Rep: OEB Doc: 128Rc Rev: 0 ONTARIO ENERGY BOARD Volume: 2 April 05, 2002 BEFORE: M. JACKSON VICE CHAIR AND PRESIDING MEMBER G. DOMINY MEMBER P. SOMMERVILLE MEMBER 1 HEARING RP-1999-0017 2 IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998 c.15 (Sched. B); 3 AND IN THE MATTER OF an Application by Union Gas Limited for an order or orders approving or fixing just and reasonable rates and other charges for the sale, distribution and transmission and storage of gas as of January 1, 2001 and January 1, 2002; 4 AND IN THE MATTER OF the Performance Based Rate mechanism provided by the Ontario Energy Board through proceeding RP-1999-0017. 5 APPEARANCES 6 PAT MORAN Board Counsel JAMES WIGHTMAN Board Staff CHRIS MACKIE Board Staff MICHAEL PENNY UNION GAS MARCEL REGHELINI UNION GAS TOM BYNG UNION GAS DAVID DENT UNION GAS ROBERT WARREN CAC MURRAY KLIPPENSTEIN POLLUTION PROBE MALCOLM ROWAN CME TOM MOUTSATSOS CME GEORGE VEGH CEED ALICK RYDER CITY OF KITCHENER DWAYNE QUINN CITY OF KITCHENER MICHAEL JANIGAN VECC SUE LOTT VECC TOM BRETT "THE SCHOOLS" VINCE DeROSE IGUA DAVID POCH GREEN ENERGY COALITION RANDY AIKEN LPMA & WGSPG RICHARD KING LPMA & WGSPG TIBOR HAYNAL TRANSCANADA PIPELINES BARBARA BODNAR ENBRIDGE CONSUMERS GAS 7 TABLE OF CONTENTS 8 PRELIMINARY MATTERS: [15] UNION GAS LIMITED - PANEL 1 [112] EXAMINATION BY MR. PENNY: [114] CROSS-EXAMINATION BY MR. BRETT: [156] CROSS-EXAMINATION BY MR. AIKEN: [321] CROSS-EXAMINATION BY MR. QUINN: [400] CROSS-EXAMINATION BY MR. RYDER: [709] 9 EXHIBITS 10 EXHIBIT NO. F.2.1 SUMMARY OF RISK MANAGEMENT OF FIRM AND OTHER PURCHASES [28] EXHIBIT NO. F.1.2 2001 ACTUAL FINANCIAL INFORMATION [31] EXHIBIT F.2.2 LETTER FROM MICHAEL KOVAL WITH RESPECT TO OXFORD AUTOMOTIVE DATED MARCH 12, 2002 [221] EXHIBIT F.2.3: LETTER DATED APRIL 3, 2002, FROM P. BARNETT CONSTRUCTION INC. - REQUEST FOR LATE INTERVENOR STATUS [226] EXHIBIT NO. F.2.4 BOOK OF MATERIALS FOR THE WHOLESALE GAS SERVICE PURCHASERS GROUP AND NATURAL RESOURCE GAS LIMITED [325] 11 UNDERTAKINGS 12 UNDERTAKING NO. G.2.1: UNION GAS CURRENT FAILURE-TO-DELIVER CHARGE, NORTHERN REGION [166] UNDERTAKING NO. G.2.2: CONCERNING THE CLAW-BACK OF THE DCC FOR GAS WITHDRAWN FROM STORAGE AND PROVIDED TO ANOTHER IN-FRANCHISE CUSTOMER [585] UNDERTAKING NO. G.2.3: PROVIDE THE RATIONALE OF HOW THE CARRIAGE SERVICE RATE WAS DESIGNED ORIGINALLY [703] UNDERTAKING NO. G.2.4: REVENUE-TO-COST RATIO CALCULATED AS IF KITCHENER WAS AN M-9 SYSTEM-GAS CUSTOMER [881] 13 --- Upon commencing at 9:35 a.m. 14 MR. JACKSON: Good morning, please be seated. 15 PRELIMINARY MATTERS: 16 MR. JACKSON: Just as one preliminary matter this morning, I wanted to ask about the Ontario Cured Tobacco Growers Marketing Board. I believe that they participated in the ADR by consent of all parties, but did they wish to become an intervenor in these proceedings? I think they did. I don't see a representative here. 17 MR. PENNY: I don't believe they were here yesterday and they're not here today, so there's an outstanding motion. We have had no communication with them. 18 MR. JACKSON: Well, I think I'll leave it a day and see if they pick this up and want to retreat or become a full-fledged member of this proceeding. 19 Mr. Penny, then, if you have any preliminary matters this morning. 20 MR. PENNY: Yes, the first matter, Mr. Chairman, is the one outstanding request that the Board had made in connection with the ADR agreement; relates to risk management. And the Board had asked whether information that related to risk-management activities in the other purchased gas cost account could be made available. Mr. David Dent is with me this morning. Mr. Dent is the manager of gas supply and he was able to pull together some information on the other account, and also combine that with the firm account to show the overall effect of risk management. There's a two-schedule document of three pages that was placed before you this morning, or should have been. 21 MR. JACKSON: Yes, we have that, thank you. 22 MR. PENNY: It's called: Summary of risk management, firm and other purchases. What I would propose, Mr. Chairman, is that Mr. Dent simply explain to you what is reflected in these schedules and explain the overview of the risk-management program as it relates to both accounts, and he would be happy to ask any further questions that the Board has. 23 MR. JACKSON: Good. Thank you, Mr. Penny, that would be acceptable. 24 I think that since we're going to treat this as evidence in the total proceeding that -- would it be wise to swear the witness or not? It's explanatory. 25 MR. PENNY: It was -- it is offered in the context of explanations. If as a result of that the Board feels it's necessary to have evidence on the record, we could perhaps make the schedule or something an exhibit, but I don't think it's necessary for Mr. Dent to testify. 26 MR. JACKSON: Well, I think in order to track it we should give it an exhibit number, and I do believe that there was an exhibit that we failed to number yesterday. So, Mr. Moran, would you like to suggest some numbers? 27 MR. MORAN: Right. Perhaps the document that was just referred to could be marked as Exhibit F.2.1. 28 EXHIBIT NO. F.2.1 SUMMARY OF RISK MANAGEMENT OF FIRM AND OTHER PURCHASES 29 MR. JACKSON: Thank you. 30 MR. MORAN: And there was a document yesterday, I guess that would become Exhibit F.1.2. It's the 2001 actual financial information. 31 EXHIBIT NO. F.1.2 2001 ACTUAL FINANCIAL INFORMATION 32 MR. JACKSON: Yes. 33 That tidies that up. So Mr. Penny, would it be a good idea to have Mr. Dent just lead us through these schedules? 34 MR. PENNY: Yes. 35 MR. DENT: Thank you, Mr. Chairman. I'll draw your attention first to schedule 1. Schedule 1 is a compilation of C.1.4 plus the new information that we've just put together. You'll recognize the numbers on line as 1 and 4 coming out of C.1. Looking at the volume total risk cost, total risk management cost to 9.3 million and the risk management as a percentage of cost of 1 percent. Union's average price, the market price, and the standard deviation which Union achieved less than what the market standard deviation was. 36 Similarly, on line 2, we look at other purchases, which is a summary of what we find on schedule 2 that we'll look at in just a moment. Again, the total volume of purchase cost, the risk-management impact and the percentage, the risk-management as a percentage of the total purchase cost, 2.4 percent. And then we get into Union's average price, which is about $5 a 10 cubed above the market price, with a standard deviation about $20, $21 per below the market standard deviation. So in total, over the two-year period the risk management as a percentage of cost is 1.6 percent above what the average market price was, or about $24 million in a portfolio of $1.5 billion, total cost. 37 Then we've done a similar summary on lines 4 and 5 looking at the pricing cycle that was identified in C-1. At the bottom line there is with all other purchases, is that we are above the market by, about 1.9 percent. Standard deviation is significantly lower than the market standard deviation, and if you combine both the firm purchases and other purchases together, then basically it's a wash. The total risk management is about $400,000 above market total portfolio cost of just under $1.3 billion. 38 MR. JACKSON: Thank you. That's good. So for some reason, the standard deviation was a little bit -- just a minute -- I was just going to say a little bit higher over the two-year period than it was over the selected price-cycle period, but that's just not unexpected. 39 MR. DENT: No, I would say what's more significant here -- it's not the absolute, but the fact that trending-wise, the standard deviation is less. Overall, you'd probably expect to have a little more volatility than the other purchased gas because there's more NYMEX exposure, and NYMEX tends to be more volatile than the AECO markets. But, on the whole, if you look at the total firm purchases, other purchases, what we're doing is we're not managing each individual account separately; we're managing it as a whole. 40 MR. JACKSON: Right, thank you. 41 MR. DENT: Now, if I can move you over just briefly to schedule 2, page 1 and 2 gives the overview of the 2000 purchases. And I believe this schedule is very similar to the one that's in C.1.4 that you looked at yesterday. Just quickly running through line 1, delivery month January of 2000, we purchased molecules, price-managed molecules, from February 9th through to December 20th of 1999. We have a high and a low price for those transactions, the number of transactions to achieve that were 12. The monthly volume, the total cost of that volume, and then line G is the average price with both the physical and financial hedges stripped away. 42 Line H gives us the impact of physical risk management, that would be combining the molecules that physically fit. Line -- I believe that's I, gives us the impact of financial hedges, and then line J gives the average price that Union achieved, the $124 per 10 cubed. And the average risk management price for impact is $7. 43 Again, from an impact point of view, we've separated this out for display purposes, but when we are transacting, a physical hedge or a financial hedge achieves exactly the same thing for us. So although we've broken it out here for display purposes, when we're transacting we're not focussing on one or the other but whatever makes more sense given the market that we're dealing with at the time and the contract that we're trying to manage. 44 Then line J, which gives the total risk-management impact in January. It was an over-the-market charge of about $700,000. On the bottom right-hand corner, line 13, column J, the total impact for 2000 was below market of $11.5 million. 45 And then we move over to schedule 2, page 2 of 2, there the charges are laid out in a very similar way. We note again January, where the price spike was, and then there was a positive impact there as prices grew weaker throughout the balance of 2001. And then there was a negative impact on risk management. The total for the calendar year 2001 in other purchased gas was just over $26 million. Part of the impact for the -- for why it's asymmetrical between 2000 and 2001 is really due to the fact that the Alliance-Vector pipeline did not start flowing until the end of November of 2000. At one time that pipeline was supposed to start flowing November 1, 1999, pushed back to October 1, 2000, then November 1, November 14, and then to the end of November. Our policy indicates that we will not hedge without firm transport and firm commodity, and because we didn't know when that pipeline was going to begin operation and indeed how the early part of the operation was going to proceed, then we were not in a position to do significant hedging on the Alliance-Vector pipeline leading up to the commencement of operation. 46 Once it was operating and we were confident that our volumes were flowing as they were expected to flow, then we began to layer those volumes into our overall risk-management strategy. But just because Alliance-Vector was uncertain, as far as when it was starting, didn't mean that we weren't hedging in similar percentage for our portfolio as a whole. We looked at other opportunities to hedge so that our percentage of hedge for that winter was the same, whether Alliance-Vector was flowing or not. So we achieved a similar result, but just did it using different pipe. 47 So, in summary, to come back to the overview on schedule 1. We see the impact, or we need to consider the impact of both the firm and other purchased gas together. Over the two calendar years, which is slightly above the average market price of 1.6 percent, and the volatility is significantly less in the market as a whole. And again, if you look at the pricing cycle, basically our price and the market price are essentially the same, but again, we see significant reduction in volatility. So customers were receiving the average price over that period but were not exposed to the significant volatility that we saw, particularly in the December-January-February period of 2000-2001. I would consider this a satisfactory result with the way the markets were at the time, the kind of volatility, and the fact that we've reduced that significantly and have a cost that's relatively close to the market price. To my mind, we've met the objectives of the program. 48 MR. JACKSON: In terms of the volatility that you're managing to reduce, is that a benefit to Union in terms of a better operation, better return on equity, because you do it this way or is that a benefit to the customers? 49 MR. DENT: Well, in my opinion, the greater benefit is to the customers. When I'm -- I mean in my past life, I did some social service work, and for some of the individuals that I was dealing with, what they were trying to manage was -- they could manage changes in their expenses as long as there was some smoothing of that. Particularly when I was dealing in the housing market, the high interest rates when they jumped to 18, 19 percent, that really -- that price shock really hurt those clients, and I think the similar analogy is true with gas or any kind of utility. That if you can smooth those, especially the spikes so the customer isn't exposed to that big, lumpy price spike, then it's better for the customer to manage his own affairs and certainly helps those individuals who may need some time to adjust to rising expenses. 50 MR. JACKSON: Right. And given the costs of this risk management are passed on too, any benefits that come out of it, I think the methodology that is being used is such that shareholders could neither benefit nor suffer. So that's the -- I think that's the answer to the first part of my question which perhaps I asked too quickly, but as to the second part, I guess what I'm thinking of is with equal billing plans and with Union's tempering price changes by waiting for a trigger point to arrive and so on, to what extent really is this damping out of price volatility, which you're doing on the cost side actually affecting what flows through to customers after these other mechanisms have come into play? And maybe that's beyond your area because you're looking at just taking the volatility out of the cost that Union sees, but it strikes me that there're several things already designed to take the volatility out of the customer's price. 51 MR. REGHELINI: Perhaps I could answer that, Mr. Chairman. And first of all, you are correct in that because gas costs are a flow-through cost, there is no opportunity for Union to benefit or receive an adverse impact from this except through -- if, in the review of our deferral account balances from time to time, if the Board was of the view that we were imprudent in any purchase activity, of course, but generally ther's no opportunity to benefit or to be adversely impacted. 52 We do do a number of things to smooth volatility for customers, and again our QRAM pricing process is a process that looks at doing forecast prices out for a year, not just moving price up and down by quarter, so that helps a customer as well and we do make equal billing -- equal payment plan arrangements available to customers to help smooth volatility as well. 53 MR. JACKSON: Right. And so if you didn't have the risk-management program which over short periods of time may result in a price higher than market or lower than market, then I think you said yesterday in theory it's like an insurance contract of sorts so that you would expect it to cost a little bit to do this risk management. If you didn't have that, would there be enough other ways to remove the volatility from the customer and get them an overall, perhaps, lower price over a longer time period? In other words, is Union a big enough buyer and seller of system gas to self-insure? I think maybe I should just leave the question. 54 MR. REGHELINI: I don't know if I can answer that. 55 MR. JACKSON: It's a philosophical one, but there is a question, I guess that goes back to the origins of why you entered into the risk-management program and it may very well have been the desire of the stakeholders in these proceedings that pushed you into it, I don't know. So maybe I need to do a little review on that. 56 MR. REGHELINI: I don't know if I should really comment on that at this stage, but just remind the Board that we have agreed in the settlement agreement to conduct a review of all of these things so -- 57 MR. JACKSON: Yes. 58 MR. REGHELINI: -- that will happen in due course. 59 MR. JACKSON: Thank you. I'm jumping ahead. 60 MR. DOMINY: I was looking at the C.1.4 and I was looking at this chart. I wonder if you could explain to me what "average price without physical hedges" is. Is that a delivered price? 61 MR. DENT: No, that would be the commodity price with any transport fuels stripped out and it would be the price that we would have expected to pay had that volume of gas settled to index, whether that index would have been NYMEX or AECO in case of Alliance-Vector, yes. 62 MR. DOMINY: The reason I was interested in it is I was comparing the units of actual average price in C.1.4 against this one that's filed and there's a different pattern between 2000 and 2001. In 2000, the other purchased gas is higher, all the way down virtually, and in 2001, it reverses and the other purchased gas is lower; that's looking at Union's actual gas price. I wonder if there's any explanation of that. 63 MR. DENT: The actual average price in 2001? 64 MR. DOMINY: Column J. 65 MR. DENT: Column J. If I understand your question correctly, I'm not sure that you can make a straight comparison between the firm purchases and the other purchased gas. In the firm purchases, it's basically compared against the Empress index in the other purchase gas, where you have significant volumes of Trunkline and Panhandle, which are really priced on NYMEX minus a basis of about 15 cents. And, if you were buying gas in Alberta, Empress, the basis would be significantly different. And therefore, it's really not apt to compare the units of firm versus other purchased gas because the commodity itself is not comparable as an apple to an apple. You'd almost have to compare the landed costing to get more of the apple-to-apple comparison. Here we're just looking at the commodity, which is really what we're price managing, it's not necessarily the fuel or the transport that is involved in that price-management program. 66 MR. DOMINY: I was just wondering whether I could glean some information from these charts which would help me understand perhaps the differences in the cost base by Union by using one transportation route versus another transportation route. 67 MR. DENT: No, I don't think from this chart you could make that direct comparison. We would need to overlay into these charts the transporting fuel to make the fair comparison. 68 MR. DOMINY: Thank you. 69 MR. JACKSON: Could you do that for us? Could you show us the similar data, perhaps prepare another chart with two columns showing the landed price? 70 MR. PENNY: I'm sure that one way or another we can get around to that, Mr. Chairman, although it seemed to me that the -- we're getting into an area which is going to be the subject of evidence later on, which is the effect of the Alliance-Vector and the cost of the Alliance-Vector. And it may be that -- and it doesn't relate directly to the risk management of the molecule purchases. So, it may be that that's something that the panel that's addressing the gas supply would be better positioned to deal with in the context of evidence before the Board. 71 MR. JACKSON: It may be -- 72 MR. DENT: If I could add, I don't think it would be necessarily meaningful, certainly in the other purchased gas because you do have Panhandle, Trunkline, as well as Alliance-Vector. You've got two different costs in those. So you could do a weighted average, but I'm not sure by doing that it would show you anything meaningful because you do have the two different things in the same, the same account. 73 MR. JACKSON: I think that's a very good observation. I think, if you wanted to see a good comparison you might ask Alliance-Vector -- everything else in other purchased gas costs and TCPL, all of which would be done on a landed-cost basis. Now maybe this -- I'm sorry, I just can't remember where I would find that in the evidence so I can do some reading before this comes up in the hearing process. Can you tell me, is that in evidence as a response to an interrogatory already? 74 MR. PENNY: Off the top of my head, Mr. Chairman, I can't tell you, but we'll check today and let you know. 75 MR. JACKSON: Okay, thank you very much. And if we could start -- 76 MR. PENNY: But certainly, we'll alert the witnesses on the Alliance-Vector panel to that question, in any event. 77 MR. JACKSON: Yes, I think that could be very helpful to the Board in terms of understanding the issues involved in the source and supply. So, if there's any chance at all that that isn't in the record, getting it the day before the witnesses appear, that would be very helpful. Thank you very much. 78 Any other questions? 79 Mr. Moran. 80 MR. MORAN: If I might, Mr. Chair, just a follow-up question. Mr. Dent, I wonder if you could look at Exhibit C.1.4, schedule 2, page 2 of 2, for firm gas purchases, and then the equivalent table in the exhibit that you prepared that was filed today. 81 If we look at the bottom line in the table, looking at the number of transactions in C.1.4, we see 387 transactions in relation to a volume of about 1.8 million, and in the other table we see 151 transactions in relation to a volume of 1.5 million. I wonder if you could comment on the disparity in the number of transactions. 82 MR. DENT: We roughly -- when we're hedging, whether we're buying physically or hedging financially, we're generally doing it in relatively small pieces of 5 to 10,000 gJ's per transaction. What I think the difference is reflecting is the fact that primarily Alliance-Vector, because it came on as I previously described late in November, that there was some of that volume that we might have hedged had we known for sure that that pipe was going to be on line. And because it wasn't hedged, there were fewer transactions. 83 Conversely, because we weren't sure about when that was starting, we probably hedged a little bit more in the firm than what we would have had we known that Alliance-Vector was going to be on in November. Consequently, we have a little bit more weighing towards the hedging in the firm and consequently, I think, you see that reflected in the transactions in the firm versus the ones in the other purchased gas. 84 MR. MORAN: All right. Well, taking that into account then, if we go back to page one of those two tables, what comment would you make with respect to the number of transactions in relation to those volumes? 85 MR. SOMMERVILLE: Referring to schedule 1, Mr. Moran? 86 MR. DENT: Schedule 2, page 1 of 2? 87 MR. MORAN: The same schedules. 88 MR. DENT: The ratio is probably a little bit higher on firm than on the other purchased gas. Again, with 2000 there was a relatively lower volume in other purchased gas which would account for part of that variance. Also, with 2000, as we approached the -- certainly the latter half of 2000, we we're expecting vertical slice to become part of our direct purchase activity, and therefore we were leaving more Trunkline-Panhandle to settle to index than we might have in previously years; consequently there were relatively fewer transactions in the Panhandle/Trunkline area of hedging transactions than there might have been previously. 89 MR. MORAN: Thank you. 90 Thank you, Mr. Chairman. 91 MR. JACKSON: Thank you. 92 If, by any chance, you are having to put some schedules together with respect to what we discussed just previously, I'll leave it to you to think about how you treat transportation, but I guess we would be interested in seeing what the effect over these time periods is of the actual transportation that you purchased for this gas and not sort of plugging it with a surrogate number of any sort. That is, say just the firm transportation that might apply to those volumes. So if you do buy any transportation in the secondary markets or whatever, I guess we'd be interested in seeing what the landing cost actually turns out to be. But I -- you know, I'm not quite sure what's in that sort of pool of transportation; I'll leave it to you to sort of think about it and comment on it. 93 MR. PENNY: Yes, Mr. Chairman. 94 MR. JACKSON: Thanks a lot. 95 I think, Mr. Penny, that takes care of following up, then, with respect to the ADR settlement proposal, and I thank you very much for that additional information. 96 So back to you, then, for the main matters of the case. 97 I do have one other matter I might just mention, and this might be the appropriate time to do it. And that is, we did see that financial information which we gave the number, F.1.2 I think it was, excuse me. I might ask you, in terms of any questions we might have on that where might you suggest we put those in the proceeding? 98 MR. PENNY: Mr. Chairman, since it has no impact on anything that's before you in this proceeding, it actually wasn't intended that that be evidence in this case. Nothing that is being dealt with in this proceeding turns on that information, and so frankly, it wasn't our proposal that we really deal with it. It was filed for informational purposes. It doesn't -- it -- it will become relevant in the 2003 customer review process because it might be relevant to the relation to the earnings per share or whatever, but it isn't relevant to any issue that's before you in this case. 99 MR. JACKSON: Okay, I guess I do understand that; thank you for clarifying it. I think the Board wants to make sure it sort of arrives at the next stages of this overall process with enough information to deal with it as intelligently as possible. So I think we'd like to explore that a little bit. And so it seems to me that perhaps we should ask you some questions about it, and maybe just as a very preliminary thing this morning, if I could just give you notice of a few questions and just leave it with you. 100 We'd like to know when we're going to see your first attempt at reporting by line of business, and I think that you should realize that the Board appreciates that there may have to be a certain amount of interaction in getting this right. I think a lot of the allocations that you may have to do in order to report by line of business have already been thought about, in some part, by the people who do your cost allocation by class of service work, but perhaps not. There may be an evolutionary process to this and the Board would like to try to be part of it and get some fairly good results. But I think that it has to start somewhere, so we need to know when we might see your first cut at it. So that's one question I would have for you. 101 The second question I had for you is: Could you just file a brief schedule with us letting us know when you did your quarterly reporting to the ERO over the last two-year period, the dates that the reports were filed for each quarter. And I fully realize that you file these in confidence, but I think that we'd just like to know what the experience has been and how you're doing with keeping up with those requirements. 102 MR. PENNY: I'm sure we can find that information for you. 103 MR. JACKSON: Good. Thanks very much. Okay. 104 MR. PENNY: Mr. Chairman, the only other preliminary matters were to advise you that we did turn around a revised issues list based on your rulings of yesterday and that's been made available to members of the Board and to the parties in the room. There was some additional information discovered during the course of preparation for the hearing that was responsive to a question that Vulnerable Energy Consumers' Coalition had posed by way of written interrogatory, and so we've made available to the Board and to the parties the additional correspondence with TransCanada PipeLine, between Union and TransCanada PipeLine that occurred in the -- I think it was '96 to '99 period. So that has been filed with the parties and with the Board as a supplementary response to Exhibit C.39.6. 105 That concludes the preliminary matters, and we would propose then to proceed with Mr. Packer's evidence. 106 MR. JACKSON: That's fine, Mr. Penny. I think in the material that you filed yesterday too, that you filed a correction to, you say Exhibit 39.33, and I think it was 39.38, wasn't it? I may not have got that right. If you could just double-check that for me. 107 MR. PENNY: Yes, the -- I misspoke myself, and there's a typographical error in the letter that records that. So you're right, Mr. Chairman, it's 39.38, that the corrected version that was filed in respect of. 108 MR. JACKSON: Thank you, then. Let's proceed with Mr. Packer. You're name, for the record? 109 MR. PACKER: Michael Wayne Packer. 110 MR. JACKSON: Do you choose to swear or affirm? 111 MR. PACKER: Swear. 112 UNION GAS LIMITED - PANEL 1 113 M.PACKER; Sworn. 114 EXAMINATION BY MR. PENNY: 115 MR. PENNY: Good morning, Mr. Packer. You are currently the manager of regulatory initiatives for Union Gas. 116 MR. PACKER: That is correct, yes. 117 MR. PENNY: And until recently you were the manager for rates and pricing for Union Gas. 118 MR. PACKER: Yes, that is correct 119 MR. PENNY: And had you principle responsibility for matters relating to rates and cost allocations. 120 MR. PACKER: That is correct, yes. 121 MR. PENNY: Now, I understand you have an honour's degree in business administration from Wilfred Laurier University. 122 MR. PACKER: Yes. 123 MR. PENNY: And you are both a certified management account and a certified investment manager. 124 MR. PACKER: That is correct, yes. 125 MR. PENNY: And you've appeared on numerous occasions testifying before the Ontario Energy Board principally in relation to rates and cost allocation matters. 126 MR. PACKER: That is correct, yes. 127 MR. PENNY: And with respect to this case, the rates and cost allocation evidence, that has been filed was prepared either by you or under your supervision? 128 MR. PACKER: It was. 129 MR. PENNY: And do you adopted that evidence for the purposes of this hearing. 130 MR. PACKER: I do. 131 MR. PENNY: Perhaps by way of introduction, Mr. Packer, it might assist the Board if you would just step through each of the items that are listed as rate schedule issues and very briefly explain what the issue is, just so the Board has some context and can understand what issue. Many of these may sound familiar, Mr. Chairman, from the PBR case but I thought it might just assist you if Mr. Packer walked through them briefly to say what the issue is and what, based on his understanding of these, is in dispute, which might assist in focussing on what we need to deal with. 132 MR. JACKSON: Yes, I think that would be helpful. 133 MR. PACKER: I will be working from the list of issues that has been prepared by the applicant. 134 The first rate schedule change is identified as item 14.2 which is a change to our failure to deliver charges for rate R-1, T-1 and T-3. What we are proposing to do with respect to that rate is to increase it to have the effect of the DCC claw-back, the delivery commitment credit claw-back, that existed when the delivery commitment credit was in place. As a result of the settlement agreement in the PBR case, we are proposing to eliminate the DCC and that will be happening soon. The increase in the failure to deliver charge is as a result of losing one of the levers that existed as far as charges to customers who failed to deliver their obligated supply in the southern operations area. 135 The next issue is issue 14.4 which is a change to our T-1, T-3 diversion of gas description, as well as a change to the charge for customers who create a negative storage balance. The change in the description is really to provide some clarity and consistency with the current Ontario Energy Board Act. The change in the charge for customers who don't -- sorry, who allow their storage balance to go below zero is to align the charges to T-1 and T-3 customers with those charges that we are proposing to apply to bundled customers who don't balance to within the 4 percent tolerances, which is to charge customers who go below zero the highest spot price at Dawn in the month of occurrence and the following month. 136 The next issue is issue 14.6, which are proposed changes to the maximum rates for some of our C-1 storage and transportation services. The proposed changes will enable us to continue to derive market value for those transactional services. 137 Issue 14.7 is an issue where we are proposing to identify on those rate schedules, the M-13, M-16 and C-1, firm transportation rate schedules the customer supply fuel ratio. In the past, customers did not have the customer supply fuel alternative, and we are proposing to put that on the rate schedule. 138 Issue 10 is the allocation of the DCC elimination from rates. What we are proposing to do is to eliminate the delivery commitment credit, the DCC, from rates based on how it was paid out, which is what we agreed to do in the PBR/ADR settlement agreement. My understanding is the parties who were taking issue with this approach may be concerned about the impact on revenue/cost ratios. 139 The next issue, the allocation of direct purchase revenue payments account, 179-60, is issue 11.5. We are proposing to allocate balances that have accumulated in that account the same way that the forecast amount had been allocated, included in rates for 1999. My understanding is that the parties concern about that approach is linked to the previous issue that I talked about where we were proposing to eliminate the DCC and how that's -- how we were proposing to do that. 140 The next issue is a change to other purchased gas cost account, which is issue 11.2. What we are proposing to do is to charge customers who -- these are bundle customers -- who didn't balance to within 4 percent in our southern operations area the highest spot price at Dawn for the period October 31st, 2000, to October 31st 2001. We are proposing that the charge reflect the highest spot price at Dawn in the month following contract expiry. But from October 31st 2001 on, we are proposing that it be the highest spot price at Dawn in the month the contract expires and the following month, so the higher of the two-month period. 141 That is a change relative to what we have done in the past, where we have charged customers who didn't balance our average spot price in the quarter the contract expired. The reason we are proposing a change is, given the volatile commodity market that we've gone through, the previous approach wasn't providing much of a discipline, or as much of a discipline, as we needed to get people to balance to within 4 percent when their contract expired. There just wasn't enough incentive for them to do that, so that's why we are proposing the change. When customers don't balance to within 4 percent, that has the potential for additional costs to be incurred by the utility which are passed on to other customers and we don't feel that's appropriate. 142 Issue 11.5, allocation of transportation and exchanges deferral accounts, 179-69. For a number of years we've allocated the margin we obtained from transactional transportation services to customers in proportion to available capacity. So we'd look at how much contract demand they are paying for relative to their through-put, and the more capacities that parties make available to us -- to provide inter-transactional services, would warrant a higher proportion of the deferral account clearing. As I said, that has been our approach for a number of years; it's been approved by the Board. My understanding is that parties are concerned about how the additional capacity that may have been made available as a result of customers not taking the 20 percent delivery point flexibility have been factored into that calculation or how it should be. 143 Rate change and deferral account disposition implementation plan, issue 11.8, 16 and 17, we have recently filed an update to our deferral account disposition evidence as well as an update to our implementation plan. In summary, the update to the deferral account disposition evidence identifies that, for rate-01 customer, there are small credits in 1999, 2000, and 2001. In 1999-2000, it's $3.89 a customer and in 2000, it's $1.92 a customer; both credits. In the M-2 category, there's a credit related to the 1999-2000 of $35.61 and a debit for 2001 of $34.18. The reason we have combined 1999 and 2000 commodity related deferral accounts for purposes of disposition is we were no longer able to retain customer-specific information on our billing system so we had to combine those two years for purposes of the disposition. 144 Moving on to the delivery side, we are proposing to collect as a one-time charge the cumulative impact of the delivery-rated deferrals and the retroactive that has resulted from implementing rates after their effective date. The charge to a rate-01 customer would be $102.57 and the charge to an M-2 customer would be $117.81. The reason we're proposing that as a one-time charge as opposed to a protective rate rider as we originally proposed is for the following reasons. 145 One of the main drivers for our original proposal for a rate rider was to align the introduction of a delivery rate rider with the elimination of the commodity rate rider on April 1st. That's no longer going to be possible, so we've lost that alignment. When we updated the commodity related deferral account balances, we now find ourselves in a position of having small net credits to customers, so where in the past when we had a doubling up effect of the commodity retroactivity in the delivery, we don't really have that issue any longer. It's just a delivery piece. We now know, given that we just went through a warmer-than-normal winter, that for anybody on our equal payment plan there will have been credits that will have been accumulating as a result of that which we think will be approximating the one-time charge. So anybody on our equal payment plan won't see any net charge if we're able to dispose of this in August, when our true-ups for the equal payment plan typically happen. 146 And anybody who's not on the equal payment plan is implicitly, I think, accepting some volatility in their charges and a one-time charge in August, which is the month where their charges would typically be their lowest, would still be at or below their charge that they typically see in the winter. 147 The other driver for a one-time charge in August is to contain the calls that we are anticipating getting from the customer in a one month period prior to the light-up season happening. Start getting into the fall, then you get people calling and asking for their furnaces to be lit up and those calls will be coming in the same time we will be getting other calls from customers asking about the rate changes. 148 The last issue is the impact of weather normalization methodology on the storage allocation and I don't have any evidence on that per se. There are some interrogatory responses, I think. Our proposal -- so to update the aggregate excess calculation, consistent with what had been agreed to in the PBR-ADR settlement agreement to reflect current customer profiles. Part of that would be to capture the impact of weather normalization change, and my understanding is that there may be some parties that want to ask some questions about that. 149 That was -- I think that's it for the issues I'm prepared to talk to this morning. 150 MR. JACKSON: Thank you, Mr. Packer. 151 MR. PENNY: Thank you, Mr. Chairman. That's all I had for Mr. Packer by way of introduction so he's available for questions. 152 MR. JACKSON: I guess there are a number of different issues that Mr. Packer is dealing with so it would probably be difficult to sort of sort people out by saying those that support his position would like to ask questions first. So I'll take any -- is there any agreed-upon first party to be do the questioning? Mr. Brett? 153 MR. BRETT: I don't know that it's agreed upon, Mr. Chairman, but I would certainly appreciate being able to go first. 154 MR. JACKSON: Good. 155 MR. JACKSON: It's a pleasure to have you here, sir. 156 CROSS-EXAMINATION BY MR. BRETT: 157 MR. BRETT: Thank you very much. Good morning, Mr. Packer. 158 MR. PACKER: Good morning. 159 MR. BRETT: Mr. Chairman, my intent was to ask questions on issue number 1, which in my case deals with 14.2 and 14.6, I believe, and then I would later ask him questions on these other issues. I don't intend to try and cover all of the seven issues that he's responsible for in one burst here. 160 Mr. Packer, just for everybody's assistance, the first issue I want to deal with is 14.2, the failure-to-deliver charge, and that's covered in the settlement conference on page 28 of the agreement. There's two or three paragraphs there that sort of helpfully set the context to this, I think. 161 As you noted, Mr. Packer, this proposal deals only with Union's southern region. I take it the reason for that is that there was no DCC in the northern region and therefore no DCC to eliminate so it's not relevant not northern region. In other words, there's no rationale for changing the charge in the northern region as there is in the southern region. 162 MR. PACKER: I'll accept that, yes. 163 MR. BRETT: Can you tell us, just as an aside, what is the current failure-to-deliver charge in the northern region? Or if would you prefer to take that by way of undertaking, that would be fine too. 164 MR. PACKER: I think that might be best, yes. 165 MR. BRETT: Can we have an undertaking to that effect? 166 UNDERTAKING NO. G.2.1: UNION GAS CURRENT FAILURE-TO-DELIVER CHARGE, NORTHERN REGION 167 MR. PENNY: That's to provide the current failure-to-deliver charge in the southern operations area. 168 MR. BRETT: In the northern operations area. 169 MR. MORAN: That will be undertaking G.2.1. 170 MR. JACKSON: Thank you, Mr. Moran. 171 MR. BRETT: Mr. Packer, just so I understand, we're speaking here of the rate-1 rate schedule and the T-1 of T-3. And the rate-1 schedule, as I understand it, is basically the schedule that applies for direct-purchase customers, whether they be M-2s, M-4s, M-7s; the rate-1 is sort of the bundle transportation rate that applies to that group of bundled direct-purchase customers; is that right? 172 MR. PACKER: Yes, the R-1 schedule is a companion schedule to the bundled rates schedules in the south. 173 MR. BRETT: Just so everybody understands, that is essentially the entire population of the direct purchasers in the southern region with the exception of those that fall into the T-1 or T-3 categories, and the latter would be a rather small group of, as I understand it, very large industrial what we call today quasi-unbundled customers; is that roughly correct? 174 MR. PACKER: I think so. I just didn't know whether I heard you said that T-3 -- may have related T-3 to the large industrial customers. 175 MR. BRETT: I think I may have misspoke myself. T-1 would be and then T-3 is -- would you just clarify T-3? 176 MR. PACKER: It's the semi-bundled rate for other utilities that are supported by our franchise area. 177 MR. BRETT: Thank you. Sorry about that. 178 Effectively then, this was the -- I just want to get the circumstance when this arises, when this failure-to-deliver charge is to arise. This is typically, as I understand it, when a -- and we'll talk about bundled customers -- when a bundled direct-purchase customer such as a -- it could be an industrial customer, could be a commercial customer, a large institutional customer. These are customers that are taking delivery of gas, typically, at the Alberta border and then are passing on to you at the Alberta border under a bundled transportation agreement, or passing custody of the gas on to you at the Alberta border which you, in turn, then redeliver to them. What we're speaking about here is when a customer in that position fails to deliver to you under his bundled transportation contract as he's contractually obligated to do. Is that fair? 179 MR. PACKER: What we're talking about here is a charge to customers who fail to deliver their obligated volumes which they are contractually obligated to do. It may be at the Alberta border, it may be Ontario; both types of arrangement. 180 MR. BRETT: I accept that clarification, it may be either. 181 And if they fail to deliver at the -- I'll just stick with the Alberta border because it's the one I understand the best myself -- if they fail to deliver, as I recall the terms of your bundled transportation agreement, they have to -- effectively you will deliver the gas to them, redeliver the gas to them -- assuming you purchase the gas or get the gas elsewhere. But they will have to pay any cost differential; is that still the case? In other words, if they fail to deliver to you for a few days at the Alberta border, you have to replace their gas to maintain deliveries to them or you have to take it from storage. In either event, they've got to compensate you for any excess costs that you incur in that exercise. Is that still the case? 182 MR. PACKER: I believe, yes. To the extent somebody fails to deliver, we will try and replace that supply if we can and pass those costs on to the person who failed. That's right. 183 MR. BRETT: Right. Right. And as I understand it, the -- as I recall, your bundled transportation agreement requires the customer to give you a firm commitment to deliver. In other words, the force majeure circumstance in that contract is, or the excuses that the customer might invoke at the Alberta border are quite limited; is that fair? In other words, for example, if the customer was buying gas at the Alberta border from a marketer or a producer, and that marketer or producer couldn't deliver to him that day because his gas field was frozen, my understanding has always been that that would not excuse your customer from delivering to you. The customer still has to basically deliver I think in all circumstances short of perhaps some major transportation breakdown. Does that seem reasonable? 184 MR. PACKER: It seems reasonable. I'm not conversant with the force majeure clause section of the contract, but it seems reasonable. 185 MR. BRETT: No -- that's fair enough. I'm not asking you to comment on the legal niceties of the force majeure clause. 186 In the event that the current charge of $1.34 gJ that you mentioned here on page 28, at the current failure-to-deliver charge, what -- how is that set, basically? Where does that emanate from? 187 MR. PACKER: The $1.34 is the increase. 188 MR. BRETT: Okay, I'm sorry, I've got this wrong three or four times in talking to people. The $2.31 per gJ is the current regular delivery price. Where does that $2.31 a gJ derive from or how is that calculated? 189 MR. PACKER: I believe it's the equivalent to the first block of the M-2 delivery rate. 190 MR. BRETT: Okay. So it's equivalent to the first block of the M-2 delivery rate which would be -- that's the first commodity block, sorry. The first combined block, that would be -- would that be the most expensive block of the delivery rate? 191 MR. PACKER: Yes. 192 MR. BRETT: And the proposal now to change it. You want to increase it by the $1.34 to $3.65. Can you tell us the -- I think I understand what you mean or what the writer meant here in the last sentence of this paragraph where he says: "The $1.34 is approximately equal to 12 months of DCC payment claw-back recovered over 30 days of failure." When you had the DCC, or I guess you still have it, but under the existing provisions as I recall, and correct me if I am wrong, that if a person were delivering to you, a direct-purchase customer was obligated to you to deliver at Parkdale pursuant to the terms of the bundle transportation agreement. And if he failed to deliver effectively, you can -- I'll use an extreme example just to, I suppose not really make my point but -- just because it doesn't help me it hurts me -- but just to sort of clarify the ground. If he were to default on the 364th day, under the old regime, if you wished, you could actually charge him for the DCC or I think you certainly had the option for charging him or taking back if you like his DCC credit payments back to day one of that year; is that right? 193 MR. PACKER: That's correct, yes. 194 MR. BRETT: And now what you're saying here basically is you computed the $1.34 by assuming that you would recover a year's worth of DCC in respect of the undelivered volume by over a 30-day period. That's the arithmetic? 195 MR. PACKER: Yes. 196 MR. BRETT: All right. 197 All right. Mr. Packer, could you tell me, do you know what failures you've had to deliver over the last winter? In other words, how many times have you had direct-purchase customers fail to deliver gas to you at Empress or at Dawn or other delivery points in the East as a result of which you had to invoke this failure-to-deliver charge? 198 MR. PACKER: I don't think we had too many failures this past winter, and that was really a function of weather and gas prices. But the prior winter, a ballpark would be about a dozen failures and that was during the -- when gas prices were high; that's when people tend to fail. 199 MR. BRETT: In this past -- I'll just come back to last year in a second, but as far as this last winter we just came through, did you have any failures? 200 MR. PACKER: I'm not aware of any. But that was based on the circumstances. The prior winter, I think it was about a dozen. 201 MR. BRETT: A dozen failures. Can you give us any indication of how long the failures lasted in each case? What the average duration of the failure would be, in terms of days? 202 MR. PACKER: I don't know exactly how many days the failures would last. Typically, what happens if they last for more than 30 days or a month after when they start, we will start to look at moving the customer back to system. So, 30 days to -- we have some issues in the general service market where you would only move somebody back on the first of the month. So a 30-day window is not a bad proxy for how long somebody could be in a failure situation. It could be a little bit longer when they fail relative to the start of the month, but I don't know what their disbursement was between zero and 30 days. 203 MR. BRETT: Yes. Do you have any notion of the amounts of gas in those failures? 204 MR. PACKER: I don't know the amount of the gas, but I believe the ballpark figure on the amount that we clawed back, as far as DCC, was around $50,000. 205 MR. BRETT: $50,000? 206 MR. PACKER: And when we claw back the DCC, that get put into a deferral account. 207 MR. BRETT: And that $50,000, can you just clarify for me one small point. When you claw back, you don't have -- under the DCC arrangement, you claw back in each instance, you don't waive your claw back right. What you claw back is what you claw back. Or putting it maybe another way, the $50,000 really represents, is the result of your exercising your claw-back right for all of these folks that fail; you didn't say, some of them we're not going to claw back and others we are going to claw back. It's an automatic act that you take? 208 I'm not sure a heck of a lot turns on that; I really just want to get an idea of the magnitude of this thing. 209 MR. PACKER: I think 50,000 is a reasonable proxy for the magnitude, but to go ahead with your question, I don't think we would as a matter of course waive the charges. But at some point, we have to determine whether there's any -- whether we're able to recover it all, and those types of considerations may come into play at some point. 210 MR. JACKSON: Sorry, when you say able to recover it all -- 211 MR. PACKER: Depending on who fails, in the circumstances we are going to add up all of our charges but -- 212 MR. JACKSON: They may come to so much that you don't think they're good for it. 213 MR. PACKER: Or we know they're not good for it. 214 MR. BRETT: Okay, thank you. 215 MR. JACKSON: Mr. Brett, I was just wondering if this would be an appropriate time to take the morning break. 216 MR. BRETT: Thank you, Mr. Chairman, it would be from my point of view. I'm going to move on to the next issues. So let's take 20 minutes then so we should return at 11:05. 217 --- Recess taken at 10:45 a.m. 218 --- On resuming at 11:10 a.m. 219 MR. JACKSON: Please be seated. 220 MR. MORAN: Mr. Chair, just a housekeeping matter, perhaps, before we continue. Given the subject matter of this panel, I thought it might be appropriate to enter in two exhibits before we go much further. There's two letters. One is with respect to Oxford Automotive, it's dated March 12th, 2002, from Michael Koval. That would become Exhibit 2.2. 221 EXHIBIT F.2.2 LETTER FROM MICHAEL KOVAL WITH RESPECT TO OXFORD AUTOMOTIVE DATED MARCH 12, 2002 222 MR. MORAN: The other one is a letter from P. Barnett Construction Inc., dated April 3, 2002. It's a letter of comment and request for late intervenor status and that would become Exhibit 2.3. 223 MR. JACKSON: Thank you. Is a representative here, if they are asking for late intervenor status? 224 MR. MORAN: This appears to come in by fax so I am assuming that there isn't a representative right now. 225 MR. JACKSON: They may wish to speak to that later. 226 EXHIBIT F.2.3: LETTER DATED APRIL 3, 2002, FROM P. BARNETT CONSTRUCTION INC. - REQUEST FOR LATE INTERVENOR STATUS 227 MR. JACKSON: Mr. Brett, back to you. 228 MR. BRETT: Thank you, Mr. Chairman, panel. 229 Mr. Packer, I just wanted to confirm, you may have said this earlier, but the failure-to-deliver charges are for the account of the shareholder; correct? 230 MR. PACKER: I'm not sure I said that this morning, but I think there was an interrogatory that asked what happened with failure-to-deliver charges and yes, they are in the account of the shareholder. Really to manage all of the costs that we incur as a result of a failure we have to deal with that. We have legal costs, we have overtime, we have -- it's not an easy thing for us to accommodate when it happens. 231 MR. BRETT: My next area is 14.6 which is the C-1 charges. And this is at page 30 of the settlement agreement draft. There's a short summary of there what's at issue here and I just have a few questions in this area. 232 Mr. Packer, the C-1 rate is a combined storage and transportation rate in the southern region? I mean by that, did you take it you have to take both storage and transportation; is that correct? 233 MR. PACKER: No, that's incorrect. 234 MR. BRETT: So can you describe what it is? You can take just storage, just transportation, or the two together? 235 MR. PACKER: The C-1 rate schedule is a rate schedule where in-franchise services are provided with respect to storage and transportation. You can take whatever services you'd like off the schedule as long as the capacity is available and you are willing to pay the price that we're asking for the service. Most of the services are transactionally based, where alternatives exist in the market. So, we've been allowed for a number of years to price them within the range. 236 MR. BRETT: Within the range? 237 MR. PACKER: Yes. 238 MR. BRETT: And the range, can you just state for the record what the range is. 239 MR. PACKER: Is there a particular service you'd like to me to talk about? There are a number of services on the rate schedule. 240 MR. BRETT: C-1 storage rate. 241 MR. PACKER: For short term, less than two years, in off-peak storage combined-storage space and interruptible deliverability, the maximum currently is $2.363 per gJ. Firm deliverability, the maximum is $0.562 per gJ. 242 MR. BRETT: Okay. Could I just stop you there, please. On the first one, the off-peak, the minimum is what? 243 MR. PACKER: When we went to a -- as a result of a PBR mechanism being approved for us, the minimums were dropped off the rate schedule. In effect, all of our rates are maximums. So it didn't make sense that you would have some rates with minimums and others without. 244 MR. BRETT: Okay. So the minimum is zero and the maximum is $2.363. Just so I understand, you're talking here about -- in this particular instance we're talking about the short-term storage, short-term transportation services. We're not talking about a longer-term storage contract, we're talking about storage contracts for less than two years in duration? 245 MR. PACKER: You stopped me kind of mid-stream. That's what I've talked about so far, but we are proposing changes to the ranges for both short-term and long-term storage. 246 MR. BRETT: I'm sorry, okay. Carry on then. 247 MR. PACKER: Rather than go through each of the changes and put it on the record, it may be easier for people to follow if I direct them to the filed schedules. 248 MR. BRETT: That's fine. 249 MR. PACKER: I'm looking under tab 14, appendix A, near the back there's a marked-up version of the C-1 rate schedule, where we black lined our changes, our proposed changes. 250 MR. BRETT: And, just to confirm something that you said a moment ago, I want to make sure I understand it clearly, there is no -- let me it ask it this way. If you were asked to describe to the Board a typical customer for this service, who would a typical customer be taking this kind of service? 251 MR. PACKER: Well, it's an ex-franchise rate schedule so, typically, they are ex-franchise customers who come to us as a result of us posting capacity being available and provide an indication of what they're willing to pay. And, if they are successful in that bid, then they are awarded the service. It's generally -- they are in large measure brokers and marketers. It could be LDCs in other jurisdictions. 252 MR. BRETT: They would not be end users, typically? 253 MR. PACKER: Typically, they are not, although if an in-franchise customer wanted to take a service within this rate schedule it wouldn't preclude that, but it doesn't happen very often. 254 MR. BRETT: So you could be an in-franchise customer and take service under this rate. When might an in-franchise customer wish to do that, for example? 255 MR. PACKER: For example, the most recent example is we have an in-franchise customer who would like to, rather than source their gas at Parkway, they like to source it in the States and they've contracted for C-1 transportation to get from Ojibway to Dawn and then as REM 12, to get from Dawn to Parkway. So the situation would be where a customer has an obligation to us and they want to change the arrangement, such that we're indifferent, they maintain that obligation but they fulfil it in a different way than they have historically. 256 MR. BRETT: Have you had many in -- have you had, in the last say 12-month period many in-franchise customers that have done that sort of thing? 257 MR. PACKER: I'm only aware of the one. 258 MR. BRETT: And in that -- in that case, you've just described to me under your proposal that in-franchise customer would or could be charged, would be charged, the market rate for storage? 259 MR. PACKER: No. Well, in that particular case I just gave to you, I think they were contracting for firm transportation for more than a year between Ojibway and Dawn. That is a post price; it's not a range rate, other than by virtue of the PBR price cap, the way our rates were set. 260 MR. BRETT: Just on that last point, under the PBR regime which you are currently under, could you just say that again? The transportation rate that's he been charged would be a -- 261 MR. PACKER: My understanding is that, again they have options, but I understand that he had purchased the service that took his gas from Ojibway to Dawn and he's paying the posted price which. In the previous cost-of-service environment, it wasn't a range rate, it was a posted price. 262 MR. BRETT: And it still is. Basically, it still is a posted price? 263 MR. PACKER: Well, the posted price isn't in excess of what it would have been under cost-of-service, in theory. All of our prices are now caps under the PBR. 264 MR. BRETT: And in that case, storage component of that service is -- 265 MR. PACKER: He's not taking any storage that I'm aware of. 266 MR. BRETT: So he's not really a customer for this at all; he taking long-term transportation service and no storage. 267 MR. PACKER: I interpreted the question to be: Are there any in-franchise customers that may avail themselves of C-1 services? And the example I gave fulfills that criteria. He's not taking any storage that I'm aware of, other than taking a in-franchise customer. 268 MR. BRETT: Fair enough. I guess I mis -- 269 MR. PACKER: If it's helpful, I think it would be very rare that you get an in-franchise customer asking for C-1 storage service because they are entitled to cost-base storage services under other rate schedules and we have -- 270 MR. BRETT: That's what I thought. That's why I was -- 271 MR. PACKER: We are committed to provide that service to them at cost, based on the aggregate access calculation. So to the extent somebody wanted to -- an in-franchise customer wanted to avail themselves of C-1 storage, they'd have to be doing that to meet some other need. We wouldn't preclude it, but that doesn't happen very often. 272 MR. BRETT: Some other need with respect to some -- 273 MR. PACKER: He wants to play in the secondary market. It's not to meet his plant's requirements. 274 MR. BRETT: In the example that you were giving, the person that was taking long-term transportation service, you said he had options, meaning that he had -- meaning what there? 275 MR. PACKER: A customer that is looking for C-1 transportation has a number of options, and that particular example I gave he could have remained at Parkway, he didn't have to come to us to ask for C-1 transportation service. He could have gone to the secondary market and picked up capacity from somebody else. He could have, in certain circumstances, contracted from 12 Transportation if he wanted to source his gas at Dawn. 276 MR. BRETT: Thank you. 277 MR. PACKER: The obligation for deliveries at Parkway, how he gets them there, is really up to him. 278 MR. JACKSON: But his options for storage, what would those have been? 279 MR. PACKER: In the example I've gave, he's not asking for any storage under this rate schedule. His options would have been to contract for either bundled service, in which case it's part of the bundled package, or T-1 storage service, in which he would be paying the cost-based charge as per the T-1 rates. 280 MR. JACKSON: And he may have gotten the U-2 schedule, hypothetically, if that were available? 281 MR. PACKER: This is a large industrial customer. He could have taken U-7 or U-5 which are already available. 282 MR. JACKSON: Just one more clarification, if I could. You said that when we implemented the PBR decision that most of your fixed rates for transportation became caps rather than fixed rates. Just help me on that. That may indeed have happened, I don't know if I've read all of the rate schedules in detail, but you're saying you can price at anything under the fixed rates for now, all distribution and transportation rate schedules? 283 MR. PACKER: Yes, that's my understanding. During PBR, we had proposed that we had the ability to discount or offer multi-year prices, and I believe the Board approved that in their decision and the rate schedules now have a sentence or two that identify that. 284 MR. JACKSON: Right. So that if it goes for more than a year, you can price under. What about less than a year? I'm just trying to recall, and I will review these hopefully before you're off the stand. 285 MR. PACKER: My understanding of what the Board approved was that if it's for more than a year we have the ability to negotiate a price. It may be above or below the posted price because the parties always have the ability to take the posted price. If it's for less than a year then it's not symmetrical, we would have the ability to discount but -- 286 MR. JACKSON: But not go above. 287 MR. PACKER: But not go above. 288 MR. JACKSON: Thank you. 289 MR. BRETT: Just to recap then, the only way in-franchise customers would get involved with this set of services would be, as a practical matter, if they wish to take a set of services that are subject to your proposal here which, as I read it here, are the short-term firm transportation services. That's the only time that your proposal would intersect with the fortunes of an in-franchise customer. 290 MR. PACKER: If my answer confused people, I apologize. All I was trying to identify is that any in-franchise customer has the option of taking any of the services on this rate schedule if they have a particular desire to do so, but in most cases they have a cost-based option available to them under one of the other rate schedules which would mean that it would be fairly rare that an in-franchise customer would be electing to take service under the C-1 rate schedule. It would be because they -- in most cases, because they were electing to play the secondary market. 291 MR. BRETT: And your point with respect to the ex-franchise customers is simply that, I guess, it's two-fold. It's one: That the market is competitive for these services, for these people, for these entities. And, your second argument is that you don't want some intermediary or some other party taking the market rent, if that's the right way to put it, between the cost-based rate and the market-based rate. So if there is any surplus there you'd like to have Union get that. 292 MR. PACKER: I think that's generally correct. It doesn't make sense for us to be precluded from charging a market value for something when the party we are selling it to can then turn around and mark it up. Under the current structure though, 75 percent of those rents, so to speak, would be deferred and given back to ratepayer. They wouldn't stick to Union's shareholder, if that's the way you use the term Union. 293 MR. BRETT: Yes. Yes. Okay. And the final point, I guess, is just that some of the parties that would take the service from you would -- they in turn, I suppose, could use those services, and I'm asking this rhetorically if I'm wrong, please tell me, but they could use those storage and transportation assets as part of a package that they would offer in turn to in-franchise customers or just other ex-franchise customers? That's not an easy question. I think perhaps it's a -- 294 MR. PACKER: I guess there are -- there may be circumstances where the person taking the capacity could provide a packaged service to an in-franchise customer as a result of that. 295 MR. BRETT: But you expect the bulk of it to be effectively services that they would be providing to people up or down stream of Union. 296 MR. PACKER: Right. And the reason I would think that is -- don't forget Dawn-Trafalgar transportation. If an in-franchise customer is trying to service their own needs, that's part of the rate they pay us for delivery service. So I'm not sure why there would be an additional need. 297 MR. BRETT: Thank you very much. Thank you, Mr. Chairman, for commenting in that discursive last few minutes. I'm finished for now. 298 MR. JACKSON: Thank you, Mr. Brett. 299 You're finished with this Panel? 300 MR. BRETT: Yes, sir. Not with this Panel, but this set of issues, the issue number one. The off -- 301 MR. PENNY: Sorry, Mr. Chairman, but let's clear up any misunderstanding, if it exists about that, that Mr. Packer's here to testify to all of these issues. And to the extent that the parties -- it's my position that to the extent that parties have questions of Mr. Packer on this bundle of rate-related issues that they ask them now, and they don't have a second, a third, a fourth, a fifth or a sixth or a seventh time to ask him another series of questions. 302 MR. BRETT: Mr. Chairman, perhaps I can address that. As I mentioned, I don't know where Mr. Penny was when I made my initial comment, but I did say that I would be dealing with the issues -- that the point under issue number 1. Certainly, I have no intention of coming back "a fourth, a fifth or a sixth or a seventh time." There is one other issue in this area that I would -- that is -- there are two other issues that are of interest to me. They are complicated issues, they are very different than the issues we've just spoken about, and I frankly am not prepared to deal with them this morning. 303 I mean, the typical way that one proceeds, I think, is by issue and at the outset I made my point that I would be dealing with issue number 1. And I don't know what Mr. Penny's concerned about. Is he concerned that somehow it's going to be more time spent if it's -- I don't expect to spend a great amount of time on any of these issues, but I would like to come back to the DCC issue. 304 MR. JACKSON: Yes. 305 MR. PENNY: Mr. Chairman, I beg to differ with Mr. Brett. The practice of the Board has always been that the questions that parties have for panel witnesses get put at one time. Mr. Packer may well be done today and if Mr. Brett isn't ready to go, I'm not prepared to have Mr. Packer come back just to suit Mr. Brett's preparation time. Mr. Brett is an intervenor in this hearing, is an experienced intervenor in this hearing and he should be prepared to ask questions. 306 MR. BRETT: Mr. Chairman, I'm prepared to ask questions today; I'm not prepared to ask questions immediately, as we sit here. So I'll certainly be no party to Mr. Parker -- Packer having to come back, or anything of that sort. 307 MR. JACKSON: Thank you for that. I think we should be able to accommodate that if Mr. Packer isn't off the stand. I think -- I don't disagree with Mr. Penny's comments about usually having every -- all your questions for one panel ready to go, but on the other hand, do you have any trouble with accommodating Mr. Brett as long as he can do this before Mr. Packer is off the stand? 308 MR. PENNY: Mr. Chairman, I was just going to say, if it's a question of just accommodating Mr. Brett I have no difficulty ultimately with that. I do think that it would be salutary to have your direction, that that's an accommodation of Mr. Brett specifically, and unless someone can accommodate a similar issue then we should proceed in the ordinary way. 309 MR. JACKSON: Is there anyone else that will be inconvenienced by the proposal Mr. Penny has, which I believe is consistent with the way a number of hearings have come forward that I have been associated with, so I have no trouble with that as a general rule, but is there anyone else who would need to have accommodation in respect of some of the issues that Mr. Packer is dealing with, and to have to go twice? There's no one then that wishes to speak to that? 310 MR. DEROSE: Vince Derose on behalf of IGUA. I have a number of questions that relate to Mr. Brett's cross-examination on the first issue as well. I do not anticipate having any questions specifically on weather normalization, but if the accommodation is being given to Mr. Brett I would only ask for the same accommodation with respect to that issue. To a certain extent, it depends when I get up -- to a certain extent, it would in my mind make sense for myself to go next, only because I'm going to be dealing with the same issues that Mr. Brett has just dealt with. I would -- 311 MR. JACKSON: You're asking to reserve on weather normalization, if you think of something else after your colleagues have asked questions? 312 MR. DEROSE: Yes, Mr. Chairman. 313 MR. PENNY: That's quite different, I think. That falls squarely into the kind of concern that we run into where the process will entirely break down and everybody will be wanting to come back having thought up something else and it is not conducive to an orderly proceeding, in my submission. And unless there is a specific reason that a particular party can say, I'm not prepared to deal with this and I need a little bit more time or whatever, then that accommodation, in my submission, ought not to be granted. 314 MR. JACKSON: I think we'd like to follow that path too. So my understanding in this particular instance is that Mr. Brett had a different understanding when we started. 315 MR. PENNY: Quite so. 316 MR. JACKSON: And he might not have volunteered to go first, had he not thought he would have a couple of opportunities on different issues. So let's proceed that way and Mr. Brett can come back on this, as long as Mr. Packer is still on the stand. And for other people, would you please try to cover all the questions that Mr. Packer is going to deal with. 317 So on that basis, Mr. Derose, does IGUA still want to go next? 318 MR. DEROSE: Well, I'm not going to volunteer but I'm in your hands, Mr. Chairman. 319 MR. AIKEN: Mr. Chairman, I am. 320 MR. JACKSON: Thank you, Mr. Aiken. 321 CROSS-EXAMINATION BY MR. AIKEN: 322 MR. AIKEN: I'm going to be referring to a book of materials that I provided the Board staff and to Union and the intervenors yesterday, and I was wondering if we could get an exhibit number for that? 323 MR. MORAN: The next exhibit number is F.2.4, Mr. Chair. 324 MR. JACKSON: Thank you. 325 EXHIBIT NO. F.2.4 BOOK OF MATERIALS FOR THE WHOLESALE GAS SERVICE PURCHASERS GROUP AND NATURAL RESOURCE GAS LIMITED 326 MR. PENNY: Mr. Chair, before Mr. Aiken starts, as I sometimes do with parties who represent more than one party, ask through you whether Mr. Aiken could indicate on whose behalf, if it makes a difference, on whose behalf he is asking questions with a particular issue. 327 MR. AIKEN: For all of my cross today, it will be on behalf of both parties that I represent. The issues are basically the same for both parties. 328 Mr. Packer, if I could have you turn to page 1 of that book of materials, and the title is, "delivery commitment credit." 329 MR. PACKER: I have a slightly different package that I understood to be the same; it was a package filed by Kitchener so if you could stick to identifying your titles, I would appreciate that. 330 MR. AIKEN: I think the first page is essentially the same as what Kitchener had sent in. 331 My first question on here is just to confirm that Union's proposal to eliminate the DCC is shown in column D. I want you to confirm that. 332 MR. SOMMERVILLE: Mr. Aiken, I had some difficulty in hearing that question. 333 MR. AIKEN: My question is, is Union's proposal to eliminate the DCC payment shown in column D on page 1 of the book of materials. This shows the reduction by rate class that Union's proposing. 334 MR. PACKER: Yes, that's correct. 335 MR. AIKEN: And on that same schedule, under column C labelled DCC per cost study, can you confirm that those are the allocated costs of the DCC? 336 MR. PACKER: Those are the costs as included in rates, yes. 337 MR. AIKEN: Yes, and that was part of the EBRO 499 Board -approved cost allocations? 338 MR. PACKER: Yes. 339 MR. AIKEN: In the RP-1999-0017 ADR agreement, section 1.2.4, which is on page 18 -- I don't think you need to turn it up -- the agreement states, and I quote, "the DCC will be eliminated in a manner which is revenue-neutral to all end-use customers." Can you please explain what you believe that "revenue neutral to all end-use customers" means? 340 MR. PACKER: Yes. Throughout the PBR case, as it related to the elimination of the DCC, we had identified how we had proposed to remove it, and it was the same way it was being paid out. So when I look at revenue neutral, or when you asked me what "revenue neutral" means to me, I look at it from the perspective of customers and what they were seeing as far as a net bill. Prior to the DCC being eliminated, they would see their delivery rate and they would see a DCC offset which would generate a net revenue number for us. Our proposal was to maintain that, but by virtue of eliminating the DCC, rolling the payment into the charge so that the net charge that a customer saw would not change. 341 MR. AIKEN: Throughout the evidence, Union is proposing a number of allocations, of deferral account balances for example. I believe there are 17 accounts in the updated Exhibit B, tab 13 schedule 4 that were filed yesterday. And then they all have allocations associated within the rate class, as well as allocations of pass-through items, the increase in 2001 for the price, and perhaps some non-routine adjustments. I'm not sure if there were any of those. Would it be fair to say that on the majority of those allocations, they're done on the basis of the Board -approved cost allegation methodology, from EBRO 499. 342 MR. PACKER: Yes, that is part of the PBR case, the EBRO 1999-0017 that was what we had proposed. The pass-through adjustments would be allocated in relation to how costs had been built into rates in E.B.R.O 499. That's what we proposed; that's what we're doing. Same thing for the DCC. We had proposed to eliminate the way it had been paid out. That was accepted in the ADR and that's what we're doing. 343 MR. AIKEN: Are there any other -- or any allocations done on the basis other than the way the costs were included in the Board -approved 499 case? 344 MR. PACKER: Not that I'm aware of. As I said, in my opinion both things were agreed to or accepted by the Board in that case; how we were going to handle pass-through adjustments and how we were going to eliminate the DCC. 345 MR. AIKEN: And what about the allocation of the deferral account balances? Those are based on Board -approved allocation methodologies; is that correct? 346 MR. PACKER: Whenever we dispose of deferral account balances, we look at them to identify what the appropriate allocator is, but by and large we have used the same allocator as the Board has approved in the past which is the same for the account that captures the DCC payment variances. We're proposing to allocate those balances the same way they were included in rates. 347 MR. AIKEN: Yes, and I'll be getting to them in a moment, yes. 348 Would there be any financial impact on Union if Union were to eliminate the DCC based on the allocation of the costs shown in column C as compared to the methodology shown in column D of page 1? 349 MR. PACKER: Potentially, yes. 350 MR. AIKEN: And what would that be? 351 MR. PACKER: Well, it would be as a result of the impact that type of approach would have on our industrial customers. If I look at the impact that would have on the net charge that an industrial customer would see on our system, it would be an increase to T-1 customers of 49 percent. So, approximately 50 percent increase in their net charge from Union. For bundled M-7, it would be a net increase of about 35 per-cent and I can't help but think that that's going to have some impact on their consumption and the appeal of natural gas to them, and over time that would reduce the revenue from that particular market segment. 352 MR. AIKEN: If I could have you turn to page 2 of the book of materials, this is the revenue-to-cost ratios, and I think this ties into your last answer. First of all, for the M-2 and the M-9 rates, under the revenue cost ratios proposed before the DCC elimination, which is in the middle of that page, you'll agree with me that from M-2 and M-9/T-3 rates, those revenue-to-cost ratios are both above 1, and that would indicate that those customers are paying the costs that have been allocated to them; is that correct? 353 MR. PACKER: Sorry, I will agree that the revenue-cost ratios shown there are above 1, I'm not sure I caught the second part of your question. 354 MR. AIKEN: Oh, sorry. That that effectively means that they are paying the cost that has been allocated to them. 355 MR. PACKER: That's typically what a revenue-to-cost ratio would indicate, yes. 356 MR. AIKEN: Yes. And for example, the T-1 rate class you mentioned before: They have a revenue-to-cost ratio there of .803, before the elimination of the DCC; correct? 357 MR. PACKER: Yes. 358 MR. AIKEN: And that would fall, under your proposal, to .528 with the elimination of the DCC. 359 MR. PACKER: Yes, it would fall. Yes, it would fall. This isn't a new proposal, we're just doing what parties agreed and accepted would be the approach in the last case. 360 MR. AIKEN: I think there's obviously a debate around that point. 361 MR. PACKER: Well, all of this information was provided in the PBR case. We identified how we were going to eliminate the DCC, it was embedded in the revenue-approved schedules and the parties had that available to them when they were looking at the settlement agreement. 362 MR. AIKEN: If I can have you go back to page 1. You've indicated that the M-2 and M-9 rate classes, because the revenue-to-cost ratio is greater than 1, they are paying the costs that have been allocated to them. In column E, we see the difference between the allocated cost and the reduction proposed by Union. And for the M-2 customer class, there is a continuing cost of 15.3 million and for the M-9/T-3 class, continuing cost of 144,000. My question is, does Union's proposal mean that these customers will continue to pay these costs after the DCC is eliminated? 363 MR. PACKER: The way we are eliminating the DCC means that people are going to have the same net charge, after the DCC is eliminated, as they did prior to the DCC being eliminated. 364 MR. AIKEN: So I would take that as a yes. 365 MR. PACKER: I believe so, yes. 366 MR. AIKEN: And you believe that's fair? That you've eliminated a cost but it's still going to be embedded in the rates for some customers? 367 MR. PACKER: Yes, I do. The allocation of the DCC was approved by the Board some time ago. This has been the net effect on customers for quite a long period of time. We allocate the DCC costs in proportion to Dawn-Trafalgar design-data demand. The DCC amount was established looking at avoided costs on a our Dawn-Trafalgar system. We're not proposing anything different here other than to eliminate something in a way that kept people neutral to whether it existed or not. 368 MR. AIKEN: Do you -- when you come back for a cost-allocation hearing, at the end of this current PBR term, is this going to present problems in terms of revenue-to-cost ratios going forward? You'll see on page 2 of my booklet of materials that once you've eliminate the DCC, there are substantial reductions to the large industrials in particular. When you come back with the cost-allocation study, are we then going to have a problem that we're going to say that there is too much of an increase in the rates to those industrial customers? Because I assume your cost allocation studies will not have a DCC cost in it going forward. 369 MR. PACKER: The cost-allocation study wouldn't have a DCC cost, I wouldn't expect, no. Will it create problems, I don't know whether it will create problems. It will depend on people's concern about what the revenue-cost ratios are when we rebase. 370 MR. AIKEN: Don't you believe that the revenue-cost ratio should be a concern now, given that you are eliminating a specific cost but it's still being embedded in rates? 371 MR. PACKER: We are not. The net effect on customers as a result -- how we are eliminating this is exactly the net effect that this did as prior to its elimination. So no, I don't believe this should be a concern for people. This is effectively is what's been happening for a number of years; it just wasn't transparent because the DCC payment was a charge to somebody that was reflected in our cost of service and allocated -- in our allocated in proportion to the design day demand. 372 MR. AIKEN: So you're saying that because they've been paying this subsidy -- I'm speaking of the M-2s for example -- not necessarily a subsidy, but they've been paying more in their rates than what they've been paid by Union, the DCC payment, that even after this payment is gone, the program is gone, and this program is going, that difference should remain in the rate. 373 MR. PENNY: I must say, Mr. Chairman, that the difficulty that I'm having with Mr. Aiken's entire premise and basis of questioning is that he is a party to the settlement agreement that agreed that the DCC would be eliminated in a manner which is revenue neutral to all end customers. Mr. Aiken himself has been asking a number of questions why this wasn't eliminated on a cost-neutral basis. And the whole premise of Mr. Aiken's questioning is focused on the difference that transpires between doing it on a revenue-neutral basis and on a cost-neutral basis. 374 if Mr. Aiken is a party to this agreement, and there are procedures to be followed if the party seeks to resile from a settlement agreement. Mr. Aiken has not even attempted to justify an attempt to resile from the agreement that he made in the PBR case. 375 MR. AIKEN: If I could respond to that. My client takes issue with the definition of revenue neutral to all end-use customers. We would submit that eliminating the cost, based on the cost allocation, is also revenue neutral to all end-use customers in aggregate. It's the same $27 million. The ADR agreement does not state that it's revenue neutral to each end-use customer. It does not say it's revenue neutral in each rate class. 376 MR. JACKSON: I think you are objecting to this line of questioning but I can say that -- I can make two observations. 377 I think that the interpretation could be at more than one level and I think that maybe the ADR was not specific as the ADR agreement, whether it was revenue neutral by class of service. And my second observation I have is that it raises a difficult situation for the Board. That was a settlement proposal agreed to for purposes of one proceeding and the Board issued what it thought was a final decision in that proceeding, and whether no party will change their mind afterwards in another proceeding is another question. If you would like to pursue it, I guess we could get into that, but I think it's a question of how long is that agreement binding, too. 378 MR. PENNY: Yes. No, Mr. Chairman, I don't think it's necessary to pursue it. You've raised an interesting question and we'll leave that for another day. I take Mr. Aiken's point; at that point it obviously becomes a question of argument. So the only observation I would have at that stage is whether we're really cross-examining on facts or cross-examining on argument at this point. But I take Mr. Aiken's point, that there's at least the potential for difference in interpretation. 379 MR. JACKSON: I take it, Mr. Aiken, correct me if I am wrong, but I took that you had done a very good job, Mr. Penny, as to establishing Mr. Packer as an expert who was being asked for his opinion. 380 MR. AIKEN: Thank you, Mr. Chair. I had actually finished my cross examining on that issue. 381 I'm moving now to the direct purchase revenue and payment deferral account, and this shows up as the last three columns on page 1 of my materials. 382 First, I'd like to provide an update to the column H. I had attempted to do this allocation prior to Union filing some updated information yesterday, and perhaps, Mr. Packer, you can take subject to check my numbers aren't far out. But in place of a 4271 on the M-2 line of column H, it would be 4269 followed by 432, 26, 0, 518, and then the remainder of the numbers would be same. That comes from Exhibit B, tab 13, schedule 4, updated. I just wanted to make sure everybody was working off the same set of numbers. 383 My understanding is that your proposal to allocate the balance of this -- in this account is essentially based on the allocation used in column C, that the allocation approved for the cost in the EBRO 499; is that correct? 384 MR. PACKER: That's correct and the rationale for that is, had the costs been forecast as they were incurred at roughly 33 million, that's how they would have been included in rates. 385 MR. AIKEN: So just to make it clear to me, then, that the link between this account and the 27 million that was allocated in the cost study, is just, for example, increase in direct purchase volumes that required DCC payment now. This is just the difference between the actual and the forecast. 386 MR. PACKER: The difference between actual and forecast volumes, yes, because the unit rate hasn't changed. 387 MR. AIKEN: And you mentioned earlier the $50,000 in claw-back revenue. Does that go into the credit in this account? 388 MR. PACKER: Yes. 389 MR. AIKEN: Moving on to my final topic for Mr. Packer, and this has to do with the rate change and deferral disposition plan that you filed yesterday. I didn't see anything there in the proposal for the contract accounts. Are you still proposing the six monthly payments or whatever it was in the original evidence? 390 MR. PACKER: Yes. There's no update required to the contract rate classes. The only update required was for the general service market and that was really to align it with the fact that we had proposed a prospective rate recovery, or a rate rider, that started in April, and we knew that wasn't going to happen so. We've updated the proposal. The proposal for the contract market is no different than what we had proposed, where we would calculate the amounts that each customer owed us and if there were charges owed, we'd recover that over the period of time that was left between the implementation date and the end of the year. That's really a function of -- there are reasons why we'd handle those differently due to equal-payment plan credits being accumulated and the fact that in the contract markets the payment stream is more even. We don't have the winter spike that we do in the general service market. 391 MR. AIKEN: Thank you, Mr. Packer. Thank you, Dr. Jackson, those are my questions. 392 MR. JACKSON: Thank you, Mr. Aiken. 393 Who would go next? 394 MR. RYDER: I think it's the City of Kitchener and if it's all right with the Board, Mr. Quinn will address issue 5 and then I'll address the other issues. 395 MR. JACKSON: That's fine with us and I might just suggest, if I could, that since we're sitting a full day today, we would -- have scheduled to break at noon and return at 1:30. So, I think that that's probably the best way to proceed. So, thank you, Mr. Ryder and we'll have you up at 1:30 then. So we will return at 1:30. 396 --- Luncheon recess taken at 12:00 p.m. 397 --- On resuming at 1:35 p.m. 398 MR. JACKSON: Good afternoon, please be seated. 399 Mr. Ryder or Mr. Quinn, whenever you're ready. 400 CROSS-EXAMINATION BY MR. QUINN: 401 MR. QUINN: Thank you, Mr. Chairman. Just prior to the lunch break, Mr. Ryder had indicated that I would be asking questions in terms of issue 5, weather normalization. We did not mention I'd ask a couple of questions in the areas of 14, 14.2 and 14.4 and 14.6, which are rate impacts that would impact our area. I think it would be helpful to us and the Board to understand the reasons for why. Mr. Ryder then would follow with his examination also. 402 MR. JACKSON: Thank you. 403 MR. QUINN: Mr. Packer, I wanted to first start with the area of weather normalization, and it may be implicit in your evidence but I want to make sure it is explicit. Would you be proposing, when you refer to using it for operational purposes, to determine the amount of storage required to meet in-franchise needs? 404 MR. PACKER: Yes, I think that's implicit. We aren't planning to use a better estimate of weather in determining our consumption so it would follow from that that it would be used to determine storage requirements. 405 MR. QUINN: And I think it is explicit in that, but I would like confirmation as well that it would also include the allocation to customers who unbundle the amount of storage they would get under the aggregate quote for excess of regular methodology. 406 MR. PACKER: Yes, it would. It would also follow that any customers affected by our weather normalization process would have their storage entitlements calculated using the new base. 407 MR. QUINN: Thank you. Is it correct then that your proposed weather normalization methodology weights more recent year's weather more heavily than your existing methodology? 408 MR. PACKER: I'm not -- I can accept that, subject to check. I'm not an expert in the differences between 30-year average and 20-year trend, but my understanding is that likely would be the outcome, yes. 409 MR. QUINN: Possibly through the course of that discussion, maybe we can come back to that. And, if you'd be willing to check in that area as an undertaking to understand the impact, then we will get to that point later on. 410 MR. PACKER: Yes, I said I'd accept it, subject to check. 411 MR. QUINN: Okay. Thank you. Then I will carry on subject to check. 412 We've just experienced four warmer-than-normal winters in a row; is that your understanding? 413 MR. PACKER: Again, I don't know that to be factual or not. That's not my area but I would accept that the last winter we went through was definitely warmer than normal. Warmer than we've seen in the past. 414 MR. QUINN: Well, our weather information indicates that it's four warmer-than-normal winters in a row and I believe Union has stated that in some of the evidence in other proceedings. Maybe you would be able to check that? 415 MR. PACKER: It may be helpful to me if you've seen that in other proceedings if you could highlight that for me. 416 MR. QUINN: I don't have the evidentiary references readily available. If we take it subject to check that there have been and we'll just follow that as a scenario, and you could tell me at the end of the day if my assumptions are correct in terms of how you would be using this information for its allocations. 417 MR. PACKER: Sorry, you're asking me to take subject to check if the last four winters were warmer than normal? 418 MR. QUINN: Yes. 419 MR. PACKER: I can do that, yes. 420 MR. QUINN: Thank you. If that is the case then, knowing your allocation methodologies and the impact of taking those winters into account, in a 20-year, not a 30-year, even if we did a straight-line average not a trend-line, what would be the impact on the normalized volumes for that data? 421 MR. PACKER: Again, I'm prepared to talk about the impact on the allocation of storage to unbundled customers that results from the weather normalization change. I'm not an expert on our weather normalization process. 422 MR. QUINN: Okay. Well then, focussing on the allocations, let me ask a question. Can you confirm, would the allocations go down if the weather indicates, as in your evidence, that the weather has been warmer than normal and the normalized pattern that Union is now going to use reduces the allocations for in-franchise customers? 423 MR. PACKER: I don't know if this is helpful or not, but there was an interrogatory, Exhibit C.1.40 where we do acknowledge the impact on the storage allocation factor that resulted from the change in weather methodology. If that's what you are asking me to confirm then yes, I can confirm that there is a lower storage allocation that results from using better weather information to calculate customer's requirements. 424 MR. QUINN: And I can appreciate that you would believe that to be better weather information. But I guess that is something that has yet to be determined. 425 In having said that, if you are going to have reduced allocations, as per your evidence, what would happen if we were to have a colder-than-normal winter in a successive year? So if a customer were to go unbundled with their storage allocation and the next winter, or four winters in a row were colder than normal, how would the customer get through the winter for load balancing? 426 MR. PACKER: Sorry, the customer you're referring to is what customer? 427 MR. QUINN: A customer who has taken the unbundled allocation from Union using its new weather methodology, as per the evidence you have. If there is a colder-than-normal winter, or four in a row as I projected, how would the customer -- what options would the customer have for load balancing? 428 MR. PENNY: Mr. Chairman, what I'm stumbling over in the question is what Mr. Quinn means by warmer or colder than normal. 429 MR. QUINN: Union's weather methodology would establish what they perceive to be a normalized winter, based upon the new methodology. Based on the old methodology or the newer methodology, we've gone through four -- or let's say a number of successive winters of warmer-than-normal weather. If we go colder than normal with the new methodology and the customer is allocated a certain amount of storage capacity they are to unbundle, what would the customer's options be for load balancing? 430 MR. PACKER: I guess there's two aspects to my response. The first one is the customer who is taking the unbundled service, they are required to balance their demands with supply, supply coming either on up-stream pipelines or out of storage. So to the extent that they found that they didn't have enough capacity coming out of storage, then they would be required to deliver more supply in order to align the two components. 431 The comment that I'd make, though, is that we believe that the new weather methodology is appropriate. So we would be using that for our own planning purposes as well as for allocating unbundled customer's storage. So to a large extent, the bundled customers that we're balancing would be in the same position that the unbundled customers would be, to the extent that it was ever a situation where they were a little short. 432 But the point is, it doesn't make a lot of sense to us to use assumptions about demand, it just doesn't, it isn't current. That's why we're proposing to change -- that's why we're changing the weather methodology. 433 MR. JACKSON: Would the difference between bundled and the unbundled customer, though, be that the bundled customer could rely on Union to figure out how it was going to be the balancing but the unbundled customer would have to have some alternative means of providing the additional balancing if, indeed, additional balancing were required. 434 MR. PACKER: That's right. The party that would have the responsibility would be different. In one case it would be Union, in the other case it would be the unbundled customer. The options available are probably very similar, where you have to go into the market to get something to meet your requirement. 435 MR. JACKSON: And you might purchase more storage, might you, as well as the alternative of purchasing additional supplies to be delivered? 436 MR. PACKER: I'm not sure that that's necessarily the solution to the problem that Mr. Quinn posed to me, because I thought that he was suggesting that once you get into the winter and you find it's colder than you would have expected, what are your outcomes, what are your options, and at that point, it's too late. 437 MR. JACKSON: Oh no, I take that as -- 438 MR. QUINN: That is a clarification and I appreciate that, and it is what I was -- if I say it in two parts. If you were in the middle, that is your option is delivering more gas, if you know up front that from whatever the best information you have from a weather point of view, it is going to be colder than normal, I take it that one of your options is to buy additional storage at the C-1 rate. 439 MR. PACKER: Sorry, whose options? 440 MR. QUINN: One of the customer's options. 441 MR. PACKER: If a customer feels they want to add more storage than they think they really need to balance their needs, C-1 storage is an option. I'm not sure why anybody would, in advance of the winter, make that assumption. Our assumption is about what the winter would be would likely be, I assume will be consistent with the methodology we're proposing. 442 MR. QUINN: Well, maybe I will present a scenario that would help. If a customer believed that the amount of degree days that they experienced in their franchise area is different from what Union is using, and historically has been able to show that, would they not then want to prudently make sure they have provided the most economical approach to load balancing for the winter? 443 MR. PACKER: The difficulty I have with your question is, the weather normalization change impacts general service customers and, in the context of storage allocations, it's primarily M-2 customers. So, I'm not sure how an REM or a group of M-2 customers would make that determination or why they would. 444 MR. QUINN: Well, in other proceedings previously, we have provided Union information that our degree days experienced in our territory are more than what Union uses as their historical average, which is based on London. 445 MR. PACKER: My understanding is that we don't weather normalize your consumption. 446 MR. QUINN: That's correct. But I'm going forward in terms of what your proposals have in terms of impact, and I don't have to use ours as an example. If a customer whose aggregating volumes for M-2 customers or -- sorry -- rate-1 customers in Thunder Bay and they believed that their allocation was insufficient, would they not want to access whatever means they could to get through the winter? 447 MR. PACKER: I guess a couple of concerns. First one is you are talking -- you gave an example that's in the north, I think. And the impact of the weather normalization change on storage allocations is really restricted to the south, because that's the area where the aggregate access calculation applies. 448 MR. QUINN: If we use Owen Sound instead. If we replace that. Okay, my mistake, replace Owen Sound for Thunder Bay. 449 MR. PACKER: And then the rest of your question is -- could you repeat it, please? 450 MR. QUINN: If a customer had a belief that they needed more storage -- that they needed -- the storage that was allocated to them was insufficient for their load-balancing needs for the winter. Would one of their options be to get C-1 storage from Union Gas? 451 MR. PACKER: Is it -- you are putting something to me that I find very difficult to comprehend that it would happen. You're suggesting that prior to the winter they'd have to make that determination, and I find that a difficult assumption to accept. But I guess in that context, if somebody wanted more storage prior to the winter, and it was available, they could ask for C-1 storage. I wouldn't suggest that they rely on that because C-1 storage by its nature is something we release if it's available; it isn't always available. 452 MR. QUINN: Okay, the next questions may help in that. Just through Mr. Aiken's assistance, the reference I have is your reference for 0029 Exhibit B, tab 6 page 5 of 20 which gives the 30-year average normal and actual heating degree days, which shows that we've had four warmer-than-normal winters. And if you want, subject to check that -- I don't want to -- I can read it in but, Mr. Packer offered a subject to check, and I just thought I'd help him -- his evidence to show that. 453 MR. PACKER: I'm still going to have to accept it, subject to check, because this isn't my evidence so I'm sure I did comment on the conclusions that can be reached by the page you reference, but I appreciate the reference. 454 MR. QUINN: Okay. When you talk about using your new weather methodology for determining in-franchise needs, we've agreed from your evidence that the in-franchise needs are to be reduced; is that correct? 455 MR. PACKER: I think what I said was the in-franchise needs are reduced. What the change in the weather normalization process does is it tries to reflect more current requirements than not making a change to the weather normalization process. The need isn't reduced as a result of he weather change, the need is reflective of what the customer's profiles are. The weather normalization process is trying to catch up to that. 456 MR. QUINN: In C.1.40 you referred to me before, you provide two figures. C.1.40, page 2, 2 of 6, you provide two figures. One, without the weather methodology change, 702 cubic meters per residential customer, with the weather methodology, 66 per residential customer. Is that -- am I reading this incorrectly? Does it say that the weather methodology does not reduce the storage allocation per residential or heat-sensitive customer? 457 MR. PACKER: The change in the weather normalization methodology does reduce the entitlements on a per-customer basis. What I was disputing is your correlation between -- with need basically. The need is independent of the calculation. What we're trying to do is catch up to the need. 458 MR. QUINN: Catch up to a reduced need? 459 MR. PACKER: Reduced need is already there. Using a 30-year average didn't reflect what a customer really needs as far as storage, for balancing. 460 MR. QUINN: Let's say up to this change in proposed methodology, Union used this existing methodology to determine the amount of storage required for in-franchise customers; is that correct? 461 MR. PACKER: Historically, we've used a 30-year average to plan and operate our system. We don't think that's appropriate anymore. We're now using a 20-year trend. I think that makes better sense from a planning and operational perspective. 462 MR. QUINN: So by using the 20-year trend, the totality of in-franchise needs is reduced; is that correct? If you're not certain of that, I'd like to take an undertaking because it's important to the rest of the line of questioning. 463 MR. JACKSON: I think he's saying the totality of calculated in-franchise needs is reduced, but the needs themselves are not; isn't that what you're saying? 464 MR. PACKER: That's correct. I agree. 465 MR. QUINN: What would be the difference between the calculated and the actual? 466 MR. JACKSON: I think what one might be, have faith in the calculation. 467 MR. QUINN: Well this is where we're striving to understand how Union has used this for operational purposes. Our premise is that in-franchise -- the in-franchise storage requirements would be reduced by using the new weather methodology, that calculated in-franchise storage would be reduced; is that correct? 468 MR. PACKER: The -- I think it's correct, but I will just describe why I think it's correct. I think what you are saying to me is if we calculate the amount of storage we immediately need to balance our customers using the 30-year average or the 20-year trend, the 20-year trend generates a lower number; and that's true. 469 MR. QUINN: That's true. Okay. Thank you. When you do come up with that lower number, what would Union's plan be for the unallocated storage requirements? What would Union be doing with the difference between the old calculation and the new calculation for storage requirements? 470 MR. PACKER: The first thing it would be used for is to manage growth requirements as a result of customer additions and requirements growing. To the extent that we found we had storage surplus to our needs then it would be it would be released through the tendering process and parties would contract for it as C-1 storage. 471 MR. QUINN: At market rates? 472 MR. PACKER: Yes. And any margin that was generated from that currently would be provided back to customers, 75 percent of it would be provided back to customers. 473 MR. QUINN: And 25 percent back to Union's shareholders. 474 MR. PACKER: As per the Board's decision, that's correct. 475 MR. QUINN: So in essence, the option is at Union's discretion as to what to do with it, based on its derivation of what they believe would be needed and what opportunities there are for maximizing the values of those assets. 476 MR. PACKER: It's no different than how we operate the system; it's a component of us managing the system, yes. 477 MR. QUINN: So the 499 rates were the base rates for all in-franchise rates going into PBR, those were based on asset allocations that were determined based upon the 30-year average winter? 478 MR. PACKER: Yes. Again, the only rate classes that are impacted by the weather normalization approach is the M-2 class but yes, I believe that to be true. 479 MR. QUINN: Thank you. I'll follow that later. 480 I understand Union is also initiating a concurrent proceeding for blanket storage agreements. Is it true that Union's requesting the opportunity to sign storage contracts for up to 10 years without Board approval? 481 MR. PENNY: This is not Mr. Packer's area, Mr. Chairman, but I can tell you that the answer to the question is no. 482 MR. JACKSON: I think it would help. No, because the Board would give blanket approval. 483 MR. QUINN: Thank you for the clarification. 484 So under that blanket approval, Union could potentially contract all deemed excess storage of its -- over and above its calculated in-franchise needs for up to 10 years with numerous parties as long as it was less than 5 BCF; is that correct? 485 MR. PACKER: It's not my area, but I did have somebody provide me with a copy of the filing. My understanding is we're requesting a 10-year term and a 5 BCF limit on the blanket. That doesn't alleviate the Board's responsibility for approving for storage contracts. There is just a blanket in place which would reduce the number of applications we would bring forward to the Board for specific approval, prior approval. 486 MR. QUINN: But maybe I -- I am going ask the specific question, then. In approving Union using this weather methodology for operational purposes, and assuming the approval of Union's request, would Union then be in a position, based upon its new methodology, Board -approved, to be able to contract out its excess storage over and above its calculated in-franchise needs? 487 MR. PACKER: We are already in a position to do that under the old blanket, and to the extent a particular arrangement didn't meet the criteria of the blanket we could bring forward applications to the Board. 488 MR. QUINN: Okay. This is the area where Union has deemed that they have -- I don't want to put words into -- so you say that Union will use this for operational purposes. At some point, will Union be in a position to bring this weather methodology position back to the Board for formal approval? 489 MR. PACKER: I'm not sure I'm a position to comment on that question. I'm prepared to talk to the impacts of the change on the storage allocations; whether we bring something forward to the Board for approval in the future or not, I can't comment on. 490 MR. QUINN: Is there somebody from Union that can? 491 MR. PENNY: Mr. Chairman, we had this discussion yesterday. The issue that was discussed was the impact of this on storage allocations and I explained to you in the context of those submissions about that issue that there's currently no rate effect. And that if Union wants to reflect the methodology for rate purposes, that of course it would come forward, and indeed I rather suspect that that would be the case. But we can't say definitively today that that necessarily would be. 492 MR. JACKSON: Wait. I'm going to pause and consult with my fellow Board members on this, but the thought that comes to my mind right now that you might want to think of too is: Is this essentially a service quality indicator although it's not a normally specified one, but this is an issue in the nature of service quality and -- that is perhaps being raised? I wondered yesterday, before I heard about it, whether it was an issue of -- sort of appropriate access that might affect the competition. But now I see it may be a service quality indicator that someone is saying that the operational changes under the PBR plan, going forward, are making available a smaller allocation of storage to the in-franchise customers at cost-based rates. And, to have been offered a chance of more storage would have been more or higher quality of service. 493 Now, I just toss it out. 494 MR. PENNY: I think the answer to that, Mr. Chairman, is quite clearly no. And the reason is because the relationship between what is allocated to a customer in a given year is entirely based on what the anticipated demand is. So the fact that they're getting less storage is 100 percent because their demand will be less and it has nothing to do with service quality or level of service. And that's always the way that it's happened. So if you need -- if your expected -- demand expects the need for 100 units, then you are allocated 100 units. And that's not really a service quality issue. What Mr. Packer is saying is that because Union believes that its weather methodology is not accurately reflecting that consumption, that in fact, on my example, that the need is in fact 90 units, there is no reason for Union to be going out and building for or constructing facilities for 100 units when it only needs 90. And that's really what it boils down to, in simplistic terms. But it's not a service quality indicator. 495 MR. JACKSON: I hear your point, but from the point of view of the customer, he will only be offered 90 units instead of 100. 496 MR. PENNY: And that's because he only needs 90 and because the weather -- 497 MR. JACKSON: The new calculation suggests he only needs 90. 498 MR. PENNY: Just as the old calculation suggested that he needed 100. Precisely. 499 MR. QUINN: And paid for 100. So -- 500 MR. PENNY: No, and then -- 501 [The Board confers] 502 MR. JACKSON: Mr. Quinn, I think that this exchange has served to put your concern on the record. Now whether you think you can get any further answers that would further your ability to argue on this, I guess is a question I will let you decide, but it seems to me that you may have enough information on this to go forward to argue. That's my impression. 503 MR. QUINN: Thank you. While you were doing that, I had time to whittle down my questions so I will summarize fairly quickly. But there is a couple of important points that flow from that if I may continue. 504 MR. JACKSON: Thank you. Yes. 505 MR. QUINN: We had asked about C-1 storage premium and has you had indicated, 25 percent went to the shareholders, 75 percent to the customers; how would the 75 percent be broken down in the deferral account into what -- how would it be allocated to the individual rate classes? 506 MR. PACKER: Typically, if we speak storage, we allocate to rate classes in proportion to how peak storage has been allocated in rates. One thing I might add here is, to try and put it in prospective for the Board, I think we'd get a rough calculation of how much storage might be freed up if everybody went unbundled as a result of weather normalization change, if it was two BCF or less. That's if everybody went unbundled, which I don't expect to be the case in the next year or so. 507 MR. JACKSON: Thank you for putting that into context. 508 And just so that we're all thinking about this in the same way, too, the allocation of storage, is it area-particularized so that it reflects the weather experience in a particular area in which the customer is operating? Or is it just one sort of rule of thumb that is used for allocating storage to customers from Owen Sound to Point Pelee? 509 MR. PACKER: From Owen Sound to Point Pelee, it would be an aggregate excess, because those are points in the southern operations area. Our allocation methodology in the northern and eastern operations area is different, and that flowed out of the PBR bundling case. 510 MR. JACKSON: But within the southern area, if you had this customer who would get -- two customers the same size and the same in all attributes except one was located in a much colder area than another, would the one in a much colder area get a larger allocation of storage based on your methods for allocating storage? 511 MR. PACKER: I'm not sure that I would describe -- given that you're looking at the southern operations area that there would actually be areas within that geographic parameter -- the parameter would actually be a lot colder than another areas. In the case of a contract-sized customer we look at the aggregate access specific to that plant's requirement. So, I guess, to some extent if there was any weather impact, that would be captured in that aggregate access calculation. We're talking about U-2 customers by and large, we expect a retail energy marketer to group a number of customers together which will likely be disbursed throughout the province. So I doubt you would get a broker picking all customers in one specific spot, Windsor or Point Pelee. 512 MR. JACKSON: I haven't put a lot of thought to this so I apologize but I would assume sitting up here with Kitchener asking these questions, it might affect the City of Kitchener. So -- no, eh? 513 MR. PACKER: We don't weather normalize the City of Kitchener's requirements so this change doesn't have -- to my knowledge -- any impact on them directly. 514 MR. JACKSON: Thank you for the comment. 515 MR. QUINN: That's not entirely correct. We have been weather normalized in terms of what was offered by Union for storage. So we can take that issue as a separate -- I don't want to take up the Board's times in those areas, so -- 516 MR. JACKSON: Well, there may be a way to put that information on the record, too, just to clarify it. 517 MR. QUINN: We were talking about the C1 market premium and the allocation of the rate classes. Can you give us the account numbers so we can check that allocation? If it would help, we could get that as an undertaking. We just wanted to have that information. 518 MR. PACKER: I think your -- I don't have the definitions of the accounts per se, but I'm looking at Exhibit B, tab 13, page 31 of 38 and 32 of 38. I think the storage accounts are listed there. Short-term storage services deferral accounts is 179-71, and the long-term peak storage services account is 179-72. 519 MR. QUINN: Thank you. In deference to Dr. Jackson's comments, I will go on to 14, the areas of rate changes. 520 Can you remind us of the purpose of the DCC? 521 MR. PACKER: I'm looking at -- as we talked this morning -- I was wondering whether some references may be of assistance to the Board with respect to the DCC -- or the history related to the DCC. One of the things I'm looking at the EBRO 499 settlement agreement and this is where the latest DCC rate of $4.25 of a thousand cubic metres was approved. Basically what we had proposed to do in that case was pay the DCC on obligated deliveries and the way the amount was calculated was to look at avoided facilities costs at transmission and storage facilities and we calculated the rate using average embedded costs related to M-12 storage and transportation. What we tried to do in continuing to pay a DCC in that particular case was to recognize the benefit obligated deliveries provide our system. That payment is in relation to the obligated deliveries that parties provide to us. 522 MR. QUINN: Thank you. My simple way of saying that would be to incent. customers to deliver to Parkway to avoid the cost of Dawn-Parkway billed; is that accurate? 523 MR. PACKER: Generally, obligated deliveries provide a system-design benefit. As a result of obligated deliveries, we have a need for less storage and transportation. 524 MR. QUINN: Thank you. So my understanding -- Union referred the issue of claw-back this morning, and I understand that if somebody does not make their obligated deliveries, Union has a right of claw-back. 525 MR. PACKER: Sorry, what's your question? 526 MR. QUINN: Does Union have the right of claw-back if somebody does not meet their obligated deliveries? 527 MR. PACKER: Yes. 528 MR. QUINN: And that was approved by the Board in previous proceedings in the initiation of the DCC? 529 MR. PACKER: I don't know if it was explicitly approved by the Board. I think it's part of the contract and I'm sure we've talked about it in the past. 530 MR. QUINN: This is an issue that will be helpful to understand if there has been Board approval, because I want to ask a follow-up question in that area. And possibly you could take it and provide the Board approval. 531 MR. PACKER: We can undertake to see if the Board explicitly approved it. The difficulty I have is that I don't know whether the Board's explicitly approved the claw-back or not; I know they explicitly approved the DCC payment. I think it would be more likely somewhere along the record we've talked about it and talked about the claw-back. I'm just not sure how easy it will be to find those references. 532 MR. JACKSON: And Board Staff, to the extent that they would have looked at the deferral account balances, would have seen some claw-back revenue in the past; would that be correct to say? 533 MR. PACKER: Potentially, yes. 534 MR. JACKSON: I take your point. It may be difficult to find explicit approval, but it's something that's been going on which, if the Board staff were very alert about, at least they would have recognized what's happening. 535 MR. PACKER: Yes, it's been going on since the DCC was created so it's been going on for a number of years. 536 MR. QUINN: Maybe I can clarify my concern in this area. I'm going to provide a scenario and ask if somebody has made their obligated deliveries and then after the gas has been injected in Dawn, if they want to sell their gas to somebody else at Dawn, does the DCC get clawed back? 537 MR. PACKER: Yes, it does. That's been our approach for -- again, since the beginning of the DCC payment. I think what you may be raising is an issue specific to your T-3 contract and I think we advised you that what you were looking for was something that would have differentiated the treatment for you from other customers, T-1 customers, and we indicated we weren't prepared to do that, especially given that the DCC is about to be eliminated. So why would we go through and try and propose a change to something that was only going to be around for a few more months? 538 MR. QUINN: Well, I can appreciate the DCC is going away and we may not have this imposed upon us. Let me clarify: Other T-1 customers have not liked it either, but have not taken Union to task in that area. 539 MR. PACKER: Any DCC that is clawed back is put in a deferral account, so to the extent you have concerns about -- back up. 540 The DCC is paid on obligated deliveries. So to the extent somebody is -- has extra gas in storage and they want to move it off system, we have, over the last number of years, clawed back the DCC. The reason being that that's no longer gas that's been obligated because they're moving it off system. We thought that was appropriate. We didn't think we should differentiate one customer from another and we weren't making any money on that, it was going into the deferral account so you wouldn't see that there would be any concerns about that. 541 MR. QUINN: You had said they wanted to move it off system if they have to move it, because they are going to go over their storage limit. That is a choice the customer needs to make in terms of awarding penalty; is that correct? 542 MR. PACKER: If they need to move it off system as a result potentially facing having a storage account too full, then the deliveries they've made to us, I would have thought, would have been too high and they would have been paid the DCC on obligated deliveries that were too high. So it -- otherwise you could have a situation where somebody's obligating a lot of deliveries to you in order to get the DCC, and then knowing that later on they want to move it off system and then it would be clawed back. 543 MR. QUINN: Under a bundled contract arrangement, that would be an issue, and I'd agree with that. But is Union counting upon our daily gas balance for its operational needs? 544 MR. PACKER: Sorry, I'm not sure I follow what you're asking. 545 MR. QUINN: If your DCC is based upon an incentive to costs in your facility, storage and transportation, the implicit assumption, based upon your rationale, is that Union would be counting upon a storage balance in that account and therefore that is the -- the disincentive is to claw back the DCC if that gas were to be removed. 546 MR. PACKER: I'm not sure I heard a question there. 547 MR. JACKSON: I think he's asking you to confirm it, if you could. Could you confirm what he said or not? 548 MR. PACKER: I think he's going to have to put it to me one more time then. 549 MR. QUINN: If the DCC claw-back is a disincentive to people not meeting their obligations, that means you're counting on their obligations, including those that are in storage. So if you are clawing back the DCC out of storage, is it because you are relying on the amount of gas in our bank gas account or our storage allocation. 550 MR. PACKER: The reason we're clawing back the DCC is because in moving back the gas off system that, in our view, is no longer obligated because it's not on our system. You're moving it off. 551 MR. QUINN: So you're saying it does -- you are counting on it in the banked gas account? 552 MR. PACKER: I don't know if we're counting on it or not. What I'm trying to do is explain to you why we're clawing it back. 553 MR. QUINN: So what negative impact does it have on your operations if we are to move that gas from ourselves to another T-1 customer in your franchise? 554 MR. JACKSON: Can I just ask whether this other customer would have the same delivery point to Union Gas? 555 MR. QUINN: Yes. 556 MR. JACKSON: Because that's an important consideration, isn't it? 557 MR. QUINN: Yes. 558 MR. JACKSON: So he's saying that -- I think, if I hear it correctly -- he's saying that you are guaranteed to still get the delivery, you can still be considered to be obligated, it's just when that gas arrives at that delivery point, the title will have changed. 559 MR. QUINN: Once injected at Dawn. So we've already made our obligation to Parkway, is injected, and it doesn't change our firm obligations on that a given day at Parkway. 560 MR. JACKSON: But -- I thought the DCC was connected or associated with meeting or not meeting the obligation to deliver at Parkway; right? 561 MR. PACKER: It's associated with obligated deliveries and the bigger benefit is at Parkway. We have paid it for obligated deliveries at Dawn because -- in part because there's a storage benefit, but we also didn't want to disadvantage supply coming in from an alternate transportation route. So those are the drivers for that. 562 MR. JACKSON: So do you pay it only on some of your firm deliveries at Dawn and perhaps on all firm deliveries at Parkway or -- help me on that. 563 MR. PACKER: We pay it on all obligated deliveries, but if somebody's just nominating to bring in an incremental supply, that's not supply we can count on necessarily so it doesn't get the DCC payment. But it's on all obligated supply, irrespective of where it is on the system. 564 MR. JACKSON: Thank you for that clarification. So the question is, as I understand it is, would you please comment on the rationale for clawing it back if the only thing that's happened with respect to the obligation is a title change on the gas, but you can still count on the gas being delivered at that location. 565 MR. DOMINY: Could I ask one other question to clarify? Where is the destination of the gas that is now being used for another purpose by this person who is having his DCC clawed back, outside franchise or inside franchise? 566 MR. QUINN: Inside the franchise is the example I used. 567 MR. DOMINY: So stay inside the franchise. 568 MR. QUINN: Yes, a T-1 customer inside the franchise. 569 Being very conscious of the time, I'm willing to take an undertaking and you can provide the rationale. I'm looking at the clock and managing other people's expectations here and I still have some questions. 570 MR. JACKSON: I think that it's tweaked the Board's interest to know what the rationale would be under the limited question that I tried to put, if my question was clear, but go ahead and ask me. 571 MR. PENNY: I think it would benefit us all if it was clear what the parameters of the question were and I followed, Mr. Chairman, what you said. I'm not sure if that's what Mr. Quinn wants or not, but -- so maybe he can go through it one more time and make sure we understand precisely what the parameters are, and who the other customer is and what he's going to do; he or she or it is going to do with the gas. 572 MR. QUINN: Under the scenario I provided, just to simplify, a T-3 customer has delivered gas, met his obligation at Parkway, has injected the gas at Dawn and at Dawn makes a title transfer to another T-1 in-franchise customer at Dawn. What you've told me and what our experience has been is the DCC is clawed back and I would like to understand the rationale. 573 My concern in that regard, because as Mr. Packer has alluded to is DCC is going away, but we are asked to accept rate changes that have not been specified as to some of the logistics of how they will be applied and this is our area of concern because there has been little evidence to support them at this point. 574 MR. JACKSON: I think we are talking about the existing practice that probably can be explained. If there is a rationale, it probably can be explained. 575 Is the question clear enough, Mr. Packer, or do you want to get some clarification? 576 MR. PACKER: I wouldn't mind stating it for the record so to make sure I get it right. The question is why would we claw back the DCC for gas withdrawn from storage and provided to another in-franchise customer, and the customer is going to -- the customer whose gas is being provided to a second customer, they still have obligated deliveries at Parkway, or obligated deliveries on the system? 577 MR. QUINN: They have continued to meet their obligated deliveries on the system. And I want to be specific: T-3 and T-1 customers, because we're not a bundled customer, and that goes back to the question of the banked gas account. 578 MR. PACKER: You confused me at the end there. What is the reference to banked gas account? 579 MR. QUINN: I will qualify my question just as T-3 and T-1 customers and exchange from T-3 and T-1 and your own Union people can clarify internally the reference banked gas account. 580 MR. JACKSON: If there is any relationship. 581 MR. PACKER: You're not incorporating that as a requirement? 582 MR. QUINN: No, I'll leave that off. 583 MR. JACKSON: Yes. We'll give that a number. 584 MR. MORAN: It will be Undertaking G 2.2. 585 UNDERTAKING NO. G.2.2: CONCERNING THE CLAW-BACK OF THE DCC FOR GAS WITHDRAWN FROM STORAGE AND PROVIDED TO ANOTHER IN-FRANCHISE CUSTOMER 586 MR. QUINN: Moving to 14.4, again, I will try to whittle down my questions. But Union's proposed a change and there -- if you can go to page -- it's the T-3 rate schedules that are supplemental to section 14, so appendix A in the schedules for the T-3 rate, page 5 of 5. 587 MR. PACKER: I have it. 588 MR. QUINN: As I understand it from Union's evidence, there are some reasons for the changes that Union is proposing under -- in the evidence. Can you specifically, on the second last question there, there will be no charge for diversions among customers served by a common T-service contract. Diversions that occur within storage are diversions upstream of the -- I'm sorry. It is in the record, and in the second last sentence, Mr. Packer, is the one I'm referring to. It's the sentence that starts, "There will be no charge." You're removing that sentence. 589 MR. PACKER: That's correct, yes. 590 MR. QUINN: Would you provide the rationale specific to that sentence and why you would need to remove it? 591 MR. PACKER: I guess when we looked at this paragraph, it was a while ago, the paragraph was really -- my understanding is it was put together in the context of T-services being contemplated; it was put together at the time of the contract carriage hearing in the late '80s. I'm not sure that that sentence has any meaning anymore. 592 MR. QUINN: So if it doesn't have any meaning, you would be adverse to keeping it in if the customer requested. 593 MR. PACKER: If I don't understand what the sentence says, I'm more inclined to pull it out because I don't -- it's confusing to us and the customers. 594 MR. JACKSON: Mr. Quinn, I'm sorry, I didn't catch the reference. I should have but I didn't. 595 MR. QUINN: I'm sorry, sir. In trying to move things quickly, I spoke quickly. It is in the schedules that are behind section 14; it doesn't have an actual tab on it. It is the T-3 rate schedule that would be effective, it says here, January 1st of 2001. I think that might be an error. 596 MR. JACKSON: I have it, thank you. 597 MR. PACKER: The second sentence is -- 598 MR. PENNY: Just to interject for a moment, Mr. Chairman, you will recall that this is an issue that Mr. Reghelini dealt with in -- at the outset, in terms of the settlement agreement. 599 MR. JACKSON: That's right. It was one of his examples. 600 MR. PENNY: And it was one of the examples. 601 MR. QUINN: For T-1, and we disagreed with it as being a resolved issue because we're trying to understand it, and that's the position we have taken in the ADR. 602 MR. JACKSON: And it's -- which sentence were you saying, Mr. Packer, you didn't understand? 603 MR. PACKER: The one that, the second last sentence being stroked out; it says there will be no charges for diversions among customers served by common T-service contract diversions that occur within storage upstream of Union. I guess, from my perspective, I'm not sure what it means when it says a common T-service contract. I think that may have contemplated certain arrangements being in place that haven't evolved. Diversions that occur within storage, a diversion isn't -- diversion is when you move gas, that's going to be arriving at one place to another place, so I'm not sure how you could have a diversion within storage. 604 MR. QUINN: In your nominations group, they call it a diversion even though it's transfer-in-storage at times, depending on how it's worked out through nominations. 605 MR. PACKER: Diversions that occur upstream of Union -- if they occur upstream of Union then Union is not a party to them. 606 MR. QUINN: So specifically within storage relative to my last questions regarding a T-1/T-3 transfer. 607 MR. PACKER: Right. They don't occur within storage. There was a withdraw from storage, there can be a name change and there can be a reinjection. And I'm not sure that -- 608 MR. QUINN: Why is it withdrawn and then -- 609 MR. PACKER: Because that is the way the bundled and semi-bundled services work. 610 MR. QUINN: Is that -- there's an evidentiary basis for the semi-bundled being charged that? I have not been able to find one. I've asked the question of Union Gas previously and I don't have that reference. 611 MR. JACKSON: Mr. Packer, were you saying that if there's a title transfer, under those conditions, that it's deemed to have come out of storage and gone back in? 612 MR. PACKER: We know -- the only -- may I have a second, please? 613 MR. JACKSON: Yes, absolutely. 614 MR. PACKER: I'm looking at the RP-1999-0017 settlement agreement. There was a fair bit of evidence put on the record as far as how title transfers worked. As part of that settlement agreement, we accepted that we would facilitate title transfers between unbundled customers in a manner that continues to respect the contractual storage injection withdrawal parameters and only charge the three-tenths-of-a-cent, a GJ-title transfer admin fee for in-storage title transfers i.e., no storage injection withdrawal charge. 615 The evidence in that case explained how title transfers worked and the fact that they occurred above ground. In the ADR agreement, we accepted a different treatment for the unbundled service. There was no change to any of the other -- how any of the other services worked. 616 MR. JACKSON: T-3 is a semi-bundled service; is that correct? 617 MR. PACKER: Right. It's not an unbundled service in the context of the unbundled service that we were talking about in that case. 618 MR. JACKSON: And that would have been clear to everyone at the ADR? 619 MR. PACKER: It should have been, yes. 620 MR. QUINN: That's the point of clarification I'd like to ask. Let me ask it this way: Prior to Union's 1999-0017 evidence and subsequent proceedings, was carriage service called unbundled contracts? 621 MR. PACKER: At the time of the PBR unbundling case, we introduced a new unbundled service that had a lot more responsibilities placed on the people who contracted for that service and as a result, they had more that access to assets. Prior to that, and again, it depends on the context and who you were talking to. When that service wasn't in existence, the only thing that was available that allowed a customer to contract for storage separately was T-service. So there may have been instances where somebody said, well, that's our unbundled service. But it's not unbundled in the context of the unbundled service that we know today. 622 MR. QUINN: Well, that's a good distinction and a distinction might well have been well served to have been seen in the evidence prior to the ADR, but I guess the question still remains, was T-service prior to 1999-0017 was referred to as unbundling by Union? 623 MR. PACKER: It was definitely not referred to as an unbundled service the way the unbundled service was developed in the last case. It may have been -- the term unbundled may have been used to refer to it, but it was as, a result of being able to contract for storage separately, not in a way that conveyed more responsibilities or different terms and conditions than exists with T-3,T-1 service today. Nothing has changed as a result of the unbundled service being available with respect to how the T-1,T-3 service operates. It's the same as its operated in the past. 624 MR. JACKSON: I think the question has certainly served to highlight that it could have been subject to some confusion. Certainly, whatever the T-3 was, it was juxtaposed to what was then called "bundled T-service." So one might have thought it may have been unbundled if you had nothing else to look at. 625 MR. PENNY: There was, however, something else to look at, Mr. Chairman -- 626 MR. JACKSON: A new proposal. 627 MR. PENNY: -- and that was in the evidence that was filed in that case. And it may assist Mr. Quinn to look at Exhibit B, tab 1, page 4 of 87 in that evidence which specifically says that throughout this evidence, reference to unbundled services are related to the new or future unbundled options proposed as distinct from current services, such as T-service. 628 MR. JACKSON: Thank you for that reference. That's helpful to the Board. 629 MR. QUINN: Thank you. So getting back to the question, Mr. Packer, Union is proposing a removal of that second to last sentence, when we talk about title -- diversions that occur within storage. Union's removing that, and my, I guess, contention is that we would like to see that remain because we believe we have an interpretation. You're saying you're not sure of the interpretation of that? 630 MR. PACKER: I'm saying a diversion within storage doesn't exist so to have words in a rate schedule that talk about the charges that will apply if it happened doesn't seem to me to be appropriate. 631 MR. QUINN: So if we read the sentence that is proposed prior to that, what's the practical effect of the addition of that sentence and removal of the second sentence. 632 MR. PACKER: I'm not sure we are adding anything there. I would need an old rate schedule to be able to confirm that. I think we're just eliminating parts of the paragraph that we didn't think had any meaning in the current environment. 633 MR. QUINN: Well, it says the price to be charged for the right to divert shall be determined through negotiation, and then you are removing the waiver of those charges through diversions within storage. And you may say that there's no such thing as a diversion in storage but obviously, over time, just as in the case of the unbundling, the nomenclature and phrasing has evolved. 634 MR. PACKER: The only thing we're doing in that paragraph is proposing to eliminate some of the wording. The reason there is a change identified on the second line is because we're now capitalizing the T in "the". I think it's appropriate that the availability and right to divert gas be based on our ability to accept that. We rely on gas landing on your system to operate the system. We can't have people diverting without our involvement. 635 MR. QUINN: So that's a system integrity requirement? 636 MR. PACKER: Right. 637 MR. QUINN: How would that affect the price? 638 MR. PACKER: Sorry? 639 MR. QUINN: How would that affect the price? 640 MR. PACKER: The price of the diversion? 641 MR. QUINN: It says the price to be charged will be determined through negotiation. 642 MR. PENNY: Mr. Chairman, the purpose of the dispute in issue is about the removal of words, and Mr. Quinn is now cross-examining about words that have been in the rate schedule for some time. 643 MR. JACKSON: I think he's wondering whether he will be left with the words removed. It does seem that the word diversion has been used by Union in this rate schedule as diverting between or among customers, independently of where they are located. And then when thinking of where they are located and thinking that there might be occasions not to charge for those diversions, Union had put in that schedule a sentence saying that under the following several situations, it will not charge for the diversions, and I think that Kitchener is just highlighting very clearly through this that they think they will lose something if the sentence is removed which previously gave them comfort that they would not be charged for certain kinds of diversions. I'm not sure how much farther we can take it. But I would invite Union to try to make it clear that it doesn't mean what I just read it to mean. Because that's the difficulty you would have. It strikes me that the concept of diversion there is -- maybe it is old terminology but it was -- it was talking about gas going from one customer to another customer, not going from one location to another location, necessarily, but indeed possibly that as well. But it was the idea of gas going from one customer to another customer. So I invite both of you to do anything you can in the future to shed light on it. I'm not sure we're getting much farther at this point right now. 644 In any event, Kitchener, I take it, has agreed to the small charge for transfer in storage, the title transfer in storage; is that correct? Because you're signing the ADR agreement, notwithstanding the relief you might have had from this sentence here, you have agreed to that charge. I think what you're concerned about is through negotiation you might get hit with an even larger charge. 645 MR. QUINN: Who do I negotiate with if I'm moving gas for myself to somebody else in Union storage? Union is the only party that can do that for me. 646 MR. JACKSON: Yes, if title needs to be transferred, Union is the only one who can do it. But I think the point that actually Mr. Dominy was drawing my attention to was this point in the ADR agreement in -- yes, in the 17 case at page 31 where it says, Union will facilitate title transfers between unbundled customer in a manner which continues to respect the contractual storage injection and withdrawal parameters and to only charge the .3 cents per gJ title transfer administration fee for in-storage title transfers. I'm sorry to have repeated that, but I think that that was read into the record. 647 MR. QUINN: That is helpful. But Mr. Penny's clarification is that we are not considered unbundled. 648 MR. JACKSON: Oh. So I'm not sure we can get any farther with that. 649 MR. PENNY: I accept that; I think that's probably right, Mr. Chairman. I mean Mr. Packer has explained the rationale for why the words in the last sentence are coming out and those are effectively, as you've heard, that there are no common T-service contracts, that there is no such thing as an in-storage title transfer. That is a diversion -- sorry, I put that improperly. That a diversion is not an in-storage title transfer and that diversions that are upstream of Union have nothing to do with Union. That's what it amounts to. 650 MR. QUINN: I don't agree with that in context but I think we can take any other points to argument and I'm satisfied we have it on the record. 651 MR. JACKSON: Yes. I think that's the best way to deal with it. 652 MR. QUINN: The last point is 14.6. We discussed the C-1, that Union is requesting the opportunity to charge full market rates as their C-1 rate. Is that a simplified version? 653 MR. PACKER: I wouldn't agree with that entirely, no. We're proposing to increase the maximums, to continue to charge market-based rates. We've been charging market-based rates for storage services, short-term storage services, for probably 10 years. All we are proposing to do is to increase the maximum to recognize current market value for some of those services. 654 MR. QUINN: Transportation and storage. 655 MR. PACKER: Short-term transportation and storage, yes. 656 MR. QUINN: So in terms of Mr. Brett's cross-examination wherein you said that people who would want to use that service would be, the phrase you use "playing in the secondary market." How would -- let me put a scenario, if I have to get my gas out of storage to avoid a penalty rate for exceeding my storage demand and I want to get my gas from Dawn to an ex-franchise Union Gas location, what are my alternatives from for moving the gas from Dawn to, and I will be specific, Blue Water, in terms of providers of that service? 657 MR. PACKER: There's a few things I guess you could do. First of all, one of the difficulties I'm having is you're trying to make your T-3 service act like an unbundled service where parties have more control over the assets and they accept responsibility for that. 658 The T -- you're trying to use your T-3 contract to -- or it appears as if you're trying to use your T-3 contract to do a lot of activities in the secondary market. If you're not doing that, then one of the things you could have done is diverted upstream supply because if you are long, you can divert your upstream supply and not have it come on to our system. The other thing is if you are long gas, you can find another customer at Dawn to take it. 659 MR. QUINN: If the most economical approach for me is ex-franchise, what are my options? And I want to be specific. This is to manage the storage allocation that we've been given and to do it in an economical fashion as a prudent utility would need to. 660 MR. PACKER: But it's not managing storage; you say you are managing your inventories. In theory, I would have thought you'd only land gas on our system that you need. If you want to do something more than that, then you really are playing in the secondary market. 661 MR. QUINN: Okay. Maybe it will be helpful if you could tell me how -- we'll use this year. 662 So prudently, Union has -- Kitchener's contract with Union to make ongoing deliveries that's required in our contract, our consumption profile this winter has not been as good as we had hoped because something beyond our control, the weather, has reduced our consumption. Now we're projected to be going over our storage requirements as of October 31st or sometime later on this fall. And I -- we would have to need to move that gas out to prudently manage our storage and not accept unauthorized overrun charges. How would you deem that to be playing in the secondary market? 663 MR. PACKER: The reason I relate to the secondary market is most other customers, all of them that I'm aware of, would either divert their upstream supply, and we've allowed diversions so you wouldn't land gas that you don't need, or they find another party in-franchise. If you don't get -- we typically don't get requests for in-franchise customers to move gas to Blue Water to get rid of excess gas. 664 MR. QUINN: And if that is my choice because it's the best economic alternative to myself -- 665 MR. PACKER: Then I think you should pay the value for that because you're doing something that takes away for -- from Union's ability to provide that service to anybody else. 666 MR. QUINN: And if the gas is flowing west to east and I'm going east to west, how does that take away Union's ability to provide that service to anybody else? 667 MR. PACKER: The proposition you have put to me was you were long gas and you wanted to move it to Blue Water to move it off the system. There is either going to be a bottleneck on that capacity or there's not. If there's not a bottleneck, then the market value of that capacity is probably fairly low and it would be relatively cheap for you to do that. If there is a bottleneck and you are competing for others to move gas on that system, then you should pay something that's reflective its value. That margin is deferred. 668 MR. JACKSON: Sorry, isn't it clear that there's no bottleneck because he's going against the physical flow? 669 MR. PACKER: He assumes he's going against the physical flow; I'm not sure if he is or not. 670 MR. QUINN: Well given the context of my question, that's what I am saying. We are moving from east to west in the summer, against the physical flow. Why would Union -- let me -- I will ask the question, why would Union then be able to extract market rates for -- in this case, actually reducing its costs, because it's reducing the amount of gas that has to flow west to east? 671 MR. PACKER: But you're moving gas from Dawn to Blue Water and I don't know whether there's a constraint on that system in the period of time you want to do that transaction or not. I'm saying if there is, then I'm not sure why you think you should pay a cheaper rate than what the market is. If there is not and the market value is low, then you won't be paying very much. 672 MR. QUINN: You've made some assumptions about what would happen. I don't want to get into fundamental economics, but in inefficient markets, are there not arbitrage opportunities such that the market value does not reflect the actual cost? And in this case if, economically, I can put myself in a position to manage my assets more prudently, why should that be inhibited by the only provider that I can access? 673 MR. PACKER: We're not inhibiting it; we're saying the extent you want to do on the system that isn't contemplated by what you typically do, then you shouldn't have -- you shouldn't have access to that cost. You should be ready to stand up with everybody else who wants to take that service and pay something that reflects its value. 674 MR. JACKSON: Is this not the upstream diversion that was contemplated in that earlier -- those earlier days? 675 MR. QUINN: Not completely, because it's actually a movement of gas from storage to ex-franchise; the one we were talking about before is in-franchise. 676 MR. PACKER: The rate you are paying, the delivery rate you are charged doesn't reflect the flexibility to do that. That's -- the delivery rate you pay reflects the cost to move gas to your point of consumption. To the extent you want to do something different, there are options available to you, you can divert, and so forth. If you want to use another physical part of our system, then you need to recognize that there may be a cost associated with that. 677 MR. QUINN: That might be helpful then. You've made a point that might be able to help us summarize and move on to Mr. Ryder. Can you show us how your delivery rate is structured such that it does not include those types of services? 678 MR. PENNY: We're pretty far afield from the issues list at this point, I think, Mr. Chairman. 679 MR. QUINN: Well, the premise of Mr. -- 680 MR. PENNY: I was talking too about the C-1 rate. 681 MR. QUINN: Mr. Packer has suggested that that's not the way our rate is designed, and I don't know that that's the case because, I believe, that there was some contemplation in the carriage service contracts that came forward from the 486 that customers hadn't managed their assets and I -- If Mr. Packer knows that that's not the case, then I'm just asking to undertake to show it. 682 MR. JACKSON: Well, if there is any additional light that could be shed on that as to what their existing contractual arrangements do and do not cover, it might be more easily done in a paragraph or two, I think. And, could I suggest, Mr. Packer, on a best-efforts basis that you try to answer that in a paragraph or two and give that a number and move on. Or is that -- I'm sorry, it sounds to me like -- I guess you're being asked to say what's not in the rate schedule but maybe that's hard to do. 683 Why don't the two of you talk about this over a quick break and come back afterwards and see if there is any way you can work out getting something on the record about how that's precluded from the Kitchener situation under its current rates. 684 MR. PACKER: I think it's precluded because it's not part of -- that type of flexibility is not part of the rate schedule or the contract. 685 MR. JACKSON: Or T-3? Is that what we're talking about? 686 MR. PACKER: That's right. 687 MR. QUINN: That's the retail aspect of it, but you had said that the costs go into our rate do not reflect that type of flexibility and I -- 688 MR. PACKER: No, well -- that's right, because we didn't forecast you to be looking for dedicated capacity on something other than the facilities we need to serve your market requirement. 689 MR. QUINN: Specifically, I'm not asking for dedicated I'm asking for -- on a -- as available, that we would pay a cost-based rate for service to manage our T-3 contract in the way we had originally designed out of 486. 690 MR. PACKER: You'd have to help me with what the reference to 486 is. 691 MR. QUINN: That's my understandings of where carriage service contracts were originally established. Sorry, 412, in 1986. Thank you for that correction. 692 MR. JACKSON: Let's break at this point and right after the break, let's see if there is any way to clear this up. I think that if Kitchener's got a concern here there ought to be a way to clear up this answer and maybe the two of you can do it by talking at the break. And Mr. Ryder will be on, I believe? So let's come back here at 10 after and, just one second. Okay. Thank you. We'll be back at 3:10. 693 --- Recess taken at 2:55p.m. 694 --- On resuming at 3:15p.m. 695 MR. JACKSON: Please be seated. We're on. 696 MR. PENNY: We're on. Yes, Mr. Chairman, with respect to the issue that was being muted just prior to the break, I think our conclusion is that that it probably does make the most sense for Mr. Quinn to state his question in the way he wants and that we do an undertaking and give him a considered response in the circumstances. 697 MR. JACKSON: Yes, I think that's the best way to proceed. Have you got a form for your question? 698 MR. QUINN: I am -- speaking with Mr. Packer, I'm going to attempt the question. He's going to recite it back to make sure he has full understanding and hopefully we won't take too long doing that. Our question -- concern was related to when a carriage service customer requires to get gas from Dawn, in this case, to Blue Water, and if there's no physical limitations on the system, why the carriage service customer could not get a cost-based rate. What I want to ask is if they would provide the rationale of how the carriage service rate was designed originally, to show that it would preclude that type of service and the evidence that they're relying upon to come up with that. 699 MR. JACKSON: Mr. Packer. 700 MR. PACKER: The only thing -- I think I have it. The only additional piece of information that I understood to be part of that question was that it would be on an IT basis. 701 MR. QUINN: On an IT basis relative to physical capacity limitations. 702 MR. PACKER: Right. Okay. Yes. 703 UNDERTAKING NO. G.2.3: PROVIDE THE RATIONALE OF HOW THE CARRIAGE SERVICE RATE WAS DESIGNED ORIGINALLY 704 MR. JACKSON: IT being? 705 MR. QUINN: Interruptible -- sorry -- interruptible service. 706 MR. JACKSON: Thank you. 707 MR. WIGHTMAN: G2.3. 708 MR. JACKSON: Thanks. Mr. Ryder then. 709 CROSS-EXAMINATION BY MR. RYDER: 710 MR. RYDER: I'd like to start with issue 10, please. The DCC elimination and I want to deal with two components of the DCC program when it is operating. And the first component is the steps you take to obtain funding for the credit. All right? 711 MR. PACKER: Okay. 712 MR. RYDER: And I understand that you do that by adding amounts to the revenue requirement of each rate class. 713 MR. PACKER: That's correct, yes. 714 MR. RYDER: And a result of that is an increase in rates to each class. 715 MR. PACKER: That's right, yes. 716 MR. RYDER: And the second component is the payment of the credit to the customer classes. 717 MR. PACKER: Yes, I think I'm with you, yes. The two aspects of the funding which is through a rate component of the rate and then there's the payment to customers who have obligated their deliveries. 718 MR. RYDER: Thank you. And the allocation of a credit to the customer classes is based on the volume delivered to each class. 719 MR. PACKER: No, the allocation -- the allocation of the payment is in relation to who has obligated their deliveries. And the assumption behind the 499, EBRO 499 set of rates was that most contract rate classes would have obligated all of their consumption, although the payment is not on consumption; it's on deliveries coming into our system. 720 MR. RYDER: The allocation for credit varies from class to class. 721 MR. PACKER: Everybody gets paid the same credit in relation to their obligated deliveries. 722 MR. RYDER: All right. Turning to the allocation of the funding requirement, that's done on a different basis. 723 MR. PACKER: The costs are allocated in proportion to the, in a large measure, in proportion to the facilities that we've avoided. So to the extent that we would have had to build more Dawn-Trafalgar facilities, those would have been allocated using Dawn-Trafalgar design day demand. We've allocated the DCC cost in relation to Dawn-Trafalgar design day demand. The payment is recognized in relation to the amount of gas the parties have obligated to deliver to us. 724 MR. RYDER: So the way it works out is that respecting the M-2, M-9 and T-3 classes, the allocation of the funding requirement exceeds the credit. 725 MR. PACKER: Yes. 726 MR. RYDER: And for the M-7, T-1, M-5A and M-4 classes, the credit exceeds the allocation of the funding. 727 MR. PACKER: I'm not -- I'm not sure anything turns on your terminology but I think I'm with you. With respect to the fact that there's more paid out than what would have been included in the rate. 728 MR. RYDER: Yes. 729 MR. PACKER: If that's your question, yes, that's true. 730 MR. RYDER: Now turning to Mr. Aiken's Exhibit F.2.4 at page 1, looking at the M-9, T-3 rate class. To fund the DCC for 2002, the revenue requirement was increased by $1.502 million. That was the revenue requirement attributable to the funding of the DCC. 731 MR. PACKER: I'm sorry, I didn't catch the number. The number again was 1.5 -- 732 MR. RYDER: 1502; I'm looking at column C. 733 MR. PACKER: Yes, I see that. 734 MR. RYDER: And that's the money that the M-9 T-3 classes paid to Union in order to fund the DCC program. 735 MR. PACKER: That was the amount of money included in rates and their pro-rata share of the cost of the DCC, yes. 736 MR. RYDER: And the credit they received is over at column D, and that's 1358. 737 MR. PACKER: That's correct. 738 MR. RYDER: And your proposal drops the -- or eliminates the credit of 1358. 739 MR. PACKER: It eliminates the payment. And all we're talking about here is, when we have rates set which included a cost for DCC, and then we had the separate payment stream that was going out the door as a cost, what the customer saw was the net of the two. What Union saw was a rate that included the cost and then this payment that went out to customers. I'm not sure I would describe it as -- that it's gone; it's just now rather than being a payment out the door, we're netting it off the delivery rate before we charge it. But the net effect to customers is the same. 740 MR. RYDER: But you've reduced -- the credit is eliminated, and the credit was 1358. 741 MR. PACKER: We're not -- showing two numbers, one that has a delivery rate and then a separate payment. The two have been netted off against one another. 742 MR. RYDER: And for the -- in terms of the revenue requirement which is the cost in column C, you've reduced those not fully, but only by 1358. You've reduced our revenue requirement by the amount of the credit. 743 MR. PACKER: We have reduced your rate by the amount that you were paid otherwise, so that you were kept indifferent. 744 MR. RYDER: Right. So on the basis of this table, you have reduced our rates by 1.358 million. 745 MR. PACKER: Yes. 746 MR. RYDER: And you've left in our revenue requirement, $144,000, that was formally attributable to the DCC costs. 747 MR. PACKER: I think I can take that, yes. 748 MR. RYDER: Now, the reality is that there are no -- after the elimination of the DCC, there will be no more costs arising from that program; the program will be terminated. 749 MR. PACKER: What we're -- 750 MR. RYDER: Please, just answer my question. 751 MR. PACKER: I'm trying to. 752 MR. RYDER: After the elimination of the DCC, all the costs associated with that program will be terminated. 753 MR. PACKER: Yes. 754 MR. RYDER: And so there is no cost causality support for the $144,000 that will be left in the M-9 T-3 rate. 755 MR. PACKER: What we're doing when we eliminate the DCC is basically to preserve the net effect on customers that occurred prior to the DCC being eliminated. One of the things that wasn't showing up was, in revenue-to-cost ratios, was that payment stream that is now being reflected as a reduction to delivery rates. 756 MR. RYDER: Let me ask the question again: Once you've eliminated the DCC, there is no cost basis for the $144,000 that's left in our rates after the elimination. 757 MR. PACKER: I'm not sure I would agree with that entirely, because if you look at the situation that existed prior to the DCC being eliminated, parties, by virtue of the agreement where the DCC was set at 425, accepted the way those costs were allocated to rate classes which was in proportion to design day demand. And they accepted the payment which was in proportion to your obligated deliveries. Implicit in that arrangement is recognition for the value that obligated deliveries provide to our system and the avoiding facilities cost that result. So to the extent it was appropriate before the DCC was eliminated, I don't see any reason whys it's not to maintain that type of outcome. 758 MR. RYDER: Look at the M-2. The costs that remained in the -- sorry -- the revenue requirement that is left with the M-2 after you've eliminated the DCC, am I correct in saying that's $15,306,000 in column E? 759 MR. PACKER: That's the difference between the two numbers; yes. But that's been there for a long period of time. One of the things that happens as a result of eliminating the DCC is, rather than that payment stream going to retail energy marketers, it will now go to offset delivery rates. So in the past, where the credit would have gone to direct-purchase customers, assuming it was passed along, it will now go to offset everybody's delivery rates. 760 MR. RYDER: But there's no cost support -- there is no cost causality to support that number. 761 MR. PACKER: Again, we're preserving the situation that existed prior to the DCC being eliminated. 762 MR. RYDER: Well aren't you recognizing that there's no cost support for the 15 million left in the M-2 and the 144 left in the M-9 and T-3 when you look at the cost of revenue ratios. Because you've left that -- those costs in their -- in their -- that revenue requirement there, without any corresponding cost to support it, the ratios have gone up considerably. 763 MR. PACKER: That's the explanation for why the revenue-cost ratios have changed, yes. Because the -- when you do a revenue-to-cost ratio -- after the DCC is eliminated, the cost side was reduced by the amount that was included in our cost of service and the revenue side is reduced by the payment stream that was happening under cost of service. So when you recognize what was going on, it has the appearance as if the revenue-to-cost ratios have changed. One of the things we could do is restate the old revenue-to-cost ratios, recognizing this fact. And you can see that they haven't changed very much. If you are actually recognizing what was happening when the DCC existed. 764 MR. RYDER: Well under the cost-of-service study that supports 499 rates, the 15 million for the M-2, 15,306 is not in the cost of service, is it? It's not a part of Union's cost of service. 765 MR. PACKER: Sorry, it was a part of our cost of service. 766 MR. RYDER: I'm saying after the elimination of the DCC, it's not a part of Union's cost of service. 767 MR. PACKER: After the DCC is eliminated, 27.261 million is eliminated and we are eliminating it the way it's paid out. So to the extent there is a component of that amount that is gone, then I would agree with that, yes. 768 MR. RYDER: Thank you. 769 MR. JACKSON: Mr. Packer, could you just remind us what the total revenue requirement would have been in that cost allocation study for the M-2 class. 770 MR. PACKER: Actually, I think it's -- if you're looking for a ballpark it's identified on the next page of the exhibit, 370 million approximately, depending on how you -- what scenario you're looking at. 771 MR. JACKSON: Right. 772 MR. PACKER: I'm looking at the M-2 line: Revenue to costs before the DCC elimination and revenue to costs after the DCC elimination. 773 MR. JACKSON: So it would be that the 370 or the 370 plus the 15,306, wouldn't it? 774 MR. PACKER: Sorry, I'm not sure why you'd add those. 775 MR. JACKSON: Okay. Immediately before the elimination -- yes -- it's 3.70. I was thinking before the DCC plan was implemented but that's harder to get at, I guess. 776 MR. PACKER: It would have been a long time ago. 777 MR. JACKSON: Fair enough, but it does give me a ballpark. Thank you. 778 MR. DOMINY: Can I just toss out a question just to make sure I've understood. Basically, as I understand it, the revenue-cost ratios were calculated prior to these ones, the DCC payment didn't even enter the calculation; the DCC cost did? Is that correct? 779 MR. PACKER: Correct. That's correct. 780 MR. DOMINY: And therefore, you would have had revenue-cost ratios for say the M-9 -- well, let's take another one which was not say 1.002 but 1.029, if you had somehow reflected the revenues payments in that. 781 MR. PACKER: That's correct. Yes. 782 MR. DOMINY: So in other words, the wrong revenue-cost ratio, if that's the way you're going to say it -- widely divergent revenue costs that were already in existence, the problem was that the payments from DCC were not reflected in those calculations. 783 MR. PACKER: I think that's fairly accurate, yes. That's the issue. Costs were in there but the revenue stream wasn't. 784 MR. DOMINY: And can I ask another question related to this, because this is obviously an important issue. And that is: Now that the DCC payment has been eliminated, is the obligation to deliver still there? 785 MR. PACKER: Yes, it is, yes. The obligation to deliver is not changed. We're just recognizing what the payment used to provide in the form of rate reduction. 786 MR. DOMINY: Thank you. 787 MR. RYDER: Looking at column E in Mr. Aiken's table, page 1, the M-7, T-1, M-4, 5A Union -- for those classes, Union's proposal reduces the revenue requirement by the amounts in that table; is that correct? 788 MR. PACKER: Sorry, you'll have to repeat that. 789 MR. RYDER: Well, for the classes M7, T1, M 4, and M-5A, Union's proposal reduces the revenue requirements by the amounts set out in column E. 790 MR. PACKER: I'll acknowledge that they were -- payout exceeded what was included rates for those rate classes. 791 MR. RYDER: When you eliminate the DCC, the revenue requirements for those rates will go down by these amounts. 792 MR. PACKER: When look at revenue requirement, I view that as a summation of the cost, so I would have thought that the revenue requirement would have gone down by the amounts specified in column C. 793 MR. JACKSON: I think a lot of people would be delighted, in this room if they did. Did you say go down by the amount? 794 MR. PACKER: The costs have gone down, the revenue requirement and the costs would have gone down by that amount. We're not suggesting that the revenue or the rates go down by that amount. 795 MR. JACKSON: Okay. 796 MR. RYDER: If you look at -- maybe let me take you to column E. The classes that have brackets around their numbers, that's a reduction, isn't that represented by a reduction in the revenue requirement? 797 MR. PACKER: The numbers that are shown in column E is the difference between what had been included in rates and the payout. 798 MR. RYDER: All right. And the M-2 and the M-9 and T-3, those amounts basically offset the reductions that are achieved by the M-4, M-5, 6-A and M-7 and T-1? 799 MR. PACKER: The -- I'll accept that the negatives and the positives offset, yes. 800 MR. RYDER: Yes. So what you've got is the revenue surplus for the M-2 has gone up by 15.306 million; right? Revenue requirement minus costs leave a surplus and the surplus for the M-2 has gone up by 15,306. 801 MR. PACKER: Maybe I don't view it correctly, but I view revenue requirement as a summation of costs. You are comparing revenue requirement to costs. Revenue is -- 802 MR. RYDER: I'm saying revenue requirement is the money generated by rates, right. 803 MR. PACKER: That's different than what I typically view revenue requirement as the revenue; that's the revenue stream. 804 MR. RYDER: The revenue stream by the M-2, using your term, creates a surplus by the elimination of the DCC by 15,306. The surplus of revenue over cost has gone up as a result of the elimination by 15,306 for the M-2s. 805 MR. PACKER: Yes, I think I acknowledge that that's showing up in the revenue-to-cost ratios but it's what's existed for a large number of years. 806 MR. RYDER: And it's existed for as long as the DCC has been in place. 807 MR. PACKER: That's correct. 808 MR. RYDER: Now we're trying to eliminate that program, right? 809 MR. PACKER: We're eliminating the cost and the agreement was that we would do that in a way that tried to keep individual customers indifferent. 810 MR. RYDER: And you've added to the surplus requirement of the M-2 by 15,306. Okay? And you've reduced the requirement on the other classes by the amount shown in the brackets. Isn't what we've got here is a transfer from the M-2 and M-7 -- sorry, M-2 and M-9 classes of over $15 million to the other classes? 811 MR. PACKER: No, we're eliminating the payment the same way it was paid out. There's no transfer in the cash flow or the revenue achieved from customers is the same on that basis as existed prior to the DCC being eliminated. 812 MR. RYDER: Well, 813 MR. PACKER: It's just showing up in a revenue-to-cost ratio now where it didn't appear before. 814 MR. RYDER: You've increased the revenue surplus of the M-2 by 15 million. And where does that money go to? It goes to, surely, the M-4s, M-7s and T-1s. 815 MR. PACKER: I'm only taking issue with "where it goes to" may imply that it's gone somewhere different than it has in the past. And it's been going there for -- if you want to view it that way, for a long time. 816 MR. RYDER: It's been going there for the duration of the DCC. So there's been a subsidization, or a transfer of funds from the M-2s to the M-1s -- M-7s, for the duration of the DCC. 817 MR. PACKER: When you look at it from the perspective of revenue-to-cost ratios, that may be true. The issue, though, is that the DCC was approved for a purpose, which was to recognize the system benefit that obligated deliveries provided. And those costs were allocated in the same way the facilities would have been allocated had the obligated delivery benefit not existed. But I'm not sure I would view this as a subsidy. It's a recognition of the benefit that obligated deliveries provide. 818 MR. RYDER: Where there is a large revenue surplus generated by a rate class, doesn't that automatically mean that that class is subsidizing some other class that is operating at a deficiency, a revenue deficiency? 819 MR. PACKER: No. I guess, in my view, that doesn't mean that it doesn't necessarily mean that it's automatic. 820 MR. RYDER: We know that an M-7 is operating at a revenue deficiency, do we not? Isn't that what the ratios indicate? 821 MR. PACKER: That's what the ratio indicates. The revenue doesn't -- is less than cost, but there's a rationale for that and that's because there is a benefit that obligated deliveries provide the system which has been captured in the DCC payment. And what we're doing is reducing rates to reflect that. 822 MR. RYDER: You're making the M-2s and the M-9s pay for the benefit and you're -- I mean we're just arguing here, but that's what you're doing. 823 MR. PACKER: We're not doing anything different than what existed and was found to be appropriate in the past. There was a benefit provided by obligated deliveries which was reflected in the DCC payment. All we're doing here is reducing rates to recognize what would have otherwise been a payment stream that went out the door. 824 MR. RYDER: So because of the DCC, the M-2s and the M-9s have to bear a permanent subsidization of the M-7s. 825 MR. PACKER: I wouldn't view it that way. Because obligated deliveries provide a significant system benefit, we recognized that in the DCC payment in the past and we're proposing to recognize that going forward as a result that the delivery rate reduction that accompanies the DCC elimination. 826 MR. JACKSON: We did want to recognize that before the DCC program was put in place. Was there an element of cost moved among rate classes in order to reflect the disparity of benefits you thought existed prior to the DCC? 827 MR. PACKER: At some point in the past, we proposed that the DCC be calculated on the basis of a void-facilities cost. Prior to that, the DCC was really a result of how the old buy-sell pricing mechanism worked. So, if you go back to when the DCC was originally put in place, it would have been when direct purchase started. So when you talk about what would have happened prior to the DCC, there wouldn't have been obligated deliveries by direct purchase customers because it wouldn't have existed. 828 MR. JACKSON: A point well taken. So, that -- I should ask when was the cost shift made in revenue requirements supported by the facilities argument? That was -- you're saying after a sort of an arbitrary -- an introduction of the rate which, or a DCC, which may have been determined in a way other than costs. At some point, somebody tried to draw a connection to cost and I think what you're saying -- I can't remember exactly the history of this by any means, but I think what you're saying is that happened sometime after the delivery commitment credit had been introduced. 829 MR. PACKER: Yes, and it was in EBRO 499. 830 MR. JACKSON: Oh, okay. I thought it might have been around 493 or 494, no, eh? 831 MR. PACKER: In one of the 493, 494 proceedings, the buy-sell pricing mechanism was changed and we were directed to come back with some evidence that dealt with -- what should be done with the DCC and that was primarily in the EBRO 499 case. 832 MR. JACKSON: Okay. So, the difficulty is trying to go back before the introduction of the DCC and see what the cost allocation would have been at that point in time, because the DCC precedes the cost justification of itself. 833 Please, if you disagree with me, tell me. So I think it does complicate this issue further, but now that we have a cost justification on the table, I think that what some stakeholders are putting to the company is that the amount that they have been recently attributing as the cost of this program is greater than the delivery commitment credit payments to the same class of customers and are questioning whether, if you were to sort of unwind the program at this point in time, you shouldn't be looking at the revenues and costs rather than at just the revenue neutrality by class of service. And I think maybe it would help the Board to know if there was any clear definition of revenue neutrality in the ADR discussions and I don't see how that could be information that you -- would be considered to be privileged by any participant. But, if some participant can think of why that's privileged, please tell me. 834 MR. PACKER: From my perspective, what the ADR agreement did was endorse what the company was proposing. And the company's evidence I thought was clear; that we were trying to eliminate on a customer -- so that it was neutral from a customer-specific perspective. I don't, by any means, have all the references but I have some references that illustrate that. 835 MR. JACKSON: That might be helpful, too, because -- were someone just to read the agreement as a couple of Board members did, one might have thought it that it applied in the overall company level, but we didn't get into -- we perhaps didn't review the evidentiary base for the ADR agreement as well as we reviewed other evidence in the proceeding. 836 MR. DOMINY: It was referenced in the footnotes to the ADR agreement: Identifies the parts of the evidence which I think you are saying you're basing agreement on. 837 MR. JACKSON: We should go back and look at it but if you can -- that's what we should look at. 838 MR. PACKER: I think -- I assume that those references are complete, but I could give you a couple of references today if you would like. 839 MR. JACKSON: Yes let's put them on the record. 840 MR. PACKER: I'm looking at Exhibit C.24.17: It's a question from the Major Energy Consumers and Producers. 841 MR. DOMINY: That's in this proceeding? 842 MR. PACKER: No. These are in the 17 case. I won't read all of the responses but there's a sentence in the response that says: "Union's objective was to minimize the impact on individual customers by removing the forecast 1999 DCC payout from each rate class's delivery rate. Union feels it has met this objective. End-use customers should be indifferent in the elimination of the DCC." Exhibit C24.41, part of the responses, has identified in Exhibit B, tab 1, page 28 of 87: "Union's objective in handling the DCC elimination, as proposed, was to minimize the impact on individual customers." 843 Exhibit C.24.43: "Union's proposal to charge different demand charges to southern customers preserves the effect of cost-to-customer incurred prior to the elimination of the delivery commitment credit." 844 We had proposed, as part of that case, that we have a range rate for demand charges for M-7 and T-1. The main impetus for that was so that we could keep customers different, and because we were affecting the demand charge, the only way to do that was to have a customer-specific demand charge. And that was evident from the evidence as well. 845 MR. JACKSON: Thank you, very much, Mr. Packer. 846 MR. DOMINY: Those are all references that are in the bottom of the ADR agreement. 847 MR. RYDER: And, as I understand it, there's -- none of those references show what -- delve into what the impact on the revenue-to-cost ratios would be. 848 MR. PACKER: There were not any questions that I'm aware of that dealt with revenue-to-cost ratios. 849 MR. RYDER: And they don't suggest that the M-2 and the M-9 or the T-3 would be obliged to bear a -- an additional revenue surplus until the end of time to support the T-1. 850 MR. PACKER: No, what they say, though, is we're proposing to eliminate it the way it was paid out; so the customers would remain indifferent. 851 MR. RYDER: But that wasn't fleshed out the way it's being fleshed out today, as to what that would be. 852 MR. PACKER: Well, I accept that -- we didn't talk about what it would mean to the revenue-to-cost ratios. We did talk about how we were proposing to eliminate it and why we were proposing to eliminate it the way we did. And that's what parties accepted. 853 MR. RYDER: Now this is just so I can just get the history wrapped up. Before the DCC, the obligation to deliver was based on contract, alone? 854 MR. PACKER: I think I had trouble a minute ago with discussing before the DCC because I'm not sure we had direct purchase before the DCC and its original form was created. So there would be no obligation because people weren't managing the supply. 855 MR. QUINN: Just in terms of being helpful, if Union had asked direct purchasers to provide replacement for whatever they -- if Union was making the deliveries at Parkway and if Union had established a contractual responsibility from direct purchase customer without any DCC, what would the situation be like today in terms of revenue-to-cost ratio? 856 MR. PENNY: Just a minute, Mr. Chairman, I know Mr. Quinn is, as he says, "trying to be helpful," but tag team cross-examination is not something that I've seen in the context of any litigation, ever, and it seems to me not appropriate. It's one thing to divide up responsibility but it's quite another thing to have two parties cross-examining on exactly the same issue. 857 MR. RYDER: All right, we withdraw, Mr. Penny; we will proceed without taking any more of your time. 858 I think you've made it clear that the justification of a cost associated with the elimination of the -- with the value, the obligations to deliver, that was first introduced in EBRO 499. 859 MR. PACKER: Yes. That was the case where we proposed to use avoided-facilities costs as a basis. 860 MR. RYDER: And 499 was 1999 rates? 861 MR. PACKER: Yes. 862 MR. RYDER: And when was the DCC first implemented? 863 MR. PACKER: I think the DCC existed since direct purchase was started, because we came out of the buy-sell pricing mechanism. 864 MR. RYDER: When was that? 865 MR. PACKER: Late '80s. 866 MR. RYDER: And if Kitchener today was a system-gas customer under the old M-9, would the elimination have any impact on its revenue-to-cost ratio? 867 MR. PACKER: Yes, likely. 868 MR. RYDER: To the degree that it has now? 869 MR. PACKER: It may have a larger impact because the cost would be approximately the same, I would think, including your rate, but there would have been no payout so I believe that does not -- 870 MR. JACKSON: But I think there would be very little then to deduct from the cost; because if the amount being paid out is what is deducted from the cost -- 871 MR. PACKER: It would be very little to deduct from the revenue. The cost would have been almost the same, I think. 872 MR. JACKSON: Yes. So with very little to deduct from the revenue, the cost being approximately the same, the revenue-to-cost ratio would not have changed very much, would it? 873 MR. PACKER: It would have likely changed, but I think would have gotten worse. 874 MR. RYDER: Could you work that out for us and give us an undertaking to do that? 875 MR. PENNY: Again, I think there's a number of ways that one could come at this, so the parameters for it, Mr. Ryder, will have to be defined; for example, changed in relation to what? 876 MR. RYDER: It's just, what would they be? Just tell us what the revenue-to-cost ratio would be if Kitchener was an M-9 system-gas customer. 877 MR. PACKER: If it suits the Board, it may be easier if we just assume the entire class was system supplied and I will reduce the total DCC by that amount and calculate the -- recalculate this using that set of assumptions. 878 MR. RYDER: Can I turn to issue 11.2. 879 MR. JACKSON: Can we just get a number for that, please. 880 MR. MORAN: It will be G.2.4. 881 UNDERTAKING NO. G.2.4: REVENUE-TO-COST RATIO CALCULATED AS IF KITCHENER WAS AN M-9 SYSTEM-GAS CUSTOMER 882 MR. JACKSON: Now, Mr. Ryder, I should ask you, it is 4:00 and do you have a couple more items or are you just about to the end? Would you like to -- 883 MR. RYDER: No, I would be content to come back on Monday. 884 MR. JACKSON: Thank you. So we will resume our hearing -- 885 MR. DOMINY: Just going back to the history, I just thought that as an interesting world that the new methodology for calculating the DCC was also the subject of an ADR agreement. 886 MR. PACKER: That's correct. 887 MR. DOMINY: So it's been ADR, ADR, ADR all the way along. 888 MR. PACKER: Two ADRs. 889 MR. JACKSON: If there's nothing else we need to cover this afternoon in terms of other business, we will adjourn until 9:30 on Monday morning. And I'm told that there is no TTC strike for Monday at this stage, so we may have to revisit that but I think we'll just try to accommodating that if one occurs. Mr. Moran? 890 MR. MORAN: Yes, Mr. Chair, we have been attempting to set up a hotline so that parties can check in and see where we are, but we haven't been successful yet in getting that set up so just wanted to let people know that. 891 MR. JACKSON: And Monday we're going to sit a full day and I would say the way things are going, probably our arm is going to be twisted and we are going to sit a full day on Tuesday as well, but not Wednesday. Thank you. 892 --- Whereupon the hearing adjourned at 4:00p.m.