2 MR. THOMPSON: All right. So, can I 3 take it that that is the company's reasonable 4 estimation of the CIS-related costs that are incurred 5 that are included in the Board-approved 1999 budget? 6 MR. McGILL: No, I wouldn't describe 7 them that way. 8 What those costs represent are our 9 information services costs associated with the support 10 of the company's existing Legacy systems, in 1999. 11 MR. THOMPSON: Which are used to 12 perform the CIS functions, in 1999. Right? 13 MR. KENT: That's correct. 14 MR. THOMPSON: All right. So -- 15 MR. KENT: But, Mr. Thompson, we have 16 thrown in there a lot of costs to make sure that we 17 didn't underestimate what we are talking about. We 18 threw in, for example, a desktop services cost 19 allocation of 4.4 million that is within that 20 14.5 almost. And that is, to put it mildly, a very 21 generous allocation of costs. 22 We were trying to make sure that we 23 threw in everything, including the kitchen sink, so 24 that we didn't, in providing information that would be 25 compared with other utilities, neglect to put anything 26 in there that could conceivably be viewed by any 27 utility as a part of the cost of supporting a 28 customer-care function. 1341 KENT/McGILL, cr-ex (Thompson) 1 MR. McGILL: These costs would be 2 there regardless of what CIS was being supported. 3 MR. THOMPSON: I'm just trying to get 4 from you a reasonable estimate of the costs within the 5 current 1999 Board-approved budget that relate to the 6 performance of what we call "CIS functions". 7 You folks provided to Mr. Stephens 8 this estimate of 14.5 million, and then you indicated 9 it's going up to about 25.182 million, in Year 2000. 10 MR. KENT: That is not correct. 11 MR. THOMPSON: It isn't correct? 12 MR. KENT: No. If you look at 13 Mr. Stephens' evidence, you will see that number goes 14 up to 15.1 million. 15 MR. THOMPSON: Well, the numbers 16 shown at sub-total CIS, for each of the years, are 17 correct, are they not? 18 They are a correct addition. 19 MR. KENT: The numbers we gave 20 Mr. Stephens were the lines that are -- are the numbers 21 that are in the CIS line. What he has labelled as the 22 "CIS" lines. 23 MR. THOMPSON: All right. Well, the 24 CIS Z-factor comes from your rate case and CIS rate 25 impact comes from -- well, these two numbers come from 26 Exhibit I, Tab 12, Schedule 44, page 2. That's your 27 information. He didn't make them up. 28 MR. KENT: Well, some of the numbers 1342 KENT/McGILL, cr-ex (Thompson) 1 come from there and some of them come from some 2 additional information that we gave to Mr. Stephens. 3 But the line that Mr. Stephens -- or 4 the row that Mr. Stephens has entitled "CIS" does not 5 appear on Exhibit I, Tab 12, Schedule 44. It's a 6 separate set of numbers that were given to 7 Mr. Stephens, on the basis of further enquiries that he 8 made. He was seeking to understand the breakdown; we 9 were seeking to help him. 10 MR. THOMPSON: All right. Well, the 11 CIS number you gave for 1999 is the 4.465 and you also 12 gave one for Year 2000 of 15,132? 13 MR. KENT: That's correct. 14 MR. THOMPSON: And that 15,132 did 15 not include the CIS Z-factor or the CIS rate impact 16 number shown in Exhibit I, Tab 12, Schedule 44? 17 MR. KENT: That is also correct. 18 MR. THOMPSON: All right. Thank you. 19 Now, just so that looking at those 20 numbers, the total 1999 budget versus the 2000 budget, 21 the sub-total CIS line, I make the difference between 22 the two to be about $11.8 million, roughly -- 23 11.7, $11.8 million. 24 Would you take that, subject to 25 check? 26 MR. KENT: Yes, I will take that, 27 subject to check. 28 MR. THOMPSON: It's 10.8, 1343 KENT/McGILL, cr-ex (Thompson) 1 Mr. Stephens tells me. Ten point eight. 2 And then, just, then, to measure that 3 comparison, in terms of impact -- and that's a cost of 4 service impact; I realize that's not a revenue 5 requirement impact, it's a cost of service impact -- 6 MR. KENT: Excuse me, Mr. Thompson. 7 How do you get a cost of service impact out of that? 8 MR. THOMPSON: Well, the amounts 9 recoverable in rates appear to be 14.4 million, and 10 under the budget, those amounts will be about the 11 10.8 million higher. 12 MR. KENT: I think, Mr. Thompson, if 13 you are seeking rate impact, it's better to go to other 14 places than our evidence where we set out numbers that 15 describe rate impact. 16 MR. THOMPSON: Okay. Well, let's do 17 that, then. That's what I was leading to, quite 18 frankly. 19 Would you go to IGUA 41. What we 20 were asking you to do here was in relation to the case 21 that had been filed in February of 1998. What we were 22 asking you to do in Question (e) -- this is IGUA, 23 Tab 12, Schedule 41, page 1 of 7. We were asking you 24 to remove all of the additional amounts that you had 25 put into your original filing related to the CIS 26 proposition, and there was resistance to giving that 27 information but, indeed, you gave it, and this is 28 described at page 5, "Removal of the CIS Project". 1344 KENT/McGILL, cr-ex (Thompson) 1 In your original filing, you were 2 seeking to include all costs related to the project 3 within the ambit of "utility". Correct? 4 MR. KENT: Yes, we were. 5 MR. THOMPSON: All right. So we are 6 trying to ascertain, in effect, going back to point 7 zero with none of those costs coming in and that's -- 8 the response that is provided gives an estimate of 9 that. Is that fair? 10 MR. KENT: The arithmetic calculation 11 that was provided shows the rate impacts of not closing 12 the capital cost of CIS to rate base but it does not 13 account, in any way, for the rate impacts of the 14 tangible benefits that are already flowing from the BPR 15 and a number of other factors. 16 So to say that this is an estimation 17 of the rate impact of CIS is a characterization that we 18 can't accept, because there are positive impacts, very 19 significant positive impacts, from the implementation 20 of CIS. 21 MR. THOMPSON: Let me just take us 22 through this exhibit so we can understand what it does, 23 because it is basically backing out the revenue 24 requirement implications of what I would call full 25 recovery of all CIS related costs in the context of a 26 rate base treatment. 27 MR. KENT: Yes, I can accept that. 28 MR. THOMPSON: If we go to page 5, 1345 KENT/McGILL, cr-ex (Thompson) 1 you make here qualifying statements as to why this is 2 inappropriate, and then you go on and describe the 3 consequences in words and the amounts are shown on 4 page 7 of this exhibit. Is that fair? 5 MR. KENT: Yes. 6 MR. THOMPSON: If we could just go 7 back and forth between those two pages, you describe in 8 the second-last paragraph, first of all: 9 "Rate base would decline by 10 $23.77 million." 11 Is that fair? 12 MR. KENT: Those are the numbers that 13 appear in this arithmetic calculation, yes. 14 MR. THOMPSON: And then you go on 15 to say: 16 "Cost of service would decrease 17 $11.85 million due to removal of 18 the CIS Z-factor (net of 19 incremental benefits) in the PBR 20 calculation of O&M in the amount 21 of $5.71 million, lower 22 amortization expense ... and 23 lower capital and large 24 corporation tax --" 25 And the $11.85 is shown on column 10, line 2 of page 7, 26 Schedule 41. 27 MR. KENT: That was column 2, 28 line 10, was it? 1346 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Yes. 2 MR. KENT: Yes, I have that. 3 MR. THOMPSON: And then the other 4 impacts of reduction in rate base and elimination of 5 tax shield, and that kind of thing, results in a 6 revenue requirement change of about $10.3 million, 7 mathematically. 8 MR. KENT: I am glad you added that 9 qualifier, Mr. Thompson; yes. 10 MR. THOMPSON: And the $10.3 million, 11 mathematically, is based on a Z-factor of 5.7 that we 12 were discussing previously -- 5.701 -- which is really, 13 on a normalized basis, understated by about 14 $2.8 million because it includes the phase-in credit. 15 MR. KENT: We are just talking about 16 test year cost impacts here, I believe, Mr. Thompson. 17 MR. THOMPSON: Yes. 18 MR. KENT: But I agree that in 19 subsequent years the CIS Z-factor will be a higher 20 amount. 21 MR. THOMPSON: Similarly, the revenue 22 requirement impact would be up from the $10.3 million. 23 MR. KENT: Yes, but again we are not 24 talking about rate impacts in future years. 25 MR. THOMPSON: All right. This 26 high-level analysis indicates to me that on a 27 normalized basis your original proposal would have had 28 a revenue requirement of in the order of $12.8 -- 1347 KENT/McGILL, cr-ex (Thompson) 1 $13 million. 2 MR. KENT: I'm sorry, we don't follow 3 that one. 4 MR. McGILL: Could you run that one 5 by us again? 6 MR. THOMPSON: $10 million revenue 7 requirement, excluding, if you will, the normalizing 8 adjustment for eliminating the phase-in credit, which I 9 make to be $2.8 million, so I add the two of them and 10 get the $12.8 million -- ballpark, $13 million. 11 MR. KENT: Okay. You are talking, 12 then, about fiscal 2001? 13 MR. THOMPSON: Yes. 14 MR. KENT: Just as long as we 15 understand that this isn't relevant to fiscal 2000 16 rates, I am okay with following you down this path. 17 MR. THOMPSON: I am just trying to 18 get a big picture. What would it have meant if you got 19 100 cents on the dollar for your proposal, which is 20 including all of these capital cost in rates? It looks 21 to me like it would have meant a revenue requirement 22 increase of something in the order of $13 million. 23 Then I want to come back. If we look 24 at -- well, maybe I am off base here. 25 Let's go to IGUA -- I think it is 18. 26 I believe you were making reference 27 to the numbers in here, Mr. Kent, when you were talking 28 about "We are better off by $3.5 million". 1348 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: If you are referring to 2 IGUA 18, yes. I was just actually looking at the 3 response to that interrogatory to see if it showed a 4 stand-alone impact for CIS in the old model. It 5 doesn't appear to be included in Schedule 18. We may 6 have it elsewhere in our evidence. 7 But this portrays the difference 8 between our original proposal in column 1, as filed, 9 which showed the revenue requirements, assuming that 10 all of CIS were to be recovered through a rate based 11 treatment, and the impacts of our revised approach in 12 column 2, which reduces the revenue requirement in the 13 test year by $3.5 million. 14 MR. THOMPSON: The point I am trying 15 to make is this. Based on your original filing, where 16 you are, in effect, claiming 100 cents on the dollar, I 17 am trying to find the revenue requirement impact of 18 that versus your modified proposal, which you, in 19 effect, say reduces the revenue requirement impact of 20 that by $3.5 million. 21 MR. KENT: That is exactly what is 22 set out in the response to IGUA 18. 23 MR. THOMPSON: But that $3.5 million, 24 I suggest, is probably $700,000 when you factor in the 25 $2.8 million of understated Z-factor claim -- 26 MR. KENT: I don't meant to interrupt 27 you, Mr. Thompson, but if you could go on, the third 28 row there talks about the impact in fiscal 2001, where 1349 KENT/McGILL, cr-ex (Thompson) 1 those initial effects, as you describe, are washed out. 2 And in that year the reduction in the revenue 3 requirement is $7.86 million. 4 MR. THOMPSON: But compared to the 5 impact of what you were claiming initially. 6 MR. KENT: Yes, that's correct. 7 MR. THOMPSON: And what is the impact 8 of what you were claiming initially? 9 Am I right that it is about 10 $13 million? Is it less? Is it $10 million? Help me 11 with that number. 12 If you can't, perhaps you would 13 undertake to tell us what it is in the test year and 14 in 2001. 15 MR. FARRELL: I am not too sure that 16 we understand your question. 17 MR. KENT: I believe, in fact, 18 Mr. Thompson, that we have already answered the 19 question, and that was the response in IGUA 41 that you 20 took us to, where in the test year it is approximately 21 $10 million. We haven't provided a number for fiscal 22 2001, but if you can work from the starting point of 23 the test year, which is really all we are talking about 24 here, the number appears there. 25 I think it would be highly 26 speculative to try to determine the number for 2001 in 27 our original proposal and isolate it -- back it back 28 out again. 1350 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Let's perhaps leave it 2 there then. In the test year it is $10 million, and 3 the impact is -- it is a $10 million add-on, and you 4 are telling us in IGUA 18 that that $10 million add-on 5 has been reduced to $6.5 million. Is that what you are 6 purporting to tell us? 7 MR. KENT: My trouble is, 8 Mr. Thompson, that you are talking about a calculation 9 that excludes the costs of CIS from recovery in rates, 10 while including all of the benefits that flow from CIS. 11 You are saying that you want the 12 benefits, but you are not prepared to pay for the 13 system, and that doesn't work. It just can't happen 14 that way. 15 So if we want to remove the system, 16 then we should be removing the matching benefits. 17 But the numbers from your requested 18 arithmetic calculation do exist in IGUA 41 and in 19 IGUA 18. 20 MR. THOMPSON: I will argue the 21 benefits in argument, but the numbers, then, we have 22 them correct, it is essentially a revenue requirement 23 increase in your original proposal of about 24 $10 million, which you say has been reduced in the 25 test year by about $3.5 million. 26 MR. McGILL: I don't think that is 27 what we have said. I think what we have said and what 28 is laid out in the response to IGUA 18 is that it shows 1351 KENT/McGILL, cr-ex (Thompson) 1 the difference between our original proposal, which was 2 to close the entire value of the CIS project to rate 3 base, and compares that to what the rate impact is with 4 the current proposal for the 2000 and the 2001 fiscal 5 years. And the difference is that the reduction for 6 2000 is $3.5 million and the reduction for 2001, 7 between the two proposals, is $7.86 million. That is 8 what that interrogatory -- 9 MR. THOMPSON: I understand that, but 10 it is a reduction from -- an increase under your 11 original proposal from the baseline of today, and what 12 I am trying to get is the revenue requirement increase 13 that was related to your original proposal, and I think 14 Mr. Kent is telling me that in the test year that was 15 $10 million, approximately, mathematically. 16 Have I got that correct? 17 MR. KENT: The impact of closing the 18 full capital costs of the CS project, BPR, everything 19 that's in that $119 approximately to rate base, would 20 be to change the revenue requirements in the test year 21 by approximately $10 million following these 22 calculations here, but what we are also telling you is 23 that that's not a reasonable or feasible approach. 24 MR. THOMPSON: Fine. You keep 25 repeating that. I'm just trying to get the 26 mathematics. We will argue what is the approach. 27 Now, in the year 2001, do we have the 28 number comparable to the $10 million? Is it greater 1352 KENT/McGILL, cr-ex (Thompson) 1 than $10 million? 2 MR. KENT: I don't believe that we do 3 have that number for fiscal 2001. 4 MR. THOMPSON: Can that be provided? 5 MR. FARRELL: You mean in the detail 6 shown on Exhibit I, Tab 12, Schedule 41, page 7? 7 MR. THOMPSON: Yes, if that's 8 possible. Just give us the comparable calculation that 9 relates to the 7.86 that is referred in 18. 10 MR. FARRELL: It will be, I would 11 suggest, a hypothetical test year that has not yet 12 arrived yet. I don't know the amount of work it would 13 take to produce it because -- 14 MR. THOMPSON: Well, it's no more 15 hypothetical, I guess, than the number you have 16 provided in Tab 12, Schedule 18, for the test year. 17 It's just using a different point of departure. Could 18 I have an undertaking to provide it or at least inquire 19 as to how long it would take? 20 MR. FARRELL: I think we are prepared 21 to inquire how much work would be involved. 22 THE PRESIDING MEMBER: That is fine, 23 Mr. Farrell. 24 Mr. Thompson, again, help us 25 understand. It is the year 2001. What is the object 26 here once you get that information? 27 MR. THOMPSON: The company has 28 calculated in Schedule 41, Tab 12 of 41, what I 1353 KENT/McGILL, cr-ex (Thompson) 1 understand to be the revenue requirement impact moving 2 from the existing rates based on the Board's 1999 3 approved budget to the regime originally proposed. 4 THE PRESIDING MEMBER: But the main 5 part of that is $10 million which is shown at the 6 bottom line of the adjustment base. 7 MR. THOMPSON: In the response they 8 do not do that for the 2001 year. In the response to 9 IGUA, Schedule 18, they have indicated in line 2 the 10 extent to which that impact would be reduced of 11 $3.5 million, so that's 3.5 from, as I understand it, 12 10. They indicate that it would be a $7.8 million 13 reduction in item 3 from their filing that was made 14 initially in the year 2000. 15 I'm just asking what would be the 16 2001 number equivalent to the $10.8 million. We would 17 have 10 million versus 3.5 and "X" versus 7.86. Is 18 that helpful? 19 THE PRESIDING MEMBER: I understand 20 what you are getting at. I'm just not sure how you 21 would use it. 22 MR. THOMPSON: Well, I leave that to 23 the company. They managed to do it for a departure 24 point of their filing. I'm just asking in effect to do 25 it from a departure point of the existing rates. 26 MR. KENT: I would have some concern, 27 Mr. Thompson, because the departure point would be 28 based on a capital budget for the test year whereas we 1354 KENT/McGILL, cr-ex (Thompson) 1 don't have a capital budget for fiscal 2001. You are 2 asking us to back certain amounts out of rate base for 3 that 2001 year. 4 MR. THOMPSON: If you can do it in 5 Schedule 18, you can do it for 2001. You can do it for 6 2001 from a different point of departure. 7 MR. KENT: Well, for fiscal 2001 in 8 response to IGUA 18, we provided a forecast that may be 9 as accurate as is possible to get. That shows the CIS 10 related revenue deficiency forecast for fiscal 2001. 11 The number that is shown there is $19.61 million. 12 Isn't that the number you are looking for, 13 Mr. Thompson? 14 MR. THOMPSON: Maybe it is. 15 THE PRESIDING MEMBER: That would 16 assume that all our things being equal, Mr. Thompson, 17 if you accept that assumption going from 2001 to 2002 18 and if your interest is not any other adjustments to 19 any other of the rows, then that's the answer, 20 the 19.61. 21 MR. THOMPSON: I'm sorry, I missed 22 that CIS related revenue deficiency forecast. I 23 apologize. It has already been done, I guess, to the 24 extent it can be done. 25 MR. KENT: Yes. Again, I would put a 26 caveat around there and say that it may be still a 27 fairly rough estimate, but sometimes it's misleading. 28 We show more numbers after a decimal place than could 1355 KENT/McGILL, cr-ex (Thompson) 1 really be justified by the accuracy of some of the 2 assumptions going into it. 3 MR. THOMPSON: What I was driving at, 4 and I apologize for not picking this up, if for the 5 test year we are going from a CIS related deficiency of 6 forecast of about 10 million and reducing it by 3.5 to 7 6.5 and for your 1991 it's going from 19.61 to 11.75, a 8 reduction of about 7.86, I do have the proportions that 9 I was looking for. 10 MR. KENT: Yes. I think that that's 11 reasonably -- I was going to say accurate. I think 12 it's a reasonable forecast or estimate. 13 MR. THOMPSON: All right. Thank you. 14 Now that I understand that impact, I 15 would like to move, if I could, to some of the rate 16 base claims. 17 I am going to try and split this and 18 deal with the $30.25 million component briefly because 19 that's been kind of flogged to death. Then I will go 20 to the O&M components of what you are seeking. I will 21 come back to the IS capital budget towards the end. 22 MR. KENT: Yes. Thank you for that. 23 It's helpful. 24 MR. THOMPSON: All right. Now, in 25 terms of the $30.25 million, you have discussed with 26 others the various components of this. I don't want to 27 go through that again. 28 In terms of the history of the CIS 1356 KENT/McGILL, cr-ex (Thompson) 1 project, it has been a long history, would you agree, 2 Mr. Kent? 3 MR. KENT: It has been a very large 4 project and it has been comparable in that respect to 5 the experience of many other utilities. 6 MR. THOMPSON: To those of us sitting 7 over here, it has been a pretty ugly history and you 8 have captured that notion, I'm sure, as the days have 9 progressed, the days and years have progressed in this 10 case. 11 MR. KENT: It has been a very 12 difficult project. I think at the outset it's clear we 13 didn't understand quite how complex and difficult it 14 would be. We had over time developed quite 15 sophisticated and complex Legacy systems. I don't 16 think we appreciated just how complex and sophisticated 17 they were and how difficult it would be to replace 18 them. 19 MR. THOMPSON: And it has been going 20 on for seven years, is that right? It started in 1992, 21 at least the idea, and it has germinated and gone 22 through a number of adjustments. 23 MR. KENT: I don't recall for sure, 24 but I believe that 473 was in 1992 and that was the 25 beginning of the SIM project as a whole. As we have 26 discussed, CIS itself wasn't the first project and only 27 reached the development stage around about 1996. 28 MR. THOMPSON: It's clear from your 1357 KENT/McGILL, cr-ex (Thompson) 1 evidence we are not there yet. 2 MR. KENT: We have delivered the 3 first phase, the first release of CIS into production. 4 It's working today. At Mr. Stephens' request, we 5 showed him that system running in our call centre today 6 in use by our customer service representatives dealing 7 with inquiries from some of our 1.5 million 8 approximately customers. 9 That part is in and running and it 10 works fine. The next release is scheduled for 11 November 6. As of yesterday, we were still on target 12 to meet that. 13 MR. THOMPSON: But there are a total, 14 I believe, of five releases. 15 MR. KENT: That's correct. 16 MR. THOMPSON: And Mr. Stephens 17 indicates in his evidence that the next one is fairly 18 critical. 19 MR. KENT: It is. We have indicated 20 the same in our evidence too. 21 MR. THOMPSON: Okay. I am glad we 22 are on the same wave length there. There is a scenario 23 where it may not work. I know that's not in your 24 expectation at the moment, but based on past history, 25 there is that possibility. 26 MR. KENT: There is always a 27 possibility, Mr. Thompson, I will grant you that, but 28 we are well into the testing process for the next 1358 KENT/McGILL, cr-ex (Thompson) 1 release. We are getting quite encouraging results back 2 from the testing process. 3 At the moment I have no reason to 4 believe that we won't hit that November 6 date. 5 MR. THOMPSON: We have had a lot of 6 statements to that effect previously. What happens if 7 it doesn't work? Where do we go then? 8 MR. KENT: The existing Legacy 9 systems would continue to function, and the company 10 would continue to be able to bill its customers and 11 respond to them as it has in the past. 12 The company would not achieve as 13 quickly some of the benefits that come from the next 14 release of CIS, and we would likely -- if we can't fit 15 it in in November, we would likely have to postpone it 16 until the New Year. We have to be careful not to 17 introduce changes to our information systems around 18 about January 1, 2000. We are going to have to have a 19 moratorium period around that. 20 I think that if we slip for more than 21 perhaps three weeks in the delivery of Phase IB, we 22 would have to -- I was going to say re-assemble, but 23 perhaps that is not quite the right word. We would 24 have to deliver in February 2000 something that might 25 combine the features of both Phases 1B and 1C. It 26 would depend on what the problems were. 27 As I say, at the moment I can't 28 conceive what they would be. 1359 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Is there any 2 contingency plan to go to an outsourcing solution if 3 this thing doesn't work as planned? 4 MR. KENT: No, because the thing does 5 work in the first release as planned. 6 What we are building on is systems 7 that we know and understand. The Legacy batch billing 8 system, for all its complexities, functions. The gas 9 bill that you get -- I hope that you are a customer and 10 get a bill from us. That bill is produced by the 11 Legacy systems. 12 They are going to continue to 13 function into the year 2000, because we have done the 14 year 2K remediation work. 15 In the background, the systems that 16 generate those bills will work better. They will work 17 in new ways when we implement Phase 1B, the next 18 release. 19 If it doesn't work, we can still 20 continue to use the old system. 21 It may well be that in the long 22 term -- and when I say the long term, I am talking 23 something beyond about five years -- it may well make 24 sense to look at that stage for a replacement for this 25 CIS in the packaged marketplace. 26 That is changing fast. There are 27 getting to be now some very powerful systems coming on 28 to the marketplace. But it is early days for some of 1360 KENT/McGILL, cr-ex (Thompson) 1 those systems, and we are not at present in a position 2 to contemplate implementing one of those. 3 As this CIS ultimately reaches the 4 end of its useful life, as it will, we may at that 5 stage be able to find among the packaged solutions 6 available something that does meet the company's needs 7 and something that could be implemented more 8 economically than what we are doing now. 9 But as we stand right now, this is 10 our best choice. 11 MR. THOMPSON: Just on alternatives, 12 there is indication in the material that the rental 13 program is going to assist them other than the one you 14 offer at the moment, and your affiliate expects to 15 offer. 16 Is that right? 17 MR. McGILL: What we have said in the 18 evidence, and specifically in HVAC No. 11, is that for 19 a transition period of up to six months, beginning 20 October 1st, the company would bill rental charges on 21 behalf of Enbridge Services Inc. as part of the 22 company's non-utility agent billing collection service. 23 To the extent that we do that during 24 the transition period, we will be using the same CIS 25 system as the utility is using as part of Enbridge 26 Consumers Gas. 27 MR. THOMPSON: My question really 28 was: Where do you go then in terms of alternatives? 1361 KENT/McGILL, cr-ex (Thompson) 1 Is an outsourced package option selected being 2 examined? 3 MR. McGILL: After the transition 4 period? 5 MR. THOMPSON: Yes. 6 MR. McGILL: At the moment we are 7 looking at a number of options with respect to how we 8 can support the utility needs and ESI, Enbridge 9 Services Inc., is looking at how they can support their 10 own needs. 11 We are considering outsource options 12 for various parts of the functions that need to be 13 required, and as of yet we haven't made a firm decision 14 as to how Enbridge as a whole is going to move forward 15 in this area. 16 MR. THOMPSON: Is it the plan to move 17 forward as the Enbridge Group? 18 What I am interested in is this: 19 What do the other companies in the Enbridge Group use 20 to perform the CIS component of customer support 21 services? 22 MR. McGILL: During the transition 23 there will be two billing services essentially provided 24 to Enbridge Services Inc. One will be for line items 25 that appear on the utility bill, and all those things 26 will be done through the agent billing and collection 27 services, a non-utility activity. 28 There will be some other billing 1362 KENT/McGILL, cr-ex (Thompson) 1 support services provided to Enbridge Services Inc., in 2 the way of stand-alone or non-recurring bills, if it is 3 just for a jobbing contract for a one-time furnace 4 repair, or something like that. 5 We will be providing a stand-alone 6 Enbridge Services bill and doing that under the 7 requirements of the Code of Conduct, the Affiliate Code 8 of Conduct. 9 MR. THOMPSON: I am asking: Who is 10 going to provide it? 11 What is the software that you are 12 going to be using for these other functions down the 13 road: for the rental, the MFP? 14 What does the pipeline company use? 15 They are not using your clunker; that's for sure. 16 MR. KENT: They only have about 17 40 customers, Mr. Thompson. It is a completely 18 different kind of concept. 19 The Cornwall Electric Group uses a 20 different software package that is appropriate for 21 small utilities, as does St. Lawrence Gas. GazifŠre 22 uses the same set of systems as the Ontario utility. 23 The short-term plan, as Mr. McGill 24 has mentioned, is in effect to use the CIS software for 25 Enbridge Services Inc. in a transition period. 26 The CIS software is capable of 27 meeting the current needs of Enbridge Services. It may 28 not be the best choice for them longer term, depending 1363 KENT/McGILL, cr-ex (Thompson) 1 on where they want to take their business. That is a 2 decision that they have to make. 3 MR. THOMPSON: "They" being the 4 rental, the MFP, GazifŠre. Who else do we have to wean 5 off the system? 6 MR. KENT: Why would we want to wean 7 anybody off the system? 8 MR. THOMPSON: Obviously, you don't. 9 But you are telling us that nobody is going to use it 10 other than -- long term, nobody is going to use it 11 other than the utility. 12 MR. KENT: No, I haven't said that. 13 MR. McGILL: In our revised -- 14 MR. FARRELL: Just to be clear, 15 Mr. Kent was speaking of Enbridge Services Inc. He 16 didn't include GazifŠre in his comments, for example. 17 MR. McGILL: In our revised prefiled 18 evidence, I think we indicated that part of the 19 thinking around transferring the CIS software asset 20 outside of the utility is that it would provide the 21 potential to make it available to other Enbridge 22 organizations. 23 MR. THOMPSON: Before I leave this, 24 who are the software providers that Cornwall uses, for 25 example, and St. Lawrence? 26 MR. KENT: Cornwall is in the process 27 of transitioning. It is to do with Year 2000 issues. 28 I am not sure what they are using currently. 1364 KENT/McGILL, cr-ex (Thompson) 1 St. Lawrence outsources to an 2 American organization -- I can't remember now which 3 one -- for reasons of the magnitude of their customer 4 base, the size of their system, and the adaptations 5 that are necessary because of U.S. accounting and tax 6 differences. 7 MR. THOMPSON: You are not able to 8 identify the outsource? 9 MR. KENT: I could probably undertake 10 to find out for you, Mr. Thompson, but I am at a 11 complete loss to understand the relevance of that. 12 MR. THOMPSON: Maybe it is 13 irrelevant. 14 Mr. McGill, you gave me the 15 impression that the utility is looking at a number of 16 options for outsourcing various functions that are 17 within the customer support category of functions at 18 this time. 19 Did I understand that correctly? 20 MR. McGILL: Yes. We outsource some 21 functions now and we are considering outsourcing some 22 others. 23 MR. THOMPSON: The functions that you 24 outsource now are what? 25 MR. McGILL: Meter reading and 26 payment processing. 27 MR. THOMPSON: Does the unbundled 28 budget base reflect outsourcing of that function? 1365 KENT/McGILL, cr-ex (Thompson) 1 MR. McGILL: The PBR base budget does 2 reflect outsourcing of those two functions. 3 MR. THOMPSON: And the functions that 4 you are contemplating outsourcing, could you just give 5 me a list of those, within customer care? 6 MR. McGILL: The biggest, the most 7 significant one that we are looking at at the moment is 8 the printing, inserting and mailing of the actual 9 bills. 10 MR. THOMPSON: And you are looking at 11 that currently? 12 MR. McGILL: Yes, we are. 13 MR. THOMPSON: Anything else that you 14 are contemplating outsourcing? 15 MR. McGILL: There are other things 16 that could be outsourced, but that is the one that is 17 closest on the horizon and the one that we are most 18 likely to go ahead with. 19 MR. THOMPSON: What are the other 20 things that could be outsourced? Could you just give 21 me the list? 22 MR. KENT: I think the list would be 23 common for any company, Mr. Thompson. You can 24 outsource printing functions, you can outsource -- 25 MR. THOMPSON: I'm just trying to get 26 your list on the record. 27 MR. KENT: -- legal functions, I 28 suppose. There are a number of things we could be 1366 KENT/McGILL, cr-ex (Thompson) 1 doing. 2 We already have, where it made sense, 3 gone to outsourcing to reduce costs if we could obtain 4 the same level of service. 5 As outsourcing as a generic category 6 of business activities becomes better developed in the 7 future there may well be other areas. Some companies 8 outsource their complete IT functions. Some have done 9 so and gained benefits, others have done so and seen 10 significant disadvantages and are currently bringing 11 their IT functions back in-house. 12 There are an almost unimaginable 13 spectrum of variations on this, Mr. Thompson. 14 MR. THOMPSON: All right. 15 Now, I don't know if you are going 16 until 1:00, Mr. Chairman, or to 12:30, but I suppose -- 17 THE PRESIDING MEMBER: As soon as we 18 finish this area, Mr. Thompson, we will break. 19 MR. THOMPSON: Okay. I will just ask 20 this final question and try to understand the 21 implications of PBR, what you are claiming with respect 22 to CIS by way of Z-factor. 23 Let's assume that you get what you 24 are asking for and the -- 25 MR. KENT: Can we repeat you in 26 argument, Mr. Thompson? 27 MR. THOMPSON: Pardon? 28 MR. KENT: Can we repeat that in 1367 KENT/McGILL, cr-ex (Thompson) 1 argument? 2 MR. THOMPSON: The assumption? 3 MR. KENT: No, your suggestion that 4 that is a good idea. 5 MR. THOMPSON: Well, if -- 6 MR. KENT: I apologize, I was just 7 teasing. 8 MR. THOMPSON: That's fine, Mr. Kent. 9 You and I go back a long way here. 10 --- Laughter 11 MR. THOMPSON: Let's assume that you 12 get what you are asking for and that the total customer 13 support costs, including the CIS, go from the 14 $67 million roughly, that is shown for 1999 in the IGUA 15 interrogatory, and Mr. Stephen's schedule up to the 16 $80 million roughly -- it's about $14 million 17 increase -- and then you outsource and you cut your CIS 18 costs in half. Under the PBR regime what happens? 19 MR. KENT: I think in the case of the 20 arithmetic calculations that you have put forward the 21 lower operating costs would be to the benefit of 22 shareholders for the term of the PBR arrangement and 23 would then be incorporated in the PBR base for 24 subsequent years and enjoyed thereafter by the 25 ratepayer. 26 That's my layman's understanding of 27 the impact of the PBR approach. 28 MR. THOMPSON: During the course of 1368 KENT/McGILL, cr-ex (Thompson) 1 the three-year PBR, if you manage to, through 2 outsourcing, reduce the CIS component of what you are 3 seeking here, that would accrue to the benefit of the 4 shareholder until rebasing. Is that your 5 understanding? 6 MR. McGILL: Don't forget, there is 7 also a productivity adjustment in the PBR formula that 8 goes to the customers during the three years of the 9 PBR. 10 THE PRESIDING MEMBER: But, 11 Mr. Thompson, the CIS component or the customer support 12 category? I wasn't clear. 13 MR. THOMPSON: The CIS increase 14 really doesn't matter, but the CIS component of 15 customer support is the major cause of the increase 16 that the company is seeking. I was just looking at it 17 from the total customer support picture because the 18 company is talking about outsourcing a number -- 19 THE PRESIDING MEMBER: I guess my 20 confusion is that sometimes we refer to the CIS -- at 21 least in the last couple of hours -- as something 22 larger than the CIS fee that the company would be 23 paying to its affiliate. That's why I wasn't sure what 24 you were referring to. 25 So it is beyond the fee itself to be 26 paid to the affiliate. It is something beyond that. 27 It is the total customer support service area? 28 MR. THOMPSON: Includes -- yes. 1369 KENT/McGILL, cr-ex (Thompson) 1 What I'm talking about is the CIS 2 component of customer support. If they get what they 3 are asking for, I say it is about a $14 million 4 increase -- I'm sorry, it's $10 million and the rest is 5 other customer support components that make it up to 6 $14 million. They are talking about outsourcing 7 generally, that there are a lot of things that could be 8 outsourced, including CIS. I wanted to know what 9 happens to the money. 10 As I understand the witnesses, they 11 are telling me it accrues to the benefit of the 12 shareholders. 13 MR. FARRELL: I just want to make 14 sure that I understand what you are including, 15 Mr. Thompson. 16 Are you including the CIS Z-factor in 17 your term "customer care costs"? Because it comes here 18 annually. That is the reason I'm having some trouble 19 with your question. 20 MR. McGILL: Yes. If it were to go 21 down in subsequent years, let's say due to 22 renegotiation of the Newco contract, then that would be 23 reflected in the Z-factor we are going to bring 24 forward. 25 Again, my understanding of the PBR 26 was that a big part of the benefit of the PBR was that 27 it would encourage the company to look for new ways of 28 doing things in order to drive out benefits that would 1370 KENT/McGILL, cr-ex (Thompson) 1 in turn flow to the customers at the time of rebasing. 2 MR. THOMPSON: Well, let's just focus 3 on Mr. Farrell's question. 4 If you outsourced CIS and reduced the 5 costs from what you are seeking to recover of about 6 $25 million, according to what is indicated in 7 Mr. Stephen's appendix based on information you 8 provided, let's say to $15 million, where would the 9 $10 million savings flow? 10 MR. KENT: I think we would be better 11 to go back to the Newco contract and think of that in 12 terms of the fees that are paid for the CIS software, 13 because isn't that where you would go in an outsourcing 14 type of concept, Mr. Thompson? 15 I'm sorry, I don't understand 16 Mr. Stephen's number. We haven't had an opportunity to 17 cross-examine on it, and it seems at the moment a very 18 nebulous number with which to be working. 19 MR. McGILL: I think the proposal we 20 have before the Board right now is doing exactly what 21 you are suggesting. We had originally come forward 22 with a proposal to put the entire value of CIS into 23 rate base. We have amended that come forward with an 24 outsourcing proposal. 25 We are going to transfer the asset to 26 the Newco affiliate and hire it on an outsourcing basis 27 to provide us with a CIS service. That benefit in the 28 test year is $3.5 million and that is flowing to the 1371 KENT/McGILL, cr-ex (Thompson) 1 customer. 2 MR. THOMPSON: And it's a benefit 3 from a scenario that was never approved by the Board. 4 How you can classify that as a benefit is beyond me. 5 It's a reduced burden is what you are talking about. 6 MR. FARRELL: This is becoming 7 argumentative over terminology, Mr. Chairman. 8 MR. THOMPSON: It's fairly basic. 9 Anyway, let's break. I will go and 10 have a cold shower and we will come back. 11 MEMBER HALLADAY: I just have a 12 couple of questions, just to clarify. 13 Can someone explain to me if there is 14 a difference between Enbridge Services and Enbridge 15 Home Services? Are they two separate corporations? 16 Are they the same? 17 MR. FARRELL: Enbridge Services Inc. 18 is the corporate entity. Enbridge Services Inc. has 19 registered two business names, one business name is 20 Enbridge Home Services and I think the other business 21 name is Enbridge Business Services. It is in an 22 interrogatory response, but I can't remember the number 23 offhand. 24 MEMBER HALLADAY: Thank you. 25 THE PRESIDING MEMBER: Just to be 26 clear, Mr. Kent -- or Mr. McGill, I believe you 27 answered those questions. 28 In the transitional phase Consumers 1372 KENT/McGILL, cr-ex (Thompson) 1 Gas shall continue to bill for those so-called 2 deregulated services according to the bill insert. 3 I'm sorry, let me go back. 4 It's not clear to me from the bill 5 insert that Mr. Thompson submitted as to what is the 6 transitional phase that you spoke of earlier. You said 7 six months. What happens after six months? What is so 8 magical about six months? 9 MR. McGILL: Well, I think the only 10 significance to the six months is that the company 11 believes that that is the time it is going to take in 12 order to rearrange the billing arrangements and move 13 forward beyond that transition period. 14 As to exactly what those arrangements 15 end up being, again we are looking at a number of 16 options and I don't know exactly where we are going to 17 end up at this point in time, but we have a lot of work 18 ahead of us. 19 THE PRESIDING MEMBER: Continuing the 20 same billing arrangement is not an option, you are 21 saying? It's not an option? 22 MR. McGILL: I don't anticipate that 23 we would continue on with the billing arrangements I 24 have described for the transition period beyond the end 25 of March, no. 26 THE PRESIDING MEMBER: Would that be 27 a sort of business decision or are there any other 28 considerations that you have to pay attention to? 1373 KENT/McGILL, cr-ex (Thompson) 1 MR. McGILL: I think it's largely a 2 business decision and there are some issues I think 3 with respect to shared services that we need to deal 4 with. 5 MEMBER HALLADAY: So the utility will 6 be billing for Enbridge Home Services charges during 7 this transition period? 8 MR. McGILL: During the transition 9 there will be two types of billing. 10 One is for things that appear as line 11 items on the utility bill. That will occur as part of 12 the ABC non-utility activity. 13 For stand-alone Enbridge Services 14 Inc. bills, what we are planning on doing is providing 15 them with a service whereby we take their charges and 16 print them on an Enbridge Services bill for them, 17 almost in exactly the same way as we produce GazifŠre 18 bills for the GazifŠre utility affiliate at the moment. 19 THE PRESIDING MEMBER: So what 20 programs would be considered billable under the 21 services company as opposed to Consumers Gas? I am not 22 clear. Out of the five -- 23 MR. McGILL: It would be things like 24 jobbing contracts for an appliance repair, something 25 like that. 26 Basically, it is non-recurring types 27 of bills, things that wouldn't appear on a regular 28 monthly bill, with the exception of some of the HIP 1374 KENT/McGILL, cr-ex (Thompson) 1 charges that are billed monthly. That would be a 2 monthly Enbridge Services Inc. bill. 3 MR. KENT: But an annual HIP renewal 4 would come on it. 5 MR. McGILL: Yes. And that is the 6 other issue around HIP is that we will be providing 7 that service for HIP, for customers that sign up for 8 the program, up until September 30th, and then after 9 that Enbridge Services Inc. will take on that billing 10 responsibility itself, so that there is sort of a phase 11 out over the 2000 year. 12 MR. KENT: But the volume of these 13 bills is relatively small compared to the number of 14 line items associated with the rental water heater 15 program, for example. So it is feasible to do it on a 16 small scale, but handling it for the bulk, the huge 17 volume of bills associated with the rental water 18 heaters, for example, is something that we weren't able 19 to transition to immediately. 20 THE PRESIDING MEMBER: Those times 21 where you have to bill for one-time charges, as you 22 call them, Mr. McGill, it would be a Consumers Gas bill 23 showing a Consumers Gas logo? 24 MR. McGILL: No, it would not. It 25 would be an Enbridge Services Inc. bill showing their 26 logo. 27 THE PRESIDING MEMBER: Okay. Thank 28 you. 1375 KENT/McGILL, cr-ex (Thompson) 1 MEMBER HALLADAY: But the elements 2 such as the hot water rental charge will still be on 3 the Enbridge Gas utility bill? 4 MR. McGILL: Yes, and we would manage 5 that in the same way we manage commodity billing for 6 gas marketers at the moment. 7 MR. KENT: And this is for a 8 transition period until we can figure out a longer term 9 way of doing it. 10 THE PRESIDING MEMBER: You mentioned 11 that for the HIP there are some contractual 12 considerations for one year. 13 MR. McGILL: Yes. 14 THE PRESIDING MEMBER: Are there 15 similar considerations for the rental program? 16 MR. McGILL: No. The rental program 17 is going to be subject to the transition period itself. 18 That will be treated differently. There is no contract 19 renewal, if you will, associated with that. 20 --- Pause 21 MEMBER HALLADAY: I'm sorry, I'm -- 22 MR. KENT: It's okay. It's confusing 23 for us, too. 24 MEMBER HALLADAY: Okay. Thank you. 25 So all new Enbridge Home Services -- 26 or Enbridge Services division of Enbridge Home 27 Services, the new services that they offer and the HIP 28 renewal, et cetera, will be an Enbridge Home Services 1376 KENT/McGILL, cr-ex (Thompson) 1 distinct bill? 2 MR. McGILL: That's right. Yes. 3 Any of the bills we produce for them, 4 for HIP, will be Enbridge Services Inc. bills or 5 Enbridge Home Services Inc. bills. Then, once those 6 arrangements expire, they will move on to the Enbridge 7 Services Inc. billing application, which I know 8 basically nothing about. So it will transition off the 9 utility shared service back to the affiliate over a 10 period of time. 11 MR. KENT: I think part of the 12 confusion arises because there will be two bills for 13 many customers: one from Enbridge Consumers Gas and 14 one from Enbridge Home Services. 15 The utility may actually be producing 16 both bills separately or charging Enbridge Home 17 Services for that function for a period of time. But 18 that is -- we see, in particular, for the rental water 19 tanks, that being a transitional arrangement. 20 MEMBER HALLADAY: Okay. I think I 21 understand that. 22 And you will charge a fee to Enbridge 23 Home Services for doing the Enbridge Home Services 24 bill. 25 MR. McGILL: Yes. We will be 26 charging them fees subject to service agreements as 27 required by the Affiliate Code. 28 MEMBER HALLADAY: Right. Okay. I 1377 KENT/McGILL, cr-ex (Thompson) 1 understand that. 2 So you will be charging them for the 3 separate bill. Will you be charging for inclusion 4 on -- in the interim, in the transition -- the 5 Consumers Gas bill? You will be charging them for that 6 as well. 7 MR. McGILL: Yes. They will be 8 billed as ABC clients in a very similar way as we bill 9 gas marketers now. 10 MEMBER HALLADAY: Okay. But it 11 hasn't been determined how you will move them off the 12 computer? 13 MR. McGILL: No. We haven't got that 14 far yet. 15 MEMBER HALLADAY: You haven't gotten 16 that far yet. 17 This may not be the correct panel, 18 but it seems to me that there was some evidence 19 before -- when we were talking about moving out the 20 rental program, there was some evidence that in fact a 21 lot of the cost savings, by moving it out, you couldn't 22 allocate it directly because some functions such as the 23 envelopes, the stamps, et cetera, Consumers Gas would 24 still have to pay those. 25 MR. McGILL: That's right. 26 MEMBER HALLADAY: So some savings 27 would not be realized merely by moving it out. 28 I am wondering now whether this joint 1378 KENT/McGILL, cr-ex (Thompson) 1 venture, shall we say, in billing, even for a 2 transitional period of time, has been reflected or 3 there has been a proper allocation on the services side 4 for expenses such as stuffing and stamps and whatever 5 if in fact Enbridge Gas is going to be doing it for the 6 services. 7 MR. McGILL: What we have done is we 8 have removed the ABC program 1999 budget fully 9 allocated costs out of the utility O&M. We have also 10 removed the direct and marginal costs of the rental 11 program out because that business is being transferred 12 outside the company. 13 You are right that the allocated 14 costs associated with billing for the rental business 15 aren't going to disappear. Like you say, we are still 16 going to be printing the same number of bills every 17 month, the same number of stamps go on them, the same 18 number of payments need to be processed, on and on and 19 on, so that there is very little opportunity to avoid 20 that type of expense. 21 THE PRESIDING MEMBER: I believe 22 Ms Halladay was going after whether the O&M is 23 overstated, but you are saying that it may be 24 understated. 25 MR. McGILL: There definitely is that 26 potential, and we indicate that in HVAC 3, that if 27 there are incremental costs associated with supporting 28 the affiliates during this transition period the 1379 KENT/McGILL, cr-ex (Thompson) 1 shareholder will be exposed to that. 2 THE PRESIDING MEMBER: That is only 3 for the transition period, but not beyond that for the 4 balance of two and a half years? 5 MR. McGILL: Hopefully we will be 6 able to put a process in place that won't expose the 7 shareholder to that kind of risk in the longer term. 8 THE PRESIDING MEMBER: I was thinking 9 the other way around. 10 --- Laughter 11 MEMBER HALLADAY: Although I guess my 12 question also relates to whether in fact the savings 13 for the affiliate who doesn't now have to pay during 14 the interim period for the stamps and the envelopes and 15 the stuffing, whether that has been properly allocated. 16 MR. McGILL: They will be charged a 17 market fee for the services they are provided during 18 the transition period as required by the Affiliate 19 Code, so that I believe that they will be incurring a 20 fair cost with respect to those services. 21 MEMBER HALLADAY: Thank you. 22 THE PRESIDING MEMBER: It is 23 10 to 1:00. We should still take a one-hour break 24 until 10 to 2:00 and when we come back, then, we will 25 continue. 26 Any other matters before we adjourn 27 for lunch? 28 Being none... 1380 KENT/McGILL, cr-ex (Thompson) 1 --- Luncheon recess at 1250 2 --- Upon resuming at 1355 3 THE PRESIDING MEMBER: Before we get 4 to Mr. Thompson, Mr. Farrell, if I could ask the 5 company to update Exhibit J1.3 to reflect the new gas 6 costs so that we will have that on the record, please. 7 MR. FARRELL: Yes, we will do that. 8 Thank you, Mr. Chairman. 9 THE PRESIDING MEMBER: Thank you. 10 Mr. Thompson. 11 MR. THOMPSON: Thank you, 12 Mr. Chairman. 13 If I might, panel, just pick up on 14 some questions you were being asked by Board Panel 15 Members at the break -- I do this now because it's 16 fresh in our minds. It's just on the billing scenario 17 that is expected to unfold in the year 2000. I got a 18 little bit confused. 19 Mr. McGill, you mentioned that ABC T, 20 there had been an elimination of $3.0 million on a 21 fully-allocated cost basis from the O&M base. 22 Did I understand that correctly? 23 MR. McGILL: Yes, that is correct. 24 MR. THOMPSON: And that represents -- 25 does that represent the amount that -- let me come at 26 it this way: The ABC charges which you made to brokers 27 are designed to recover fully-allocated costs? 28 MR. McGILL: Yes, that's correct. 1381 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: And that translates 2 into a fee, per bill, of some amount? 3 MR. McGILL: Yes. Based on the 4 forecasts we had last September and the fully-allocated 5 costs of the program that came out of the 497 decision, 6 that's where we ended up at was $1.05 a bill for a 7 residential bill. The fees are somewhat higher for 8 industrial and commercial. 9 MR. THOMPSON: Okay. So, ball park, 10 let's just say $1.00 a bill. 11 And so, does the $3 million removal 12 represent a forecast of the revenue that will be 13 realized from brokers? 14 MR. McGILL: No. It represents the 15 fully-allocated -- the 1999 fully-allocated costs of 16 operating the ABC program. There are about $300,000 of 17 direct and marginal costs and about 2.7 million of 18 allocated costs and they were all removed as part of 19 making the ABC business activity a non-utility 20 activity. 21 MR. THOMPSON: Is there any 22 relationship between that elimination and the revenue 23 that will be received from brokers? 24 MR. McGILL: Only to the extent that 25 the company wishes to recover all of the costs assigned 26 to the program through the fees it charges. There's no 27 requirement for us to set the fee so as to recover 28 those costs; we would set the fee that it could recover 1382 KENT/McGILL, cr-ex (Thompson) 1 more or it could recover less of those costs. 2 MR. THOMPSON: Okay. Moving, then, 3 to the rental program. 4 I understood you to say to the Board 5 Panel Members that the utility will be providing a 6 service to Enbridge Services, if I'm not mistaken, on a 7 transitional basis in the test year. Is that right? 8 MR. McGILL: I said that there would 9 be two types of billing services provided to the 10 affiliate during the transition period; one would be 11 billing rentals and MFP contracts in effect at 12 September 30th as line items on the utility bill and 13 those -- that activity would be treated as non-utility 14 ABC activities. So it wouldn't be the utility 15 providing that, it would be Enbridge Consumers Gas, but 16 not part of the utility function of the company. And 17 then there would be the non-recurring stand-alone 18 billing where it would be an Enbridge Services or Home 19 Services bill, with their logo, et cetera, on it that 20 would be produced as a stand-alone bill by the company 21 under the requirements of the Affiliate Code in exactly 22 the same manner that we provide billing for GazifŠre. 23 MR. THOMPSON: But I'm just confused 24 as to when the stand-alone bill approach starts and the 25 inclusion on the gas bill ends. 26 Is that at the end of six months? 27 MR. McGILL: Yes. They would both 28 start and stop at the same point in time. That's my 1383 KENT/McGILL, cr-ex (Thompson) 1 expectation right now. There could be technical 2 reasons why one, maybe, is changed over ahead of the 3 other, but at this point in time, I'm not certain. But 4 I think our intent would be that we would transfer both 5 types of support service at the same time. 6 In terms of when the stand-alone bill 7 would start, that would be October 1st of 1999. 8 MR. THOMPSON: We have a transitional 9 arrangement, for six months, beginning October 1, 1999? 10 MR. McGILL: That's correct. 11 MR. THOMPSON: And that applies to 12 rental, which will appear on the bill like ABC T? 13 MR. McGILL: That's correct. 14 MR. THOMPSON: So the stand-alone, 15 for rental, would start six months after October 1, 16 1999. Is that right? 17 MR. McGILL: Yes. 18 MR. THOMPSON: Okay. 19 MR. McGILL: Or sooner, if possible. 20 MR. THOMPSON: All right. 21 MR. McGILL: Or, Mr. Thompson -- 22 MR. THOMPSON: When one ends the 23 other begins. 24 MR. KENT: Some other arrangement 25 will come into place then. But there will be 26 stand-alone bills starting October 1, not for rentals 27 but for HIP and other things like the JC contracts that 28 we were talking about just before lunch. 1384 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: So MFP and rental will 2 be on the gas bill until a point in time, and then they 3 will go to a stand-alone bill? 4 MR. KENT: They will go somewhere, 5 somehow, yes. 6 MR. THOMPSON: And then, HIP and some 7 other services will be on a stand-alone bill commencing 8 October 1, 1999? 9 MR. KENT: That's correct. 10 MR. McGILL: That's correct. 11 MR. THOMPSON: All right. So that 12 the gas customer on HIP, starting October -- and who 13 may be renting a gas furnace -- will be getting his gas 14 bill, his rental will be on the gas bill, he will be 15 getting another bill generated by the gas company 16 related to HIP? 17 MR. McGILL: Well, it will be an 18 Enbridge Home Services bill and, for a period of time, 19 the transition period, that Enbridge Home Services bill 20 will be produced by Enbridge Consumers Gas for that 21 affiliate. 22 MR. THOMPSON: And Enbridge Consumers 23 Gas, as I understand, is going to be charging the 24 affiliate -- whether it's in the rental mode where it 25 appears on the gas bill for a point in time or the HIP 26 mode where it's on another bill, they will be charging 27 the affiliate for each of those transactions on a 28 fully-allocated cost basis. Is that my understanding? 1385 KENT/McGILL, cr-ex (Thompson) 1 MR. McGILL: We will be charging the 2 affiliate a market base price for that service, not 3 necessarily a fee related to the fully-allocated costs 4 of providing those services. 5 MR. THOMPSON: So, has that fee been 6 determined? 7 MR. McGILL: No. We are still in the 8 midst of discussions with respect to that. 9 MR. THOMPSON: Is it going to be less 10 than the fee that's charged for ABC T service? 11 MR. McGILL: For that style of 12 billing, it's my expectation that it will be comparable 13 to that fee. It may or may not be exactly the same 14 amount. 15 MR. THOMPSON: So the affiliate will 16 get a charge, for the sake of argument, $1.00 per bill? 17 MR. McGILL: On that order of 18 magnitude for items that appear on the utility bill 19 during the transition period. 20 MR. THOMPSON: And for the 21 stand-alone bill, about the same? 22 MR. McGILL: No; it will be something 23 different. It will be something -- again, I'm not 24 exactly certain what that service is going to include, 25 at this point in time, but it won't be the same charge. 26 MR. THOMPSON: Will it be higher? 27 MR. McGILL: I'm not 100 per cent 28 certain because I'm not certain, at this point, whether 1386 KENT/McGILL, cr-ex (Thompson) 1 or not they are going to be buying a complete package 2 from us with respect to that bill or whether they are 3 going to be paying for components of the process 4 separately directly to some of the outside vendors 5 involved. 6 MR. THOMPSON: Let's assume for the 7 sake of argument it's about $1.00 a bill. Okay? 8 MR. McGILL: Fine. 9 MR. THOMPSON: So, we have one 10 customer, then, who is paying, through rates, the cost 11 of billing the gas bill; the affiliate is going to be 12 charged $1.00 for the line item entry relating to the 13 gas rental; and the HIP service provider will be 14 charged about $1.00, perhaps, for the bill being 15 generated with respect to the HIP program. Is that 16 right? 17 MR. McGILL: I think that's a fair 18 synopsis. 19 MR. THOMPSON: Okay. And in terms 20 of -- and whether the affiliate passes this on to the 21 consumer, is that beyond your control? 22 MR. McGILL: Yes, I would agree 23 100 per cent with that. 24 MR. THOMPSON: All right. But if 25 they are planning to recover their costs of providing 26 service, they will attempt to pass that on? 27 MR. McGILL: Well, they -- 28 MR. THOMPSON: -- from a business 1387 KENT/McGILL, cr-ex (Thompson) 1 perspective. Is that -- 2 MR. McGILL: I would assume that they 3 would. But they are going to be competing for business 4 with others, in the marketplace, and it will be 5 dependent on their ability to compete, given their cost 6 structures. 7 MR. THOMPSON: So, there is a 8 possibility that the gas consumer may end up paying 9 $3.00 for these bills that we have been talking about. 10 Correct? 11 MR. McGILL: I would assume that 12 there's a possibility. I can't say whether or not they 13 would or not. 14 MR. THOMPSON: And in terms of the 15 impact on rates of the bill that is going to be 16 rendered by the company with respect to rental program, 17 while it's in the transition, and MFP, while it's in 18 the transition, is that having any impact on the O&M 19 base? Like the ABC component. 20 MR. McGILL: Well, I don't think it 21 does. And I don't think the ABC component has any 22 impact on rates any more since it's now a non-utility 23 activity. 24 MR. THOMPSON: I thought that the O&M 25 base was adjusted by -- 26 MR. McGILL: Yes, to the extent that 27 the O&M base had been adjusted to remove the ABC 28 business activity, it has impacted rates. 1388 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: But my understanding 2 is, there will be no further adjustment to the O&M base 3 for these other billing transactions in the test year 4 that will be transitional, according to your testimony. 5 MR. McGILL: That's correct. 6 MR. THOMPSON: So that the benefit of 7 those dollars being paid by the affiliate to the gas 8 company will flow to the shareholder. 9 MR. McGILL: Yes, I believe that's 10 correct. 11 MR. THOMPSON: Thank you. 12 Just before I leave that, do we have 13 an estimate? 14 MR. McGILL: There is one other 15 point, though. The cost of that activity also goes to 16 the same shareholder. The same shareholder owns both 17 entities. 18 MR. THOMPSON: Yes, but the customer 19 could get hit three times for one bill -- for a billing 20 process that is being provided by the utility and not 21 get credit for two of the hits. 22 MR. McGILL: That, I think, is one of 23 the potential impacts of unbundling. If the customer 24 were to go and get a water heater from somebody else 25 and go and get a program comparable to HIP from 26 somebody else, I would assume that they would be 27 supporting the costs of those two other entities' 28 services in what they pay as well. 1389 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: I will argue whether 2 you have approached this matter correctly in terms of 3 efficiencies and so on later. But at least I now 4 understand the facts. 5 Coming back, if I could -- 6 THE PRESIDING MEMBER: Mr. Thompson, 7 I am sorry to interrupt, but I want to make sure that I 8 understand. 9 There have been $3 million divorced 10 or separated from the utility cost of service because 11 of ABC T, on a full cost basis, and that was based on 12 activities that were 1999 oriented. 13 MR. McGILL: That's correct. 14 THE PRESIDING MEMBER: And now there 15 are additional activities under the ABC T program. 16 MR. McGILL: The ABC is going to have 17 a higher activity base, yes. 18 THE PRESIDING MEMBER: Right. So 19 there will be additional costs because of additional 20 activities. 21 MR. McGILL: There may be, yes. 22 THE PRESIDING MEMBER: As an extended 23 additional cost associated with additional activity, 24 then where is that reflected into lower rates or higher 25 amounts to be separated from the utility cost of 26 service? 27 MR. McGILL: At the moment it is not. 28 I guess the way I would look at it is, if there are 1390 KENT/McGILL, cr-ex (Thompson) 1 incremental costs that Enbridge Consumers Gas incurs in 2 providing the rental billing to the affiliate during 3 the transition period, the shareholder would be at risk 4 of that. 5 Similarly, once we have removed ABC, 6 if the volume of commodity billing that the program 7 does falls below what that 1999 forecast activity level 8 was, the shareholder would be at risk for that. 9 THE PRESIDING MEMBER: Okay. I will 10 think about it. Thank you, Mr. McGill. 11 MR. THOMPSON: Dealing with the rate 12 base claims, if you would turn up Exhibit B1, Tab 8, 13 Schedule 3, page 6. You have discussed this chart with 14 a number of others already. This is the detail of the 15 $30.3 million that you wish to close to rate base. 16 Could you just explain to me why on line 8 the IDC goes 17 up and down from year to year? It just doesn't seem to 18 me to make any sense. 19 MR. KENT: I think we talked about 20 that briefly yesterday. We stopped charging IDC when 21 we were considering our course correction during fiscal 22 1998. IDC was charged up until, if I remember 23 correctly, approximately March of 1998, and we then 24 ceased charging IDC while we were deciding what to do 25 about the project. 26 So that explains why there is a 27 smaller amount in 1998. 28 The reason the number is smaller in 1391 KENT/McGILL, cr-ex (Thompson) 1 1999, although higher than the 1998 value, is that we 2 didn't recommence charging IDC to the project until it 3 began again on the 4th of January 1999. 4 So the 1997 number represents sort of 5 the full amount for the outstanding capital put up by 6 the shareholders. In 1998, because there was at that 7 point some indecision about the ultimate disposition of 8 the project, where we were going, there was a holiday 9 period during which there was no IDC charged and the 10 shareholder bore the costs of carrying that capital 11 through that period, and it was re-established in 1999. 12 MR. THOMPSON: What is the 13 explanation for the drop from 1995 to 1996, and then an 14 increase from 1996 to 1997? 15 Is that another holiday? 16 MR. KENT: Not to my knowledge. I am 17 not sure. It may be that we should have charged more 18 IDC through that period. 19 I can undertake to find out. There 20 may be an error here. 21 You will note that the column in 1996 22 has smaller amounts of direct costs as well. It may be 23 that the IDC that is calculated is only for a part of 24 the year during which those direct costs were being 25 attributed to the BPR and analysis phase. 26 I can go back and investigate it, if 27 you like. 28 MR. THOMPSON: Perhaps you should 1392 KENT/McGILL, cr-ex (Thompson) 1 give an undertaking to explain that, without attempting 2 to amend your claim at this late date. 3 MR. KENT: It would seem appropriate, 4 if we misstated our claim either upward or downward, to 5 re-state it, Mr. Thompson. 6 MR. THOMPSON: Of course, Mr. Kent. 7 Anyway, I am giving you the opportunity. 8 You don't know, as you sit here 9 today -- 10 MR. KENT: No, I don't know what the 11 explanation for that is. 12 MS DESAI: Undertaking J8.3. 13 UNDERTAKING NO. J8.3: 14 Undertaking given by Mr. Kent to 15 explain the drop in IDC from 16 1995 to 1996 and the increase in 17 IDC from 1996 to 1997 18 MR. THOMPSON: In terms of this issue 19 of closing this amount to rate base, would you agree 20 with me -- and I think you have answered this in 21 questions put by others -- that the classification of 22 these costs historically as CIS project costs was your 23 classification? 24 In other words, nobody imposed that 25 on you. 26 MR. KENT: The approach to accounting 27 for SIM project costs, including the BPR costs, was, I 28 believe, a proposal that the company made to the Board 1393 KENT/McGILL, cr-ex (Thompson) 1 in E.B.R.O. 473. My recollection is that it was 2 approved by the Board at that time as an appropriate 3 way to account for SIM project costs, and we have been 4 following that principle for each and every one of the 5 SIM projects. 6 MR. THOMPSON: That is my point. You 7 put the proposal forward to classify them as CIS 8 project costs, the Board accepted it and they have been 9 recorded in that fashion ever since. 10 MR. KENT: In E.B.R.O. 473 the 11 proposal would have been one on the matter of the 12 principles of how the accounting work would be done, 13 and it wouldn't have been specific to the CIS project 14 or any other. 15 MR. THOMPSON: No, there was an 16 allocation of costs to a whole raft of projects in that 17 SIM package, as I recall it. 18 MR. KENT: Yes. 19 MR. THOMPSON: And the costs that you 20 are seeking to recover by closing to rate base were 21 incurred years ago. 22 MR. KENT: Many of them were, yes. 23 MR. THOMPSON: There is nothing being 24 incurred in Year 2000. 25 MR. KENT: That's correct. 26 MR. THOMPSON: So they are 27 technically out-of-period costs. 28 MR. McGILL: They are the costs of 1394 KENT/McGILL, cr-ex (Thompson) 1 the work in progress. 2 MR. THOMPSON: Yes? 3 MR. McGILL: And those costs -- the 4 proposal is to close them to rate base when the project 5 that they are attributable to is implemented. 6 MR. KENT: I am not sure, 7 Mr. Thompson, what you mean by out-of-period costs. 8 MR. THOMPSON: They are not being 9 incurred in the 2000 test year. 10 MR. KENT: That's correct. 11 MR. THOMPSON: But I take 12 Mr. McGill's point. They are work in progress costs, 13 but they are classified as CIS project costs, and 14 essentially what you are coming forward with in this 15 case is a request to be permitted to reclassify these 16 costs as something other than CIS project costs. 17 Right? 18 MR. KENT: No, I wouldn't agree with 19 that, Mr. Thompson. 20 MR. THOMPSON: So you are now telling 21 us that business process re-engineering, they're this, 22 they're that. 23 MR. KENT: We told the Board that 24 throughout, Mr. Thompson. 25 MR. THOMPSON: But they were 26 allocated to the project. 27 MR. McGILL: I think what we're 28 saying is when an organization goes out to acquire a 1395 KENT/McGILL, cr-ex (Thompson) 1 major system like this, there's some internal costs 2 that that organization needs to incur in order to 3 figure out what its needs are and make sure that its 4 specifying those needs properly when it goes out 5 through a tendering process to find solutions or 6 vendors and that those costs are properly absorbed by 7 that organization and once the decision is made to 8 acquire a service or a product from a vendor that those 9 costs are the ongoing costs of acquiring that service. 10 MR. THOMPSON: Well, others have 11 taken you through the discussion of whether the bulk of 12 these costs are properly classified as software 13 development costs or something else. I don't propose 14 to go through it again. 15 On the classification point, what I 16 suggest you are trying to do is essentially retroactive 17 ratemaking. It's sort of like coming in and saying "We 18 allocated these costs to this project year after year 19 after year like, for example, we allocated costs on a 20 fully marginal basis". Now you are coming forward and 21 saying "Oops, I would like to do the allocation another 22 way". 23 Do you not agree it has a retroactive 24 ratemaking aspect to it? 25 MR. KENT: I would agree that we're 26 proposing that the overall costs that have to date been 27 accumulated in the CIS work in progress project account 28 number now need to be split out between costs that will 1396 KENT/McGILL, cr-ex (Thompson) 1 properly pass to Newco for the software and costs that 2 properly are resident in the utility. 3 As I mentioned I think earlier this 4 morning, if we had known in E.B.R.O. 473 what we know 5 now about affiliate relationships and the desirability, 6 the advantages of this kind of relationship for 7 ratepayers and the company, we would have at that stage 8 have set up two distinct accounts, one relating to 9 expenditures that would ultimately be borne by the 10 utility for the BPR work and other similar things and 11 another account for the costs that would go to Newco. 12 We weren't so good at seeing into the 13 future back in 1992 to realize that that would 14 ultimately be the way things would have to be broken 15 out and we are now trying to reconstruct that 16 accounting process. I do agree with that, but I do not 17 see this as being retroactive ratemaking. 18 MR. THOMPSON: Well, if we knew what 19 we know now, we would have an outsource CIS application 20 package at a cost of about $60 million or less, not a 21 $120 million dinosaur that we are trying to evaluate. 22 That's what you are going to argue. 23 MR. McGILL: Mr. Thompson, it's I 24 think fruitless to speculate about that. I appreciate 25 that you are going to argue that. We to the depths of 26 our souls do not believe that that was possible then 27 and, frankly, I doubt that it's possible even today. 28 What I do know is that the BPR work 1397 KENT/McGILL, cr-ex (Thompson) 1 that was done for the utility generated very 2 significant benefits that had been flowing for the 3 benefit of ratepayers for a number of years. 4 The fact that the BPR costs were not 5 closed when those benefits first started to flow was a 6 function of the accounting conventions that were 7 established in E.B.R.O. 473. 8 We can look back at this now and say 9 "That wasn't appropriate, we should have done something 10 different", but we still have to do something about it 11 now. We can't just leave it with nothing but a pile of 12 should-haves. 13 MR. THOMPSON: All right. Well, I 14 will move on. My point is you folks tied these costs 15 to the CIS project and it's a little late in the day to 16 uncouple them, in our view, but that's argument. 17 Let's go on to the O&M. I will come 18 back to the capital budget after we get to this O&M 19 business. 20 We have discussed the impact of what 21 it is you are proposing for your O&M, but step one in 22 the process that you are putting forward for treatment 23 of O&M costs in this application is the affiliate 24 transaction and contract arrangements. In other words, 25 you are outsourcing the CIS application to an 26 affiliate. 27 MR. KENT: Yes. The ownership of the 28 software will be by an affiliate to the company. 1398 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Right. The actual 2 transfer, as others have indicated, is not going to 3 take place until a point in time outside the test 4 year 2000. 5 MR. McGILL: Title to the software 6 asset won't transfer until October 1 of 2000. 7 MR. THOMPSON: And so in fact the 8 software asset will be owned by the utility. 9 MR. McGILL: No. It will be owned by 10 Enbridge Consumers Gas, but it will be outside of the 11 utility rate base. 12 MR. THOMPSON: So the owner is 13 Enbridge Consumers Gas, the corporate entity. 14 MR. McGILL: Until October 1 of 2000. 15 MR. THOMPSON: Right. The corporate 16 entity that will be operating the software will be 17 Enbridge Consumers Gas, the corporate entity. 18 MR. KENT: The affiliate will be 19 established at the beginning of October this year. As 20 I mentioned I think yesterday, the affiliate will be 21 providing staff to operate the application effective 22 the 1st of October 1999. 23 Now, the number of that staff will 24 increase over the course of the year and it may be that 25 in the transitional period at the beginning of the year 26 that it will in fact be utility staff whose costs are 27 eliminated from the utility. 28 MR. THOMPSON: What I'm trying to get 1399 KENT/McGILL, cr-ex (Thompson) 1 at is this affiliate transaction for the purposes of 2 the year 2000 is a hypothetical transaction. It's not 3 like Union where the stuff went out to the affiliates 4 and the repayments had to be made to the affiliates 5 once the transfer had taken place. This is 6 hypothetical for the year 2000. 7 MR. KENT: I think we are getting 8 confused because I believe, Mr. Thompson, you have the 9 understanding that the software is currently owned by 10 the ratepayer in some fashion. Is that where you 11 started? 12 MR. THOMPSON: No. I'm not 13 suggesting -- the ratepayer doesn't own anything. The 14 company owns the assets. 15 MR. KENT: Okay, good. We are with 16 you so far. 17 MR. THOMPSON: The entity that is 18 going to be operating those assets is the utility 19 entity, not an affiliate of the utility entity for the 20 period ending September 30, 2000. 21 MR. KENT: No. That's not correct. 22 Newco will operate the asset starting October 1, 1999, 23 and we will be providing services to the utility based 24 on the phases of the software that are in service at 25 that time and then will be brought into service during 26 the course of the year. 27 The utility is going to get the 28 benefit of using the software and Newco will be paying 1400 KENT/McGILL, cr-ex (Thompson) 1 the costs of operating it as of the 1st of October. 2 MR. THOMPSON: Are you telling me 3 Newco is going to be incorporated by October 1, 1999? 4 MR. KENT: Whatever the entity is, 5 and it may be an existing entity, will be incorporated 6 by October 1, 1999. Yes. 7 MR. THOMPSON: But it's not going to 8 own any assets, is that right? 9 MR. KENT: It will have made in 10 effect a downpayment or a deposit on the assets. What 11 it will be using is a partially completed asset. It's 12 not the finished product. That's why it's not paying 13 for the finished product until it is completed at the 14 end of fiscal 2000. 15 MR. THOMPSON: So what's the deposit? 16 MR. KENT: Again, we covered this 17 ground yesterday, Mr. Thompson, but the idea is that 18 Newco will make a payment or a series of payments for 19 the right to use the unfinished CIS. It will be a 20 payment on account, if you like, towards the full 21 purchase price. It will represent the value of the 22 unfinished asset at that time. 23 MR. THOMPSON: All right. You may 24 have gone through it. I unfortunately missed it. 25 There is no agreement of purchase and sale. 26 MR. KENT: That's not been 27 drafted yet. 28 MR. THOMPSON: No. That's not going 1401 KENT/McGILL, cr-ex (Thompson) 1 to close until October 1, 2000, for tax reasons, we 2 were told. 3 MR. KENT: That's correct. 4 MR. FARRELL: Title won't be 5 transferred until October 1, 2000, for tax reasons. 6 MR. THOMPSON: Is there going to be 7 some sort of operating agreement between Consumers Gas, 8 the corporate entity, and Newco? 9 MR. KENT: It's the services 10 agreement. 11 MR. THOMPSON: And that's going to 12 have effect, you say, October 1, 2000. 13 MR. KENT: No. 1999. 14 MR. THOMPSON: 1999. 15 MR. KENT: It says so in the services 16 agreement. 17 MR. THOMPSON: Well, I guess I'm a 18 little thick. 19 We are going to be paying fees to an 20 entity that doesn't own anything. Is that right? 21 Through rates you are going to be collecting 22 $15 million and some odd to pay fees to an entity that 23 doesn't own anything. 24 MR. FARRELL: Well, I think to be 25 legally correct, they are paying fees for a service 26 provided by Newco. You are implying that Newco needs 27 to own the asset it's operating in order to provide a 28 service. I think Mr. Kent is telling you that's 1402 KENT/McGILL, cr-ex (Thompson) 1 not so. 2 MR. THOMPSON: I am just trying to 3 cut through the restructuring here. Essentially, what 4 we have now within the utility is your existing systems 5 that are in transition to a new system. 6 MR. KENT: Some of the existing 7 systems are in transition. The batch Legacy billing 8 engine is. Other pieces are new and are being built 9 today. 10 MR. THOMPSON: I understand that. It 11 is in transition to a new system, is what I said. 12 We are going to subdivide what is 13 housed, if you will, in one corporate entity today 14 between two entities. 15 MR. KENT: Yes. I am not sure if it 16 is one today. But please keep going, Mr. Thompson, and 17 I will see if I can follow you to your conclusion. 18 MR. THOMPSON: Why aren't you sure 19 that it is in one today? I thought it was Consumers 20 Gas, the corporate entity. 21 MR. KENT: The title, to the extent 22 that such exists independently of the Legacy batch 23 billing engine, really rests with the utility, I 24 believe, rather than the company that has to date been 25 laying out the money for the development of CIS. 26 Portions of it may be split in that 27 fashion. But they will migrate from that state to 28 ownership by Newco, so that the whole thing is owned by 1403 KENT/McGILL, cr-ex (Thompson) 1 Newco. The title transfer will take place for 2 October 1, 2000. 3 MR. THOMPSON: The people providing 4 CIS functions today are with the Consumers Gas Company, 5 the corporation? 6 MR. McGILL: That are operating the 7 application today? 8 MR. THOMPSON: Right. 9 MR. McGILL: Yes. 10 MR. THOMPSON: The hardware is with 11 that company? 12 MR. KENT: Yes. 13 MR. THOMPSON: The software is with 14 that company? 15 MR. KENT: Which software? 16 MR. THOMPSON: The software that is 17 being used to provide the CIS application. 18 MR. McGILL: Today? 19 MR. THOMPSON: Today. 20 MR. KENT: Some of it would be within 21 the utility, and some of it would be within the 22 corporate entity but outside the utility. 23 MR. THOMPSON: Right. So it is in 24 the one corporate entity. 25 MR. McGILL: One legal entity. 26 MR. THOMPSON: Fine. When we are 27 going to subdivide those resources under your proposal. 28 MR. McGILL: I think the transfer 1404 KENT/McGILL, cr-ex (Thompson) 1 agreement is going to have to deal with those matters. 2 MR. THOMPSON: But at the end of the 3 day we are still going to have, if you will, the same 4 deck chairs providing the service that is in 5 transition. 6 MR. KENT: There may be some old deck 7 chairs but there are a lot of new ones, because there 8 are a lot of new elements to the CIS. 9 MR. THOMPSON: I just want to 10 understand this deposit business. 11 We don't know the identity of the 12 company, but some unknown company is going to be paying 13 a deposit to Consumers Gas? 14 MR. KENT: To the corporate entity, 15 yes, for the right to use the unfinished software. 16 MR. THOMPSON: Is that a monthly 17 payment of some sort? 18 MR. KENT: I don't believe that that 19 has been determined. 20 MR. THOMPSON: It hasn't been 21 determined. 22 MR. KENT: And again, it has no 23 ratemaking implication. 24 MR. THOMPSON: Well, we see -- is it 25 reflected in the Z-factor? 26 MR. KENT: No, it is not. 27 MR. THOMPSON: And this you are 28 characterizing as simply -- it could be a dollar day, 1405 KENT/McGILL, cr-ex (Thompson) 1 I suppose, could it, towards a $120 million purchase 2 price? 3 MR. KENT: I suppose, hypothetically, 4 it could. 5 MR. McGILL: Towards an $89 million 6 purchase price. 7 MR. THOMPSON: What happens if you 8 don't get your $30 million? Does the purchase price 9 become $120 million? 10 MR. KENT: No. 11 MR. THOMPSON: What happens to the 12 affiliate transaction if you don't get your 13 $30 million? 14 MR. KENT: I don't think it is 15 affected. 16 MR. McGILL: I would assume that we 17 would just go ahead. 18 MR. THOMPSON: If you go ahead, then 19 the book value of the asset becomes $120 million. So 20 that becomes the purchase price. Is that right? 21 MR. KENT: That may be an accounting 22 convention; but not to my knowledge. 23 MR. THOMPSON: In any event, 24 something is going to be paid by an unnamed affiliate 25 beginning October 1, 1999. 26 MR. KENT: Correct. 27 MR. THOMPSON: On account of the 28 purchase price is yet undetermined. 1406 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: The purchase price will be 2 the net book value of the software asset at the title 3 transfer date of October 1, 2000. 4 MR. THOMPSON: And then it appears 5 from the evidence that you will be collecting, if your 6 proposal is accepted, CIS fees from ratepayers of 7 $15.814 million. 8 MR. McGILL: Well, the Newco would be 9 charging Consumers Gas $15.8 million, less the phase-in 10 credit of $4.1 million, less the avoided IS labour 11 reduction of $435,000, and less the hosting fees of 12 $3.6 million, netting out. And then when the 13 incremental operating cost benefit is factored in, that 14 gets you to the Z-factor of $5.7 million. 15 So the net amount that the Newco 16 affiliate ends up recovering is much less than the 17 $15.8 million. That is the case throughout the period 18 of the contract. 19 MR. THOMPSON: Excuse me. The fees 20 for the service that you say the affiliate is going to 21 provide are $15.814 million. There may be some other 22 amounts flowing the other way, but I didn't ask you 23 that. 24 The fees for the service are 25 $15.814 million. 26 MR. KENT: That is correct, 27 Mr. Thompson. 28 MR. THOMPSON: The service that is 1407 KENT/McGILL, cr-ex (Thompson) 1 being provided is operating assets that at that point 2 in time still sit with the Consumers Gas Corporation. 3 MR. KENT: That is correct. And 4 Newco will pay a fee to the utility for the right to 5 do so. 6 MR. McGILL: Will pay a fee to 7 Enbridge Consumers Gas to do so. 8 MR. THOMPSON: Is it operationally, 9 for the year 2000, essentially the same as it is now, 10 but we just created some accounting manoeuvres and 11 legal changes that produce this rather odd looking 12 structure? 13 MR. KENT: It is sure legal ingenuity 14 that led to this. There will be new CIS services 15 provided during the course of fiscal 2000. Those new 16 services deliver real benefits and real cost reductions 17 to ratepayers. 18 There are costs associated with the 19 development of that new software, and the recovery of 20 those costs is reflected in the CIS fees net of the 21 phase-in credit. 22 Ratepayers are getting something in a 23 new system during the course of fiscal 2000. They are 24 going to start to have to pay for it. 25 MR. THOMPSON: Well, I will come back 26 to that. 27 In terms of the practical realities 28 is, operationally, everything that will be happening in 1408 KENT/McGILL, cr-ex (Thompson) 1 the test year really as it is happening now? 2 MR. KENT: I would say not, because 3 the new CIS is going to be in service and replacing the 4 Legacy system. 5 MR. THOMPSON: What is the tax reason 6 for this October 1, 2000 closing date? 7 MR. KENT: My understanding, as I 8 explained to Mr. Warren yesterday, is that on transfer 9 of an asset between affiliate companies, Revenue Canada 10 requires that there be a valuation of the asset. 11 The valuation of unfinished software 12 is apparently much more of an art than a science. It 13 is really very difficult to decide what the software is 14 worth in its unfinished state. That then causes 15 Revenue Canada some problems and potentially the 16 company some problems. 17 The most effective way to avoid that, 18 in our view, is to wait until the software asset is 19 completed, in which case it is relatively 20 straightforward to have Revenue Canada accept a value 21 for it. 22 MR. THOMPSON: Right. But the 23 ratemaking you are seeking now is on an assumption that 24 it will be completed. 25 MR. KENT: Absolutely. It will be 26 completed. 27 MR. THOMPSON: Are you doing it that 28 way so that you will have something to say to Revenue 1409 KENT/McGILL, cr-ex (Thompson) 1 Canada: "Well, we are collecting $15 million in rates; 2 therefore, it is worth something." 3 MR. KENT: That suggestion has never 4 been made internally in the company, to my knowledge. 5 MR. THOMPSON: There was a decision 6 from the Board -- I think it was E.B.R.O. 495 -- where 7 they said don't come back until this thing is finished. 8 Do you recall that? 9 MR. KENT: Yes. And I think one of 10 the intervenors -- I am not sure, it may have been 11 yourself -- filed an interrogatory about that. 12 MR. THOMPSON: Right. Why should we 13 deal with it? Aren't you back before it is finished? 14 MR. KENT: I think we outlined -- 15 MR. THOMPSON: Isn't this premature? 16 MR. KENT: I think we outlined in our 17 response to that interrogatory the reasons why we felt 18 it was appropriate to come back now. 19 Do you remember the interrogatory 20 number, by any chance, Mr. Thompson? 21 MR. THOMPSON: I do remember it, but 22 I haven't my number noted. I think it's around 12 23 maybe. 24 No, it's 19. Exhibit I, Tab 12, 25 Schedule 19. 26 MR. KENT: Okay. Thank you, 27 Mr. Thompson. 28 MR. THOMPSON: The first page of our 1410 KENT/McGILL, cr-ex (Thompson) 1 response is a preamble that matches the preamble to 2 your question so I think we can go straight to the 3 second page. 4 Our position is that the Board can 5 now have confidence that the CIS project will be 6 completed in the test year. I think there are many 7 elements of our evidence that would lead the Board to 8 conclude that that is the case. 9 In a forward test year process, if an 10 asset is going to be completed and will be ready to be 11 close to rate base in the test year, the Board has, in 12 many, many previous instances, accepted the idea that 13 the review of that project should take place in the 14 case that accompanies or is associated with that test 15 year. 16 We do the same thing with pipeline 17 projects, we have done the same thing with many 18 computer projects in the past. It is based on our firm 19 conviction that CIS can and will be finished in the 20 test year that we have now brought it forward. 21 MR. THOMPSON: I understand that. 22 But we have heard that before too and the Board said: 23 Don't come back until it's finished. And yet here you 24 are and repeating yet again, "We will get it done in 25 the test year." 26 MR. FARRELL: That, Mr. Thompson, is 27 your interpretation of paragraph No. 3.6.32, I would 28 assume, on page 84, and I don't read it as the Board 1411 KENT/McGILL, cr-ex (Thompson) 1 saying: Don't come back. 2 MR. THOMPSON: All right. Well -- 3 If you get what you are asking for 4 and the ratepayers pay these CIS fees for the year and 5 it doesn't work, do we get the money back? 6 MR. KENT: Again, I think this is 7 ground we covered before. 8 The first release of CIS is in and it 9 does work. Your own expert consultant, Mr. Stephens, 10 has seen it work in full production volumes at our 11 site. It is the first release. There are further 12 enhancements that will be made to it in the subsequent 13 releases, but it is in and it is working. 14 MR. THOMPSON: This is the database. 15 MR. KENT: What's in now and 16 functioning is the on-line inquiry portion -- 17 MR. THOMPSON: On-line inquiry. 18 MR. KENT: -- as I'm sure 19 Mr. Stephens can tell you. 20 The database conversion is taking 21 place on the 6th of November and there are three 22 subsequent releases that bring further functionality. 23 Now, with each one of those there are 24 benefits that flow to the company. It is possible then 25 to achieve cost reductions. We are providing those 26 cost reductions to ratepayers in the form of the 27 Z-factor, and ratepayers are guaranteed to receive 28 those cost reductions. Whether the company actually 1412 KENT/McGILL, cr-ex (Thompson) 1 achieves them or not, the cost reductions will flow to 2 ratepayers. 3 MR. THOMPSON: All I asked was: If 4 it doesn't work do we get the $15.814 million back? 5 MR. KENT: But I'm saying it does 6 work. Part of it works already. 7 MR. THOMPSON: You don't know that. 8 Pardon? 9 MR. KENT: Mr. Thompson, I would 10 suggest that you ask Mr. Stephens whether Phase 1A 11 works. He has seen it work. 12 MR. THOMPSON: We are paying 13 $15.814 million for Phase 1A? 14 MR. KENT: No, no. 15 MR. THOMPSON: No. 16 MR. KENT: No. You are paying for 17 each of the other releases as they go in. 18 MR. THOMPSON: Right. 19 MR. KENT: But we promised this Board 20 that we would update all parties during the course of 21 this case as to progress. 22 When we wrote the original evidence 23 in February of this year we, at that stage, set out a 24 schedule for the releases. At that stage release 1A or 25 Phase 1A release was due in June of this year. We 26 delivered it two weeks ahead of schedule. We didn't 27 wait until after it was done to tell the Board. We 28 forecasted that and we did it. 1413 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Mr. Kent -- 2 MR. KENT: We are on schedule to 3 deliver in November. 4 I apologize, Mr. Thompson, for going 5 on, but you seem to have a degree of scepticism about 6 our deliveries -- 7 MR. THOMPSON: Yes. 8 MR. KENT: -- that is based on the 9 project -- 10 MR. THOMPSON: Well-founded, I might 11 say. 12 MR. KENT: -- as it was before. 13 MR. THOMPSON: I'm asking a simple 14 question: Let's assume the Board gets a letter in 15 December, not unlike ones we received before, "Whoops, 16 we can't make the delivery date. There is a problem 17 and we will have to..." -- do we get the money back? 18 MR. KENT: I don't see how it's 19 possible to do that through the normal ratemaking 20 process, Mr. Thompson. Perhaps you could suggest a 21 mechanism by which that would work. 22 MR. THOMPSON: Well, it's not give it 23 to you until it's up and running, which is what the 24 Board, in my view, said the last time. 25 MR. KENT: But, Mr. Thompson, you 26 have been protesting for some time about the idea of 27 retroactive ratemaking and a number of other matters 28 that you are suggesting are false on the company's part 1414 KENT/McGILL, cr-ex (Thompson) 1 if we make proposals that would lead to that. Surely 2 your proposal would lead to exactly the same kind of 3 retroactive ratemaking impact. 4 MR. THOMPSON: Let's move on. 5 In terms of the contract, we have had 6 a lot of discussions about the constraints that it may 7 impose on the utility, and there was a discussion with 8 one of the questioners, I think it was Mr. Brett, about 9 the lock-in provisions. Do you recall that? 10 MR. KENT: The fact that cancellation 11 isn't possible until, I believe, three years into the 12 contract? 13 MR. THOMPSON: Yes. 14 MR. KENT: Yes. 15 MR. THOMPSON: Could you just tell me 16 how the market value provisions of the contract are 17 intended to work? 18 MR. KENT: You mean the comparators 19 to other systems, to the extent that there are other 20 systems out there generally available that would offer 21 the same services? 22 MR. THOMPSON: Yes. There is a group 23 of clauses in there that, as I understand it, are 24 designed to assure that the ratepayers pay no more than 25 market value for the service that the affiliate is 26 going to provide. 27 MR. KENT: Yes, that is the intent of 28 those clauses. 1415 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Okay. Could you just 2 give me a brief description of how they are intended to 3 work? 4 MR. KENT: Mr. McGill is just pulling 5 it up. Perhaps he is in a better position to do that 6 than I while I am looking for them myself. 7 MR. McGILL: I'm still looking. 8 --- Pause 9 MR. McGILL: It is Article 9.8 of the 10 contract on page 21 of 53 of Exhibit B2, Tab 7, 11 Schedule 4. 12 What that article says is that: 13 "If during the term of this 14 agreement client can demonstrate 15 to Newco that the total of all 16 estimated fees for the forward 17 contract year are above the fair 18 market value of the services 19 associated with such fees, then 20 on notice from the client the 21 parties may renegotiate the 22 fees." (As read) 23 MR. THOMPSON: All right. So just 24 again I would like a description of how this is 25 intended to work. 26 This contract, you tell us, is going 27 to go into force on October 1 of 1999? 28 MR. KENT: That's correct. 1416 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: You will be 2 collecting -- at least the utility will be collecting 3 in rates -- fees of $15.8 million, if you get what you 4 ask for? 5 MR. KENT: The annual impact on 6 ratepayers of the CIS Z-factor is set out in our 7 evidence. 8 MR. THOMPSON: Yes, I understand 9 that. The fees component -- 10 MR. KENT: The amount that is going 11 to end up -- that it is going to end up costing 12 customers is $5.7 million or $3.84 per customer. 13 MR. THOMPSON: I'm just focusing on 14 the "Fees" line. The fees payable -- 15 MR. FARRELL: But that is not the 16 fees line that go into the company's rates, 17 Mr. Thompson. 18 MR. THOMPSON: I didn't say it did go 19 into company's rates. I'm talking about the contract. 20 The fees payable under the contract 21 are $15.814 million. 22 MR. KENT: That is correct. 23 MR. THOMPSON: Thank you. 24 If you get what you ask for those 25 amounts will be recovered in rates. 26 MR. KENT: The effect on ratepayers 27 is the recovery of $5.7 million or $3.84 per customer. 28 MR. THOMPSON: Have it your way. 1417 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: Thank you. 2 MR. THOMPSON: Now, if the project 3 traders in 2000 -- under the contract do I understand 4 that there is no relief to the client until year 2001? 5 MR. KENT: There are dispute 6 arbitration proceedings and if Newco is unable to 7 provide the services those provisions would kick in. 8 Without spending some time going 9 through the agreement I'm not sure exactly how that 10 would work. 11 But clearly, if Newco fails to 12 deliver on its obligations to provide working software, 13 there are ways in which the utility can find remedies. 14 The utility is locked in for a 15 three-year period only under the assumption that Newco 16 is providing the services as described in the Services 17 Agreement. 18 MR. THOMPSON: I am just trying to -- 19 what happens if the services are, if you will, hobbled 20 by some failure or partial failure in the anticipated 21 performance of the next series of releases? Does the 22 company have any relief under the market value 23 provisions of the contract? 24 MR. McGILL: I think the company 25 would be in a position to renegotiate the pricing under 26 the contract, and, as Mr. Kent has indicated, there is 27 a dispute resolution process outlined in the contract 28 in section 16, "Article Disputes". 1418 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: In the Union case, as 2 I recall it, Union does not automatically get what is 3 payable under the contract year after year after year. 4 The amount has to be approved by the Board. Do you 5 recall that? 6 MR. KENT: I'm not sure if that is 7 the case or not, but that is the understanding that we 8 have of how the CIS Z-factor would operate during the 9 term of the current PBR agreement. 10 MR. THOMPSON: Meaning what the Board 11 would assess the market value of this service year by 12 year? 13 MR. KENT: The CIS Z-factor would be 14 a matter for consideration by the Board in the annual 15 rates case, yes. 16 MR. THOMPSON: But a Z-factor is a 17 presentation by you people, and I am trying to focus on 18 market value. If the market value drops, for whatever 19 reason, is it your understanding that is going to be 20 determined by the Board for ratemaking purposes each 21 year? 22 MR. KENT: The Z-factor is made up a 23 number of components, but the market price for CIS 24 services is one of those components. So if the bottom 25 line of the Z-factor is before the Board, so too would 26 the market price. 27 MR. THOMPSON: So is the answer to my 28 question: Yes, the Board will determine the market 1419 KENT/McGILL, cr-ex (Thompson) 1 value each year? 2 MR. KENT: I believe that option is 3 open to the Board to determine if the fees that are 4 being paid by the utility to Newco are different than 5 what the Board believes to be fair market value. It 6 can be adjusted in each rates case. 7 MR. THOMPSON: If the costs that you 8 have claimed are not approved for ratemaking purposes, 9 there is a clause in the contract that says the 10 contract becomes -- terminates, or words to that 11 effect, and I know you have discussed this with others. 12 Is this affiliate transaction that 13 you are proposing or the outsourcing to your affiliate 14 a go regardless of what the Board decides from a 15 ratemaking perspective? 16 MR. KENT: The utility absolutely has 17 to have a viable billing system. If Newco owns CIS, in 18 the near term that is probably the only practical place 19 that the utility can go to get a billing system. 20 Therefore, I believe that, at least in the near term, 21 the next two to three years, the utility would still 22 receive CIS services from Newco. I don't believe there 23 is any other practical option. 24 MR. THOMPSON: All right. 25 So the contract will go forward on 26 some basis. 27 MR. KENT: It may be appropriate to 28 renegotiate the Services Agreement between Newco and 1420 KENT/McGILL, cr-ex (Thompson) 1 the utility at that point, but at this stage I have no 2 idea how that renegotiation might take place. I don't 3 know what impacts a Board decision might have on a need 4 to renegotiate the Services Agreement. 5 MR. THOMPSON: Let's turn to the fair 6 market value issue. 7 You appear to accept, in a number of 8 interrogatory responses and also in your prefiled 9 evidence, that you can only recover in rates the fair 10 market value of the service to be provided. 11 MR. KENT: Yes, we do accept that. 12 We also recognize that over the term of this contract, 13 that means that the shareholder will not be able to 14 recover the full cost of the investment that has been 15 made in CIS. 16 MR. THOMPSON: And the issue is how 17 much of it you can recover. 18 MR. KENT: Well, we can't recover all 19 of it. 20 MR. THOMPSON: No. We know that 21 because you are claiming less than 100 per cent. 22 MR. KENT: Essentially, that's 23 correct. 24 The shareholder, by accepting that 25 the best way for all parties to take this forward is 26 through an affiliate relationship and a fair market 27 value-based fee, has accepted the fact that the 28 $89 million that will be transferred to Newco cannot be 1421 KENT/McGILL, cr-ex (Thompson) 1 recovered during the course of the contract. 2 You can figure it out pretty quickly, 3 just by looking at the amount that is being paid back 4 to the utility through the hosting fees, through the 5 costs that Newco is going to have in operating the 6 system, looking at the gross amount of the revenues 7 that Newco is going to receive, that Newco is going to 8 fall short by something in the order of about 9 $15 million, by my back-of-the-envelope calculation, 10 over the course of this contract in recovery of the 11 costs of the CIS. 12 MR. THOMPSON: The question is 13 whether what you are seeking to recover is fair market 14 value or whether it is considerably in excess of fair 15 market value. That is the question for the Board to 16 consider. 17 MR. KENT: Okay. 18 I'm sorry, Mr. Thompson. I thought 19 you were saying in the hypothetical where the Board did 20 accept that this was fair market value, what would the 21 company recover. 22 I am saying if the Board does accept 23 the fair market value that is set out here, the 24 shareholder is still short. 25 MR. THOMPSON: I am not quarrelling 26 with that. I accept you are short something. 27 MR. KENT: Okay. 28 MR. THOMPSON: You can appreciate 1422 KENT/McGILL, cr-ex (Thompson) 1 that our position is: Are you still claiming more than 2 fair market value? 3 MR. KENT: I see. 4 MR. THOMPSON: Do you understand that 5 position? 6 MR. KENT: Yes, I do. 7 MR. THOMPSON: Okay. That's good. 8 Now, in order to determine the -- 9 what is the definition of "fair market value" that you 10 apply? 11 There is one in the Affiliate 12 Transactions Code for gas utilities. Is that -- 13 MR. KENT: It sounds like a good one. 14 MR. THOMPSON: -- the one you are 15 happy with? 16 MR. KENT: I believe it is the one 17 that is applicable. 18 MR. THOMPSON: Okay. 19 Just for the record, if I can find -- 20 MR. McGILL: I can read it in, if you 21 would like, Mr. Thompson. 22 MR. THOMPSON: Yes, please. 23 MR. McGILL: "Fair market value" 24 means: 25 "...the price reached in an open 26 and unrestricted market between 27 informed and prudent parties 28 acting at arm's length and under 1423 KENT/McGILL, cr-ex (Thompson) 1 no compulsion to act." 2 (As read) 3 MR. THOMPSON: Would you agree with 4 me that determining fair market value can be looked at, 5 first of all, by arm's length transactions in the 6 marketplace? That is one source of information? 7 MR. KENT: Yes, it is. 8 MR. THOMPSON: Insofar as your 9 transaction is concerned with the affiliate, this is 10 not an arm's length transaction in the marketplace? 11 MR. KENT: That's correct. 12 MR. THOMPSON: So what we have to do, 13 since you didn't go to bid or anything of that nature, 14 we have to look at other sources for estimating fair 15 market value? 16 MR. KENT: That's correct. 17 MR. THOMPSON: The sources that are 18 normally referenced are to comparables in the market? 19 MR. KENT: Yes, I think that would be 20 fair. 21 MR. THOMPSON: And other 22 benchmarks -- or including benchmarks? 23 MR. KENT: As a generic matter, yes, 24 I think one would always want to be very careful in 25 reviewing both the comparability of services and the 26 validity of benchmarks. But as a generic matter I 27 agree that those are the sorts of things you would 28 look at. 1424 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Yes. Like real estate 2 appraisers, car appraisers. 3 MR. KENT: Yes. 4 MR. THOMPSON: You would find a 5 comparable and then you adjust that comparable to make 6 it conform to the subject under consideration. 7 MR. KENT: If it's necessary to make 8 adjustments, yes. 9 MR. THOMPSON: All right. 10 In terms of this service that we are 11 trying to evaluate, this is a service still in 12 transition, as we have discussed. Correct? 13 MR. KENT: The final release of CIS 14 will not be completed until August of 2000, yes. 15 MR. THOMPSON: Okay. 16 But what the contract is based on is 17 an assumption that we will get to where you are 18 planning on going? 19 MR. KENT: Yes, that's fair. 20 MR. THOMPSON: In order to evaluate 21 this product, I think it is important for everybody to 22 appreciate where we are coming from in terms of the 23 product and where we are going in terms of the product, 24 and then trying to evaluate what the result is in the 25 context of comparables. This is where I am heading in 26 my next series of questions. 27 MR. KENT: I would have thought, 28 Mr. Thompson, that a comparable is a comparable, no 1425 KENT/McGILL, cr-ex (Thompson) 1 matter where it is coming from. But I'm happy to 2 follow with you on this if you want. 3 MR. THOMPSON: Well, tied up in this 4 evaluation of fair market value is that we have, in 5 rates now, costs for performing the functions that the 6 CIS application is to perform, correct, and we are 7 moving to other costs based on the new design? 8 MR. KENT: The company's old systems 9 that perform the functions, generally speaking, that 10 will be performed by the new CIS were generally 11 expensed as they were built and there's no current 12 recognition in rates of the recovery of any capital 13 investment made to build those systems. They are 14 essentially fully depreciated and providing services to 15 customers at -- from the point of view of amortizing or 16 seeking return on the original investment, that's gone. 17 There's no more capital recovery going on, in rates, 18 for the old system. 19 MR. THOMPSON: You are anticipating 20 me, Mr. Kent. I didn't ask any questions about 21 capital. I just tried to lay out where these next 22 series of questions were going. 23 MR. KENT: I think -- 24 MR. THOMPSON: Just try and relax 25 and -- 26 MR. McGILL: Well, what I -- 27 MR. THOMPSON: -- hear the 28 question -- 1426 KENT/McGILL, cr-ex (Thompson) 1 MR. McGILL: Well, what I -- 2 THE PRESIDING MEMBER: Well, why 3 don't we wait for the -- let's wait for the question. 4 MR. McGILL: Okay. 5 MR. THOMPSON: Now, in terms of what 6 is reflected in existing rates for the service that's 7 in transition -- well, the service before it got into 8 transition. Just to nail that down. 1999. The CIS 9 service was being provided by the Legacy systems, 10 primarily? 11 MR. KENT: That's correct. 12 MR. THOMPSON: And then there were 13 software and human resources that were involved in 14 performing the functions? 15 MR. KENT: Yes. 16 MR. THOMPSON: Okay. Now, the major 17 CIS functions you describe, I believe, in your 18 testimony, at Exhibit B1, Tab 8, Schedule 1, page 7? 19 MR. KENT: At a very high level, yes. 20 MR. THOMPSON: This is your first set 21 of testimony. 22 You say: 23 "In the most simplified form, 24 the CIS system includes three 25 main elements: a database 26 storing information on 27 customers; an on-line system 28 that allows access by employees 1427 KENT/McGILL, cr-ex (Thompson) 1 to this information; and then a 2 billing system that uses meter 3 and account information." 4 (As read) 5 And then you go on and say: 6 "There are many associated 7 systems." (As read) 8 MR. KENT: Yes. 9 MR. THOMPSON: All right. 10 Mr. Stephens, in his testimony -- perhaps you could 11 turn that up -- tried to describe what I call the "old 12 system". His testimony is Exhibit L25.2. And you will 13 find this in his testimony, at page 16. 14 MR. KENT: Yes, we have that. 15 MR. THOMPSON: And he says: 16 "ECG currently has an IBM `CICS' 17 mainframe CIS solution. It uses 18 an Adabas hierarchical database 19 to store information, provides 20 an online capability to query 21 customer records but does not 22 allow online update of those 23 records, and has an inflexible 24 batch billing capability. The 25 lack of an online update 26 facility necessitated the use of 27 hand-written cards, which were 28 then keypunched, and used by a 1428 KENT/McGILL, cr-ex (Thompson) 1 batch program to update customer 2 records - an unproductive and 3 error-prone process. The 4 replacement of this CIS solution 5 was the major application 6 initiative in the...SIM plan." 7 Is that a fair description of the old 8 situation? 9 MR. KENT: I think it's reasonably 10 accurate. There's a couple of value judgments in there 11 that I think we may want to question Mr. Stephens 12 about. But, factually, it's essentially correct. 13 MR. THOMPSON: All right. And the 14 resources that that system depended upon -- taking, 15 first of all, software -- were what? 16 MR. KENT: The company has, over a 17 long period of time, written a number of programs, 18 using in-house staff, primarily using computer 19 languages known as PL-1, Assembler, to some degree, I 20 believe there's some COBOL modules included and -- I 21 think that's about it. 22 MR. THOMPSON: Okay. And the 23 hardware resources that that system depends on? 24 MR. KENT: It runs on a mainframe 25 with a large attached data storage capacity. The 26 majority -- in fact, I think almost all of it is 27 leased. The hardware is currently an IBM mainframe, 28 and I believe it's EMC that's the -- that is used for 1429 KENT/McGILL, cr-ex (Thompson) 1 data storage. 2 MR. THOMPSON: And the human 3 resources needed to support that process? 4 MR. KENT: They are within the 5 current IS and customer systems area and they currently 6 are, I believe, six programmer analysts and one 7 supervisor. 8 MR. THOMPSON: But to provide the 9 client enquiries and all that kind of thing that fall 10 within the ambit of the CIS function -- we have the 11 database storing, so that involves input, as I 12 understand it; and then we have access to information 13 in order to respond to customer inquiries; and a new 14 billing system -- there is a body of humans that are 15 needed to provide this function? 16 MR. KENT: It's very largely 17 automated, now, Mr. Thompson. I'm not sure -- this is 18 a situation where I would like to go off-line with 19 Mr. Stephens and ask what the basis of the question is. 20 Perhaps you can expand on it a little 21 bit to help me -- 22 MR. THOMPSON: Well, if I call in and 23 ask an enquiry about my account -- 24 MR. KENT: Oh, yes. Okay. 25 MR. THOMPSON: -- there's a lot of 26 people there that are available to respond. Is -- 27 MR. KENT: Yes. And that really 28 falls into Mr. McGill's area. 1430 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: I'm just trying to get 2 the big picture of how many full-time equivalents are 3 required under the system, as it then, was to support 4 it, not only from the computing IT but also from the 5 customer call centre, the customer support -- 6 MR. KENT: You are talking about 7 the entire function, including the IT required to 8 support it? 9 MR. THOMPSON: Yes. 10 MR. KENT: That's the majority of the 11 costs that are in Mr. Wood's area and some allocation 12 from the information services group. 13 MR. THOMPSON: My understanding from 14 Mr. Stephens was that he was informed that it's about 15 800 full-time equivalents. Is that in the ball park? 16 MR. McGILL: That's the approximate 17 number -- not full-time equivalents. Positions. That 18 would include part-time positions, as well. 19 MR. THOMPSON: Is there a full-time 20 equivalent number somewhere? 21 All I'm trying to find out is what is 22 there that's being changed. And the next question is: 23 What's the dollars that are currently being recovered 24 in rates to support that system? And then we move to 25 the new system. 26 So it's the software resources, the 27 hardware resources and the people resources. Eight 28 hundred positions is in the ball park. Is that -- 1431 KENT/McGILL, cr-ex (Thompson) 1 MR. McGILL: I think that was 2 answered in the interrogatory question that we were 3 looking at this morning. 4 MR. THOMPSON: Oh. Well, could you 5 direct my attention to it, please. 6 MR. McGILL: I'm just trying to 7 recall the number. 8 MR. THOMPSON: Forty-one or 18? 9 MR. McGILL: No, it was neither one 10 of those. 11 --- Pause 12 MR. KENT: Perhaps, Mr. Thompson, 13 while Mr. McGill is looking for that reference, I can 14 take you somewhere else which will give you a better 15 sense of the incremental changes. Because we have 16 listed the incremental benefits for the 17 implementation -- 18 MR. THOMPSON: I don't -- 19 MR. KENT: -- includes reduction -- 20 MR. THOMPSON: I don't want to go 21 there, just yet. I want to see what we are 22 incrementing on. 23 MR. KENT: But I think what's 24 represented in the Z-factor is the increment. The 25 other is in the PBR base, as I understand the process. 26 MR. THOMPSON: I'm just trying to 27 find how many positions are there to support the 28 performance of this function as it was when the base 1432 KENT/McGILL, cr-ex (Thompson) 1 was established. 2 MR. KENT: Fine. 3 MR. McGILL: The interrogatory I had 4 in mind was IGUA 12, which is I12, Schedule 44, page 2 5 of 33. That's where we broke out the $80 million that 6 is included in Mr. Diamond's evidence as the company's 7 total 2000 customer-care cost. 8 So what you have there for 1999 and 9 the 2000 fiscal years is the total cost of providing 10 customer support services to the company's 1.5 million 11 customer base. 12 MR. THOMPSON: Yes, those are the 13 costs, but I was trying to find the people reflected in 14 the numbers. 15 MR. McGILL: As we indicated, there 16 are approximately 800 positions there; something less 17 in terms of FTEs. 18 MR. THOMPSON: Is the FTE number in 19 the record somewhere? 20 MR. McGILL: I don't believe it is. 21 The details of O&M aren't an issue in this case. 22 MR. KENT: It presumably would be in 23 last year's evidence, though, Mr. Thompson. 24 MR. THOMPSON: Okay. Would it be 25 possible for you to give me the reference in last 26 year's evidence? 27 MR. KENT: We will have to make 28 inquiries. 1433 KENT/McGILL, cr-ex (Thompson) 1 MR. McGILL: I will undertake to do 2 that. 3 MR. THOMPSON: Thank you. 4 Could I have a number for that, 5 please? 6 MS DESAI: J8.4. 7 UNDERTAKING NO. J8.4: 8 Undertaking by Mr. McGill to 9 provide the FTE number reference 10 in the previous year's evidence 11 MR. THOMPSON: In terms of the 12 changes that are being made to that system which 13 Mr. Stephens described, you describe them in various 14 places. 15 Mr. Stephens, again, goes on in his 16 testimony at page 16: 17 "The new ECG custom developed 18 CIS solution uses a client 19 server technology model --" 20 Is that right? 21 MR. KENT: Yes, it is. 22 MR. THOMPSON: 23 "-- stores customer records in 24 DB2 on the IBM mainframe, 25 downloads them as required to 26 Unix servers running Sybase, 27 which passes them to 28 workstations (PC's) for user 1434 KENT/McGILL, cr-ex (Thompson) 1 access and update." 2 Has he got that right? 3 MR. KENT: I can accept that, yes, 4 for the sake of this discussion. It is not entirely 5 accurate, but it is close enough. 6 MR. THOMPSON: And then it goes on: 7 "The printing solution could not 8 be made to work as designed --" 9 I think he should have used the word "planned": 10 "-- and so it was decided to 11 interface the current billing 12 system to the 13 PricewaterhouseCoopers on-line 14 system." 15 MR. KENT: We have asked Mr. Stephens 16 an interrogatory about that because we don't understand 17 his conclusion. 18 MR. THOMPSON: All right. My 19 understanding -- and Mr. Brett went through this with 20 you yesterday -- was that the original concept was the 21 Pricewaterhouse 2000 and there was a billing aspect to 22 that which didn't work, was the way I understood the 23 testimony, and that you then had to back off, 24 re-evaluate what you were doing, and you decided to 25 adjust your existing batch billing system in some way 26 to be accommodated in this new CIS plan. 27 MR. KENT: The outcome is correct. I 28 think, though, that your description of it as not 1435 KENT/McGILL, cr-ex (Thompson) 1 working is not what we have said. 2 We have said that we realized it was 3 going to take far longer than anticipated to test it 4 adequately and bring it into production, and that would 5 lead to both a delay in delivery of CIS that was 6 unacceptable to the company and an increase in cost 7 that was also unacceptable to the company. It was for 8 that reason we decided to use our batch billing system 9 in association with the other components of Service 10 2000. 11 MR. THOMPSON: Okay. Mr. Stephens 12 goes on: 13 "The CIS solution which ECG now 14 proposes was developed using an 15 application toolset from 16 PricewaterhouseCoopers and not 17 an application package." 18 (As read) 19 Is that right? 20 MR. KENT: It is based on Service 21 2000, and I am not going to quibble with this 22 distinction here. I think that PricewaterhouseCoopers 23 might be in a better position to do so, but certainly 24 Service 2000 includes frameworks, menus and processes 25 with which it is possible to create a software solution 26 that meets the utility's needs. 27 MR. THOMPSON: The comparison was to 28 a toolset as opposed to a package, and I understood -- 1436 KENT/McGILL, cr-ex (Thompson) 1 and perhaps I am incorrect -- that the word "toolset" 2 came from you. 3 MR. KENT: I don't recall using that 4 terminology myself. Perhaps Mr. Stephens has expertise 5 in IT that may be slightly different than mine. It may 6 be terminology -- 7 This is Mr. Stephens' report. 8 MR. THOMPSON: I know, but I was at a 9 meeting where I thought you used that phrase. 10 In any event, what does it mean to 11 you, that word "toolset"? What does it mean to you? 12 MR. KENT: I think a toolset would 13 mean something that would require further work to 14 develop a solution that suited any utility. 15 You could not take a toolset and turn 16 it on and make it work for anyone. A package, however, 17 is something that you could install, turn on and have 18 work. 19 Now, you would have to modify the 20 package to suit the requirements of any particular 21 utility, and it may be that the work involved in 22 modifying the package would be as great or greater than 23 the work involved in starting with a toolset and 24 building from that point. 25 It just depends how close the package 26 is to the needs of the business and what changes have 27 to be made. 28 MR. THOMPSON: All right. 1437 KENT/McGILL, cr-ex (Thompson) 1 Mr. Stephens gives an analogy in his evidence with 2 respect to toolset. He says that it is like buying a 3 pre-built house, but needs labourers to pour the 4 foundation, framers to assemble and fasten the walls, 5 electricians to install the electrical, et cetera. 6 Just stopping there, this 7 Pricewaterhouse product that you have -- there is 8 nothing in the contract to the effect that 9 Pricewaterhouse is going to maintain it. 10 MR. KENT: That's correct. 11 MR. THOMPSON: If any upgrades or 12 enhancements are required you are going to have to do 13 that yourself. 14 MR. KENT: We have the option of 15 asking Pricewaterhouse to do it at a later stage or 16 going to another vendor, as long as it is not a direct 17 competitor of PWC. 18 Even then, as long as they gave us 19 permission, we could do so. 20 MR. THOMPSON: Or do it yourself. 21 MR. KENT: Yes, or do it ourselves. 22 MR. THOMPSON: Okay. In order to 23 interface that product with your other systems, that is 24 something you have to do yourself? 25 MR. KENT: It has to be done; not 26 necessarily by ourselves. 27 MR. THOMPSON: Internally as opposed 28 to outsourcing that activity. 1438 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: It could be outsourced. 2 MR. THOMPSON: In terms of 3 Pricewaterhouse's availability to -- 4 MR. KENT: Excuse me, Mr. Thompson. 5 Before you finish this, are you going to stick with 6 this analogy that Mr. Stephens has pointed out, because 7 I have another comment about it? 8 MR. THOMPSON: Yes, please comment 9 on it. 10 MR. KENT: I think that the analogy 11 is a fair one. I think, though, that my point about 12 the package applies to the second portion about buying 13 a finished house. 14 If the only house that is available 15 is a one-bedroom bungalow and you have 16 children, you 16 have a problem. You have to do something to modify 17 that house to make it acceptable to your needs. 18 You have to, then, make changes that 19 involve the same carpenters, electricians, framers and 20 labourers that would be involved in building the house 21 from scratch, and it may be that the additions you 22 would have to make to the pre-finished house that you 23 bought would result in something that was more 24 expensive than starting from scratch and building a 25 house from the ground up. 26 MR. THOMPSON: There are sort of two 27 approaches to these solution/problems. 28 MR. KENT: I agree. 1439 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: One is to try to build 2 your own. In other words, try to create something that 3 conforms to your particular business vision. Or, the 4 other way is to convert your business into an existing 5 package. 6 The approach you folks have used 7 since 1992 is really the former. You are trying to 8 build this thing to make it work, even on a -- on any 9 basis. 10 MR. KENT: The packages that were 11 available at the outset of SIM were not, for example, 12 customized to Canadian needs. They could not compute 13 GST and PST. And I take it you are not suggesting that 14 we should have accepted that and put in a billing 15 system that couldn't calculate GST. 16 MR. THOMPSON: No. I am just saying 17 that for the past seven years -- and we are still at 18 it. We are building this thing. It is going to 19 conform one way or another. 20 MR. KENT: No. I don't think you 21 understood it properly, Mr. Thompson. 22 What I am trying to convey is the 23 fact that there were not any pre-built houses that met 24 the company's needs. 25 We had to do something. If we had 26 suggested to anyone that we were going to put in a 27 billing system that couldn't handle GST, we would have 28 been laughed out of whatever forum we were making that 1440 KENT/McGILL, cr-ex (Thompson) 1 point in. We had to adapt the existing solutions in 2 one way or another. 3 We got as close as we could in 4 selecting PriceWaterhouse at the time we were making 5 that decision. We have used the Service 2000 product. 6 You could call it a toolset or a package or whatever 7 you want. We have used that as a basis for 8 constructing our billing system. 9 MR. THOMPSON: All right. Let's move 10 on. Mr. Stephens indicates in terms of the packaged -- 11 the application package analogy -- that it's like 12 buying a finished house and you, I believe, addressed 13 your comments on that, have you? 14 MR. KENT: Yes, thank you. 15 MR. THOMPSON: Then he goes on 16 further: 17 "PriceWaterhouse has now 18 strategic alliance with utility 19 CIS solution suppliers --" 20 And he names them. 21 "-- and no longer sells the 22 toolset --" 23 Which is the PriceWaterhouse 2000 24 product, I believe. Is that your understanding? 25 MR. KENT: I don't believe that they 26 are actively marketing Service 2000 any more. Yes, 27 that's correct. I'm not sure if this is a full listing 28 of the CIS solution providers with whom 1441 KENT/McGILL, cr-ex (Thompson) 1 PriceWaterhouseCoopers has alliances. There may well 2 be others as well. 3 MR. THOMPSON: Okay, but I think the 4 point is that they are no longer basically supporting 5 actively marketing the product and they are not 6 providing enhancements or maintenance and so it's not 7 likely to appeal to any other purchasers. Therefore, 8 it's likely to fall into disuse. 9 MR. KENT: Well, we have acquired 10 from PriceWaterhouse the source code for the system and 11 full rights to use it and to modify it. Service 2000 12 is based on programming languages that are in very 13 active use and are being regularly updated. 14 We can take advantage of those 15 upgrades and updates as they happen. In fact, we asked 16 Mr. Stephens in another interrogatory about this 17 portion because we didn't understand his comment here 18 either. I look forward to hearing or seeing his 19 response to it. 20 MR. THOMPSON: Well, I sort of tried 21 to give you a signal as to what it's likely to say. In 22 any event, to keep this thing current, it's essentially 23 going to fall on your shoulders to either do it or to 24 find someone to do it, keep this toolset current. 25 MR. KENT: I would say that keeping 26 the underlying software in which the application is 27 written current does not lie on us. It's based on 28 PowerBuilder which is very actively marketed and a very 1442 KENT/McGILL, cr-ex (Thompson) 1 successful programming system or tool. 2 The changes or upgrades that might 3 reasonably be expected are changes that are going to 4 have to reflect what's going on in the Ontario 5 marketplace. Those are changes that would likely have 6 to be made on a custom basis in any event. 7 MR. THOMPSON: Well, let's move on. 8 Mr. Stephens goes on and addresses the releases. 9 MR. KENT: Yes. 10 MR. THOMPSON: Has he got those 11 straight, more or less? 12 MR. KENT: The release he shows as 13 August 2000 will in fact come in two stages, one in 14 June and one in August, but it's essentially correct. 15 MR. THOMPSON: And are these all 16 major milestones or is one more important than the 17 other? 18 MR. KENT: I think the most critical, 19 because it has the greatest technical complexity, is 20 the database conversion that's scheduled for 21 November 6. 22 MR. THOMPSON: He goes on that the 23 new solution primarily is his current business 24 processes. Is that fair? 25 MR. KENT: It's an interesting 26 comment. I think perhaps Mr. Stephens didn't have the 27 opportunity to see our business processes prior to the 28 BPR exercise and hasn't seen the extent to which 1443 KENT/McGILL, cr-ex (Thompson) 1 business processes have already been changed. 2 I think it's fair to say that the 3 software itself as it's going to be installed is not 4 going to radically change a large number of business 5 processes. It will eliminate online data entry -- I'm 6 sorry, batch updating of data, as Mr. Stephens has 7 pointed out, and it will do some other things that have 8 significant benefits. 9 I think they are probably not 10 reasonably described as radical changes in process as 11 some of the changes that flowed out of the original BPR 12 I think reasonably could be described. 13 MR. THOMPSON: All right. Well, he's 14 probably quite happy he didn't see the evolution. 15 Darwin's theory cuts both ways, as you know. 16 MR. KENT: It leads to continual 17 improvement, one hopes. 18 MR. THOMPSON: One hopes. He now 19 points out that your solution is not designed for 20 electronic commerce. Is that correct? 21 MR. KENT: I don't believe that 22 that's a fair comment. I think it's a system that 23 through changes in PowerBuilder will be one quite able 24 to adapt for electronic commerce. In fact, subsequent 25 to Mr. Stephens' visit with us, we have done some 26 further investigation of that. 27 MR. THOMPSON: I guess maybe the 28 point is without further cost, it's not designed for 1444 KENT/McGILL, cr-ex (Thompson) 1 electronic commerce. 2 MR. KENT: Expectation is that the 3 costs involved in embarking on the kinds of electronic 4 commerce that I think Mr. Stephens has in mind here 5 would not be significant. 6 MR. THOMPSON: In some testimony, I 7 think it's in response to one of Mr. Brett's IRs, you 8 talk about needing a further $30 to $50 million to 9 bring this thing into a state where it could 10 accommodate unbundling. 11 MR. KENT: But I think that there is 12 a distinction between what I thought Mr. Stephens was 13 saying about electronic commerce and unbundling of the 14 metro gas marketplace in Ontario. 15 MR. THOMPSON: It may well be. That 16 particular interrogatory response came to mind when you 17 said further enhancements are going to be cheap. That 18 was not a cheap number, as I recall it. 19 MR. KENT: No , and my understanding 20 is that it's likely that other utilities would also 21 need to make investments in their information 22 technology system for the same order of magnitude. 23 MR. THOMPSON: Is it likely that any 24 user is likely to purchase service from the affiliate, 25 the service that's described here, compared to 26 shareholders? 27 MR. KENT: I certainly hope so, 28 Mr. Thompson. 1445 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Well, are you planning 2 to market it actively? I thought you had been telling 3 us that you are outsourcing various activities to 4 parties other than your proposed affiliates. 5 I have left the impression, perhaps 6 wrongly, that rental billing and HIP billing and this 7 other stuff is also going somewhere else eventually 8 other than to this service provider. 9 MR. KENT: The system has the 10 capability of billing for programs like HIP and rental 11 water heaters and things like that. It, however, has 12 been built for the Ontario marketplace and has 13 hardcoated within it a lot of things that are specific 14 to this marketplace and the kinds of ways that Enbridge 15 Consumers Gas does business with its customers. 16 To the extent to which another 17 utility wasn't comfortable with adopting those 18 processes or if it was in another jurisdiction, the 19 changes that would have to be made to the system would 20 have to be made. They are not built into the system. 21 You can't just throw a switch and have it operate 22 properly in a U.S. jurisdiction, for example. It would 23 require work to make the system functional for a U.S. 24 utility. 25 I think the likelihood is that it 26 will not probably be used by other major utilities. 27 MR. THOMPSON: Whoever it will appeal 28 to will only pay what it's worth. 1446 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: I would expect them to pay 2 fair market value for it. 3 MR. THOMPSON: The point I'm trying 4 to make is the vision for your affiliates is not the 5 same as Union's where Enlogix SCT is an active 6 participant in the software marketplace. That's not 7 the vision of Newco. 8 MR. KENT: I think that's fair, at 9 least in the short to medium term because this software 10 is exactly suited to the needs of Enbridge Consumers 11 Gas and would have to be modified to meet the needs of 12 other utilities. 13 MR. THOMPSON: Okay. Now, in terms 14 of the functionality of this solution that you are 15 putting forward, old compared to the new, we are going 16 to have improved database -- we are going to have 17 improved client inquiry function. Is that fair? 18 MR. KENT: Yes, that's true. The 19 benefits are laid out in numerous places in our 20 evidence, but they result in an opportunity for the 21 utility to reduce staff, get the same amount of work 22 done with fewer people. It will also help particularly 23 in things like on-line data entry, in reducing the 24 possibility of errors, and it should give customers a 25 higher quality of service through faster response and 26 more complete information. 27 MR. THOMPSON: We are going to get 28 rid of the card business, I understand. 1447 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: Yes, that is correct. 2 MR. THOMPSON: Does that depend on 3 the November release being successful? 4 MR. KENT: Depend on it? It is part 5 of the plan, yes, because the new on-line capability 6 that was delivered ahead of schedule in Phase IA 7 accesses data that is in the old database format. 8 We could have written the capability 9 of doing update into that version, but when we switched 10 from Adabas to DB2 it would have had to be rewritten. 11 So we deferred the development of that on-line update 12 capability until the new database was in place. 13 But it is not physically impossible 14 to do it for the old database design. 15 MR. THOMPSON: We are still dealing 16 with cards, are we, as we speak? 17 MR. KENT: Yes, we are. 18 MR. THOMPSON: And that is going to 19 change, we hope, in November. 20 MR. KENT: That is correct. 21 MR. THOMPSON: The client inquiry in 22 on-line update, does that depend on November as well? 23 MR. KENT: I am not sure what you 24 mean by "client inquiry". 25 MR. THOMPSON: Well, somebody phones 26 in and they want some information. 27 MR. KENT: Yes. 28 MR. THOMPSON: My understanding is, 1448 KENT/McGILL, cr-ex (Thompson) 1 the way things work now, the customer service rep 2 cannot update the client's information or the 3 customer's information on the screen. 4 MR. KENT: That is correct. 5 MR. THOMPSON: They have to go back 6 to the cards. Somebody has to write it out. Somebody 7 has to input it and eventually it gets in the system. 8 MR. KENT: That's right. That is one 9 reason why we need a new CIS. 10 MR. THOMPSON: The improvement to 11 on-line inquiry and update on-line will take place 12 after November? 13 MR. McGILL: February of 2000. 14 MR. KENT: Part of it is going to be 15 delivered now in November. We have been able to bring 16 forward some of that update capability and include that 17 with a November release. 18 MR. THOMPSON: Then the other major 19 topic you mentioned was billing. Somehow you have 20 adjusted or your plan contemplates adjusting billing to 21 accommodate your existing batch billing process. 22 Have I got that right? 23 MR. KENT: Well, the reason, 24 Mr. Thompson, why I described it, in a very simplistic 25 way, as three components is because that gives, I 26 think, a sense of a degree of independence of the three 27 elements. 28 The database is the key. That is 1449 KENT/McGILL, cr-ex (Thompson) 1 where all the information is stored. Information is 2 taken out of the database -- well, it is viewed as it 3 sits in the database and updated by two processes: one 4 is the on-line, where if you phone in with an inquiry 5 about your account, someone can view the data about 6 your account on the on-line database and make 7 adjustments to it. 8 The other is the batch billing 9 process. The batch billing process runs every night to 10 take updated meter readings and payments and 11 transactions and a huge amount of other data, and 12 process that to generate a bill for one-twentieth of 13 our customers. 14 MR. THOMPSON: That information is 15 taken from cards. 16 MR. KENT: No, no. It is all stored 17 in the database. 18 MR. THOMPSON: Okay. 19 MR. KENT: The billing system goes 20 against the database and the on-line portion goes 21 against the database, but on-line and billing don't 22 really go against each other. 23 They are less linked, on-line and 24 billing, than the linkages that exist between the 25 database and each of those components. 26 MR. THOMPSON: Is the new billing 27 service associated with this transition from old to new 28 up and running now, or is that going to be up and 1450 KENT/McGILL, cr-ex (Thompson) 1 running later? 2 MR. KENT: When we changed the 3 database from its current format to DB2, we have to 4 change the current billing system to find the right 5 pieces of data in the DB2 storage as opposed to the 6 Adabas. We have to make sure that when the billing 7 runs, it updates the right pieces of information and 8 essentially keeps everything straight. 9 There are a number of other 10 enhancements that are coming to the billing process, 11 but those are in subsequent releases. All we are 12 really doing right now is making sure that the billing 13 engine can run with the new DB2 database. 14 MR. THOMPSON: All right. Comparing 15 the old to the new, will there be any improvement in 16 the billing function? Is it just a new way of doing 17 the same? 18 MR. KENT: In November there really 19 won't be an appreciable improvement. The improvements 20 are going to come in release IC when we are delivering 21 a full account level journaling capability so that we 22 can track discrepancies in accounts much better. 23 In subsequent releases there will be 24 new credit management pieces and new ways of breaking 25 down amounts that are owed by customers to the company, 26 to track it better and to discriminate between amounts 27 that are owed in a fashion that we cannot do today. 28 MR. THOMPSON: Is that in August of 1451 KENT/McGILL, cr-ex (Thompson) 1 2000 or thereabouts? 2 MR. KENT: I think part of it is 3 coming in the June release, if I remember correctly. 4 MR. THOMPSON: In terms of resources 5 that we will have supporting this service under the new 6 regime, we have eliminated software, have we, some 7 software? 8 I am looking at Board staff No. 73, 9 which talks about, as I understand it, systems that 10 will become obsolete if this thing goes forward. 11 Exhibit I, Tab 1, Schedule 73. 12 MR. KENT: Yes, I have that. 13 MR. THOMPSON: Is that talking about 14 hardware or software or both? 15 MR. KENT: This is talking about 16 software. 17 MR. THOMPSON: Is that a 18 comprehensive list of software that goes out of 19 service, if you will? 20 MR. KENT: No, it is not a 21 comprehensive list. There are other systems, as well, 22 that will be replaced. 23 MR. THOMPSON: Many of them? 24 What I am wondering is everything 25 that is no longer used -- are you taking the position 26 with respect to software that it has all been fully 27 depreciated? 28 MR. KENT: Yes. 1452 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: With respect to 2 hardware, what is no longer to be used under the new 3 scheme of things? Is there any obsolescence there? 4 MR. KENT: No, there isn't. 5 Everything that is going to be needed to run the new 6 CIS is in place now and is being used now to run the 7 Legacy systems. 8 MR. THOMPSON: The people that will 9 be needed to support the new system compared to the 10 existing -- and using our 800 positions as the 11 benchmark -- will decline. 12 Is that right? 13 MR. KENT: It is set out in our 14 benefits stream. Newco will have, by the end of the 15 test year, approximately 10 employees, fulltime 16 equivalents, who will be carrying out the monitoring 17 and break-fix of the application as described in the 18 Services Agreement. 19 The utility will be -- the utility is 20 showing a benefit or a cost reduction in the IS O&M 21 area representing those FTEs. 22 In addition -- 23 MR. THOMPSON: So 10 shift to the 24 affiliate. 25 MR. KENT: It ramps up over the 26 course of the year. They may not be shifted. They may 27 be new employees. It may not be the same faces that 28 move from the utility to Newco. 1453 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: But 10 will be 2 eliminated in the utility. 3 MR. KENT: That's correct. Ten jobs 4 move. 5 MR. THOMPSON: And are there any 6 other positional changes within the utility, other than 7 this -- 8 MR. KENT: Not related to CIS, that I 9 am aware of. 10 MR. THOMPSON: So the 800 positions, 11 less 10, is what is required to support the new system? 12 MR. KENT: No. There are other 13 benefits, as we set out in our evidence at B2, Tab 7, 14 Schedule 1, that allow the utility to operate the call 15 centre with fewer people and to see some other cost 16 savings. 17 If you look to Exhibit B2, Tab 7, 18 Schedule 1, page 4 of 4, that sets out the incremental 19 additions to the CIS annual benefits for each of fiscal 20 2000 and fiscal 2001. 21 It is these benefits -- 22 MR. THOMPSON: Does it give the 23 number of positions there? Just dollars, is it not? 24 MR. McGILL: It outlines the dollars 25 and those are the same dollars that are included in the 26 CIS Z-factor. 27 MR. THOMPSON: I'm just trying to -- 28 somewhere I thought there was an interrogatory response 1454 KENT/McGILL, cr-ex (Thompson) 1 that identified the positions related to those. 2 MR. KENT: I believe in our original 3 evidence, Mr. Thompson, we outlined some estimates of 4 the FTE changes. 5 MR. THOMPSON: If you could just help 6 me with those positions, because it would be a 7 reduction of the 800, as I'm understanding. 8 MR. McGILL: That's right. That is 9 what we are proposing to flow the effect of that 10 through the Z-factor to rates. 11 MR. THOMPSON: I understand that. 12 I'm just trying to sort of get a bottom line of what is 13 there under your proposal. Would it be about 14 700 positions? 15 I seem to recall an interrogatory 16 where you identified -- Board's 57 and 58, I think 17 it is. 18 MR. KENT: I think, Mr. Thompson, you 19 can see the incremental changes most clearly in our 20 Exhibit B1, Tab 8, Schedule 1, starting on page 14. 21 We go through there a description of 22 the various benefit areas talking about productivity 23 improvements. In some instances at least there is a 24 mention of the number of the FTEs that we expect will 25 not be required any longer. 26 MR. THOMPSON: If you turn up Board 27 Staff 57 and 58, there is reference in 57 to values 28 representing 53 FTEs and some of them appear to be 1455 KENT/McGILL, cr-ex (Thompson) 1 productivity benefits and some of them appear to be 2 avoided hires. Then there is another reference on 3 Schedule 58 to 52 FTEs. 4 I'm just trying to get a reasonable 5 approximation of the extent to which your new solution 6 reduces the 800 positions. Is it by about 100? Is 7 that a fair approximation? 8 MR. KENT: It would appear that by 9 the end of fiscal 2000 it would be at about that level. 10 So there is obviously a transition through fiscal 2000 11 as set out in the answer to Board Staff IR 57. 12 MR. THOMPSON: I appreciate that. So 13 that in the end state, give or take a few, it will be 14 down to approximately 700 positions supporting the new 15 CIS solution? 16 MR. KENT: Well, Mr. Thompson, they 17 are not supporting the new CIS solution. They are 18 responsible for all aspects of our customer care 19 functions. 20 The support of the CIS solution, the 21 software is being provided by Newco, not by any of 22 those staff. 23 MR. THOMPSON: I take your point. 24 --- Off record discussion 25 THE PRESIDING MEMBER: Mr. Thompson, 26 is this a convenient time to break? The witness has 27 been there for almost two hours. 28 MR. THOMPSON: I know I'm wearing 1456 KENT/McGILL, cr-ex (Thompson) 1 everybody down, but I am getting there. 2 MR. KENT: It's okay, Mr. Thompson, 3 we are doing fine here. 4 --- Laughter 5 MR. THOMPSON: Yes, this would be a 6 convenient time to break, Mr. Chair. 7 THE PRESIDING MEMBER: Okay. Well, 8 let's return at four o'clock, a 15-minute break. 9 --- Upon recessing at 1547 10 --- Upon resuming at 1610 11 THE PRESIDING MEMBER: Please be 12 seated. 13 When you are ready, Mr. Thompson. 14 MR. THOMPSON: Thank you. 15 Just if I could, Mr. McGill, to 16 understand the savings that have been flowed to the 17 Z-factor pertaining to the elimination of these 53 and 18 52 FTEs that are referred to in Schedules 57 and 58, 19 Exhibit I, Tab 1 -- 20 MR. McGILL: Just to clarify one 21 thing: With respect to the company's response to Board 22 Staff Interrogatory 57, those are the dollars and the 23 resulting FTEs that flow through the Z-factor, the 24 $1.9 million, and that equates to 53 FTEs in the test 25 year. 26 With respect to Board Staff 27 Interrogatory 58, the call centre consolidation 28 occurred prior to 1999 and the $1.3 million saving 1457 KENT/McGILL, cr-ex (Thompson) 1 there is already reflected in the company's O&M base. 2 MR. THOMPSON: So the reduction in 3 positions is roughly 800 to 750? 4 MR. McGILL: In the test year. 5 MR. THOMPSON: Yes, okay. 6 MR. KENT: So, Mr. Thompson, we are 7 not sure about this estimate of 800 I think, as you 8 have pointed out before -- or you asked us to undertake 9 to try to clarify where we might find a better number 10 for 1999 in terms of head count. 11 MR. THOMPSON: Yes. You said you 12 were going to check last year's cases. 13 MR. KENT: Yes, that's right. But 14 the number 800 is one that none of us, I think, are 15 quite sure where it comes from. 16 MR. THOMPSON: I thought Mr. McGill 17 said that it was in that order or magnitude -- 18 MR. KENT: I think it's in that -- 19 MR. THOMPSON: -- in terms of 20 positions. 21 MR. McGILL: In terms of positions 22 for 1999 I think that is reasonably correct. 23 MR. THOMPSON: Okay. 24 I'm not holding you to it. I 25 understand you are going to check it. 26 MR. McGILL: No, but we will confirm 27 it with the undertaking. 28 MR. THOMPSON: Confirm it. All 1458 KENT/McGILL, cr-ex (Thompson) 1 right. 2 But the deduction is not 100 that we 3 were talking about, it is closer to 50 from the right 4 number and we are using 800 as being in the ballpark. 5 MR. McGILL: For the test year. 6 MR. THOMPSON: Right. I understand 7 that. 8 Just in terms of the dollar savings, 9 is that the full dollar savings with respect to 53 FTEs 10 or is that only an allocation of them to CIS? 11 MR. McGILL: No, that would be the 12 full benefit -- the full O&M cost reduction stemming 13 from the implementation of CIS for fiscal 2000. 14 MR. THOMPSON: Fifty-three FTEs 15 equates to $1.3 million. Is that right? Or it's 16 $1.9 million? 17 MR. McGILL: One-point-nine. 18 MR. THOMPSON: Okay. So that is less 19 than $40,000 per FTE? 20 MR. McGILL: Yes, it would be on that 21 order of magnitude. 22 MR. THOMPSON: These FTEs are, I 23 guess, customer service? 24 MR. McGILL: The majority of them 25 would be customer service representatives. 26 MR. THOMPSON: Because the $40,000, 27 if you include benefits and that kind of thing is a 28 fair bit below the average, as I recall it, for 1459 KENT/McGILL, cr-ex (Thompson) 1 employees within the company. I am going back to prior 2 rate cases. 3 MR. McGILL: Yes. I'm not 100 per 4 cent certain what the average was used for SIM. 5 THE PRESIDING MEMBER: But it is the 6 full year effect, Mr. McGill, you are saying? 7 MR. McGILL: Well, no, it's not. 8 That may be part of the difficulty. 9 Because the $19.3 million is indicative of the phasing 10 in of the releases of CIS throughout 2000, that is why 11 the benefit increases in 2001. 12 MR. THOMPSON: The full year effect, 13 then, would be the $2.5 million, which would be closer 14 to $50,000? 15 MR. McGILL: Yes. I just want to 16 take a look at our Exhibit B2, Tab 7, Schedule 1, and 17 the table on page 4 of 4. The table at the top of the 18 page, Table 7, that gives a description of the benefit 19 for the fiscal -- the incremental benefit for the 20 fiscal 2000 year. 21 So the first element, $45,000, that 22 impacts O&M. And the $19.3 million, that impacts O&M. 23 The Board Staff Interrogatory we were 24 looking at was specific to the call centre. So that's 25 how we get to 19. I guess 1.976 was the number that 26 flowed into the Z-factor for O&M. 27 There is also a benefit associated 28 with reduced working cash because we are going to be 1460 KENT/McGILL, cr-ex (Thompson) 1 reducing the meter reading to billing lag. 2 Then the table at the bottom of that 3 page outlines the full year impact of those benefits 4 and that is what we are showing for fiscal 2001. So 5 there we see things like the on-line update capability 6 coming on. 7 The other things that impact O&M are 8 the second item from the bottom, because we believe we 9 can reduce our bad debt expense somewhat. That 10 wouldn't have an FTE impact. 11 Then there is another additional 12 increase in the call centre productivity. So that gets 13 the total benefit for 2001 up to $4.1 million, but 14 approximately $690,000 of that again are working cash 15 benefits so they don't impact O&M and aren't included 16 in the Z-factor for 2001. 17 MR. THOMPSON: So if you look at the 18 table at the bottom of page 2, line 1 of that table 19 indicates the O&M reduction that is flowing through the 20 Z-factor in 2000 and 2001, and that carries -- and 21 2002, which carries into the table on, I believe it's 22 page 11 of B2, Tab 8, Schedule 3. 23 MR. THOMPSON: Okay. Just to close 24 out this discussion of the end state under the solution 25 that you are proposing, we are going to have some 26 reduction in people that -- in customer support 27 services who use CIS, as we have been discussing, there 28 is going to be a transfer gradually of up to 10 -- or 1461 KENT/McGILL, cr-ex (Thompson) 1 an elimination of up to 10 from the people from the 2 utility and perhaps transfer or staffing of up to 10 at 3 the affiliate. 4 Now, what hardware, if any, is being 5 transferred to the affiliate? 6 MR. KENT: No hardware is being 7 transferred. The hardware remains with the utility and 8 Newco will pay the hosting fee to the utility each year 9 so that the cost of that hardware will really be borne 10 by Newco though it will remain with the utility. 11 MR. THOMPSON: All right. You have 12 discussed that with others now. 13 This software that will be 14 transferred is software yet to be completed? 15 MR. KENT: The software that will be 16 acquired by Newco will not be finally completed until 17 the end of fiscal 2000; and the title transfer, as we 18 have discussed, will be on October 1st, 2000. 19 MR. THOMPSON: Okay. 20 I thought in the Services Agreement 21 there was a reference to an appendix describing the 22 software to be transferred. Is that blank at the 23 moment? In other words, does this product have a name 24 yet? Does it have a description? 25 MR. KENT: Our CIS? 26 MR. THOMPSON: That's going to be 27 transferred to the affiliate if it works. 28 MR. KENT: We have just referred to 1462 KENT/McGILL, cr-ex (Thompson) 1 it as the CIS system. I guess we haven't given it any 2 other name. Maybe that should be part of the 3 christening process, to give it a name. 4 MR. THOMPSON: That's it at the 5 moment, CIS system? 6 MR. KENT: We call it CIS. 7 THE PRESIDING MEMBER: I'm not sure 8 you would like Mr. Thompson's suggestion. 9 --- Laughter 10 MR. KENT: We should perhaps have a 11 competition among employees for a good name. We could 12 always ask Mr. Thompson for his suggestions too. 13 MR. THOMPSON: Yes. Do have a prize 14 and a raffle. It would be much appreciated. 15 There are a number of names that I'm 16 sure intervenors could suggest, and it would be born 17 losers, I suppose. 18 All right. Let's move on, if I can, 19 then, to the discussion of functionality. 20 Mr. Stephens addresses this in his 21 report, starting at page 15, where, in section 5.1, he 22 describes the functional requirements in the 23 deregulated gas sales and distribution environment 24 today. 25 There are three paragraphs there. He 26 says: 27 "...CIS solutions need to be 28 extremely flexible and capable 1463 KENT/McGILL, cr-ex (Thompson) 1 of interacting electronically 2 with all participants in the gas 3 supply, delivery and consumption 4 value chain." 5 And goes on in the following 6 paragraph to the same effect. This description is 7 supported by excerpts in the TMG report, which is found 8 at Tab 8 of his evidence. 9 Do you accept that that is a 10 reasonable description of CIS functional requirements 11 in the marketplace today, Mr. Kent? 12 MR. KENT: I'm not sure that we can. 13 Potentially it is, but there are a number of things 14 about it we didn't really understand, and we have asked 15 Mr. Stephens some interrogatories in regard to, for 16 example, his definition of the deregulated natural gas 17 marketplace. 18 MR. THOMPSON: Okay. 19 Did you review the TMG report at 20 Tab 8? 21 MR. KENT: Yes, we have reviewed it. 22 MR. THOMPSON: Can I direct your 23 attention to page 7 of that report. 24 I would like to get your comments on 25 the text under the heading "The Marketplace", where, in 26 the first three paragraphs, the author describes really 27 the nature of the marketplace in which CIS must 28 function. Is there anything there in those first three 1464 KENT/McGILL, cr-ex (Thompson) 1 paragraphs that you quarrel with? 2 MR. KENT: I think there are some 3 things I don't clearly understand. For example, 4 Mr. Galluzzi, refers to: 5 "The customer system of tomorrow 6 will require a solid focus on 7 the relationship and interaction 8 with the customer..." 9 I don't understand what that means, 10 what it would imply in terms of features of the system 11 or anything like that. 12 MR. THOMPSON: Okay. 13 MR. KENT: Can you help us in that 14 regard, Mr. Thompson? 15 MR. THOMPSON: I can't speak for 16 Mr. Galluzzi, but I can direct you to other portions of 17 his position paper dated August 9, 1999. 18 If you would go to page 13 where he 19 is talking about customer care, there are two 20 paragraphs there that I think shed some light on what 21 he had in mind. 22 He says: 23 "It is imperative that the 24 energy company provide both 25 internal and external customers 26 with the necessary tools to 27 provide exceptional levels of 28 customer service." 1465 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: Okay. Let's go through 2 this one sentence at a time because, Mr. Thompson, I 3 agree with that. It is extremely important that a CIS 4 system be able to do those things. We of course would 5 argue that our CIS does so in our circumstances and for 6 our company. 7 MR. THOMPSON: All right. 8 "Customers want convenience in 9 dealing with their energy 10 company so it is important that 11 a single point of contact is 12 provided and that customers are 13 allowed alternative 14 communication paths including: 15 telephone, fax, automated voice 16 response and the Internet. 17 Ultimately the goal of the 18 energy company is to realize 19 lower costs and greater customer 20 satisfaction through customer 21 self-service." 22 Do you accept that? 23 MR. KENT: I would agree with the 24 first sentence. 25 I think the second sentence, one 26 might need to modify to say "to the extent to which 27 customers want self-service, the utility should make it 28 available." But I'm not sure that it is in the best 1466 KENT/McGILL, cr-ex (Thompson) 1 interest of either the customer or -- the company or 2 its customers to force self-service upon customers. 3 MR. THOMPSON: I don't know if he is 4 saying that, but, in any event, the paragraph at the 5 bottom, do you have any quarrel with what is stated 6 there? 7 The last sentence in particular: 8 "The energy company must 9 transfer between market 10 participants and provided the 11 product or service in as 12 seamless a manner as possible, 13 managing the entire life-cycle 14 from registration through 15 termination with a minimum 16 effort by its customers." 17 (As read) 18 MR. KENT: We may be talking about 19 systems beyond the CIS itself here. I'm not sure. 20 MR. THOMPSON: Yes, they probably 21 are. It's customer care generally. 22 MR. KENT: Well, it is also getting 23 into the relationship between the company and brokers I 24 think, though I'm not sure. 25 MR. McGILL: That is the way I would 26 interpret it. 27 MR. THOMPSON: Okay. 28 MR. FARRELL: Are you assuming, 1467 KENT/McGILL, cr-ex (Thompson) 1 Mr. Thompson, that the phrase "energy company" is 2 synonymous with distribution company? 3 MR. THOMPSON: No. 4 MR. FARRELL: Because I think these 5 witnesses are answering from the perspective of a 6 distributor. 7 MR. THOMPSON: Yes. I accept that. 8 No, I'm not assuming that. 9 I'm trying to help you, Mr. Kent, 10 with this concern you had at page 7 about the 11 marketplace. 12 If you would go to page 16 of this 13 report, we see a section entitled "A Competitive 14 Business Model". I think that is the section in which 15 Mr. Galluzzi is describing his vision of the 16 competitive business marketplace. 17 Without reading it to you completely, 18 do you have any particular concerns with what is stated 19 in that section of the position paper? 20 MR. KENT: I think I might benefit 21 from a more extensive explanation by Mr. Galluzzi. 22 For example, I'm not sure what a 23 "market data interface" is and whether that is part of 24 a CIS or a separate system. 25 I'm not sure who would be encompassed 26 by "market participants". I think I can guess, but I'm 27 not sure. 28 What is the distinction between 1468 KENT/McGILL, cr-ex (Thompson) 1 "service" and "usage"? 2 I can guess about some of those 3 things, but I'm not sure I have it in the same way that 4 Mr. Galluzzi would have it. 5 MR. McGILL: I know in discussions we 6 have had with Atlanta Gas Light where distribution 7 service unbundling has probably gone farther than 8 anywhere else that I'm aware of and all the systems 9 they built in order to support that were outside of 10 their CIS. 11 MR. THOMPSON: Well, CIS is an 12 integral component of providing customer care, is it 13 not? 14 MR. McGILL: It is, but different 15 applications are designed to do different things and 16 they can be integrated to work in different ways. I 17 guess that's my point. And in that one instance where 18 we have had discussions with people from that utility, 19 they built the entire infrastructure to support their 20 deregulated world around the existing system. 21 MR. THOMPSON: All right. Well, my 22 obligation is to draw your attention to these passages 23 and give you an opportunity to comment. Which we have 24 done. 25 In the context of fair market value, 26 I would like to turn to other alternatives in the 27 marketplace. I'm sure you are aware, from reading his 28 report, that Mr. Stephens' approach was to analyze what 1469 KENT/McGILL, cr-ex (Thompson) 1 your solution offers and then look at two utilities in 2 Canada as comparables, the BC Gas and the Union Gas 3 solutions. 4 He also used the rules of thumb 5 contained in the TMG report to develop an estimate of 6 what it would cost your company to build its solution 7 from scratch -- or build a suitable solution from 8 scratch. And then there are some bench-mark 9 comparisons -- not build but use an outsourcing 10 application. And then we have the bench-mark 11 comparisons -- which I will come to shortly. 12 I would like to just take you 13 through, first of all, his description of the BC Peace 14 software CIS function that's contained at page 15 of 15 his evidence. 16 My question is: Do you have any 17 concerns or comments on the reasonableness of this 18 description of the BC Peace software CIS solution? 19 MR. KENT: We have a number of 20 questions for Mr. Stephens that we will be posing to 21 him in cross-examination, but we don't have direct 22 knowledge of the Peace software project. It's our 23 understanding -- and this is partly from Mr. Stephens' 24 evidence -- it's our understanding that that's going to 25 go live. The target date is somewhere around 26 February-March 2001. Though I understand that it has 27 been run in a pilot mode. So we haven't had the 28 opportunity to see it. 1470 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Well, just so we nail 2 it down. Page 9 of his testimony, he describes the 3 solution by reference to the BC Gas program Mercury CIS 4 rate application of March, 1999. 5 MR. KENT: Yes, and we have obtained 6 a copy of that material. 7 MR. THOMPSON: So you checked the 8 application. Is there anything in its description of 9 it that you suggest is in error? 10 MR. KENT: Oh, I see. Let me just 11 review this quickly, if I might, Mr. Thompson. 12 MR. THOMPSON: Yes, please. 13 --- Pause 14 MR. KENT: I don't think, 15 Mr. Thompson, there's anything here that we would 16 regard as being an inaccurate description of what is in 17 the BC Gas Mercury project application to BCUC other 18 than that we did have further questions, I think in 19 particular, in regard to the scalability of the Peace 20 software application. Mr. Stephens has stated here 21 that it has been demonstrated to be scalable to one 22 million customers. We wanted some further information 23 about that scalability evaluation because, as I'm sure 24 you are aware, there's a lot of ways of doing that sort 25 of thing and we want to understand whether it was an 26 evaluation that was complete and fair. 27 MR. THOMPSON: The other comparator 28 that -- another comparator that Mr. Stephens uses is 1471 KENT/McGILL, cr-ex (Thompson) 1 the Union Gas Enlogix/SCT CIS solution. 2 MR. KENT: Yes. 3 MR. THOMPSON: And he describes that 4 by reference to information that was filed before this 5 board in E.B.O. 177-15, at pages 10, 11 and 12 of his 6 evidence. 7 Is there anything in that description 8 that you regard as being a material error or omission? 9 MR. FARRELL: I trust Mr. Thompson 10 isn't trying to foreclose questions that I might have. 11 Because I have looked at this material quite carefully, 12 I do have questions on both Mr. Stephens' description 13 of the program Mercury and also his description of the 14 Enlogix/SCT CIS application. 15 MR. THOMPSON: I'm not trying to 16 foreclose any questions. I just wanted to draw to your 17 attention the description and have you tell me if 18 there's any comments or concerns you wish to express 19 about the description, because it's that description 20 that feeds the analysis that appears a little later on 21 that then relates to his opinion as to fair market 22 value. 23 MR. KENT: I think the difficulty we 24 are under, Mr. Thompson, is that until we have answers 25 to some questions, we won't have fully explored this; 26 we won't know whether the characterizations offered 27 here are fair and reasonable or not. For example, 28 Mr. Stephens may have further information about the 1472 KENT/McGILL, cr-ex (Thompson) 1 BC Gas system beyond the project Mercury description 2 that may help us understand further the applicability 3 or the comparability of that application to ours. 4 MR. THOMPSON: I accept that. But 5 are there any errors in the text that -- I assume you 6 looked at the Union Gas application, as well. Union is 7 one of your comparators. 8 MR. KENT: Yes, it is. 9 MR. THOMPSON: It's one of your -- 10 it's your primary comparator. 11 MR. KENT: It is a comparator, 12 obviously; it's an outsource customer information 13 system that's provided to a major utility in Ontario, 14 who would be very difficult for us not to view that as 15 a comparator. 16 MR. THOMPSON: All right. And so, 17 he's described it. And is there any -- without trying 18 to foreclose the questions that you have, is there any 19 misdescription in this text about the Union case that 20 you are aware of as we speak? 21 MR. KENT: The only thing that I'm 22 not sure about is the -- on the surface, the only thing 23 that immediately leaps out at me is that I'm not sure 24 whether the schedule date for conversion of the 795,000 25 Union Gas customers to the Enlogix system for October, 26 1999, is accurately described. 27 MR. THOMPSON: At page 12, in the 28 last paragraph, he says he's informed that the 1473 KENT/McGILL, cr-ex (Thompson) 1 Board-approved amount for Union Gas CIS outsourcing 2 costs currently recoverable in Union's rates is 3 $6.9 million. 4 Do you accept that? That's the 5 number that you people have cited in a number of 6 interrogatory responses. 7 MR. KENT: Yes, I believe that that 8 is the correct number. 9 MR. THOMPSON: And the 12.244 million 10 that you have used in developing the outsourcing charge 11 that you propose for the company is not yet an amount 12 approved by this Board 13 MR. KENT: I think we would have a 14 number of concerns with that final sentence. I think 15 that the comparator is not so much in terms of the 16 total cost of the system but the per customer cost, and 17 the per customer cost that's built into Union's fiscal 18 1999 rates is from their services agreement linked to 19 the per customer cost that we have in our services 20 agreement. 21 That is where the linkage would be 22 more apparent. Or, not the linkage; the comparison 23 would be more fairly made. 24 MR. THOMPSON: Perhaps we are passing 25 each other like ships in the night. The per customer 26 charge that you referenced for Union, I think -- or 27 somebody referenced -- is about $10.95 per customer. 28 MR. KENT: That number sounds 1474 KENT/McGILL, cr-ex (Thompson) 1 familiar. 2 MR. THOMPSON: And that is based on 3 their forecast for 2000 of $12.2.4 million. Do you 4 accept that? 5 MR. KENT: I will have to go back to 6 look at the material, if you don't mind, Mr. Thompson. 7 MR. THOMPSON: Let's just try to find 8 it in one of your own interrogatories. 9 --- Pause 10 MR. THOMPSON: Look at Board 11 Staff 170. At the third paragraph on page 1 you 12 describe a letter from Mr. Byng to the Board, reciting 13 the current charge of $6.9 million -- that is the 1999 14 charge -- which you say is $8.32 per customer. Do you 15 see that? 16 MR. KENT: Yes, I do. 17 MR. THOMPSON: My understanding is 18 that Union has 1.1 million customers. Do you know how 19 you got $8.32 per customer? 20 MR. KENT: I think I would need to go 21 back to Mr. Byng's letter. 22 MR. THOMPSON: Is that a number in 23 his letter, or is that a number that you have derived? 24 Or, do you remember? 25 MR. KENT: I'm sorry, Mr. Thompson, I 26 don't remember. 27 MR. THOMPSON: Could you undertake to 28 advise us with respect to the derivation of that 1475 KENT/McGILL, cr-ex (Thompson) 1 amount? 2 MR. KENT: Yes, we can. 3 MR. THOMPSON: Thank you. 4 MS DESAI: J8.5. 5 UNDERTAKING NO. J8.5: 6 Undertaking by Mr. Kent to 7 determine how the figure of 8 $8.32 per customer was derived 9 MR. THOMPSON: My understanding of 10 the decision in Union's case is that no amounts that 11 Union forecast get recovered in rates until the Board 12 approves those amounts on an annual basis. Is that 13 your understanding? 14 That is from the 177-15 decision. If 15 you want a reference I can probably find one. 16 MR. KENT: I think if it is important 17 to you to have my comment on that we had better find 18 the reference. 19 But I am not sure, Mr. Thompson, what 20 materiality that has for our proposal. We have agreed 21 that ours will be evaluated on a year-by-year basis. 22 MR. THOMPSON: Yes, but your starting 23 point -- the $15 million-and-some-odd that you are 24 claiming by way of a fee uses as a starting point a 25 forecast by Union of $12.2 million, which has never 26 been accepted by the Board, yet. The $6.9 million for 27 Union was accepted in the context of a settlement 28 agreement, where the O&M were increased overall by 1476 KENT/McGILL, cr-ex (Thompson) 1 something in the order of 2 per cent. 2 This is set out in the Union 3 decision. 4 My only point to put to you is: Is 5 it fair to use that forecast as a point of departure 6 when it has not yet received Board approval? 7 MR. KENT: If you will allow us to 8 back up -- and I apologize for not perhaps being clear 9 in my explanations this late in the day. 10 Our starting point was not the Union 11 Gas agreement. We used the material -- the work that 12 was done by Mr. Diamond to give us a sense of the range 13 of prices that would be reasonable in a fair and open 14 market -- competitive market for CIS services. 15 We then essentially said that -- in 16 Ontario there was a very direct comparator that, in our 17 view, set a cap or an upper limit on the amount that 18 this Board and intervenors would be prepared to accept 19 as fair market value for CIS services -- a comparable 20 CIS. 21 So we ended up seeing that as not a 22 primary driver, but a limitation perhaps is a better 23 way of putting it; a boundary on what this Board would 24 expect to see as a fair market value for CIS services. 25 I am not sure if I am making the 26 distinction clear, but it was in our minds, I think, a 27 real one. 28 MR. THOMPSON: I think what you are 1477 KENT/McGILL, cr-ex (Thompson) 1 saying is, you started with Mr. Diamond and ended up 2 with Union as a ceiling. Is that what you are saying? 3 MR. KENT: Yes, I think that is 4 probably a fair description. 5 MR. THOMPSON: Now, Mr. Diamond's 6 evidence wasn't delivered until long after your 7 evidence was filed. It has a date on it. I am looking 8 at B2, Tab 7, Schedule 5. It has a cover sheet on it 9 of June of 1999. Did you have the results of his study 10 before that? 11 MR. KENT: Yes, we did. 12 MR. THOMPSON: How much earlier did 13 you have the results? 14 MR. KENT: As we said earlier, 15 Mr. Diamond had done some work for us approximately a 16 year previous and what we asked him to do this year was 17 to update the results of that work based on any new 18 information that was available to him and provide that. 19 We wanted to have the most updated 20 material possible, the most current material possible. 21 But there wasn't a material change in the results of 22 his work from one year to the next. 23 MR. THOMPSON: Okay. But I come back 24 to my question with respect to your approach, which you 25 say Union is the upper limit. And for some reason you 26 departed from Board-approved Union to forecast and not 27 yet Board-approved Union. My question is: What was 28 the rationale for that? 1478 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: I think part of the 2 problem in a direct comparison based on current systems 3 is that our system is in the process of being 4 implemented, as is Union's Enlogix system. They 5 haven't got it rolled out fully, and because it is not 6 rolled out fully they are not paying full fees in this 7 year. We are not paying full fees either. 8 The end result of our calculation was 9 a charge to Union Gas customers of $8.32 per customer 10 for their partially delivered system, compared to 11 $7.96 per customer for ours, as you will see on the 12 second page of Exhibit I, Tab 1, Schedule 170. 13 But they are not really fully 14 comparable at this stage because they are both in the 15 process of being rolled out. But there is a linkage, 16 there is a direct connection within the Union 17 Gas-Enlogix agreement between the fees chargeable in 18 the start-up phase and the longer term fees, just as 19 there is in our services agreement. 20 MR. THOMPSON: Mr. Stephens has 21 described both the Union, BC and ECG solutions in his 22 testimony. He has provided a functionality summary in 23 a table on page 18 of 19, and then some functionality 24 conclusions at page 19. I would just like to take you 25 through the chart and the conclusions to see if you 26 agree with his findings. 27 MR. KENT: Perhaps I could 28 short-circuit the process, Mr. Thompson, by saying that 1479 KENT/McGILL, cr-ex (Thompson) 1 obviously we don't agree with the bottom line 2 conclusion, and we are unclear at the moment about some 3 of the comparisons to be made and we need to ask him 4 some further questions about them. 5 MR. THOMPSON: I accept that. Would 6 you just bear with me? 7 On page 18 -- 8 MR. KENT: Yes, we have that. 9 MR. THOMPSON: -- under "Relational 10 Database", BC Gas, Informix, Union Gas, Oracle, ECG, 11 Custom, Solution IBM -- do you agree with that? 12 MR. KENT: Yes, I do. 13 MR. THOMPSON: Data updates on-line 14 for all three. Do you agree with that? 15 MR. KENT: Yes. 16 Can you help me, Mr. Thompson? Is 17 Mr. Stephens suggesting that there is any material 18 difference between those three databases, and, if so, 19 which does he regard as the best? 20 MR. THOMPSON: That is a question you 21 can ask him. 22 Just in terms of what he has provided 23 here in his summary, on-line in each category, you 24 accept that. 25 MR. KENT: Yes. 26 MR. THOMPSON: The billing Unix 27 server in BC Gas and Union Gas and mainframe -- your 28 solution? 1480 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: We asked Mr. Stephens a 2 specific interrogatory about that line because we do 3 not believe that the answer under Union Gas-Enlogix is 4 correct. There is a contradiction between what is 5 shown here and some other material -- or some other 6 parts of Mr. Stephens' evidence, and we don't know 7 which part is correct. 8 MR. THOMPSON: Yes, you are quite 9 right. 10 MR. KENT: We would hope that 11 Mr. Stephens can explain this discrepancy on the stand, 12 if he hasn't had a chance to answer in the form of an 13 interrogatory. 14 MR. THOMPSON: Well, we were late 15 getting those, but let me just -- 16 --- Pause 17 MR. THOMPSON: You tell us that you 18 studied Union's Enlogix system as part of your options 19 before you -- 20 MR. KENT: We reviewed it as an 21 option. That's correct. 22 MR. THOMPSON: So, does it have a 23 Unix server or not? 24 MR. KENT: It has the Unix servers, 25 as we understand it, within it, but our understanding 26 is that a mainframe is needed for billing processing. 27 Our system is the same. It has Unix servers for some 28 purposes, for the online access, and a mainframe for 1481 KENT/McGILL, cr-ex (Thompson) 1 the billing function. 2 MR. THOMPSON: Under technology, do 3 you agree with Mr. Stephens' summary there for BC Gas, 4 Union Gas and your organization? 5 MR. KENT: Well, it was interesting 6 reading the description of Project Mercury and the 7 characterization of this CIS as a package, given the 8 number of different software solutions that seem to be 9 integrated to provide CIS services. 10 I'm not sure what weight Mr. Stephens 11 is putting on this comparison. Is it better to use 12 customs using toolsets as opposed to package for 13 customization? If so, why? 14 MR. THOMPSON: Do you agree with the 15 description, package with customization for BC and 16 Union Gas custom using toolset for ACG? 17 MR. KENT: I think without some 18 further explanation, particularly in regard to the 19 BC Gas solution, an opportunity to cross-examine 20 Mr. Stephens on that, I would be reluctant to 21 accept it. 22 MR. THOMPSON: Okay. 23 MR. KENT: And I'm not sure what 24 point there would be in having me accept it in any 25 event. 26 MR. THOMPSON: Mr. Kent, you don't 27 have to argue every question with me. Do you agree 28 with the description he has used about what software 1482 KENT/McGILL, cr-ex (Thompson) 1 vendor? 2 MR. KENT: At this stage I cannot 3 because I do not understand the characterizations, in 4 particular in regard to the BC Gas solution. 5 MR. THOMPSON: I move down to the 6 next line. 7 MR. FARRELL: I remind you that 8 Mr. Kent earlier quarrelled with the use of the word 9 "toolset". 10 MR. THOMPSON: All right. How about 11 software vendor? Any hangups there? 12 MR. KENT: I believe there's some 13 other software packages associated with the BC Gas 14 solution, but basically no. I will give you that one, 15 Mr. Thompson. 16 MR. THOMPSON: Technical strategy, 17 will you give me that one? 18 MR. KENT: Well, we go back again to 19 this question of whether there is a mainframe involved 20 in billing in the Union Gas solution. 21 MR. THOMPSON: Okay. So you won't 22 give me that one. You quarrel with the description. 23 MR. KENT: We need further 24 clarification from Mr. Stephens as to whether or not he 25 has characterized this correctly because there is a 26 conflict within his evidence. 27 MR. THOMPSON: Okay. Response time. 28 This one seems to be fairly significant. Union Gas is 1483 KENT/McGILL, cr-ex (Thompson) 1 subsecond, according to his analysis, and yours is one 2 to two seconds. Is that right? 3 MR. KENT: Mr. Stephens has made this 4 judgment based on his visit to our call centre, I 5 gather. Unknown under BC Gas, P software CIS solution, 6 I don't know what the significance of that is. If it 7 is ten seconds or ten minutes, there's a problem with 8 the system. If it's subsecond, that sounds good. I 9 don't know what unknown means. 10 MR. THOMPSON: Is yours one to two 11 seconds? 12 MR. KENT: There's a lot of different 13 ways to comparing system performance. 14 MR. THOMPSON: Is it one to two 15 seconds? 16 MR. FARRELL: Just let him answer. 17 MR. THOMPSON: Well, I appreciate -- 18 THE PRESIDING MEMBER: 19 Mr. Thompson -- 20 MR. KENT: There are a lot of 21 different ways of comparing system performance. It 22 depends on a lot of factors, I think, in my 23 understanding of it. We need to understand how 24 Mr. Stephens judged the response time. 25 MR. THOMPSON: By watching the 26 screen, I would imagine. 27 MR. KENT: I would think so, but I 28 don't know. 1484 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Do you watch it 2 yourself occasionally? 3 MR. KENT: Yes. I have been down to 4 the call centre to see the system run. 5 MR. THOMPSON: Does it have one to 6 two seconds response time? 7 MR. KENT: It varies according to the 8 screens that the CSRs are accessing. It varies 9 according to the number of simultaneous inquiries that 10 are being made on the system, the amount of network 11 traffic. It varies depending on whether the access is 12 from our call centre in Toronto or the remote locations 13 where you have the additional lag time associated with 14 transmission over the network of the data. 15 There are a lot of factors like that 16 that come into it. I don't know the basis for 17 Mr. Stephens' assessment, in particular the Enlogix 18 solution. 19 MR. THOMPSON: Well, did you look 20 at -- we saw that too. 21 MR. KENT: That's great. We need to 22 know more about it because we weren't a party to that. 23 Mr. Stephens didn't invite us to accompany him and we 24 have no idea what discussions he had with Enlogix. 25 MR. THOMPSON: Your own evidence 26 indicates you supposedly studied the Enlogix system. 27 MR. KENT: Yes, but we have no 28 knowledge of what kind of demonstration was made 1485 KENT/McGILL, cr-ex (Thompson) 1 available to Mr. Stephens. We don't know the basis for 2 his comparison. 3 MR. THOMPSON: In your study of the 4 Enlogix system, was its response time subsecond? 5 MR. KENT: Our review of the Enlogix 6 system was carried out at a stage where it was not 7 possible to evaluate the response time of the system in 8 the way that it is possible to evaluate response time 9 of our system now in production. 10 MR. THOMPSON: Was that because you 11 couldn't see it? 12 MR. KENT: Because it wasn't in 13 production. In fact, Mr. Thompson, it isn't in 14 production today. 15 MR. THOMPSON: It is being used for 16 230,000 former Centra customers. 17 MR. KENT: Mr. Thompson, the system 18 that is currently in use for the former Centra 19 customers, as I understand it, is not the Phase II 20 banner solution that's described here. 21 MR. THOMPSON: Well, whatever 22 operation, did you go and take a look at it? 23 MR. KENT: It was the old system. 24 MR. THOMPSON: When did you consider 25 Enlogix, how many years ago? 26 MR. KENT: I guess the time we 27 considered it most recently was that described in our 28 evidence, some time in the spring or maybe early summer 1486 KENT/McGILL, cr-ex (Thompson) 1 of 1998, but the system is not operational at Union Gas 2 today. 3 I don't know what Mr. Stephens saw. 4 I can't comment on his evaluation of performance 5 without knowing what he saw. We would hope to be able 6 to get some further explanation of that from 7 Mr. Stephens. 8 This, frankly, is not sufficient 9 information for us to be able to comment to you on 10 whether it's a valid comparison or not. 11 MR. THOMPSON: Most real estate 12 agents when they are trying to appraise a property and 13 there is a comparable presented go out and take a look 14 at it. You sort of -- well, you just say "I am in my 15 bunker here and how that works --" 16 MR. FARRELL: That's totally unfair. 17 Mr. Kent told you the last time the company reviewed it 18 and he told you at the time it wasn't operational. 19 MR. THOMPSON: Let's move on, 20 Mr. Kent. 21 Mr. Stephens' functionality 22 conclusions on the next page where he says from a CIS 23 perspective, the ECG custom developed solution is not 24 currently designed for the deregulated natural gas and 25 distribution environment, which I assume do, reference 26 unbundling amongst other things. Can we agree that 27 you're not ready for unbundling? 28 MR. KENT: Mr. Thompson, we asked an 1487 KENT/McGILL, cr-ex (Thompson) 1 interrogatory of Mr. Stephens, as I am sure you are 2 aware, to have him describe his view of the deregulated 3 business model that a CIS had to fit because it's his 4 evaluation. We need to understand the basis for his 5 comparison. 6 MR. THOMPSON: Is your system ready 7 for unbundling? The evidence indicates you need $30 to 8 $50 million to make it ready for unbundling. 9 MR. KENT: I believe that there has 10 been discussions in the market design task force of the 11 need for further IT infrastructure to facilitate a 12 greater degree of market unbundling. 13 I think you are going way too far in 14 linking that immediately to a thought that a CIS as 15 such is a system that needs to be developed. This is, 16 again, a very preliminary estimate of the costs of IT 17 infrastructure necessary to facilitate unbundling. 18 MR. McGILL: I sat on the mock design 19 subcommittee IT task force or working group, whatever 20 it was called at the time. I'm here to tell you that 21 we could go out and we could buy a system that's 22 running in an unbundled model or environment today. 23 The one thing I can guarantee you is it would be the 24 wrong system for what we need here because nobody knows 25 right now what we need here. 26 MR. THOMPSON: Fine. There is a 27 schools 29 sub (a) where you talk about the $30 to 28 $50 million. 1488 KENT/McGILL, cr-ex (Thompson) 1 MR. FARRELL: There is no reference 2 to unbundling in the first bullet. 3 MR. THOMPSON: Fine. Forget the 4 first bullet. I just asked: Are you ready for 5 unbundling and not without spending $30 to $50 million, 6 which is what your evidence is. Is that fair? 7 MR. McGILL: I think the more 8 relevant question is what we need to spend the $30 to 9 $50 million on, certainly not on our CIS. 10 MR. KENT: Would you like to review 11 the response to schools interrogatory 29, Mr. Thompson, 12 because I think it might be helpful. It talks about 13 the other systems that need to be developed and the 14 advantage conveyed by our new CIS, the improvement 15 offered by our new CIS in relation to Legacy systems. 16 In particular, I would quote to you: 17 "Although CIS is not capable as 18 a single system of supporting 19 all of the requirements of 20 unbundled distribution services, 21 such as full electronic data 22 interchange with other market 23 participants, its availability 24 places the company in a much 25 better position to respond to 26 such change." (As read) 27 There's a number of other things in 28 that response that go on to amplify upon it. 1489 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Well, you are grateful 2 that I drew it to your attention. 3 MR. KENT: I am indeed. Thank you. 4 MR. THOMPSON: Now, in terms of 5 billing flexibility, does your solution have better 6 billing flexibility or worse billing flexibility than 7 the BC solution or the Union-Enlogix solution. Do you 8 know? 9 MR. KENT: This is a value judgment 10 that is offered by Mr. Stephens, based on his 11 understanding of the degree of flexibility that is 12 needed in the marketplace in Ontario. 13 We have to have something that is a 14 fit with what our customers need. Mr. Stephens has 15 made an assessment of that fit. We would like to 16 discuss that with him. 17 MR. THOMPSON: I am just highlighting 18 these topics. I am asking you, Mr. Kent: Does your 19 billing solution have the same, better, or worse 20 billing flexibility than these other solutions? 21 Do you know? 22 MR. KENT: I believe that our CIS 23 offers fully adequate billing flexibility for our 24 marketplace in Ontario. I believe, based on the 25 description that I have seen in the Project Mercury 26 outline, that the Peace software solution that is under 27 development at BC Gas may offer superior billing 28 flexibility. 1490 KENT/McGILL, cr-ex (Thompson) 1 When it is in place in, let's hope, 2 early 2001, I would be very interested in getting a 3 better look at it, because it may be a system that 4 would be of use to us in the longer term. 5 MR. THOMPSON: Based on your 6 knowledge of the Union-Enlogix solution, do you believe 7 that it offers superior billing flexibility? Based on 8 your own knowledge. 9 MR. KENT: It is certainly 10 comparable. It is not less than our system. 11 Whether there is a material 12 difference in flexibility or not, I am not sure. 13 MR. THOMPSON: Do you agree that the 14 BC and Union solutions have Internet capability? 15 MR. KENT: When in service, they are 16 touted as having Internet capability, but they are not 17 currently in service, either one. 18 MR. THOMPSON: Does your system 19 currently have Internet capability? 20 MR. KENT: Our system, as it is 21 currently in service, does not have Internet 22 capability. But we believe that this capability can be 23 added at a relatively low cost. 24 MR. THOMPSON: Have you identified 25 that cost? 26 MR. KENT: Actually, we have started 27 to do a bit of work on it, prompted by some of 28 Mr. Stephens' comments. We believe that enabling 1491 KENT/McGILL, cr-ex (Thompson) 1 Internet access to our CIS would be of value to some of 2 our customers. 3 You may recall some of our 4 discussions in previous rates cases about our 5 marketlink project and our development of Internet site 6 capability. That was all intended to deliver that kind 7 of functionality. 8 THE PRESIDING MEMBER: I bet you 9 remember Mr. Thompson's argument too, Mr. Kent. 10 MR. McGILL: Against all those. I 11 remember them quite well, Mr. Vlahos. I find it quite 12 ironic that now it is important to him to have that 13 capability. 14 MR. THOMPSON: I just said proceed at 15 your own risk. Don't put it on our backs until it 16 works. 17 I apologize, Mr. Chairman. It has 18 taken far longer than I had expected. I would probably 19 need another hour to wrap it up. 20 THE PRESIDING MEMBER: Okay. We will 21 break now, then. 22 Are you moving to a new topic 23 tomorrow, Mr. Thompson? 24 MR. THOMPSON: Yes, I am -- the next 25 page. 26 THE PRESIDING MEMBER: Mr. Farrell. 27 MR. FARRELL: Mr. Chair, you might 28 recall that in the Settlement Proposal there was an 1492 KENT/McGILL, cr-ex (Thompson) 1 adjustment mechanism for the cost of short-term debt. 2 For the record, it is in relation to 3 Issue 4.1, and the adjustment mechanism is described in 4 Exhibit N1, Tab 1, Schedule 1, page 24. 5 I am advised that the adjustment 6 mechanism has not been triggered, and I would propose 7 to have Mr. Seal prepare the data that would support 8 that advice; and when he does, I will file it as a 9 hearing exhibit, just so it is in the record. 10 THE PRESIDING MEMBER: Thank you, 11 Mr. Farrell. 12 Are there any other matters? 13 No. 14 Then we will adjourn until nine 15 o'clock tomorrow. 16 --- Whereupon the hearing adjourned at 1704 17 to resume on Thursday, September 1, 1999 18 at 0900