1493 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 Thursday, September 2, 1999, 24 commencing at 0903 25 26 RATES HEARING 27 28 VOLUME 9 1494 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 1495 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 1496 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 Preliminary Matters 1503 5 PREVIOUSLY SWORN: DUNCAN KENT 1505 6 PREVIOUSLY SWORN: STEPHEN McGILL 1505 7 Continued Cross-Examination by Mr. Thompson 1505 8 Cross-Examination by Ms Desai 1568 9 Examination by the Board 1571 10 Upon recessing at 1140 1606 11 Upon resuming at 1200 1606 12 Submissions by Mr. Thompson 1606 13 Submissions by Mr. Cass 1620 14 Reply Submissions by Mr. Thompson 1634 15 Luncheon recess at 1258 1642 16 Upon resuming at 1402 1642 17 SWORN: STUART DIAMOND 1644 18 Examination-in-Chief by Mr. Farrell 1644 19 Cross-Examination by Mr. Brett 1645 20 Cross-Examination by Mr. Janigan 1663 21 Cross-Examination by Mr. Thompson 1667 22 Upon recessing at 1518 1701 23 Upon resuming at 1541 1701 24 SWORN: BRADLEY BOYLE 1702 25 PREVIOUSLY SWORN: ROBERT BOURKE 1702 26 Examination-in-Chief by Mr. Cass 1702 27 Cross-Examination by Mr. Brett 1706 28 Cross-Examination by Mr. Mondrow 1741 1497 1 INDEX OF PROCEEDINGS (Cont'd) 2 PAGE 3 4 Hearing adjourned at 1708 1765 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1498 1 UNDERTAKINGS/OBJECTIONS (Cont'd) 2 3 NO. DESCRIPTION PAGE 4 5 J9.1 Mr. Kent undertakes to show 1559 6 the impact of reducing the CIS 7 fees in B1, Tab 8, Schedule 3 8 by 50 per cent 9 10 J9.2 Mr. McGill undertakes to 1566 11 ascertain whether all of the 12 fully-allocated costs of 13 supporting those services 14 categorized as non-utility, 15 prior to the rental program 16 transfer-out, have been removed 17 18 J9.3 Mr. Kent undertakes to 1572 19 ascertain if there are any 20 SIM projects closed to rate base; 21 to ascertain that there are no 22 vestiges of any SIM projects that 23 have worked their way into CIS 24 system 25 26 27 28 1499 1 UNDERTAKINGS/OBJECTIONS (Cont'd) 2 3 NO. DESCRIPTION PAGE 4 5 J9.4 Mr. Kent undertakes to provide 1601 6 an outline of how the calculation 7 of IDC is worked and why; and to 8 provide an explanation as to the 9 numbers that will pertain to the 10 IDC for 1997, 1998 and 1999 in 11 Exhibit B1, Tab 8, Schedule 3, 12 page 6 13 14 J9.5 Mr. Diamond undertakes to run 1650 15 the 10 largest U.S. pure gas 16 utilities to arrive at an 17 industry average 18 19 J9.6 Mr. Diamond undertakes to 1658 20 report if there are any U.S. 21 utilities that have outsourcing 22 arrangements for the CIS 23 function that are comparable to 24 the Union Gas outsourcing 25 arrangements and the proposed 26 Enbridge outsourcing arrangement 27 28 1500 1 UNDERTAKINGS/OBJECTIONS (Cont'd) 2 3 NO. DESCRIPTION PAGE 4 5 J9.7 Mr. Diamond undertakes to 1692 6 provide any backup documents 7 pertaining to the information 8 on Florida Power Corp. found at 9 Exhibit B2, Tab 7, Schedule 5 10 11 J9.8 Mr. Boyle undertakes to 1758 12 provide the following: who 13 was staffing the project 14 management office; how many of 15 these people, if any, would be 16 going to an affiliate; and is that 17 office responsible for the pamphlet 18 that Mr. Mondrow referred to; the 19 breakdown of the 1.2 that relates to 20 the project management office; and if 21 there's a significant portion of the 22 1.2 that is not people-related costs, 23 some brief description of what 24 those other costs are for 25 26 Objection can be found on pages 1749 and 1761. 27 28 1501 1 EXHIBITS 2 NO. PAGE 3 4 K9.1 Document consisting of 1665 5 three individual documents 6 from the Web site of the OECD 7 8 K9.2 Document entitled "HVAC 1704 9 Coalition Interrogatory #21: 10 Filed 1998-04-17, EBRO 497, 11 Exhibit I, Tab 12, Schedule 21, 12 page 4 of 9" 13 14 K9.3 Document entitled "Consumers' 1705 15 Association of Canada 16 Interrogatory #16, Updated: 17 1998-11-27, EBRO 497-01, EBO 179-14, 18 EBO 179-15, Exhibit D, Section 5.16, 19 page 1 of 14 20 K9.4 Written direct testimony of 1727 21 Kathleen McShane filed in 22 proceeding No. 179-14/15 23 24 25 26 27 28 1502 1 ERRATA/ADDENDA 2 REFERENCE DESCRIPTION 3 RP-1999-0001 - Volume 7 4 08/31/99 P. 1105 L. 5 5 "loyalty free" S/B 6 "royalty free" 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1503 1 Toronto, Ontario 2 --- Upon resuming on Thursday, September 2, 1999 3 at 0903 4 THE PRESIDING MEMBER: Good morning, 5 everyone. 6 MR. FARRELL: Good morning. 7 THE PRESIDING MEMBER: Any matters, 8 Mr. Farrell, before we turn to Mr. Thompson? 9 PRELIMINARY MATTERS 10 MR. FARRELL: Just one, Mr. Chair. 11 We have left with you and Ms Halladay 12 another response to undertaking, in this case 13 Exhibit J5.1. 14 THE PRESIDING MEMBER: Thank you. 15 There is another package here. It 16 starts with responses to ECG Interrogatories. 17 Mr. Thompson? 18 MR. THOMPSON: Yes, Mr. Chairman. 19 First of all, I would like to thank 20 the company for assisting us in getting these documents 21 completed and printed. What you have before you now 22 are the responses to ECG's interrogatories of 23 Mr. Stephens. 24 If we could have an exhibit for that, 25 please? 26 THE PRESIDING MEMBER: Ms Desai, 27 isn't an exhibit automatically given to it as part of 28 the -- 1504 Preliminary Matters 1 MS DESAI: I think I will have to 2 check with the company. We weren't sure whether to 3 give it L.25 or whether that would be an "I" exhibit. 4 We will sort that out with the company. 5 THE PRESIDING MEMBER: We will worry 6 about this later. 7 MR. FARRELL: We will give you the 8 exhibit number and the schedules for the individual 9 questions at the break -- or after the break, I 10 should say. 11 THE PRESIDING MEMBER: Okay. 12 Mr. Warren? 13 MR. WARREN: Mr. Chairman, I 14 apologize for being like a persistent and somewhat 15 irritating tsetse fly on the subject of scheduling, but 16 I did want to alert you to the latest melodrama. 17 Because of a conflict which came up 18 late yesterday afternoon I am required to be before the 19 Environmental Appeal Board this afternoon. Mr. Farrell 20 and I have agreed, subject to your direction, that 21 Ms Williams would appear at a fixed time at nine 22 o'clock tomorrow morning, rather than have her sit 23 around all day on the contingency that she might or 24 might not get on today. 25 Mr. Farrell, that would allow 26 Mr. Thompson to complete his cross-examination, 27 Mr. Diamond to go in, and perhaps the next panel to be 28 completed, which is the cost of capital panel. 1505 Preliminary Matters 1 Mr. Farrell has kindly agreed that, 2 if necessary, we can interrupt them to get her on 3 tomorrow morning at nine o'clock. 4 So if that works for the Board it 5 certainly works -- it accommodates me, which I 6 appreciate. 7 THE PRESIDING MEMBER: It would 8 appear, then, for Mr. Stephens next week. 9 Right, Mr. Thompson? 10 MR. FARRELL: I think that's almost 11 inevitable at this point, Mr. Chair. 12 MR. MATTSON: Mr. Chairman, are we 13 just on for the morning tomorrow or are we going right 14 to the end of the day for Friday? 15 THE PRESIDING MEMBER: Just the 16 morning, Mr. Mattson. 17 MR. MATTSON: Thank you. 18 THE PRESIDING MEMBER: Okay. 19 Mr. Thompson. 20 MR. THOMPSON: Thank you, 21 Mr. Chairman. 22 PREVIOUSLY SWORN: DUNCAN KENT 23 PREVIOUSLY SWORN: STEPHEN McGILL 24 CONTINUED CROSS-EXAMINATION 25 MR. THOMPSON: Mr. Kent, when we 26 broke yesterday we were discussing the comparative 27 functionality of your system to the Enlogix SCT 28 solution and the BC Gas solution. I believe we were at 1506 KENT/McGILL, cr-ex (Thompson) 1 Mr. Stephens testimony at about page 19. Do you recall 2 that? 3 MR. KENT: Yes, I do. 4 MR. THOMPSON: All right. 5 You had mentioned previously that you 6 had used the Enlogix-Union Gas year 2000 forecast 7 really as a cap rather than a guide to the claim for 8 the outsourcing charge. Did I understand that 9 correctly? 10 MR. KENT: In thinking though what 11 could reasonably be construed by the Board as fair 12 market value for CIS we were guided first by 13 Mr. Diamond's work, which covers, I guess, essentially 14 North America, but we were well aware that there are 15 significant variations from one jurisdiction to another 16 in the kinds of systems that are necessary and 17 appropriate to serve customers in those jurisdictions. 18 Given that there was an existing 19 agreement between Union Gas and Enlogix on the public 20 record before this Board setting forth the prices that 21 would be payable under that agreement for CIS services, 22 we felt that the Board would reasonably see that as a 23 direct comparator to our system and that if we were to 24 bring forward something that was a higher fee schedule, 25 or a higher per-customer cost than that, that it would 26 be difficult for the Board to accept it. 27 Given that, we felt that we were, in 28 a sense, under the circumstances, I guess constrained 1507 KENT/McGILL, cr-ex (Thompson) 1 is the word. 2 I think we felt that it would be a 3 battle and a very difficult battle to establish that 4 fair market value was higher than that. The effort 5 involved in that battle, the time and controversy that 6 would be involved was not worth it. 7 MR. THOMPSON: Before turning to 8 questions I have about how you were guided by 9 Mr. Diamond's work, does all of what you have said mean 10 that -- and I appreciate we have an issue about 11 adjustments, but does the company accept the Union Gas 12 CIS Enlogix solution as a comparable for the purposes 13 of assessing fair market value? 14 MR. KENT: Yes, I think we do. 15 I don't think that it is identical to 16 our system. It has some differences in its features, 17 but clearly it provides CIS services to a utility that 18 is generally comparable to Enbridge Consumers Gas, 19 operating in Ontario in a similar climate in a similar 20 tax regime and there are many features that would make 21 the two systems comparable. 22 MR. THOMPSON: All right. 23 Again, I know we have an adjustments 24 debate, but does the company accept BC Gas and its CIS 25 solution as a comparable for the purposes of this fair 26 market value issue? 27 MR. KENT: We know far less about the 28 BC Gas solution. 1508 KENT/McGILL, cr-ex (Thompson) 1 What we do know is that it is going 2 to be included in the rate base of BC Gas rather than 3 being provided through an affiliate, which immediately 4 makes it difficult to compare it directly. 5 We know from the Project Mercury 6 filing that BC Gas provided to BCUC, we know that it is 7 going to be amortized over a 10-year period, which we 8 think is -- which we know is longer than we had 9 anticipated amortizing system and a period that is 10 longer than we think is reasonable given the current 11 rate of change in the gas marketplace. 12 We also know that the BC Gas solution 13 is not currently operational. Their target date is 14 February/March 2001. I think at the moment we have 15 every reason to believe that they will hit that, but it 16 is still a long way off and many things can happen. 17 They are still, as I understand it, 18 in the process of developing a thorough understanding 19 of how they are going to convert the customer 20 information that is currently handled for them by 21 BC Hydro and there may be some issues there that aren't 22 fully understood. 23 There may be some other issues in 24 development that arise that we don't currently know. 25 We don't know if the final cost of the system is going 26 to be as originally budgeted. It may be higher. If it 27 is, then there is the prospect of recovery of cost 28 overruns if they are reasonably and prudently incurred 1509 KENT/McGILL, cr-ex (Thompson) 1 by BC Gas and that wouldn't be the case with an 2 affiliate relationship. 3 So I think there are a number of 4 factors that make it difficult to compare the BC Gas 5 solution directly with ours. 6 MR. THOMPSON: Well, adjustments 7 involve that exercise. 8 My question is: Do you accept it as 9 a comparable? 10 That sounded like a "yes, but" or it 11 could have been "no". 12 MR. KENT: I think in a very 13 long-winded way I was trying to say no. 14 I apologize for going on so long, but 15 I was attempting to explain why I don't think at this 16 stage it is really fair to say that it is comparable, 17 particularly from a pricing perspective. 18 It would appear to be a very good 19 system with excellent features, but we haven't had a 20 chance to see it. 21 I, myself, attempted to use the 22 demonstration version of the system that is available 23 over the Internet, as Mr. Stephens did, and neither one 24 of us have been able yet to get approval from Peace 25 software to use that system. We have been trying for 26 at least a couple of weeks. 27 So I would like to see the system, I 28 would like to understand it better, but I can't get 1510 KENT/McGILL, cr-ex (Thompson) 1 into it. 2 MR. THOMPSON: Well, the point you 3 made yesterday is, yours is an unfinished product, you 4 are suggesting theirs -- 5 MR. KENT: That's not correct. 6 MR. THOMPSON: -- is an unfinished 7 product -- I'm sorry? 8 MR. KENT: Mr. Thompson, if you don't 9 mind. 10 Our system is currently operational. 11 The first phase of it, I agree, is the only thing that 12 we have in production. But we have something in full 13 scale production for our entire customer base and that 14 is not true of either the Peace software solution for 15 BC Gas or the version of the Enlogix system that I 16 understand Stephens to be comparing with ours. 17 MR. THOMPSON: All right. Well, we 18 will argue the comparability issue later. 19 I would like to turn to how 20 Mr. Diamond's work influenced your approach here. 21 Mr. Diamond's work that you are 22 referring to, I assume, is what is expressed in 23 Exhibit B2, Tab 7, Schedule 5? 24 MR. KENT: Yes, Mr. Diamond prepared 25 this material in preparation for this hearing. He had 26 done, as we mentioned yesterday, some previous work for 27 us to give us an understanding of the comparables in 28 CIS systems throughout North America. 1511 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Well, is what he has 2 done before captured in this document? Is there -- 3 MR. KENT: This document updates it. 4 Particularly his survey of the capital cost of other 5 CIS systems and the FERC material. He went back to the 6 databases to get updated data. 7 MR. THOMPSON: So, there's no 8 material difference between what we have here and what 9 you used previously. Is that what you are telling me? 10 MR. KENT: There's such a wide range 11 in the cost of CIS systems and the ways in which they 12 are provided -- the features of CIS systems -- that we 13 had a range of values from Mr. Diamond before, just as 14 we have a range of values now. There isn't one single 15 number you can put your finger on and say, "That is the 16 precise value and it's changed by 2.2 per cent", or 17 something of that nature. It was a range. And the 18 range was essentially the same last year and now. 19 MR. THOMPSON: What Mr. Diamond has 20 provided is, first, some estimates of customers' 21 support costs, based on a large sample. Right? 22 MR. McGILL: That's correct. 23 MR. THOMPSON: Okay. And the product 24 we are trying to evaluate is a CIS application. 25 MR. McGILL: What we were trying to 26 achieve, and what we had asked Mr. Diamond to do for 27 us, is, because it's very difficult to try and pin down 28 the value of this type of application -- I know that 1512 KENT/McGILL, cr-ex (Thompson) 1 Union had difficulty doing it when they were before the 2 Board; they had hired consultants to help them in 3 that -- and what we were trying to do was come up with 4 a number of tests of reasonability, so that we were 5 taking a look at the capital -- we thought we could 6 take a look at the capital costs per customer, the 7 total customer support costs of the company and the 8 comparators, with respect to outsourcing a CIS service, 9 and we felt that those three tests covered a broad 10 range of alternative approaches and that if we were 11 somewhere within the range of prices in the marketplace 12 for this type of service, with respect to those types 13 of tests, that we could be reasonably certain that we 14 were priced reasonably compared to alternatives. So we 15 were trying to broaden the means of testing the 16 reasonability of our price. 17 MR. THOMPSON: The only outsource 18 pricing -- outsourcing costs that Mr. Diamond discusses 19 are in his Table 3, at page 8? 20 MR. McGILL: Yes. In addition to 21 comparing the costs of our CIS arrangement to that of 22 Union-Enlogix. 23 MR. THOMPSON: Yes. That's on 24 Table 4. Right? 25 MR. McGILL: Yes. 26 MR. THOMPSON: And the other 27 information he provides, concerning customer support 28 costs, really doesn't focus on the product that we are 1513 KENT/McGILL, cr-ex (Thompson) 1 trying to price here, being the CIS application. 2 That's a far broader topic. 3 MR. McGILL: Yes, it is much broader, 4 but it's a means of comparing, on a utility-by-utility 5 basis, how their overall customer support costs 6 compare -- and I think the validity of that type of 7 test is that the inputs that companies employ can vary 8 across companies. Some companies might spend a lot 9 more money on information technology and because of 10 that, they can save money on labour. Some companies 11 might not invest a lot in technology but they have 12 higher labour costs. I think what's important is that 13 companies have developed efficient mixes of input that 14 result in them delivering outputs at reasonable costs 15 so that it's a way of looking at a number of utilities 16 and trying to determine where they shake out, in terms 17 of their customer support costs, acknowledging that 18 they are operating in different environments, under 19 different regulatory regimes of different tax 20 structures, different sizes of customer bases, et 21 cetera, that they have different needs, they meet them 22 in different ways, and this kind of shows how those 23 things shake out and how the companies shake out, 24 overall, with respect to each other. 25 MR. THOMPSON: But my point is -- and 26 I believe you agree with it -- Mr. Diamond's customer 27 support costs analysis does not identify, in his 28 sample, the component of those costs that are 1514 KENT/McGILL, cr-ex (Thompson) 1 CIS-related. He's just done it on a global basis. Is 2 that correct? 3 MR. McGILL: With respect to that 4 test, what we have done is we have included all of the 5 costs the company will incur associated with providing 6 customer support services. 7 MR. KENT: Mr. Thompson -- 8 MR. THOMPSON: And the CIS component 9 is not identified separately. Can we agree on that, 10 gentlemen? 11 MR. KENT: Mr. Thompson, Mr. Diamond 12 is available for cross-examination in the next panel 13 and it's, perhaps, more appropriate that you ask him 14 about his sources of data and their interpretation. 15 But it's our understanding that different utilities 16 account for these costs in somewhat different ways and 17 it isn't easy to compare one utility with another, in 18 terms of, specifically, the identified CIS, as you have 19 described it, because different companies may have the 20 costs appearing in different accounts. 21 MR. THOMPSON: I'm just -- you said 22 this guided you. And the guide that we are seeking is 23 a guide for the pricing of the CIS application. 24 All I'm trying to get you to agree to 25 is that the information on customer support costs that 26 supposedly guided you did not segregate the CIS-related 27 costs in it. To -- 28 MR. KENT: That's correct. 1515 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: -- me it's obvious. 2 Thank you. 3 MR. KENT: That's correct, it did 4 not. 5 MR. THOMPSON: All right. 6 MR. KENT: But it was only used as 7 one of several means of assessing the reasonableness of 8 the CIS costs. 9 MR. THOMPSON: Now, in terms of his 10 capital cost analysis -- we find that in Table 2 -- how 11 did that guide you? 12 In terms of coming up with your 13 outsourcing charge claim of $10.64. 14 MR. KENT: Again, it was one of 15 several ways of looking at it. It is not directly a 16 way of coming up with the outsourcing charge, I agree 17 with that. It's a way of comparing, as best we could, 18 based on what we believe to be accurate data from a 19 very reputable company, conducted for the purpose of 20 developing these costs -- a way of assessing the 21 capital cost, the total capital cost, of our system in 22 comparison to others. And the comparison we have used 23 here was based on the entire cost of everything 24 associated with CIS -- and even the BPR and analysis 25 phase work in the same overheads, as you will note. 26 The CIS capital costs shown here is the full 27 $119 million - and, strictly speaking, that isn't the 28 cost of our software. 1516 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Well, I suppose it's 2 arguable. Maybe Mr. Diamond accepted that project 3 costs were 119 million not the 89, but -- 4 MR. McGILL: Mr. Thompson, the reason 5 we included the 119 million is we would -- we are 6 attempting to make the test as rigorous as we could. 7 If we drop it down to the $90 million level, the cost 8 per customer, capital cost per customer would be on the 9 order of 63.50 per customer. 10 MR. THOMPSON: The only point I was 11 trying to get at, gentlemen, is you put this forward, 12 as I understand it, to suggest that the project costs 13 of your project, at 119, fall within a range of 14 reasonableness. Is that what you are suggesting? 15 MR. KENT: I think that's fair. But 16 Mr. Diamond took the information about the cost of our 17 system and Mr. Diamond looked at it in relation to the 18 data that was available to him and it's Mr. Diamond's 19 conclusions in that regard that I think are important. 20 MR. THOMPSON: Which guided you? 21 MR. KENT: Yes, it did. 22 MR. McGILL: That's right. 23 MR. THOMPSON: Now, if it turns 24 out -- let me put it to you this way: Had the company 25 been persuaded that the capital costs of its project 26 were twice what they should have been, what influence 27 would that have had on your 10.64 claim? 28 MR. KENT: What do you mean by "twice 1517 KENT/McGILL, cr-ex (Thompson) 1 what they should have been", Mr. Thompson? Because I 2 think if our costs were -- if, hypothetically, they had 3 been well outside this range, I think that would have 4 caused us concern. I think we would have wanted -- 5 felt, at that point, that we were obligated to do a 6 much more extensive evaluation of the features of other 7 systems, and ours, to see whether that -- whether it 8 was reasonable that our system fell outside the range. 9 Because it fell inside the range 10 anyway, we didn't have to go that extra stage, I guess, 11 is the way I would look at it. 12 MR. THOMPSON: Let me try it this 13 way. If you are satisfied that the fair market value 14 of the project was, for the sake of argument, 15 $50 million rather than $90 million or $120 million, 16 would you have made your outsourcing claim half of what 17 you claimed? 18 MR. KENT: The value of the system to 19 Enbridge Consumers Gas and its customers depends on 20 what the system can do and what comparable systems 21 available in the marketplace that can fully serve all 22 of those functions would cost in terms of a per 23 customer, per year amount. 24 If a software company were to invest 25 $10 million and produce a system that could be sold for 26 that value, then the owners of that software company 27 would stand to make significant profits. If the cost 28 of that software were far higher, it would eat into 1518 KENT/McGILL, cr-ex (Thompson) 1 whatever profits could be made by that affiliate, or 2 that software company, and it would get to the point, 3 as I described yesterday, where if the costs were 4 higher than could be supported by the fair market value 5 of the system, the owners of the software company might 6 not be able to recover in the course of a reasonable 7 contract period or a reasonable amortization period the 8 full amount of their investment in that software. 9 MR. THOMPSON: So are you saying that 10 in the final analysis how the total project costs 11 compared to, if you will, a market-based evaluation 12 really doesn't matter? "We are going to price this 13 based on what we deliver." 14 Is that what you are saying? 15 MR. KENT: I think, ultimately, the 16 capital cost of the system is an indicator, but if 17 there are other pieces of information that demonstrate 18 clearly that a fair market value is something different 19 than could be supported by the capital cost of the 20 system, then that is the way you would need to go. 21 We did this work, Mr. Thompson -- and 22 Mr. Diamond did this work -- before we decided that the 23 appropriate route was to -- instead of rate basing the 24 cost of the software, transferring the software to an 25 affiliate. Frankly, this part of it was more relevant 26 in that instance. 27 But when we went forward we just 28 simply felt the work was done. It is useful 1519 KENT/McGILL, cr-ex (Thompson) 1 information. It tells you something about CIS systems. 2 We should file it in the case, despite the fact that it 3 doesn't have the same level of relevance to our current 4 proposal that it had to our earlier evidence. 5 MR. THOMPSON: All right. Fine. It 6 is an indicator. 7 MR. KENT: Yes, it is. It is an 8 indicator. 9 MR. THOMPSON: Let's move, then, to 10 the outsourcing cost in Mr. Diamond's table. I just 11 want to ascertain -- what did you take from these 12 numbers that he has put in Table 3? Did you understand 13 these to be prices either approved by regulatory 14 agencies or representative of transactions that had 15 concluded in the marketplace? 16 Did you investigate these prices? 17 MR. KENT: The material on which 18 these prices are based was available to us and we had a 19 look at it. Frankly, all of these numbers were so much 20 higher than what we thought was the practical cap in 21 Ontario, namely the Union Gas-Enlogix fee structure, 22 that we didn't think there was a whole lot of point 23 getting far into them because we weren't going to be 24 able to use them anyway. I guess that is the best way 25 of putting it, Mr. Thompson. 26 MR. THOMPSON: Did you check the 27 references? 28 MR. KENT: Of course, and we filed in 1520 KENT/McGILL, cr-ex (Thompson) 1 evidence portions of the material that is referred to 2 here. 3 MR. THOMPSON: I would like you to 4 turn up some of that. It is attached to -- I think it 5 is IGUA 48, Exhibit I, Tab 12, Schedule 48. 6 MR. KENT: Fifty-nine pages thereof. 7 MR. THOMPSON: Yes. I will be frank 8 with you, Mr. Kent. When I looked at these numbers and 9 then checked the references I found these numbers 10 rather misleading. I wanted to ascertain if the 11 company reviewed the references and whether the company 12 had a similar reaction to mine. 13 If you go to the first reference in 14 Mr. Diamond's evidence at page 8, the BC PUC 15 Commission, that is a decision in May of 1996 16 pertaining to Pacific Northern Gas, which is a part of 17 the Westcoast group as I understand it. Is that fair? 18 MR. KENT: I believe so, yes. 19 MR. THOMPSON: You will see that the 20 Board -- if you go to page 3, under the interrogatory 21 response -- Exhibit I, Tab 12, page 3 -- the current 22 CIS Board-approved cost there was $4.25 per customer. 23 MR. KENT: Yes. 24 MR. THOMPSON: And it notes that PNG 25 had obtained an independent cost quotation of $17 per 26 customer as the high-end benchmark for a new system. 27 It goes on to describe that system, and the bottom line 28 is that that did not represent any Board-approved 1521 KENT/McGILL, cr-ex (Thompson) 1 transaction or any transaction in the marketplace and 2 that the PNG company was going forward as part of a 3 group supporting the Enlogix solution. 4 Are you aware of that? 5 MR. KENT: Yes. 6 MR. THOMPSON: So that this decision, 7 if it does anything, in my submission does nothing to 8 support a market value of $17 per customer and it 9 points to the Enlogix solution. 10 MR. KENT: Mr. Thompson, you referred 11 me to a statement that said that PNG had obtained an 12 independent cost quotation of $17 per customer? 13 MR. THOMPSON: As the high-end -- it 14 is a quote. It is not a market transaction. 15 MR. KENT: It is information that 16 would -- 17 Again, I go back to what I said 18 earlier. When we saw all of these numbers and we saw 19 how much higher they were than what we believed to be 20 the limit of what would be reasonably acceptable by the 21 Board in Ontario, these numbers were so much higher 22 that we didn't go far into them. 23 If we had found numbers in the same 24 kind of range as the value that we believe is fair in 25 Ontario, given the precedent of the Union Gas-Enlogix 26 agreement, then we would have certainly looked at them 27 a great deal harder. That would then have indicated to 28 us that there was some question as to whether or not 1522 KENT/McGILL, cr-ex (Thompson) 1 the Union Gas-Enlogix fee was higher than it should be. 2 But all of our investigation 3 indicated to us that for a utility of our size, 4 supplying customers with the kind of complex services 5 that we provide, in the tax structure within which we 6 live in Ontario, the Union Gas system was at the very 7 low end of any comparators that we could find. 8 MR. THOMPSON: Mr. Kent, if you look 9 at Mr. Diamond's evidence, he is putting forward the 10 average industry outsourcing charge as $22.76 per 11 customer. I say baloney to that number, and you seem 12 to be saying baloney to that number too. 13 MR. KENT: No. I don't think you 14 have interpreted that correctly, Mr. Thompson, at all. 15 What we are saying is that Mr. Diamond's review gave us 16 a very high level of confidence that what we saw as an 17 upper bound on acceptable pricing in Ontario was well 18 below pricing seen elsewhere in the industry. 19 Now, if we had really felt that we 20 absolutely had to justify a higher fair market value 21 for our system in Ontario than the Union Gas-Enlogix 22 number, we obviously would have done further research. 23 We would have investigated all of this much more. We 24 would have come back with something that is more 25 extensive than this. 26 But all of these numbers are so far 27 above the pricing that was established as a kind of 28 benchmark in Ontario through the Union Gas-Enlogix 1523 KENT/McGILL, cr-ex (Thompson) 1 services agreement that we didn't feel we had to 2 investigate it any further. 3 MR. THOMPSON: Let's just come 4 forward to the last report that Mr. Diamond references. 5 It is support for some sort of range of $24 to $33 per 6 customer. This is a Pricewaterhouse report. It starts 7 at page 28 of this exhibit. I assume you reviewed this 8 document in checking Mr. Diamond's work. 9 MR. KENT: Yes, and this is the 10 material that was filed in the Union Gas-Enlogix 11 affiliate transaction hearing, I believe. 12 MR. THOMPSON: Its focus is Enlogix 13 CIS services and their value? 14 MR. McGILL: My understanding of the 15 work that was done by PWC for Union in this regard is 16 that they were trying to establish comparators for the 17 Union-Enlogix CIS fees. 18 MR. THOMPSON: If you look at page 30 19 in the introduction, the objective is described in the 20 first paragraph. It is to determine whether Union Gas 21 is getting fair value for their CIS services. 22 You would agree that that is the 23 purpose? 24 MR. KENT: Yes, that is certainly 25 what is stated here. 26 MR. THOMPSON: If you go to the last 27 page, page 36, you get the conclusion: 28 "Based on this information --" 1524 KENT/McGILL, cr-ex (Thompson) 1 Again, which were offers and not 2 transactions in the marketplace. 3 "Based on this information, the 4 CIS bureau package offered by 5 Enlogix at $11 per customer per 6 year is competitive and offers 7 strong market value. The market 8 for CIS services, however, will 9 continue to grow. As firms 10 continue to develop their 11 capabilities and competition 12 increases in Canada, we expect 13 the number of firms offering a 14 full range of CIS BPO services 15 to increase and for the price of 16 those services to become more 17 competitive." (As read) 18 I would suggest to you, gentlemen, 19 that all this report supports is an $11 per customer 20 per year charge, and that the prices are going to 21 decline. 22 Would you agree? 23 MR. KENT: I would agree that it 24 supports $11 per customer. In fact, I would say it 25 supports a higher number. I would think that Enlogix 26 must have been kicking themselves after they got this 27 report, thinking they should have priced their services 28 considerably higher. 1525 KENT/McGILL, cr-ex (Thompson) 1 I presume that they had made a 2 commitment to Union Gas at that level and were then 3 stuck with it. 4 MR. McGILL: It would appear to me 5 that this report supports prices anywhere in the range 6 of $33 to $11 per customer per year. 7 MR. THOMPSON: They are based on, not 8 transactions in the marketplace, offers, opening 9 offers. In any event, it is $11 is what this report's 10 conclusion is. 11 We were quarrelling yesterday about 12 the Enlogix functionality and the functionality of your 13 system. So I will use your material to help us with 14 this debate. 15 Would you go to page 33 of this 16 document. There is a matrix which identifies the 17 Enlogix range of services. 18 And if you go to page 50, there is an 19 appendix that defines these activities. 20 MR. KENT: Yes, we have that. 21 MR. THOMPSON: I would like you to 22 tell me which ones of these 20 activities remain with 23 the LDC under your proposal and which ones will go to 24 the affiliate. 25 MR. KENT: We can attempt to do so. 26 I believe that that is essentially the same situation 27 faced by Union Gas as they are unbundling their 28 operations as well. But we can go through this. 1526 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Just quickly. Site 2 information: is that with the LDC or the affiliate in 3 the end state? 4 MR. KENT: With the LDC. 5 MR. THOMPSON: Customer information? 6 MR. McGILL: It will be with the LDC. 7 MR. THOMPSON: Product and service 8 information? 9 MR. McGILL: Yes, I think that would 10 stay with the LDC. 11 MR. KENT: We are going to get into 12 things here, Mr. Thompson, where it is applicable to 13 both. I think this is one where certainly the 14 unbundled activities would also have products and 15 services. 16 MR. THOMPSON: LDC/affiliate? 17 MR. KENT: Yes. 18 MR. THOMPSON: Contracts and 19 agreements? 20 MR. FARRELL: I want to make sure the 21 witnesses are given enough time to read each one rather 22 than just responding directly to Mr. Thompson reading a 23 heading. 24 MR. KENT: This would appear, from 25 this description, to be primarily LDC, particularly in 26 regard to things like pre-authorized payment options. 27 But there may also be usage made by an unbundled 28 business. 1527 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Marketing products and 2 services? 3 MR. KENT: Again, I think this is 4 both, although in this instance it may be something 5 that the unbundled business would make heavier use of 6 than the LDC. 7 MR. THOMPSON: So that would be A/LDC 8 rather than LDC/A -- "A" standing for affiliate? 9 MR. KENT: On the basis of our very 10 quick read of this, and what is admittedly a very quick 11 assessment at your request, Mr. Thompson, yes. 12 MR. THOMPSON: Customer interactions? 13 MR. KENT: This would appear to be 14 almost exclusively LDC, but maybe a small component for 15 the "A" category you referred to. 16 MR. THOMPSON: Read measurements? 17 MR. KENT: LDC. 18 MR. THOMPSON: Usage consumption? 19 MR. KENT: LDC. 20 MR. THOMPSON: Charges? 21 MR. KENT: This would appear to be 22 both, but certainly the LDC's needs with respect to 23 billing the commodity are more complex than for billing 24 other services. 25 MR. THOMPSON: Bill productions and 26 distribution? 27 MR. KENT: Again both, but I think 28 more on the LDC side, particularly when it talks about 1528 KENT/McGILL, cr-ex (Thompson) 1 things like consumption and degree day graphs, and 2 things of that nature. 3 MR. THOMPSON: Payments? 4 MR. KENT: I would expect that both 5 organizations would expect to be paid. 6 MR. THOMPSON: Receivables? 7 MR. KENT: That tends to be a 8 function of payments, or lack thereof. 9 MR. THOMPSON: Credit and 10 collections? 11 MR. KENT: The same thing again. 12 MR. THOMPSON: Personnel information? 13 MR. KENT: Both the LDC and the 14 affiliate would have need of this. 15 MR. THOMPSON: Field work? 16 MR. KENT: Again I think both, 17 although it is difficult, based on this quick read, to 18 give any assessment of what proportion would be 19 required by each organization. 20 My suspicion would be that the LDC 21 would have a greater need for it, but I am not sure. 22 MR. THOMPSON: Work queues. 23 MR. KENT: The examples here in 24 regard to things like meter reading exceptions, erratic 25 use consumption, are clearly LDC and exclusively LDC. 26 The other stuff may also be a value 27 to an affiliate. 28 MR. THOMPSON: Measurement and 1529 KENT/McGILL, cr-ex (Thompson) 1 related equipment? 2 MR. KENT: In my view, exclusively 3 LDC. 4 MR. THOMPSON: Reporting? 5 MR. KENT: I think both. 6 MR. THOMPSON: Administrative 7 support? 8 MR. KENT: Both again. 9 MR. THOMPSON: Interfaces? 10 MR. KENT: Again, both. 11 MR. THOMPSON: All right. Can I 12 then, from that analysis of Mr. Diamond's influence, 13 come back to Mr. Stephens' work, first of all dealing 14 with project costs. 15 You will find that at page 20 of his 16 testimony. You will see what he has shown in the chart 17 on page 20. There is further detail of it in 18 Appendix 1, not Appendix 3, in line 3. 19 There is an error. It should be 20 Appendix 1. 21 In terms of the ECG current, if 22 in-house, like Mr. Diamond, Mr. Stephens has used 23 $119.9 million project costs. 24 MR. KENT: I see that he has used 25 that number, yes. 26 MR. THOMPSON: You can't fault him 27 for that. 28 MR. KENT: He has used the number. 1530 KENT/McGILL, cr-ex (Thompson) 1 We do have some questions for Mr. Stephens in regard to 2 some of this material, as I think you know, 3 Mr. Thompson. 4 MR. THOMPSON: I understand that. 5 In terms of the project costs for 6 BC Gas in-house and Union Gas in-house, do you have a 7 dispute with those? 8 MR. KENT: I understand that those 9 are the costs as filed. I think, in particular in the 10 case of Union Gas, some time has passed since that 11 material was filed. I am not sure if that is currently 12 a reasonable estimate of the costs that are being 13 incurred by Enlogix. I have no way of knowing that, 14 and I suspect that you don't either. 15 MR. THOMPSON: There is one point 16 that I forgot to mention when we were talking about 17 Mr. Diamond's evidence. 18 The last entry he had in his 19 testimony with respect to outsourcing costs was to a 20 website, cisworld.com. 21 That's at page 8B, Tab 7, Schedule 5. 22 In response to our interrogatory, 23 Exhibit I, Tab 12 at Schedule 48, the Internet site 24 material was produced. It's at page 56. This is what 25 led us to Mr. Galluzzi at TMG. 26 MR. KENT: I'm glad we could be of 27 assistance to you, Mr. Thompson. 28 MR. THOMPSON: Did you folks 1531 KENT/McGILL, cr-ex (Thompson) 1 communicate with them as well by any chance? 2 MR. KENT: I did not. I don't know 3 whether Mr. McGill did. 4 MR. McGILL: I don't believe we did. 5 MR. THOMPSON: All right. 6 Now, Mr. Diamond came up with a 7 number of $33.57 somehow from this Internet 8 information. Do you know how he came up with that 9 number? 10 MR. KENT: I think it's probably more 11 appropriate that you ask Mr. Diamond that question. 12 MR. THOMPSON: I certainly am going 13 to ask him, but I am asking: Do you know how it was 14 derived? 15 MR. KENT: No, I do not know in 16 detail how it was derived. 17 MR. THOMPSON: All right. Back to 18 Mr. Stephens work. 19 In terms of developing his in-house 20 replace cost for Consumers Gas, what Mr. Stephens is 21 trying to transmit here obviously is that the project 22 costs of $120 million, or even $90 million, are 23 substantially above what they ought to have been. 24 MR. KENT: I do manage to read that 25 into Mr. Stephens' report. I understand that to be his 26 opinion. 27 MR. THOMPSON: Appendix 7, where he 28 derives total project cost per customer of $40, he has 1532 KENT/McGILL, cr-ex (Thompson) 1 derived that from Mr. Galluzzi's position paper in 2 Rules of Thumb that is found at Appendix 8? 3 MR. KENT: Yes. We found those very 4 interesting and we have some further questions for 5 Mr. Stephens about them. 6 MR. THOMPSON: All right. 7 But Mr. Galluzzi's information, the 8 TMG information, has been based on a number of RFP 9 situations, as I understand it. Can you confirm that, 10 or do you know? 11 MR. KENT: We have not consulted with 12 Mr. Galluzzi, but I'm sure Mr. Stephens will be able to 13 give us answers to that kind of question. 14 MR. THOMPSON: All right. 15 But the other interesting feature of 16 Mr. Galluzzi's work in terms of project costs and how 17 he derives them is that he segments the market into 18 large utilities, a million or more customers, and then 19 he has more than 5,000 and less than 25,000. 20 MR. KENT: Yes. 21 MR. THOMPSON: My question is: Have 22 you folks checked the Chartwell Report and other 23 sources to determine project costs per customers where 24 the sample is a million customers or more? 25 MR. KENT: I think if you look in our 26 evidence -- and we were looking a few moments ago at 27 it -- the material filed by Mr. Diamond lists 28 individual utilities, lists the number of customers 1533 KENT/McGILL, cr-ex (Thompson) 1 served by each, the cost of their CIS and then computes 2 a cost per customer therefrom. 3 There are a range of utility sizes 4 shown there, but for each one there is a calculated 5 cost per customer. So you can see that one large 6 utility and one small one -- you can see yourself the 7 impacts of large versus small. 8 MR. THOMPSON: Mr. Diamond's sample 9 is -- for his sample he took utilities having 10 100,000 customers or more and then within that universe 11 he selected some and omitted others. 12 MR. KENT: I believe in response to 13 an interrogatory we subsequently filed the full -- I 14 think the term you used was universe of information. 15 MR. THOMPSON: Well, again, just did 16 you check that information? 17 MR. KENT: The full universe of 18 information? 19 MR. THOMPSON: Yes. 20 MR. KENT: I personally scanned 21 through it, but I wasn't attempting to replicate 22 Mr. Diamond's work. 23 MR. THOMPSON: Let me just give you 24 an example. 25 If you look at Mr. Diamond's Table 2, 26 Cincinnati Gas & Electric, a customer of 1.4 million -- 27 1.4 million customers. Do you see that? 28 MR. KENT: Yes, I do. 1534 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: He show -- 2 MR. KENT: I also see a CIS capital 3 cost of $116 million -- 4 MR. THOMPSON: Yes. 5 MR. KENT: -- and a CIS cost per 6 customer of $83 per customer in comparison to our cost 7 of $79, even if we throw the BPR analysis phase costs 8 and the SIM overhead and everything in there. 9 MR. THOMPSON: Yes. 10 Now, first of all, that customer was 11 not part of the Chartwell Report. I'm sure you know 12 that. 13 MR. KENT: No, I wasn't aware of 14 that. 15 MR. FARRELL: I'm just wondering 16 about the ethicacy of a detailed examination of another 17 witness' evidence with this panel. 18 MR. THOMPSON: Well, this influenced 19 you. You have directed me to this chart. 20 I will just use this one example, 21 Mr. Kent. 22 If you turn to IGUA Exhibit I, 23 Tab 12, Schedule 46, you will see here we have the 24 Cincinnati Gas & Electric Company case Mr. Diamond used 25 to develop this table which is -- I interpret it was 26 suggesting that these costs were reasonable for this 27 project. 28 Then we see, if we look at the 1535 KENT/McGILL, cr-ex (Thompson) 1 Cincinnati case at page 2, that -- 2 MR. KENT: I'm sorry, I have lost 3 you, Mr. Thompson. Where are you? 4 MR. THOMPSON: Exhibit I, Tab 12, 5 Schedule 46. I'm sorry, 46. 6 --- Pause 7 MR. KENT: Yes, I see that. 8 MR. THOMPSON: Right. 9 If you go to the second paragraph -- 10 this case is, again, not dissimilar to yours. It is 11 one that the costs got very high. 12 You will see the project was finally 13 completed in July 1993 at a total cost of $80 million 14 with a capitalized cost of $62.3 million. Do you see 15 that? 16 MR. KENT: Yes, I do. 17 And there would appear to be a 18 discrepancy with the information in the Chartwell 19 Report and I'm sure since you have mentioned this I 20 will, if you don't mind, ask Mr. Diamond to see if he 21 can clarify that before he takes the stand. 22 MR. THOMPSON: This has nothing to do 23 with the Chartwell Report. This is one he picked 24 somewhere else. 25 MR. KENT: No. I think if you look 26 at the reference, Mr. Thompson, Table 2 is derived from 27 the Chartwell Report. 28 MR. THOMPSON: Well, I'm telling you 1536 KENT/McGILL, cr-ex (Thompson) 1 the Cincinnati Gas & Electric is not in the Chartwell 2 Report, it's in this reference. Okay? 3 MR. KENT: Mr. Thompson, I don't mean 4 for you to be excited about this or upset. 5 I don't know. This is Mr. Diamond's 6 evidence. I'm sure that he will be able to resolve 7 this discrepancy. 8 MR. THOMPSON: I just want to take 9 you through the number. 10 He has put a number in here in his 11 table of $116 million. That is the Canadian gross up 12 of $80 million. Would you take that, subject to check? 13 MR. KENT: That seems a reasonable 14 gross up, yes, as a matter of fact, now that you 15 mention it. That would also be a reasonable 16 explanation. But it not one that I can give you with 17 confidence because it is Mr. Diamond's evidence. 18 MR. THOMPSON: Fine. I just want to 19 illustrate for you. 20 You said you took comfort in this 21 table and all I'm trying to -- 22 MR. KENT: As an indicator, yes. 23 MR. THOMPSON: -- as an example of 24 the table. So that's what we have in page 1 of the 25 evidence, only 62.3 of that amount had been 26 capitalized. 27 If you go to the last page you will 28 see that what was approved by the Board in the case was 1537 KENT/McGILL, cr-ex (Thompson) 1 only 29.75 million. 2 MR. KENT: Yes. I know there was a 3 disallowance in that case. 4 MR. THOMPSON: Right. That is not 5 reflected in Mr. Diamond's table. 6 MR. KENT: No, but Mr. Diamond was 7 not asked to report on the regulatory processes around 8 any of these systems, he was asked to tell us what 9 these systems cost. 10 MR. THOMPSON: But you are putting 11 this forward as a range of reasonable capital project 12 costs, that example -- 13 MR. KENT: That is exactly correct. 14 MR. McGILL: Mr. Thompson, the costs 15 are the costs. What is approved by a regulator is 16 something different. They are not necessarily the same 17 thing. 18 MR. KENT: Hopefully it is the same 19 thing, but there are exceptions. 20 MR. McGILL: Yes. Well, in this 21 example there was. 22 MR. THOMPSON: Quite an exception in 23 that case. 24 MR. KENT: I agree. 25 MR. FARRELL: We can argue that, if 26 you wish, but I don't think beating up on these 27 witnesses is going to get you anywhere. 28 --- Pause 1538 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Did you check the 2 Chartwell Report for utilities reporting that had 3 customers over a million? 4 MR. KENT: I have reviewed the 5 Chartwell Report some time ago, yes. 6 MR. THOMPSON: Well, if you look at 7 our interrogatory responses provided this morning that 8 do not yet have an exhibit number, on page 9 of 16 -- 9 MR. KENT: I'm afraid, Mr. Thompson, 10 I have not had a chance to see those yet. 11 MR. THOMPSON: All right. Well, I 12 will ask Mr. Diamond, then, because that -- there's a 13 table there that identifies the companies from the 14 Chartwell Report that have a million or more customers 15 and, curiously enough, the project cost per customer is 16 quite consistent with the $40.00 per customer that 17 Mr. Stephens has used. 18 Let's move to the operating cost 19 analysis. 20 You will find that at Mr. Stephens' 21 page 21. It's derived from his array of information at 22 Appendix 2. 23 MR. KENT: Yes. And, again, we have 24 a number of questions for Mr. Stephens in regard to 25 this chart and the calculations that he's made -- 26 given. 27 MR. THOMPSON: Well, let's talk about 28 approach, first. 1539 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: That is what we would like 2 to ask Mr. Stephens about: his approach. 3 MR. THOMPSON: Well, I'm going to ask 4 you about it first. Okay? 5 MR. KENT: Mr. Stephens -- 6 MR. THOMPSON: -- can tell us whether 7 you disagree or agree. But do you accept that when 8 examining the operating costs of comparables, it's 9 important to put those operating costs on a consistent 10 amortization base? 11 MR. KENT: Yes, I do. 12 MR. THOMPSON: All right. And so, 13 Mr. Stephens has done that for BC Gas in-house for 14 five-year, seven-year and 10-year. 15 MR. KENT: Mr. Thompson, we would 16 have considerable difficulty with the way in which 17 Mr. Stephens has done that. We believe that there are 18 some fundamental flaws in his calculation methodology. 19 But we would like to understand what they are through 20 having the opportunity to cross-examine Mr. Stephens 21 about his calculations. 22 MR. THOMPSON: You will have that 23 opportunity. 24 The approach, in terms of putting 25 them on a -- the comparables -- on a consistent 26 amortization period, you accept. And I think you 27 mentioned earlier you were aware that the BC analysis 28 was done on the basis of a 10-year amortization period? 1540 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: That's correct. 2 MR. THOMPSON: All right. And the BC 3 transaction involving Peace software is one where 4 BC Gas acquired that product in the marketplace. In 5 other words, it's an open market transaction? 6 MR. KENT: Yes. As we did when 7 acquiring the rights to use Service 2000 from Price 8 Waterhouse. 9 MR. THOMPSON: Union Gas acquired 10 their rights to the Banner system, again, in the open 11 market. Right? 12 MR. KENT: That's my understanding, 13 yes. 14 MR. THOMPSON: And the transaction 15 between Enlogix and Union Gas is not an open market; 16 it's an affiliate transaction non-arm's length? Like 17 yours is proposed to be. 18 MR. KENT: The transaction between 19 Union Gas and Enlogix was one that was found by the 20 requirements of this Board, as I understand it, to -- 21 so that it was necessary to demonstrate that the value 22 of the services and the pricing thereof was equivalent 23 to, as best could be determined, pricing in the open 24 marketplace. 25 So, while Union Gas and Enlogix 26 may be affiliates, the constraints around their 27 business relationship were such that the pricing of the 28 service was essentially at fair market value, as we 1541 KENT/McGILL, cr-ex (Thompson) 1 understand it. 2 MR. THOMPSON: In terms of the 3 selection of the amortization period, Mr. Stephens 4 indicates, at page 23, that: 5 "-- ten years is a reasonable 6 amortization period for a 7 utility that implements a 8 packaged CIS software solution 9 from a supplier that has a 10 maintenance and renewal 11 strategy. The software 12 suppliers to BC Gas and Union 13 Gas have maintenance and renewal 14 strategies." 15 Do you agree with that statement? 16 MR. KENT: I agree with the fact that 17 you quoted it directly from Mr. Stephens and that it 18 is, I gather, his opinion. I don't know what he means 19 by a "maintenance and renewal strategy" and I have no 20 idea whether either supplier to Enlogix or to BC Gas is 21 going to be able to carry through on a maintenance and 22 renewal strategy. 23 MR. McGILL: And we also have no idea 24 what a maintenance/renewal strategy conducted over a 25 10-year period might cost. 26 MR. THOMPSON: You don't know what a 27 maintenance -- the provision of maintenance by a 28 software supplier means? 1542 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: I think different software 2 suppliers have different interpretations of it and 3 there are, certainly, software -- 4 MR. THOMPSON: What's your 5 interpretation of it? 6 THE PRESIDING MEMBER: Mr. Thompson, 7 let the witness finish, please. 8 MR. THOMPSON: All right. 9 MR. KENT: There are certainly 10 software suppliers -- I give you the example of 11 Platinum Technologies that was recently taken over by 12 Computer Associates. Some of the products that 13 Platinum Technologies swore up and down would be 14 supported ad infinitum are going to be discontinued by 15 Computer Associates. That's very unfortunate. 16 Particularly for people who bought and used that 17 software. 18 Now, there may be other computer 19 suppliers whose promises about ongoing support 20 arrangements are such that they are going to be able to 21 deliver on them on much longer periods, but there are 22 many examples of software packages that have become 23 orphans, either because the companies that owned them 24 went broke or were sold to other organizations or 25 simply discontinued that line of business. It's 26 unfortunate. It's something you try to avoid. But it 27 happens. 28 So, none of these guarantees are 1543 KENT/McGILL, cr-ex (Thompson) 1 ironclad, Mr. Thompson. 2 MR. THOMPSON: I wasn't suggesting 3 they were. But you were indicating -- 4 MR. KENT: I took you to be implying 5 that they were. I apologize. 6 MR. THOMPSON: The message you 7 transmitted to me was you didn't know what a 8 maintenance strategy from a software supplier was -- 9 which kind of surprised me. 10 MR. KENT: I think -- hopefully, you 11 have, from my last answer, realized that I do 12 understand what one is. But I don't know what 13 Mr. Stephens' interpretation is, in this context. It's 14 his evidence describing his experience and 15 understanding of the other packages. We would like to 16 understand more clearly what it is before we reach any 17 conclusions about it. 18 MR. THOMPSON: Do you know what a 19 renewal -- "renewal", to me, is the software supplier 20 supports the package, enhances it as time goes by. 21 Is that your understanding of a 22 renewal strategy? 23 MR. KENT: I think that that would be 24 a reasonable definition of the renewal strategy, yes. 25 MR. THOMPSON: In your original 26 material -- I was looking at Board Staff No. 60 -- you 27 were proposing a seven-year amortization for some of 28 these CIS claims that you were -- 1544 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: Our original proposal did 2 set out a seven-year amortization. All of the other 3 SIM projects were amortized over five. But for a 4 number of reasons, including the extent of potential 5 rate impact of a shorter amortization period, we felt 6 that it would be appropriate to extend that, in the 7 case of CIS, to seven years. 8 Now, fortunately, because of the 9 revisions to our proposal, we do not any longer believe 10 that that's necessary because our revised proposal 11 reduces the rate impact for customers and brings them 12 the benefits of CIS at a lower cost. 13 MR. THOMPSON: I appreciate we have a 14 debate on the appropriate amortization period. 15 Again, just in terms of approach, 16 would you turn to Appendix 2, please. 17 MR. KENT: This is Mr. Stephens' 18 evidence? 19 MR. THOMPSON: Yes, please. 20 MR. KENT: Yes, and we had some 21 questions about this, too, Mr. Thompson. 22 MR. THOMPSON: You said that before I 23 directed your attention to it. 24 In terms of approach, again, what he 25 has done is identify the number of customers. He's 26 estimated the number of CIS system users based on 27 information that the various sources provided to him, 28 including your company. 1545 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: Yes. 2 MR. THOMPSON: He has outside 3 demarcation point costs. And then, he has inside 4 demarcation point costs. 5 Now, the demarcation point, that, as 6 I as understand it, reflects the point where -- well, 7 it's the equipment that needs to -- that remains with 8 the utility is described in the inside demarcation 9 cost. And the outside demarcation cost describes the 10 equipment, as I understand it, that the affiliate is 11 going to need -- and, in your proposal, this gives rise 12 to the hosting revenue. Is that right? 13 MR. KENT: Yes, and I think it is 14 essentially comparable in the Enlogix agreement and 15 ours. I am not quite so sure about others. The BC Gas 16 one may be a little bit more difficult for us to 17 understand, the inside and outside demarcation stuff. 18 We might have some questions for Mr. Stephens in that 19 regard as well. 20 MR. THOMPSON: You will have your 21 chance. You keep saying that. But outside the -- 22 MR. FARRELL: I think that is unfair, 23 Mr. Thompson. You are now giving your interpretation 24 of Mr. Stephens' evidence and then asking the witnesses 25 to comment. 26 MR. THOMPSON: I am just trying to 27 get the witness to tell us -- 28 THE PRESIDING MEMBER: Mr. Thompson, 1546 KENT/McGILL, cr-ex (Thompson) 1 can I just help to bring it home now? 2 The issue now -- we started at the 3 fair market value of the fee. Now, what is the issue 4 now? Is the issue one of that fee versus outsourcing? 5 Is that where you are going? 6 MR. THOMPSON: It is fair market 7 value with respect to services outside the demarcation 8 point as well as inside. I am just trying to have the 9 witnesses clarify and make sure that we don't have a 10 dispute on what is outside and what is inside. 11 But they persist in wanting to argue 12 with me and it is just a factual question that I am 13 trying to establish. 14 THE PRESIDING MEMBER: I'm sorry, I 15 still don't understand, Mr. Thompson. I need more 16 help. 17 The issue is the origination of the 18 proposed fee. That is how you are started this 19 morning. Now, you are going to outsourcing and I want 20 to understand, at the end of the day, what do we have 21 to compare? 22 MR. THOMPSON: You will have to 23 compare the fee that the company is claiming for the 24 outsourcing service on a fair market value basis. You 25 will have to compare the costs that the company is 26 recovering inside the demarcation point for CIS 27 services on a fair market value basis. 28 MR. FARRELL: That is the part that I 1547 KENT/McGILL, cr-ex (Thompson) 1 don't understand. If they are utility costs, where 2 does fair market value come into it? 3 MR. THOMPSON: You have taken the 4 view, as I understand it, that fair market value is to 5 be the test. 6 MR. FARRELL: For the affiliate's 7 fees. 8 THE PRESIDING MEMBER: Yes. That was 9 what I understood too, Mr. Thompson. I am just trying 10 to bring you home, as I said. 11 MR. THOMPSON: I guess I would say 12 that if the inside the demarcation line costs exceed 13 fair market value, then they are unreasonable and 14 should be excluded from utility ratemaking. They can't 15 just go wild in there and spend whatever they want. 16 I wasn't trying to get into the 17 numbers; I was just trying to get into the demarcation 18 point. It relates to the hosting charge and this kind 19 of thing. 20 Really what I am trying to get at is: 21 Have we got the right things outside? Is there 22 anything missing? And have we got the right things 23 inside? 24 And we will debate about the 25 reasonableness of the amounts. 26 THE PRESIDING MEMBER: Go ahead, 27 Mr. Thompson. But try to also assist the Board. We 28 are not interested in tricking the witnesses or putting 1548 KENT/McGILL, cr-ex (Thompson) 1 them on defence. We are interested in the best 2 information possible. 3 MR. THOMPSON: I am not trying to 4 trick them either, let me assure you. I am trying to 5 understand the information. 6 Panel, in terms of equipment outside 7 the demarcation line, which is, to me, equipment for 8 which the affiliate is responsible, if it is owned by 9 Consumers Gas and used by the affiliate, then we have 10 this payment for use, which you describe as the hosting 11 charge. 12 MR. KENT: Yes. 13 MR. THOMPSON: But is the equipment, 14 the Unix server, described as line 1? 15 What is the equipment? You tell me. 16 MR. KENT: It is set out, 17 Mr. Thompson, in the services agreement. If you could 18 go back to that, I think there is a very clear 19 definition of the demarcation point. 20 Now that we know what you want, we 21 can help you. If you look -- 22 MR. THOMPSON: I am sorry that I am 23 so vague. I guess it's my nature. 24 MR. KENT: If you look at Exhibit B2, 25 Tab 7, Schedule 4, page 4 of 53, point 1.17 is the 26 definition of demarcation point. Just to be sure we 27 have it readily available, I will read this into the 28 record: 1549 KENT/McGILL, cr-ex (Thompson) 1 "`Demarcation Point' means the 2 designated point from which 3 CLIENT shall be responsible for 4 the CLIENT System, currently the 5 routers leased or owned and 6 operated by Newco on the 7 premises of Newco and/or Newco's 8 Approved Agents, Subcontractors 9 and Suppliers." 10 Now, that is essentially the same 11 definition as is used in the Union Gas-Enlogix 12 agreement. There, where the hosting is provided 13 remotely from the client site where the call centre is 14 located, it means that the routers that -- as I 15 understand it in their instance -- the routers that are 16 on the outsource hosting service provider's site. 17 Now, in our case, because the hosting 18 is being provided on site, there isn't the necessity 19 for communication links between the call centre and the 20 hosting system, at least not long distance ones, and 21 the routers are in fact in the same building as the 22 call centre. 23 I hope that clarifies it. 24 MR. THOMPSON: Yes. So, apart from 25 that equipment, then everything else is inside. 26 Everything else that is needed to support the CIS 27 application is inside the demarcation point. Is 28 that fair? 1550 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: Yes, that's fair. What is 2 outside, just to put it in the most simplified form, 3 are the PCs that sit on people's desks and the wiring 4 that communicates from those PCs to the router. 5 Now, there may also be -- depending 6 on how the system is set up, there may be some 7 subcomponents in there, but they are relatively minor. 8 MR. THOMPSON: Just in terms of the 9 hosting charge, which you have discussed with 10 others -- and this was referenced in HVAC 29 -- you 11 said there that the Unix related cost is $100,000. 12 MR. KENT: Yes, and we have 13 undertaken to provide more detail on that. 14 Unfortunately, we haven't yet been able to do so, but 15 that material is on its way. 16 MR. THOMPSON: What does one of those 17 items cost? 18 MR. KENT: Unix servers? They vary a 19 lot. It depends on how many processes there are in 20 them, how much attached disc storage capacity there 21 is -- a number of things. They can cost up to $500,000 22 each and they can be down in the range of -- well, 23 certainly below $100,000. 24 MR. THOMPSON: All right. That 25 amount that you quoted for using that equipment struck 26 us as being very low, but I am sure that will be 27 covered in your interrogatory response. 28 In terms of the amounts that 1551 KENT/McGILL, cr-ex (Thompson) 1 Mr. Stephens has used, the outsource affiliate amount 2 that he has for your charge of $15.814 million is 3 correct? 4 MR. KENT: Are you still at 5 Appendix 2 of Mr. Stephens' evidence? 6 MR. THOMPSON: Yes, I am. 7 MR. KENT: And you are about a third 8 of the way down on a line that says "CIS application 9 outsourcing charges"? 10 MR. THOMPSON: Yes. 11 MR. KENT: Yes. The figure that 12 appears in the right-hand column of $15,814,000 is 13 correct for the test year. 14 MR. THOMPSON: And for the purposes 15 of this comparison, again in approach, do you agree 16 with me that we are not talking about rate impact here, 17 we are talking about the costs of each of the 18 outsourcing alternatives? 19 MR. KENT: I am not sure if I follow 20 your distinction, Mr. Thompson. 21 MR. THOMPSON: Fine. I will leave it 22 for argument. 23 You noted Mr. Stephens' conclusion, I 24 am sure, at page 23, that on the 10-year amortization 25 period your costs appear to be about almost twice of 26 BC's and Union's. 27 MR. KENT: Mr. Thompson, as I said 28 before, we have a lot of questions for Mr. Stephens 1552 KENT/McGILL, cr-ex (Thompson) 1 about how he did this amortization and what it means. 2 And we also, as I said before, believe that an 3 appropriate amortization period for a CIS in today's 4 tumultuous marketplace is considerably less than 5 10 years. 6 MR. THOMPSON: He checks an 7 indicator -- and this is at page 24 -- IT cost versus 8 G2R benchmarks, and that is against total revenues. 9 Again, the numbers in your case appear to be double the 10 benchmark. That is his conclusion. 11 MR. KENT: I am interested by the 12 term "benchmark". We have a number of questions of 13 Mr. Stephens in regard to the information on which he 14 bases his conclusion. 15 MR. THOMPSON: Then he does another 16 comparison of IT costs versus TMG customer support 17 services benchmark. This is information that came from 18 the reference that I drew your attention to that 19 Mr. Diamond had provided. 20 Here, again, we see more than double 21 the benchmark or the indicator. Everywhere we look it 22 seems we are running up about a factor of two. 23 MR. FARRELL: Everywhere we look in 24 Mr. Stephens' evidence. 25 MR. KENT: Mr. Thompson, do you have 26 a question for us in this regard? 27 MR. THOMPSON: Yes. If the basis for 28 Mr. Stephens' recommendation -- and I would like to 1553 KENT/McGILL, cr-ex (Thompson) 1 wrap this up by coming, if I could, to the ratemaking 2 implications of Mr. Stephens' recommendations if the 3 Board accepts them. 4 THE PRESIDING MEMBER: Mr. Thompson, 5 before you do that, so that I can follow, your last 6 series of questions which dealt with page 24 -- again, 7 I want to understand this. 8 When it says IT costs versus industry 9 benchmarks, what is the issue here? Does it go to the 10 fair market value of the fee or the fair market value 11 of the fee when you consider what is left in the 12 utility, the inside demarcation cost? 13 Is this going beyond that now? Where 14 does it go? 15 MR. THOMPSON: It is an indicator 16 that the claim that the company is making is about 17 twice what it ought to be. 18 Again, it is -- 19 THE PRESIDING MEMBER: Which claim? 20 It says IT costs versus industry -- 21 What is IT costs? That is what I am 22 trying to understand? 23 What is included? Is it all IT 24 capital expenditures and operating costs? I don't 25 understand what the comparison is here. 26 MR. THOMPSON: It is not for me, I 27 guess, to give Mr. Stephens' evidence, but it is 28 described in Appendix 3, where Mr. Stephens has 1554 KENT/McGILL, cr-ex (Thompson) 1 attempted, from information provided by the company, to 2 build up total IT O&M and capital costs. 3 THE PRESIDING MEMBER: That is what I 4 am trying to understand, Mr. Thompson. 5 Is the issue on the table that the -- 6 are the capital expenditures, the IT expenditures on 7 the table? Or where does it go in terms of the issues 8 that we are addressing? 9 That's where I can't make the link. 10 MR. THOMPSON: It is an indicator 11 similar to the project costs indicator, which indicate 12 that the company's costs are about twice the norm. So 13 in the context of the issues that you have on the 14 table, it deals with, first, the outsourcing charge. 15 Is it too high? 16 So it is the fair market value of the 17 outsourcing charge. 18 Our primary evidence is the 19 comparables. This is what I would call corroborative, 20 indicative evidence. 21 It also goes to the question of what 22 is on the inside. Is it too high and unreasonable? 23 Again, the indicators are that 24 capital and operating on the inside are excessive. So 25 it would go as an indicator to the capital budget issue 26 and also to what I call the inside demarcation point 27 operating costs. 28 THE PRESIDING MEMBER: Thank you. I 1555 KENT/McGILL, cr-ex (Thompson) 1 understand that now. 2 MR. THOMPSON: Turning to 3 Mr. Stephens' conclusions, Mr. Kent -- and I appreciate 4 that you don't accept them, but I just want to get an 5 agreement on the impact of the Board endorsement of a 6 market value for the outsourcing charge of $6.00 per 7 customer per annum. 8 That would be $4.64 cents, I believe, 9 less than yours. 10 MR. KENT: Mr. Thompson, if you go 11 back to our evidence, the impact of the Z-factor 12 associated with CIS is $5.7 million in the test year, 13 or $3.84 per customer. 14 That appears in our evidence at B1, 15 Tab 8, Schedule 3, page 9. 16 MR. THOMPSON: Fine. 17 MR. KENT: That is the rate impact of 18 the CIS Z-factor. It includes an O&M benefit of 19 approximately $2 million. We can back that out, and 20 you will then see clearly the impact of the CIS 21 agreement on its own. 22 MR. THOMPSON: The impact -- we are 23 just talking about the fair market value of line 2 24 here: CIS fees at your B1, Tab 8, Schedule 3. 25 That claim is based on a cost per 26 customer of $10.64 cents; agreed? 27 MR. KENT: I'm sorry, I missed your 28 evidence reference, Mr. Thompson. 1556 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: B1, Tab 8, Schedule 3, 2 page 11. 3 MR. KENT: I'm sorry, I was on 4 page 9. 5 Okay, page 11. I have it. 6 MR. THOMPSON: Line 2 is based on 7 your assertion that the fair market value per customer 8 is $10.64; right? 9 MR. KENT: Yes, based on -- 10 MR. McGILL: That is correct. 11 MR. KENT: Mr. Thompson, you have to 12 appreciate that the impact on ratepayers is offset by 13 cost reductions shown in the phase-in credit, CIS O&M 14 reduction and the hosting revenue, all of which flow to 15 the benefits of ratepayers and bring down that -- 16 MR. THOMPSON: I understand that, 17 sir. We are just trying to determine the fair market 18 value of this fee. 19 MR. KENT: I'm sorry, Mr. Thompson. 20 I thought you had turned to rate impact. 21 MR. THOMPSON: So if the Board finds 22 that the fee is not $10.64 but $6.00, that would be a 23 reduction of $4.64 per customer. 24 Can we agree on that? 25 MR. KENT: I will take it subject to 26 check. It is your calculation. 27 If so, it would mean that the rate 28 impact would be negative; that customers would have 1557 KENT/McGILL, cr-ex (Thompson) 1 lower rates because the new software was available, 2 which is an admirable effort but I don't think in any 3 way realistic. 4 MR. THOMPSON: So it is $4.64 and you 5 have one-and-a-half million customers? 6 MR. KENT: Approximately, yes. 7 MR. THOMPSON: So to determine the 8 implications of that for the Z-factor, we would 9 multiply $4.64 by one-and-a-half million. 10 Is that fair? 11 MR. KENT: I think we would perhaps 12 need a schedule of some for from you to lay out this 13 calculation so we could review it. It is hard to do 14 this verbally. 15 MR. THOMPSON: $10.64 minus $6.00 is 16 $4.64. We don't need a schedule -- 17 MR. KENT: No, I don't need a 18 schedule for that. 19 MR. FARRELL: These vary depending on 20 the type of customers. So it is simplistic to multiply 21 it by 1.5 million. Mr. Kent told you that the other 22 day. 23 THE PRESIDING MEMBER: Mr. Thompson, 24 can we just work as follows: your number is the $6.00 25 or the $4.00, so it is a percentage of say 40 or 50 per 26 cent; and then it is 40 or 50 per cent of the 27 $15 million, for example, for the test year. 28 Can we work that way? 1558 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: Fine. Could we have 2 an undertaking to show the impact of reducing the CIS 3 fees in B1, Tab 8, Schedule 3 by 50 per cent? 4 MR. KENT: So the chart on page 11 5 for the test year, you would like us to show the CIS 6 fee number -- instead of the current number of 7 $15,814,000, you would like us to show half of that and 8 calculate the remainder as a number. 9 MR. THOMPSON: Yes. 10 MR. KENT: Yes, we can do that. 11 MR. THOMPSON: Just so I understand, 12 does the phase-in credit in any way depend on the 13 amount of the outsourcing fee? 14 MR. McGILL: Yes, I think they are 15 related because the phase-in credit represents a 16 reduction in the value during the first year, because 17 all the components of the application are not available 18 for the full 12 months. 19 MR. THOMPSON: That would reduce, as 20 well, in your calculation. 21 MR. KENT: It is your calculation, 22 Mr. Thompson. We can put any number in there that you 23 would like us to show. 24 MR. THOMPSON: Mr. Kent, I am just 25 trying to get the impact on the Z-factor of a finding 26 by the Board that the market value of the outsourcing 27 charge is less than what you are claiming. 28 I appreciate we are going to argue 1559 KENT/McGILL, cr-ex (Thompson) 1 about it. 2 Mr. Vlahos suggested 50 per cent. I 3 am adopting his suggestion. 4 Does a reduction in the market value 5 of the fee have any impact on the O&M savings in line 1 6 and the IS O&M reduction in the other lines? 7 MR. KENT: No, it would not. 8 MR. THOMPSON: Does it have any 9 impact on the hosting revenue? 10 MR. KENT: No, it would not. 11 MR. THOMPSON: Could I have an 12 undertaking number for that, please? 13 MS DESAI: J9.1. 14 UNDERTAKING NO. J9.1: Mr. Kent 15 undertakes to show the impact of 16 reducing the CIS fees in B1, 17 Tab 8, Schedule 3 by 50 per cent 18 --- Pause 19 MR. THOMPSON: In terms of the IS 20 capital budget -- you will be happy to know that I have 21 finished O&M expenses. 22 In terms of the IS capital budget of 23 $21 million, to what extent is that influenced by the 24 number of users of the CIS system? 25 MR. KENT: I don't believe that any 26 of those expenditures relate to CIS in any way 27 whatsoever. 28 But I can, if you wish, make further 1560 KENT/McGILL, cr-ex (Thompson) 1 inquiries of Mr. Willett. There may be some background 2 effect that I'm not aware of. 3 But we have in place now the 4 infrastructure on which the CIS system will run through 5 all its phases. It's in. It's running. The CIS 6 system is operational, Mr. Thompson. 7 MR. THOMPSON: No, no. I understand 8 that. 9 But coming back to Mr. Stephen's 10 Appendix 2 -- and again, it's not for numbers, it's 11 just for items. 12 MR. KENT: Oh, I see. 13 MR. THOMPSON: Inside the demarcation 14 point we have, as I understand it, a whole lot of users 15 that need desktops and this kind of thing. 16 MR. KENT: Yes, that's fine. I have 17 you now. 18 MR. THOMPSON: Okay. And those 19 turnover every few years. 20 MR. KENT: Yes. 21 MR. THOMPSON: Mr. Stephens indicates 22 that the estimated number of users of your system is 23 800, up on the top there and I think you are going to 24 give us some further data on that. 25 But I just wanted to get a feel for 26 the extent to which the capital budget would be reduced 27 if the Board were to find that the number of users you 28 have there is excessive. 1561 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: Well, the number of 2 users -- the people who use the system are the people 3 who respond to customer inquiries on the phone; the 4 people who resolve billing queries; who are involved, 5 in one fashion or another in either inputting data into 6 the system or reviewing data that is in the system. 7 Those users -- that number of users 8 is really independent of the features and capabilities 9 of the system itself. It depends on the number of 10 inquiries we get from our customers. It depends on 11 the volume of work that the system is actually required 12 to do. 13 So if we had fewer inquiries from 14 customers we could have fewer staff answering the 15 phones. There is a linkage between those things. 16 Obviously we try to get customers to use IBR or we try 17 to find ways of reducing the number of staff we have to 18 have in the call centre. 19 MR. McGILL: It's all related to the 20 service levels we are committed to maintain. 21 MR. THOMPSON: Right at the moment 22 you have people there writing cards, people inputting 23 cards, there are people who are accessing information 24 on these screens to respond to customer inquiries. 25 Perhaps I could do it this way: If 26 the number of CIS users were to decline by 100, could 27 you give us an indication of the extent to which the 28 computer equipment cost in the budget would decline? 1562 KENT/McGILL, cr-ex (Thompson) 1 MR. KENT: The computer equipment 2 costs in here already provide for the reductions in 3 staff that are in the benefits anticipated from CIS. 4 As we achieve the savings, through 5 further phases of CIS that you have described, we have 6 forecast a benefit. There is an operating cost benefit 7 and we have made matching adjustments to the IS capital 8 budget so that we don't need to buy as many PCs in the 9 test year as we would otherwise. 10 Because we are anticipating -- we 11 have built into the budget those improved efficiencies 12 and the lower number of staff that flow from bringing 13 the CIS system on-line. 14 MR. THOMPSON: Are you telling me 15 that if you eliminated 100 users there would no change 16 to your capital budget? 17 MR. KENT: No, I'm sorry, 18 Mr. Thompson, I didn't say that. 19 What I said was, we have already 20 accounted in the capital budget for the performance 21 improvements, the efficiencies and the reduced head 22 count that will flow from the introduction of CIS. 23 MR. THOMPSON: All right. Well, I am 24 trying to just, so I can close this off, have you 25 assume it is another 100 beyond what you have included. 26 MR. KENT: Okay. 27 MR. THOMPSON: Could you -- 28 MR. KENT: If you go to Mr. Willett's 1563 KENT/McGILL, cr-ex (Thompson) 1 evidence at B2, Tab 6, Schedule 1, on the first page of 2 his evidence there is a line item midway down the page 3 entitled "Desktop/Laptop Replacements". That is 4 520 units at an average of $2,579 per unit. 5 Now, if we were to have 100 fewer 6 users in the company in the test year we would be able 7 to reduce the number of desktop/laptop replacements. 8 Those last approximately four 9 years -- let's say that for the sake of argument -- so 10 let's say, for the sake of argument, reducing by 11 100 users would mean that we would have to buy 25 fewer 12 a year over this next four years. It would be 25 times 13 $2,579 or approximately, in my very rough math, about 14 something less than $55,000. 15 --- Pause 16 MR. THOMPSON: That's it? 17 MR. KENT: Yes. 18 MR. THOMPSON: All right. 19 MR. KENT: That's basically it. 20 Again, I want to reiterate, we have 21 already built into the capital budget the number of 22 full-time equivalents that we will be able to reduce as 23 a result of introducing CIS. 24 MR. THOMPSON: The last topic I just 25 want to turn to -- and it's really unrelated -- comes 26 back to the impact on rates of the use of billing 27 services to be provided by the utility to the rental 28 program on a temporary basis. 1564 KENT/McGILL, cr-ex (Thompson) 1 This came up in the transcript 2 earlier and I have spoken with Mr. Farrell and he is, 3 as I understand it, content that I ask these questions 4 on the record with respect to the items that were 5 deferred to you, Mr. McGill. 6 We were discussing, I believe it was 7 yesterday, that based on the company's approach to the 8 PBR -- the formula in the PBR base, the extent to which 9 the rental program uses the billing service provided by 10 the utility in the test year for about six months, as I 11 understand it, will not have any rate-reducing effect 12 for distribution services ratepayers. 13 MR. FARRELL: I want to make sure 14 that the terminology is correct. 15 When Mr. McGill explained this the 16 other day he explained what the utility would provide 17 and what the non-utility would provide. 18 So I take it, Mr. Thompson, you are 19 asking only about the utility portion? 20 MR. THOMPSON: That's right. 21 MR. McGILL: The billing services 22 provided during the six month transition as part of the 23 ABC activity will be conducted as a non-utility 24 activity, but the ABC business activity does make use 25 of the company's billing system. 26 MR. THOMPSON: Has an estimate been 27 prepared of the fully-allocated costs pertaining to the 28 provision by the utility of the billing service to the 1565 KENT/McGILL, cr-ex (Thompson) 1 rental program in the transition period? 2 MR. KENT: Anything provided by the 3 utility during the transition period would be provided 4 to the ABC business unit and then the ABC business unit 5 would in turn provide a service to the affiliate. 6 The numbers that I am familiar with 7 are that -- based on the 1999 budget the 8 fully-allocated costs associated with billing rentals 9 as part of the utility as an ancillary business was 10 $6 million for the year. That would work out to an 11 average of approximately $500,000 per month. 12 MR. THOMPSON: So that on the 13 assumption that the service is provided for six months 14 the fully-allocated costs associated with are 15 $3 million -- estimated to be $3 million? 16 MR. McGILL: For six months that 17 would be correct. 18 Our proposal was that -- this was 19 part of our ADR counter proposal -- was that we would 20 credit $500,000 a month to a deferral account for the 21 duration of the transition period. 22 We believe the transition period will 23 be less than six months, but it could be up to that 24 length of time. 25 MR. THOMPSON: Now, are there similar 26 implications for the billing service to be provided by 27 the utility to the HIP Program and, if so, what are the 28 fully allocated costs? 1566 KENT/McGILL, cr-ex (Thompson) 1 MR. McGILL: No; I believe the costs 2 associated with supporting HIP and the service 3 businesses moving to the affiliate were removed as part 4 of the adjustments pertaining to that and the original 5 unbundling calculations back in 179-14/15. So, as far 6 as I'm aware, those costs have all been taken out. 7 MR. THOMPSON: Fully-allocated costs? 8 Or direct and marginal? 9 MR. McGILL: I would have to defer to 10 Ms Reynolds with respect to exactly what those costs 11 included. But the advice that I have been given is 12 that there is nothing left behind, with respect to 13 that, that's been dealt with in the non-utility 14 elimination. 15 MR. THOMPSON: Could I have an 16 undertaking to check to ascertain whether all of the 17 fully-allocated costs of supporting those services have 18 been removed? 19 THE PRESIDING MEMBER: "Those" 20 services, Mr. Thompson? Services that had been 21 categorized as non-utility prior to the rental program 22 transfer-out? 23 MR. THOMPSON: Yes. Yes. 24 MS DESAI: J9.2. 25 UNDERTAKING NO. J9.2: 26 Mr. McGill undertakes to 27 ascertain whether all of the 28 fully-allocated costs of 1567 KENT/McGILL, cr-ex (Thompson) 1 supporting those services 2 categorized as non-utility, 3 prior to the rental program 4 transfer-out, have been removed. 5 MR. THOMPSON: Thank you, panel. 6 THE PRESIDING MEMBER: If you are 7 going to ask more questions in this area, Mr. Thompson, 8 you can assume that they have been transferred at full 9 cost. I believe that's probably in the evidence. That 10 was my recollection. But you are just asking for 11 confirmation. But if you want to ask more questions 12 about it, you can do so, on the assumption that they 13 have moved out on a full-cost basis. 14 MR. THOMPSON: Well, if they are out 15 on a full-cost basis, I'm happy. If they are not out 16 on a full-cost basis, I'm assuming the answer to the 17 undertaking will tell me what's still in there. 18 MR. KENT: Yes. 19 MR. McGILL: My understanding is that 20 those costs were dealt with as part of the non-utility 21 elimination, it's either in 179-14/15 or 497-01. 22 MR. THOMPSON: Well, there was a 23 discussion, on the record, where the initial 24 non-utility elimination was $12 million and it got 25 adjusted down to 5.9, which led me to conclude some of 26 them had been left behind. 27 MR. McGILL: Well, that's why I'm not 28 100 per cent certain. 1568 KENT/McGILL, cr-ex (Thompson) 1 MR. THOMPSON: All right. I just 2 want to make it clear the undertaking will tell us 3 that? 4 MR. McGILL: Yes, it should. 5 MR. THOMPSON: Thank you. 6 Those are my questions. Thanks for 7 your patience, panel. 8 THE PRESIDING MEMBER: Thank you, 9 Mr. Thompson. 10 Mr. Mattson, do you have any 11 questions of this panel? 12 MR. MATTSON: No, I don't, 13 Mr. Chairman. 14 We will just be filing argument on 15 this issue. 16 THE PRESIDING MEMBER: Thank you. 17 Does Staff have any questions? 18 CROSS-EXAMINATION 19 MS DESAI: There's just one matter 20 which I wanted to clarify. This just relates, I guess, 21 to the E.B.O. 177-15 decision. I'm not sure if you 22 have that in front of you. It's just a compliance 23 matter. 24 I'm looking at paragraph 3.2.62. 25 MR. FARRELL: I'm sorry. Is it 26 179-14/15? 27 MS DESAI: No. E.B.O. 177-15. This 28 was the CIS decision related to Union Gas. 1569 KENT/McGILL, ex (Desai) 1 MR. FARRELL: Oh, Union. Okay. 2 Sorry. 3 MR. KENT: I believe we have a copy 4 of it, but it will take us a moment to find it. 5 MR. FARRELL: Do you have the 6 reference, please. 7 MS DESAI: Yes. Paragraph 3.2.62. 8 And I'm not sure if you need to refer to it or not. 9 What it was was that the Board had 10 asked Union to provide certain information, in 11 confidence, to the E.R.O. 12 MR. KENT: This would be with respect 13 to the detail -- 14 MS DESAI: Yes. 15 MR. KENT: -- C Schedule? 16 MS DESAI: Yes. 17 MR. KENT: Yes, I am aware of that 18 request. 19 MS DESAI: Right. I don't think you 20 have addressed that anywhere in the evidence. 21 Now, if you were required to file 22 that, would you be -- would you be willing to file 23 that? 24 MR. KENT: Yes, we would be. 25 In fact, I think we answered an 26 interrogatory saying that we would do so, if that's 27 what the Board requires. 28 MS DESAI: And in this paragraph 1570 KENT/McGILL, ex (Desai) 1 after that, there's also a request that if the Board 2 required, they would ask Union, in that case, to file 3 certain information with respect to fees, to confirm 4 that they were at fair or below fair market value. 5 Would that be -- I will read it out: 6 "The Board may require Union to 7 seek price comparisons and 8 provide information as to 9 whether the fees are at or below 10 fair market value." (As read) 11 MR. KENT: We provided a lot of 12 stuff, already, in evidence. I'm not sure that we have 13 anything more. But if the Board has anything that 14 they -- in fact, I know we don't have anything more -- 15 but if there is anything else that the Board requires 16 of us, we would do our best, of course, to find it. 17 I should mention, by the way, with 18 respect to the details of a fee schedule, the filing of 19 that information with the Energy Returns Officer would 20 be on the basis, I presume, that it would be held in 21 confidence within the Board? 22 MS DESAI: Thank you, Mr. Chair. 23 THE PRESIDING MEMBER: Thank you, 24 Ms Desai. 25 The Board has some questions. We 26 thought we would ask them, now, Mr. Farrell, so that 27 this panel can go home or the shop. 28 Ms Halladay? 1571 KENT/McGILL, ex (Desai) 1 EXAMINATION 2 MEMBER HALLADAY: I think this 3 question is for Mr. Kent. 4 You indicated that some of the SIM 5 projects, I think, closed into rate base. 6 I also understand that some elements 7 of the company's proven and reliable batch billing 8 system are going to be included in the new system. 9 My question is: Were any of the 10 costs incurred in the previous SIM projects, or 11 modules, do they, in any -- that have now been closed 12 to rate base -- are any of those reflected in the new 13 CIS system that will be transferred over to the 14 affiliates? 15 MR. KENT: No. All of the other SIM 16 projects are now complete and closed to rate base. 17 This is the only project that remains. 18 The work that was done under or 19 within each of those projects was completed at various 20 times and closed to plant over various times. The only 21 thing that really remains from SIM, as distinct from 22 CIS, is this pool of overhead costs and the start-up 23 costs that were to be distributed. That's the only 24 thing that's left from SIM, as a general topic, and 25 everything is directly related to the CIS. 26 MEMBER HALLADAY: So, there's no SIM 27 project sort of closed to rate base? There's no 28 vestiges of those projects that have sort of worked 1572 KENT/McGILL, ex (Board) 1 their way in the CIS system, in any way? 2 MR. KENT: Not to my knowledge. 3 If you like, I can undertake to go 4 back and confirm that. Because I'm not absolutely 5 certain. There may have been some things in early 6 deliverables that are not fully depreciated -- and now 7 that you asked the question, I'm starting to wonder. 8 Because there were some portions of SIM that were 9 viewed as early deliverables where some software 10 packages could be implemented individually and ahead of 11 time. 12 I think that all of those are now 13 fully depreciated and have no further rate-making 14 impact, but I'm not certain. I can go back and confirm 15 that, if you wish. 16 MEMBER HALLADAY: I appreciate that. 17 MS DESAI: That's Undertaking J9.3 18 UNDERTAKING NO. J9.3: Mr. Kent 19 undertakes to ascertain if there 20 are any SIM projects closed to 21 rate base; to ascertain that 22 there are no vestiges of any SIM 23 projects that have worked their 24 way into CIS system. 25 MEMBER HALLADAY: My next question -- 26 and if it's been dealt with, I apologize; lots of 27 things have been dealt with -- my question is: What 28 about the database? 1573 KENT/McGILL, ex (Board) 1 I understand that the hardware is 2 staying with the utility and is subject to the hosting 3 agreement. I understand that the software applications 4 are being transferred over to Newco. I'm not sure 5 about where the database is going to reside. 6 MR. KENT: I guess there's really two 7 components to the database: one is the hardware 8 itself, the hard discs on which the data sits; and the 9 other is the database software that organizes it and 10 provides for access to it. 11 The hardware is leased by the utility 12 and will remain with the utility and Newco is going to 13 compensate the utility for that, as part of the hosting 14 agreement. 15 The utility also licenses the 16 software, the database software, the DB2 software that 17 will be used to organize the data, and payments for the 18 use of that software, by Newco, are also included in 19 the hosting agreement. 20 So, both components are leased, in 21 effect, by the utility, provided to Newco, and Newco is 22 paying the utility for its costs in providing those. 23 MEMBER HALLADAY: I guess my 24 question, Mr. Kent, relates to the underlying 25 information itself, not how the -- not the computer 26 programs and hardware and software to manipulate that 27 data, but the actual data. 28 MR. KENT: The data remains the 1574 KENT/McGILL, ex (Board) 1 property of the utility, throughout. 2 MEMBER HALLADAY: Because that was 3 not clear in the services agreement and in dealing with 4 the -- the definition of "system" is pretty broad. I 5 would like to be comfortable with the fact that this 6 data is -- underlying data -- is with the utility, for 7 two reasons: one is that the utility, presumably, has 8 paid for O&M, over the years, to collect that 9 information -- and that's not reflected anywhere that I 10 could see in this transfer; and the other reason, 11 obviously, deals with the Affiliate Relationships Code 12 and the confidentiality of that. 13 MR. KENT: Yes. It's, I believe, 14 covered off in the hosting agreement that we discussed 15 yesterday and which is still in fairly rough form. 16 We provided a copy of it, I believe, 17 to Mr. Mondrow, yesterday, and he was going to advise 18 as to whether he wanted that included as an exhibit. 19 But we would have no objection if you 20 would like us to file it in its current form. 21 But I can assure you that this 22 question of the information being owned by the utility 23 is covered within the hosting agreement and it is clear 24 there that the utility owns the data. 25 MEMBER HALLADAY: I appreciate that. 26 Thank you. 27 My next question goes to Mr. McGill. 28 Again, I apologize, Mr. McGill, for being slow and 1575 KENT/McGILL, ex (Board) 1 going back to envelopes and stamps. 2 I just thought I was catching on to 3 all of these non-utility activities and associated 4 activities, and now you have thrown me a curve with 5 this billing. So if you can bear with me, I guess what 6 I am concerned about is that I am concerned that there 7 may be subsidization by the utility for non-utility 8 activities conducted by the company for services 9 provided to an affiliate. I think that sort of 10 summarizes my concern. 11 In other words, I am concerned that 12 because the utility has a billing function that they 13 then use -- and I appreciate the fact that the 14 incremental costs of providing services to the 15 affiliate are borne by the shareholder under the PBR 16 formula. So if the O&M goes up because they are going 17 to be providing billing services for the affiliate, 18 that is covered there. 19 MR. McGILL: That's correct. 20 MEMBER HALLADAY: I also understand 21 that the fees charged to the company -- not the 22 utility, but the fees charged to the company for 23 providing these billing functions will be on the 24 account of the shareholder and won't affect rate base. 25 MR. McGILL: That's correct as well. 26 MEMBER HALLADAY: I also understand 27 that they are being charged at fair market value 28 because of the Affiliate Relationships Code. 1576 KENT/McGILL, ex (Board) 1 MR. McGILL: Yes. 2 MEMBER HALLADAY: I am not sure in my 3 own mind whether the Affiliate Relationships Code has 4 envisaged these company activities that are not in the 5 utility, but that hasn't been said. 6 My question is that, therefore, 7 presumably the incremental costs of including a bill 8 through the affiliate would not be equal to the fair 9 market value that the company would charge for those 10 services. However, the fact that the company would 11 only be paying for the incremental costs of providing 12 those services, the difference would then be solely for 13 the benefit of the shareholder and there would 14 be -- and I think this is what Mr. Thompson was trying 15 to get at -- there would be no corresponding benefit in 16 reduction in the cost of service for the utility 17 portion. 18 Are you following what I am saying? 19 MR. McGILL: Yes. 20 MEMBER HALLADAY: And the reason why 21 the company, non-utility, would be able to provide 22 these services at an incremental cost is solely 23 because -- or mainly because the utility is performing 24 these billing functions. 25 So I am concerned that there is a 26 type of cross-subsidization by the utility of the 27 non-utility business that is being provided to the 28 affiliate, and I would like your comments on that. 1577 KENT/McGILL, ex (Board) 1 MR. McGILL: I think we can just 2 focus on the relationship between the utility and the 3 ABC business unit, because the ABC business unit is 4 going to be providing the service to the affiliate, but 5 it is the ABC business unit that is residing within 6 Enbridge Consumers Gas as a non-utility activity, and 7 it is going to be making use of some assets that are 8 either owned or paid for by the utility. 9 Now, when we removed ABC from the 10 utility as part of the 497-01 adjustments we took out 11 all of the 1999 fully allocated costs associated with 12 the program -- all three: the direct, the marginal and 13 the fully allocated. So based on the 1999 level of ABC 14 activity, we have taken out all of the conceivable 15 costs associated with doing that. 16 So now what we are doing for this 17 temporary period of time -- the ABC activity will be 18 higher than it otherwise would be and there may be some 19 incremental costs associated with that. I don't 20 believe they are going to be significant. And there 21 are going to be revenues coming back into Enbridge 22 Consumers Gas for provision to the affiliate based on a 23 market price. So, to the extent that the incremental 24 revenues are greater than the incremental costs, or the 25 marginal revenues are greater than the marginal costs, 26 there would be a potential benefit to the shareholder, 27 yes. 28 But I think we have eliminated the 1578 KENT/McGILL, ex (Board) 1 right cost for the ABC program to make it a non-utility 2 program. 3 THE PRESIDING MEMBER: I guess the 4 question then is -- I believe it was $3 million that 5 was removed as a non-utility elimination. 6 MR. McGILL: That's correct. 7 THE PRESIDING MEMBER: And that did 8 not contemplate any additional activity for billing for 9 the rental program. I guess the question is, as I 10 understand the questions of Mr. Thompson: Was it 11 enough? 12 Had you known that you had to perform 13 some billing functions for the rental program for a 14 while, is the $3 million removal adequate? 15 I realize that there are incremental 16 costs. There are incremental costs from the utility. 17 There will be incremental revenues going to the 18 company. You said the "Consumers Gas company", and I 19 took that as the corporate -- 20 MR. McGILL: Yes. 21 THE PRESIDING MEMBER: -- not the 22 utility. 23 MR. McGILL: I think it was in 24 recognition of that type of concern that we made the 25 offer we did in ADR. 26 THE PRESIDING MEMBER: And that is 27 where I am going to go last, because that is the first 28 time we hear of this. 1579 KENT/McGILL, ex (Board) 1 MR. McGILL: Oh, I am not sure it is 2 the first time you have heard about it within this 3 proceeding. 4 THE PRESIDING MEMBER: $500,000? 5 MR. FARRELL: Mr. Thompson referred 6 to that, I think, last Thursday and that caused a bit 7 of a kerfuffle about whether or not it was disclosure 8 when we had the discussion with Mr. Warren. 9 Mr. Thompson mentioned that I consented to his use of 10 the figure, and it is in that context that I consented 11 to it. 12 THE PRESIDING MEMBER: I must have 13 been asleep. 14 I recall the issue about $231,000, 15 but that is really another issue. 16 MR. FARRELL: Yes, there were two. 17 The $231,000 was the second. 18 MR. THOMPSON: I just want to make it 19 clear. All I referred to was the amount. I didn't 20 talk about any offer or anything, I was just talking 21 about the amount, and that is what brought up this 22 debate about information versus positions. 23 Mr. McGill is the first one that 24 talks about offers. 25 THE PRESIDING MEMBER: All right. In 26 any case, I guess the issue which we are trying to 27 understand is, as we move forward from the 1999 base, 28 have the appropriate adjustments been made to the Year 1580 KENT/McGILL, ex (Board) 1 2000 cost of service in light of this additional 2 activity. I guess that is the issue we are trying to 3 understand. 4 MR. McGILL: Based on my 5 understanding of marginal and fully allocated costs and 6 how they should be dealt with in terms of the 7 management of the business, I would say yes. 8 THE PRESIDING MEMBER: And you say 9 yes because the incremental costs incurred by the 10 utility to perform those additional activities are 11 covered off by what revenues? And where were they 12 shown? 13 MR. McGILL: It would be incremental 14 activity -- non-utility incremental activity -- and I 15 expect that any incremental costs would be covered by 16 the revenues, although the shareholder is at risk if 17 that is not the case. 18 THE PRESIDING MEMBER: I'm sorry. 19 The incremental revenues will go where? To the 20 utility? 21 MR. McGILL: They will be ECG 22 non-utility revenues in the case of ABC. 23 THE PRESIDING MEMBER: Right, but the 24 costs will be incurred by the utility. 25 Are we talking at cross purposes? 26 MR. McGILL: Perhaps. I don't think 27 that the incremental costs would be incurred by the 28 utility because the utility's O&M is set by the 1581 KENT/McGILL, ex (Board) 1 formula. The utility has no ability to pass on any 2 incremental costs that may arise from this activity to 3 ratepayers. So I think the incremental costs would be 4 for the account of the shareholder and the incremental 5 revenues would be as well. 6 THE PRESIDING MEMBER: All right. 7 But is there an issue there about incremental costing 8 versus full costing? 9 MR. McGILL: Perhaps -- 10 THE PRESIDING MEMBER: In any event, 11 we will just leave it at that. I guess we are trying 12 to understand if there are any ramifications. 13 MEMBER HALLADAY: I think, also, that 14 is nature. If you are charging the fair market value 15 for the services that are being performed and you are 16 only incurring the incremental costs in performing 17 those services, then it is difficult for me to envisage 18 how the shareholders would not make a profit from those 19 non-utility types of transactions. 20 MR. McGILL: The ABC program is 21 already incurring through the non-utility elimination 22 $2.7 million of allocated costs. 23 MEMBER HALLADAY: I appreciate that 24 it may be a question of whether the appropriate 25 adjustments have been made. 26 MR. McGILL: Yes. 27 THE PRESIDING MEMBER: Gentlemen, 28 just one area. My questions go to trying to be 1582 KENT/McGILL, ex (Board) 1 anticipatory as to what the arguments may be. 2 There was a lot of discussion -- 3 Mr. Kent, I can start with you -- about the ability of 4 the company to complete the CIS project. 5 I guess the evidence is that Phase I 6 has been completed and there are four phases to go. I 7 anticipated that you would not be surprised if parties 8 would argue that faith may not have been restored yet; 9 that they would like to see the results. 10 MR. KENT: I do appreciate that, sir. 11 We attempted to address that in our original evidence. 12 I can assure you that Phase IA is in 13 production. In fact, Mr. Stephens did have the 14 opportunity to see it in production. 15 THE PRESIDING MEMBER: I think quite 16 a bit of time was spent on that issue, and we have your 17 answers on it, Mr. Kent. 18 Where I am coming from is that in 19 case the Board was inclined to conclude that perhaps 20 the Board would like to have some evidence of 21 successful completion of the CIS project -- and of 22 course there has to be some kind of benchmark in terms 23 of how successful, based on those arguments that may 24 come forward from intervenors -- I would like to 25 explore with you the ramifications of the Board 26 saying -- and the numbers may not be the issue; whether 27 the fee or the costing revenue or the phase-in credit. 28 Take those as given. Parties may 1583 KENT/McGILL, ex (Board) 1 argue otherwise, and we will have to decide on that. 2 But for the purpose of this discussion, take them as 3 given; in other words, the bottom line is $5.7 million 4 when it comes to the Z-factor. 5 If the Board were inclined to say 6 "that is fine, we have no problem with the numbers but 7 we would like to see completion of the project", and 8 therefore one of the regulatory instruments or tools it 9 would have is to say: "Let's defer that $5.7 million. 10 In the scheme of things, it might not be that sizable 11 since you have been deferring $190 million worth of CIS 12 for a number of years." 13 I would like to explore with you the 14 ramifications of that. 15 First of all, would it have an impact 16 on completing the agreement with Newco? 17 MR. KENT: I don't believe so, 18 although, as we discussed before, Newco isn't actually 19 set up. The officers and the board of directors of 20 Newco, when it is set up, would have the responsibility 21 to satisfy themselves that it was an appropriate 22 agreement. 23 I cannot make a commitment on their 24 part, but I would not anticipate that this would result 25 in a problem. 26 THE PRESIDING MEMBER: All right. 27 In your view, is the size of the 28 amount of $5.7 million material to cause any -- I don't 1584 KENT/McGILL, ex (Board) 1 want to use the words financial hardship. Obviously, 2 that is not the case. Would it cause a great concern 3 to the company? 4 MR. KENT: I'm not sure. I guess at 5 that point the investment made in the software, the 6 $90 million, approximately, would I suppose be in some 7 kind of state of limbo. 8 The utility would presumably -- I am 9 trying to see through this myself. 10 Would you anticipate, sir, that the 11 utility would make a payment to Newco for use of the 12 software but then not be able to recover that in rates; 13 put that payment in a deferral account of some nature 14 for subsequent recovery? 15 THE PRESIDING MEMBER: Yes. What I 16 had in mind is that all the mechanics that have been 17 discussed in your evidence would go ahead. The only 18 component that would be missing is the recovery in 19 rates starting right now, or starting at the first of 20 the fiscal year. 21 MR. KENT: Okay. In that case, Newco 22 would receive its payment from the utility, and Newco 23 would have a cash flow to support its operations in the 24 test year. Newco then could provide the service to the 25 utility. 26 The utility would be at risk for the 27 year, presumably, and then there would be a double 28 recovery in the fiscal year 2001, presumably; that the 1585 KENT/McGILL, ex (Board) 1 deferral account would be recovered, plus the fees for 2 that year. 3 I would doubt that that would have a 4 material impact on the market's view of the utility's 5 viability. 6 It is a little complex. I am not 7 sure to what extent the marketplace looks at the 8 operations independently any more, as well. 9 THE PRESIDING MEMBER: You must 10 appreciate that the driver of this action would be that 11 the Board may be inclined to agree with intervenors 12 that the Board would also like to see some results of 13 the phasing-in of the full CIS. 14 MR. KENT: Yes, I appreciate that. 15 The other thing I might suggest, 16 though, is that as I understand the PBR decision, the 17 Board has the intention of reviewing some Z-factors, 18 and specifically the CIS Z-factor, in its rates case 19 each year. 20 So to the extent that the CIS 21 Z-factor were to be reviewed by this Board next year, 22 there would be an opportunity at that time to get an 23 update on the final completion of the project and the 24 appropriateness of fees that were to be charged in 25 fiscal 2001. 26 This isn't sort of a forever and 27 always kind of approval of the CIS charges, as I 28 understand it. 1586 KENT/McGILL, ex (Board) 1 THE PRESIDING MEMBER: That's a scary 2 thought. 3 MR. KENT: As I understand it, the 4 mechanism of the PBR review process means that the 5 company would have to bring forward, at least for the 6 term of this PBR agreement, in each year a body of 7 evidence to support the CIS Z-factor. That could 8 certainly include -- I would expect that it would 9 include an update for the Board in regard to progress 10 of CIS. 11 So if the final completion of the 12 project were at risk next year, if there was some doubt 13 about the delivery of the services that were 14 anticipated, the additional benefits that will come 15 from CIS, the Board could take the appropriate action 16 in its decision for fiscal 2001 rates. 17 THE PRESIDING MEMBER: Presumably, 18 Mr. Kent, the issues would be not the same as they are 19 today, because the issues today are mainly on the 20 completion of the project. 21 MR. KENT: Yes. I anticipate that 22 the issues that would be discussed next year would be 23 to have confirmation that the project had been 24 completed on schedule. 25 To the extent that there was any new 26 information about fair market value of CIS systems, 27 that would also be brought forward in the proceeding 28 next year. 1587 KENT/McGILL, ex (Board) 1 THE PRESIDING MEMBER: If we continue 2 with that scenario, then, assuming there is a deferral, 3 then I want to follow that up of the ramifications of 4 the expenditures that you are proposing to close into 5 rate base. Okay? 6 MR. KENT: Yes. 7 THE PRESIDING MEMBER: Perhaps 8 Mr. McGill can also be of assistance here. 9 MR. McGILL: Yes. 10 THE PRESIDING MEMBER: First, we have 11 the direct costs, that have been so labelled "direct 12 costs". 13 There was some confusion originally, 14 in my mind at least, that direct costs versus indirect 15 costs of CIS -- that there wasn't a clear distinction. 16 When we said direct costs, they were direct costs that 17 would go into rate base and they were non-CIS related. 18 I am talking about the BPR costs. 19 MR. KENT: Yes. Those costs have 20 been variously described as CIS costs and non-CIS 21 costs. The confusion I think arises because they were 22 all initially aggregated within the work in progress 23 numbers set aside for CIS. 24 THE PRESIDING MEMBER: So now we do 25 have two sub-categories of direct costs: CIS related 26 and non-CIS related. 27 There was an undertaking -- I am not 28 sure if the answer has arrived yet. Does it break down 1588 KENT/McGILL, ex (Board) 1 the direct costs? 2 MR. KENT: I'm afraid we have not yet 3 been able to complete it, sir, but it breaks down the 4 direct costs that the company proposes to close to rate 5 base and to those associated with the BPR phase and 6 those associated with the analysis phase. 7 THE PRESIDING MEMBER: So the 8 CIS-related costs go to both the BPR and the analysis. 9 Not all of the BPR were non-CIS. 10 --- Pause 11 THE PRESIDING MEMBER: Do you want me 12 to repeat the question? 13 MR. KENT: Yes. I'm not sure I 14 understand. 15 THE PRESIDING MEMBER: Okay. 16 MR. KENT: But let me, if you don't 17 mind, just give it a shot. 18 The BPR work resulted in benefits 19 that could be achieved immediately through process 20 improvements and also other things that led to ideas 21 for the new CIS that as we went through the analysis 22 phase were translated into specifications for the new 23 system. 24 So some of the BPR benefits could be 25 achieved independent of the software, in fact a 26 significant amount of those benefits, but others were 27 contingent on the CIS software. 28 So that the BPR looked at processes 1589 KENT/McGILL, ex (Board) 1 that encompassed more than just what a CIS system did, 2 but what a CIS system was, nevertheless, included 3 within the BPR work as well. 4 THE PRESIDING MEMBER: All right. So 5 the essence of that undertaking, then, would it show 6 the BPR component of the $10.5 million, the analysis 7 component of the $10.5 million, and then within each 8 are you going to have CIS-related and non-CIS-related? 9 MR. KENT: Well, we were going to 10 break down the costs. I don't think into the two 11 categories you have suggested. 12 I don't think that we can distinguish 13 the costs incurred during the BPR exercise as between 14 those that resulted in benefits independent of CIS and 15 those that were dependent. 16 We have outlined how the benefits 17 split out in our evidence and we have related the 18 quantum of the benefits achieved early, because they 19 were independent of CIS, and the quantum that is 20 dependent on the software itself. 21 As a suggestion, the only thing I can 22 think of is that it might be appropriate to allocate 23 the costs of the BPR phase in a similar fashion. 24 THE PRESIDING MEMBER: All right. 25 Okay. 26 Then moving to the indirect costs, 27 the $13.4 million. Those consist, as I recall the 28 evidence, of the SIM start-up costs and the overhead 1590 KENT/McGILL, ex (Board) 1 costs. 2 MR. KENT: That's correct. 3 THE PRESIDING MEMBER: By the way, 4 both the direct and indirect costs have been incurred 5 some time ago, as least they have no more costs after 6 1996? 7 MR. KENT: That is correct. 8 THE PRESIDING MEMBER: Okay. 9 So those would be all CIS-related? 10 MR. KENT: They are related to CIS 11 because of the allocation process that was followed for 12 all of the SIM projects. 13 Before there was a CIS project as 14 such there were expenditures involved in setting up the 15 overall SIM project and getting it started and the 16 accounting convention allocated a portion of those 17 costs to CIS as soon as it was an identifiable project. 18 So they were, I think, necessary 19 precursors to the BPR work and the analysis phase work 20 and ultimately to the selection of software and the 21 delivery of CIS. 22 THE PRESIDING MEMBER: Okay. So in a 23 hypothetical situation where no CIS-related costs will 24 be allowed -- hypothetical -- then none of those costs 25 should be allowed? 26 MR. KENT: No, I don't think so, sir, 27 because the SIM start-up costs were, to a fairly 28 considerable extent, I think, involved in setting up 1591 KENT/McGILL, ex (Board) 1 the BPR work, in establishing the right processes to be 2 used within the company and doing business process 3 re-engineering, in setting up the project teams that 4 did business process re-engineering, and those teams 5 then went on and were supplemented with other resources 6 such as, for example, Pricewaterhousecoopers in the 7 case of CIS, to determine the exact specifications of 8 the software, to purchase whatever kind of package was 9 used as the base and to make modifications. 10 So the overhead costs -- I'm sorry, 11 excuse me. 12 The start-up costs were a necessary 13 foundation upon with the BPR was then carried out and 14 then there was a stage that flowed very directly from 15 the BPR to analysis where we developed the 16 specifications for tendering the system. 17 THE PRESIDING MEMBER: Okay. 18 Mr. Kent, the total start-up costs, I think the amount 19 was something like $39 million, the SIM start-up costs. 20 Am I -- 21 MR. KENT: I believe that's the total 22 of start-up, overheads and IBC, but I'm not sure. 23 THE PRESIDING MEMBER: Okay. 24 MR. KENT: No. Mr. McGill has found 25 for me the reference and it is in Exhibit I, Tab 11, 26 Schedule 24, page 2. I believe the number you are 27 referring to is the one that is in the first line which 28 is the total direct project costs for the other SIM 1592 KENT/McGILL, ex (Board) 1 projects. That is $39,548,600. 2 THE PRESIDING MEMBER: For the other. 3 So I have to add $39 million plus $13.4 million? 4 MR. KENT: No. That number was the 5 direct project costs for the other SIM project, the 6 non-CIS SIM project. 7 THE PRESIDING MEMBER: I'm not sure 8 anything turns on it, Mr. Kent. 9 I just wanted to confirm that of the 10 indirect costs of $13.4 million, that is a portion of 11 the SIM start-up costs and overhead. That is all I 12 wanted -- 13 MR. KENT: That is correct. 14 THE PRESIDING MEMBER: Okay. 15 MR. KENT: Yes, that's correct. And 16 the remainder has already been closed to rate base. 17 THE PRESIDING MEMBER: Right. So in 18 any scenario where the CIS costs would be excluded from 19 the cost of service, is there any reason not to exclude 20 this cost to defer those costs as well? 21 MR. KENT: In the company's view I 22 believe that there are a lot of reasons for now 23 including these costs in rates. 24 To start with, the benefits have been 25 flowing now for a number of years and they have 26 provided rate reductions for ratepayers, but the bill 27 hasn't been paid. 28 THE PRESIDING MEMBER: Maybe that's 1593 KENT/McGILL, ex (Board) 1 where we are talking at cross purposes. 2 I am not referring to the SIM 3 start-up costs or overhead costs that have been already 4 closed in with the other SIM projects. I'm talking 5 about the portion of those costs that have been 6 associated with CIS, i.e., the $13.4 million. 7 MR. KENT: Yes. Maybe I was jumping 8 too quickly, but I was thinking of the BPR work that 9 was supported, that was done on the foundation of those 10 start-up expenditures. Because that BPR work that we 11 have characterized to date as CIS BPR work has 12 delivered the tangible benefits we talked about 13 earlier. 14 That was the reason for a comment 15 that appeared in our evidence at some point to the 16 effect that we had incurred -- or our processes had 17 resulted in a mismatch of the timing of the delivery of 18 benefits and the recovery of costs associated with it. 19 Because the BPR costs and the associated SIM overhead 20 costs have been funded by shareholders since they were 21 paid -- since the expenditures were incurred, and yet 22 the benefits are already flowing and have been flowing 23 for a number of years in rates. 24 So it's an unpaid bill, I guess, that 25 is sitting there is the way that we would view it. 26 THE PRESIDING MEMBER: All right. 27 So if one were to compare, then, the 28 fees that Consumers Gas will pay to Newco with other 1594 KENT/McGILL, ex (Board) 1 fees that are out there, should one also include those 2 costs to the $50 million fee, for example, for the test 3 year? 4 MR. KENT: We don't believe so, sir, 5 because if the company went to Enlogix and if, 6 hypothetically, the Enlogix system was a perfect fit 7 for the company for its systems and no costs were 8 required to integrate with the company's systems, we 9 would pay the fair market value that Enlogix charges 10 Union Gas, presumably, and we would receive the use of 11 a CIS system. But those expenditures would not provide 12 the benefits that the ratepayer is receiving now from 13 the BPR work. 14 The BPR work was done by us because 15 of our circumstances and situation and resulted in 16 dramatic improvements in productivity. 17 In the case of Union Gas, they were 18 in the midst of amalgamating the Centra Gas operations 19 with Union Gas at the time they were developing CIS and 20 their evidence, as I understand it, was to the effect 21 that it didn't make sense to try to layer a business 22 process re-engineering on at the same time. 23 They really had to focus on getting 24 the new system in place and amalgamating the operations 25 of the two companies and that's what they did. They 26 didn't go through the kind of exercise that we did. 27 So it isn't behind the Enlogix 28 system, it isn't, therefore, comparable to the 1595 KENT/McGILL, ex (Board) 1 services -- or the benefits that ratepayers receive 2 from the BPR expenditure. 3 THE PRESIDING MEMBER: Thank you. 4 My last question is, the mechanics of 5 the interest during the construction, the $6.4 million, 6 the amounts are being booked or recorded as you went 7 through this whole SIM and CIS process? 8 MR. KENT: Yes. 9 THE PRESIDING MEMBER: Just help me 10 with the mechanics -- and Mr. Kent, you may not be the 11 best person to answer this, and Mr. McGill, but if you 12 cannot help me perhaps we can just leave it as an 13 undertaking. 14 My understanding is that you are 15 spending $1.00, starting in 1992, for example, and that 16 $1.00 carries a cost and that is recorded somewhere. 17 My first question is: What is the 18 rate of interest that attracts? Is that something the 19 Board has approved some years ago, specific to that 20 project? Or is there a rate of interest that applies 21 to all work in progress? 22 MR. KENT: My understanding is that 23 the rate of interest and the process is common to all 24 capital projects undertaken by the company, and I would 25 presume that it's been reviewed and approved by the 26 Board, though I don't know exactly when or where. 27 THE PRESIDING MEMBER: All right. 28 MR. KENT: I don't know if another 1596 KENT/McGILL, ex (Board) 1 witness can help with this. 2 THE PRESIDING MEMBER: It would not 3 be the approved short-term -- approved process 4 short-term debt, for example? I don't think it would 5 be that number. 6 MR. KENT: I don't know what the 7 number is. 8 I am advised by Mr. Ladanyi that it's 9 prime plus one-half per cent. 10 THE PRESIDING MEMBER: Okay. That 11 was my recollection, too. Thank you. 12 All right. So $1.00 is spent in 13 Year 1992. There's, let's call it 10 per cent for 14 that. So, 10 cents is recorded for Year 1992. 15 So, now, moving to Year 1993, there's 16 an additional $1.00 spent. So there's another 17 10 cents. 18 Now, what happened to the first 19 10 cents? Does it compound or -- 20 MR. McGILL: My understanding is that 21 it does not compound. 22 THE PRESIDING MEMBER: If it does not 23 compound, then someone is being cheated -- excuse the 24 expression. 25 I spend $1.00 and I book 10 cents, 26 but that 10 cents is only good for a year. What 27 happens from 1992 to 1999? 28 MR. KENT: I believe -- and we are 1597 KENT/McGILL, ex (Board) 1 really getting on thin ice here -- that in Year 2 the 2 outstanding balance is $2.00. So what's booked is 3 20 cents, in the second year. But there's no IDC on 4 the 10 cents that was incurred in the first year. So 5 it's not 21 cents, or whatever the -- 6 THE PRESIDING MEMBER: There is no 7 carrying costs on the balance of the -- 8 MR. McGILL: On the prior period 9 carrying costs. 10 THE PRESIDING MEMBER: There isn't? 11 MR. McGILL: That's my understanding. 12 MR. KENT: But if you want assurance 13 on this -- 14 THE PRESIDING MEMBER: I see 15 Mr. Ladanyi is here. 16 MR. LADANYI: Finally, I will speak. 17 --- Laughter 18 MR. LADANYI: Okay. IDC is 19 calculated on the closing balance of the previous 20 month, and it's at prime interest rate plus one-half 21 per cent. There's no compounding, which means there's 22 no interest charged on the interest. And, yes, 23 somebody is being cheated. The shareholder is being 24 cheated on a long-term project like this because the 25 shareholder is incurring much higher carrying costs 26 than the shareholder is getting benefit for. 27 THE PRESIDING MEMBER: We have the 28 answer to that question. 1598 KENT/McGILL, ex (Board) 1 So that if something stops at 1995 or 2 1996 there is no recognition of the time value of money 3 until the project is brought into rate base? 4 MR. KENT: There is a calculation 5 made in a similar fashion. What we have done in 6 preparing our submission is to show the IDC that's 7 related to the outstanding balance for BPR and analysis 8 phase work, those direct costs. For the years 1996, 9 1997 and 1998, and I suppose 1999, as well, we could go 10 back to the evidence and find it, but we continued to 11 show the calculation of IDC on the outstanding balance 12 from the end of the analysis phase until the time that 13 we anticipate that these amounts can be closed to rate 14 base at the end of this fiscal year. 15 I think if you go back to the 16 evidence, we can find out for you in a moment, sir. 17 --- Pause 18 MR. KENT: It's Exhibit B1, Tab 8, 19 Schedule 3, page 6 of 13. The second line from the 20 bottom, line (a), is the IDC line. 21 We discussed, the other day, the 22 reason for some of the fluctuations that are shown for 23 1998 and 1999. There's an outstanding question about 24 the value for 1996. But the way in which the numbers 25 were calculated, for 1997, 1998 and 1999, was basically 26 that at the end of each month the amount outstanding in 27 the account related to the direct and indirect costs of 28 the project related to this work triggered the 1599 KENT/McGILL, ex (Board) 1 calculation of an IDC associated with that. So we went 2 back and redid the IDC calculation for these costs 3 alone. 4 Now, there were other costs for the 5 project in the design phase and construction phase, and 6 all of that IDC has been excluded from this 7 calculation. The IDC that's shown here is only related 8 to the BPR and analysis phase work. 9 THE PRESIDING MEMBER: Because there 10 was still some work continuing -- 11 MR. KENT: Oh, yes. 12 THE PRESIDING MEMBER: -- you are 13 saying, for these years? 14 MR. KENT: Oh, yes. There was a lot 15 of work going on. 16 THE PRESIDING MEMBER: Okay. But if 17 you stopped the work in 1996, then I would see the IDC. 18 It should be zero for the following years? 19 If there was no work, it should have 20 been zero? 21 MR. KENT: On conclusion, sir -- and 22 I'm sure that this is something that others may wish to 23 argue -- was that the money had been spent by the 24 company, to that point. The shareholders had funded 25 the total amount of expenditures to the end of the 26 analysis and BPR phases in 1996 and the amounts of IDC 27 that are shown for 1997, 1998 and 1999 are essentially 28 the carrying costs on that outstanding amount. That's 1600 KENT/McGILL, ex (Board) 1 the way we viewed it. 2 THE PRESIDING MEMBER: All right. 3 Well, remember my previous comment, that if you just 4 had the 10 cents for the first year, 1992 -- I will use 5 1992 as the starting year -- and then you have another 6 $1.00 spent in 1993, what you record is a total of 20 7 cents, not 20 cents plus? 8 MR. KENT: That's correct. And 9 that's what we have tried to do here. 10 THE PRESIDING MEMBER: Okay. But, 11 then, once the work stops and you don't expect 12 recognition of those costs in rate base, then you do 13 add some carrying costs? 14 That's what you just told me. 15 MR. KENT: The amount that was in the 16 account, in direct and indirect costs, did not change 17 after the end of the analysis phase. but a separate 18 account that was being used to track the IDC was 19 incremented each month by the prime plus one-half, as I 20 understand Mr. Ladanyi's explanation, of the amount 21 that was in the project itself at the end of that 22 month. So it was 9-1/2. Let's say if prime was 9 per 23 cent, at that stage, it would be 9-1/2 per cent, 24 divided by 12 for a monthly calculation, times the 25 outstanding amount of the work-in-progress account, in 26 that month, related to BPR and analysis phase work. 27 The IDC that had been previously booked against those 28 amounts was held separate and not included in the 1601 KENT/McGILL, ex (Board) 1 calculation. So there was no IDC on IDC. But because 2 the amount was still outstanding and there was no 3 recovery of those costs, what we have shown here is the 4 calculation of the IDC on that amount alone. 5 It is confusing, I agree. 6 THE PRESIDING MEMBER: Okay. 7 Perhaps, Mr. Kent, the suggestion of my colleague is 8 that maybe just an explanation, on paper, what rate has 9 been applied over the years and, in an hypothetical 10 case where the activity stops at the Year T or Year 11 T-plus-3, and then if nothing happens until 12 Year T-plus-6, what happens in the two years in 13 between. 14 MR. KENT: Yes, I think that is a 15 good idea, and we can provide a calculation, or an 16 outline of how this calculation is worked and why. 17 THE PRESIDING MEMBER: At the same 18 time, maybe a bit of explanation as to the numbers that 19 will pertain to the IDC for 1997, 1998 and 1999 in 20 Exhibit B1, Tab 8, Schedule 3, page 6. 21 MR. KENT: Yes, we can do that. 22 MS DESAI: That's undertaking J9.4. 23 UNDERTAKING NO. J9.4: Mr. Kent 24 undertakes to provide an outline 25 of how the calculation of IDC is 26 worked and why; and to provide 27 an explanation as to the numbers 28 that will pertain to the IDC for 1602 KENT/McGILL, ex (Board) 1 1997, 1998 and 1999 in 2 Exhibit B1, Tab 8, Schedule 3, 3 page 6. 4 MR. KENT: By the way, sir, if you 5 don't mind my returning to an earlier comment that you 6 made, I have been reflecting a bit more on your 7 suggestion that intervenors may argue that there should 8 be a deferral of the cost of service consequences of 9 the software impact -- 10 THE PRESIDING MEMBER: No, I'm not 11 sure if I used those words. I am in anticipation of 12 argument that: The company is not ready; we should not 13 be convinced this time that the company can bring this 14 project into completion successfully this fiscal year. 15 I was thinking: What are the 16 regulatory tools? They may argue what they are, 17 but -- that was my observation. 18 MR. KENT: Yes. I appreciate that it 19 wasn't your suggestion, sir, but the anticipation of 20 the arguments of others. 21 I think, though, that that would send 22 to the company and to its shareholders a message that 23 would be, under the circumstances, surprising and 24 disturbing, because I think that the evidence we have 25 been able to lay before you sets out, from the 26 company's perspective, in a very convincing fashion 27 that the project, as it is being completed now, is on a 28 very different course than the project was before. 1603 KENT/McGILL, ex (Board) 1 We have been successful. We made a 2 commitment in February that we would deliver in June 3 the first phase of this system, and we were by no means 4 close to it at that point. The project didn't re-start 5 until the beginning of January. We had a lot to do; a 6 lot ahead of us. 7 We were successful in meeting that 8 objective and, in fact, delivering two weeks early. 9 You have my evidence that we are 10 currently on track for November 6 delivery of the 11 second release of CIS and that we see no 12 difficulty -- I shouldn't say that. The project is on 13 track to deliver all releases within fiscal 2000, and 14 in fact was enlarged because our anticipation is that 15 we will complete the last release in August of next 16 year. 17 We are approaching the project in a 18 very different way. We have controls and approaches, 19 relationships with suppliers. We have staff that have 20 been proven to be able to deliver what they promised. 21 I would suggest that there is no 22 evidence to support a contention that the project, as 23 it is currently proceeding, is at risk of being 24 materially off its current schedule. 25 THE PRESIDING MEMBER: Thank you, 26 Mr. Kent. 27 Mr. Farrell, do you have any 28 re-direct? 1604 KENT/McGILL, ex (Board) 1 MR. FARRELL: No, I have no 2 re-examination. 3 Looking at the time, however, I am 4 wondering whether we should break now for an early 5 lunch and whether your intention after the luncheon 6 adjournment is to hear Mr. Thompson's request and then 7 move to Mr. Diamond, or should we start Mr. Diamond 8 after what I will call a mercy break at this point and 9 have him go for another hour or so? 10 THE PRESIDING MEMBER: I am not sure 11 if the restaurants are going to have the tables ready 12 at 25 to 12:00. 13 Let's recap here. 14 This panel is excused, with our 15 thanks. 16 We have Mr. Diamond today and we have 17 Mr. Thompson's request, and we will give Mr. Thompson 18 two o'clock, time certain. 19 We have panel 10.2: capital 20 structure, cost of capital and deferred taxes. 21 Ms Williams we have deferred to 22 tomorrow at nine o'clock, certain. 23 Monday is a holiday. Tuesday is open 24 right now, and then Mr. Stephens for Wednesday. That 25 is the 8th, and we can only sit for half a day, as we 26 discussed earlier. 27 For today, it is a question of 28 whether Mr. Thompson can go before Mr. Diamond when we 1605 1 return after lunch. 2 MR. THOMPSON: Yes. I was wondering 3 if it would make any sense to have the normal morning 4 adjournment. I could give my brief submissions, as I 5 was warned. Perhaps we could get that out of the way 6 before the luncheon break. Would that make sense? 7 THE PRESIDING MEMBER: I am not sure 8 about Mr. Farrell. 9 Mr. Farrell, will it be yourself that 10 will -- 11 MR. FARRELL: No. Mr. Cass will be 12 speaking to Mr. Thompson's request, but I am advised 13 that he is here. He will be leading panel 10.2 as 14 well. 15 THE PRESIDING MEMBER: All right. 16 MR. WARREN: The other issue was that 17 Ms Lea wanted to be here. 18 THE PRESIDING MEMBER: That's right, 19 we forgot Ms Lea. 20 MS DESAI: If we have a short break, 21 I am sure that Ms Lea will be able to -- 22 THE PRESIDING MEMBER: All right. 23 Why don't we break now for 15 minutes and we will 24 return at 5 minutes to 12:00. We can deal with 25 Mr. Thompson's request and then break for lunch. 26 MS LEA: I'm sorry. I was listening 27 upstairs and I just came down. 28 I am available at any time. 1606 1 THE PRESIDING MEMBER: All right. 2 The plan, Ms Lea, is to take a break now until 3 5 minutes to 12 and then we are going to go to 4 Mr. Thompson's request, so if you can join us we will 5 be happy. 6 MS LEA: Thank you. 7 --- Upon recessing at 1140 8 --- Upon resuming at 1200 9 THE PRESIDING MEMBER: Mr. Thompson? 10 SUBMISSIONS 11 MR. THOMPSON: Yes, thank you, 12 Mr. Chair. 13 My request is for directions from the 14 Board to the company, requiring them to file certain 15 information, and the topic has been discussed on the 16 transcript before at pages 548, 602 and 1062. 17 THE PRESIDING MEMBER: Could you give 18 me those references again, Mr. Thompson? 19 MR. THOMPSON: Yes. Pages 548, 602 20 and following, and 1062 and following. 21 The information that I am asking you 22 to direct the company to file -- there are three 23 categories of it. Three types. 24 The first is a direction to the 25 company to file the 1999 actual E.R.O. reports that 26 were delivered to the Energy Returns Officer. There 27 would be four of them, as I understand it. 28 The second is a direction to file 1607 THOMPSON, Submission 1 information concerning the company's 1999 financial 2 results in sufficient detail to show the going in 3 benefits of the PBR regime which the Board has adopted. 4 What we are seeking is 9-month actual, 3-month 5 estimates. 6 The format of that, we suggest, 7 should be something similar to what is contained in the 8 E and F exhibits. 9 The third thing that was discussed 10 and which I am asking the Board to direct the company 11 to provide is a revised unbundled 1999 Board-approved 12 budget in a format comparable to Exhibit K3.3, but 13 reflecting the adjustments -- the further adjustments 14 which the company says are appropriate for the 15 determination of the PBR base upon which the setting of 16 Year 2000 rates will operate. 17 Let me, then, just deal with the 18 points, briefly, as to why these three items should be 19 produced now. 20 Dealing with the last item first, 21 which is, if you will, the update of the unbundled 22 budget base. In my submission, this item is the marker 23 for the monitoring and reporting of the performance of 24 the O&M PBR regime, which is vital as the regime 25 operates. There are critical issues in this case that 26 the Board needs to determine with respect to that 27 unbundled budget base, and, in my submission, they 28 ought to be determined in the context of an unbundled 1608 THOMPSON, Submission 1 budget presentation, updated to reflect the company's 2 position. 3 This document, in my submission, is 4 needed so that the Board and interested parties have a 5 clear understanding of the components of the final 6 unbundled budget base on which PBR will operate and 7 against which the performance of PBR will be measured. 8 This request, in my submission, is 9 relevant to issues concerning PBR unbundled budget 10 adjustments and to ongoing regulatory scrutiny, which 11 are described in the issues list and the scoping 12 document. 13 Turning to the second category of 14 documents that I am asking the Board to direct the 15 company to produce, being the 1998 E.R.O. reports -- 16 MS LEA: I'm sorry. Is that 1998, 17 sir, or 1999? 18 MR. THOMPSON: 1998. This is 19 historic 1998. 20 The reason that these documents need 21 to be scrutinized on the public record is because the 22 company asks the Board and intervenors to accept that 23 its reporting to the E.R.O. will suffice to satisfy any 24 monitoring and reporting requirements of the PBR O&M 25 regime which the Board has adopted. 26 In my submission, it is impossible 27 for either the Board members or intervenors to evaluate 28 the reasonableness of that submission without first 1609 THOMPSON, Submission 1 seeing the format of the reports. 2 As I understand it, Board members do 3 not see the reports. So the only person who sees them 4 is the E.R.O., and his staff. My submission is that 5 everyone ought to have the opportunity to see the 6 format of the reports before making submissions as to 7 whether what the company suggests as to an appropriate 8 reporting regime is reasonable or unreasonable. 9 There can be no prejudice to the 10 company by producing those reports. 11 The 1990 results are actual now. 12 They have been reported to shareholders. We have the 13 annual report. No secrets will be disclosed by having 14 that information on the public record. 15 The third direction that I am seeking 16 is with respect to the 1999 financial performance. We 17 are seeking this on a nine-month actual and three-month 18 estimated basis. 19 As to the relevance of this 20 information, I will just list the points that are on 21 the record previously as to its relevance. 22 First, it is relevant to the going-in 23 benefits issues pertaining to PBR. 24 Second, it is relevant to claims 25 which the company is making to recover costs incurred 26 in 1999 in deferral accounts. We have in that category 27 claims to recover what the company called separation 28 costs, the bulk of which have been incurred in the 1610 THOMPSON, Submission 1 bridge year. 2 Third, the information is relevant to 3 the intervenors' position that the adoption of the PBR 4 regime and the generosity of the going-in benefits is a 5 factor to be considered in deciding whether the 6 two-tiered sharing regime for the transactional 7 services deferral account will continue. 8 You will see that topic described in 9 the scoping document. 10 THE PRESIDING MEMBER: Mr. Thompson, 11 if I can just interrupt you for a minute, this is the 12 third time you have referred to the PBR benefits being 13 generous. I would ask you to refrain from that, 14 please. 15 You may want to say the benefits or 16 the calculations, but the generosity part can be left 17 out. 18 MR. THOMPSON: I apologize. I didn't 19 mean to cast any implied criticisms at anyone in using 20 that terminology. 21 The next topic that the information 22 is relevant to, in my submission, in the context of 23 this case is to an evaluation of the off ramp rights 24 that intervenors were accorded in the E.B.R.O. 497 25 decision. 26 The next topic to which the 27 information is relevant, in my submission, is the right 28 that the intervenors were accorded to ask questions 1611 THOMPSON, Submission 1 about the performance of the PBR plan in successive 2 rate cases. The questions about the going-in effects 3 of the plan, in my submission, fall within that 4 category. 5 The last topic that I submit the 6 information is relevant to is to the orderly monitoring 7 of PBR as we go forward and a clear trail for rebasing. 8 In my submission, access to actual 9 information in a timely manner is critical to the 10 integrity of the rate regulation process, just as it is 11 critical to the integrity of the securities regulation 12 process. 13 We note that the company publicly 14 files information with its securities regulator on an 15 actual basis quarterly. That information, as far as I 16 am aware, is not audited. So there can be, in my 17 submission, no reasonable criticism of our request for 18 information on the grounds that the information to be 19 filed is not audited. 20 I appreciate that information filed 21 with the securities regulator does not contain 22 normalized forecasts of returns. However, that 23 information, bridge year information, containing 24 normalized forecasts of returns has been traditionally 25 filed before this Board and has been of importance to 26 this Board in exercising its ratemaking jurisdiction. 27 We have, in the "E" and "F" exhibits, 28 a presentation of a normalized sufficiency calculation 1612 THOMPSON, Submission 1 for the bridge year. The problem with it, in my 2 respectful submission, is that it may be misleading 3 because it does not reflect the 9 and 3 O&M expenses. 4 There can be, in my submission, no 5 prejudice to filing information concerning normalized 6 returns that was provided under the old regime. 7 Everybody needs accurate and timely information for 8 ratemaking purposes. 9 The importance of getting this 10 information in this case, in my respectful submission, 11 is underscored by the indicators that the O&M savings 12 in the bridge year are substantial. I would like to 13 just touch on those indicators. 14 First, we have the 1998 actual O&M 15 expenses which are reported. They are in D5, Tab 1, 16 Schedule 3, where it is indicated that the 1998 actuals 17 were under the Board approved by $7.8 million. 18 Secondly, you have at Exhibit A, 19 Tab 12, Schedules 2, 3 and 4, the information that has 20 been delivered to shareholders and I believe filed with 21 the securities regulator. I just want -- 22 THE PRESIDING MEMBER: Mr. Thompson, 23 I'm sorry, I did not get the last reference. 24 MR. THOMPSON: Exhibit A, Tab 12, 25 Schedules 2, 3 and 4. 26 THE PRESIDING MEMBER: Thank you. 27 MR. THOMPSON: If I could just 28 quickly draw your attention to what that information 1613 THOMPSON, Submission 1 suggests in terms of enhanced returns in the bridge 2 year, I would ask you to turn up Exhibit A, Tab 12, 3 Schedule 2. 4 Schedule 2 is the orderly report for 5 December 31, 1998. That is the first quarter of the 6 bridge year. You will see earnings per share compared 7 to 1997 down considerably: 45 cents in 1997; 18 cents 8 in 1998. 9 If you go to Schedule 3, for the six 10 months ended March 31, 1999 earnings per share at $1.83 11 compared to 1998, $1.82. 12 Then if you go to Schedule 4, nine 13 months ending June 30, earnings per share, $1.76 for 14 1998; $1.92 for 1999. 15 So the earnings per share improvement 16 in these first three quarters, compared to 1998, is 17 apparently quite dramatic. 18 That indicates, in my respectful 19 submission, that something is happening in terms of 20 enhancing returns. We have heard evidence, and it is 21 described in these reports, that the throughputs in the 22 bridge year are lower than forecast and that weather is 23 warmer than forecast. 24 So here we have what appears to be a 25 situation indicating enhanced returns in a condition of 26 lower volumes. 27 The last item that indicates a need 28 for the Board to touch base with reality for the bridge 1614 THOMPSON, Submission 1 year is the company's failure to file any reports -- 2 any reports -- with the E.R.O. for the bridge year. 3 I could accept that the failure to 4 file one was a mistake, but the failure to file three 5 reports, that are now overdue, in my submission, raises 6 questions which the Board should resolve by getting 7 information about what is happening in this bridge 8 year. 9 Quite frankly, I was surprised to 10 learn that nothing had been filed, in cross-examination 11 of Mr. Bourke, when we had been repeatedly told in 12 prior cases and in this case that filings with the 13 E.R.O. are sufficient to satisfy any concerns that 14 intervenors have and to discharge the company's public 15 interest obligation. 16 A failure to disclose that these 17 reports have not been filed, up front, in my 18 submission, does not inspire confidence in the process. 19 As I indicated, the format of the 20 filing does not at this stage need to be line by line, 21 but it needs to be in sufficient detail to give 22 intervenors and the Board Members a reasonable 23 appreciation of the normalized earnings in the bridge 24 year. 25 There is, in my submission, nothing 26 in your earlier decisions to support this trend to 27 secrecy in the interests of regulatory efficiency, as 28 Mr. Grant suggests in his testimony. 1615 THOMPSON, Submission 1 It is my submission that if you 2 decide this case without making yourselves aware of the 3 normalized situation for the bridge year, you run the 4 risk of granting very substantial rate increases that 5 this company seeks, some $70 million or more in 6 delivery-related deficiency, in the context of a period 7 where the returns being earned by the company appear to 8 be in excess of the Board-allowed and perhaps 9 unreasonably excessive. 10 I submit the Board ought not to 11 expose itself to that risk and that it ought to keep a 12 close watch on the reality of the situation and in a 13 timely manner. If not, I submit the integrity of the 14 rate regulation process is going to suffer. 15 So for all of these reasons I ask 16 that you direct that this information be provided. 17 THE PRESIDING MEMBER: Thank you, 18 Mr. Thompson. 19 Mr. Cass, would you prefer Ms Lea to 20 go first? 21 MR. CASS: I would, Mr. Chairman, if 22 that is acceptable, please. 23 THE PRESIDING MEMBER: Ms Lea. 24 MS LEA: I don't have submissions 25 largely on the merits, but I wanted to make one 26 suggestion that I would like to have each of my 27 friend's have an opportunity to respond to. It deals 28 with the request for the filing of the 1998 actual 1616 1 E.R.O. Reports. 2 As you are aware from our 3 cross-examination, staff was interested in this issue 4 as it relates to the monitoring and reporting issues 5 that is on the issues list and relates to the issue 6 also -- in addition to what Mr. Thompson said, we think 7 it relates to whether additional filing requirements 8 should be imposed by the Board for the company to the 9 E.R.O. now that PBR is the way that O&M is being dealt 10 with. 11 So I have a suggestion: If it is 12 merely the format of the E.R.O. Report that is going to 13 be useful to intervenors and the Board, would it be an 14 idea to merely file the template empty as opposed to 15 the template with numbers in it which, if the company 16 has confidentiality concerns -- and we haven't heard 17 yet whether they do or not given that these are 18 historic numbers -- would the template be of use to 19 intervenors and the Board in understanding what goes to 20 the E.R.O. and whether anything incremental needs to go 21 given that we are now in a PBR regime for O&M. 22 THE PRESIDING MEMBER: Thank you, 23 Ms Lea. 24 Mr. Thompson. 25 MR. THOMPSON: I can respond to that, 26 speaking for myself. 27 I don't think so. Because one of the 28 things I think intervenors need to evaluate is the 1617 1 consistency between the E.R.O. filings and the 2 regulatory filings. We have to first of all be 3 satisfied that it is on a reasonably clear 4 apples-and-apples basis. 5 So that is why I have suggested 1998, 6 because that is all water under the bridge. 7 So I would not be content with just 8 the template. 9 THE PRESIDING MEMBER: Before we get 10 to Mr. Cass, Mr. Thompson just a couple of questions. 11 If that information is provided, all 12 or in part, that you request, then what is the process 13 you are suggesting in terms of production and would 14 there be any cross-examination or simply a production? 15 MR. THOMPSON: Speaking for myself, I 16 believe I would be content with simply production. I 17 don't like to foreclose the right to cross-examine but 18 I am really interested in the results and then basing 19 my argument with respect to ratemaking implications of 20 that information, including monitoring and reporting, 21 on the availability of that information. 22 But others may hold different views. 23 THE PRESIDING MEMBER: I was just 24 interested in getting your reaction to the information 25 that is filed by the company in response to, I believe 26 it was your undertaking, the impact of $10 million 27 reduction in O&M and the impact on the rate of return 28 on common equity being .2 of 1 per cent. How does that 1618 1 relate to the excessiveness in earnings? 2 MR. THOMPSON: Well, that information 3 I believe I can cross-examination on with the next -- 4 Mr. Bourke is coming back and I wanted to follow 5 through on that because that -- Mr. Grant said he 6 thought it was 50 basis base and I think you had 7 indicated you had done a calculation that it was 8 70 basis points. I haven't check that, but there is 9 enough there that I would want to question, at least 10 understand how they got to 20 basis points. 11 THE PRESIDING MEMBER: Okay. 12 Thank you. 13 MR. MATTSON: Mr. Chairman, I just 14 wanted to address your earlier decision not to allow 15 others to speak on this issue. 16 I think it is clear that what 17 Mr. Thompson is bringing forward in his request for 18 direction here goes to issues that certainly my client 19 had intended on filing final argument on. 20 That is a real concern for us now if 21 you are going to make a determination of these issues 22 without our having the opportunity to address the Board 23 on these issues and then in some way it would prevent 24 us -- or at least it would usurp our ability to put 25 final argument to you. 26 As you know, Mr. Grant has been 27 cross-examined on these issues. There was evidence on 28 the record and certainly my client is insisting that 1619 1 with respect to this issue -- I have had meetings, we 2 have talked about final argument on the 3 cross-examination and if you don't want me to speak on 4 it that's fine, but we are asking that we be allowed 5 the opportunity. 6 THE PRESIDING MEMBER: Mr. Mattson, 7 this is not the first time we are addressing this 8 issue. It has been raised at least once and maybe a 9 couple of times throughout the proceeding. I believe 10 at that time the parties did have the opportunity to 11 speak on this matter. 12 Mr. Thompson's request arose out of 13 his questions to a panel and it is not to be framed as 14 a motion as such. I thought regulatory efficiency 15 would dictate that Mr. Thompson, who was asking the 16 questions and was not provided with the information, he 17 could make this request in a more formal sense. It was 18 done simply for reasons of regulatory efficiency. 19 I believe some of the comments of the 20 other parties have been on the record, if I'm not 21 mistaken. That is what has driven the Board in its 22 wish to go that way. 23 One moment, please. 24 --- Pause 25 THE PRESIDING MEMBER: Depending on 26 what the ruling of the Board will be, of course, that 27 would not foreclose Energy Probe from arguing on the 28 issues that in the Board's mind are still issues that 1620 1 have to be argued, be it monitoring only or be it 2 monitoring plus other things that may be raised because 3 of the production of this information. 4 Mr. Cass. 5 SUBMISSIONS 6 MR. CASS: Thank you, Mr. Chairman. 7 Mr. Chairman, I do have a number of 8 areas to cover in response to what Mr. Thompson has 9 said. I realize that the Board is trying to move 10 expeditiously so I will endeavour not to elaborate too 11 much in each area. I will try to just identify my 12 area, hit some points and move on as quickly as I can. 13 THE PRESIDING MEMBER: Hopefully you 14 will be brief as well, Mr. Cass. 15 MR. CASS: Yes. I'm going to try 16 very hard to do that, Mr. Chairman. 17 The first area that I want to hit on, 18 Mr. Chairman, is just to bring out, if it is not 19 obvious already, that the grounds for this request by 20 IGUA are shifting grounds. 21 When it first came up at 22 transcript 550, Mr. Thompson suggested that what we are 23 doing here is developing the base. You, Mr. Chairman, 24 at transcript 553 reminded Mr. Thompson that the base 25 has previously been developed and that there has 26 already been a motion on that, which I will come 27 back to. 28 Then at transcript 554 Mr. Thompson 1621 CASS, Submissions 1 said he is just trying to get a process for the 2 provision of information. That I will address later. 3 On cross-examination of the 4 separation costs panel, as he has now tried to do in 5 argument, Mr. Thompson related this point to the 6 company's request for separation costs. 7 When he announced the motion today at 8 transcript 1062-1063, he put it on the basis of the 9 transactional services deferral account. That is what 10 he referred to that day. 11 This is a moving target that has been 12 somewhat difficult for me as counsel to the company on 13 this issue to respond to. I will do my best to move 14 through this quickly, but I would say to the extent 15 that any new grounds come out in Mr. Thompson's reply 16 that I have not dealt with, I do hope that the Board 17 will disregard those. 18 Now, I wasn't intending when I came 19 here today to address the motion for a reopening of 20 E.B.R.O. 497-01 that the Board has already heard, but 21 when I listened to Mr. Thompson's submissions today I 22 couldn't help but think that really what we are doing 23 is we are dealing with that same motion again. 24 I apologize that I don't have copies 25 for everyone, but I have a copy of the Notice of Motion 26 from that attempt to reopen the 497-01 proceeding. 27 It is important to bear in mind there 28 that there was relief requested there not only in 1622 CASS, Submissions 1 497-01 but also in this case RP-1999-01. 2 So looking at page 2 of that motion 3 record what was requested in relation to this case was 4 an order broadening the scope of the issue to permit 5 parties to scrutinize details of fiscal 1998, 1999 and 6 2000 O&M expenses. 7 Also what was requested was an order 8 broadening the issues list to allow the parties to 9 scrutinize the complete details of fiscal 1999 and 1999 10 O&M expenses for the purpose of establishing a new 11 base. 12 Also requested was that the off ramp 13 issue that Mr. Thompson alluded to here today be put on 14 the issues list for this case, and also that there be a 15 possibility in this case that parties could make an 16 argument that the implementation of the PBR plan be 17 delayed. 18 None of those things were granted by 19 the Board, Mr. Chairman, in relation to this case. 20 So as far as Mr. Thompson's comments 21 are concerned about earnings per share and what the 22 Board should be looking at and doing because of the 23 things he has put on the record about earnings per 24 share, this whole thing about an off ramp and about 25 delaying implementation and basically about trying to 26 derail the PBR plan before it is even started was the 27 issue on that motion, and no such relief was granted 28 there. 1623 CASS, Submissions 1 The next subject I would like to 2 touch on quickly, Mr. Chairman, is the submissions in 3 relation to the transactional services deferral 4 account. 5 There are two points that I would 6 like to make here. 7 First of all, the parties have agreed 8 that that issue can go to argument. Mr. Thompson now 9 seems to be suggesting that he needs evidence on 10 something where the parties have agreed that we are 11 going to go straight to argument. 12 Secondly, and more importantly, as I 13 already said when a similar issue was discussed in this 14 case, Mr. Thompson's position, if you accept it, would 15 be that where there is any element of the company's 16 case with which he does not agree, this is a reason for 17 you to re-open the PBR plan and look at what he -- I 18 hate to even repeat the word, Mr. Chairman, but what he 19 has called the generosity of the plan. 20 He has done it in relation to the 21 transactional services deferral account and he has done 22 it in relation to separation costs, suggesting that if 23 he disagrees with something, then you should take 24 another look at the plan. 25 I submit to you, Mr. Chairman, that 26 this cannot be correct or appropriate. If this 27 approach is allowed, it means that the plan is 28 constantly subject to re-opening whenever an intervenor 1624 CASS, Submissions 1 disagrees with some element of the company's case and 2 wants to use the plan as a lever to make an argument on 3 that element of the case. 4 Another related point, Mr. Chairman, 5 is that the Board would be fully aware that the PBR 6 plan is intended to be an incentive plan. 7 It is hard to visualize what the 8 incentive to the company will be if the notion is that 9 the plan will be subject to re-opening, in comparison 10 to other elements of the company's case, on a continual 11 basis. 12 The next area I want to talk about 13 quickly, Mr. Chairman, is the scoping document. When 14 we addressed Mr. Thompson's request for this 15 information previously, the Board didn't have the 16 scoping document. 17 We now have it. It identifies three 18 issues arising out of the 497-01 decision. One is 19 called the rental program adjustment. 20 Mr. Chairman, if you look at the 21 scoping document to see what that issue is about, it is 22 very clear that it is a contest between removal of the 23 program on the basis of direct and marginal costs and 24 removal on the basis of fully allocated costs. 25 That is at page 7 of the scoping 26 document. That is what the rental program adjustment 27 is about. 28 There is an issue about -- 1625 CASS, Submissions 1 THE PRESIDING MEMBER: One second, 2 Mr. Cass. 3 MR. CASS: Sorry, Mr. Chairman. I 4 realize I am going very quickly here, and I apologize 5 for that. 6 THE PRESIDING MEMBER: It was here a 7 few days ago. 8 MS LEA: We have it. 9 THE PRESIDING MEMBER: I have it now; 10 thank you. 11 MR. CASS: Page 7 I was referring to, 12 Mr. Chairman. 13 THE PRESIDING MEMBER: Go ahead. 14 MR. CASS: As I said, Mr. Chairman, 15 there are three issues arising out of 497-01 identified 16 in the scoping document. 17 Another is certain Z-factors proposed 18 by the company for the fiscal 2000 test year. 19 Obviously, this doesn't have anything to do with the 20 Z-factor that is talked about there. 21 And finally, the third issue in 22 relation to 497-01 is monitoring and reporting 23 requirements. This, in my submission, is the real 24 issue here that lies to be dealt with in final argument 25 in this case. 26 As I have already mentioned, 27 Mr. Thompson had made a previous reference, at 28 transcript 550, to developing the base. When he was 1626 CASS, Submissions 1 brought up a little bit short on that, what he said, at 2 transcript 554, is that we are trying to get a process 3 for the provision of information. 4 I would suggest to you, Mr. Chairman, 5 that that is really what is at issue here: it is a 6 process for monitoring and reporting that is really at 7 issue. 8 The next area that I would like to 9 cover, Mr. Chairman, I would capture with the 10 exhortation: Please don't prejudge the process. 11 The PBR plan, as we all know, doesn't 12 even start until fiscal 2000. The issue in this case 13 is not about trying to do monitoring and reporting in 14 this case. The issue is about the process for 15 monitoring and reporting which will occur when the PBR 16 plan starts. 17 Mr. Chairman, in my submission, we 18 have an extremely full record allowing this issue about 19 the process to be argued. 20 There was a relatively extensive 21 cross-examination on this issue first with Ms Gould's 22 panel. We then put up another panel of Mr. Grant and 23 Mr. Bourke, and I think the cross-examination of that 24 panel was more than half a day. 25 So we have a very extensive record 26 upon which the Board can hear argument and make a 27 decision about the monitoring and reporting process. 28 That argument and that decision has 1627 CASS, Submissions 1 not occurred yet, so it has not been decided what 2 information should be disclosed and how that disclosure 3 should occur. I ask the Board not to make directions, 4 such as Mr. Thompson has suggested, and prejudge that 5 decision about what information should be disclosed and 6 how disclosure should occur. 7 The next area I would like to deal 8 with quickly, Mr. Chairman, is the company's proposal 9 for monitoring and reporting. 10 I believe that the submissions you 11 have heard suggest that the proposal is not understood. 12 The proposal is essentially the same now as it was in 13 the 497-01 case, and you will recall, Mr. Chairman, 14 what was said there. 15 The company suggests that the Board 16 needs to retain some flexibility around monitoring and 17 reporting at this stage of PBR. The company suggests 18 that this is not the time to cast in stone, so to 19 speak, a process for monitoring and reporting. 20 We know that there are many other 21 utilities out there in this province moving towards 22 PBR, including I think over 200 municipal electric 23 utilities and including Union Gas. 24 In my submission, it is premature to 25 establish a formalized monitoring and reporting 26 requirement that is sure to have an impact on all these 27 other PBR plans at this time. 28 In light of this, what the company's 1628 CASS, Submissions 1 proposal is, is to start with a process that takes 2 account of what the Board already has -- and that is 3 the E.R.O. -- and the company's suggestion that this 4 leaves open the desired flexibility as the Board works 5 it way forward through PBR. 6 The company's proposal is to work the 7 E.R.O. to develop a monitoring and reporting process on 8 the confidential basis contemplated by the Act. If as 9 a result of that the E.R.O. has any concerns about 10 issues which should go to a hearing, Section 109 of the 11 Act, as has been discussed here, I believe, and was 12 certainly discussed in 497-01, allows the E.R.O. to go 13 to the Board. 14 So there is the flexibility there to 15 start out with the confidential process through the 16 E.R.O. and then move in another direction, if that 17 appears to be necessary, as the Board gains experience 18 with PBR. 19 In the context of the E.R.O., 20 Mr. Chairman, I would just like to move on to another 21 area which I will call confidentiality. 22 As we all know, the Ontario Energy 23 Board Act contains strong confidentiality provisions 24 around the process of reporting to the E.R.O. These 25 are found mainly in Section 111 of the Act. 26 This confidentiality which attaches 27 to E.R.O. reporting, in my submission, takes account of 28 issues which arise from other regulatory regimes and 1629 CASS, Submissions 1 specifically the securities regulation regime which 2 Mr. Thompson has referred to. 3 When Mr. Grant testified here on 4 Monday, he spoke of the difficulties of making 5 disclosure of information by a public company such as 6 the applicant. The Securities Act in fact contains 7 constraints on the disclosure of material facts by 8 reporting issuers, and the company is a reporting 9 issuer. 10 The objective of securities 11 legislation and securities regulators is to ensure 12 equal access to material information and to prevent 13 disparities in the dissemination of information that 14 will find its way to the marketplace. 15 I can also tell the Board that under 16 the Securities Act there are very serious civil 17 liabilities and fines for a reporting issuer which 18 breaches the requirements for disclosure of material 19 information. 20 The company is satisfied that its 21 confidential disclosure to the E.R.O. does not cause it 22 to run afoul of any of this securities law, but this 23 confidentiality lies at the very heart of the E.R.O. 24 reporting process. 25 In my submission, the Board should 26 not set a precedent here by way of making an order that 27 overrides the confidentiality in Section 111 of the Act 28 and thereby put a chill on that very important E.R.O. 1630 CASS, Submissions 1 reporting process. 2 In my submission, it doesn't matter 3 whether you call it historical information or not. 4 Mr. Thompson has said that the historical information 5 is available elsewhere anyway. 6 I ask rhetorically: Why would the 7 Board in any way make an order abrogating the 8 confidentiality of information filed with the E.R.O. 9 which is so fundamental to that process? 10 Further, I suggest to the Board that 11 a decision about 1999 actual O&M numbers being 12 disclosed to parties beyond E.R.O. before it has been 13 publicly disseminated raises serious issues about the 14 interrelationship between the objectives of this 15 regulatory process and the objectives of other 16 regulators, specifically in the securities law area. 17 Having said that, Mr. Chairman, I 18 want to then make a few more comments about this 19 request for information which Mr. Thompson calls 20 historic. 21 IGUA's submission, as I understand 22 it, is that intervenors must see this information in 23 order to understand the process of reporting to the 24 E.R.O. proposed by the company. 25 With the greatest of respect to 26 Mr. Thompson, Mr. Chairman, I believe that this misses 27 the company's point. 28 The company proposes that intervenors 1631 CASS, Submissions 1 will see information in rates cases. Mr. Grant 2 described that on Monday of this week. It would 3 include high-level reporting on SQIs and it would 4 include the financial information that he described. 5 The company proposes a confidential 6 monitoring and reporting process through the E.R.O., 7 which is in addition to what intervenors see in rate 8 cases. 9 IGUA and other parties are free to 10 argue at the end of this case that they disagree with 11 the confidential process through the E.R.O. that does 12 not include intervenors -- include or involve 13 intervenors. But at this point I don't think any of us 14 even know for sure to what extent the 1998 so-called 15 historical information is even representative of the 16 reporting to the E.R.O. that the E.R.O. would expect 17 under the PBR plan once it is operating. 18 So, in my submission, seeing the 1998 19 information is not going to be relevant to any argument 20 IGUA can make about the appropriateness of the process 21 through the E.R.O. 22 IGUA may or may not agree with the 23 company's proposal for a confidential process through 24 the E.R.O., but this doesn't give it a basis, in my 25 submission, to ask the Board to abrogate that very 26 confidentiality. In my submission, IGUA is turning the 27 company's proposal for a confidential process on its 28 head, using that as a basis for the Board to make an 1632 CASS, Submissions 1 order contrary to the confidentiality provisions of 2 Section 111. 3 I would just like to quickly at this 4 point address Ms Lea's question about the template. 5 Subject, of course, to the question being put to the 6 E.R.O. and the E.R.O. agreeing that it is acceptable, I 7 don't think the company has any difficulty with the 8 parties seeing a template of the type of information 9 that is filed with the E.R.O. 10 In my submission, though, that misses 11 the point, because the company's proposal is for a 12 confidential process through the E.R.O. that would not 13 involve the intervenors, at least in the initial 14 stages, until the Board works its way through the 15 process and decides what is appropriate. To suggest 16 that the intervenors need to see that, in my 17 submission, is missing the point. 18 Mr. Thompson touched on off ramps. 19 Again, my submission is that the request was made on 20 the motion for a re-opening of 497-01 to put off ramps 21 on the issues list for this case, and the Board did not 22 do so. So, again, in my submission, what this really 23 shows is that we are talking about a process for the 24 future. Mr. Thompson seems to think that he needs this 25 monitoring and reporting to decide whether he can 26 request an off ramp. He can't request that in this 27 case, Mr. Chairman; the Board didn't put it on the 28 issues list. 1633 CASS, Submissions 1 So, in my submission, that helps to 2 make it clear that we are talking about a process for 3 something that may happen in the future if, as 4 Mr. Thompson suggests, this is an appropriate off ramp. 5 As I have already indicated to the Board, of course, 6 and the evidence of the company has indicated, the 7 company certainly does not accept that this is in any 8 way within the notion of an off ramp as it was used in 9 the 497-01 proceeding. 10 But, in any event, if Mr. Thompson 11 wants to make that argument, it is an argument for the 12 future. Off ramps are not on the issues list in this 13 case. 14 Just by way of conclusion, 15 Mr. Chairman, I would like to make a few comments about 16 this new PBR regime that the company is under. As I 17 have already pointed out, and it is obvious, the PBR 18 plan which the Board has approved for the company 19 hasn't actually even started yet. I suggest that 20 whichever of the many grounds that Mr. Thompson has 21 brought forward that the Board looks at, it is clear 22 that what would be happening here if this information 23 is disclosed is that there would be a continuation of a 24 cost of service type of disclosure under a new PBR 25 regime, and I suggest to the Board, as I think I have 26 already done previously, that to put a cost of service 27 type of disclosure on top of a PBR plan is not the 28 right way to go, especially before the plan has even 1634 CASS, Submissions 1 started. 2 I suggest to the Board that it is 3 certainly not going to send the right message to all of 4 the other utilities in this province which are about to 5 embark on PBR. 6 In conclusion, Mr. Chairman, I urge 7 the Board to leave this issue of monitoring and 8 reporting for argument. I urge the Board, just as it 9 has already done on the motion for a re-opening of 10 497-01, to reject the attempt to have continuing cost 11 of service type of disclosure in a PBR regime. 12 I apologize again, Mr. Chairman, for 13 going so quickly, but I know that the Board wants to 14 deal with this as expeditiously as possible. 15 THE PRESIDING MEMBER: Thank you, 16 Mr. Cass. 17 Mr. Thompson? 18 REPLY SUBMISSIONS 19 MR. THOMPSON: Yes, thank you, 20 Mr. Chairman. 21 I won't reply to everything that 22 Mr. Cass has said. There are a few points, though, 23 that I would like to make in reply. 24 First of all, in his submissions he 25 seemed to think I am asking for the production of 1999 26 E.R.O. filings. I am not asking for that. Those 27 haven't been filed yet and the company, for some 28 reason, has missed three quarterly filings. But I 1635 THOMPSON, Reply Submission 1 appreciate the sensitivity of that. What I asked for 2 is the company to update its regulatory filings in the 3 E and F exhibits to reflect the nine months actual and 4 the three months estimated O&M. And that, I suggest, 5 is no breach of precedent. That is consistent with 6 precedent. 7 That is the information that I am 8 seeking. I think he misstated what I was asking for. 9 We were asking for the 1998 10 information from the E.R.O., and I tried to explain the 11 reasons for that, but not the 1999. 12 The second point I would like to make 13 is with respect to Mr. Cass' attempts to characterize 14 this request as a re-opening of the motion to review 15 the 497-01 decision. It is not that. I accept the 16 parameters of the PBR plan. I accept that there will 17 be no true-up for the purposes of the operation of that 18 plan. However, what we do seek is not to re-argue 19 those parameters or the no true-up decision; what we do 20 seek is information to evaluate, first of all, certain 21 ratemaking issues in this case, which I have touched 22 on, and we seek the information that is, in our 23 submission, relevant to the process debate -- I agree 24 there will be further process debate at the end of the 25 case, but we need the information available to decide 26 whether what the company proposes is appropriate or 27 inappropriate and to decide on, if you will, the 28 parameters of appropriate ongoing reporting. 1636 THOMPSON, Reply Submission 1 My friend suggests that the 2 Securities Act somehow constrains your Board's access 3 to actual information for the bridge year. I submit 4 that is not the case. You have always considered 5 actual information with respect to the bridge year in 6 the context of your ratemaking functions, and it is 7 often the case that the company updates us for actual 8 information in the bridge year when it suits its 9 convenience. 10 So the availability of the 11 information is not constrained in any way by the 12 Securities Act, and I am asking that it be normalized, 13 just as it has been filed in the past, but on a 14 globalized basis. I am sure there will be further 15 debate at the end of the case as to whether the global 16 basis that I am suggesting is appropriate. Some may 17 urge more detailed filing. 18 But the issue is the timely 19 disclosure of information so that parties can evaluate 20 that information in the context of ratemaking and in 21 the context of the rights that they were provided in 22 your decision. 23 I accept that off ramp is not an 24 issue in this case. I quite agree. But the timely 25 evaluation of information and the importance to your 26 Board of having a timely touch with reality when you 27 are exercising your powers are two of the points on 28 which I rely to support the production of the material. 1637 THOMPSON, Reply Submission 1 I think that is really all I have to 2 say. Anything else would be simply repeating myself 3 and I urge you to grant the directions requested. 4 Thank you. 5 THE PRESIDING MEMBER: Thank you, 6 Mr. Thompson. 7 The only thing I would ask, Mr. Cass, 8 is if you want to add anything by way of the facts that 9 you have heard in terms of the securities legislation, 10 then I will give Mr. Thompson the same opportunity, if 11 he hasn't taken one already. 12 Some of the things that Mr. Thompson 13 said about what may be allowable under the securities 14 law, did you want to respond to that? 15 To be more specific, it concerned the 16 confidential nature of what has been reported to the 17 E.R.O. and, once it becomes historical, then is that a 18 problem as far as the securities law is concerned? 19 MR. CASS: Mr. Chairman, in terms of 20 something that is truly historical and that has been 21 publicly disseminated, I don't think that that is 22 directly a problem as far as securities law is 23 concerned. 24 I disagree with Mr. Thompson that 25 providing actuals for the bridge year before they have 26 been publicly disseminated is not an issue. That is 27 where I say the issue arises. 28 In relation to the historic 1638 1 information, my point was simply: Why override the 2 confidentiality in Section 111 for something historic 3 and put a chill around this confidential process when 4 the numbers are there anyway? As I said, the company 5 would agree, if the E.R.O. does, that the template can 6 be released. 7 So what is the point of potentially 8 putting a chill around its confidentiality by setting 9 this precedent that it is going to be overridden? 10 That was my point in relation to the 11 historical information. 12 THE PRESIDING MEMBER: Mr. Thompson, 13 anything to add? 14 MR. THOMPSON: Just on this point 15 about the chill and the E.R.O., I guess Mr. Cass asked 16 a rhetorical question and I will ask one as well: If 17 the E.R.O. had the information that was supposed to be 18 filed for 1999, I suppose there is a scenario where he 19 would be here making the submissions I am making, that 20 something ought to be put on the public record. 21 In terms of the facts for 1999, for 22 nine months they have been disseminated publicly. We 23 have the "A" exhibits. I am not asking for anything 24 there that hasn't been disseminated publicly. I am 25 just asking that those facts, and the estimates for the 26 balance of the year, be put into a regulatory format 27 for the bridge year that allows parties and the Board 28 to have a true appreciation of what is happening. 1639 1 I omitted to mention, and I should 2 have mentioned in my opening remarks, that Mr. Warren 3 wanted me to emphasize that his client takes a very 4 serious interest in this issue. 5 Perhaps he wants to add something 6 himself. I saw him reaching for his mike. 7 MR. WARREN: I don't, sir, other than 8 to say -- 9 THE PRESIDING MEMBER: The invitation 10 was to Mr. Thompson, and I hope the answer is no by 11 Mr. Warren. 12 MR. WARREN: I don't, sir. I just 13 wanted to make the point that Mr. Cass kept saying that 14 IGUA wants this, IGUA wants that. I obeyed your 15 injunction. I gave what meagre ammunition I had to 16 Mr. Thompson. 17 I simply wanted to underscore the 18 point that CAC fully supports the issues that are 19 raised by Mr. Thompson. 20 THE PRESIDING MEMBER: Ms Halladay? 21 MEMBER HALLADAY: I just want to 22 clarify one issue with Mr. Cass with respect to the 23 timely disclosure by reporting issues under the 24 Securities Act. 25 Are you saying that the Board does 26 not have jurisdiction to order this disclosure because 27 of a conflict with the Securities Act? 28 MR. CASS: I didn't mean to say that, 1640 1 Ms Halladay. I meant to say that the Board I hope 2 would be cognizant that there is another regulatory 3 regime out there, as well, that has its own objectives, 4 and that those objectives should be taken into account. 5 I think I did try to use the word 6 objectives; the balancing of this Board's objectives 7 with the objectives of another regulator. 8 MEMBER HALLADAY: So it doesn't go to 9 jurisdiction; it just goes to balancing of interests. 10 MR. CASS: I think that is correct. 11 MEMBER HALLADAY: In fact, if we did 12 order such disclosure, there may be a corresponding 13 requirement for you to make disclosure under the 14 Securities Act of the reporting issue, I understand. 15 MR. CASS: Yes. 16 THE PRESIDING MEMBER: Thank you, 17 gentlemen. 18 We will break for lunch now and will 19 return at 2 o'clock. 20 Mr. Cass, there was one outstanding 21 issue with respect to Mr. Mondrow. I am not sure as to 22 where the matter stood. I thought someone was to 23 report back by Thursday. 24 Did you get some advice from 25 Mr. Ladanyi? 26 MR. CASS: I'm sorry, Mr. Chairman, I 27 don't know the status of that and Mr. Ladanyi is not 28 able to help me out. Perhaps we could try to have the 1641 1 answer after lunch? 2 THE PRESIDING MEMBER: That's fine, 3 if you can; if not, tomorrow. We would like to keep 4 control of those items. 5 MR. CASS: Yes. When I said the 6 answer, I meant the answer as to the status of where 7 it's at, Mr. Chairman. 8 THE PRESIDING MEMBER: Fine. 9 Mr. Farrell has come in, walking with 10 purpose. 11 MR. FARRELL: Yes, Mr. Chairman. I 12 spoke with Mr. Mondrow last night, and I told him that 13 we would have material for him to examine when he 14 arrived today. So we are awaiting his arrival. 15 My understanding is that he will 16 examine it and will decide whether or not it meets his 17 needs. If so, it will be filed; and if it doesn't meet 18 his needs, we may be back before you with another 19 debate. 20 That is where it stands. I don't 21 expect that he would reach his conclusion upon a single 22 quick reading, but we have it ready for him. 23 THE PRESIDING MEMBER: Thank you, 24 Mr. Farrell. 25 We will adjourn until 2 o'clock. 26 Mr. Warren, are you on the record or 27 off the record? 28 MR. WARREN: I had been here today in 1642 1 cross-examining Mr. Diamond, as I advised the Board. I 2 have to respond to a stay motion before the 3 Environmental Appeal Board downstairs at 3:00. I think 4 that professional obligation requires that I do some 5 modest preparation for my submissions in that case, 6 which means that I will not be here for Mr. Diamond and 7 I will defer to my friend Mr. Thompson to ask the 8 questions that are appropriate. 9 I would otherwise have been here, 10 sir. 11 THE PRESIDING MEMBER: Thank you, 12 Mr. Warren. 13 --- Luncheon recess at 1258 14 --- Upon resuming at 1402 15 THE PRESIDING MEMBER: Please be 16 seated. 17 We don't have a ruling yet. We will 18 have one tomorrow morning. 19 With that, then, anything else, 20 Mr. Farrell? 21 MR. FARRELL: Yes. I put up on the 22 dias number 7 of the hearing schedule which we are 23 trying to keep current on a daily basis, at least in 24 terms of the exhibits referable to each panel and the 25 sequence in which they appear. 26 Ms Duguay has asked me to make a 27 transcript correction on the record. This is Volume 5 28 from last Friday. Page 755. 1643 1 Mr. Thompson was asking Ms Duguay 2 about customer communication in advance of rate 3 proposals and Ms Duguay's answer starts at line 5 and 4 runs to line 8. 5 She informs me that she was speaking 6 about the migration of customers from Rate 300 to 7 Rate 115, that there were IGUA members who did migrate 8 but that TransAlta isn't one of them. So when she 9 mentioned: 10 "...TransAlta, which I believe 11 is one of your customers.." 12 I assume she meant "members" on line 7. 13 Mr. Thompson at line 9 said: 14 "Are they in IGUA?" 15 and Ms Duguay said: 16 "Yes, they are." 17 That is incorrect, but otherwise her 18 answer as it deals with the migration from Rate 300 to 19 Rate 115 is correct as recorded. 20 THE PRESIDING MEMBER: Thank you. 21 MR. FARRELL: Then there was mention 22 this morning of the exhibit number to be assigned to 23 Mr. Stephens responses to our interrogatories. It 24 would be in Exhibit I, Tab 25, which are responses by 25 various parties to Enbridge Consumers Gas 26 interrogatories. 27 Under the normal convention the 28 28 responses would be Schedules 46 to 73, however each 1644 1 of the interrogatory responses -- there are 28 of 2 them -- were not on separate pages. So I think it is 3 just convenient to assign to the entire package the 4 exhibit number, Exhibit I, Tab 25, Schedule 46. 5 THE PRESIDING MEMBER: Okay. 6 MR. FARRELL: Those are all the 7 preliminaries I have. 8 THE PRESIDING MEMBER: Thank you, 9 Mr. Farrell. 10 Anything else? 11 There being none... 12 MR. FARRELL: Mr. Diamond is the next 13 witness. He is a partner Strategic Services Group of 14 Computer Sciences Corporation and perhaps could be 15 sworn. 16 SWORN: STUART DIAMOND 17 EXAMINATION-IN-CHIEF 18 MR. FARRELL: Mr. Diamond, are you 19 responsible for Exhibit B2, Tab 7, Schedule 5? 20 MR. DIAMOND: Yes. 21 MR. FARRELL: Does your exhibit 22 contain your curriculum vitae? 23 MR. DIAMOND: Yes. 24 MR. FARRELL: Are you also 25 responsible for the interrogatory responses in 26 Exhibit I that bear your name? 27 MR. DIAMOND: Yes. 28 MR. FARRELL: Was this material 1645 DIAMOND, in-ch (Farrell) 1 prepared by you or under your direction and control? 2 MR. DIAMOND: Yes. 3 MR. FARRELL: Is this material 4 accurate to the best of your knowledge or belief? 5 MR. DIAMOND: Yes. 6 MR. FARRELL: Would you briefly 7 describe your company's business? 8 MR. DIAMOND: Computer Sciences 9 Corporation is a professional services firm. We 10 provide general management consulting and IT consulting 11 to both business and commercial sectors. We were 12 founded in 1959. We have about 52,000 employees around 13 the world. Current revenues are about $7.2 billion. 14 As you can imagine, because we are so 15 large we have specialist -- we are organized by 16 industry specialists and functional specialists. We 17 serve the utility industry, the energy industry, among 18 others, and we have a specialist in the area of 19 customer care and CIS. 20 MR. FARRELL: Thank you, Mr. Diamond. 21 Mr. Diamond is available for 22 cross-examination, Mr. Chair. 23 THE PRESIDING MEMBER: Thank you, 24 Mr. Farrell. 25 Mr. Brett. 26 MR. BRETT: Thank you, Mr. Chairman. 27 CROSS-EXAMINATION 28 MR. BRETT: Good afternoon, 1646 DIAMOND, cr-ex (Brett) 1 Mr. Diamond. 2 MR. DIAMOND: Hi. 3 MR. BRETT: Mr. Diamond, in your 4 evidence B2, Tab 7, Schedule 5 you purport to raise and 5 answer three questions related to Enbridge Consumers 6 Gas customer care and CIS expenditures. The first of 7 these is that you compare Enbridge's customer care 8 costs to the utility industry averages on a 9 per-customer basis. 10 You conclude, as I understand it, on 11 page 3 of your evidence, at the bottom of that page, 12 that Enbridge Consumers Gas "customer care" cost per 13 customer is 19 per cent less than the gas utility 14 average, and you say substantially lower -- and I make 15 that to be 35 to 40 per cent lower -- than the 16 electricity utility average cost. 17 The amount that you give for the 18 Consumers customer care per customer -- and I take it 19 that is annually per -- no, sorry -- yes, annual cost 20 per customer is $53.90. That is on Table 1 at page 6 21 of your evidence. Is that a fair summary of your 22 conclusion? 23 MR. DIAMOND: Yes. 24 MR. BRETT: You agree, I take it, 25 that the customer care expenditures are broader than 26 CIS expenditures? 27 MR. DIAMOND: That's correct. 28 MR. BRETT: CIS expenditures being a 1647 DIAMOND, cr-ex (Brett) 1 subset of customer care expenditures. 2 MR. DIAMOND: Right. 3 MR. BRETT: I would just ask you to 4 confirm: In arriving at that $53.90 number, in 5 Footnote 1 to your Table 1 on page 5 where you set out 6 the number, you say: 7 "Customer care calculation based 8 on Enbridge's original 1999 9 fiscal year adjusted by the 10 OEB-approved PBR formula plus 11 the CIS Z-factor." (As read) 12 Does that amount to or is that 13 equivalent to, in your view -- and I guess for this -- 14 well, let me just give you the number. You may wish to 15 turn this up. 16 You have a number of $80,091,000 17 which is contained on page 2 of Exhibit I, Tab 12, 18 Schedule 44, which is one of the IGUA questions to you. 19 Is the $53.90 based on the $80,091,000? 20 MR. DIAMOND: Yes. 21 MR. BRETT: Thank you. 22 Now, you say in your sample that 23 you -- the sample that you use to draw these gas 24 utility and electric utility and utility industry 25 averages from -- there are 155 gas utilities, 1,259 26 electric utilities. I would assume that a number of 27 these were also combined utilities. Is that correct? 28 MR. DIAMOND: That would be correct. 1648 DIAMOND, cr-ex (Brett) 1 MR. BRETT: That statement is 2 contained at the bottom of page 4 of your evidence. 3 Now, it appears from the table that 4 we have spoken of, Table 1 on page 6, that the electric 5 utility average customer care cost is significantly 6 higher than the gas utility customer care cost on 7 average. 8 Without getting into great detail 9 about it, in a nutshell, why is that the case? 10 MR. DIAMOND: I think primarily 11 because customer care in the electric industry, there 12 are a lot more outages and a lot more problems and, 13 therefore, there are a lot more calls, higher call 14 volumes and thus you need to have a larger customer 15 care operation. 16 MR. BRETT: The same would be true, 17 presumably, in the combined utilities. 18 My understanding is a good number of 19 the American utilities are combined electric and gas 20 utilities. Is that the case? 21 MR. DIAMOND: I wouldn't necessary 22 draw that same conclusion. I would have to look at the 23 numbers. 24 MR. BRETT: Right. I'm thinking of 25 utilities such as Pacific Gas & Electric, San Diego Gas 26 & Electric, Central and Southwest, and so on. 27 MR. DIAMOND: Yes. I mean, that's 28 correct, but there are a number of municipalities at 1649 DIAMOND, cr-ex (Brett) 1 least where they are separate. 2 MR. BRETT: Right. 3 Now, you state at page 5 of your 4 evidence that there were no Canadian utilities included 5 in this sample, correct? 6 MR. DIAMOND: Correct. 7 MR. BRETT: Would it be fair to 8 assume that in general terms, as a general proposition, 9 that customer care costs per customer would likely be 10 somewhat lower for larger utilities, everything else 11 being equal, than for smaller utilities because of some 12 economies in providing these costs? 13 MR. DIAMOND: Yes. Potentially that 14 is correct. 15 MR. BRETT: Now, your sample, as you 16 say, covered a large number of gas utilities and an 17 even larger number of electric utilities. 18 Just looking at the gas utilities for 19 a moment, your sample included 155 gas utilities. Do 20 you have a -- your number you arrived at for industry 21 average was $66.86. Had you used only the 10 largest 22 U.S. gas utilities, pure gas utilities, I take it that 23 you would expect that that number would probably be 24 lower, somewhat lower? 25 MR. DIAMOND: I would have to run the 26 numbers. 27 MR. BRETT: Could you do that for the 28 largest 10 gas utilities, please, and file that as an 1650 DIAMOND, cr-ex (Brett) 1 undertaking? That is just the 10 largest U.S. pure gas 2 utilities? 3 MS DESAI: It would be Undertaking 4 J9.5. 5 UNDERTAKING NO. J9.5: 6 Mr. Diamond undertakes to run 7 the 10 largest U.S. pure gas 8 utilities to arrive at an 9 industry average 10 MR. BRETT: Thank you very much. 11 varying sizes, correct? 12 The second test that you deal with is 13 CIS capital cost per customer and that is laid out on 14 Table 2 on page 7 of your evidence. 15 You have Consumers Gas there at 16 $79 per customer. You have a sample, a subset here of 17 the range of utilities. You picked out, it looks like, 18 something like 12 to 15 utilities. As I read this 19 list, these utilities are -- well, first of all they 20 are of varying sizes, correct? 21 MR. DIAMOND: Yes. 22 MR. BRETT: And, also, they are all, 23 I believe, with the exception of Enbridge Consumers 24 Gas, unless I'm missing something here, they are all 25 either electric utilities or they are combined gas and 26 electric utilities. An example of an electric utility 27 would be Bangor Hydro and an example of a combined 28 utility would be Cincinnati Gas and Electric. But am I 1651 DIAMOND, cr-ex (Brett) 1 correct in that? 2 MR. DIAMOND: That's correct. 3 MR. BRETT: You say that -- I gather 4 you selected this group of utilities from a much larger 5 sample group, but you have said, in your reply to 6 IGUA 45, that's I12-45 -- you probably don't have to 7 turn this up but I will read you the quote; it says: 8 "The CA -- CSC selected these 9 utilities with a -- selected 10 those utilities -- those 11 utilities -- with a customer 12 base greater than 13 100,000". (As read) 14 Correct? 15 MR. DIAMOND: Correct. 16 MR. BRETT: And what you have done is 17 you have selected some of the utilities with a customer 18 base -- 19 MR. DIAMOND: I believe we selected 20 most of them; there's a just few outliers that we 21 didn't select. 22 MR. BRETT: Well, you do agree with 23 me that there are a number of -- unless we are talking 24 about different numbers here -- 100,000 was the 25 threshold. You agree with me that there are a number 26 of large U.S. utilities -- let's take as an example gas 27 utilities, large gas utilities. Take, for instance, 28 Southern California Gas, Minnegasco, East Ohio Gas, 1652 DIAMOND, cr-ex (Brett) 1 Southern Union Gas, Northwest Natural Gas. These are 2 all larger U.S. gas utilities that don't appear in this 3 list. Correct? 4 MR. DIAMOND: Yes. 5 MR. BRETT: I'm concerned that this 6 list -- I guess my conclusion I draw -- well, my 7 conclusion, preliminary conclusion, I draw from looking 8 at this list is that it's not a very representative 9 list in terms of not having any gas utilities, pure gas 10 utilities, on it, number one, and -- well, let's stop 11 there. 12 How do you -- would you comment on 13 that? 14 MR. DIAMOND: I would be happy to. 15 If you look at this study in total, 16 the first piece of the day that we already talked about 17 was looking at the entire customer care costs, and we 18 had 153, I believe, gas utilities. And for looking at 19 cost to develop a CIS, which is what this data is, 20 there just isn't a lot of available data. The 21 Chartwell folks produced this study and that's what was 22 available to us; and then we found a few other pieces 23 of data that we put in there. So there was not an 24 attempt to narrow it or to skew the data; it was just 25 this is what was available to us. 26 MR. BRETT: So, you basically used 27 the data that you could get access to from Chartwell, 28 or elsewhere, and reproduced it here? 1653 DIAMOND, cr-ex (Brett) 1 MR. DIAMOND: That's correct. That 2 would be a fair statement. 3 MR. BRETT: I understand. So that 4 you wouldn't be able to give me, then -- you 5 anticipated my next question, in a sense. I was going 6 to ask you to provide the IS capital costs for the 10 7 largest pure gas utilities in the United States. You 8 couldn't do that? 9 MR. DIAMOND: Could not do that. 10 MR. BRETT: Now, just an aside, if we 11 were to look at this table, the table you have 12 provided, and look at the seven utilities that have -- 13 and these are electric utilities, or combination 14 utilities, and we have already discussed the fact that 15 electric utilities tend to have higher -- they 16 certainly have documented higher customer care costs 17 than gas utilities. 18 Do I look at this list and look at 19 only the large utilities -- they are the utilities with 20 customers of over a million, and Consumers ranks -- of 21 seven of them, they rank the third most expensive. 22 Right? 23 MR. DIAMOND: Let me ask you this -- 24 MR. BRETT: That's quite crude but -- 25 MR. DIAMOND: Yes. Let me ask you 26 this. My question is: You are eliminating the lower 27 ones because -- under a million -- because of economies 28 of scale. Is that the premise? 1654 DIAMOND, cr-ex (Brett) 1 I'm just wondering why you 2 eliminated -- 3 MR. BRETT: Well, first of all, let 4 me -- first of all, I'm correct in my mathematics here? 5 That's the first question. 6 MR. DIAMOND: I would have to look at 7 that. But my question to you is: Why are we taking a 8 subset? 9 MR. BRETT: Well, I'm interested -- 10 my question to you, really, is: Looking at the largest 11 seven -- the largest customers, you agreed with me a 12 moment ago that, in terms of looking at customer care 13 costs per customer, on a going forward basis, it would 14 be reasonable to expect larger utilities to have a 15 lower total customer care cost per customer than 16 smaller utilities? 17 MR. DIAMOND: Yes. 18 MR. BRETT: Now, I'm just applying 19 that same principle to this table which deals with the 20 costs of putting in place CIS systems for utilities. 21 I'm assuming a similar principle might apply. 22 MR. DIAMOND: I would -- if I could 23 clarify. I would agree with you completely that, you 24 know, there's a tremendous economies of scale and 25 that -- but applying that same principle, you don't 26 want -- if you want to exclude the bottom half, those 27 under a million, you would almost have to exclude those 28 over two million because you get what I would maybe 1655 DIAMOND, cr-ex (Brett) 1 call super economies of scale; that is, I would assume 2 that most of these that can bill a million and a half 3 customers could probably fairly easily bill two million 4 customers. 5 So, you know, I'm not trying to 6 narrow the data. I would like to expand the data and 7 be as broad as possible. But if, you know, if you were 8 going to narrow it, you might want to look at the 9 cluster, then, that's around Consumers Gas. So maybe 10 take the million to a million, whatever -- the million 11 to a million seven range might be a -- may be a fairer 12 representation if you are looking to narrow it. 13 MR. BRETT: So you are saying when 14 you get to a certain size and you go beyond that, the 15 economies of scale might not be there? 16 MR. DIAMOND: No, no, it would be 17 there. Like if you double -- that is, if you can bill 18 a million and a half customers, to bill another 50,000 19 is just a fairly incremental cost, so -- 20 MR. BRETT: Okay. You are talking 21 about the width of the brackets that -- 22 MR. DIAMOND: That's right. So I'm 23 saying if you are going to eliminate the bottom half, 24 you may want to also think about -- you know, you can 25 do anything you want with the numbers -- you might want 26 to eliminate those that are over the two million to get 27 a fairer sample and look at the clustering that way. 28 I'm just suggesting that, you know. 1656 DIAMOND, cr-ex (Brett) 1 You do whatever you want. But that would be what I 2 would suggest, if you are going to look at -- if you 3 wanted to cluster it, that might be a better way to 4 do it. 5 MR. BRETT: All right. If we look at 6 the outsourcing cost for a customer, which is your 7 third test -- first of all, in question-and-answer 14, 8 you talk about Consumers Gas, Enbridge Consumers Gas 9 proposed charge-back mechanism. 10 I gather what you mean there is 11 the -- that's your way of labelling the fee, the 12 outsourcing fee that we have in this case? 13 MR. DIAMOND: That's correct. 14 MR. BRETT: Okay. Now, to your 15 knowledge, have many utilities in the United States 16 entered into arrangements of this nature whereby they 17 have -- that are closely comparable to what we are 18 speaking about here? 19 MR. DIAMOND: No. It is very -- this 20 last piece of data is very anecdotal. It's very hard 21 to compare one outsourcing arrangement to another. So, 22 I would be -- you know, this would -- 23 MR. BRETT: And do -- 24 MR. DIAMOND: If I could. That's why 25 I would have to make the statement that it's -- I look 26 at the data more in the whole as opposed to each 27 individual component because it is very hard to compare 28 applies to apples in these arrangements. 1657 DIAMOND, cr-ex (Brett) 1 MR. BRETT: Are there any U.S. 2 utilities, to your knowledge, that have entered into 3 arrangements that are truly comparable to these 4 arrangements? 5 MR. DIAMOND: I can't give you a list 6 of them, no. I'm aware that there are outsourcing 7 arrangements out there with utilities. I don't have 8 the specifics. 9 MR. BRETT: Okay. You might -- would 10 you mind taking as an undertaking to provide us, if 11 there are any -- if there are any U.S. utilities that 12 have outsourcing arrangements for the CIS function, if 13 I can put it this way, closely comparable to what we 14 are speaking about here, could you advise us of that? 15 Or if there aren't, just advise us if there aren't. To 16 the best of your -- 17 MR. DIAMOND: I would be happy to do 18 that, it's just that I can't -- what I'm stumbling 19 about is I can't think of where I would go to actually 20 look for all that data. I don't know where, for 21 instance -- you know, the Chartwell report, like the 22 CIS data, caught -- that data is just -- you know it's 23 hard to find that data. The Chartwell Report was a 24 convenient way to find it. There is not a huge amount 25 of data on who has outsourcing arrangements, a 26 repository. But I will try. 27 MR. BRETT: All right. Thank you. 28 Your main source for your answer to 1658 DIAMOND, cr-ex (Brett) 1 me was that the Chartwell Report -- 2 MR. DIAMOND: For the CIS costs. 3 MR. BRETT: For the -- 4 MR. DIAMOND: For the second one. 5 MR. BRETT: For the second one. 6 MR. DIAMOND: Right. For the 7 outsourcing -- 8 MR. BRETT: Not all for the third 9 one? 10 MR. DIAMOND: My third one was, you 11 know, just anecdotal evidence that we came across. 12 MR. BRETT: Right. 13 MS DESAI: Should we give that 14 undertaking number, J9.6? 15 UNDERTAKING NO. J9.6: 16 Mr. Diamond undertakes to report 17 if there are any U.S. utilities 18 that have outsourcing 19 arrangements for the CIS 20 function that are comparable to 21 the Union Gas outsourcing 22 arrangements and the proposed 23 Enbridge outsourcing arrangement 24 MR. FARRELL: I'm not too sure just 25 what it is that Mr. Brett wants. I'm a bit concerned 26 based upon Mr. Diamond's statements that he's not 27 agreeing to sort of start from scratch and do a 28 telephone survey -- 1659 DIAMOND, cr-ex (Brett) 1 MR. BRETT: No, Mr. Chairman. But I 2 don't think -- I think it's reasonably clear we are not 3 asking that. I just -- to the best of his ability, 4 without going into undue cost and effort, if he's able 5 to look at his various sources and advise whether or 6 not there are arrangements that U.S. gas utilities 7 have, I would like you to identify them separately -- 8 MR. DIAMOND: I would be happy to do 9 that. 10 MR. BRETT: -- that are closely 11 comparable to this arrangement that Union and Enbridge 12 are -- that Union has and that Enbridge Consumers is 13 proposing for the outsourcing of the CIS system. 14 MR. DIAMOND: Just one other thing -- 15 I would be happy to do it, no objection there -- it's 16 just getting at the details of these outsourcing 17 arrangements is usually highly confidential, so it 18 would be very difficult to say whether it's producing 19 the exact same thing. 20 MR. BRETT: Well, I think you could 21 caveat it. 22 MR. DIAMOND: Sure. I would be happy 23 to do that. 24 MR. BRETT: The TMG report, which 25 is -- and this, really, is along the same line, I 26 suppose. I would like you to -- you are familiar with 27 Mr. Stephens' evidence, L25.2? 28 MR. DIAMOND: I have to get it out. 1660 DIAMOND, cr-ex (Brett) 1 I looked at the main body of the evidence. 2 MR. BRETT: Yes, and there is an 3 appendix there which is Appendix 8, which is a text of 4 a report from a company entitled -- 5 MR. FARRELL: It is technically 6 called a position paper, Mr. Brett. 7 MR. BRETT: All right. 8 MR. FARRELL: We will find out what 9 that actually means when we speak with Mr. Stephens. 10 MR. BRETT: That's right, you will, 11 but it is a position paper and it is produced by TMG 12 Consulting in Austin. I just wanted to refer you to 13 the -- 14 I think the statement, basically, 15 that I am going to read to you confirms what you have 16 already told me, but let me refer you to page 47 of 17 that report, toward the back of that report. It is 18 page 47. There is a section entitled, "8.1.10 19 Outsourcing Analysis". It is at page 47 of Appendix 8 20 to Mr. Stephens' report. 21 Do you have it? 22 MR. DIAMOND: Yes. 23 MR. BRETT: The last two paragraphs 24 there read: 25 "Outsourcing is great and has 26 been proven effective for the 27 complete outsourcing of 28 Information Technology needs. 1661 DIAMOND, cr-ex (Brett) 1 However, the total outsourcing 2 of an application such as CIS is 3 proving to be much more 4 difficult. While many utilities 5 are purchasing an in-house 6 solution and outsourcing 7 application support they are not 8 embracing a total outsourcing or 9 netsourcing solution." 10 The author goes on to say: 11 "Outsourcing is effective for 12 startups like ESCO's and ESP's 13 and it is an attractive solution 14 for these energy marketers. 15 However, for a municipal or 16 investor owned utility 17 outsourcing has many roadblocks 18 and is not viewed as a cost 19 effective or attractive solution 20 at this time." 21 Does that seem like a fair summation 22 of the state of acceptance of outsourcing of the CIS 23 application in the U.S.? 24 MR. DIAMOND: Yes. I would have to 25 say that it is a fairly fair representation. Each deal 26 is so unique that it is hard to make a blanket 27 statement. There are some times when outsourcing seems 28 to be beneficial and some times when it isn't. So it 1662 DIAMOND, cr-ex (Brett) 1 is hard to make a general statement about outsourcing. 2 You would want to look at it on a case-by-case basis. 3 I do agree, certainly for these ESCOs 4 and people who don't have any infrastructure in place 5 already -- I would certainly agree there that this is 6 an attractive option to look at. 7 MR. BRETT: You mentioned to me a 8 moment ago that your estimate -- first of all, the 9 estimate of outsourcing cost per customer contained in 10 Table 3 to your evidence says $22.76. As you said, the 11 evidence is mainly anecdotal, and you cite some studies 12 there that you looked at to see whether you could get 13 some information on other costs. 14 Those are they, I take it. That is 15 the list? 16 MR. DIAMOND: That is the list, yes. 17 MR. BRETT: Thanks very much. Those 18 are my questions. 19 THE PRESIDING MEMBER: Thank you, 20 Mr. Brett. 21 Mr. Mondrow? 22 MR. MONDROW: I have no questions for 23 Mr. Diamond, sir. I am here for the next panel. 24 Thank you. 25 THE PRESIDING MEMBER: Mr. Janigan? 26 MR. JANIGAN: Yes, thank you, 27 Mr. Chair. 28 MR. JANIGAN: I just have some very 1663 DIAMOND 1 brief questions. 2 CROSS-EXAMINATION 3 MR. JANIGAN: I wonder if you could 4 turn up in your evidence, Mr. Diamond, T7, Schedule 5, 5 page 6. 6 MR. DIAMOND: Which table is it? 7 MR. JANIGAN: It is Table 1. 8 MR. DIAMOND: Table 1, yes. Okay. I 9 thought you said Table 5, I'm sorry. 10 MR. JANIGAN: Did I say that? I 11 think I said Tab 7 and you might have thought it was -- 12 I note in the numerical note that is 13 under this table, the last note, which is configured 14 No. 2, that the exchange rate of U.S. dollars of .69 15 was used to calculate industry averages. 16 MR. DIAMOND: Yes. 17 MR. JANIGAN: Why did you use this 18 number? 19 MR. DIAMOND: That was the prevailing 20 exchange rate at the time. 21 MR. JANIGAN: Now, do you think, for 22 comparison purposes, that the use of the prevailing 23 rate of exchange is always appropriate? 24 MR. DIAMOND: No. It depends on the 25 context. 26 MR. JANIGAN: And in this context why 27 was it appropriate? 28 MR. DIAMOND: In this context -- and 1664 DIAMOND, cr-ex (Janigan) 1 I have to take you back a little bit as to why and how 2 the study came about. 3 In late 1997 we were engaged by then 4 Consumers' Gas to look at their unbundling of customer 5 care and one of the topics under discussion at that 6 time was potentially offering customer care services to 7 other utilities, and other U.S. utilities potentially. 8 During the course of it, before we 9 got too far, CSC suggested that you ought to look at 10 your cost of customer care. Is it reasonable? Could 11 you go to a U.S. utility and be competitive? 12 Therefore, we looked at what is the 13 cost of their current customer care functions. We 14 compared that to the database and we felt that, yes, 15 their costs were reasonable and that, let's say it cost 16 $10 Canadian to produce a bill, we would have to get at 17 least $6.90 in order to break even. 18 So I think in that case it was a 19 reasonable approach. 20 MR. JANIGAN: Are you aware of 21 studies that have shown that the prevailing currency 22 exchange rate may not be the best way to compare price 23 levels of different commodities in each country? 24 MR. DIAMOND: Yes, I am. Again, you 25 know, I am not an economist and I would defer to 26 anybody in this room who has better knowledge, but my 27 take is that this market basket rate, let's say, would 28 be more appropriate if I were moving to Canada and my 1665 DIAMOND, cr-ex (Janigan) 1 firm had to figure out the differential of what it 2 would cost and how they would have to adjust my salary 3 in Canadian dollars, because you are looking at market 4 baskets of goods and services and you would have to 5 make some adjustment. I think that would be completely 6 appropriate. 7 But if I go out tonight and have 8 dinner and it costs me $20 Canadian, I want to be 9 reimbursed from my company at the current exchange 10 rate. 11 So I think this study, at least -- we 12 were looking to sell a specific product. We knew the 13 cost and we were trying to figure out what we would 14 have to get in terms of U.S. dollars to break even. 15 So that is the context. 16 MR. JANIGAN: Okay. You have 17 anticipated me somewhat. I haven't introduced this 18 document yet, but I think I provided to you a document 19 which consists of three individual documents from the 20 Web site of the OECD. 21 MR. DIAMOND: Yes. 22 MR. JANIGAN: I wonder if that could 23 be marked. 24 MS DESAI: We will give that Exhibit 25 No. K9.1. 26 EXHIBIT NO. K9.1: Document 27 consisting of three individual 28 documents from the Web site of 1666 DIAMOND, cr-ex (Janigan) 1 the OECD 2 MR. JANIGAN: The first page of this 3 document -- 4 MR. FARRELL: Just a second. He is 5 locating it. 6 --- Pause 7 MR. DIAMOND: You are not going to 8 quiz me on the French side, are you? That was my 9 concern. 10 --- Laughter 11 MR. JANIGAN: I'm sorry. Could I 12 have that exhibit number again? 13 MS DESAI: K9.1. 14 MR. JANIGAN: This document refers to 15 certain studies that are done by the OECD concerning 16 purchasing power parities. 17 MR. DIAMOND: Correct. 18 MR. JANIGAN: As I understand it, 19 purchasing power parities are the rates of currency 20 conversion that eliminate the differences in price 21 levels between countries. 22 MR. DIAMOND: Again, I am not an 23 economist, and my assumption is, if you want to look at 24 a group of goods and services, this would probably be a 25 good way to look at them. 26 MR. JANIGAN: Okay. I think, as you 27 indicated, this is done on a representative basket of 28 goods and services in individual OECD countries. 1667 DIAMOND, cr-ex (Janigan) 1 MR. DIAMOND: Correct. 2 MR. JANIGAN: On the third page of 3 this document it indicates the comparative price levels 4 between Canada and the U.S. for April 1999, and it 5 would appear to indicate that prices in Canada are 6 equivalent in U.S. dollars at a rate of .81 cents. 7 MR. DIAMOND: Yes. That is what it 8 appears to be. That is my interpretation. 9 MR. JANIGAN: Okay. That would have 10 been at about the same time that you did this 11 particular study. April 1999? I have forgotten the 12 date. June 1999. Would that, more or less, be the 13 same period of time? 14 MR. DIAMOND: Correct. 15 MR. JANIGAN: I have not been able to 16 locate a study that zeroes in on the computing services 17 industry itself, but are you aware that the OECD does 18 studies on individual industries to come up with these 19 kinds of comparative price levels? 20 MR. DIAMOND: No. 21 MR. JANIGAN: Thank you, Mr. Chair; 22 those are all of my questions. 23 THE PRESIDING MEMBER: Thank you, 24 Mr. Janigan. 25 Mr. Thompson? 26 MR. THOMPSON: Thank you, sir. 27 CROSS-EXAMINATION 28 MR. THOMPSON: Mr. Diamond, just 1668 DIAMOND, cr-ex (Thompson) 1 following up on some answers you gave to Mr. Janigan, 2 you indicated that you were retained late in 1997 for 3 the first time. Is that right? 4 MR. DIAMOND: That's correct. 5 MR. THOMPSON: And the purpose of 6 that retainer was, as I understood you, to explore the 7 possibilities of Consumers' Gas selling customer care 8 services in the States? 9 MR. DIAMOND: That wasn't the primary 10 purpose. The primary purpose was getting them ready 11 for unbundling and one of the topics under 12 discussion -- someone had an idea -- was: Is there a 13 market for customer care services? Could Consumers' 14 Gas provide that to other entities? 15 So that is what was kind of the 16 genesis for our work that is here today. Again, the 17 first thing we said was: "Let's see how your costs 18 are." Because many times -- I have been into many 19 companies where IT departments will say, "Gee, we ought 20 to be selling our services to other companies", and 21 then when you do a little research you find out that 22 their costs are way out of line and their service 23 levels aren't so hot. Therefore, we wanted to nip it 24 in the bud. 25 So we just did a test: Were their 26 costs reasonable? Could they go to other companies and 27 sell their services at a reasonable cost? 28 MR. THOMPSON: So in support of that 1669 DIAMOND, cr-ex (Thompson) 1 exercise, did you do the same kind of sampling analysis 2 that you are presenting here? 3 MR. DIAMOND: Yes, that is correct. 4 The original work was done several years ago. We did 5 this analysis. One of our analysts did this -- never 6 dreaming that I would have the pleasure of being here 7 testifying -- just seeing if these costs are 8 reasonable. 9 MR. THOMPSON: Did the work at that 10 time include the average customer cost analysis of the 11 type that is presented here? 12 MR. DIAMOND: The first one, yes; 13 that's correct. 14 MR. THOMPSON: Did it include 15 analysis of CIS costs per customer? 16 MR. DIAMOND: No, because that really 17 wasn't an issue then. 18 MR. THOMPSON: Did it include the 19 outsourcing charge analysis? 20 MR. DIAMOND: No, because again we 21 were looking at total customer care costs and we were 22 looking at bundling the entire customer care service 23 and then approaching other utilities and offering that 24 service. 25 MR. THOMPSON: So the initial 26 retainer terminated when? 27 MR. DIAMOND: I would say probably 28 January of 1998, maybe February. 1670 DIAMOND, cr-ex (Thompson) 1 MR. THOMPSON: Was there anything 2 further done in connection with this prospect of the 3 company's selling customer care in the States, to your 4 knowledge? 5 MR. DIAMOND: To my knowledge, no. 6 MR. THOMPSON: You were not involved 7 in that. 8 MR. DIAMOND: I was not involved. I 9 have no idea. 10 MR. THOMPSON: When were you next 11 asked to get involved? 12 MR. DIAMOND: I was pretty much done 13 then. That was pretty much the -- I was tangentially 14 aware of some other activities we had there, but I was 15 not hands on involved in other activities. 16 MR. THOMPSON: When in point of time 17 were you next asked to get involved for the purposes of 18 this case? 19 MR. DIAMOND: Not to go back, but let 20 me just say generally the spring of this year. I was 21 just asked to update the tables, if we could rerun it 22 to see if we had the same conclusion. 23 MR. THOMPSON: You updated what is in 24 Table 1? 25 MR. DIAMOND: Correct. 26 MR. THOMPSON: When were you first 27 asked to do the work that is captured in Table 2? 28 MR. DIAMOND: Tables 2 and 3? Around 1671 DIAMOND, cr-ex (Thompson) 1 the same time, we were aware of other things that came 2 available, and we were asked to take a look at that and 3 see if we could draw any conclusions. 4 MR. THOMPSON: What was the purpose 5 of that retainer, as far as you are concerned? 6 MR. DIAMOND: That was for the 7 purpose that we are here today. 8 MR. THOMPSON: Was any description 9 put on the objective of the work? 10 MR. DIAMOND: No. 11 MR. THOMPSON: You were asked to do 12 what? 13 MR. DIAMOND: We were asked to look 14 at customer care cost, total customer care cost, and 15 see whether Enbridge Consumers Gas' costs were 16 reasonable. Then we looked at the Chartwell Report to 17 determine, on a per customer basis, how Enbridge 18 Consumers Gas compared; and on this proposed 19 outsourcing arrangement, how Enbridge Consumers Gas 20 compared. 21 Again, it is not an exact science 22 because it is very difficult to compare one CIS system 23 with another, or one outsourcing. But in general, 24 looking at the body of evidence as a whole, could we 25 conclude whether or not it was reasonable. 26 MR. THOMPSON: Did the words "fair 27 market value" come into the retainer in any respect? 28 MR. DIAMOND: None. 1672 DIAMOND, cr-ex (Thompson) 1 MR. THOMPSON: So your evidence is 2 not directed to an evaluation of either the 3 functionality or the capability of the company's CIS 4 solution. 5 MR. DIAMOND: That is completely 6 correct. 7 MR. THOMPSON: Compared to the CIS 8 solution of others, you were not engaged to do that. 9 MR. DIAMOND: No, we were not engaged 10 to do that. And that task, to do it correctly, would 11 be a fairly lengthy task, to look functionality by 12 functionality. 13 MR. THOMPSON: Is it fair, then, to 14 suggest that your role was really to provide indicators 15 pertaining to total customer support costs? 16 MR. DIAMOND: Yes, there was a 17 reasonable test: Was there anything that we could 18 conclude that would say Enbridge Consumers Gas' costs 19 were unreasonable or reasonable? It was a reasonable 20 test. 21 Based on the whole evidence, we could 22 find that it appeared that things were reasonable. 23 MR. THOMPSON: As Mr. Brett pointed 24 out, you didn't focus in any way on the CIS component 25 of customer -- 26 MR. DIAMOND: Only from the Chartwell 27 Report. The Chartwell Report was CIS -- 28 MR. THOMPSON: Customer costs. 1673 DIAMOND, cr-ex (Thompson) 1 MR. DIAMOND: Customer. So I would 2 say in that one we did focus on it. The Chartwell 3 Report, plus two pieces of evidence that we were aware 4 of, we looked at that, and then we could draw a 5 conclusion. 6 MR. THOMPSON: Within the total 7 customer support analysis, no focus on the CIS 8 component of it. 9 MR. DIAMOND: That is correct. 10 Sorry, that is a component, and it was included in the 11 larger body. 12 MR. THOMPSON: Not isolated. 13 MR. DIAMOND: Not isolated. 14 MR. THOMPSON: In terms of the 15 project costs, again you used a sampling process and 16 provided your table, and we will come to that in a 17 moment. 18 What was the retainer with respect to 19 the outsourcing costs? Were you told that the company 20 was planning to charge $10.64? 21 MR. DIAMOND: No, we weren't. We 22 were just given some -- I had an analyst working on it 23 who was unaware of what Consumers Gas was proposing to 24 charge. We looked at this data; again, very anecdotal. 25 We tried to find in there some comparable outsourcing 26 costs, and we compiled the table. 27 MR. THOMPSON: Table 4 of your 28 evidence makes reference to this charge, so at some 1674 DIAMOND, cr-ex (Thompson) 1 point you must have -- 2 MR. DIAMOND: Obviously, we did, yes. 3 MR. THOMPSON: Before you finished 4 your work? 5 MR. DIAMOND: Yes, if this is the 6 finished work here. Yes, that is correct. 7 MR. THOMPSON: Just on the point of 8 the appropriateness of your sample, in terms of the 9 customer care costs sampling which is described, as 10 Mr. Brett indicated, in your question and answer 5 and 11 in response to IGUA -- I think it is 45. Maybe I am 12 wrong. 13 That was a very broad sample, as he 14 pointed out. 15 Sorry, it is IGUA 44. 16 The customer care sample involves, as 17 I understand it, 155 gas utilities and 1239 electric 18 utilities. 19 MR. DIAMOND: Whatever we could get 20 our hands on. 21 MR. THOMPSON: They are all gathered 22 together to produce one average. Were you instructed 23 to do that or was that your idea? 24 MR. DIAMOND: Again, in the context 25 of going back several years of looking at could we sell 26 customer care costs in a reasonable number. We were 27 trying to get averages. 28 So no one instructed us how to do 1675 DIAMOND, cr-ex (Thompson) 1 this. 2 MR. THOMPSON: And is the reason that 3 you didn't include any Canadian companies in this 4 aspect of the analysis because the focus of the initial 5 inquiry was to examine sales into the U.S.? 6 MR. DIAMOND: No. The reason we 7 didn't include Canadian is just that the data was not 8 as readily available for Canadian utilities like they 9 are in the United States. 10 If we had the same data -- I would 11 love to include it, but we just didn't at the time. We 12 were looking at reasonableness. We don't want to go 13 and have a year-long study. We just quickly determined 14 whether or not we could reasonably sell customer care 15 services to other utilities. 16 MR. THOMPSON: You are aware, of 17 course, that Union Gas operates in this jurisdiction, 18 alongside Consumers Gas. 19 MR. DIAMOND: Yes. 20 MR. THOMPSON: And Union keeps its 21 accounts in accordance with the uniform system of 22 accounts of this Board. 23 I am curious as to why someone didn't 24 do an analysis of the customer care costs for Union 25 Gas. 26 MR. DIAMOND: We could look at that. 27 I would say that when we are looking at selling 28 customer care costs to other utilities, we determine 1676 DIAMOND, cr-ex (Thompson) 1 that probably the prime market would not be other large 2 utilities because they would have the wherewithal to 3 have good customer care services, and that the market 4 would be probably more of a mid-tier market. 5 I think initially that is probably 6 why we weren't -- when somebody asks do we look at the 7 top ten utilities, we kind of zeroed in and ours is 8 kind of a mid-tier. 9 We got all of them in there. We 10 didn't exclude anybody, but that's why we didn't go for 11 a one for one comparison with large utilities. 12 MR. THOMPSON: Your evidence being 13 put forward in this case, Mr. Diamond, is really to 14 support the proposition that the charges that the 15 company proposes to recover from its affiliate for CIS 16 as a component of customer care are reasonable because 17 their total customer care costs in the big picture are 18 reasonable. 19 That is the thrust, as I 20 understand it. 21 MR. DIAMOND: That is one thrust of 22 three; that is correct. 23 MR. THOMPSON: Yet, although the 24 company acknowledges that Union is a reasonable 25 comparator for the outsourcing charge, no one has done 26 a calculation of the total customer care costs for 27 Union. 28 Doesn't that sort of strike you 1677 DIAMOND, cr-ex (Thompson) 1 as odd? 2 MR. DIAMOND: Not particularly. To 3 get back, I think it is important that you need to look 4 at total customer care. The reason is you could take 5 your meter reading function and you could completely 6 automate that function; spend a lot of money in 7 technology, be away over the average, and yet have no 8 meter readers. 9 So is that good or bad? You don't 10 know unless you look at the entire total cost of meter 11 reading. 12 So I would contend that to look at -- 13 or I would say that to look at the whole is important, 14 that if you just look at one aspect you might draw an 15 erroneous conclusion. 16 MR. THOMPSON: All right. Well, I 17 won't argue that with you. 18 One of the documents you did produce 19 in response to IGUA 48, this is Exhibit I, Tab 12, 20 Schedule 48, was Internet information CIS World, which 21 is an Internet site for TMG. 22 MR. DIAMOND: Correct. 23 MR. THOMPSON: Is TMG known to you? 24 Have you encountered TMG in your work? 25 MR. DIAMOND: I have never 26 encountered them before. 27 MR. THOMPSON: Did you have in your 28 possession the TMG position paper or a precursor of 1678 DIAMOND, cr-ex (Thompson) 1 it -- 2 MR. DIAMOND: No, I did not. 3 MR. THOMPSON: -- when you did your 4 work? 5 Do you have -- well, I suppose you 6 have it now, you have seen Mr. Stephens evidence. 7 In this Internet site information, if 8 you would be good enough to turn up Exhibit I, Tab 12, 9 Schedule 48. 10 MR. DIAMOND: Is that the Internet 11 site, just the introduction of the Internet site? 12 MR. THOMPSON: Yes, it is, sir. At 13 pages 56 and 57. 14 There what I just wanted to attempt 15 to have you confirm, if you can, is on page 56 we see 16 in the first circle there the annual operating budget 17 divided into management information services and other 18 services, user department technology -- 19 MR. DIAMOND: No, I don't have that. 20 I'm sorry. 21 MR. FARRELL: Which page is it? 22 MR. THOMPSON: Pages 56 and 57. 23 MR. DIAMOND: I have it now. 24 Thank you. 25 MR. THOMPSON: I'm looking at the pie 26 chart at the top of the -- 27 MR. DIAMOND: Right. Right. 28 MR. THOMPSON: This divides an annual 1679 DIAMOND, cr-ex (Thompson) 1 operating budget between -- it's called "MIS charge 2 back" and then there are other user department 3 technology costs. Do you see that? 4 MR. DIAMOND: Yes, I do. 5 MR. THOMPSON: The "MIS", that's 6 management information systems. Is that your 7 understanding of what that means? 8 MR. DIAMOND: That would be my 9 understanding, correct. 10 MR. THOMPSON: That is 56 per cent of 11 the total. 12 Then if you go to the next page we 13 have again the pie chart. It is a summary of IT and 14 business office costs. That is dividing up the annual 15 budget into those two segments. Do you see that? 16 MR. DIAMOND: Yes. 17 MR. THOMPSON: The IT component is 18 24 per cent. 19 MR. DIAMOND: Yes. 20 MR. THOMPSON: So Mr. Stephens has 21 used that information to conclude that based on this 22 benchmark data in your web site that the -- 23 MR. DIAMOND: In TMG's web site. 24 Yes, in TMG's web site. 25 MR. THOMPSON: I'm sorry, I misspoke 26 myself. 27 MR. DIAMOND: Yes. 28 MR. THOMPSON: That the MIS-related 1680 DIAMOND, cr-ex (Thompson) 1 IT component of -- I'm sorry, the IT component of MIS 2 costs is about 13. -- it's 56 per cent of 24 per cent 3 of the total. Do you accept that as reasonable? 4 MR. DIAMOND: Come again on that. I 5 lost you. What am I to accept as reasonable, if you 6 could repeat that? 7 MR. THOMPSON: Twenty-four per cent 8 of the total annual budget is IT costs and the rest is 9 business office costs? 10 MR. DIAMOND: You know, I would not 11 accept that as reasonable. 12 MR. THOMPSON: That's what this chart 13 says. 14 MR. DIAMOND: Yes, that's what this 15 chart says. This is TMG's chart and I don't have a 16 basis for it. 17 MR. THOMPSON: I thought you put it 18 forward as some sort of benchmark information. 19 MR. DIAMOND: No. They had these 20 transactions costs at the bottom of the page that we 21 used to calculate it. 22 Again, it is just one piece of 23 evidence they had at the bottom. They had these IT -- 24 they had costs per transaction and that is what we used 25 to calculate our numbers. We did not use these 26 benchmarks at all. 27 MR. THOMPSON: Where are the numbers 28 that you used? 1681 DIAMOND, cr-ex (Thompson) 1 MR. DIAMOND: Well, if you look just 2 below that pie chart of summary of IT and business 3 office costs that we have identified IT charge back 4 range, treasury cashiering, meter reading, customer 5 service, and they had high and low ranges there. That 6 is what we used to calculate the costs, not these 7 benchmarks. Because I don't really have any confidence 8 or knowledge of these benchmarks so I don't know. 9 MR. THOMPSON: Are you talking about 10 the numbers that appear in the paragraph, .53 cents to 11 $1.19 per -- 12 MR. DIAMOND: Right. Those are the 13 ones that we were -- those and those below that are the 14 numbers that we used. 15 Again, they were just another piece 16 of anecdotal evidence that we compiled with the rest. 17 MR. THOMPSON: Could you either tell 18 us briefly or give us an undertaking as to show us how 19 you came up with the number that appears in your table? 20 MR. DIAMOND: Yes, I would be happy 21 to do that. 22 They give a range of these per 23 transaction costs, and in each case we took the most -- 24 the lowest cost, so that we took the cheapest. So that 25 we wouldn't be of taking a higher number we took the 26 lowest possible cost. That was a per transaction cost, 27 the way we read it, per account, per month. 28 Then you add up those numbers and 1682 DIAMOND, cr-ex (Thompson) 1 that gives you a monthly cost per transaction which we 2 were assuming, and maybe incorrectly, that it was per 3 billing, and then you multiplied that by 12. That's 4 how we came up with the number. 5 MR. THOMPSON: What number did you 6 use? 7 MR. DIAMOND: We used -- there was a 8 .53 cents there. We took the low range there. There 9 was this treasury cost that ranged from 10 cents to 40. 10 We took the lowest one. There was a meter reading of 11 between 30 cents and 45, that component. And we took 12 the customer service costs of between $1.00 and $3.00 13 and we took the lowest one, the $1.00, added those 14 together, multiplied by 12 and converted to Canadian 15 dollars. 16 MR. THOMPSON: Okay. Thank you for 17 helping us with -- 18 MR. DIAMOND: Yes. Now, I would say 19 if this is incorrect, if our assumptions are wrong 20 here, we could rerun the numbers without their numbers 21 in there. But this is based on the information from 22 the web site. That is how we figured it. 23 MR. THOMPSON: You didn't follow up 24 with TMG or make any inquiries of Mr. Galluzzi? 25 MR. DIAMOND: TMG, I had a hard time 26 finding those folks. I don't know. You know, they are 27 not one of the major consulting firms. 28 MR. THOMPSON: Well, you didn't put 1683 DIAMOND, cr-ex (Thompson) 1 anybody else's web site in your material. I guess -- 2 MR. DIAMOND: Well, no every -- 3 outsourcing information is not that readily available. 4 MR. THOMPSON: Well, there is 5 evidence in somebody else's filing about, I think it's 6 CENGAS, but you are probably not familiar with that. 7 Just on TMG, if you go to 8 Mr. Stephens' evidence, it's position paper is at 9 Tab 8. Have you reviewed this before this moment? 10 MR. DIAMOND: Not all the tabs, no. 11 I looked at the main body, looked at its conclusions. 12 MR. THOMPSON: Okay. So you haven't 13 looked at Tab 8 before? 14 MR. DIAMOND: What are you referring 15 to? I have looked at some parts of it. I'm not 16 intimately aware of every detail in Tab 8. 17 MR. THOMPSON: If you just go to 18 page 4 TMG lists some of its largest customers. Do you 19 have any reason to dispute that it is acting for some 20 large -- 21 MR. DIAMOND: Do you know what, I bet 22 you they are working in every one of those customers in 23 some capacity. 24 MR. THOMPSON: You never heard of 25 them? 26 MR. DIAMOND: That's correct. 27 Do you know their size, revenue, 28 because I don't, frankly. I'm just wondering. 1684 DIAMOND, cr-ex (Thompson) 1 MR. THOMPSON: Well, I'm sure it's in 2 there somewhere in Mr. Stephens -- 3 MR. DIAMOND: I couldn't find it. 4 MR. THOMPSON: You couldn't find it. 5 All right. Well, follow up. 6 Let me turn, if I might, just 7 briefly, to some of the calculations that appear in 8 IGUA 44. This is Exhibit I, Tab 12, Schedule 44. 9 Mr. Brett referenced you to this a moment ago. 10 If you go to page 2 you see the total 11 customer care costs for 1999 and then for 2000. 12 MR. DIAMOND: Yes. 13 MR. THOMPSON: Did you have any input 14 in preparing these or were these given to you by the 15 company? 16 MR. DIAMOND: These were given to me 17 by the company. 18 The only guidelines we gave them were 19 the FERC account numbers and said "Here is what we are 20 using. Please give us comparable numbers". 21 Again, when we originally did this a 22 couple of years ago it was for an internal study so, 23 you know, we took it on faith that these were the 24 correct numbers and the numbers -- the same with these. 25 So we gave them all our FERC account 26 numbers and they matched them up. 27 MR. THOMPSON: Okay. Turning 28 quickly, if I might, to the information in your table. 1685 DIAMOND, cr-ex (Thompson) 1 The conversion of U.S. dollars to 2 Canadian dollars, you have done that in both Table 1 3 and Table 2 at .69. 4 MR. DIAMOND: Yes, we were consistent 5 throughout. 6 MR. THOMPSON: Mr. Stephens, in his 7 testimony, questions the appropriateness of that. I 8 just wanted to draw your attention to that passage. 9 Mr. Janigan asked you some questions in this area. 10 --- Pause 11 MR. THOMPSON: At page 14 12 Mr. Stephens indicated he has researched the cost of 13 staff in Canada and the U.S. and says: 14 "In general a call centre clerk 15 in Canada will make the same 16 wage as a call centre clerk does 17 in the U.S." (As read) 18 And then goes on to suggest 19 that this: 20 "...using a conversion rate of 21 .69 is probably inappropriate 22 and the matter needs to be 23 studied further." (As read) 24 Would you share that view? 25 MR. DIAMOND: I would completely 26 disagree. Here is why, and I give you two examples. 27 Again, if you were looking at total 28 customer care costs, and let's say we conclude that it 1686 DIAMOND, cr-ex (Thompson) 1 is $10 Canadian to produce a bill and we wanted to sell 2 our services, again originally to another company in 3 the United States, using our method we would say that 4 we would need to get $6.90 reimbursed. Using another 5 method, if it was .8, we would need $8.00. 6 So if I were going out to Boston Gas 7 and they offered me $7.50, under your method you would 8 turn down the business because you would think you 9 would be losing 50 cents per customer, when in fact you 10 actually would be making 60 cents per customer. 11 So, I think -- again, I would stand 12 by that as the appropriate way to look at it. And, 13 again, if you really believe that: I'm leaving 14 tomorrow; I would be delighted to give you my Canadian 15 dollars and if you would exchange it at this market 16 basket rate. 17 MR. THOMPSON: Yes, but we are not 18 talking about the sales costs in this particular phase 19 of this case. We are talking about production costs. 20 MR. DIAMOND: Well, you are talking 21 about -- we are talking about comparing the costs of -- 22 a fixed cost that we know the number and translating 23 that to U.S. dollars. It's not a general market basket 24 of goods and services where housing prices may be 25 higher in one area and lower in another, or fruits and 26 vegetables that are higher in one area or lower in 27 another. This, we know the cost. We are saying 28 what -- how much does this service cost in the United 1687 1 States, or vice versa. So it's a very specific number 2 that we know. 3 MR. THOMPSON: Well, we obviously 4 have a disagreement on that, and we will argue it. 5 With respect to the sample size 6 Mr. Brett -- I think you conceded to Mr. Brett, if we 7 wanted to get a reasonable comparator to Consumers Gas, 8 we should bracket around one and a half million 9 customers. 10 MR. DIAMOND: Well, that's not what I 11 said. I said I would -- you know, I would like to get 12 the biggest sample size possible. But if you were 13 going to eliminate -- if you were going to eliminate 14 the low end, we ought to eliminate the super high end 15 and then bracket it, yes. 16 And then, if you bracket it, which -- 17 because I did anticipate that, I actually -- we ran the 18 numbers quickly and, again, Enbridge Consumers Gas 19 appears reasonable. 20 MR. THOMPSON: You have already run 21 the numbers? 22 MR. DIAMOND: Yes. The sample size 23 isn't too big. 24 MR. THOMPSON: I thought you 25 indicated to Mr. Brett you hadn't done it. 26 MR. DIAMOND: No, no. For the CIS 27 numbers. 28 MR. THOMPSON: Oh, I'm sorry. The 1688 1 customer care numbers -- 2 MR. DIAMOND: For the customer care 3 numbers, I haven't done that. 4 But the Chartwell Report, there 5 wasn't that many people in there. So if you bracket 6 the numbers, if you take people between one and two 7 million, you are limited to that bracket. Once again, 8 they are pretty favourable. They are reasonable. 9 Their costs are reasonable. 10 MR. THOMPSON: Let me just understand 11 the bracket that you have run. It's for what? 12 MR. DIAMOND: It was -- 13 MR. THOMPSON: Not for customer care? 14 MR. DIAMOND: It was for the -- the 15 Chartwell -- I shouldn't say -- the Chartwell is 16 misleading. 17 It would be the second set of numbers 18 for CIS costs. 19 MR. THOMPSON: CIS costs. Okay. 20 MR. DIAMOND: And took every 21 customer -- every utility in the study that had 22 customers greater than a million and less than two 23 million, you get that kind of bracketing that you folks 24 were suggesting. 25 MR. THOMPSON: Well, I will come to 26 these numbers in a second. 27 The undertaking you are doing for 28 Mr. Brett, with respect to -- 1689 1 MR. DIAMOND: No, that -- 2 MR. THOMPSON: -- is the 10 largest? 3 MR. DIAMOND: Right. That's 4 something entirely different. 5 MR. THOMPSON: All right. Thanks. 6 Okay. Let's turn, then, to the CIS 7 cost per customer. 8 And the sample here is some companies 9 from Chartwell? 10 MR. DIAMOND: Right. 11 MR. THOMPSON: And some others? 12 MR. DIAMOND: Correct. 13 MR. THOMPSON: And you have -- this 14 includes at least one Canadian company: Alberta Power? 15 MR. DIAMOND: Yes. 16 MR. THOMPSON: But, again, Union Gas 17 is excluded. 18 Is there any particular reason for 19 that? 20 MR. DIAMOND: I didn't have the data 21 available. 22 MR. THOMPSON: Well, you had what you 23 produced -- what somebody produced in IGUA 48. I 24 thought this was information you referenced. 25 If you go to Exhibit I, Tab 12, 26 Schedule 48, these are these Douglas Louth Associates 27 reports. 28 MR. DIAMOND: Right. 1690 1 MR. THOMPSON: Was that part of your 2 information? Or is that the company's? 3 MR. DIAMOND: No, that was 4 information we came across, and that was more for the 5 bench-marking study. We were looking for what -- 6 zeroing in on bench-marking studies. So that was 7 another set of data looking at bench-marking costs, as 8 opposed to CIS costs. 9 MR. THOMPSON: But, if you go to page 10 14 of this document, you will see what's being 11 referenced -- the previous pages are talking about this 12 Enlogix project -- and you will see that the budget 13 there is shown at $40 million. 14 So you were aware of that -- 15 MR. DIAMOND: Yes. 16 MR. THOMPSON: -- project? 17 So, was it excluded by omission? 18 MR. DIAMOND: Yes. 19 MR. THOMPSON: Now, with respect to 20 Florida Power, I couldn't find any information on that 21 company and what was produced. 22 Is there some? 23 MR. DIAMOND: Well, again, we used 24 two sources: we used the Chartwell Report; and then, 25 some of these folks we were just, in our office, were 26 aware of their CIS costs and then we -- and we got the 27 write-back and we got the documentation included in 28 there. 1691 1 MR. THOMPSON: Well, could you point 2 me to the document that references Florida Power? I 3 cannot find it, but I may be missing it. 4 MR. DIAMOND: I would have to get 5 back to you on that. I don't have it. 6 MR. THOMPSON: Well, is there a 7 document? Because we asked for production of all the 8 documents and there was nothing on -- is this anecdotal 9 and verbal? 10 MR. DIAMOND: I have to go back and 11 check. 12 MR. THOMPSON: All right. Would you 13 do so, please? 14 MR. DIAMOND: I would be happy to do 15 that. 16 MR. THOMPSON: And if there's any 17 paper pertaining to it, I would ask you to produce it. 18 MR. DIAMOND: Yes. 19 MR. THOMPSON: Thanks. 20 MR. FARRELL: Actually, for the 21 record, the interrogatory made no reference to Florida 22 Power. 23 MR. THOMPSON: Sorry. It made 24 reference to the sample, but, in any event -- 25 MS DESAI: Is that an undertaking? 26 Undertaking -- 27 THE PRESIDING MEMBER: Mr. Thompson, 28 just repeat for the record what you are looking for. 1692 1 MR. THOMPSON: Sorry? 2 THE PRESIDING MEMBER: What is the 3 undertaking so that we can have it on the record. 4 MR. THOMPSON: Yes. The undertaking, 5 it will be to provide any backup documents pertaining 6 to the information on Florida Power Corp. found at 7 Exhibit B2, Tab 7, Schedule 5. 8 MS DESAI: This is Undertaking J9.7. 9 UNDERTAKING NO. J9.7: 10 Mr. Diamond undertakes to 11 provide any backup documents 12 pertaining to the information on 13 Florida Power Corp. found at 14 Exhibit B2, Tab 7, Schedule 5 15 MR. THOMPSON: Now, were you 16 presenting this information as to its reasonableness or 17 just as information? 18 I had a discussion with Mr. Kent, 19 this morning -- I don't know if you heard it -- about 20 the Cincinnati Gas and Electric citation. 21 MR. DIAMOND: The reason for 22 preparing this was to look at the costs that Enbridge 23 Consumers incurred on a per customer basis for billing 24 their CIS and looking at how that compared to other 25 utility companies. 26 MR. THOMPSON: So it wasn't being 27 presented to support the conclusion that the costs were 28 reasonable, but just what others had spent? 1693 1 MR. DIAMOND: No. No, I would 2 disagree. I would say was Enbridge Consumers Gas costs 3 reasonable when you look at other large CIS projects. 4 That's what the purpose of this was for. 5 MR. THOMPSON: Well, then, why did 6 you put Cincinnati Gas in at 116 million Canadian when 7 the document that you have provided indicates the Board 8 only allowed 29 million U.S.? 9 MR. DIAMOND: Well, what the Board 10 allowed and what the actual costs are are two different 11 things. 12 The actual costs to build Cincinnati 13 Gas and Electric, I believe -- and correct me if I'm 14 wrong -- in the evidence, was $80 million. Converting 15 that to Canadian, you get the 116. So the costs are 16 the costs. I mean that's what it cost them to build 17 it. So what they allowed or didn't allow, I can't 18 comment on that; I have no information there. But what 19 it did cost was $80 million. Convert that and that's 20 where we came up with the number. 21 MR. THOMPSON: Well, you do have 22 information as to what they did allow because it's at 23 IGUA Tab 12, Schedule 46, page 6. 24 MR. DIAMOND: Right. I know that's 25 what they allowed -- 26 MR. FARRELL: Excuse me, Mr. Diamond. 27 This is now becoming a debate, just 28 as it was with Mr. Kent. Mr. Thompson is quite free to 1694 1 say, in argument, that this shouldn't be -- this number 2 should be different because the allowed costs are what 3 you look at but not the costs as incurred. 4 Mr. Diamond, and Mr. Kent before him, 5 had the different view of the costs incurred and so, I 6 think that's about it. 7 MR. THOMPSON: Fine. I will move on. 8 The PSC of Colorado, again, is an 9 example that did not come from Chartwell -- and the 10 reference to that is at Exhibit I, Tab 12, Schedule 46, 11 page 7. 12 Turn that up, please, Mr. Diamond. 13 --- Pause 14 MR. DIAMOND: Yes. 15 MR. THOMPSON: And you put that in 16 your table at 76 million Canadian, which, I assume, is 17 a gross-up of the 52.3 million that appears on 18 page 1 -- 19 MR. DIAMOND: That's correct. 20 MR. THOMPSON: -- of this exhibit? 21 But, again, in this decision, none of 22 that, in this case, was allowed as being reasonable. 23 The company was simply allowed to record it, pending 24 further regulatory review. 25 MR. DIAMOND: Well, I just -- I went 26 by the company pointed out that the cost of their CIS 27 was $52 million. So the costs are the costs, and 28 that's what we used. 1695 1 Now, again, what they allowed and 2 didn't allow, I have no opinion and judgment on that. 3 It's just, "What does it cost to a build a system?" 4 That's what it cost them. 5 MR. THOMPSON: Now, in the Chartwell 6 Report -- if you would be good enough to turn up -- the 7 quickest way to do this is if you turn up Exhibit I25, 8 Schedule 46. This is Mr. Stephens' responses to the 9 company's interrogatories. 10 MR. FARRELL: I don't know whether 11 Mr. Diamond has that. 12 MR. DIAMOND: I haven't seen that. 13 MR. THOMPSON: I wanted to refer to 14 the response to Question 18. 15 MR. FARRELL: We are getting a copy 16 for him. 17 MR. DIAMOND: You can just give me 18 the highlights, maybe. 19 MR. FARRELL: I want you to have it. 20 MR. DIAMOND: In this little 21 interlude, let me say that we could go into every one 22 of these companies and say why this or that doesn't 23 apply, because it is very hard to compare these. Every 24 CIS is different. Every outsourcing arrangement is 25 different. So, you know, we could be here a while. I 26 would be happy to do that. All I am saying is, if you 27 look in total, and you look at reasonableness, that is 28 what I have been trying to do. 1696 1 MR. THOMPSON: All right. I just 2 want to understand -- first of all, you have 3 included -- 4 MR. FARRELL: Could we have the 5 reference again, please? 6 MR. THOMPSON: Yes, I'm sorry. It is 7 Exhibit I25, Schedule 46, pages 8 and 9. I am 8 referencing the table on page 9. 9 MR. DIAMOND: These don't have 10 exhibit numbers on them. 11 MR. FARRELL: It is the first 12 document, Mr. Diamond. 13 MR. DIAMOND: All right. 14 MR. THOMPSON: The page numbers are 15 at the bottom of the page. 16 MR. DIAMOND: All right. Page 9, did 17 you say? 18 MR. THOMPSON: Yes. 19 Mr. Stephens was asked to please 20 explain his decision to use the TMG's rule of thumb 21 cost of CIS system's $40 per customer, which he 22 referenced and drew from the TMG report, rather than 23 data from the Chartwell CIS report referenced in 24 Mr. Diamond's evidence. 25 So we went back and we looked at the 26 Chartwell report, and what you see on page 9 are the 27 companies in the Chartwell report who have more than 28 one million customers. 1697 1 Would you accept that, subject to 2 check, Mr. Diamond? 3 MR. DIAMOND: I would accept that, 4 subject to check. 5 MR. THOMPSON: If you look at the 6 first one, central and southwest services, in Chartwell 7 they reported project costs in a range, from 8 $15 million to $75 million, and in your chart you have 9 just converted the upper end of that range. Correct? 10 MR. DIAMOND: I would have to check 11 that. 12 MR. THOMPSON: It is at the 13 third-last bottom of your chart on page 7. 14 MR. DIAMOND: Okay. 15 MR. THOMPSON: Is there any 16 particular reason why you did that? 17 MR. DIAMOND: I would have to go and 18 ask our statisticians why they did that. 19 MR. THOMPSON: All right. Then there 20 are three other companies that reported in Chartwell on 21 an anonymous basis, all in excess of a million 22 customers, and for some reason you excluded those from 23 your sample, and even in the listing of the additional 24 companies in response to one of the IGUA 25 interrogatories. Is there some reason why those were 26 excluded? 27 MR. DIAMOND: Because they were 28 anonymous. 1698 1 MR. THOMPSON: Does that make the 2 data not reportable? 3 MR. DIAMOND: I can check. I would 4 have to go back and verify. 5 MR. THOMPSON: I can tell you that 6 they are in the book on the pages that are under 7 "anonymous", and we go on in a similar amount of detail 8 as all of the other pages. 9 In any event, those were excluded. 10 Did you do this or was this some 11 statistician in your -- 12 MR. DIAMOND: We have analysts that 13 plough through all of the data. 14 MR. THOMPSON: But the 15 exclusion -- the selection process, was that 16 administered by you or an analyst? 17 MR. DIAMOND: Our analyst looked at 18 it, looked at what was normal distribution of data, 19 excluded high end, low end -- people who are more 20 skilled in this than I am, in the statistics. 21 MR. THOMPSON: Okay, but would you 22 take, subject to check, that the results of taking the 23 companies in Chartwell over a million customers are as 24 shown in Mr. Stephens' table? 25 MR. DIAMOND: I would, but, again, if 26 you are going to be selective, I would probably want to 27 exclude those that are outside a certain band. If you 28 are going to exclude the low end of the band, I think 1699 1 you would probably want to get another statistician who 2 would probably want to exclude the high end of the 3 band. 4 MR. THOMPSON: All right. The band 5 is going here from 1.0 million customers to 2.3. Is 6 that too wide, as far as you are concerned? 7 MR. DIAMOND: I am just saying 8 that -- yes, because I think to add -- any of these 9 companies that are billing a million and a half 10 customers could probably bill 2.3 at a fairly small 11 incremental cost. 12 MR. THOMPSON: So what do you suggest 13 the band ought to be? 14 MR. DIAMOND: I am thinking here, 15 looking at this Chartwell data, plus those that we 16 have, that if you took the band of 1 million to 17 1.7 million, that might be a more appropriate band. 18 MR. THOMPSON: Okay, that's fine. 19 Finally, with respect to the 20 outsourcing information that you referenced -- and 21 Mr. Brett took you through this -- you concede that 22 that is largely anecdotal? 23 MR. DIAMOND: I would be happy to 24 concede that. 25 MR. THOMPSON: What do you mean by 26 that? 27 MR. DIAMOND: I mean if there is not 28 a large database, like in the original thing, where you 1700 1 can just go look at all of these outsourcing 2 arrangements and make sure you are comparing apples to 3 apples, that they are outsourcing exactly the same 4 thing. 5 Our firm has an outsourcing group, 6 and I know that when they go in to help companies 7 outsource, they have a team of people who come in and 8 spend months looking at outsourcing arrangements. So 9 it is very hard to compare apples to apples in 10 outsourcing, and that is why I referred to it as more 11 anecdotal than hard data that you could look at, making 12 sure that you are getting precise apples-to-apples 13 comparisons. That is what I meant by anecdotal. 14 MR. THOMPSON: Would you agree that 15 all of the references, except the CIS World site, point 16 to the Enlogix solution? 17 MR. DIAMOND: What I would concede is 18 that all of the data we looked at referenced 19 outsourcing costs and "Here is what the outsourcing 20 costs were". 21 MR. THOMPSON: All the data is 22 talking about the Enlogix solution. The Douglas Louth 23 reports, both of them, talk about -- 24 Are you familiar with those reports? 25 MR. DIAMOND: Yes, I am. 26 MR. THOMPSON: Do you agree that all 27 of them focus on the Enlogix solution? 28 MR. DIAMOND: Again, we used these 1701 1 reports because each one mentions outsourcing numbers 2 in there and we were trying to calculate what are some 3 outsourcing numbers. So that is how we used this data. 4 MR. THOMPSON: Thank you. Those are 5 my questions. 6 THE PRESIDING MEMBER: Thank you, 7 Mr. Thompson. 8 Does Board Staff have any questions? 9 MS DESAI: No, thank you. 10 THE PRESIDING MEMBER: Mr. Farrell, 11 the Board doesn't have any questions. Do you have any 12 re-examination? 13 MR. FARRELL: I have no 14 re-examination; thank you, Mr. Chair. 15 THE PRESIDING MEMBER: Thank you very 16 much, Mr. Diamond. You are excused. Have a good trip. 17 MR. DIAMOND: Thank you. 18 MR. FARRELL: Mr. Cass has the next 19 panel, Mr. Chair, so perhaps it would be convenient to 20 adjourn now and let them come in and set up. 21 THE PRESIDING MEMBER: Yes, it 22 would be. 23 Let's break for 20 minutes. We will 24 return at 20 to four. 25 --- Upon recessing at 1518 26 --- Upon resuming at 1541 27 THE PRESIDING MEMBER: Mr. Cass. 28 MR. CASS: Thank you, Mr. Chairman. 1702 DIAMOND 1 By way of one preliminary matter, the 2 response to undertaking J6.3 has just come into the 3 room. It has not been passed around yet, but perhaps 4 that could be done now. 5 --- Pause 6 MR. CASS: Mr. Chairman, we have here 7 the witness panel to address Issue 4.3. This is the 8 cost of capital issue that has been described as 9 consequences of the E.B.O. 179-14/15 decision. 10 The witnesses are, closest to the 11 Board, Mr. Brad Boyle, and also Mr. Bourke. 12 Mr. Bourke has been sworn already, 13 but perhaps Mr. Boyle could be sworn now. 14 SWORN: BRADLEY BOYLE 15 PREVIOUSLY SWORN: ROBERT BOURKE 16 EXAMINATION-IN-CHIEF 17 MR. CASS: Mr. Boyle, I understand 18 that you are Manager, Corporate Finance, of Enbridge 19 Inc. Is that correct? 20 MR. BOYLE: Yes, it is. 21 MR. CASS: Panel, generally, you are 22 responsible for the company's evidence, including 23 interrogatory responses on the cost of capital and on 24 the fiscal 2000 recovery of deferred taxes. 25 Is that correct? 26 MR. BOYLE: Yes, it is. 27 MR. BOURKE: Correct. 28 MR. CASS: And was that evidence 1703 BOYLE/BOURKE, in-ch (Cass) 1 prepared by you or under your direction or control? 2 MR. BOYLE: Yes, it was. 3 MR. BOURKE: Correct. 4 MR. CASS: Are there any corrections 5 to your evidence? 6 MR. BOYLE: No, there are not. 7 MR. BOURKE: No, I have none. 8 MR. CASS: Mr. Bourke, I understand 9 that you have a correction you would like to make to 10 some other evidence. Is that accurate? 11 MR. BOURKE: That is correct, 12 Mr. Cass. 13 In undertaking Exhibit J3.3, which 14 asked for the impact of the $10 million O&M reduction 15 and the translation into a change on return on equity, 16 the response provided gave the change in the overall 17 indicated return. 18 I would like to correct this response 19 to state that a $10 million O&M reduction which would 20 result after tax and a $5.65 million increase in net 21 income would represent a .6 per cent increase based on 22 common equity of $993 million, which is the common 23 equity level in our capital structure in Exhibit M1. 24 MR. CASS: Thank you, Mr. Bourke. 25 To come back to the evidence of this 26 panel, is the evidence accurate to the best of your 27 knowledge and belief? 28 MR. BOYLE: Yes, it is. 1704 BOYLE/BOURKE, in-ch (Cass) 1 MR. CASS: Mr. Boyle, in relation to 2 the issue with respect to fiscal 2000 deferred tax 3 recovery, can you confirm for the Board what the taxes 4 payable are? 5 MR. BOYLE: Yes. Mr. Bourke in his 6 evidence indicated that there is an approximate 7 increase in taxes payable as a result of the 8 deregulation of the rentals program, of $11.9 million 9 after tax. 10 I can point to some examples where 11 you can confirm that calculation. 12 In E.B.R.O. 497, at Exhibit I, 13 Tab 12, Schedule 21, page 4 of 9 -- 14 MR. CASS: I think Mr. Ladanyi is 15 going to pass that around, Mr. Boyle. Perhaps we could 16 just wait for everyone to have it. 17 MR. BOYLE: Sure. 18 --- Pause 19 MS DESAI: Why don't we mark this as 20 Exhibit K9.2. 21 EXHIBIT NO. K9.2: Document 22 entitled "HVAC Coalition 23 Interrogatory #21: Filed 24 1998-04-17, EBRO 497, Exhibit I, 25 Tab 12, Schedule 21, page 4 26 of 9" 27 MR. CASS: Carry on, please, 28 Mr. Boyle. 1705 BOYLE/BOURKE, in-ch (Cass) 1 MR. BOYLE: Exhibit I, Tab 12, 2 Schedule 21, page 4 of 9, is the rate of return of the 3 rental program forecast for the 1999 test year. 4 In column 2, item 1.4, it shows the 5 income tax provision of $7.75 million. 6 Then our forecast for the taxes 7 payable in the 2000 test year can be found in E.B.R.O. 8 497-01 or the E.B.O. 179-14/15 hearing evidence at 9 Exhibit D, Section 5.16. 10 MS DESAI: K9.3 to the second 11 exhibit. 12 EXHIBIT NO. K9.3: Document 13 entitled "Consumers' Association 14 of Canada Interrogatory #16, 15 Updated: 1998-11-27, EBRO 16 497-01, EBO 179-14, EBO 179-15, 17 Exhibit D, Section 5.16, page 1 18 of 14 19 MR. BOYLE: That's Exhibit D, 20 Section 5.16, page 1 of 14 of that exhibit. 21 This is the forecast rate of return 22 for the rental program on a wind-down unregulated basis 23 for the 2000 year. In column 1, item 1.4 shows a tax 24 provision of $19.7 million. 25 That represents the taxes that are 26 forecast to be payable by the company as a result of 27 the deregulation of the rental program and the 28 wind-down, and in effect the deferred taxes that are 1706 BOYLE/BOURKE, in-ch (Cass) 1 kicking in that would be payable in that year. 2 The difference between the 3 $19.7 million and the $7.75 million in the 1999 year 4 represents the increase in taxes payable as a result of 5 the wind-down, if you will. 6 That is the $11.9 million, roughly, 7 that is identified in Mr. Bourke's evidence in D1, 8 Tab 1, Schedule 1. 9 MR. CASS: Thank you, Mr. Boyle. 10 Those are my questions of the panel, 11 Mr. Chairman. 12 THE PRESIDING MEMBER: Thank you, 13 Mr. Cass. 14 Who would like to go first? 15 Mr. Brett. 16 MR. BRETT: Thank you, Mr. Chairman. 17 CROSS-EXAMINATION 18 MR. BRETT: Good afternoon, panel. 19 Could I ask you to turn up, 20 Mr. Boyle, Exhibit E, Tab 1, Schedule 1. That is the 21 cost of capital schedule. I want to ask you a few 22 questions on cost of capital first, and then I will go 23 back to this deferred tax issue that we have just 24 heard. 25 MR. BOYLE: Sorry, Mr. Brett, that 26 was Exhibit E3? 27 MR. BRETT: Yes, E3, Tab 1, 28 Schedule 1. 1707 BOYLE/BOURKE, cr-ex (Brett) 1 MR. BOYLE: Thank you. 2 MR. BRETT: The initial white page. 3 MR. BOYLE: The date on that 4 being...? 5 MR. BRETT: The date on that being 6 the 22nd of February of 1999. It's the original 7 filing. 8 MR. BOYLE: Thank you. Yes, I have 9 that. 10 MR. BRETT: I take it that that shows 11 your forecast capital structure for the test year pre 12 the decision to transfer the rental program out. 13 Is that correct? 14 MR. BOYLE: Yes, it does. 15 MR. BRETT: On that page, I notice 16 under line 1, long- and medium-term debt, you have 17 $1.986 billion, and that accounts for 58.3 per cent of 18 your capital structure. Correct? 19 MR. BOYLE: Yes. 20 MR. BRETT: Then your short-term 21 debt, on line 2, is $126 million. These are rough 22 numbers. And that accounts for 3.7 per cent of your 23 capital structure. 24 MR. BOYLE: Yes, it does. 25 MR. BRETT: And then the balance is 26 line 4 -- that totals 62 per cent. Then the balance is 27 a combination of line 4, preference shares at 3 per 28 cent roughly, and common equity at 35 per cent. 1708 BOYLE/BOURKE, cr-ex (Brett) 1 Is that correct? 2 MR. BOYLE: Yes. 3 MR. BRETT: Under column 4, in line 4 6, the overall cost of capital is 8.57 per cent; 5 correct? 6 MR. BOYLE: Yes. 7 MR. BRETT: On a total rate base, 8 which is found also on line 6, of $3.4 billion. 9 MR. BOYLE: Correct. 10 MR. BRETT: If we turn over to the 11 blue sheets, that is Exhibit E3, Tab 1, Schedule 1 12 revised, and look at those same columns -- the blue 13 sheet, first of all, would show your capital structure 14 with the effect of the transfer of the rental program 15 to an affiliate incorporated therein. 16 Right? 17 MR. BOYLE: I believe so. Let me 18 just check. 19 --- Pause 20 MR. BRETT: This was filed on the 21 4th of June of 1999. 22 MR. BOYLE: Yes. I am just trying to 23 confirm if there were other changes that were also 24 reflected in that exhibit, in addition to simply the 25 rentals change. 26 I believe there are some other 27 changes that are also reflected in that statement. 28 MR. BRETT: Could you tell us what 1709 BOYLE/BOURKE, cr-ex (Brett) 1 other changes are reflected in that, in addition to 2 the -- first of all, the largest single change by far, 3 I take it, would be the spinning off of the rental 4 program. 5 MR. BOYLE: Yes, that is certainly 6 the case. 7 MR. BRETT: And any other changes 8 that are also reflected would be very minor in 9 comparison? 10 MR. BOYLE: I think relatively, yes. 11 MR. BRETT: Can you tell me what 12 those are? 13 MR. BOURKE: If I might, Mr. Brett, I 14 have a limited information source here in front of me, 15 but I do know that we updated gas costs at that time. 16 That was the impact related to the recovery of the 17 deferred tax at that time. 18 I show revisions to gas sales and 19 T-service that would have been reflective, I believe, 20 of a volumetric consideration at that time. 21 There were other changes that 22 happened between February 22nd and the June 4th filing 23 of evidence other than just the removal of the rental 24 program. 25 MR. BRETT: Right. But the major 26 change in terms of its impact on rate base and capital 27 structure would be the removal of the rental program. 28 MR. BOYLE: Yes, I think that is 1710 BOYLE/BOURKE, cr-ex (Brett) 1 fair. 2 MR. BRETT: I will come back to the 3 question of these exceptions in a moment. 4 If we look at the blue page and look 5 at the new capital structure, the post rental 6 separation capital structure, you now have long- and 7 medium-term debt of $1.86 billion. And that accounts 8 now for 65.8 per cent of the total capital structure. 9 Is that correct? 10 MR. BOYLE: That is correct. We had 11 a long-term debt issue planned that we pulled as a 12 result of the decision to remove rentals from 13 regulation. 14 So we revised our financing plans and 15 reduced the amount of long-term debt to the extent we 16 could. 17 MR. BRETT: Yes. But nonetheless, 18 the percentage of long-term debt in your capital 19 structure has still increased from 58.3 per cent to 20 65.8 per cent. Right? 21 MR. BOYLE: The percentage has 22 increased slightly. The raw amount has come down, yes. 23 MR. BRETT: Just skipping over for a 24 moment the short-term debt, you have a slight increase 25 in preference shares. You have 102.7 in preference 26 shares, for a percentage of 3.63 of your capital 27 structure. Right? 28 MR. BOYLE: Yes. 1711 BOYLE/BOURKE, cr-ex (Brett) 1 MR. BRETT: And common equity remains 2 the same proportion, although it is reduced. It is now 3 991.7 and it still is 35 per cent of your capital 4 structure. 5 MR. BOYLE: Yes, that's correct. 6 MR. BRETT: Going to short-term debt, 7 you no longer have any short-term debt as such. Your 8 short-term debt is shown as a negative number, 127.7. 9 I take it that means effectively that you have cash on 10 hand of 127.7. 11 MR. BOYLE: On an average of averages 12 basis, yes. 13 MR. BRETT: Right. You show that as 14 a minus, a bracketed 4.51 per cent of your capital 15 structure. In other words, if you add up the 35 per 16 cent for equity, the 65.8 per cent for long-term debt, 17 add the 3.6 for preference shares, and deduct the 4.51 18 for short-term debt, you get 100 per cent. 19 I hope that's right. 20 MR. BOYLE: Yes, the short-term debt 21 is the plug, if you will, consistent with the way we 22 have always looked at capital structure for the 23 utility. 24 THE PRESIDING MEMBER: Mr. Boyle, you 25 will have to speak a little louder, please, or get 26 closer to the mike. 27 MR. BOYLE: Sorry about that. 28 MR. BRETT: As a result of that 1712 BOYLE/BOURKE, cr-ex (Brett) 1 change in proportions, I see, if we go back down to 2 line 6, the rate base -- first of all, because of the 3 transfer out of the rental program in large part, the 4 rate base is reduced from $3.4 billion to 2.83. 5 Correct? 6 MR. BOYLE: Yes. 7 MR. BRETT: And the blended return on 8 capital, on all forms of capital, if we compare the 9 white sheet and the blue sheet, on the blue sheet we 10 are looking at now it is 8.9 per cent, and on the white 11 sheet it was 8.57 per cent. 12 So, ballpark, the overall blended 13 cost of capital forecast has increased by 33 basis 14 points from the previous filing. 15 Is that fair? 16 MR. BOYLE: Yes, on those two 17 exhibits. I believe there is a subsequent schedule at 18 N1, which shows it 8.88. But it's a very similar 19 level. 20 MR. BRETT: At 8.88. Okay, I take 21 that. I recall that. 22 If I use that comparison -- and I 23 will just use my original comparison of 8.57 and 8.90, 24 because I am more familiar with the numbers and I am a 25 very simplistic mathematician. I take the increase in 26 the overall forecasted cost of capital to be the .33 27 basis points times -- in other words, .33 per cent 28 times the new rate base of 2833.4, $2,833,000,000, or 1713 BOYLE/BOURKE, cr-ex (Brett) 1 about $9.5 million. 2 Is that fair? 3 MR. BOYLE: I calculate it at 4 $9.35 million. 5 MR. BRETT: All right. That's close 6 enough. 7 That is an after-tax figure or a 8 pre-tax figure effectively? 9 MR. BOYLE: No. It relates to the 10 debt component, and it essentially would be a pre-tax 11 figure. It is a bit of a blended figure but -- 12 MR. BRETT: Precisely. There is a 13 portion of equity and a portion of debt in it, but 14 effectively the amount is $9.35 million. 15 Would you not agree with me that that 16 does not -- what that says, I think, is that one of the 17 consequences of transferring out the rental program to 18 an affiliate is an increase in the total capital cost 19 in the rate -- the cost of capital. It is an increase 20 in the blended cost of capital for the ratepayers of 21 .33 or of about $9.5 million, .33 per cent. 22 Does that not mean in effect that the 23 ratepayers are being harmed as a result of this 24 transfer? 25 MR. BOYLE: I don't believe so. If 26 you focus on the fact of the financing that's required 27 to support the utility operations, the long-term debt 28 level that is identified there is required for the 1714 BOYLE/BOURKE, cr-ex (Brett) 1 utility operations. 2 On an average of averages basis, we 3 are slightly up cash for the year because of the 4 lumpiness of the flows associated with the deregulation 5 of the rental program. We focused on financing the 6 utility as cost effectively as we can for the utility 7 operation's business. 8 In order to do that, we need 9 long-term debt, some short-term debt, the preference 10 shares and the common equity. 11 It is from time to time lumpy, and in 12 any year we are often up cash for a period of time, 13 typically a relatively short period of time where we 14 are in an investment position. 15 MR. BRETT: When you say up cash, if 16 I can just interrupt, you mean that you find yourself 17 with a block of cash for a short period of time until 18 you have an opportunity to invest that in some fashion 19 or another. 20 MR. BOYLE: That's right, until the 21 capital expenditures are required or other cash 22 requirements for seasonality of gas in storage or the 23 like. 24 You can't realistically be net zero 25 cash every day, as much as we try to do that. Because 26 of market conditions in terms of when you issue 27 long-term debt or preferred shares and the lumpiness 28 that is associated with that relative to a smooth 1715 BOYLE/BOURKE, cr-ex (Brett) 1 profile you try to develop for your short-term debt 2 maturities. There are generally periods of time when 3 you are in an investment position. 4 It is typically not a very long 5 period of time. This is a little bit unusual -- 6 MR. BRETT: Typically, how long would 7 it be? 8 MR. BOYLE: It could be a few days or 9 a month or so. 10 MR. BRETT: Right. 11 MR. BOYLE: This is a little bit of 12 an unusual situation because of the lumpiness of the 13 deregulation of rentals. However, by the end of the 14 fiscal year we do require all of that long-term debt 15 for the utility, and we are in a net borrowing level 16 for short-term debt requirements. 17 We have looked at this, and as I said 18 earlier we adjusted our financing plans for the 19 long-term and medium-term debt to reduce the issuance 20 that we had planned to finance the utility as 21 effectively as we possibly could, given the lumpiness 22 of the flows that are occurring in the test year. 23 That will disappear quite shortly as 24 we continue to grow the utility and as well as other 25 debt maturities come due which allow us to get back to 26 a more traditional level. 27 Having said that, there always is 28 lumpiness in that process, and a short-term unfunded 1716 BOYLE/BOURKE, cr-ex (Brett) 1 debt level will vary from year to year depending on 2 debt maturity levels, funding requirements and the 3 timing of market opportunities. 4 MR. BRETT: I take it you have no 5 long-term debt maturity coming due in the next 6 12 months. 7 MR. BOYLE: We do, and that is 8 reflected in this schedule, on an average of averages 9 basis. 10 MR. BRETT: All right, I understand. 11 MR. BOYLE: And we have a -- 12 MR. BRETT: And you mentioned you 13 deferred issuing $120 million in either notes or 14 long-term debt. 15 MR. BOYLE: That's correct. 16 MR. BRETT: Could you just recall -- 17 I am not sure; this may be in the evidence, but I am 18 not recalling it. 19 The consideration flowing from the 20 affiliate, from Consumersfirst, to the utility in 21 return for the rental program is what? 22 MR. BOYLE: It is structured, I 23 believe, as a tax-free rollover which involves 24 preferred shares. 25 MR. BRETT: Preferred shares and 26 cash? 27 MR. BOYLE: Not initially. 28 MR. BRETT: So it is entirely 1717 BOYLE/BOURKE, cr-ex (Brett) 1 preferred stock initially? 2 MR. BOYLE: Initially, I would say 3 that is typically the case in a rollover. 4 MR. BRETT: And it is at net book 5 value? 6 MR. BOYLE: I believe that is the 7 current forecast, yes. 8 MR. BRETT: This is going to happen 9 on the 1st of October of 1999? 10 MR. BOYLE: Yes. 11 MR. BRETT: Is there anything in the 12 evidence about this? I don't recall seeing anything. 13 MR. BOYLE: I did refer in my 14 evidence -- 15 MR. BRETT: Do you recall the amount 16 offhand of the net book value? 17 MR. BOYLE: I am just checking my 18 evidence. 19 MR. BRETT: It could be here, but it 20 may have been something that -- as I recall, it was 21 fairly silent on the particulars of the transaction. 22 --- Pause 23 MR. BOYLE: I don't believe there are 24 any details on that, no. 25 MR. BRETT: At D1, Tab 2, Schedule 2, 26 in question and answer 6 you speak of: 27 "Incremental proceeds received 28 from the unbundling of rentals 1718 BOYLE/BOURKE, cr-ex (Brett) 1 will require a short-term grid 2 note loan of approximately 3 $308 million from Enbridge 4 Consumers Gas to Enbridge Inc. 5 at market rates. This loan is 6 related to the use of proceeds 7 from the transfer to Enbridge 8 Services of the non-regulated 9 ancillary programs." (As read) 10 So that is going to take place 11 outside of the regulated utility. That is the utility 12 company lending money back to Enbridge Inc. 13 MR. BOYLE: That's right. That is 14 essentially because of the situation that it is up 15 cash, if you will, and needs to invest the proceeds. 16 So it will use part of the proceeds 17 to invest in a loan to Enbridge Inc. at market rates. 18 MR. BRETT: So in other words, the 19 $126 million is part of what is loaned back to Enbridge 20 at market rates, or it is the residual remaining with 21 the utility after the loan is made? 22 MR. BOYLE: In effect, it is part of 23 it because the $308 million is part of what they are up 24 cash, what Consumers Gas is up cash, in terms of the 25 amount. 26 MR. BRETT: Consumers Gas as a 27 utility? 28 MR. BOYLE: Yes, the utility. 1719 BOYLE/BOURKE, cr-ex (Brett) 1 MR. BRETT: The regulated utility. 2 MR. BOYLE: The regulated utility is 3 up cash by the $126 million or $127 million, on an 4 averages of averages basis. 5 On the initial date, the loan will be 6 approximately $308 million back. 7 MR. BRETT: I see what you are 8 saying. 9 So initially they are going to take 10 preferred shares and redeem them for cash, to the 11 extent of $300-odd million immediately, and then hold 12 the balance as preferred shares. 13 Is that right? 14 MR. BOYLE: There would likely be an 15 even larger amount redeemed for cash and part of the 16 proceeds will be used to pay down short-term debt, to 17 the extent feasible. 18 MR. BRETT: Short-term utility 19 debt -- 20 MR. BOYLE: Yes. 21 MR. BRETT: -- being paid down to 22 zero and then -- 23 MR. BOYLE: Yes. And part of it will 24 be used to return equity to the shareholder because 25 there is no longer an equity base required to support 26 the asset level. 27 MR. BRETT: Is it possible for you to 28 just -- do you have those numbers in your head, at the 1720 BOYLE/BOURKE, cr-ex (Brett) 1 moment? Or is it possible for you to just set those 2 out briefly, in an undertaking, just to give us what 3 that is? 4 MR. BOYLE: I have roughly -- 5 MR. BRETT: In other words, how much 6 would go -- could you just give me those proportions? 7 How much would go to -- if you go back to the 8 shareholder -- 9 MR. BOYLE: The book value of the 10 assets transferred is roughly $740 million. 11 MR. BRETT: Okay. 12 MR. BOYLE: Of which approximately 13 $230 million will be returned as a dividend. 14 MR. BRETT: Okay. 15 MR. BOYLE: Which is basically the 16 equity supporting the assets. Approximately 300 17 million, 308 million, will be loaned to Enbridge Inc. 18 and the balance, approximately 200 million, will be 19 used to retire short-term borrowings. 20 MR. BRETT: Okay. And the 126, 21 viewed in that context, is essentially part of the 22 200 million? 23 MR. BOYLE: No. 24 MR. BRETT: The 126, I understand, is 25 an average of averages and what you -- but the numbers 26 you have given me is what happens immediately on the 27 consummation -- 28 MR. BOYLE: That's right. The 1721 BOYLE/BOURKE, cr-ex (Brett) 1 126 would, in effect, be part of the investment amount 2 which, in this case, Consumers will invest in a loan to 3 Enbridge Inc. 4 MR. BRETT: I see. All right. So 5 300 is sort of -- 300 is sort of the real -- it's the 6 balancing number? 7 MR. BOYLE: That's right. It's the 8 excess cash that Consumers Gas cannot use immediately 9 to effectively retire debt. 10 MR. BRETT: Now, you have 11 outstanding -- if we just go back to the -- I have a 12 couple of questions for you simply on, for want of a 13 better word, what your options might have been -- your 14 other options might have been, rather than effectively 15 increasing your overall weighted cost of capital as a 16 result of transferring out the rental. 17 Would you have been able, for 18 example, to simply stagger that payment schedule in 19 some fashion so that all that cash wasn't coming in at 20 once? 21 MR. BOYLE: We certainly could. 22 That's not going to affect the utility operations which 23 are in your schedule. It's the removal of the rental 24 business from regulated utility operations that causes 25 the regulated capital structure to be up cash for the 26 temporary period of time on an average of averages 27 basis of 127.7 million. 28 MR. BRETT: So, are you saying it was 1722 BOYLE/BOURKE, cr-ex (Brett) 1 a two-step process? You first remove the rental 2 program from the utility operations subsequent to 3 179-14/15 and then you transferred it out to the 4 affiliate? Or -- 5 MR. BOYLE: We have not transferred 6 it. The proposal, at this point, is to do so. 7 MR. BRETT: So it resides, at the 8 moment, in non-utility operations? Or does it 9 reside -- 10 MR. BOYLE: Well, we are still in 11 1999, I guess. 12 MR. BRETT: Well, that's right. So 13 it's a direct transaction -- put another way: What's 14 going to happen is the rental program is going to go 15 from being a part of utility operations directly to 16 being a loan by the affiliate. Correct? 17 MR. BOYLE: Correct. But the reason 18 that we have the funding lumpiness in 2000, from a 19 utility perspective, is as a result of the removal from 20 regulation, not the transfer to an affiliate. 21 MR. BRETT: Well, the two things are 22 the same, though. I mean what you are telling me is if 23 you hadn't transferred to the affiliate and you 24 transferred in the non-utility operations, you would 25 still have the same impact. Is that it? 26 MR. BOYLE: That's correct. 27 MR. BRETT: But you are transferring 28 it to an affiliate; you are not transferring -- 1723 BOYLE/BOURKE, cr-ex (Brett) 1 MR. BOYLE: That's our plan. 2 MR. BRETT: -- it to the non-utility 3 operation? 4 You could have transferred it to the 5 non-utility operation, I take it, had you wished? 6 MR. BOYLE: Right. But as I said, 7 the effect would have been identical to utility capital 8 structure. 9 MR. BRETT: Well, no, the effect 10 would have been, if I heard you right, by virtue of 11 transferring it out of the utility operations, you 12 would have had the same effect on the utility capital 13 structure as the sale. Is that what you are -- maybe I 14 just -- 15 MR. BOYLE: No. This schedule from 16 June 4th would have been identical. 17 MR. BRETT: Yes, all right. 18 MR. BOYLE: It would not have changed 19 whether we transferred to -- 20 MR. BRETT: Okay. I understand. We 21 are on the same wavelength. 22 MR. BOYLE: Okay. 23 MR. BRETT: Now, in terms of your 24 debt, you have a wide variety of medium-term notes 25 outstanding and long-term debentures. Was not another 26 possible alternative for you to attempt to redeem some 27 of that debt? 28 MR. BOYLE: It certainly was -- and 1724 BOYLE/BOURKE, cr-ex (Brett) 1 we did look at that quite in depth. 2 The difficulty is that not all issues 3 have a call option on them which allows you to call the 4 debt, and those that do traditionally have what is 5 called a Government of Canada call on them. What that 6 means is, basically, you have to pay a lump-sum premium 7 to keep the investor whole on the issue because they 8 have invested their funds on a certain term and they 9 expect a certain return for that term investment. 10 If we were to come along and somebody 11 invested for 20 years and got a rate for a 20-year risk 12 return and we called that after five years and said, 13 "Sorry, no, we are going to take it all back", they 14 would have to re-invest that and would suffer a loss, 15 typically. So we need to keep them whole. 16 MR. BRETT: What was the size of that 17 premium for the various issues that you looked at? 18 MR. BOYLE: We looked at redeeming a 19 total of 250 million of long-term debt and the premium 20 was 47.5 million. 21 MR. BRETT: On the 250 million? 22 MR. BOYLE: Yes. 23 MR. BRETT: That would have been, 24 obviously, from a series of different issues that you 25 have. Right? 26 MR. BOYLE: We looked at the ones 27 that were most cost effective to redeem. 28 MR. BRETT: What if you had taken, 1725 BOYLE/BOURKE, cr-ex (Brett) 1 say, the 50 million most cost effective or the 2 100 million most cost effective? Those would have 3 given you proportionate numbers to the 47 million? 4 MR. BOYLE: No, not quite. The first 5 150 million would have been about 13 million. 6 But, as I said, we looked at that and 7 the economics of that were not favourable to do so 8 and -- 9 MR. BRETT: Did you consider -- I'm 10 sorry, Mr. Boyle. 11 MR. BOYLE: It was important to us to 12 finance this as effectively as we possibly can. 13 And we do look at redeeming those 14 issues every year, regardless of what other things are 15 going on in the business, to see if there is a 16 cost-effective way to finance more effectively. But, 17 as I said, typically, there is a premium that makes it 18 such that it is not cost effective -- and that's still 19 the case with these issues, as well. 20 MR. BRETT: Did you have -- is any of 21 that debt, at the moment -- it's all utility debt, 22 these medium-term notes and long-term debentures that 23 are listed in E3, Tab 1, Schedule 2. 24 Is any of that debt guaranteed by 25 Enbridge? Or is that strictly Enbridge Consumers Gas 26 Limited debt? 27 MR. BOYLE: Just Consumers Gas debt. 28 MR. BRETT: One option you would have 1726 BOYLE/BOURKE, cr-ex (Brett) 1 had, I suppose, is -- or would you? 2 Would you have had the option of 3 transferring a piece of that debt to the affiliate and 4 guaranteeing it? 5 MR. BOYLE: No. That would have 6 involved the same breakage costs on the debt. 7 MR. BRETT: And that's whether the 8 debt -- is all of your debt public debt or some of it 9 private placement debt? 10 MR. BOYLE: There is some private 11 placement but, by far, the bulk of it is public debt. 12 MR. BRETT: So your evidence is that 13 any kind of assignment of a piece of debt to one of the 14 other Enbridge companies from the utility -- and I am 15 thinking here, particularly, of an assignment to 16 whoever takes the assets, the rental assets, which, I 17 take it, is Consumersfirst -- that would not be 18 possible, under your debt agreement? 19 MR. BOYLE: That's right. And those 20 entities tend to be of a lower credit quality than 21 Consumers Gas. 22 MR. BRETT: That's why I mentioned 23 the guarantee. 24 MR. BOYLE: But even Enbridge Inc. is 25 a lower credit quality than Consumers Gas. 26 MR. BRETT: How much lower? 27 MR. BOYLE: Consumers Gas is rated 28 A-high on its long-term debt and debentures by DBRS and 1727 BOYLE/BOURKE, cr-ex (Brett) 1 A by CBRS, but it trades more like an A-high entity. 2 Enbridge Inc. is rated A-mid by DBRS 3 and CBRS. 4 We did look at those options but the 5 cost of doing so was not effective on a net present 6 value basis let alone on an accounting basis. 7 MR. BRETT: For the Enbridge group, 8 as a whole? 9 MR. BOYLE: Yes. Or for Enbridge 10 Consumers Gas. Because that's our focus of the 11 financing plan. 12 MR. BRETT: I left you, with your 13 counsel, some written direct testimony of Kathleen 14 McShane -- and I should give this to -- 15 --- Pause 16 MR. BRETT: This was in 179-14/15. 17 I just have one question on this, 18 gentlemen. It's not a long one. 19 MS DESAI: Can you just mark that 20 K9.4, Mr. Brett. 21 MR. BRETT: Okay. K9.4. 22 EXHIBIT NO. K9.4: Written 23 direct testimony of Kathleen 24 McShane filed in proceeding 25 No. 179-14/15 26 MR. BRETT: Ms McShane was asked, in 27 this case -- this was in 179-14/15, as I say. She was 28 retained, as per Answer 3, Consumers Gas has requested 1728 BOYLE/BOURKE, cr-ex (Brett) 1 an opinion on the reasonableness of their capital 2 structure and return for the core utility after giving 3 effect to the company's unbundling proposal -- which, 4 in that case, included the removal from the Consumers 5 Gas Company Limited out of these various merchandising, 6 merchandise finance and HIP -- and she observes, as 7 part of that Answer 3, in the last paragraph on page 1: 8 "The proposed capital structure 9 underpinning the remain 10 regulated delivery operations is 11 forecast to consist 12 of --" (As read) 13 And she goes through the proportions of debt, preferred 14 stock: 15 "-- 61.8 per cent debt, 3.2 per 16 cent preferred stock and 35 per 17 cent common equity. The 18 proposed capital structure for 19 delivery operations is identical 20 to the 1999 forecast capital 21 structure of Consumers Gas prior 22 to unbundling." (As read) 23 So, in that case, as I take it, she's 24 saying that the capital structures are the same before 25 and after. 26 At the end of her evidence, on page 27 4, she gives an opinion. She says: 28 "With respect to the removal of 1729 BOYLE/BOURKE, cr-ex (Brett) 1 the utility ancillary programs 2 at the utility --" (As read) 3 I guess that's the: 4 "With respect to the removal of 5 the utility ancillary programs 6 at the utility capital 7 structure --" (As read) 8 It seems the syntax is a bit garbled there; but, in any 9 event: 10 "-- in my opinion, that proposal 11 is reasonable on the following 12 grounds --" (As read) 13 And she gives three grounds there. 14 The second is: 15 "The cost of debt incurred by 16 the ratepayer has been no higher 17 than it would have been absent 18 the ancillary programs." 19 Now, if I try and apply that 20 principle to what's happening here, it doesn't seem to 21 me that it applies. It seems to me the cost of 22 capital -- the cost of debt is higher, in this case. 23 MR. BOYLE: I would separate that 24 into two components. 25 First of all, the cost of debt that's 26 relating to the utility operations, the base level of 27 debt is still there and the dollar amount is, in fact, 28 lower. The average cost may be slightly higher, 1730 BOYLE/BOURKE, cr-ex (Brett) 1 temporarily, because of the lumpiness of the flows. 2 But that will disappear fairly 3 shortly as the utility grows and as additional 4 long-term debt maturities come due. That will 5 disappear fairly quickly over time because of that. 6 But the raw debt levels that were 7 supporting the utility still are there and they haven't 8 changed. 9 MR. BRETT: But I think you would 10 agree that the cost of debt has changed, at least for a 11 period. 12 MR. BOYLE: The weighted average cost 13 has changed for a period due to the lumpiness of the 14 flows and the mix, yes. 15 MR. BRETT: With respect to the 16 deferred tax, your proposal on deferred taxes -- now, 17 you just gave us some information on that a moment ago, 18 as to the rationalization of that -- an explanation for 19 it. But, as I understood your original proposal, it 20 was that you would collect in rates -- you are 21 proposing to collect in rates in the test year 22 $12 million. I think you just adjusted that slightly, 23 but the original proposal was in the order of 24 $12 million, which when grossed up for tax would end up 25 at $21.2 million, which I think is the number that 26 appears in the evidence, I believe, in -- if I am not 27 mistaken, IGUA 41. 28 Are those numbers roughly accurate? 1731 BOYLE/BOURKE, cr-ex (Brett) 1 MR. BOYLE: Yes, they are. I think 2 it shows $11.963 million, and if you refer to my 3 schedules, I think it comes out to $11.935 million. 4 MR. BRETT: Okay. So that is in the 5 test year. 6 MR. BOYLE: Yes. 7 MR. BRETT: If I could just turn you 8 for a moment to Board Decision 179-14/15, at page 36. 9 MR. BOYLE: Thank you. I have it. 10 MR. BRETT: This matter was being 11 discussed. 12 The Board, at paragraph 3.3.21, made 13 its observations, and there are two things I just 14 wanted to read for you and then ask you about. 15 First of all, the third bullet in 16 paragraph 3.3.20 talks about the options that the 17 company has with respect to the rental program after 18 this decision. 19 The Board says: 20 "The Company may choose to 21 transfer the assets to an 22 affiliate or sell the program to 23 a third party. In these 24 circumstances, any proceeds from 25 the sale or transfer would be 26 available to address the related 27 tax consequences. To the extent 28 that the Company proposes to 1732 BOYLE/BOURKE, cr-ex (Brett) 1 utilize any or all of the 2 notional account, as well, the 3 Board's approval of the 4 ratemaking consequences would be 5 required." (As read) 6 The notional account they are 7 referring to is the one that they talk about at the 8 bottom of page 35 and the very top of page 36. The 9 notional account can be used to pay deferred taxes up 10 to $50 million. Correct? That is your understanding? 11 MR. BOYLE: Yes, I read that, as they 12 become due. 13 MR. BRETT: And it says, again 14 at 3.3.21: 15 "In any of these cases the 16 Company may draw on the notional 17 account to pay deferred taxes as 18 they become due." (As read) 19 I just wanted to focus on the "as 20 they become due" for a moment and make sure I get your 21 understanding of how this is going to work. 22 You are transferring, effective 23 October 1, the rental assets out to the affiliate on a 24 tax-free, roll-over transaction. So I take it that the 25 taxes that we are talking about being paid in the year 26 2000 are taxes that will be paid by the affiliate? 27 MR. BOYLE: Technically they 28 will, yes. 1733 BOYLE/BOURKE, cr-ex (Brett) 1 MR. BRETT: When you talk about the 2 $12 million, is it your view that the affiliate will be 3 paying $12 million in tax in respect of the rental 4 operations in the year 2000? 5 MR. BOYLE: They will be paying an 6 incremental $12 million in tax as a result of the 7 deferred tax cost over what they would otherwise be 8 paying, and they will need to pay those in the 9 2000 year. 10 MR. BRETT: First of all, when you 11 say "come due" and "pay", they are synonymous. 12 MR. BOYLE: Yes. 13 MR. BRETT: What you are saying is, 14 regardless of the otherwise taxability of the 15 affiliate, regardless of what else it happens to be 16 paying in taxes under its normal business as usual, if 17 you like, once it takes on this new business it is 18 going to pay an additional amount of tax relative to 19 what it would have paid had it not taken on the new 20 business? 21 MR. BOYLE: Yes. Basically what I am 22 saying is that the deferred tax drawdown that will 23 occur will require them to pay an incremental 24 $12 million -- $11.9 million or $12 million in income 25 taxes that they otherwise would not have had to pay had 26 it not been for the deferred tax liability. 27 MR. BRETT: There is not very much 28 information on this in the evidence, is there? There 1734 BOYLE/BOURKE, cr-ex (Brett) 1 is no real clear explanation of how this is to work. 2 Or, is there? 3 MR. BOYLE: I am not familiar with 4 the entire evidence, but I have not submitted anything 5 directly on this. But I guess what I am here to 6 say -- and perhaps that was part of the introductory 7 part of my evidence -- is that I can confirm that the 8 program will be transferred to an affiliate, to 9 Enbridge Services Inc. It will be wound down as 10 currently structured. Therefore, that deferred tax 11 liability will be triggered immediately. 12 The incremental cost of that in the 13 2000 fiscal year is approximately $11.9 million to 14 $12 million. 15 THE PRESIDING MEMBER: Mr. Boyle, 16 when it gets triggered, who pays? Is it the affiliate 17 or is it Consumers Gas? 18 MR. BOYLE: Technically, because of 19 the roll-over, it is Enbridge Services Inc. that will 20 pay it, and it was a liability of Enbridge Consumers 21 Gas that was transferred over. 22 It is really a liability of Consumers 23 Gas, but because of the Section 85 roll-over that will 24 be utilized, you can't treat that as consideration in 25 the roll-over and, technically, Enbridge Services Inc. 26 will pay Revenue Canada that amount. 27 Having said that, there is a 28 Consumers Gas liability that is ultimately reflected in 1735 BOYLE/BOURKE, cr-ex (Brett) 1 the value of the asset. 2 THE PRESIDING MEMBER: Thank you. 3 MR. BRETT: The way you have 4 characterized this, you are saying that you are only 5 incorporating -- you are only collecting in rates in 6 the test year, or proposing to collect in rates in the 7 test year an amount of deferred tax that is equivalent 8 to the actual incremental tax that is going to be, as 9 you say, technically paid by the affiliate, but in fact 10 reflected in the value of the asset being transferred. 11 MR. BOYLE: That's correct. 12 MR. BRETT: Can you confirm that the 13 affiliate is going to wind down the program? That is 14 not up in the air at all, or questionable? 15 MR. BOYLE: No. In its existing 16 structure it will be wound down. 17 MR. BRETT: What was that again? 18 MR. BOYLE: It will be wound down in 19 its existing structure. 20 MR. BRETT: In its existing 21 structure? 22 MR. BOYLE: Yes. 23 MR. BRETT: You mean as a rental 24 program? As a hot water rental program? 25 MR. BOYLE: Yes. Hot water units 26 will still be available from Consumersfirst and can be 27 purchased and financed or leased, but they will not be 28 rented as part of the current program. 1736 BOYLE/BOURKE, cr-ex (Brett) 1 MR. BRETT: Would they be rented at 2 all, in some other fashion? 3 MR. BOYLE: No. As I said, they will 4 be sold or financed or leased, but not rented. 5 MR. BRETT: If they are leased -- you 6 mean, actually, title held by Consumersfirst and then 7 leased out to a user? 8 MR. BOYLE: No. Consumersfirst would 9 not hold title. 10 MR. BRETT: And it would not take the 11 tax benefit from them. 12 MR. BOYLE: That's correct. 13 MR. BRETT: So it would be third 14 party involvement by way of a leasing company, or 15 something of that nature. 16 MR. BOYLE: That is our current 17 plan, yes. 18 MR. BRETT: If that were to change, I 19 suppose, then that might change the timing under which 20 these deferred taxes were payable. 21 MR. BOYLE: Yes. It could be 22 accelerated or it could be slowed down. It depends on 23 what changes you are referring to or contemplating. 24 MR. BRETT: Changes at 25 Consumersfirst. 26 MR. BOYLE: Yes. But this is our 27 current forecast, based on how we are currently 28 planning to operate the program of what costs would be 1737 BOYLE/BOURKE, cr-ex (Brett) 1 incurred as a result of that. 2 MR. BRETT: The two exhibits that you 3 filed a moment ago -- and I think you said that the 4 difference between the two of them resulted in the 5 amount of deferred tax that becomes payable in fiscal 6 2000. Is that, roughly, right? 7 MR. BOYLE: Yes. That is essentially 8 the driver, yes. 9 MR. BRETT: Could you just give me, 10 again, the references in those two exhibits as to how 11 you computed that? 12 MR. BOYLE: Yes. From 13 E.B.R.O. 497-01 or E.B.O. 179-14/15, it would be 14 Exhibit D, Section 5.16. 15 MR. BRETT: What page is that? 16 MR. BOYLE: Page 9 of 14. 17 MR. BRETT: Okay. That shows, 18 effectively, the tax that would be -- 19 MR. BOYLE: Yes. Our tax provision 20 on item 1.4 for the 2000 year is $19.7 million, or 21 $19,685,000. 22 MR. BRETT: Right. And that is to 23 say what? If the program were in the non-regulated 24 part of the utility on a fully allocated cost basis, it 25 would have taxes payable of that amount? 26 MR. BOYLE: Yes. 27 MR. BRETT: Or if it were an 28 ancillary program on a fully allocated cost basis. 1738 BOYLE/BOURKE, cr-ex (Brett) 1 MR. BOYLE: I guess what I am saying 2 is that this is consistent with our expectation of the 3 taxes that will in fact be paid. 4 MR. BRETT: All right. 5 MR. BOYLE: The difference between 6 that and what was currently paid is largely 7 attributable to the deferred tax -- 8 MR. BRETT: Where do you find what is 9 currently paid? Is that on the second exhibit? 10 MR. BOYLE: Yes, Exhibit I, Tab 12, 11 Schedule 21 from E.B.R.O. 497, page 4 of 4, column 2. 12 MR. BRETT: Column 2? 13 MR. BOYLE: Yes. 14 THE PRESIDING MEMBER: For the 15 record, that is Exhibit K9.2 in this proceeding. 16 MR. BRETT: And that is the 17 $7.7 million? 18 MR. BOYLE: Yes. That is essentially 19 what we had in the 1999 year associated with the taxes 20 for rentals. 21 MR. BRETT: And that is under a fully 22 allocated cost regime? 23 MR. BOYLE: Yes. 24 MR. BRETT: So they are both under a 25 fully allocated cost regime. 26 MR. BOYLE: Essentially the 27 difference is that the program is in a wind-down mode. 28 The deferred taxes have been triggered, and the 1739 BOYLE/BOURKE, cr-ex (Brett) 1 increased tax cost is associated with the deferred tax 2 payment obligation. 3 MR. BRETT: So the difference between 4 the two is the mode of the program. In the first 5 instance, it's a business as usual taxes paid under 6 fully allocated cost because you are continuing to 7 develop -- 8 MR. BOYLE: Yes, develop and grow the 9 program. 10 MR. BRETT: Right. And in the second 11 case it is the incremental taxes that become due as you 12 go into a wind-down mode. 13 MR. BOYLE: Correct. 14 MR. BRETT: Just a second, please. 15 --- Pause 16 MR. BRETT: If you go back to page 36 17 of the decision in 179-14/15, in the third bullet at 18 3.3.20 is the phrase: 19 "...in these circumstances any 20 proceeds from the sale or 21 transfer would be available to 22 address the related tax 23 consequences." (As read) 24 How do you interpret that statement, 25 and how does that relate to this calculation we are 26 just discussing here? 27 MR. BOYLE: I guess I am focusing on 28 the point down below that: 1740 BOYLE/BOURKE, cr-ex (Brett) 1 "The company may draw on the 2 notional account to pay deferred 3 taxes as they become due." 4 (As read) 5 And they are becoming due. This is 6 for Consumers Gas and Enbridge Services Inc. combined. 7 It doesn't say technically Enbridge Services Inc. will 8 pay it. 9 There is a transfer of proceeds from 10 Enbridge Services Inc. to Enbridge Consumers Gas as a 11 result of the transfer of assets, but Consumers Gas 12 requires those proceeds to, as I said, return capital 13 to the equityholders for the equity supporting that 14 asset and to pay down the debt-holders for their debt 15 at the appropriate times. 16 There isn't any excess cash generated 17 by Consumers Gas on the sale that they could use to 18 effectively pay the taxes, if you will. 19 That may have been different had the 20 program been sold to a third party, although that would 21 obviously also trigger an immediate significant tax 22 payment as well. 23 MR. BRETT: By saying cash available 24 to pay the taxes, you are talking about the deferred 25 taxes. 26 MR. BOYLE: Yes. 27 MR. BRETT: Thank you. Those are my 28 questions, Mr. Chairman. 1741 BOYLE/BOURKE, cr-ex (Brett) 1 THE PRESIDING MEMBER: Thank you. 2 Mr. Mondrow. 3 MR. MONDROW: Thank you, sir. 4 CROSS-EXAMINATION 5 MR. MONDROW: Mr. Boyle, you will 6 forgive me if I am attempting to digest this new 7 evidence on the fly, but let me try anyway, on the 8 unrecorded deferred tax issue. 9 Mr. Brett took you to a couple of 10 excerpts from the Board decision in what I will call 11 the separation case, E.B.O. 179-14/15. He asked you 12 about "as they become due" wording, and you have talked 13 about that a bit. 14 But he didn't ask you about the 15 "notional" account wording: the Board authorized a 16 notional account. 17 What do you interpret that to mean? 18 MR. BOYLE: I guess I am referring to 19 the $50 million notional account. 20 MR. MONDROW: What does it mean if 21 the account is notional as opposed to non-notional, in 22 your view? 23 MR. BOYLE: It is not the full 24 amount. 25 MR. MONDROW: Not the full amount of 26 what? Of the unrecorded deferred tax liability? 27 MR. BOYLE: Yes. It is a notional 28 amount of $50 million of the $168 million, in total. 1742 BOYLE/BOURKE, cr-ex (Mondrow) 1 MR. MONDROW: It is a partial amount 2 of the $168 million. You are equating the word 3 "notional" and the word "partial". 4 MR. BOYLE: I guess I am just 5 thinking out loud a bit, but I guess that is sort of 6 how I was looking at it. 7 MR. MONDROW: It seems to me that the 8 notional fits with the other part of the sentence and 9 sets up the notional account which will be drawn 10 against and money collected in rates as taxes become 11 payable on the program. 12 Isn't that what it means? 13 MR. BOYLE: Sorry, which paragraph 14 are you referring to? 15 MR. MONDROW: Let's look at 16 paragraph 3.3.19 of the Separation Decision. 17 As I understood the Separation 18 Decision, this account, which was labelled by the Board 19 a notional account, was to allow the utility to collect 20 in rates taxes as they became payable rather than as 21 the utility wished for later disposal of payment of 22 taxes. 23 Do you agree with that 24 interpretation? 25 MR. BOYLE: Sorry, could you repeat 26 that? 27 MR. MONDROW: I interpreted the 28 notional qualification to the account and the "as they 1743 BOYLE/BOURKE, cr-ex (Mondrow) 1 become due" portion of the Board's direction to direct 2 that the utility could collect the taxes in the amounts 3 that were actually payable in any given test year 4 rather than collecting an amount up-front and holding 5 it for later disposition. 6 MR. BOYLE: I think that is what I am 7 suggesting and proposing. The $12 million or 8 $11.9 million amount is the amount that will be paid in 9 that year as a result of the wind-down, the deferred 10 tax reversal, if you will. 11 MR. MONDROW: Yes, I understand that 12 is your evidence today. But until today, we haven't 13 heard any evidence to that effect. 14 Is that correct, that it is not in 15 the written evidence anywhere? 16 MR. BOYLE: I have not submitted any 17 evidence directly on this, no. 18 MR. MONDROW: Has anyone else, to 19 your knowledge, submitted any evidence on this? 20 MR. BOYLE: I believe Mr. Bourke -- 21 MR. BOURKE: Yes, I have, 22 Mr. Mondrow. 23 MR. MONDROW: Your evidence, 24 Mr. Bourke, said that these taxes will actually become 25 payable in the test year by the affiliate? 26 MR. BOURKE: My evidence pointed to 27 evidence that had been examined in the separation case, 28 as you referred to it, in which we examined the 1744 BOYLE/BOURKE, cr-ex (Mondrow) 1 drawdown in the fiscal 2000 year of the deferred tax 2 liability. That is the evidence that I pointed to. 3 MR. MONDROW: Right. So the answer 4 to my question is no, your evidence did not say that 5 those taxes would actually become payable by the 6 affiliate in the test year, did it? 7 MR. BOURKE: Going back to your 8 wording in the decision at 3.3.19 -- 9 MR. MONDROW: Perhaps you could 10 answer my question. 11 Your evidence did not -- 12 MR. CASS: He is trying to answer, 13 Mr. Mondrow, if you would let him finish. 14 MR. BOURKE: I took a portion of the 15 deferred taxes associated with the rental program as 16 they become due to mean exactly the number that I have 17 pointed at, which was examined in answer to CAC 16, 18 being the amount of deferred tax drawdown in the fiscal 19 2000 year. 20 MR. MONDROW: It was your intended 21 evidence at the time you filed this testimony that the 22 affiliate would in fact be paying those taxes in the 23 test year. 24 You were aware of that at the time? 25 MR. BOYLE: I think that has always 26 been the plan -- 27 MR. MONDROW: I'm sorry. Mr. Bourke, 28 were you aware at the time you filed your evidence that 1745 BOYLE/BOURKE, cr-ex (Mondrow) 1 the utility would be winding down the current structure 2 of the rental program? 3 MR. BOURKE: I'm sorry, could you 4 repeat that? 5 MR. MONDROW: Were you aware at the 6 time that you filed your evidence that the affiliate 7 would be winding down the rental program as currently 8 structured? 9 MR. BOURKE: I was never told 10 anything otherwise. When I made that inquiry, it was 11 always confirmed to me that the affiliate would be 12 winding down the rental program. 13 MR. MONDROW: So you were made aware 14 of this fact prior to the time that you filed your 15 evidence. 16 MR. BOURKE: I never knew anything 17 otherwise than the affiliate would be winding down the 18 rental program. 19 MR. MONDROW: Did you ask whether the 20 affiliate would be winding down the rental program? 21 MR. BOURKE: I believe I did. 22 MR. MONDROW: Who did you ask? 23 MR. BOURKE: I would have asked my 24 director. 25 MR. MONDROW: Who is your director? 26 MR. BOURKE: Mr. Grant. 27 MR. MONDROW: What did he say? 28 MR. BOURKE: I believe he confirmed 1746 BOYLE/BOURKE, cr-ex (Mondrow) 1 that the rental program was to have been considered in 2 the wind-down program throughout. 3 MR. MONDROW: Did he say that the 4 rental program would be wound down or that you should 5 consider it in a wind-down mode? 6 MR. BOURKE: On the technical wording 7 I can tell you that he did not tell me I should 8 consider it. I can tell you that I was told the rental 9 program would be wound down. 10 MR. MONDROW: We are playing word 11 games here. 12 MR. BOURKE: My apologies. 13 MR. MONDROW: Do either of you know 14 when the company was aware of the fact that the rental 15 program as currently structured would be wound down? 16 MR. BOYLE: I think that has always 17 been the plan, as we indicated earlier in the 18 separation hearing, and that plan has not changed. 19 Certainly I was aware of that throughout and, as 20 Mr. Bourke indicated, he was aware of that and based 21 his evidence on that as well. 22 MR. MONDROW: So the company knew at 23 the time that it filed this proceeding that the rental 24 program would be one way or the other wound down? 25 MR. BOYLE: That was the plan. 26 Certainly we have looked at it in the interim as to 27 what other options may exist, but the plan has always 28 been maintained to wind it down. 1747 BOYLE/BOURKE, cr-ex (Mondrow) 1 THE PRESIDING MEMBER: Mr. Boyle, you 2 are suggesting that was the evidence in the 179-14/15 3 that even if it were to be transferred to an affiliate 4 it would be wound down? 5 MR. BOYLE: Well, I think we needed 6 to see what the Board's decision was as to what 7 implications were to all the options before we were 8 able to make that final assessment. 9 At the time of the hearing, no, that 10 was not -- there wasn't any intent to do that, it was 11 simply to leave it in the utility as part of 12 co-operations and wind it down. 13 Once we received the Board decision 14 obviously we had to determine what we were subsequently 15 going to do with that. The plan since then has been to 16 wind it down in some form and the decision at this 17 point is to wind it down in Enbridge Services Inc. 18 THE PRESIDING MEMBER: That's fine. 19 I just got the impression that that evidence was given 20 at the hearing in 179-14/15 and I don't recall that. 21 MR. BOYLE: Not to my knowledge, no. 22 MR. MONDROW: Indeed, Mr. Boyle, that 23 evidence wasn't given anywhere until today when you 24 gave it. Is that correct? 25 MR. BOYLE: My intent was to confirm 26 that that is the plan. I believe, as Mr. Bourke 27 indicated in his evidence, that was the intent 28 reflected in that evidence. 1748 BOYLE/BOURKE, cr-ex (Mondrow) 1 MR. MONDROW: So the only evidence on 2 the record then, gentlemen, that deals with this issue 3 of transfer to an affiliate for wind down by the 4 affiliate is your prefiled evidence Mr. Bourke. It is 5 your position your prefiled evidence in fact deals with 6 that issue, correct? 7 Gentlemen, I'm just trying to 8 determine that we weren't told this until today. 9 Neither of you has given me a straight answer to any of 10 my questions. I understand the cumulative effect of 11 your less than straight answers to be that the only 12 reference we have on the record in this case, other 13 than your direct testimony today, Mr. Boyle, can be 14 found in Mr. Bourke's evidence. 15 It's his understanding that his 16 evidence was intended to advise us all of this plan to 17 transfer the rental business and for the affiliate to 18 wind it down. Is that correct? 19 MR. CASS: Mr. Chairman, I object. 20 Mr. Mondrow can argue this case at 21 the end, but I don't think he needs to insert into his 22 questions allegations like "less than straight 23 answers." That is just pure argument and if he wants 24 to say that at the end of the case, that is open to 25 him. 26 The witnesses have been trying to 27 explain this to Mr. Mondrow. Mr. Bourke has been 28 trying to explain that his evidence was written from 1749 BOYLE/BOURKE, cr-ex (Mondrow) 1 the point of view of a wind-down. If Mr. Mondrow 2 doesn't like what he is hearing and he wants to argue 3 it, perhaps it should be just left for argument instead 4 of these innuendos being thrown at the witnesses in 5 questions. 6 Objection 7 MR. MONDROW: That's fine, 8 Mr. Chairman, I will refine my question. 9 Can I just get confirmation from you, 10 gentlemen, and in particular you, Mr. Bourke, that the 11 evidence that you are telling us will explain this 12 transfer to the affiliate and wind-down in fact is, 13 Mr. Bourke, your prefiled evidence. Is that where we 14 will find this on the record, other than in today's 15 direct testimony? 16 MR. BOYLE: I think one other thing 17 perhaps, Mr. Mondrow, is that whether it is wound down 18 in -- 19 MR. MONDROW: I'm sorry, could I just 20 get an answer to my question? 21 Did you understand my question? 22 MR. BOYLE: Yes. Whether it is wound 23 down in Enbridge Consumers Gas or wound down in an 24 affiliate, it is still a tax cost would be incurred and 25 that is what Mr. Bourke's evidence is. 26 Perhaps the first time that it has 27 been indicated that our plan right now is to transfer 28 to an affiliate is my evidence today. But the evidence 1750 BOYLE/BOURKE, cr-ex (Mondrow) 1 that the taxes would become payable was in Mr. Bourke's 2 evidence and, as I said, whether it was in Enbridge 3 Consumers Gas or an affiliate, that tax would still be 4 due and payable. 5 MR. MONDROW: All right. Well, we 6 will argue that on the record. 7 Now, as I understand your words 8 Mr. Boyle, as currently structured as Mr. Brett has 9 discussed them with you, we now learn that what the 10 affiliate will be doing with new tanks is anything but 11 retaining title. That is, they will be sold or 12 financed or leased but title will transfer on new tanks 13 from the affiliate to the customer. Is that fair? 14 MR. BOYLE: From the affiliate to the 15 customer or some other entity, yes. 16 MR. MONDROW: Some other -- 17 MR. BOYLE: Some other institution. 18 MR. MONDROW: Some non-affiliated 19 institution? 20 MR. BOYLE: Yes. 21 MR. MONDROW: Of course, it is trite 22 to say that retention of title by the utility in the 23 rental program of these assets in the past is what has 24 afforded or driven the deferring of taxes. Is that 25 fair? 26 MR. BOYLE: Yes. 27 MR. MONDROW: Okay. Can you tell me, 28 then, why the affiliate has decided that it is not 1751 BOYLE/BOURKE, cr-ex (Mondrow) 1 going to any longer rent tanks but only deal with them 2 by transferring title? 3 MR. BOYLE: I'm not familiar with the 4 details of their decisions, but presumably they found 5 in their business it is the most effective way to do it 6 given their focus of their business. 7 MR. MONDROW: That is all the 8 evidence that you can offer us on their rational for 9 structuring their program that way? 10 MR. BOYLE: Yes. 11 MR. MONDROW: Okay. 12 --- Pause 13 MR. MONDROW: Excuse me if I'm a 14 little dense here, but it is your evidence that your 15 original filing requested recovery now of an amount 16 that would in fact be payable in the 2000 year. 17 MR. BOYLE: Yes, it will be payable 18 in the 2000 year. 19 MR. MONDROW: No, that wasn't my 20 question. 21 My question was: Your evidence, when 22 you filed it, Mr. Bourke, and the company's request for 23 recovery of this amount, which hasn't changed as I 24 understand it, was made with the anticipation that the 25 amount recovered from ratepayers would in fact be paid 26 as taxes in the test year. 27 When you asked for the money you were 28 planning just to collect it and pay it out. 1752 BOYLE/BOURKE, cr-ex (Mondrow) 1 MR. BOURKE: I can confirm that I 2 pointed to a draw-down of preferred tax liability. 3 MR. MONDROW: All right. That's as 4 far as I am going to get, obviously, on that. 5 --- Pause 6 MR. MONDROW: I'm sorry, 7 Mr. Chairman. If I could just have a moment. 8 --- Pause 9 MR. MONDROW: There is one other 10 issue, Mr. Chairman, that I had wanted to deal with on 11 the kind of impacts of the separation case. It is, 12 however, properly, I believe, an O&M issue. 13 I wasn't able to be here for the 14 first half of this panel and not until today, because I 15 haven't had a chance to read that day's transcript, did 16 I realize that the issue had been split and so I kind 17 of missed my opportunity. 18 I don't expect that these gentlemen 19 will be able to answer this question, but what I would 20 like to do is just put a question on the record and ask 21 the company if they might respond to it by way of 22 undertaking. 23 I have checked with Mr. Cass and 24 other council and I don't believe that this question 25 was asked. So, with your permission, I will just put 26 the question on the record and ask Mr. Cass if I could 27 have an undertaking for a response to it. 28 The question deals with the 1753 BOYLE/BOURKE, cr-ex (Mondrow) 1 transition costs and, in particular, the project 2 management office which is described in Exhibit D1, 3 Tab 8, Schedule 2, and there is a $1.2 million figure 4 which is requested for recovery on account of the 5 project management office's activities. 6 I was interested in finding out from 7 the company who -- that is, what functional employees, 8 what functions they carry out -- were staffing the 9 office and how many, if any, of those people staffing 10 the office would be going over to the affiliate 11 Enbridge Services. 12 Then, as kind of a separate matter 13 within the same topic, I was interested in whether it 14 was that office that was responsible for writing the 15 customer information pamphlet, part of which is 16 Exhibit K6.1 in this proceeding. 17 The questions are really aimed at 18 determining how much of this planning is of benefit to 19 ratepayers and, therefore, justifiably recovered in 20 rates, and how much, if any of it, at the same time is 21 really just to facilitate a business transaction. 22 So I have tipped my hat a bit, but, 23 in fairness, given that I am asking this late I thought 24 I would give some rationale for it. 25 If the company is inclined to provide 26 a response by way of undertaking to provide me with 27 that factual information -- I note that Exhibit K6.1, 28 as currently filed, only has one page -- well, there 1754 BOYLE/BOURKE, cr-ex (Mondrow) 1 are really two pages, a front and a back to an 2 information pamphlet. I have already asked Mr. Ladanyi 3 if the company would re-file that exhibit with both 4 pages of the pamphlet, and he has indicated to me that 5 that wouldn't be a problem. So I would just ask on the 6 record if the company could, in due course, do that. 7 I am interested in that because I 8 think that the substance of that pamphlet gives a good 9 indication to the reader as to how much is being 10 communicated and in what fashion to the customer, which 11 is, in turn, the justification of the company for 12 recovery of some of these costs, and I would like to 13 have that on the record for the sake of argument. 14 THE PRESIDING MEMBER: Mr. Mondrow, 15 is this one of the people-related expenses? You 16 mentioned $1.2 million or -- 17 MR. MONDROW: It is $1.2 million, as 18 I understand it, and that can be found at page 4 of 19 Exhibit D1, Tab 8, Schedule 2. That is the amount that 20 is, we are told, to be spent or is being spent on what 21 is called the project management office. 22 I assume that the other components of 23 these costs were dealt with. I certainly won't ask all 24 of my questions, but I understand that that component 25 of the cost, in this fashion, with this information was 26 not in fact dealt with during the examinations, and I 27 did want to have that information. 28 THE PRESIDING MEMBER: Your 1755 BOYLE/BOURKE, cr-ex (Mondrow) 1 understanding from that exhibit is that the 2 $1.2 million relates to only people costs or does it 3 include other -- 4 MR. MONDROW: No. That is quite a 5 fair distinction, sir, and that is not my 6 understanding. 7 But my question, as I have scoped 8 it -- as I have just put it on the record dealt with 9 people costs. Perhaps if there are significant costs 10 other than people costs, just advising what those are 11 would put the people costs in some context. That would 12 be useful, from my perspective. 13 MR. CASS: I wonder, Mr. Chairman, if 14 I may, through you, just clarify with Mr. Mondrow what 15 this is relevant to. I was a little confused by what 16 he said. 17 He referred, first, to the fact that 18 this panel had been split in two, and the first issue 19 dealt with it by this panel. But I don't think that 20 this question is in any way relevant to the first part 21 of this panel. 22 He then also talked about separation 23 costs, which was an altogether separate panel, and I 24 take it he is asserting that these questions are 25 relevant to separation costs. 26 But, in light of the way he phrased 27 it, I just want to be sure I understand what he is 28 saying that this is relevant to. 1756 BOYLE/BOURKE, cr-ex (Mondrow) 1 MR. MONDROW: That's fair, 2 Mr. Chairman. Again, my disadvantage is I couldn't be 3 here those days and there may have, in fact, been two 4 panels during the course of that time, both of which I 5 missed and which I'm collapsing. 6 But the question does deal with the 7 separation costs, as indicated by my evidentiary 8 reference. Whoever answered them before is really by 9 the way at this point. So, I hope that helps, 10 Mr. Cass. 11 MR. CASS: Thank you. 12 --- Pause 13 THE PRESIDING MEMBER: Mr. Cass? 14 MR. CASS: Yes, Mr. Chairman. I can 15 confirm that the company will provide that undertaking. 16 The questions, as I understood them, 17 was who was staffing the project management office; how 18 many of these people, if any, would be going to an 19 affiliate; and is that office responsible for the 20 pamphlet that Mr. Mondrow referred. Yes, we will 21 undertake to answer those. 22 I assume that he's not looking for 23 the names of people in an office. That's not of 24 relevance to him. I gather he wants just some general 25 idea of the staff of the office. 26 MR. MONDROW: The functionality of 27 the staff, that's correct. 28 THE PRESIDING MEMBER: Within that 1757 BOYLE/BOURKE, cr-ex (Mondrow) 1 answer, that will explain all of the $1.2 million. 2 MR. CASS: I don't know whether 3 that's true, Mr. Chairman. I don't even have the 4 exhibit here with me today. I don't know. I just took 5 his specific questions and -- 6 THE PRESIDING MEMBER: That's fine, 7 Mr. Cass. I just wanted to maybe add to the 8 undertaking. In the response to Mr. Mondrow's 9 question, people-related costs, I would also like to 10 know what is the breakdown of the 1.2 that relates to 11 the project management office. 12 MR. CASS: All right. Thank you, 13 Mr. Chairman. 14 MS DESAI: J9.8. 15 MR. MONDROW: If I might just add: 16 for my purposes, as well, Mr. Chairman, if there's a 17 significant portion of the 1.2 that is not 18 people-related costs, some brief description of what 19 those other costs are for. That would be helpful for 20 me. Thank you. 21 THE PRESIDING MEMBER: That was the 22 intent of my addition. 23 MR. MONDROW: I understand. I'm 24 perhaps overly sensitive to semantic niceties today. I 25 just want to make sure I have it on the record. 26 Thank you, sir. 27 THE PRESIDING MEMBER: Ms Desai, what 28 was that number? 1758 BOYLE/BOURKE, cr-ex (Mondrow) 1 MS DESAI: J9.8. 2 UNDERTAKING NO. J9.8: Mr. Boyle 3 undertakes to provide the 4 following: who was staffing the 5 project management office; how 6 many of these people, if any, 7 would be going to an affiliate; 8 and is that office responsible 9 for the pamphlet that 10 Mr. Mondrow referred to; the 11 breakdown of the 1.2 that 12 relates to the project 13 management office; and if 14 there's a significant portion of 15 the 1.2 that is not 16 people-related costs, some brief 17 description of what those other 18 costs are for 19 MR. MONDROW: Thank you very much, 20 sir, and Mr. Cass. 21 Just before I finish up, I want to go 22 back to the unrecorded deferred tax issue and just ask 23 one other question -- or ask questions in one other 24 area. 25 I'm not a tax expert, Mr. Boyle, so 26 you will have to bear with me. But as I understand it, 27 taxes actually payable in a year by a business are 28 dependent on a host of inputs, only one of which is the 1759 BOYLE/BOURKE, cr-ex (Mondrow) 1 recapture which, as I understand it, is what makes 2 these makes deferred taxes now payable. 3 So, my question is: Won't the taxes 4 payable by the affiliate, that is the actual cash owing 5 to Revenue Canada, be dependent on a host of factors, 6 most of which probably aren't even known yet, so that 7 it would be very difficult for you or anyone to tell us 8 exactly what the affiliate will have to pay in tax in 9 whatever its fiscal year is ending in 2000? Isn't that 10 fair? 11 MR. BOYLE: There are variety of 12 add-backs and deductions to income taxes payable. What 13 I can confirm for you is that the amounts I have 14 identified there are consistent with our current 15 forecasts and the driver of that difference is the 16 deferred tax liability. 17 MR. MONDROW: Right. But your 18 current forecast dealt with the rental program in 19 isolation, within the utility context. Is that 20 correct? 21 MR. BOYLE: It dealt with the rental 22 program in the income taxes that will be payable 23 associated with the rental program. 24 MR. MONDROW: Right. But all I'm 25 trying to confirm is that, as you sit here today, you 26 can't certainly tell us what actual cash tax costs or 27 liability the affiliate will have in its fiscal year 28 ending in 2000? Or that they will actually have to 1760 BOYLE/BOURKE, cr-ex (Mondrow) 1 pay -- 2 MR. BOYLE: No, I -- 3 MR. MONDROW: -- 11 million -- 4 MR. BOYLE: -- don't know any of the 5 actual numbers; they are obviously just forecast, at 6 this point. But there are other programs other than 7 just rentals that will exist in Enbridge Services Inc., 8 that's correct. 9 MR. MONDROW: Right. And you can't 10 even forecast, as you sit here today, taxes actually 11 payable, or a net tax figure actually payable by the 12 affiliate. Right? 13 MR. BOYLE: We can forecast -- we can 14 know the forecast number but, obviously, yes, we don't 15 have an actual number. 16 MR. MONDROW: Have you developed a 17 forecast number for the affiliate? 18 MR. BOYLE: We have, and as I 19 indicated, for rentals, this is the proportion 20 attributable to the rental program deferred tax and for 21 rentals for the full tax amount. 22 MR. MONDROW: Will the affiliate be 23 paying taxes in excess of $12 million in its year 24 ending in fiscal 2000? 25 MR. CASS: Well, Mr. Chairman, I'm 26 becoming a little troubled about where this is going. 27 The affiliate, of course, has operations that are not 28 regulated by this Board. I think the issue of concern 1761 BOYLE/BOURKE, cr-ex (Mondrow) 1 to this Board is taxes arising from the deferred tax 2 liability. What taxes or operations the affiliate may 3 otherwise have, I don't -- I suggest is not an issue 4 now or for this Board. I object to that type of 5 question. 6 Objection 7 MR. MONDROW: Well, if I could just 8 confirm through you, Mr. Chairman, the company's 9 position on this issue is it doesn't matter what taxes, 10 net taxes, the affiliate actually has to pay, on which 11 we have no evidence, the amount requested for recovery 12 is nonetheless legitimately requested. If that is the 13 company's position we can argue on that basis. 14 THE PRESIDING MEMBER: I must say, 15 Mr. Cass, I'm just not sure that I understand all the 16 intricacies of what we heard today and the relevance of 17 those questions or non-relevance of those questions. 18 It's that. It's also late in the day and let's pray. 19 Let's come in with fresh minds tomorrow morning. 20 So, I'm not sure. Did you 21 expect a -- 22 MR. MONDROW: I would request, sir, 23 whether through the witnesses or through Mr. Cass, a 24 confirmation of the company's, if not evidence at least 25 position, that it shouldn't matter to this Board what 26 taxes will actually be paid in the test year by anybody 27 that the requested recovery is nonetheless validly 28 requested. And if that's the company's position, we 1762 BOYLE/BOURKE, cr-ex (Mondrow) 1 will argue on that basis. 2 MR. CASS: You will argue or you will 3 continue some questions? I'm just not sure. 4 MR. MONDROW: No; I would argue. 5 MR. CASS: Mr. Chairman, Mr. Boyle 6 can correct me if I'm wrong but I think his evidence 7 has been that this is the incremental impact of the 8 deferred tax issue on the affiliate's tax bill as it 9 would otherwise be. I hope I have stated that 10 correctly. 11 The issue of what the affiliate's tax 12 bill would otherwise be, in my submission, is not 13 something that we need to get into here, what taxes the 14 affiliate might pay on its other operations. The issue 15 here is what is the incremental effect of these 16 deferred taxes that will be payable -- and I think 17 that's what Mr. Boyle was addressing but, again, he can 18 correct me if I'm wrong. 19 THE PRESIDING MEMBER: Thanks, 20 Mr. Cass. I guess what I have difficulty wrapping my 21 mind around is that we may have a number for 2000 which 22 was produced in connection with the wind-down in the 23 utility, and that is the $19 million versus another 24 number -- the $7-something million -- which, you know, 25 you said $12 million difference, increment. 26 But if we follow that rule, then what 27 happens to the year 2001? That is what I can't put my 28 mind around. 1763 BOYLE/BOURKE, cr-ex (Mondrow) 1 MR. BOYLE: Perhaps I can assist the 2 Board and Mr. Mondrow with this question. 3 First of all, to address 4 Mr. Mondrow's question, I think I can state that the 5 forecast cash tax bill at this point would be in excess 6 of the $11.9 million. That is our forecast at this 7 point for the affiliate. So it would be a cash cost to 8 the affiliate. 9 In terms of what happens subsequently 10 to 2000, what we would do is look at what the change is 11 from that level in each subsequent year or, 12 alternatively, relative back to the base level, and 13 what is the incremental tax cost relative to the base 14 1999 level that is required to be drawn down against 15 the $50 million notional account. 16 So that if we collect $11.9 million 17 in 2000 from that notional account and the 18 forecast -- if you go to Exhibit -- it would be 19 scenario 2, Exhibit D, Section 5.16, page 9 of 14. 20 MR. MONDROW: It is Exhibit K9.3 of 21 this proceeding. 22 MR. BOYLE: At this point our 23 forecast for 2001 is approximately $20.9 million. Now, 24 that may change next year, but at this point that is 25 roughly our forecast. So that we are collecting $11.9 26 million against that if we collect the $19.7 million 27 full tax amount, for example, in 2000. So we would 28 collect an incremental $1.3 million, roughly, in 2001. 1764 BOYLE/BOURKE, cr-ex (Mondrow) 1 Therefore, we would collect $12.2 million against the 2 notional account. 3 THE PRESIDING MEMBER: I see. 4 MR. BOYLE: I think that is sort of 5 the scenario I had envisioned with this. When the 6 $50 million is extinguished, then the shareholder picks 7 up the cost from that point forward. 8 MR. MONDROW: If I could, 9 Mr. Chairman, I understand, Mr. Boyle, from your 10 comments that you have actually done, or the company, 11 the utility, has actually done a projection or a 12 forecast of the affiliate taxes payable next year? 13 MR. BOYLE: That's correct. 14 MR. MONDROW: Have you gone out 15 beyond next year? 16 MR. BOYLE: Yes, we have. 17 MR. MONDROW: In order to do that you 18 have obviously been privy to their business plans? It 19 is a service that you have provided to them? 20 MR. BOYLE: I am involved in their 21 financing plans. 22 MR. MONDROW: Thank you, sir. 23 THE PRESIDING MEMBER: You are 24 testifying as a Consumers Gas witness. The utility. 25 MR. BOYLE: Yes. I am an employee of 26 Enbridge Inc. and I provide financing services to more 27 than just Enbridge Consumers Gas. My role in this case 28 is as the Enbridge Consumers Gas financing plan 1765 BOYLE/BOURKE, cr-ex (Mondrow) 1 witness. 2 THE PRESIDING MEMBER: Mr. Thompson, 3 you are going for the mike. 4 MR. THOMPSON: I just wanted, if you 5 wouldn't mind, to keep this topic open until tomorrow. 6 If there are going to be submissions on it I would like 7 to make some. But I know it has been a long day and I 8 certainly don't want to make them now. 9 THE PRESIDING MEMBER: All right. 10 Why don't we break, then. 11 Are there any other matters before we 12 break? 13 MR. JANIGAN: Mr. Chair, my intention 14 is not to return tomorrow. I have a couple of 15 questions in this area, but I think I will be able to 16 get Mr. Thompson to ask them on my behalf. 17 It would be my preference to return 18 on Wednesday when Mr. Stephens' evidence is to be 19 offered. However, I do foresee that there may be some 20 schedule conflicts that may prevent me from so 21 attending, so I would ask, at least on a conditional 22 basis, that I be excused for the balance of this 23 hearing. 24 THE PRESIDING MEMBER: Thank you, 25 Mr. Janigan. Thanks for your contribution. 26 Let's break until 9 o'clock tomorrow. 27 --- Whereupon the hearing adjourned at 1708, 28 to resume on Friday, September 3, 1999 at 0900