Rep: OEB Doc: 128Rf Rev: 0 ONTARIO ENERGY BOARD Volume: 3 April 08, 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: [18] UNION GAS - PANEL 1 [76] CROSS-EXAMINATION BY MR. RYDER: (Continued) [77] CROSS-EXAMINATION BY MS. LOTT: [257] CROSS-EXAMINATION BY MR. JANIGAN: [310] CROSS-EXAMINATION BY MR. VEGH: [387] CROSS-EXAMINATION BY MR. DEROSE: [735] CROSS-EXAMINATION BY MR. BRETT: [900] CROSS-EXAMINATION BY MR. MORAN: [963] QUESTIONS FROM THE BOARD: [1011] RE-EXAMINATION BY MR. PENNY: [1033] 9 EXHIBITS 10 EXHIBIT No. F.3.1: SWORN AFFIDAVITS OF PREPARERS OF EVIDENCE RELATING TO ADR [22] EXHIBIT NO. F.3.2: ARTICLE - USING THE GDPPI CONSISTENTLY TO SET THE INFLATION FACTOR [36] EXHIBIT NO. F.3.3: ARTICLE - APPROPRIATE GDPPI CALCULATIONS [37] EXHIBIT NO. F.3.4: EXCERPTS FROM UNION'S PRE-FILED EVIDENCE IN RP-1999-0017 [263] EXHIBIT NO. F.3.5: BOOK OF MATERIAL REFERENCES FOR THE COALITION FOR EFFICIENCY ENERGY DISTRIBUTION [391] 11 UNDERTAKINGS 12 UNDERTAKING NO. G.3.1: LIST OF KEY EVIDENTIARY BASE FOR ASSERTION THAT THE STORAGE MARKET IN ONTARIO IS COMPETITIVE [663] UNDERTAKING NO. G.3.2: UNION GAS - NUMBER OF FAILURE TO DELIVER DAYS SINCE JANUARY 1, 2000 [784] UNDERTAKING NO. G.3.3: ADDITIONAL CORRESPONDENCE WITH RESPECT TO OXFORD AUTOMOTIVE [837] UNDERTAKING NO. G.3.4: THE DIFFERENCE BETWEEN CHARGES TO UNBALANCED CUSTOMERS UNDER THE OLD METHODOLOGY VERSUS THE PROPOSED METHODOLOGY [869] UNDERTAKING NO. G.3.5: CALCULATION OF EFFECT OF PROPOSED NEGATIVE EFFECTS OF ELIMINATING THE DCC IN UNION'S PROPOSED MANNER ON AN M-2 DIRECT-PURCHASE CUSTOMER, I.E. A SCHOOL BOARD [930] 13 --- Upon commencing at 9:37 a.m. 14 MR. JACKSON: Good morning. Please be seated. 15 MR. PENNY: We have the reverse of last week's situation where the light was on all the time, now it's not on at all. 16 MR. JACKSON: That's what I just noticed too, Mr. Penny. All these mysteries. 17 I think we have some preliminary matters this morning so I'll turn it over to you. I hope you can see us up here. I think that the lighting is not quite as good as it was Friday. There are three lights burned out behind us, but as long as you can hear us we should be fine. 18 PRELIMINARY MATTERS: 19 MR. PENNY: We can both see and hear, Mr. Chairman. 20 Yes, there's three preliminary matters I wanted to address this morning. The first is that in respect to the ADR agreement, it is customary, I believe, that in respect of the evidence that is underpinning the ADR agreement that, because of the settlement, will not typically be called in the hearing, that in order to make that material evidence in the proceeding, we filed affidavits prepared by the -- sworn by the preparers of that evidence. And I have provided the Board staff with the original copies of the relevant affidavits and I believe the Board -- I gave Mr. Mackie three copies for the Board members as well. So those are simply attesting the evidence that you would otherwise not be hearing in this case as a result of the settlement. I wonder if those could be given an exhibit number. 21 MR. MORAN: That would be F.3.1. 22 EXHIBIT No. F.3.1: SWORN AFFIDAVITS OF PREPARERS OF EVIDENCE RELATING TO ADR 23 MR. JACKSON: Thank you. So F.3.1 would include all of the affidavits? 24 MR. PENNY: I think it's sufficient that they would go in as a bundle. 25 MR. JACKSON: Thank you. 26 MR. PENNY: The second preliminary issue, Mr. Chairman, just to -- by way of advising the Board and the parties -- last week, Mr. Ryder provided us with some material in advance of the hearing that gave rise to a question about the use of time periods for the calculation of the GDPPI, and in anticipation of what it appeared was a position to be taken by some of the intervenors at least we asked our experts to comment on that issue. And so we have additional reports from each of the two experts that are proposed to testify later on that issue. Those would be related to -- and as I say, that arises from some material Mr. Ryder gave us, I think, around the middle of last week. 27 Those issues are dealt with in the current evidence, and so that's a report. One is called, "Using the GDPPI consistently to set the inflation factor," by Mr. Hemphill and by Mr. Schoech, and the other is called, "Appropriate GDPPI calculations," by Mr. Mintz and Mr. Wilson. Those would -- that evidence, it appears in -- the evidence addressing that issue is in the record at Exhibit B, tab 9. So I'm in your hands, Mr. Chairman, as to what to assign that. Those could either be simply filed under that tab or they could be given new exhibit numbers. It doesn't really matter to me. 28 MR. JACKSON: I like the idea of putting it with the testimony that they've already filed. I wonder if there's any way to mark it in a subsidiary way so that it's noted that it's a document under B tab 9. What was the main document? 29 MR. PENNY: The -- there's already an appendix A of tab 9 so we could call them appendix B and C. 30 MR. JACKSON: That sounds like it might make sense. 31 MR. PENNY: Just to be clear, Mr. Chairman, this isn't putting it with the evidence they've already filed because the evidence they've already filed is on a different issue. 32 MR. JACKSON: Okay. Thank you. 33 MR. PENNY: So Exhibit B, tab 9 is the price cap evidence and that's what these reports, new reports, address. 34 MR. JACKSON: It's being suggested that since it's coming in on this day that perhaps an F.3.something would be more appropriate. Let's just go with that number. 35 MR. MORAN: We have F.3.2 and F.3.3, I guess, for each of the two reports. 36 EXHIBIT NO. F.3.2: ARTICLE - USING THE GDPPI CONSISTENTLY TO SET THE INFLATION FACTOR 37 EXHIBIT NO. F.3.3: ARTICLE - APPROPRIATE GDPPI CALCULATIONS 38 MR. JACKSON: Thank you for that. We'll get more instant answers as we go along here. 39 MR. MORAN: I wonder if Mr. Penny could indicate the title of both reports. I think he mentioned one of them. 40 MR. PENNY: Based on the order that they appear in the material, I'd assume that F.3.2 would be the report called "Using the GDPPI consistently to set the inflation factor," by Messrs. Hemphill and Schoech. Exhibit F.3.3 would be the document entitled, "Appropriate GDPPI calculations," prepared by Messrs. Mintz and Wilson. 41 Now we also, again, as a related matter and again as a result of this material that was provided to us last week by Mr. Ryder and on Thursday, material from Mr. Aiken, Ms. Elliott prepared a table. That need not be marked as yet. I'll have her identify it but -- when she testifies but just so the Board and the parties are aware that we've passed that document out. But we'll get to that in due course. 42 The third preliminary matter, Mr. Chairman, has to do with the order of the panels. The Board will be aware from looking at the list and from the pre-filed evidence that we are calling evidence from some non- Union witnesses, experts from the United States and from the University of Toronto, and we have time constraints with their availability. 43 Before the commencement of the hearing, I guess my most extreme imaginings did not think that we would still be hearing from Mr. Packer this morning and after the close of business Friday. When we regrouped on the issue, it became apparent that given the pace that we were proceeding, these witnesses from -- that are not Union employees, obviously, really have to testify today, Tuesday or Wednesday morning and we can't go past Wednesday. 44 For that reason, we have proposed to reorder the panels so that we would drop the gas supply panel, to follow the economic evidence and start with the evidence of Ms. Elliott and Messrs. Hemphill and Schoech upon the completion of Mr. Packer's evidence, and when they're done proceed with the evidence of Messrs. Mintz and Wilson. And then that in all likelihood would take us to Wednesday morning. If there's time left -- I know the Board is sitting a short day on Wednesday -- if there's time left Wednesday morning, we would start with the gas supply panel and then if not we would proceed with the gas supply panel on Thursday. 45 MR. JACKSON: I guess there are witnesses for other parties that want to have time as well and we were going to address that, firm that up this week as well. 46 I guess the first question I should ask you is have you discussed this with your colleagues, do they have any objection now to changing the order in which the witnesses come forward. What I'm thinking of there, simply, is that I -- on relatively short notice, they now have to be ready for another panel which they may not have thought they had to be ready for until later. Now, I realize it's your case, but I think that you would agree that you want to give the parties enough time to understand what's going on. 47 MR. PENNY: Absolutely, Mr. Chairman, and I apologize for the short notice of that. But as I said, it wasn't -- it did involve regrouping after Friday. I have mentioned it; I mentioned it this morning at 9:00 or 9:15 to those who were in the room. I didn't get any reaction at that time, so frankly I think I'll have to hear from the parties. The reaction I did get seemed to be that it could be accommodated, but perhaps you'll have to hear from the parties directly on that issue. 48 MR. JACKSON: Indeed. I guess when we do hear from them, what about the alternative of having Mr. Packer stand down at some point today and have some of the other witnesses start tomorrow if everybody turns out to be full agreeable. So maybe people could address that too. I don't really like rushing through the material that Mr. Packer is dealing with because he's dealing with rates and the substantive basis for striking those rates and that's what we're all about. 49 MR. PENNY: I was going to say, I rather think that Mr. Packer, both based on the estimates we had from Friday, and that didn't of course include the Board's questions, I rather think that Mr. Packer is going to more than the morning, in any event. 50 MR. JACKSON: Yes, I think he will too, that's my guess but I don't really know who wanted to ask questions beyond Mr. Ryder. So could we hear from parties as to how they think we might best proceed in light of the proposed changes in the order which the panels are presented. Any thoughts from any of the intervenors? Just all comfortable that it will unfold the way it will? 51 MR. JANIGAN: Mr. Chairman, I would second your suggestion that Mr. Packer stand down -- that after Mr. Packer's evidence is through, that he stand down until tomorrow. We're not in a position to proceed today with panels 3 and 4. We've scrambled to prepare for panel 2 today on the gas supply and it's going to take us the rest of the day after Mr. Packer finishes testifying to prepare for panels 3 and 4. So our preference would be similar to your suggestion that after Mr. Packer's evidence is concluded that the hearing be adjourned and we'll recommence tomorrow with panels 3 and 4. 52 MR. JACKSON: Any other -- 53 MR. PENNY: Just so I'm clear, Mr. Chairman, because I couldn't hear Mr. Janigan that well, the -- he initially said stand down Mr. Packer, but am I correct in understanding the proposal would be that whenever Mr. Packer's done, we then not proceed with additional evidence until tomorrow morning? 54 MR. JANIGAN: That's correct. 55 MR. JACKSON: I think so. Or in the alternative, that if Mr. Mackie is still on the stand are you suggesting that he stand down? I was really thinking of both aspects. When I threw my alternative out. 56 MR. JANIGAN: I think so, but I'm rather confident that we'll finish with the evidence of Mr. Packer today. 57 MR. JACKSON: Okay. Any other comments? 58 MR. AIKEN: Yes, I'd just like to say I agree with Mr. Janigan and with your proposal. We do have new evidence on the GDPPI that we'd like to review, and I have the additional conflict that I'm required to testify in the other room sometime today, so I wouldn't be here as you begin that second panel. 59 MR. JACKSON: Okay. And that would give you enough time, though, to prepare for that panel, Mr. Aiken? 60 MR. AIKEN: Yes, we would be ready for tomorrow morning. 61 MR. JACKSON: Good. Thank you. 62 MR. PENNY: That's certainly acceptable to Union, Mr. Chairman, as a way of dealing with it. 63 MR. JACKSON: Good. Mr. Moran, did you have a comment? 64 MR. MORAN: Just on the last scenario as it's being proposed it might make sense, and I don't know if this is possible, but perhaps to get the Panel 3 witnesses sworn and perhaps through their direct evidence as part of today's proceeding before we stand down. 65 MR. JACKSON: All right. Mr. Aiken, would you have any trouble with that? 66 MR. AIKEN: No, that would be fine. 67 MR. PENNY: That's an even better suggestion, Mr. Chairman, because then that gives us, perhaps, some available time wisely without disadvantaging any of the parties. 68 MR. JACKSON: Yes. I think that's a good suggestion. 69 That's right. If my -- my colleague has just pointed out to me that Mr. Brett and Mr. Poch, for example, are not in the room, but if they have any difficulties with this approach, Mr. Penny, I'm sure you will try to accommodate them. 70 MR. PENNY: Absolutely. We did send out an e-mail first thing this morning and I note Mr. -- so that parties -- to all intervenors. I'm certain, from talking to Mr. Poch that he's not interested in these issues. Mr. Brett may be, but given the approach that we've adopted, I'm sure that Mr. Brett will be. In fact, what we will do is call him to make sure, specifically, that he was aware of that. I think he was planning on coming back this afternoon so, I'm pretty sure we will see him in any event. But we'll make sure Mr. Brett is aware of that. 71 MR. JACKSON: Good. Thank you. Let's proceed on then that basis and Mr. Ryder, I believe you have some questions. 72 MR. RYDER: Yes, thank you, sir. 73 MR. JACKSON: Mr. Moran first. 74 MR. MORAN: One more preliminary matter, Mr. Chair. I think on the last day you were asking about the status of the intervenor requests by the Ontario Cured Tobacco Growers Marketing Board. We have received a letter from them, dated April 5, 2002, in which they say that: "Provided the Ontario Energy Board accepts the settlement agreement, the Tobacco Board will not participate in the above-noted proceeding scheduled to commence on April 4, 2002." So, I think that's probably a complete answer to the question you had. 75 MR. JACKSON: Thank you. Mr. Ryder? 76 UNION GAS - PANEL 1 77 CROSS-EXAMINATION BY MR. RYDER: (Continued) 78 MR. RYDER: Yes, thank you. 79 Mr. Packer, can I turn you to issue 11.2, in particular to account 179-26. 80 MR. JACKSON: Mr. Ryder, what is the reference, I'm sorry. 81 MR. RYDER: It's issue 11.2 and it's account 179-26. 82 MR. MORAN: It's page 21 of the settlement agreement. 83 MR. PACKER: I'm sorry, can you just tell me what the name of the account is; 179-2 is it? 84 MR. RYDER: It's the deferred customer rebate charges deferral account. 85 MR. PACKER: I have the ADR reference. 86 MR. RYDER: And you see that it states that Union is proposing to modify the operation of the account to include uncollected deferred charges. 87 MR. PENNY: Mr. Chairman, if I could just interject for a moment, issue 11.2 appears in two places on the list, and to the extent that Mr. Ryder has questions about the allocation of any amounts that would be in that account, Mr. Packer is the right person to address those questions to. To the extent that Mr. Ryder has questions about the substantive nature of the change to that account that are proposed those questions, those questions are more appropriately directed to Ms. Elliott on the next panel. If that's of assistance. 88 MR. RYDER: Yes. That's a great help. 89 My only question is -- without this proposed, who is responsible, who is at risk for these charges; is it the shareholder or the customers? 90 MR. PACKER: I think that's a question for the next panel. 91 MR. RYDER: Well, with respect to the allocation of the revenues collected from the deferred rebates, where are they to be allocated? 92 MR. PACKER: In the event the proposed change to the deferral accounting generates additional deferral account balances, we'd have to look at why those balances existed and determine our allocation methodology at that point in time. 93 MR. RYDER: So this case isn't determining the allocation of that money? 94 MR. PACKER: That's correct, yes. 95 MR. RYDER: Now, the second one is the issue 11.2, account 179-68. That is at page 22 of the ADR agreement. 96 MR. PACKER: I have it. 97 MR. RYDER: This is the other purchased-gas deferred account, gas cost deferred account. 98 MR. PACKER: That's correct. 99 MR. RYDER: And here, I understand you want to introduce two changes. The first change is a new charge on direct-purchase customers who fail to balance. 100 MR. PACKER: No, that's not correct. We are proposing changes to the -- how we determine the charge to customers who don't balance, final customers who don't balance. I wouldn't describe it as a new charge. 101 MR. RYDER: All right. It's not a new charge, but it's an increase to an existing charge. 102 MR. PACKER: I'm not sure I would accept that it's always an increase, either. It is a change to what we had done in the past. 103 MR. RYDER: Well, is the change likely to increase the revenues generated by this charge? 104 MR. PACKER: I would accept that it's likely to increase the charges. Those charges are all deferred and put against the gas supply deferral accounts. 105 MR. RYDER: And so this is not an increase in revenue that would go to Union's shareholders. 106 MR. PACKER: That's correct. 107 MR. RYDER: And the second charge is -- change, rather, is the timing for the collection of the monies. 108 MR. PACKER: Yes, that's correct. 109 MR. RYDER: And that's advanced? 110 MR. PACKER: Yes, what we're finding is if you wait until the time deferral account balances are disposed of, it is difficult for customers to remember exactly why the costs were incurred. We found it much better to try and levy the charges closer to the time the contract expires so there's a better correlation for customers between the charge and the event itself. 111 MR. RYDER: Can I next turn you to issue 11.5. The description of the issue is in the second paragraph, at the top of page 24. 112 MR. PACKER: I have the reference, yes. 113 MR. RYDER: Thank you. This issue began, I take it, with the ADR agreement in the case, the EBR case of 0017 which provided for the purchase of 150 MMCFD of M-12 capacity for delivery point flexibility; is that correct? 114 MR. PACKER: I believe that to be the intervenors' view. We are proposing the allocation of the balance in those deferral accounts on a basis consistent with how they've been handled in the past. 115 MR. RYDER: I understand that. And a portion of that 150 wasn't picked up by customers. 116 MR. PACKER: That's my understanding, yes. 117 MR. RYDER: And -- but 100 percent of the capacity that was made available as a result of the customers not picking it up was made available by -- was paid for by the in-franchise customers. 118 MR. PACKER: Yes, I believe that to be correct. We took the cost associated with providing delivery-point flexibility and that was included in the delivery rates. 119 MR. RYDER: Right. And the customers were required to give three months' notice of their intention to take it? 120 MR. PACKER: I don't know what notice time period there was. I can't -- I can accept that, subject to check. 121 MR. RYDER: And you've told us 5 percent was taken up, so that would be 7.5 MMCFD. 122 MR. PACKER: I think that's right, yes. 123 MR. RYDER: And the 7.5 MMCFD was given to Union to sell in the storage and transportation -- by the storage and transportation department? 124 MR. PACKER: , No, I inquired about whether that capacity was actually released to the storage and transportation sales group and it wasn't. So we didn't provide any firm services using that capacity. I guess one might ask whether that capacity was used to generate interruptible capacity. The capacity we sold was interruptible service. Generally, we're not fully subscribed for interruptible transportation services. This past winter there weren't any days where we were constrained, and I think the prior winter there were only a couple of days when we were constrained. 125 MR. RYDER: So did you ascertain -- so was this capacity, this 7.5 MMCFD, was that made available for the sale of interruptible transportation? 126 MR. PACKER: The way -- I wouldn't view it as an explicit process where we made it available. What we do when we provide interruptible transportation services is look at what capacity is available on the system and that will determine how much interruptible service we can provide. So I accept that it may have been something that contributed to the availability of the capacity on the system from a day-to-day basis. What I'm indicating though is that we weren't constrained other than a couple of days over the last two years as far as capacity being available to provide interruptible services. Stated another way, I don't think our interruptible transportation margin would have been much different, if at all different, had this capacity not been part of the mix. 127 MR. RYDER: Thank you. 128 MR. JACKSON: Could you just remind the Board how that interruptible service is priced; when it's provided? It's very short term, I take it. 129 MR. PACKER: Yes, it's priced within a range and my understanding is that parties will identify what they're willing to pay for the service. And, as capacity gets constrained, the people who are willing to pay the least amount are the ones who are curtailed first. 130 MR. JACKSON: Okay. But this interruptible service is contracted for considerably in advance then, is it, or is this short-term, where you're really competing with the secondary market as well? 131 MR. PACKER: I wouldn't describe it as being contracted for significantly in advance, but there may be a few days where somebody's indicated they want to have low IT for the month or something like that. And, as you get into the month, that may or may not happen based on our physical constraints and what the customer is willing to pay relative to what's available, and what others are paying. It's not a long-term service. 132 MR. JACKSON: It's not something you'd line up with your annual contract then? 133 MR. PACKER: No these are ex-franchise customers, so they would express an interest based on what they see happening in the market from time to time. It's not an annual election process. 134 MR. JACKSON: Thank you for that. 135 MR. RYDER: And the margin for interruptible transportation, how is that allocated? 136 MR. PACKER: As per our previous decision, which I think this issue was part of a settlement agreement, we've allocated C-1 margin, or margin associated with an interruptible transportation, in proportion to available capacity. What that means is, we look at the demands the customers have contracted for and we compare that to their through put, and the difference between those two factors determines what proportion of the pool of C-1 margin a customer gets. As a result of providing delivery-point flexibility and TransCanada turning back capacity to us, the proportion that TransCanada would have got of the pool of dollars is now smaller because those demands are taken out of the process. So, there is a -- in that context, there is a recognition that in-franchise customers should be get a higher proportion of the pool of dollars available. 137 MR. RYDER: So if 75 percent goes to the customers and of that 75 percent -- isn't the level -- doesn't 75 percent then go to the M-12 and only 25 percent to the in-franchise? 138 MR. PACKER: There is a split between the shareholder and the customers for variances to the forecast. So you are assuming that we've exceeded our forecast when you talk about 25/75 split. What I talked about a moment ago was what happens to the customer's share, where we determine how much would go to ex-franchise customers by customer, and we determine how much goes to in-franchise customers in total using that approach. 139 MR. RYDER: So you say that that amount varies depending on who makes the capacity available? 140 MR. PACKER: It varies based on the difference between a customer's contracted demand level and their through-put. That changes from year to year. 141 MR. RYDER: Okay. Issue 14.2, which is the failure-to-deliver charge. 142 MR. JACKSON: The documentation as to how that is allocated, where would I find that. That was in the main testimony, I think; was it, or not? 143 MR. PACKER: If you will give me a moment, I will get to the references. 144 MR. JACKSON: Thank you. 145 MR. PACKER: The reference in this proceeding can be found at Exhibit B, tab 13, page 30, where we talk about how the transportation exchange services deferral account is allocated. 146 The acceptance of this as being the appropriate allocation methodology was outlined in the Board's EBRO 493/494 decision of March 20, 1997 at page 217. In that decision with reasons there's a reference to the ADR settlement agreement where the issue was resolved. 147 MR. JACKSON: Thank you very much, Mr. Packer. 148 MR. RYDER: Well, does that take into account the customers who made the capacity available as of the time of the ADR settlement, or does it take into account the possibility that in-franchise customers could make the capacity available? 149 MR. PACKER: I'm not sure I follow the question. Could you restate it please? 150 MR. RYDER: Well -- I understood that basically, the allocation was based on identifying the customers who made the capacity available for sale. 151 MR. PACKER: The in-franchise allocator is design day demand in total. There isn't a reduction in that design day demand to reflect the fact that some of our in-franchise demands may be met from Parkway. 152 I think what you are alluding to is because there's more demand being served from Dawn, the in-franchise allocators should recognize that. In-franchise allocator looks at total design day demand, so it doesn't matter whether it's being served from Dawn or Parkway. 153 MR. RYDER: The schedule which shows the allocation of interruptible transportation, is that Exhibit B, tab 13, schedule 3? 154 MR. PACKER: That would be one of them, yes. 155 MR. RYDER: All right, and that's for the year 2000. 156 MR. PACKER: Yes. 157 MR. RYDER: And in that schedule, 179-69 gets allocated the customer's share, gets allocated 75 percent to the M-12. 158 MR. PACKER: That's correct. That's as a result of calculating the available capacity allocation units. 159 MR. RYDER: So in the event that any of the interruptible transportation that was sold stemmed from the unpicked-up 20 percent flexibility arrangement, the in-franchise customers would have got 25 percent of that and M-12 would have got 75 percent of that. 160 MR. PACKER: If you could draw a correlation between the existence of having a small amount of capacity that wasn't taken up for delivery-point flexibility and the creation of interruptible transportation margin. What I indicated earlier is that there's, except for a couple of days in the last two years, our system hasn't been constrained. So I'm not sure -- I would not accept the fact that as a result of that capacity existing we've been able to generate a lot more C-1 margin. I do not believe that to be the case. 161 The other aspect that I'm relying on in not changing the allocation of that deferral account is the fact that all in-franchise demand is captured in the allocator. We're not distinguishing between Parkway and Dawn, nor have we ever. I think the proposition that suggests that we should be increasing the in-franchise allocators is driven by the thought that all we're capturing in the allocator is demand served from Dawn, and that's not true. It's all demand and that hasn't changed. 162 The allocator is generating more margin for in-franchise customers because the TransCanada available capacity number is now lower as a result of them turning back the capacity. 163 MR. RYDER: Just one last question before I leave this issue. In your testimony on Friday, you mentioned a basis for allocating stemming from available capacity. When you describe the available-capacity method of allocation, is that different than what you're describing now for this account, 179-69? 164 MR. PACKER: No, it's the same. I was just trying to elaborate on what that meant. 165 MR. RYDER: So available capacity is not based on which customer makes the capacity available. 166 MR. PACKER: I'm not sure how you could conclude that based on what I've just said. 167 MR. RYDER: Well, I've have to read the transcript to educate myself. 168 Turning now to 14.2, the failure-to-deliver charge. 169 MR. PACKER: I have it. 170 MR. RYDER: Union is proposing to add this to the T-1 and T-3 rate schedules; is that right? 171 MR. PACKER: We're proposing changes that make it clearer that this is the charge that will apply to T-1 and T-3. 172 MR. RYDER: And the basis for the charge that you've selected is that it is necessary following the elimination of the DCC; is that right? 173 MR. PACKER: Prior to the DCC being eliminated, when somebody failed to deliver they would pay the failure-to-deliver charge and we would also have the ability to claw-back the DCC to the start of the contract. When the DCC is eliminated, you lose one of those charges. What we're proposing to do here is have the same effect after the DCC as existed prior to the DCC with respect to the charges that apply to a customer. 174 MR. RYDER: So that means that the new charge is designed to match the enforcement qualities of the DCC claw-back. 175 MR. PACKER: The new charge is designed not give any additional incentive to fail to deliver. To the extent we had both levers in the past, we would like to maintain the same effect of those two levers going forward into the future. 176 MR. RYDER: So it's -- you're trying to match the enforcement impact that you had prior to the elimination of the DCC. 177 MR. PACKER: We're trying to maintain the same incentives prior to the DCC being eliminated for people not to fail to deliver. 178 MR. RYDER: So for the T-3 customer, we have a charge, do we not, which maintains the enforcement qualities of the DCC program, plus we have a left-over revenue requirement from the DCC program; isn't that the result to the T-3 customer? 179 MR. PACKER: The way I'm looking at it, I don't think there's any impact on a T-3 customer, especially if they fulfill their obligations to deliver. The DCC mechanism that existed in the past recognized the benefit that obligated deliveries provided our system. That's why the DCC existed, that's why the payment was set the way it was. The benefit that people provide the system was allocated, or funded, based on how the costs would have been allocated this had we not been able to rely on obligated deliveries and had built facilities. I don't -- I think customers are indifferent there. This charge only applies when somebody doesn't fulfil the obligations of their contract and we're trying to maintain the same financial incentives for them to honour the provisions of their contract. 180 MR. RYDER: But the T-3 is being doubly charged for the east-end delivery requirement. 181 MR. PACKER: I don't believe so, no. 182 MR. RYDER: We still have a portion. As we discussed the other day, we still have a portion of the DCC cost left in our revenue requirement and we are being asked to submit to an additional non-delivery charge. 183 MR. PACKER: Failure to deliver -- 184 MR. RYDER: Isn't that's a sort of a double impact on us for the same point? 185 MR. PACKER: The failure-to-deliver charge would only apply to somebody to honour the provisions of their contract. I was hoping that Kitchener wasn't planning on failing to deliver. What we are proposing to do in the changes that we brought forward with respect to the failure-to-deliver charge is to maintain the same financial incentive for customers to deliver to us. 186 MR. RYDER: In the ADR agreement of 0017 when the DCC elimination was addressed, was there any suggestion at that time that you intended to increase the failure-to-deliver charge? 187 MR. PACKER: I don't believe there was; no. 188 MR. RYDER: And has there been any failure to deliver in the T-3 class which prompts this proposal? 189 MR. PACKER: There have been failures. We only have one T-3 customer, there have been failures in other rate classes. As existed before, we're trying to have one standard failure-to-deliver rate for customers in the southern operations area. 190 MR. RYDER: Does this change in the rate level, does that fall within the PBR formula, in any component of the PBR formula? 191 MR. PACKER: No, not that I am aware of, although I did indicate on Friday that when we looked at how much DCC had been collected as a result of -- or clawed-back as a result of failures, it's $50,000. This isn't going to provide a huge windfall for the company, by any means. We're more concerned with system integrity and making sure that people deliver to us when they are supposed to. 192 MR. RYDER: It's not a debt factor? 193 MR. PACKER: No. 194 MR. RYDER: Now the next issue is 14.4. 195 MR. JACKSON: Could I just ask, before you move to the next issue, that failure-to-deliver charge which is charged, I think on all quantities not delivered Union in the event that the customer supply fails, if they ask you if they can make it up the next day, what's Union's approach to that? They still charge them on all supplies not delivered on the previous day and what do you do about an overage that sort of balances things out the next day? 196 MR. PACKER: I'm not sure we have a had a situation where somebody misses for only one day. I'm not sure what we do in that case. Typically, when people's supply fails, it's intentional and it lasts for a prolonged period of time. 197 MR. JACKSON: When you say a long period of time, a month maybe? 198 MR. PACKER: A long period of time being a month. Once it gets past a month, we start looking at moving them back to system gas so the penalties don't start accumulating for any longer period of time. If somebody had a one-day occurrence, where they accidentally just didn't deliver their gas and it wasn't during a peak time, I think we'd have to look at it. But I can't recall a situation where it's only happened for one day. 199 MR. JACKSON: Suppose it happens for something less, and I'm not trying to be overly precise about this, but suppose it's 10 days. Is the total quantity that should have been delivered in that 10 days what gets that failure-to-deliver charge. 200 MR. PACKER: Right. 201 MR. JACKSON: And do you want the gas made up in a situation or not during that situation like that? How does Union feel about it if -- can a customer just get back on track by providing its daily commitment to deliver from there on? I'm not sure that anything turns on it, it's just I'm just trying to understand how the system works, that's all, as we go through this. 202 MR. PACKER: In the case of a T-1 or a T-3 customer, they have an allocation of storage that they're working with. We may not actually be short gas, they may still have gas in their account, they just failed to deliver what we needed in a particular day, if we had design conditions. So, in that particular circumstance, I'm not sure there's a need for them to do anything other than -- with respect to their storage account. But what concerns us is the fact that it didn't arrive during the day so we've either got a -- 203 MR. JACKSON: You've compensated some other way, and that is now passed, is what you're basically saying. 204 MR. PACKER: That's right. We were relying on the gas arriving so we've had to do something other than accept that gas to make sure firm demands were met. 205 MR. JACKSON: Yes. Thank you. Mr. Ryder, sorry for the interruption. 206 MR. RYDER: 14.4, Mr. Packer, and this is a change in the unauthorized storage overrun and rates for the T-1 and T-3 rate schedules. 207 MR. PACKER: I have it. 208 MR. RYDER: Under a number of T-1 and T-3 contracts, I understand that a rachet provision exists. 209 MR. PACKER: Currently that's the case, yes. 210 MR. RYDER: And this is a provision which reduces the withdrawal rights of the customer when the inventory is less than 20 percent, the inventory in storage is less than 20 percent. 211 MR. PACKER: Yes. 212 MR. RYDER: So, the risk of, say Kitchener under T-3, of withdrawing to a level -- to a negative level is very slight because of the existing discipline affected by the rachet provision. 213 MR. PACKER: I'm not sure that I would agree that it's slight. We did have an instance, not this past winter but the winter before, where we had a T-1 customer who was very close to zero and was considering going below zero, and the rachets may have been in existence in that contract as well. 214 MR. RYDER: Were they in existence? 215 MR. PACKER: I believe they were, yes. 216 MR. RYDER: But the rachets do provide a discipline which restrains withdrawals after you reach the 20 percent level. 217 MR. PACKER: Yes, that's right. 218 MR. RYDER: So -- and what you are you're saying, I take it, is that the disciplining in the existing contract is insufficient. 219 MR. PACKER: When gas prices are high, the old charge for customers who didn't maintain a positive storage balance included our weighted average cost of gas and it also included another component which was, I believe, our first block of R-2 delivery rate. Typically, that's enough of an incentive for people not to go below zero, but when WACOG lags the market and you get in a lot of volatility in a particular month, we saw a situation where it was cheaper for a customer to pay that charge than to buy gas. And, what we wanted to do is to change the rate schedules so that incentive didn't exist in the future. 220 It doesn't mean that the charges -- that the new charge is going to be higher than the old charge, there will be circumstances where it will actually be lower, but what we wanted to do was have our charge more accurately reflect the market alternative that the customer would face to bring in their own gas. 221 MR. RYDER: But it is an alteration of these T-1 and T-3 schedules in the middle of the PBR term. 222 MR. PACKER: It is, but there's no up-side for the utility in making this change. Any charges that would come about as a result of somebody going below zero would be deferred and put against the gas supply deferral accounts. There's no revenue up-side for the utility. 223 MR. RYDER: So there was no occasion or instance last year and there was one instance in the T-1 customer the year before? 224 MR. PACKER: That's my understanding. And, that was -- it's really a function of where gas prices are at a particular point in time relative to where the old charge was pegged. It drew our attention to the fact that if you have a very volatile gas commodity market, you may actually have created a financial incentive for people not to keep their storage balance above zero. 225 MR. RYDER: All right. But it's not a matter of immediate necessity? 226 MR. PACKER: When gas prices spike there isn't time for us to file something with the Board to ask for a rate change so that we remove an incentive. You have to be proactive. We didn't think this was going to be a case in the past, but we haven't had a situation arise where it would have been better or cheaper for a customer just to allow their storage account to go below zero. So, we think it's prudent for us to propose a change to that now that we're aware of that. 227 MR. RYDER: Those are my questions. Thank you, Mr. Chairman. 228 MR. JACKSON: Thank you, Mr. Ryder. 229 Just so that I understand that last issue properly, are you saying that that hypothetical customer that might choose not to make adjustments so that its storage did not go below zero would then be able to buy gas effectively cheaper then on the market, and that amount would go to a deferral account and then get redistributed to other customers? 230 MR. PACKER: I don't think so. Let me just describe what -- 231 MR. JACKSON: Okay. Because when you say that he pays the lagging reference price instead of paying the market price, it sounded to me as if he was indeed getting the benefit. 232 MR. PACKER: Under the old pricing scenario in the past, that could have been the case. 233 MR. JACKSON: Yes. 234 MR. PACKER: Under our proposal, we're proposing to charge the highest spot price at Dawn in the two-month period. I hope that's enough incentive for them not to rely on us to provide them with gas. If, for whatever reason, they still choose that option, that revenue will be deferred and it is put against the gas supply deferral accounts. 235 MR. JACKSON: I guess I'm trying to understand the current situation which, I might think from Mr. Ryder's questioning, he was hoping you would leave in place. And so under the current situation that you're asking to make the change away from, would the customer have, essentially then, purchased that gas at the lagging reference price? 236 MR. PACKER: Effectively, yes. 237 MR. JACKSON: And what would be the implication, then, for shareholders and other customers of his being able to purchase gas at what was a lower price? 238 MR. PACKER: There shouldn't be any impact on the shareholder. It would just be a matter of there being more charges in the deferral accounts for collection from other customers. 239 MR. JACKSON: Okay. And that's getting back to what my initial question was, so if there was in confusion, I think it had to do with whether I was asking a question about the existing methodology or what you are going to. So there is a problem with the existing methodology, then, in that respect, in that a customer might derive a benefit from all other customers; is that what you're saying? 240 MR. PACKER: Yes. 241 MR. JACKSON: Thank you. Mr. Ryder, did you want to follow up after I made that clarification? 242 MR. RYDER: No, sir. I think our main concern here is that it's a change to our schedule in the middle of the PBR term. 243 MR. JACKSON: Thank you, Mr. Ryder. 244 MR. RYDER: When it's not needed. 245 MR. JACKSON: > Mr. Ryder, are you going on to another issue? 246 MR. RYDER: No, that completes my cross-examination. Thank you. 247 MR. JACKSON: Thank you. 248 Now, let's consider taking our morning break at this time. So we're going to break for 20 minutes. Who will be up after the break? 249 MR. JANIGAN: Mr. Chair, Mr. Vegh graciously ceded his spot to us on Friday and has made the same concession today. So we will be proceeding after the break. 250 MR. JACKSON: Okay. Thank you. So we will return here at about five to 11:00. Thank you. 251 --- Recess taken at 10:35 a.m. 252 --- On resuming at 11:05 a.m. 253 MR. JACKSON: Please be seated. 254 Mr. Janigan. 255 MR. JANIGAN: Thank you, Mr. Chairman. Ms. Lott will be examining Mr. Packer on the first three issues and I will be dealing with the fourth issue and the update. So I will put it over to Ms. Lott. 256 MS. LOTT: Thank you very much. I wanted to start, actually I'm going to be making reference to some pre-filed evidence in the RP-1999-0017 case and I have the excerpts here which I'll make available to the panel. 257 CROSS-EXAMINATION BY MS. LOTT: 258 MR. JACKSON: Thank you. 259 MS. LOTT: I'm going to be speaking about the delivery commitment credit first, Mr. Packer, and then I'm going to ask you a question about the rate schedule changes, specifically, the C-1 storage and transportation charges. 260 MR. MORAN: Mr. Chair, do you want to mark this as an exhibit so we can track it? 261 MR. JACKSON: Yes, I think that's a good idea. 262 MR. MORAN: It will be F.3.4, excerpts from Union's pre-filed evidence in RP-1999-0017. 263 EXHIBIT NO. F.3.4: EXCERPTS FROM UNION'S PRE-FILED EVIDENCE IN RP-1999-0017 264 MR. SOMMERVILLE: Just so I know what I have is what's being referred to, is it pages 26 and 27? 265 MS. LOTT: Yes, I just wanted to make sure you had that. As well, we had faxed that to you last week. 266 Okay, Mr. Packer, I wanted to speak to you first about the delivery commitment credit. And I wanted to make reference to the exhibit that had been filed by Mr. Aiken last week on the table which is Exhibit F.2.4. I'm going to be looking at page 1 of that. 267 MR. PACKER: I have it. 268 MS. LOTT: You've got it, okay. According to 1, column C, which I know you've looked at, you looked at last week, could you confirm that the M-2 rate class pays rates of 19.1 million for the DCC, which is approximately 70 percent of that total at the bottom of that column of 27.257 million. 269 MR. PACKER: Yes, 19 million of the 27 million of the cost related to the delivery commitment credit are recovered from the M-2 class. 270 MS. LOTT: Okay. And if the DCC had never been implemented, you never would have expected that M-2 rate class to be paying that 19.107 million in rates; is that correct? 271 MR. PACKER: I have no idea of knowing the answer to that question, because the DCC does exist or has existed. We didn't pay a DCC -- one potential would be that we didn't have any obligated deliveries, in which case we would have had to build more facilities, and those facilities would have been allocated the same way the DCC costs had been allocated. 272 MS. LOTT: I guess what I'm simply saying is, if something never existed we wouldn't expect to be paying for it; isn't that correct? 273 MR. PACKER: I'm saying I can't accept that because I don't know what would have happened in the absence of the DCC existing. 274 MS. LOTT: According to the evidence that you filed in the RP-1999-0017 which has just been filed as Exhibit F.3.4, and I'm looking at page 26 which is the first page of that exhibit which we've just filed, specifically, lines 15 to 16. I just wondered if you could confirm that when the DCC historically arose, this was Union's evidence, that it arose from Union's buy/sell pricing methodology, where the DCC represented the difference between the -- Union's buy/sell -- the Ontario buy/sell price and Union's weighted average cost of gas; is that correct? 275 MR. PACKER: Yes. It represented the difference between the buy price and our weighted average cost of gas, historically, prior to EBRO 499. 276 MS. LOTT: Right. And later on in the ADR agreement, of 1.2.4, I'm thinking of the ADR agreement of June 7, 2000, the settlement agreement, and that's on page 18. The indication there is that the delivery commitment credit is something that relates to delivery obligations; isn't that correct? That there was -- there had been a change in the view of that delivery commitment -- the credit by that point. Because you say in your evidence on that page that it's no longer required because the terms and conditions of all existing direct purchase agreements contain a contractual obligation. So there's need to have the delivery commitment credit at that point. 277 MR. PENNY: I'm afraid I lost track of the question. 278 MS. LOTT: Okay. I guess I'm simply stating that we can see from your evidence in the ADR agreement of June 7, 2000 that the perception of the delivery commitment credit at that point is that it has to do with delivery obligations. I'm just merely asking if you can confirm that. And what I'm looking at is 1.2.4 where it talks -- it's the southern operations area. "DCC elimination," is the title, and that's page 18. 279 MR. PACKER: I'm sorry, the -- I'd like to acknowledge that the words there talk about the fact that we have contractual provisions that relate to customers having to obligate to provide their deliveries. As part of page 27 and 28 of the RP-1999-0017, Exhibit B, tab 1, we talked about why we're proposing to eliminate the DCC. It wasn't generally understood. They would -- if it continued, it would require the existence of a deferral account which, at the time, we didn't think was consistent with the PBR. And, it was unique to the southern operations area and didn't exist for other pipelines. 280 MS. LOTT: But wouldn't you agree that the WACOG price has really nothing to do with delivery obligations? 281 MR. PACKER: That's why in EBRO 499 we changed the methodology. We brought forward a methodology that recognized the avoided facilities costs and the benefit obligated deliveries provide the system. Parties accepted that during the ADR and the Board accepted it -- accepted the ADR. 282 MS. LOTT: So you would agree that there's been a change over time and this is indicated in -- on page 27 of the RP-1999-0017, as you just sort of pointed me to. On line 27 of page 27, you say that one of the justifications is that the rationale for the DCC is not generally understood. 283 MR. PACKER: I would accept that the way we've calculated the DCC value has changed over time. I think for quite a long period of time people have associated the payment of a DCC with obligated deliveries, and the calculation change in EBRO 499 to recognize explicitly the avoided facilities cost benefit that obligated deliveries provide the system. 284 MS. LOTT: I wanted to go back to the table that was provided by Mr. -- the Aiken & Associates table that is now filed as evidence. And, I wanted to look at page 1 again. Again, column C. I just wanted you to confirm that in your testimony with Mr. Aiken, you had agreed that column C is the allocated cost as concluded in the delivery rates, the allocated cost of DCC. 285 MR. PACKER: That's the allocation of the DCC, yes. 286 MS. LOTT: Yes. You had said that was your evidence, yes. 287 In that -- if that is the case, didn't -- did Union not say in its evidence, again I'm referring back to RP-1999-0017, page 27 of the excerpt that I've provided which is now our exhibit Exhibit F.3.4, and I'm going to read here from line 6 and 7. Union states: "As part of the unbundling proposal, Union proposes to: a) eliminate the payment of the DCC and the related charge recovery in delivery rates." In effect, you were proposing to eliminate the related charge in delivery rates; weren't you? 288 MR. PACKER: It says, "the recovery in delivery rates," page 28 of our evidence, same series, Exhibit B, tab 1, talks about the fact that, "Union is proposing that the forecast DCC payout to each rate class be removed from each rate class delivery rates to reflect the elimination of the DCC." We go on to talk about why there is a need for a range rate in the T-1 and M-7 classes to keep individual customers indifferent. There are numerous interrogatory responses that talked about the fact that what we were trying to do was keep individual customers indifferent, and those were identified in the ADR agreement as part of the references. 289 MS. LOTT: I guess my question simply goes back to that statement. Just from reading that, it indicates to me that it would suggest that the related charge or the recovery in delivery rates which you have agreed to is the cost of the DCC as included in the delivery rates, that this would be eliminated. 290 MR. PACKER: The charge is eliminated from delivery rates in total. The rest of the evidence which is -- which follows very closely to this page talks about how we are proposing to do that, keep individual customers and rate classes indifferent. Obligated deliveries provide a benefit to our system. They avoid the construction of facilities and we allocate the payout in relation to how those facilities costs would have been allocated had we had to build more facilities in place of having obligated deliveries. 291 MS. LOTT: Well let's look specifically at the M-2 class. Who used to get this delivery commitment credit payout? Who used to get that payout? It wouldn't have gone directly to the M-2 class, would it? 292 MR. PACKER: It would have gone to the -- 293 MS. LOTT: The residential customer is what I'm referring to. 294 MR. PACKER: It would have gone to marketers who were acting on behalf of end-use customers within the rate class. 295 MS. LOTT: So what you've interpreted or what you've said to us has been your testimony so far, that how you're interpreting the removal of the DCC is you are establishing it on a revenue-neutral basis. It's being eliminated in a way that will maintain a revenue neutrality. I understand that as being your evidence up until this point; that's correct? 296 MR. PACKER: And what I've explained is there are numerous references in the evidence and interrogatory responses as to what that meant to us and those references were provided in the ADR agreement. 297 MS. LOTT: Right. So, ideally, when you are providing this credit to the REM, you would have expected that they would have passed this credit on to the residential customer that they were delivering the volumes to on their behalf. So in order to make this elimination revenue neutral, then the end-use residential customer under an REM should have been getting the credit; isn't that correct, according to your understanding of maintaining this revenue neutrality? 298 MR. PACKER: There was an exhibit filed in the RP-1999-0017 case. It's Exhibit C.1.131. It talks about what was happening in the M-2 class. It's not very long; I can read it into the record. 299 "The current DCC of 425 applies to all obligated direct purchases volumes and is currently paid directly to REMs. Upon eliminating the DCC, REMs will no longer receive this payment from Union. Rate M-2 delivery rates will be reduced by an amount equal to the DCC currently paid on rate M-2 obligated volumes. Union is unable to assess the expected effect on REMs as a result of eliminating the DCC, as Union is not privy to REM arrangements with customers as it relates to the current DCC." 300 MS. LOTT: I guess my question is simply that in the event that these residential customers that are served by the REM aren't getting the full credit, then they're not being kept revenue neutral, are they? 301 MR. PACKER: My response to that is that I don't know how REMs handled the payment and this isn't new information. This was information that was provided in response to interrogatories during the last case. 302 MS. LOTT: I just wanted to ask you a last question here about the rate schedule changes, the C-1 storage and transportation charges specifically. You're proposing in the settlement agreement to increase the Board -approved maximum rates for C-1 storage and short-term transportation services. My question is, when the C-1 maximum rate was established originally, did that maximum capture, in your view, the full market price for these services at that time? 303 MR. PACKER: Over the last ten or more years, there have been changes periodically to the range rate proposed and approved by the Board. The rationale that we've provided to the Board as to why we needed to change the range rates was to capture market value. 304 MS. LOTT: So you are proposing to increase these rates now based on that same principle that the Board approved the last time, which was to capture that full market value for these services; is that correct? 305 MR. PACKER: That's correct. 306 MS. LOTT: And in your view, is the storage market a competitive market? 307 MR. PACKER: Yes. 308 MS. LOTT: Those are my questions. Thank you. 309 MR. JACKSON: Thank you. 310 CROSS-EXAMINATION BY MR. JANIGAN: 311 MR. JANIGAN: Thank you, Mr. Chairman. I'd like to continue with the change to the other purchased gas account. I wonder if we could take a look at the Exhibit B, tab 13, schedule 1, page 1 which lists the deferral account balances, while I'll dealing with this issue. 312 MR. SOMMERVILLE: Sorry? Exhibit B , tab 13 schedule 1 -- 313 MR. JANIGAN: Page 1, updated. And as I understand it, the merged other purchased gas accounts records the difference between the landed per-unit cost of all non- TCPL supply and the landed WACOG approved in rates. Did I get that right? 314 MR. PACKER: Yes, I think so. 315 MR. JANIGAN: Okay. And what are the alternate non- TCPL supplies? 316 MR. PACKER: What are they? 317 MR. JANIGAN: Yes. 318 MR. PACKER: They would be capacity on anything other than TransCanada, including landed spot supply. 319 MR. JANIGAN: And can you tell me what component of this account captures the Alliance-Vector difference from the TCPL prices? 320 MR. PACKER: I believe so, yes. 321 MR. JANIGAN: Is it possible to provide, by way of an undertaking, a breakout of this account for the individual, alternate, upstream transportation options, including Alliance-Vector and all others that -- from which this deferral account balance is derived? 322 MR. PENNY: Sorry, Mr. Chairman, this issue has nothing to do with Alliance-Vector; that is, issue 11.2. And, the questions Mr. Janigan is asking are more appropriately directed to the gas supply panel that will be testifying later. 323 MR. JANIGAN: Well, Mr. Chair, it does have something to do with the deferral account balances themselves. 324 MR. PENNY: But it has nothing to do, Mr. Chair, and my submission to you is that what Mr. Janigan is asking has nothing to do with the issue that's set out at 11.2. That's not what the dispute was about. 325 MR. JANIGAN: This question can be asked. If the need for an undertaking could give a breakout to deal with the question that's in play with that panel, if that's Mr. Penny's wish. 326 MR. PENNY: Through you, Mr. Chair, my suggestion is that Mr. Janigan address that question to the gas supply panel and find out what the answer is. And, if an undertaking is required at that time, then the Board can rule on whether it should be directed. 327 MR. JACKSON: I'm sorry, Mr. Penny, I was discovering that the updated schedules had not been filed. I was looking for them. I found them and I may have missed part of this discussion but I'm in a catch-up position at the moment. How does this not relate to changes to other purchased gas costs account? 328 MR. PENNY: The issue in 11.2 under this heading, "Other purchased gas costs," has to do -- the issue in dispute has to do with a penalty charge and whether it should be levied or not. 329 MR. JACKSON: As per the ADR. 330 MR. PENNY: Yes. That's at page 22 of the ADR agreement. 331 MR. JACKSON: And not the larger issue which -- 332 MR. PENNY: Not Alliance-Vector or what's in that account; that's right. The Alliance-Vector issue is an issue that will be spoken to by the gas supply panel. 333 MR. JACKSON: Mr. Janigan, are you asking Mr. Packer something that you think only Mr. Packer can perhaps answer because of his particular expertise? 334 MR. JANIGAN: I'm content that this -- the answer -- the undertaking be given by either Mr. Packer or the Alliance-Vector panel. I wasn't intending to pursue this issue with Mr. Packer, it was simply to get the factual information as -- the numerical or arithmetical break down into the Alliance-Vector and the other transportation options which may, in fact, be used as part of the cross-examination of the panel or the argument of the Alliance-Vector panel or the argument on this particular issue. But, I didn't intend to pursue this issue with Mr. Packer. I meant to get the information that may be required. 335 MR. JACKSON: Mr. Penny, would this speed up the process if you were to do this by way of an undertaking and then Mr. Janigan would have it so he could be better informed when he asks his questions of the next panel? 336 MR. PENNY: Well, Mr. Chair, there was an interrogatory process in this case. And the parties had opportunities to ask questions. It is, in my submission, not the practice of the Board to let parties ask additional interrogatory questions during the hearing in anticipation of future panels. My suggestion earlier was that Mr. Janigan put this question to that panel and -- because an undertaking may not be necessary. For all I know, they may know the answer to that question, in which case they can just answer it. It seems to me that the appropriate way to proceed is to put the questions to the people who are in a position to know and if they need to give undertakings to provide the information then that's the way it's done in the usual way. 337 MR. JACKSON: Mr. Janigan, if you were to get the question that is now so clearly on the record answered by the next panel, could you respond to it quite quickly? Would you need review time, really? 338 MR. JANIGAN: I could respond to it in argument. I might note that I'd have to be psychic to be asking interrogatories on updated evidence, Mr. Chairman. 339 MR. JACKSON: Whether this could have been asked on the un-updated evidence, I don't know, but if you could handle it that way, Mr. Janigan, that would be best at this point. 340 MR. JANIGAN: That would be fine. 341 MR. PENNY: Well, Mr. Janigan's had it since March the 18th. 342 MR. JACKSON: I think we've solved this without having to deal with whether he should have submitted something after March 18th in writing to Union. So could we just carry on, please. 343 MR. JANIGAN: Okay. Thank you, Mr. Chairman. 344 I wonder if this is a question better asked to the other panel, Mr. Packer, but you can direct me. What is the TCPL reference price that is used in this calculation, in order to calculate the differential? 345 MR. PACKER: I don't know. 346 MR. JANIGAN: Okay. I can ask that of the next panel. 347 I wonder if we could turn up your new updated evidence, Exhibit B, tab 19, page 1. 348 MR. SOMMERVILLE: Give us that reference, Mr. Janigan, sorry. 349 MR. JANIGAN: It's Exhibit B, tab 19, page 1, updated. The blue sheets. 350 Do you have that, Mr. Packer? 351 MR. PACKER: Sorry, yes, I do. 352 MR. JANIGAN: And it's noted that a single, fixed rate is being used to collect the cumulative impact of the clearances of accounts R-1 to R-10 and two rates for an M-2, a residential and commercial/industrial rate. 353 Could you tell us how those rates, sir, are being derived? 354 MR. PACKER: Sorry which rates, in particular? 355 MR. JANIGAN: Well, let's take the two rates for M-2. 356 MR. PACKER: We've taken the cumulative total of the delivery-related deferral accounts and the retroactivity deferral accounts. There are three years; 1999, 2000, 2001. Retroactivity, there are also three years; those are 2000, 2001, 2002. We've taken the cumulative total of those amounts and we've calculated what that pool of dollars represents as a portion of the total. We've calculated what the percentage increase would represent and that's been used to define what the residential amount would be relative to the commercial/industrial amount. 357 MR. JANIGAN: And how was that percentage calculated? 358 MR. PACKER: What we're trying to do is to have the same percentage impact on a residential customer as we do on a commercial/industrial customer. 359 MR. JANIGAN: And that's measured by bill impacts or measured by some other means? How do you -- 360 MR. PACKER: It's measured by the impact of the sum total of those retroactive amounts relative to what the delivery charge would be for that group of customers. 361 MR. JANIGAN: I wonder if I could direct your attention to page 2, paragraph 2 of that same update. 362 MR. PACKER: I have it. 363 MR. JANIGAN: It notes here that Union was previously concerned about the cumulative effect, doubling up of the gas supply commodity deferral account disposition debits and the delivery related retroactivity and deferral account dispositions, which were also debits. This is no longer a concern. 364 Can you tell me why Union is no longer concerned about the cumulative effect? 365 MR. PACKER: The reason being, we've also updated our deferral account allocations to reflect the March 18, 2002 update to the deferral account balances. And, as a result of that, there are, on a net basis when you look at all three years, there are credits for both the rate-01 system supplied customer and an M-2 system supplied customer. 366 MR. JANIGAN: So it's effectively an offset? 367 MR. PACKER: In the past, there was debits related to commodity-related balances and debits related to delivery-related balances. We now have a situation where there are small credits on the commodity side, so there isn't the doubling up effect that we were concerned about in the past. 368 MR. JANIGAN: I wonder if I could turn your attention to the next page, page 3. I'm looking at the customers that are on equal billing. What percentage of Union's customers are on equal billing? 369 MR. PACKER: Approximately 38 percent. 370 MR. JANIGAN: The credits that might be available for customers on equal billing have the warm weather as their source I take it? 371 MR. PACKER: Primarily, yes, that's right. 372 MR. JANIGAN: Can you tell me the relative size of those credits versus the one-time charge? 373 MR. PACKER: We don't have -- we don't know the exact number until we actually get to August, when things are trued up. But I'm being told that it would be about the size of the one-time charge. So it would be around $100, thereabouts, is what we're estimating. 374 MR. JANIGAN: Now, on page 4, you note the dollar amount of the one-time charge. Has there ever been as large a one-time charge for the M-2 class levied before? 375 MR. PACKER: Not that I'm aware of, but I don't think we've seen the set of circumstances that we are in this particular case before, either. 376 MR. JANIGAN: Have you considered phasing this charge over a period of somewhere between 2 to 4 months -- or 6 months, I'm sorry. 377 MR. PACKER: Yes, we have, and the reasons we concluded that had wasn't the best approach are listed in my evidence. What you have is a situation where you are getting into the winter months where bills are higher anyway, if somebody is not on the equal payment plan, and you're adding the collection of a charge to bills that are larger. We also get into a situation where we anticipate calls coming in for light-ups starting in September and there will also likely be calls from customers wanting to talk about the rate changes and the retroactivity. We have that issue as well. 378 Basically, we concluded that it was best to levy this as a one-time charge because we had 38 percent of the customers who wouldn't be impacted because they've got credits that have been created. For anybody who's not on the equal payment plan, they've accepted some volatility by virtue of not electing the plan, and the cumulative impact of the one-time charge on their August bill is still less than some of their winter months' bills. And it's better in our view just to collect the dollars as one-time shot, get it over with, rather than have this resonating for a number of months and having customers call in because it's a thorn in their side for a longer period of time. 379 MR. JANIGAN: Now, what would you be telling these customers when the one-time charge is levied? I assume that you will be doing a billing insert. What will you be saying on the billing insert to the customers? 380 MR. PACKER: I'm not the person who creates the bill insert, but we'd be explaining that there's an outstanding charge, primarily relating to 2001 and the high gas costs' impact on our delivery rates that that has generated. 381 MR. JANIGAN: It may not be also a question that you can deal with, but is it possible that the customer groups can be circulated with a draft notice prior to it being sent out? 382 MR. PACKER: I think that's part of the normal rate order process that exists today. You already have that option. 383 MR. JANIGAN: So the bill insert would be circulated in advance? 384 MR. PACKER: The draft notice is filed with the Board with the draft rate order. The Board reviews it and my understanding is that parties also have opportunities to review the rate order as well as the notices and provide comments. 385 MR. JANIGAN: Thank you. Mr. Chairman, those are all my questions of this panel. 386 MR. JACKSON: Thank you, Mr. Janigan. Mr. Vegh. 387 CROSS-EXAMINATION BY MR. VEGH: 388 MR. VEGH: Thank you, sir. Good morning, Mr. Packer. 389 Panel, I will be referring to a book of materials I provided to the parties last week as well as to Board staff. It's entitled, "Book of material references for the Coalition for Efficiency Energy Distribution," dated April 4th. 390 MR. MORAN: That would become Exhibit F.3.5, Mr. Chair. 391 EXHIBIT NO. F.3.5: BOOK OF MATERIAL REFERENCES FOR THE COALITION FOR EFFICIENCY ENERGY DISTRIBUTION 392 MR. JACKSON: Thank you. 393 MR. VEGH: Thank you. 394 Mr. Packer, just by way of introduction, I will be asking you about three issues from the issues list, and as well I will be seeking a clarification from your examination-in-chief. The issues I will be asking you questions about and the order I will be asking them are by reference to the settlement agreement numbers. I will be asking you some questions about the impact of the weather normalization on storage, that's issue 5. I will be asking you some questions about changes to the C-1 rate schedule, that's issue 14.6. I will also ask you a couple of questions about issue 11.2, the other purchased gas costs accounts. 395 Turning first to the issue of weather normalization, as well as referring to this book of materials, Exhibit F.3.5, I'll also refer to an interrogatory of my clients', Exhibit C.6.4 and you might want to have that handy. 396 Thank you. The preamble to the interrogatory sets out in evidence the reference that I'd like to refer to, just to put this issue into some context, and that preamble that I'm referring to is in the first paragraph. I take that when you get right down to it, the need for this new methodology arises because the current methodology has overestimated the heating demand of customers by 6.8 cents in a typical year; is that right? 397 MR. PACKER: I was with you until you referenced 6.8 cents. I'm not sure where that's coming from. 398 MR. VEGH: 6.8 percent in a typical year. My reference is to the end of the first paragraph in the preamble to that interrogatory, C.6.4. 399 MR. PACKER: I will accept that, yes. 400 MR. VEGH: So basically the problem with the old methodology was that it overestimated how cold it would be in a typical year. 401 MR. PACKER: I think that's accurate, yes. 402 MR. VEGH: Now with that I'd like to ask some questions about how this new methodology will impact the use of storage on Union's system. And, first I'd like to address that by reference to the amount of storage that is held back by Union for system integrity purposes and that's what this interrogatory directly asks. It asks what the impact is on the amount of storage held behind -- held back for system integrity purposes. And the answer -- I'm sorry, just before getting to the answer, maybe we could just confirm that Union currently retains about 9.1 Bcf of storage for system integrity purposes; does that sound right? 403 MR. PACKER: Yes, that's correct, yes. 404 MR. VEGH: And the question in C6.4 asks about whether the new weather methodology had any impact on that quantum of storage, the 9.1, and the answer that you set out in this interrogatory is basically that the calculation had no -- or the new weather methodology had no impact on the amount of storage kept behind; is that fair? 405 MR. PACKER: Yes, that's what I believe the interrogatory is indicating. 406 MR. VEGH: So under the old methodology, Union kept back 9.1 and under the new methodology, Union proposes to keep back 9.1 Bcf. 407 MR. PACKER: Yes, and I believe the response indicates that the calculation of the system integrity requirement amount was largely independent of the weather normal -- of the normal weather forecasting method. 408 MR. VEGH: The calculation of that amount, that was set out in more detail, that is referred to in this interrogatory, set out in more detail in the evidence in RP-1999-0017 at Exhibit B, tab 1, page 64 and I'd like you to turn to that if you could. It's at tab 1 in the materials that I sent out or that I provided at exhibit -- tab 3.5. Do you see that? 409 MR. PACKER: I have it, yes. 410 MR. VEGH: So, page 64 at tab 1 of Exhibit F.3.5, sets out the basis for the 9.1 Bcf figure and that's the evidence that's relied upon in responding to this interrogatory? 411 MR. PACKER: I can't answer on what was relied upon to create the interrogatory. I think the issues are related. 412 MR. VEGH: Maybe I can help you. The answer to the interrogatory says: "As indicated, RP-1999-0017 Exhibit B, tab 1, page 64 system integrity space is required for the following." So the reference is to this evidence, so this is the evidence then that was relied upon at least for that portion of the interrogatory that came up with the 9.1 figure; is that right? 413 MR. PACKER: The reference identifies why system integrity or space was required, and I accept that as where that is the appropriate reference for where those components were laid out. 414 MR. VEGH: Well, both why it was required and the quantum of 9.1. 415 MR. PACKER: Yes. 416 MR. VEGH: Okay. And if you go to page 65, then, the next page in exhibit -- or from 1999-0017, it says that: "Except for this space set aside," the 9.1, "all remaining storage space is allocated to customers." 417 So the approach in establishing the initial allocations of storage in 1999-0017 was to subtract system integrity storage space from the total amount of storage space required and then allocate the difference to customers; isn't that right? 418 MR. PACKER: No, that's not right. 419 MR. VEGH: Well, this says "except for this space set aside," except for the 9.1, "all remaining storage spaces is allocated to customers." So didn't you go through that process of identifying how much was required for system integrity and then allocating the rest to customers? 420 MR. PACKER: The reason I take exception to the way you're describing it is we did that check to make sure that we had enough. But the calculation of space available for unbundled customers was based on the aggregate access calculation, which looks at winter demand relative to average demand for 151 days. It was a double-check, but we didn't take the total, deduct the system integrity amount and allocate the remainder. That's not what was done. 421 MR. VEGH: Well, is it fair to say that the two had to interact? That is, how much storage space was set aside for system integrity and how much was allocated to customers? 422 MR. PACKER: It's, I guess, it's safe to say that if there was a big difference between what the aggregate access calculation would have yielded and what would have been available when you deducted the system integrity amount from the total, we would have had to consider what we were going to do about that. But there wasn't that issue at the time. 423 MR. VEGH: Well, if you go to the next paragraph on page 65, you discuss further about how -- you discuss further about identifying the quantum of 9.1 Bcf and how that interacted with the allocations to customers, and you say the system integrity space was quantified assuming that all customers elect unbundled storage service and provide their own balancing and deliverability requirements from the storage they have been allocated. So it seems to me that you have somewhat of an interactive process here between identifying how much is required for system integrity space and how much can then be allocated to customers without threatening that system integrity space; isn't that fair? 424 MR. PACKER: Not necessarily, no. The sentence you just read to me, I believe, was meant to convey that when we identified how much system integrity space we would need, the assumption is that everybody is unbundled and that we needed to make sure that worked. I don't accept your premise that what we were doing here was taking the total and deducting off the system integrity and everything that remained was allocated. 425 MR. VEGH: So when you say that it had to work you mean that it had to hang together? That is, the quantities allocated to customers had to be consistent with the quantities held back for system integrity storage? 426 MR. PACKER: What I'm saying is that we needed make sure that when we identified how much system integrity we needed -- system integrity space we needed to operate the system, we looked at what the requirements on the system would be if everybody was unbundled. 427 MR. VEGH: Right. So there was an interaction between the amount of storage that would be allocated to customers who would unbundle and the amount held back for system integrity storage space. 428 MR. PACKER: No, what I have difficulty with is your conclusion that the allocation was tied. That's not the way I interpret this. 429 This is communicating that we need to determine how much system integrity space we needed in a certain scenario, and the scenario that's talked about here is that everybody is unbundled. How much -- what it's saying is how much system integrity space do you need to manage weather variations to back-stopping supply failures; to deal with operational integrity, things like line hack, unaccounted-for gas, operating balance agreements with other pipelines in an environment where people are unbundled. That's what that's talking about. The 9.1 was generated under the assumption that everybody is unbundled and we need to have some system capability to handle these types of things. 430 MR. VEGH: Well, maybe you can clarify. When you read the next sentence at the top of page 65, and you say, "except for this phase set aside for system integrity all remaining storage space is allocated to customers," is that, in fact, true? 431 MR. PACKER: At the time of the PBR filing, I have confirmed that when we looked at removing this amount of system integrity space from what we had available, and we allocated space to unbundled customers in proportion to aggregate access, we weren't short. The -- if you are suggesting that the theory was that we allocated everything we had irrespective of whether an unbundled customer needed it or not, that was in the case. 432 MR. VEGH: I'm just asking if this sentence was, in fact, true. 433 MR. PACKER: I think it's true, but it may be true in a different context than what you are trying to use it for. 434 MR. VEGH: I'm just asking if the words in this sentence were true in 1999. Is this what you did? Was all remaining storage space allocated to customers? 435 MR. PACKER: And I'm saying it wasn't a process of taking what was left over and allocating it. It was a process of determining an appropriate way of determining what the unbundled customers needed, comparing that to what was available after we took the total and deducted off system integrity. And there wasn't a big variance between the two. 436 I think the reference in the evidence is accurate. What I take issue to is the premise that we somehow got lucky that aggregate excess used up everything that was left over because the goal was to allocate it all, and that's not the case. It wasn't the goal to allocate it all. 437 MR. VEGH: Well, Mr. Packer, Union comes in with a proposal how to allocate storage in an unprecedented manner. We haven't been involved in any process to unbundled customers. Union comes in and presents this says we have to set aside a certain amount of space for system integrity storage. Customers aren't in a position to challenge that, to challenge how much you need for system integrity storage. But you present the position that will hold back a certain amount of space, and you say right here the rest will be allocated to customers. Now isn't it reasonable for customers to expect that they are entitled to the amount of space that's not allocated for system integrity storage? 438 MR. PACKER: No. Because there's numerous reference throughout our evidence and the ADR agreement about how we were going to calculate the storage entitlements to people who unbundle, and it was in proportion to aggregate excess. And we talked about the fact that that would be changed from year to year as the underlying customer profile impacted the calculations. 439 MR. VEGH: Why don't I go on to the next paragraph, then, that we've already discussed, starting at line 7. This figure of 9.1 Bcf that was based on this scenario that all customers elect unbundled storage and provide their own balancing and delivery service. Would you agree that it's not very likely that all customers will elect unbundled storage and provide all other balancing and delivery requirements from storage, and in fact, it's more likely that this will not happen? 440 MR. PACKER: I'm sorry. I guess it depends on the time period you're looking at. I think we expect people to take the unbundled service at some point in the near future. When everybody gets to the unbundled service I guess is yet to be seen. I note when we talked about what we needed to maintain system integrity prior to the unbundle process it was slightly higher. So I'm not sure the number changes a whole lot depending on who is bundled and who is unbundled. On page 64, we talk about the fact that we start off with the 10.4 Bcf as system integrity storage space to provide the bundled services that are offered today. 441 MR. VEGH: But the reference in the paragraph starting at line 97 -- at line 9 -- which refers to "this system integrity space," you're talking about the 9.1 Bcf; aren't you? 442 MR. PACKER: I believe so, yes. 443 MR. VEGH: And isn't it fair to say that, in order to avoid any risk to system integrity, you assume the extreme case that all customers took up the service without regard to whether or not that was likely to happen. 444 MR. PACKER: Yes, I'm not in the system planning area, but what I can glean from the reference here, we had 10.4 required to provide the bundled services and in the unbundled environment we needed 9.1. So, I guess depending on the mix, it's reasonable to assume that somewhere between 9.1 and 10.4 and we picked 9.1. I don't know whether that's an extreme situation or not. 445 MR. VEGH: I thought I heard you just say on Friday that you don't expect this to happen, you don't expect all customers to take up unbundled service. 446 MR. PACKER: That's when I responded and said I didn't expect or didn't view this as being an extreme situation. The reason I was saying that was -- it looks like when you have all bundled customers, you need 10.4. When you have all unbundled customers, you need 9.1. So whether we picked an extreme scenario or not, I guess, I don't believe we did because it's somewhere between 10.4 and 9.1. 447 MR. JACKSON: Mr. Vegh, could I try to understand this. Perhaps you don't want me to know exactly where you're going yet, but I'm trying to guess. 448 MR. VEGH: There are no mysteries. 449 MR. JACKSON: Are you suggesting that there should be perhaps more than 9.1 held for system integrity purposes? 450 MR. VEGH: Am I suggesting, no -- more than 9.1? No. 451 MR. JACKSON: On the basis of having heard that since everyone will not go on an unbundled basis, that 10.4 would have been the number if everyone were bundled, and none had gone unbundled. 9.1 is the number where everyone goes unbundled, so are you suggesting 9.1 is too low a number to keep your system integrity purposes? 452 MR. VEGH: No, what I'm getting at is that the 9.1 figure was a number put forward by Union that -- so that Union would have sufficient storage in the extreme case that all customers went unbundled. And, I'm trying to understand what the -- and what I'm getting at is how that figure impacted upon the storage allocations that were ultimately agreed to in 1999-0017. So I'm not questioning Union's position that 9.1 is sufficient, I'm asking Union to continue to accept it. And the difficulty I have is I don't hear Mr. Packer accepting this evidence any longer. 453 MR. JACKSON: Well, initially I thought what you were saying was that Union -- whatever the number that should be kept for system integrity purposes, you thought that the storage that should be available for allocation was not all available; is that not the first submission that you were making? 454 MR. VEGH: The first submission, sir, will be that you take the full amount of storage that Union has available, you reduce it by the amount that's required for system integrity storage and the remainder, the difference, should be available to customers. 455 MR. JACKSON: Based on the wording in the ADR agreement from the 17 case; is that correct? 456 MR. VEGH: Based on how the evidence was put forward in the 17 case, yes. 457 MR. JACKSON: And Mr. Packer is saying, notwithstanding that whatever that number is that should be available and allocated. It was clear that it would have been allocated in proportion to numbers determined by the aggregate excess method; is that correct? 458 MR. VEGH: That's what he's been saying, yes. -- sorry. 459 MR. JACKSON: Yes, Mr. Packer, that's correct; isn't it? 460 MR. PACKER: That's correct, yes. 461 MR. JACKSON: But, whether it's done in proportion to that or in proportion to something else, isn't Mr. Vegh trying to get at whether or not the total amount that is being allocated should be a larger number? Is that really what you are addressing? 462 MR. VEGH: Yes, I believe that it should not be reduced by the amount that Union is proposing to reduce it. 463 MR. JACKSON: The 9.1? 464 MR. VEGH: No, the difference between the 9.1 -- the allocations to individual customers should not be reduced because those allocations were based on the difference between 9.1 and the total amount of available storage. And, the 9.1 is not impacted by this methodology; therefore, my argument will be that the difference should not be impacted by this methodology either. 465 MR. JACKSON: I wasn't, just to try to understand your argument, but I think it does help us understand the questions and the answers that we're hearing as well about positions. But I think I'm puzzled by how this proportionality answer addresses your concern. But pick it up from there, again, if you would, and see if you can get some clarity. I'm not trying to take over; I'm just trying to following what's going on. 466 MR. VEGH: Okay. Well, thank you for that. Maybe it will become -- maybe it will become more clear now. 467 MR. JACKSON: Thank you. 468 MR. VEGH: Can I just ask you, Mr. Packer, if Union continues to maintain the 9.1 Bcf for system integrity storage, and if the allocations to customers of -- to unbundled customers of storage space are unchanged from those allocations in 1999-0017, is there any risk that Union will be short of storage space required for system integrity purposes? 469 MR. PACKER: I'm not sure there's an easy answer to that. The difficulty I'm having is we're -- the difficulty I'm having is that we're planning to use the new weather methodology to do our own planning. So if everybody is still bundled, we will need less storage, in theory, under the new methodology, than we would under the old methodology. At a point in time that people go unbundled and get an allocation greater than we have underpinning their bundled service, then in theory I guess we could run out, yes. 470 What you're putting to me is an assumption that an unbundled customer gets more than we think they need and they also get more than we would have used to balance them as a bundled customer. And I don't think that's appropriate. 471 MR. VEGH: Well, you only run out of storage space if you use that space for another purpose; isn't that right? 472 MR. PACKER: Or growth uses it up. 473 MR. VEGH: Yes. 474 MR. PACKER: And in certain circumstances, we could have -- we could be planning to use the new weather normalization methodology for our own purposes. We may not be developing storage because we don't think we need it or we've developed it and provided it ex-franchise, and then an unbundled customer gets more than they need at cost, and it may not be available. It may mean that the remaining bundled customers are short. I don't think that's appropriate. 475 MR. VEGH: Or it may mean that you can't use that space for S and T. To provide S and T services. 476 MR. PACKER: If it's there, that's right, but it's storage that the marketer doesn't need to meet the requirements of the customer -- of their end-use customers. 477 MR. VEGH: Well, let's pursue that point right now, what you say a marketer needs. The preface to your answer to this question, you said there probably is an easy answer to that question. Could you just confirm that if the allocations remain unchanged from 1999-0017 and all customers go unbundled, that Union would still have access to this 9.1 Bcf of storage space for system integrity storage. Can you give the easy answer to that question? 478 MR. PACKER: If I said there was an easy answer, I misspoke myself. I intended to say that I don't think there is an easy answer to the question and I think the answer that I gave is -- still stands. I think there could be certain circumstances where we infringe on our system integrity space as a result of giving an unbundled customer more than they need and more than we were using to balance them as a bundled customer. 479 MR. VEGH: Because you would use that space to either manage growth or release it to the S and T group. 480 MR. PACKER: That's right. 481 MR. VEGH: Okay we'll get to that in a minute. 482 Could you turn back a couple of pages in your evidence to 1999-0017 to page 62. And 62 is where you set out the actual quantum of space that's available to customers under the -- or, the amount that you proposed under your evidence. And for residential customers, you proposed an allocation of 742 cubic metres per customer, do you see that? 483 MR. PACKER: I take you back to page 61. 484 MR. VEGH: I will get to 61 in a minute. Can you just confirm that this is a number for residential customers, at 742? 485 MR. PACKER: I will take you back to page 61. At the bottom of the page, it talks about "for administrative ease, Union calculated a single factor to be applied against all rate classes in the southern operations area rather than factors that would vary by rate class." The top of the page, we talk about what we are proposing to use as the allocation methodology to individual customers who unbundle and it's the aggregate excess calculation. The only reason 742 existed was for administrative ease. It was the result of what the aggregate excess calculation would have produced. 486 MR. VEGH: I'll take you to the calculation. I just wanted you to confirm that that was the number that was allocated to residential customers. 487 MR. PACKER: And what I'm saying is it's the aggregate excess calculation that defines the amount that was used as a -- for administrative ease. That is the amount on the page. 488 MR. VEGH: So the 742 amount is the number that was derived for residential customers. 489 MR. PACKER: Using the aggregate excess methodology. It was the amount derived using the aggregate access methodology. 490 MR. VEGH: Okay, let's look at how that amount was derived then, I'll take you to page 61. You've referred to the aggregate excess methodology and that's discussed in the first paragraph of page 61. 491 MR. PACKER: Yes. 492 MR. VEGH: And that's the difference between the winter demand and average annual demand, right, for 151-day winter period? 493 MR. PACKER: Correct. 494 MR. VEGH: Then in the next paragraph, you talk about -- so you come up with an aggregate excess and in your evidence that's what's required for each customer? 495 MR. PACKER: That's right. 496 MR. VEGH: And then the next paragraph talks about discounting that amount. 497 MR. PACKER: It talks about applying a factor to recognize that there was some customers who were actually, in effect, providing a benefit to the system based on their summer load profile. These were all things that were accepted in the ADR agreement. 498 MR. VEGH: I'm not disagreeing with you, sir, I'm just trying to understand how that 742 figure was derived. 499 So you discounted the aggregate excess amount but multiplying it by 97.6; right? 500 MR. PACKER: We took that aggregate excess and multiplied it by 97.6 percent. 501 MR. VEGH: And you say that -- if you go to line 13, you say that in the absence of this discount factor being applied, Union would be allocating 1.1 Bcf more storage space to customers who unbundle than is available. You say: "This over-allocation of storage space to unbundled customers would reduce the system integrity storage," this 9.1 we talked about, "available to Union to manage the provision of all services and maintain system integrity." 502 So, your evidence was that the reason you -- you didn't actually provide the aggregate excess amount, you discounted this amount, you adjusted this amount so that you would have enough space to manage -- so that you would have enough storage to manage system integrity storage; didn't you? 503 MR. PACKER: Yes, and I talked about that a minute ago where we compared the aggregate excess calculation to the result of taking the total system -- the total storage space available and deducting the system integrity amount. And we would have been short had we not applied the factor. The factor was independently calculated using summer load, and the customer profiles that had a predominantly summer load to come up with what the factor should be. 504 MR. VEGH: But what you did, Mr. Packer, is you came, you said this is how much storage space we need to manage system integrity, we'll calculate how much would be available to unbundled customers. You discounted that amount, you adjusted it, and the reason you adjusted it was that it wouldn't impact on your 9.1 Bcf; isn't that fair? Isn't that what you did? 505 MR. PACKER: What we wanted to do was, if you are managing the bundled pool and you allocate it all to unbundled customers you want to make sure you have enough. And in the bundled pool if you've got some summer load -- summer-peak load customers, they are providing a benefit to the winter peak-load customers. So at a point in time if you are balancing your bundled portfolio and those are in there, and then immediately the next day you want to allocate all the space you had available, you wouldn't have enough and it would be as a result of having these customers in your mix. I don't think that's any different than what I'm saying now in respect of -- if we honestly believe we need less storage space as a result of the weather normalization methodology change then you wouldn't want to over-allocate space to people who go unbundled. I think it aligns well with the 97.6 from that perspective. 506 MR. VEGH: And this matter was agreed to because parties accepted in good faith that they didn't want the unbundled allocation to interfere with system integrity storage space requirements for this system so they accepted an adjustment. And what you're saying to the Board is that those parties shouldn't recognize any up-side adjustment when, in fact, these storage requirements for the system are going to be less than we otherwise thought. 507 MR. PACKER: You are focussing on the up-side adjustment. One of the things that may not be clear, and I will draw your attention to it, this is in Exhibit C.1.40. 508 MR. VEGH: Sorry, where are you? 509 MR. PACKER: Exhibit C.1.40. 510 MR. DOMINY: Of this hearing? 511 MR. PACKER: Of this hearing, yes. In point I, which is really the second paragraph, we talk about the impact the weather normalization change will have on how we determine how much upstream capacity a customer will get. The focus so far has been on the -- they get less storage but they also get less transportation capacity allocated to them as a result of a new weather normalization change. So I think people need to appreciate the fact that there's a -- we require less storage to manage the system. The parties will also require less transportation capacity as a result of the weather normalization change as well. 512 I want to make sure people understand that both changes are happening as a result of us going to a new weather normalization methodology. 513 MR. VEGH: Yes, but we're talking about storage. 514 MR. PENNY: Yes, and you started talking about up-side and Mr. Packer is making a point that you can't look at so-called up-side when looking at so-called down-side. 515 MR. VEGH: I haven't heard a reference to down-side. 516 MR. PACKER: The down-side is we're operating less capacity to direct-purchase customers -- upstream capacity, so we're having to manage that. The alternative would be that we continue to use the 30-year average to determine customer's upstream requirements and they'd have more capacity to manage themselves. 517 MR. VEGH: Maybe I will just -- I think our points are clear. Maybe I will finish on this point on storage and then that would be a convenient time to break. It's just a couple of questions. 518 MR. JACKSON: That's fine, Mr. Vegh. 519 MR. VEGH: You said there were two -- let me step back, sorry. As you reduced the allocations to customers, Union is left with an additional amount of storage resulting in those reductions. And you've indicated that there are a couple of uses that that storage could be put to, one is to manage growth and the other is to release it to the S and T group; those are the two purposes? 520 MR. PACKER: I believe so, yes. And if that storage space was not available to manage growth, I take it under the PBR that Union would be responsible to manage growth. 521 MR. PACKER: Yes, and continue to provide storage at cost-related rates. 522 MR. VEGH: Right. So the cost of doing that would be to Union. 523 MR. PACKER: Yes, to the extent we have to build extra storage facilities to meet a requirement, that would be to the account of Union. I don't believe it's appropriate for us to have to build extra storage space to provide extra to a broker who is serving end-use customers. I don't know why that would necessarily fall to Union to manage providing extra storage space to somebody who doesn't need it and have to charge them a cost-related rate to do that. 524 MR. VEGH: What I'm suggesting to you, if you maintain the allocations that you've put forward and that other parties accepted in your last case that you, Union, said it would be prepared to manage the cost of growth for -- of storage for in-franchise customers; isn't that fair? 525 MR. PACKER: To meet a need, not to meet something that doesn't exist. The customer doesn't need the storage to balance their requirements. I don't believe it was ever our proposal that we would build storage to provide a need that doesn't exist. The ADR agreement specifically talks about us using the aggregate excess calculation and that the amount that comes out of that calculation would change from year to year. There was never any reference to that number being fixed for a particular reason. 526 MR. VEGH: Yes, of course. But the number was negotiated based upon the basis of how much -- negotiated and in fact discounted to the benefit of Union on the basis of your statements of how much storage space you required. And now even though that discount is no longer required, Union is saying, well, we're going in fact to reduce the amount of storage our customers have. And maybe I will finish the question, and the entire up-side of that reduction with respect to managing growth, you're saying, goes to Union. 527 MR. PENNY: Well, Mr. Chairman, with respect to the tendentious introduction to that question, the ADR agreement clearly stated that Union would examine and adjust, as necessary, the annual storage allocation to reflect changes to the underlying aggregate excess profile. So for Mr. Vegh to suggest Union was going to pull something over on him is just completely wrong, and totally unfair, in my submission. 528 MR. JACKSON: Wasn't that with respect to new allocations of storage when new customers went unbundled? Wasn't that -- 529 MR. PENNY: That's an annual allocation, Mr. Chairman, of all storage to -- not just new customers. 530 MR. JACKSON: Even if the marketer hasn't taken up that storage; is that correct? You're saying -- I thought it was just an allocation at the time that the customer was leaving system gas. Help me with that. If, once the customer has left system gas, he still has some sort of a string on entitlements from that period, I need that clarified for me. 531 MR. PENNY: Just a moment, if I could have your indulgence for a moment, Mr. Chair. 532 I hope I can answer the question. Each year, new unbundled customers would be allocated a level of storage. That does not become fixed for them for the rest of the time that they're customers. It continues to be adjusted each year and the only people who are fixed are those who have contracted for fixed amounts. 533 MR. JACKSON: I'm sorry, what was that last part? 534 MR. PENNY: The only people who remain fixed are those people who have contracted for fixed amounts and they get what they get for their contract. But when their contract is renewed, then there needs to be a reassessment of what they're entitled to. But for anyone who is not under a contract for a fixed amount then that, -- when they go on to unbundled service, they get allocated a certain amount of storage and then each year that changes, depending on the forecast of their profile, based on the aggregate excess method. 535 MR. JACKSON: Mr. Penny, see if you can help me with this. 536 MR. PENNY: Mr. Packer may be able to help you more than I can but we will see. 537 MR. JACKSON: Or Mr. Packer. To the extent that the aggregate excess method determined what a customer might need, the customer said, for the other benefits associated with going on an unbundled basis they, through their representatives, said they would need 97 percent of what they needed, the way I hear it, in order that the system integrity not be compromised. Am I right so far? 538 MR. PACKER: No, I think what Mr. Packer said is they -- not that they would get 97 percent of what they needed, but they need 97 percent of what the aggregate excess methodology generates. 539 MR. JACKSON: Sorry. I didn't hear him say the latter; Mr. Packer, would you like to say the latter? 540 MR. PACKER: I think -- go back to the first principles here maybe. The theory behind unbundling was to give customers access to the assets that we were using to manage their bundled service. What we were suggesting was, as a result of some customers being summer-peak customers and others being winter-peak customers, the effect of that is to have less storage in total being required for everybody. So when we -- in theory, under the aggregate excess allocation, that would be what a customer needs. But what parties accepted was that the reality was that when you operate a bundled system that wasn't what we were going to have available and they should only get what we were using to balance them as a bundled customer. 541 MR. JACKSON: So that you needed to apply the 97 percent factors to bring that in mind. 542 MR. PACKER: Right. 543 MR. JACKSON: And, notwithstanding that some are summer peakers and some are winter peakers, as a practical way to proceed, everybody got the same allocation, didn't they? The summer peakers did not get their allocation. 544 MR. PACKER: Summer peakers, well, their allocation would be zero rather than negative, because the calculation takes winter demand relative to average annual demand for 151 days. So a summer peaker, if you did the calculation, it would be negative. So the reason there's a factor required is we can't give them negative storage; we give them zero. So the factor reflects the difference between zero and the negative amounts. It's one of the things to add, would be if the brokers sign up a proportionate amount of winter peakers and summer peakers, they will have what they need because they had then have the same circumstances facing them as we did when everybody was bundled. It's only if an REM took all the winter peakers and had the factor applied to them that there may be a smaller shortage. It's fairly small, if you look at 97.6 percent factor being applied against something. 545 MR. JACKSON: The only other difficulty I'm having in this area is bringing it back in relation to the discussion you had with Mr. Quinn. You said that the customers' needs didn't change, just their calculated needs. 546 MR. PACKER: Well, what I was trying to -- 547 MR. JACKSON: Calculated allocation, excuse me. 548 MR. PACKER: What I was trying to illustrate there is that the need changes as a result of whatever the requirements are on the system being there. All we were trying to do was catch up to that reduced need by changing the weather normalization methodology. It wasn't the weather normalization methodology itself that changed the requirement, the requirement change came first. We were just trying to catch up to it. 549 MR. JACKSON: Okay. That's enough. Let's break for lunch and let's give ourself an extra ten minutes for the 25 we've taken now so we'll be back at 20 minutes to 2:00. Thank you. 550 --- Luncheon recess taken at 12:25 p.m. 551 --- On resuming at 1:43 p.m. 552 MR. JACKSON: Please be seated. 553 MR. MORAN: Mr. Warren asked me to advise you that he wouldn't be in attendance on the basis that other parties are going to cover off his areas. 554 MR. JACKSON: Thank you. 555 MR. VEGH: Thank you. Panel, I've finished with my questions on storage, and I was going to move to the issue of C-1, but before doing that, Mr. Packer, I just wanted to clear up or clarify a statement you made in your examination-in-chief. It was about the elimination of the DCC and you said that it will be happening soon. I take it that the DCC will be eliminated when unbundled services are made available for small-volume customers. That's the schedule, isn't it? 556 MR. PACKER: The reason I hesitated was we had originally proposed that the DCC be eliminated as close as possible to the time unbundled services were available in the general service market. As a practical matter, we can only eliminate the DCC when we're changing rates so I was just checking the ADR to see whether we'd accepted anything other than that, but I think we'd be looking to eliminate the DCC as close as possible to when 2001/2002 rates are implemented. 557 MR. VEGH: I didn't have -- do you have a copy handy of the settlement agreement in RP-1999-0017? I'm sorry, Mr. Packer. I discussed this issue with Mr. Reghelini. I take it it hasn't been discussed with you, but if you look at the settlement agreement at page 18 there's a discussion around the DCC elimination. 558 MR. PACKER: Can you give me a minute to find it? 559 MR. VEGH: Yes. I'm referring to page 18 of the settlement agreement, under heading 1.2.4, DCC elimination. 560 MR. PACKER: I see it. 561 MR. VEGH: Second full paragraph. And there's the reference there to what I think you referred to as Union's original proposal with respect to the timing and it says: "During the negotiations, Union agreed to defer the elimination of the DCC to be effective April 1, 2001 in order to align with the projected unbundled implementation date." While that April 1 date has been lost to us, I take it that there's no issue that the timing of the DCC elimination will correspond with the availability of unbundled services to small-volume customers. 562 MR. PACKER: All I was identifying is it's -- you'd want to eliminate the DCC at a point in time when you're setting rates. I do see at page 19 of the ADR agreement where all parties agree that the DCC was not to be eliminated until the unbundled services are available to the small-volume market. I -- it's my position that we'll honour the ADR agreement, whatever that sentence was intended to mean. 563 MR. VEGH: Well, if this is a matter of company policy, and we do want to clarify what that sentence was intended to mean, perhaps Mr. Reghelini can state what company policy is on this. 564 MR. REGHELINI: Well, the expectation was that the Board's decision on the enabling unbundled cases is pending and that we would eliminate the DCC on a similar timeframe. As to the availability of the unbundled services in the small-volume market and if things are ideal, we'll be doing that at the same time as we're implementing 2001/2002 rates. 565 MR. VEGH: But in any event, the DCC will be eliminated when the unbundled services are available for small-volume customers. That's my understanding of that statement. 566 MR. PACKER: I think what Mr. Reghelini has said is, our hope is that the two can be aligned. There is a practical difficulty associated with trying to eliminate the DCC on the exact date that the unbundled service is available, if they don't happen to land on the same time as we are implementing rates. So, I think it sounds like we haven't changed our position from the perspective of, we'll try to align the two the best we can, but they may not be on the same date. 567 MR. VEGH: I'm confused then, the same date as what? 568 MR. PACKER: We will have to pick a time when we're implementing rates for a particular year, and I think it's 2002, assuming that we get endorsement to provide the unbundled service in the general service market around the same time as we are implementing rates for 2002. There may be a few months' variance between the two dates and it wouldn't be our position that those have to be lined-up exactly. It was a directional commitment from my perspective. 569 MR. VEGH: Well, Mr. Packer, this is new to me because I didn't see this as a directional commitment, I saw this as a negotiated commitment where certain parties conceded points in exchange for the timing of the DCC commission. Now you are saying this was something that Union hoped to do. I don't see "hope" in either ADR agreement. 570 MR. PENNY: In fairness, Mr. Chairman, Mr. Packer's already said that Union will honour its ADR commitment. 571 MR. VEGH: If that's the answer, that's fine, but I'm not getting that clear an answer. 572 MR. PACKER: We will -- I have said we will honour the ADR agreement and we will. 573 MR. JACKSON: And he did say "whatever that meant," and that was I think what gave us some pause. But I think he's said whatever happens in terms of doing away with the DCC will have to happen when there is another rate change occurring. And if the unbundled services were to be available earlier than that, it might -- it might mean there was some lag, I guess, between the availability of some services and the actual rate change occurring. 574 Did I understand correctly? 575 MR. PACKER: That's right, yes. 576 MR. JACKSON: Okay. So that whenever it happens, it will not happen before the unbundled services are available, is the way I hear it. And I think that is consistent with how I read the agreement. 577 MR. VEGH: That would be consistent with my reading of the agreement as well, sir. 578 MR. JACKSON: I hope that helps. That's what I think Mr. Packer has said and I think that it is confirmed that that is what he said. 579 MR. PACKER: Yes. 580 MR. VEGH: Okay. With that, then, Mr. Packer, I'll turn to the C-1 rate schedule issue and that's addressed, I believe, at Exhibit B, tab 14, page 4 of your evidence, the pre-filed evidence. 581 MR. PACKER: I have it. 582 MR. VEGH: You have it. Under the heading C-1 storage and transportation services, there's a paragraph or two on your proposal. You say in the evidence that the maximum charge has been set to capture market opportunities. I take it that in other words, what that means is that the rate is set to ensure that, effectively, Union will to capture whatever the market is prepared to pay for those services; is that right? 583 MR. PACKER: I believe so. What we're proposing to do is ensure that the maximum of the range for these services is not below market, which has been our guiding principle in the past when we propose changes to the maximum of the range. 584 MR. VEGH: So the purpose of this rate then, in effect, is to ensure that -- or to allow the market to set the price for the services offered under the C-1 rate. 585 MR. PACKER: No, I think the Board will still be setting the price. We're not asking for forbearance. It's just a service that's priced within the range the same way it's been within the range for 10 years. 586 MR. VEGH: But you want the rate to be high enough so the market will be effectively setting the price. 587 MR. PACKER: We want the maximum of the range to be set high enough so that we don't charge something less than the what market value is and then have somebody else in a position to buy it at that price and then turn around and mark it up themselves. 588 MR. VEGH: So you want the market so set the price for these services? 589 MR. PACKER: Which is the same thing that has been in the market for 10 years. 590 MR. VEGH: I don't understand if you're disagreeing with me or not. I'm just asking whether you agree that what you want is a market-driven price for these services. 591 MR. PACKER: I think to some extent the Board is setting the price by way of the range rate being approved. We are setting the price by accepting bids from customers for the services and we are trying it align that price with what the value is. 592 MR. VEGH: Let me try it this way. The purpose of the rate increase that you're requesting is to ensure that the price for these services is not constrained by the posted rate. 593 MR. PACKER: I think that's fair. We're proposing an increase in the maximum range rate to ensure that money isn't left on the table for somebody else to turn around and mark up the price of our services and pocket that. 594 MR. VEGH: And you say in your evidence, and I heard you say in response to a VECC question this morning, that the market for the services under the C-1 rate is competitive; that's Union's position? 595 MR. PACKER: Certainly with respect to the storage service, that is true, yes. 596 MR. VEGH: Is that true for all services under C-1 or just the storage service? 597 MR. PACKER: I had a discussion on Friday with some other parties about the fact that we do have transportation services on that rate schedule for service between Ojibway and Dawn and St. Clair and Dawn. Those are priced in a cost-related amount. 598 MR. VEGH: So is there a market premium on those services that you feel Union is missing out on as a result of the rates that you are requesting? 599 MR. PACKER: Those rates have historically been -- rates for firm services on those systems have historically been set to recover a cost-related component. We're not proposing any changes to that. 600 MR. VEGH: Maybe the simplest way to do it is turn to the C-1 schedule. 601 MR. PACKER: I have it. 602 MR. VEGH: Now that schedule identifies services, can you tell me which of the services in this schedule are competitive services where you are looking for the market to set the rate and which are not competitive services which you say should be cost-based? 603 MR. PACKER: The services where there has been a range rate historically used to determine the price within are: the short-term less than two years and up peak storage services; the long-term two year or more storage services; and by and large, the interruptible services on the next page. 604 MR. VEGH: I'm sorry, which services are those? 605 MR. PACKER: The interruptible transportation commodity range rate, where the maximum is over $9. The services that I was referring to a minute ago, which are priced in a cost-related manner, are the ones under firm transportation demand, under item A. 606 MR. VEGH: Okay. What about item B? 607 MR. PACKER: Item B, we are proposing in this case to include a -- include the firm short-term transportation services under the interruptible range rate. And the reason we're doing that is it didn't make sense to us, in the current environment, that we'd have a demand charge for short-term, one year or less, firm-transportation demand. Under certain load factors, it would mean that we'd be charging less for firm-transportation demand than we were for interruptible-transportation demand -- interruptible-transportation services. So we're proposing to fold those into one. We're not proposing an increase to the range for interruptible-transportation services as much as we're proposing to fold in the short-term services. 608 MR. VEGH: Well, this service, firm transportation demand from Dawn to Kirkwall and Dawn to Parkway, I'm still not following. Are you saying that service -- that there is competition in the market for that service and therefore that service should fall within -- should be treated that way, or should just be treated as a cost of service activity. Union will be able to capture whatever the market is prepared to pay for those services; is that right? 609 MR. PACKER: I believe so. What we're proposing to do is ensure that the maximum of the range for these services is not below market, which has been our guiding principle in the past when we propose changes to the maximum of the range. 610 MR. VEGH: So the purpose of this rate then, in effect, is to ensure that -- or to allow the market to set the price for the services offered under the C-1 rate. 611 MR. PACKER: No, I think the Board will still be setting the price. We're not asking for forbearance. It's just a service that's priced within the range the same way it's been within the range for 10 years. 612 MR. VEGH: But you want the rate to be high enough so the market will be effectively setting the price. 613 MR. PACKER: We want the maximum of the range to be set high enough so that we don't charge something less than the what market value is and then have somebody else in a position to buy it at that price and then turn around and mark it up themselves. 614 MR. VEGH: So you want the market so set the price for these services? 615 MR. PACKER: Which is the same thing that has been in the market for 10 years. 616 MR. VEGH: I don't understand if you're disagreeing with me or not. I'm just asking whether you agree that what you want is a market-driven price for these services. 617 MR. PACKER: I think to some extent the Board is setting the price by way of the range rate being approved. We are setting the price by accepting bids from customers for the services and we are trying it align that price with what the value is. 618 MR. VEGH: Let me try it this way. The purpose of the rate increase that you're requesting is to ensure that the price for these services is not constrained by the posted rate. 619 MR. PACKER: I think that's fair. We're proposing an increase in the maximum range rate to ensure that money isn't left on the table for somebody else to turn around and mark up the price of our services and pocket that. 620 MR. VEGH: And you say in your evidence, and I heard you say in response to a VECC question this morning, that the market for the services under the C-1 rate is competitive; that's Union's position? 621 MR. PACKER: Certainly with respect to the storage service, that is true, yes. 622 MR. VEGH: Is that true for all services under C-1 or just the storage service? 623 MR. PACKER: I had a discussion on Friday with some other parties about the fact that we do have transportation services on that rate schedule for service between Ojibway and Dawn and St. Clair and Dawn. Those are priced in a cost-related amount. 624 MR. VEGH: So is there a market premium on those services that you feel Union is missing out on as a result of the rates that you are requesting? 625 MR. PACKER: Those rates have historically been -- rates for firm services on those systems have historically been set to recover a cost-related component. We're not proposing any changes to that. 626 MR. VEGH: Maybe the simplest way to do it is turn to the C-1 schedule. 627 MR. PACKER: I have it. 628 MR. VEGH: Now that schedule identifies services, can you tell me which of the services in this schedule are competitive services where you are looking for the market to set the rate and which are not competitive services which you say should be cost-based? 629 MR. PACKER: The services where there has been a range rate historically used to determine the price within are: the short-term less than two years and up peak storage services; the long-term two year or more storage services; and by and large, the interruptible services on the next page. 630 MR. VEGH: I'm sorry, which services are those? 631 MR. PACKER: The interruptible transportation commodity range rate, where the maximum is over $9. The services that I was referring to a minute ago, which are priced in a cost-related manner, are the ones under firm transportation demand, under item A. 632 MR. VEGH: Okay. What about item B? 633 MR. PACKER: Item B, we are proposing in this case to include a -- include the firm short-term transportation services under the interruptible range rate. And the reason we're doing that is it didn't make sense to us, in the current environment, that we'd have a demand charge for short-term, one year or less, firm-transportation demand. Under certain load factors, it would mean that we'd be charging less for firm-transportation demand than we were for interruptible-transportation demand -- interruptible-transportation services. So we're proposing to fold those into one. We're not proposing an increase to the range for interruptible-transportation services as much as we're proposing to fold in the short-term services. 634 MR. VEGH: Well, this service, firm transportation demand from Dawn to Kirkwall and Dawn to Parkway, I'm still not following. Are you saying that service, that there is competition in the market for that service, and therefore that service should fall within -- or should be treated that way? Or should this be treated as a cost-of-service activity? 635 MR. PACKER: What I'm suggesting is that in our view, there's not much difference between the firm, short-term service that's one year or less and interruptible-transportation service. So we're proposing to use a common range for those services, and the range that has been established for interruptible-transportation services is a range that has been intended to allow us to recover the market value for those services. 636 MR. VEGH: So B is market value? 637 MR. PACKER: What I just went over is that B is a demand charge for firm -- historically, has been a firm demand charge for transportation service. We don't see a lot of difference between that and the interruptible service as identified under the old E, so we are proposing to combine those two services for purposes of applying the price within the range. 638 MR. VEGH: I'm just trying to understand how this evidence interacts with your statement. Maybe you could keep your hand on the rate sheet and go back to your statement at Exhibit B, Tab 14, page 4 of 5. At that evidence you say, "as market alternatives to Union providing these services, the maximum charge that has appeared on the C-1 rate schedule has historically been set to capture market opportunities." Can you just tell me for which services are you saying -- it would be that the rate would be set to capture market opportunities as opposed to capture the cost of the providing the service. 639 MR. PACKER: My point of view, those would be the storage services identified on page 1. 640 MR. VEGH: Right. 641 MR. PACKER: The short-term, one year or less, firm transportation service. 642 MR. VEGH: That's C on page 2. 643 MR. PACKER: Which was the old B. 644 MR. VEGH: Sorry, go on. 645 MR. PACKER: And the interruptible firm transportation commodity charge under the old item E. But we're not changing any, we are not proposing any change to the maximum of that range. 646 MR. VEGH: So then the group of services that you would exclude from this statement are the services on C-1, page 2 of 4, and section A, firm transportation. 647 MR. PACKER: That's true, yes. 648 MR. VEGH: Okay. So if we can go back to your statement on page 4 on competition for these services, and you understand that you are excluding firm transportation. So when I'm talking about C-1 services, let's -- we'll just restrict it to those services for which you say competition is present. 649 For those services, can you tell me, apart from this statement on page 4, can you confirm that Union hasn't provided any evidence on the state of the competitive market for those services? 650 MR. PACKER: I guess in the context of this hearing, I don't think we were asked by anybody to prove that statement. From my perspective, I would have thought people would have already known that to be the case. The short-term storage services that we've provided for approximately 10 years have always been priced within a range to derive market value from them. Our rates evidence that we've filed in support of those rate changes has talked about these being competitive services. In our RP-2001-0063 application for changes to the blanket storage policy, we talk about the fact that, in our view, these are competitive services. 651 MR. VEGH: You make that assertion, in that case. 652 MR. PACKER: There's been numerous cases where we've brought long-term negotiated storage prices to the Board with respect to the Benpath-Rosedale storage development and the Century Pools development. 653 MR. VEGH: So that's the evidence? The evidence you've filed in those cases is the evidence you're relying upon in support of the position that the market for the storage services is competitive? 654 MR. PACKER: That's true. And in one of the proceedings, we referenced a filing that Enbridge had made, their 492 and their 495 cases where they go through, in detail, as to why there's a competitive storage market. 655 MR. VEGH: Can you provide, by way of an undertaking, an identification of the evidence in all cases that you rely upon for the statement that the market for storage services in Ontario is competitive? 656 MR. PACKER: That is fairly -- could be a fairly voluminous undertaking. If the Board was interested in that, we could undertake to do it, but I think there were numerous times where we put on the record why we felt storage was a competitive service. 657 MR. VEGH: I know you've put it on the record before, but what I'm looking for is evidence in support of those statements. 658 MR. PACKER: I think there have been other witnesses that have testified in support of that view and I don't think anybody has necessarily concluded that we were wrong, that those witnesses were wrong. 659 MR. JACKSON: I must say, I think that it would be very helpful to have that list. We're not asking you to put together a book of references, as I understand it, just a list of the key evidentiary base for that assertion that the storage market in Ontario is competitive. I'm for example, remembering the evidence of Sharon Chow in one proceeding. And, you may too when you refer to other people's evidence on this. But, I couldn't tell you what number that was and if I went back to try to read up on this because I thought it was important, I would have a great deal of difficulty right now. So if you could put -- maybe you're going to miss something but, do your best to compile a list, that would be very helpful to the Board. 660 MR. PACKER: Yes, I will do that. 661 MR. JACKSON: Thank you very much. 662 MR. MORAN: That would become undertaking G.3.1, Mr. Chair. 663 UNDERTAKING NO. G.3.1: LIST OF KEY EVIDENTIARY BASE FOR ASSERTION THAT THE STORAGE MARKET IN ONTARIO IS COMPETITIVE 664 MR. JACKSON: That's right. Just -- if I might say -- my colleague has just pointed out that Sharon Chow's evidence was in 494-03. So there you go, you've got something to start your list. 665 MR. VEGH: I'm quite familiar with that, thank you. 666 MR. JACKSON: I'm sure you are, Mr. Vegh. 667 MR. VEGH: Because I'm not sure, Mr. Packer, that everyone shared your consensus on the competitiveness of the market. But, of those cases that you've referred to, going back ten years, I take it that in deciding those cases, the Board did not have the mandate to facilitate competition in the sale of gas; did it? 668 MR. PENNY: That's a legal question, surely, Mr. Chairman. 669 MR. JACKSON: Sorry, I didn't hear the question. 670 MR. VEGH: The question was whether in deciding the cases Mr. Packer referred to, the Board had the mandate to facilitate competition. 671 MR. PENNY: And my comment, Mr. Chairman, was that's a legal question. I'm assuming Mr. Vegh is referring to the Ontario Energy Board Act 1998, and that is clearly a legal question. 672 MR. VEGH: I'm just considering whether there is a relevant distinction between the cases that your relying upon, Mr. Packer, in support of this evidence and the relevance of this evidence in today'S environment. But I'll take Mr. Penny's point and I will go on. 673 MR. PENNY: And that is surely a matter of argument, Mr. Chairman. 674 MR. VEGH: Well, do you know whether at the time those cases were decided, Mr. Packer, whether title transfers were even allowed in Ontario? 675 MR. PACKER: I'm aware that in the past, there were some limitations on title transfers if Ontario. I'm not sure whether any of the cases that I had in mind actually were heard after the Energy Board Act was changed or not. 676 MR. VEGH: So if title changes were not allowed in Ontario at the time those cases were decided, the Board would not have wanted to encourage unlawful activity of parties transferring title to gas, would it? 677 MR. PACKER: I can't speak for the Board. 678 MR. VEGH: Well, is it fair to say that THE Board would not have sought to have encouraged competition in gas sales when competition in gas sales were illegal. 679 MR. PACKER: Again, you're asking me to provide an opinion on what the Board might or might not have been thinking or doing. I'm not in a position to comment on that. 680 MR. VEGH: Let's leave aside those old cases then and leave it to argument to determine how relevant those old cases are, and let's look at evidence in this case. In this case, there's no evidence on Union's market share of storage in Ontario; right? 681 MR. PACKER: I don't have an updated number, but I don't have any reason to believe it's changed significantly. I'm looking at an exhibit that Enbridge Consumers Gas filed in their 492 case, and it indicated that Union Gas and Central Gas combined had a 9 percent share of the working capacity of storage in the area where we would be looking for our competition to exist, which includes Michigan, New York State, Pennsylvania, Ohio. 682 MR. VEGH: Do you have any evidence in this case on what the market share is of storage in Ontario? 683 MR. PACKER: I am not sure that's a terribly relevant thing to look at when the -- when people are looking for storage services, there's nothing magical about Ontario. They can get storage services in the surrounding areas that would fulfil their need. 684 MR. VEGH: Do you have any evidence that the relevant geographic market for storage in Ontario includes those other jurisdictions that you referred to? 685 MR. PACKER: I think it was generally understood. When people are looking to -- all storage does is it allows you to buy gas in the summer and store it and provide it to your market in the winter. There are numerous other options available to customers rather than relying on our short-term storage releases. If somebody has a need, they shouldn't be relying on us to release storage to fulfil that need, because it may or may not happen. There are other storage providers within the geographic areas I've outlined. A customer can contract for winter supply, they can contract spot supply, they can contract for more FT, they can make arrangements with a third party to give that party gas in the summer and have that party return it in the winter. There are numerous other ways to fulfil the need that a storage service fulfills. 686 MR. JACKSON: Would it be right to assume that if storage in Michigan were going to be any good to a seller or a consumer in Ontario that there'd have to be sufficient capacity between Michigan and Ontario to carry that at peak times in the winter? 687 MR. PACKER: I don't believe that the customer actually has to have the -- there can be other mechanisms used other than actual physical transportation to fulfil the need. Physical capacity would be one of them but they could enter into arrangements with somebody else for an exchange. If somebody had gas in Michigan and they needed it in Ontario, they can do it with swap or something of that nature. It's one of the ways to get the gas to the market but I believe there to be others as well. 688 MR. JACKSON: I have to think about that one a little bit. I recognize swaps can occur, but if the instantaneous need is to move the molecules of gas from Michigan to Ontario when it's needed, it seems to me that there would have to be transmission capacity to do so as well, even if you were swapping with somebody else who had already arranged that capacity. 689 But I've got to think about that one. Those are the kinds of questions I think do come up as to whether or not to be any good to a seller or a consumer in Ontario that there'd have to be sufficient capacity between Michigan and Ontario to carry that at peak times in the winter? 690 MR. PACKER: I don't believe that the customer actually has to have the -- there can be other mechanisms used other than actual physical transportation to fulfil the need. Physical extra capacity would be one of them, but they could enter into arrangements with somebody else for an exchange. If somebody had gas in Michigan and they needed in Ontario they can do a swap or something of that nature. It's one of the ways to get the gas to the market but I believe there to be others as well. 691 MR. JACKSON: I have to think about that a little bit. I recognize swaps can occur, but if the instantaneous need is to move the molecules of gas from Michigan to Ontario when it's needed, it seems to me that there would have to be transmission capacity to do so as well even if you were swapping with somebody else who had already arranged that capacity. But I've got to think about that one. Those are the kinds of questions that do come up, as to whether or not storage outside of Ontario is a good alternative to storage in Ontario and I will be thinking through this. Maybe Mr. Vegh can take us a little bit farther or maybe you can help, Mr. Packer, if I'm missing something. 692 MR. VEGH: Well, this is exactly the sort of evidence that I'm asking about. What sort of evidence do we have for the geographic market for storage, and one element of that is how viable it is to claim that there's storage space in Michigan and that should be considered part of the storage market in Ontario. And my rhetorical question I guess is, is there any evidence on this? And I take it so far that the answer it to this is, no. 693 MR. PACKER: I think we will identify in the undertaking where we believe the evidence to be and I take your point that we can provide a list rather than all of the paper and that would be helpful. Thank you. 694 MR. JACKSON: Thank you. If you find any way to shed some light on the other difficulty I just raised, please do so too. I'm far from having great experience in the storage area. It's just those kinds of questions are questions I'd want answered. 695 MR. PACKER: To try and be helpful, your specific question about if somebody had gas in Michigan and they immediately needed it in Ontario on a given day, do they need to have physical transportation to do that; I don't believe they do. All they need is somebody in Ontario willing to meet that need and transfer the gas from one party to another. In Ontario it's needed, and vice versa in the States. So physical transportation is one aspect, but two parties with gas in different locations could come up with their own arrangements to fulfil their individual needs without actually physically transporting gas. 696 MR. JACKSON: I appreciate that's a possibility, sort of on a one-off basis. I've just got to think it through what it means about having it available in Ontario. Somebody else has had the storage in Ontario. 697 MR. PACKER: Not necessarily storage, but supply. 698 MR. JACKSON: Supply coming in, yes, and the willingness not to use that gas. 699 MR. PACKER: Yes. 700 MR. JACKSON: Thank you. That's helpful and I'll still struggle with it. Thank you. 701 MR. VEGH: And so there's that evidence on the geographic market that the Chair touched upon. I'd like to also know whether Union has filed any evidence on the barriers to entry for others to provide storage services, whether Union has provided any evidence on the barriers to entry that are in place if others wanted to provide services that compete with Union's C-1 services. 702 MR. PACKER: I go back to my earlier comment, I guess, about what storage really is. To the extent somebody wanted to enter into an arrangement with another party for gas to be delivered in one period and in exchange for them delivering gas in another, I don't know of any barriers to entry with respect to that. 703 MR. VEGH: Well, are there barriers to entry to somebody setting up a storage business that competes with Union's storage business? 704 MR. PACKER: I don't know that I'd call it a barrier to entry as much as I would assume that that would be subject to the same regulation that we would be. So I'm not sure that that's a barrier to entry, but we would expect the same rules to apply. 705 MR. VEGH: So that's the extent of Union's evidence on barriers to entry in the storage market? 706 MR. PACKER: What we were doing here was proposing a change to the maximum arranged rate to keep pace with the changes in the market. Historically, the range rate has been set so that those market opportunities can be pursued. I wasn't viewing this as any radical change from that so we didn't lead a bunch of evidence on things we didn't think would be required. 707 MR. VEGH: Well, you're making the assertion that the market is competitive, and one of the issues of a competitive market, or one of the issues around the competitiveness of a market, is the existence of barriers to entry. And that's why I was asking whether there's any evidence on barriers to entry. 708 MR. PACKER: And I think what I've said is there are a number of other ways that parties can fulfil their need and rightly so; they shouldn't be relying on us to release storage to fulfill their need because it might not happen. There has to be other options available to customers. 709 MR. VEGH: Well, if there's evidence on barriers to entry, perhaps you can identify it in this list that you will be preparing. Perhaps you can also identify any evidence on elasticity for demand storage services in Ontario. 710 Will you do that? 711 MR. PACKER: You're -- this is starting to turn into a fairly large undertaking. We're aware of what your concerns are. We'll keep that in mind when we're putting together the undertaking response. 712 MR. VEGH: Finally, Union -- you've mentioned a couple of times, I think, in the proceeding already that Union's shareholder and distribution-rate customers share in the rents available for storage services under the C-1 rate. Is that right? 713 MR. PACKER: That is something that came out of the Board PBR decision, yes. 714 MR. VEGH: So the answer is yes, you do share in the rents. 715 MR. PACKER: Yes, it's a fairly recent change, yes. I think it was to provide some incentive for us to be releasing storage. 716 MR. VEGH: And the rents are the revenues that are above costs; is that how they are determined? 717 MR. PACKER: I believe so, yes. 718 MR. VEGH: And what is the margin that Union earns on these -- or that is earned on these services? 719 MR. PACKER: It varies, based on market circumstances. 720 MR. VEGH: What's the range? Do you get a pretty good return on these services? 721 MR. JACKSON: Margin over what, are you thinking? 722 MR. VEGH: Over costs. 723 MR. JACKSON: Over some fully-allocated costs? 724 MR. VEGH: Well, these margins are shared between ratepayers and distributors, so they are determined somehow, and I'm not sure what the cost base is, if it's fully allocated or not. But if we just look at the how the above-cost margins are determined for regulatory purposes, that could be a good starting point. 725 MR. JACKSON: I think the cost-based rates have a profit in it already, and so when you're asking that question, it's only a measure of the additional profit that comes from collecting revenue over the revenue that would otherwise would have resulted from cost-based rates; is that what you're asking about? 726 MR. VEGH: That, sure, yes. So what is the revenue above cost-based rates? And then as a follow-up to that, I would want to know what is the revenue above costs on a marginal basis and on a fully-allocated basis. I want to get a sense of what the revenues are above costs and the different measurements. 727 It's usually another indication of how competitive a market is, as to what margins are being earned. 728 MR. PACKER: I'm not in the group that sells S and T services, but I -- it's my understanding that the value of storage is more aligned with the difference between winter and summer gas supply prices. It's that type of consideration that determines what somebody's willing to pay for storage, how much they can save by buying gas in the summer and storing it rather than having to buy it in the winter. 729 I don't have a real ballpark estimate as to the cost base. Fully allocated cost is around 40 to 50 cents depending on what our commodity costs are for fuel and so forth. We've been able to sell storage in the 80 cents to $1 range, maybe periodically a little bit above that, but that's generally what our magnitude is, I would think. 730 MR. VEGH: Okay. That will do, thank you for that. 731 Thank you, sir, those are my questions. 732 MR. JACKSON: Thank you, Mr. Vegh. 733 Are we at IGUA? 734 MR. DEROSE: I hope so. 735 CROSS-EXAMINATION BY MR. DEROSE: 736 MR. DEROSE: Mr. Packer, my name is Vince Derose. We haven't met so I thought I would introduce myself. I'm here on behalf of IGUA. 737 I'd like to start by asking some questions about 14.2 in the ADR agreement; that's the failure-to-deliver charge which is at page 28 of the ADR agreement. First of all, just as a point of clarification of operation on the DCC claw-back. Mr. Brett touched on this, but I just wanted to make sure that our understanding is correct. Our understanding is that, currently when a failure to deliver occurs, Union is entitled to claw-back DCC payments made from the beginning of the contract to the default date; is that correct? 738 MR. PACKER: Yes. 739 MR. DEROSE: So for instance, if a contract commences on November 1st, and there's a failure to deliver on January 1st, Union would be entitled to claw-back two months' worth of DCC payments. 740 MR. PACKER: Yes. 741 MR. DEROSE: And if, assuming that that failure did not continue to occur, if it was for instance a one-time failure, Union wouldn't be entitled to continue to collect DCC payments past the failure for the rest of the contract. 742 MR. PACKER: If the customer rectified the problem, no more claw-back, that's right. 743 MR. DEROSE: Okay, and with respect, I realize you've said this morning to Mr. Ryder it's rare that it would be a one-day occurrence, it's normally about 30 days of failure at that time? 744 MR. PACKER: Yes, I don't have any hard and fast rules about how long it is. It's rare that it would be one day. We have had instances where it's a couple of weeks, we've had instances where it's around 30 days. 745 MR. DEROSE: Okay. What my concern is is, with respect to the impact, if it's, for instance, a one-day failure versus a 30-day failure, my understanding is that Union would be entitled to claw-back from the last day of failure. So for instance, using the same example we used before, if a contract commences November 1st, if the failure begins on December 1st and ends on January 1st, if it's rectified, so there's 30 days -- I guess, that would be 32 days of failure -- but Union would be entitled to claw-back from the latest date; is that -- 746 MR. PACKER: I'm not following the question. If a customer has failed, they're not going to be paid the DCC for the days they are failing. I wouldn't view that as a claw-back as much as they just wouldn't get paid for those days. 747 MR. DEROSE: Okay. In that case, perhaps you could answer it this way. Why is Union choosing to calculate the $1.34 increase based on 30 days of failure? 748 MR. PACKER: We had to come up with a reasonable way of adjusting the failure-to-deliver charge to recognize that the DCC was being eliminated. We thought -- assuming 12 months of claw-back over 30 days of failure was a reasonable way of coming up with that charge. Those are the two variables that you have to assess, whether they are appropriate, the length of claw-back and how many days a customer is going to be in a failure situation. We thought those two parameters were reasonable. 749 MR. DEROSE: Okay. How many times has Union recovered 12 months of DCC claw-back? 750 MR. PACKER: I don't know. 751 MR. DEROSE: Is that something that you could perhaps -- 752 MR. PACKER: What I'm suggesting to you though is there's -- you have to weigh the two factors, the 12 months and the 30 days. We may not have collected 12 full months of DCC claw-back, but at the same time we may not have had a failure for 30 days. So it's really trying to balance the two things. 753 MR. DEROSE: Okay. Perhaps I'll come back to that in a moment. Now just again to clarify, the failure-to-delivery charge currently is $2.31 a gJ; is that right? 754 MR. PACKER: Yes. 755 MR. DEROSE: And the $1.34 increase is not intended to cover the actual costs incurred by Union as a result of the failure to deliver. 756 MR. PACKER: The 1.34 increase is intended to try and keep us in the same position we were prior to the DCC being eliminated. 757 MR. DEROSE: So just to be clear, it's not a pass-through of costs? 758 MR. PACKER: No. 759 MR. DEROSE: I think you've described it as a penalty charge; is that -- 760 MR. PACKER: I don't know whether I would describe it as a penalty charge. It's a charge intended to ensure people don't go there. We would prefer that people honour their contractual commitments. 761 MR. DEROSE: So it's not a pre-estimate of the damage which would be caused to Union by a failure to deliver, but it's a charge intended to deter a client or a customer from failing to deliver; is that a fair description of the charge? 762 MR. PACKER: That's correct, yes. 763 MR. DEROSE: Now currently, when Union collects the $2.31 a gJ, is my understanding correct that those funds are provided to the shareholders? 764 MR. PACKER: I'm not sure I would describe it as "provided to the shareholder." They are used to try and offset some of the costs we incur when somebody fails. There was an exhibit in this case that described why we thought that was appropriate. It's Exhibit C.39.30. We have costs that we incur as a result of people having to work overtime to deal with the situation, we have legal costs in trying to pursue the collection of these charges so, in our view, this charge is intended to try and offset some of those costs. 765 MR. DEROSE: Do you have Exhibit C.39.30 in front of you? 766 MR. PACKER: Yes, I do. 767 MR. DEROSE: If I can take you to sub-D, this is with respect to the $1.34. The question was and it's short, Mr. Chairman, so perhaps I could just read it into the record: "Does the increase of $1.34 per going gJ for delivery supply failure cover the actual costs incurred to the company?" And the answer was: "Union is proposing the increase of $1.34 to maintain the existing financial incentive for customers not to fail. It is intended to be a penalty and not a pass-through of costs." 768 So my understanding from that answer is that the $1.34 is not intended to cover overtime or legal costs or the actual costs of the failure to deliver, but it's intended to deter customers from failing. 769 MR. PACKER: The charge is meant to deter customers from failing. That's true. In item B, I talked about why we -- in our view it was appropriate that -- what we were doing with these funds, and that was to offset some of the costs we incur as a result of the failure. 770 MR. DEROSE: Okay. But it's not your evidence that the $2.31 is insufficient to cover the overtime and the legal costs, is it? 771 MR. PACKER: I don't know. It's hard to get a handle on what those costs are. When somebody fails there are numerous people within the company that have to deal with that. We don't have a -- we don't track costs in that manner at this point in time. 772 MR. DEROSE: So there would be no way for you to tell. 773 MR. PACKER: No, that's right. 774 MR. DEROSE: All right. Now, with respect to DCC claw-back, currently when there's a DCC claw-back it would be placed in the direct purchase revenue and payments deferral account; is that correct? 775 MR. PACKER: That's correct, yes. 776 MR. DEROSE: Okay. 777 MR. PACKER: I think I indicated on Friday that this isn't a huge cash grab for the company. The amount that we've clawed back with respect to a failure-to-deliver situation is around $50,000. 778 MR. DEROSE: Now on Friday you said to Mr. Brett that you weren't aware of any failures this past winter and you thought there would have been around 12 the previous winter; is that right? 779 MR. PACKER: Approximately, yes. 780 MR. DEROSE: Would you be able to actually, and perhaps by way of undertaking, just check that and tell us exactly how many there were, perhaps, since 2000? 781 MR. PACKER: Since when in 2000? 782 MR. DEROSE: How about January 1? I'm using January 1 as an arbitrary number just to start. From our perspective, we would just be interested in understanding the scope of the problem. And perhaps since you've identified that it's important to take into consideration both the number of days of failure and the number of days of claw-back, it would be useful if you could identify that for each failure as well. 783 MR. MORAN: That would be undertaking G.3.2, Mr. Chair. 784 UNDERTAKING NO. G.3.2: UNION GAS - NUMBER OF FAILURE TO DELIVER DAYS SINCE JANUARY 1, 2000 785 MR. JACKSON: Thank you. 786 MR. DEROSE: Now Mr. Packer, I would like to turn to what was identified in the ADR agreement as 11.2, and this is the change to the other purchased gas costs account. Just for the Board's assistance, that's on page 22 of the ADR agreement. 787 Now Mr. Packer, are you able to tell us how many customers have failed to balance since October 31st, 2000? 788 MR. PACKER: Sorry, how many customers have failed to balance? Is that the question? 789 MR. DEROSE: Yes, with respect to this account. 790 MR. PACKER: I think there's 55 to 56 customers who this charge would apply to. 791 MR. DEROSE: And if the proposed change is accepted by the Board, would you be able to tell us what the single largest charge would be? 792 MR. PACKER: The largest charge, I think, has been put on the record by Oxford Automotive. 793 MR. DEROSE: Is that Exhibit 2.2? 794 MR. MORAN: That's correct. 795 MR. DEROSE: Now Mr. Packer, could I take you to that exhibit. Do you have a copy there? 796 MR. PACKER: I have it. 797 MR. DEROSE: And if I could take you to a copy of a letter from Mark Isherwood, dated February 20, 2002. 798 MR. PACKER: I have it. 799 MR. DEROSE: And in the fourth paragraph it identifies that the additional charge will be $1,050,940.83; is that correct? 800 MR. PACKER: That's correct, yes. 801 MR. DEROSE: And am I right that that's the charge that would be levied in addition to the current charges? Or let me rephrase that in a better way for you. Is that the charge that would result from the Board's decision if they agree with Union's proposal? 802 MR. PACKER: That is the charge. It might change slightly as a result of when we actually seek recovery of it, as a result of interest, but by and large, yes, that's the charge. 803 MR. DEROSE: Okay. And would you be able to tell us what the charge would be if the proposed change is not accepted by the Board? 804 MR. PACKER: The -- 805 MR. DEROSE: I would just like to know the difference between, or the impact of the proposal. 806 MR. PACKER: The previous methodology was to calculate our average cost of spot in the quarter the contract expires. We didn't buy any spot in this quarter so there wouldn't be any additional charge. We did, however, buy a spot later on in the winter but there wasn't any in this quarter. 807 MR. DEROSE: Assuming if the Board does not accept your proposed change, Oxford Automotive will not be charged anything in addition to what they've already paid. 808 MR. PACKER: I believe that to be true, yes. 809 MR. DEROSE: Okay. Now, at the bottom of that page, we have your -- the calculation. I just want to understand how you have calculated the charge. You see at the bottom there's an asterisk, it says "calculation"? 810 MR. PACKER: Yes. 811 MR. DEROSE: Now the first number, which is 103,590 is the gJ. I assume that was the volume that they failed to deliver? 812 MR. PACKER: It's not a failure-to-deliver situation as we've talked about it earlier on today and on Friday. 813 MR. DEROSE: I'm sorry, a failure to balance. 814 MR. PACKER: It is the amount in excess of the 4 percent tolerance that they failed to bring on to the system, to help balance, yes. 815 MR. DEROSE: Thank you. And the $15.55; is that the highest price at Dawn? 816 MR. PACKER: Yes. I think the page that's attached shows it was the highest price at Dawn and the date it occurred was December 21, 2000. 817 MR. DEROSE: And then I assume the $6 is WACOG. It says price over WACOG, but the $6 and 151, that would be the -- 818 MR. PACKER: That's right. 819 MR. DEROSE: And then the 77,800 is identified as interest. First of all, do you know what date you're charging interest from? 820 MR. PACKER: I believe we're charging interest from the date the customer doesn't balance. I just want to make sure it's clear what -- where these dollars go. The money that we would collect as a result of levying these charges would go into the gas supply deferral accounts. Those are the same deferral accounts that have interest calculated on them as per the Board's accounting orders. We're just using its same rate of interest that applies to those accounts. 821 MR. DEROSE: And when I read this letter it appears that this is the first letter that you've notified Oxford Automotive that they may owe just over a million dollars. Do you know if that's correct? 822 MR. PACKER: The circumstances surrounding Oxford Automotive can -- basically go as follows: The imbalance that we see the charge applying to existed from about April of 2000 onward. During that period, our sales reps were working with the customer, advising them that they were going to be short and they needed to bring in supply. They chose not to. We sent out the communication that went to everybody advising them of what we were planning to charge customers that didn't balance. We sent an extra copy to the company advising them that the charges would be forthcoming if they didn't balance. We actually, because the balance was quite large for a customer of this size, we worked with the customer and gave them an extra couple weeks to try and bring the gas in, which would have meant they had to bring it in by the middle of December. They chose not to and that's because, as you see on the attached pricing sheet, as you go into December, the prices were rising and we were subsequently advised by the customer that they wouldn't be bringing the gas in, that we should let the rate schedule and contractual provisions prevail. 823 Although this is the first time we advised the customer of the exact amount, I think they were aware of their imbalance. They were aware for a number of months of their imbalance and they knew what the prices were in the market so they could have done the calculation themselves fairly easily to determine what it would cost them. We're not charging them a erratically different amount than what it would have cost them to go out in the market and buy the gas. We're not charging them a price that that's much different than what we incurred in January when we bought our own supply to try and balance the system. This is a cost that they would have paid and they're -- but it appears as if they are of the view that its better not to bring the gas in and gamble with the charge from the Board rather than go out in the market and know what they're paying. 824 MR. DEROSE: And, I guess, coming back to my question, in -- so this is the first letter that you've demanded that they -- I guess it's not even a demand letter, but they've identified the charge of a million -- just over a dollars and you have included an interest charge. 825 MR. PACKER: We have included an interest charge and those interest charges are treated the same way the deferral account balances are. That interest goes into the deferral account as an offset. 826 MR. DEROSE: Okay. 827 MR. JACKSON: Could I just ask, would they have been in a reasonably good position to have estimated that the charge they'd be facing would be zero times the imbalance volumes? 828 MR. PACKER: We were doing our -- what prompted us to propose a change to our methodology was customers were advising us that it was better for them to take their chances with the deferral account disposition rather than buy their own supply. So we had been advising customers, even throughout the summer period, don't rely on us to provide your supply; you are a direct purchase customer, you should be balancing your own account, otherwise we will have to come up with a price that persuades you not to rely on system gas to balance your account. 829 The impact of relying on system gas is that we don't have the ability to plan very well and we are also in a position of potentially going out and buying gas in the market at the price that they don't like to -- the customer doesn't like to pay themselves. 830 So the difficulty with them being able to estimate the price is that it really depended on what the market was. In the summer pricing was better, obviously, than the winter, and then prices really spiked in the month following this contract expiring. So at the time they made the decision to not to bring in the gas -- the last decision not to bring in the gas -- they would have been aware that the market price was very high, which may have had something to do with their decision not to buy the gas themselves. 831 MR. JACKSON: But they would have known that the price that would have been used would have been the spot price that Union faced in the last quarter, would they? 832 MR. PACKER: We did advise customers at the end of September and the 1st of October that we were planning to use this new methodology. And we sent that notice again to them prior to the middle of December, advising them that we were planning to use this methodology. 833 I think it was generally known in the industry what the old methodology was. Which again, also led people to believe, well, if you are not buying spot, then I know I'm not going to get any other charges, which we were trying to advise them that that's not a good assumption. We wouldn't support an approach by a direct-purchase customer that had the impact of increasing somebody else's cost. We didn't think that was appropriate. 834 MR. DOMINY: Is it possible that you would file some of that correspondence? It's not on the record, is it? 835 MR. PACKER: If it's not on the record, we can file it, certainly. 836 MR. MORAN: That will be G 3.3. 837 UNDERTAKING NO. G.3.3: ADDITIONAL CORRESPONDENCE WITH RESPECT TO OXFORD AUTOMOTIVE 838 MR. SOMMERVILLE: I wonder as perhaps part of that if we could get a copy of the contract governing the relationship between yourselves and Oxford Automotive. 839 MR. PACKER: Certainly. 840 MR. DEROSE: Mr. Chairman, unless you have any other questions on Oxford Automotive, I was going to move away from Oxford Automotive. 841 MR. JACKSON: Thank you for pointing that out. I think this would be a good time to take the afternoon break, so -- yes, just one moment before we leave. 842 MR. DOMINY: I just have one question. As I understand it, the 15.5 is a number that comes out of the Canadian Gas Price Reporter? 843 MR. PACKER: That's correct. 844 MR. DOMINY: Is there somewhere where we can see what prices Union actually did pay for gas in this period? 845 MR. PACKER: I'm not sure where it was in evidence, but I was made aware that we paid between $13 and $13.50 a gJ for the spot we bought in the January period. 846 There's an exhibit, Exhibit B, tab 4, page 4, which is gas supply evidence that talks about the Empress price in January -- sorry, in December, being 7.81. So if you added $1.50 to that for tolls and fuel, you're up over $9 for firm supply. Does that -- would you like something more specific, or does that help? 847 MR. DOMINY: Let me think about this. I don't think I've finished yet. 848 MR. DEROSE: Perhaps sorry to -- after I said I wasn't going to ask another question on this, but to build on what Mr. Dominy has said, perhaps it would be useful, if you can, to identify the cost of gas that you actually had to purchase for Oxford Automotive because that seems that we could then compare apples with apples. 849 MR. PACKER: We can't do that. We don't typically buy gas -- we balance the system. We don't typically buy gas for a specific DP customer that hasn't balanced. I can just give you an indication of what our spot supply was and the cost of our firm supply, or what a firm supply would cost coming out of Empress. 850 The whole issue about well, all we should be passing along is our costs, then I think customers will continue to rely on us to provide that emergency back-stopping, because in all cases they would get the benefit of averaging or the expertise we have in buying supply that may mean we get a little better price in the market. There is really -- if you don't go to the highest spot price in a month or something similar to that, I don't think we are going to get the discipline that we're looking for. 851 MR. DOMINY: Thank you, Mr. Packer. 852 --- Recess taken at 2:50 p.m. 853 --- On resuming at 3:12 p.m. 854 MR. JACKSON: Please be seated. 855 Now maybe we talk a little bit more about timing tomorrow morning, but as we come back from the break I'd just like to tell you that we've made arrangements to book this room for Monday, Tuesday, and Wednesday of the following week. And I'm going to say quite clearly I hope we don't need it, but we'll at least have that as a contingency. And Wednesday could be somewhat in doubt, at least as to whether or not we could sit in the afternoon because of the reporters but, at least we have Monday and Tuesday and we have the room for Wednesday. So we'll carry on and see how well we can progress. 856 MR. PENNY: Thank you, sir. 857 MR. JACKSON: Mr. Derose. 858 MR. DEROSE: Thank you, Mr. Chairman. Mr. Packer, we were addressing the other purchased gas costs account and I have two short questions on that and then we'll move on. The first is: Would you be able to tell us what -- that if the proposed change is accepted what the total charge to be levied is? That's total to all the customers who would be encompassed by that proposed charge. 859 MR. PACKER: The total charges that we're dealing with with respect to customers who didn't balance to within the 4 percent tolerances is identified on Exhibit B, tab 13, schedule 3 updated. That's the 2000 balance which is $2,871,000 and the 2001 balances are on the following page being schedule 4, tab 13 and the total amount there is $205,000. It will change slightly as a result of interest up until the time we implement the Board's decision. 860 MR. DEROSE: And those charges are in addition to the levy under the current Board -approved charges? So those would be as a result of the proposed change. 861 MR. PACKER: Well, we haven't -- those are the proposed charges that we are propose to levy with respect to people who didn't balance to within the 4 percent tolerances. I don't know what the amount would have been for all of the customers had we used the old methodology. Certainly for anybody who didn't balance in fall of 2000, we didn't buy any spots so there'd be no charges for those customers. But anybody that didn't balance at the beginning of 2001, there'd be some charge because we did actually buy a spot in that quarter. 862 MR. DEROSE: And do I take it from your answer that you are not able to tell us what the difference between what the charges would be if the Board does not approve your proposed change as opposed to what the charges will be if the Board does approve your proposed change? 863 MR. PACKER: I haven't calculated what the charges would be under the old methodology. They would be less for certain. 864 MR. DEROSE: Is that something that you could easily do just so that we understand the impact and so that the Board understands the impact of its decision? 865 MR. PACKER: If the Board thought it would be of value to them, I could do that. 866 MR. JACKSON: Yes, I think that would be helpful. 867 MR. PACKER: Okay. 868 MR. MORAN: That would be undertaking G.3.4, Mr. Chair. 869 UNDERTAKING NO. G.3.4: THE DIFFERENCE BETWEEN CHARGES TO UNBALANCED CUSTOMERS UNDER THE OLD METHODOLOGY VERSUS THE PROPOSED METHODOLOGY 870 MR. DEROSE: And, Mr. Packer, my last question on this topic is, and again, I think it's just a clarification that the proposed change with respect to the failure to balance is intended to be a penalty in that it -- Union is not trying to pre-estimate the costs that are going to be incurred, but rather it's a charge intended to deter customers from failing to balance. 871 MR. PACKER: It is a -- yes, it is a charge intended to deter customers from not balancing which is something they should be doing under the terms of their contract. It's also a charge that is designed to ensure that other customers aren't paying something as a result of a customer not balancing. 872 MR. DEROSE: But the charge is not a reflection of the actual cost. It's not a pass-through. 873 MR. PACKER: What I said earlier, if we continue to have cost pass-throughs for these customers that don't balance, I think there will always be instances that they are relying on us because they are gambling that they are going to get a windfall as a result of that. 874 MR. DEROSE: I just want to make clear that this isn't a pass-through of costs. I think that's your answer. 875 MR. PACKER: We are calculating the amount independent of our costs. Anything that we charge though, with respect to this, gets put against the gas supply deferral accounts. 876 MR. DEROSE: If I can turn to what has been referred to in the ADR agreement as 14.4. This is at page 29 of the ADR agreement and this is the T-1/T-3 negative storage balance charges. 877 MR. PACKER: I have it. 878 MR. DEROSE: And again, just to be clear, this charge as with the previous two that we've just been dealt with or that we've just dealt with, again is intended to deter customers from -- or to deter T 1 and T-3 customers from failing to balance. 879 MR. PACKER: It's intended to deter them from failing to keep a positive storage balance. And similar to the charge for customers -- for bundled customers who don't balance, we're proposing to use the highest spot price at Dawn, and any charges that we levy would be put against the gas supply deferral accounts. 880 MR. DEROSE: Again it's not intended to be a pass-through or to cover actual costs; it's intended to deter. 881 MR. PACKER: The proposed change is to align it to how we are planning to handle bundled customers who don't balance. 882 MR. DEROSE: With respect, again so that we have an understanding of the scope of the problem, would you be able to tell us how many T-1 or T-3 customers have failed to or have had a negative storage balance or failed to keep a positive storage balance since the year 2000, January 2000? 883 MR. PACKER: I don't believe that there were any. The reason we're proposing the change is because there was a customer that advised us that it was -- they'd be financially advantaged if they went below zero, given the charges that we would levy relative to the cost of bringing gas in which was their decision at that point in time. I think if we get into other situation where gas prices are high and there's some volatility, you will get more people looking at this. I think historically, people have come to an understanding that they are supposed to balance or keep a positive storage balance and they've also looked at the charges. And, in the context of when they looked at it, it was more expensive for them to allow their storage account to go below zero. Given that we've gone through one winter where that wasn't necessarily the case, my expectation would be if we don't make a change here we'll get more looking at it. 884 MR. DEROSE: So this is looking forward not looking back in the sense that this hasn't been a problem yet for T-1 or T-3 customers? 885 MR. PACKER: I would say that's fair; we're looking forward. As I said, we did have one customer who alerted us to this and if we don't make a change, I'm sure they will be looking at how they react to high gas costs in the future. 886 MR. DEROSE: Thank you. Then if I could turn you to the last topic, which is 14.7, which I will address. It's on page 31 of the ADR agreement. And under this proposal, am I right in my understanding that Union will be entitled to force a customer to supply its own fuel? 887 MR. PACKER: Not entirely. What we were trying to do was to provide a customer-supplied fuel component to the rate schedule, REM-13, -16 and C-1. It was our intent to try and prompt people to take the customer-supplied fuel option rather than the Union -supplied fuel option although the rate schedule wording that we had proposed really didn't give us the authority to mandate that. Although it's our desire that people should -- if somebody's buying their own gas and aren't providing their own fuel, the fuel component of the total gas they'd be buying is 1 percent or thereabouts. So, it doesn't make a lot of sense for us to be buying that gas if the customer is buying 99 percent of their requirements. They might as well buy the other 1 percent. 888 Anybody that we've talked to recently who we've supplied the fuel to under these rate schedules, and they are starting to be aware of the retroactive charge that may be accompanying that fact, I think will be looking at supplying their own fuel. I don't anticipate it being a problem. It was our desire for people to supply their own fuel, but the rate schedule wording wouldn't have allowed us to mandate that. 889 MR. DEROSE: But just to be clear, if this is accepted in the future, Union will have the option, the customer will not have the option? 890 MR. PACKER: What I'm saying is that was what we set out to do, although if a customer really challenged us on it, the rate schedule has no provisions that would allow us to enforce it. 891 MR. JACKSON: What you're asking is to change the rate schedule, aren't you? So you will have provisions? 892 MR. PACKER: No, the rate schedule changes would just be to show the fuel ratios. There's nothing in the rate schedule that says that we would have the authority to mandate that customers supply their own fuel. 893 MR. JACKSON: Okay. So, then the wording is correct in the settlement agreement? That Union is proposing that it simply have the option to request, not the option to require? 894 MR. PACKER: Yes, that's right. It's a request and we would try and educate them on why that was a good thing for them to do, but we don't have the -- based on the wording we are proposing for the rate schedule, we don't have the ability to require it. 895 MR. JACKSON: Haven't you always had the option to request it? 896 MR. PACKER: Not for those rate schedules, because they didn't have a fuel ratio on them, they only had a commodity charge on them. 897 MR. JACKSON: Okay. 898 MR. DEROSE: Thank you very much, Mr. Packer. Those are all my questions. Thank you, Mr. Chairman. 899 MR. JACKSON: Thank you, Mr. Derose. Are we at you, Mr. Brett? 900 CROSS-EXAMINATION BY MR. BRETT: 901 MR. BRETT: Thank you, Mr. Chairman, panel. Mr. Derose has asked the bulk of my question, everyone will be delighted to know, on the first point, which was 11.2, which was the balancing charge. I have some questions on the number 10, which is the DCC elimination. 902 But on the balancing charge on 11.2, I just wanted to clarify one thing, Mr. Packer. I think you, in your discussion with Mr. Dominy, said you would be filing the correspondence with the direct purchase community that set out the charges that you would propose to levy on direct-purchase customers that did not balance at the end of their term. I just want to clarify that in that -- that correspondence will show both of these proposed charges that are in the -- stated here on the settlement conference at page 22. That is to say, the one change effective October 1st, November 1st 2000 -- sorry, October 31st, 2000. And then the second change that effectively says you charge the highest price on the Dawn -- highest Dawn-delivered gas price in the two-month period. That comes into effect October 31st 2001; it's a two-step change, as I understand it. 903 MR. PACKER: That's correct. 904 MR. BRETT: And my question to you is: Did the correspondence that went out to the direct-purchase community, did it deal with both of those proposed changes? 905 MR. PACKER: No, it wouldn't have dealt with the second step. It wasn't until we sent out the original communication that we started thinking about what happens for our contract that expires in the spring. If you use the month following, you may actually be charging a price too low because you may have actually had to buy the gas in the month the contract expired, or earlier. So we had, I guess, concluded that we needed to make a change. We filed the evidence and hopefully we get the Board's endorsement of the change. Once we get the Board's endorsement we will talk to customers. We haven't had instances where customers aren't balancing to speak of this winter, primarily because of both the weather and the commodity price hasn't been an issue for us. 906 MR. BRETT: Okay. Thank you for that. 907 Moving to the question of number 10, the DCC removal. Just by way of preface, I want to -- I don't need to make this as exhibit because it is evidence from a previous case that you wrote, Mr. Packer, but it's actually very good. It's in G.1, tab 2. This is EBRO 499, Exhibit G.1, tab 2. 908 Just for everybody's information, Mr. Packer filed about a 30-page historical summary of the DCC. The panel probably knows about it already, but it starts from the beginning and carries through until 499. 909 I have a couple of questions on the history of the DCC but I won't get into it in any detail because it's referenced there. But I do want to -- I do want to cover off a couple of points. I'd like to take you first to the exhibit that was filed this morning. It's also evidence from a previous -- from the 0017 case, that 4- or 5-page section that was filed this morning, Exhibit B, tab 1, and I'm looking at page -- there's about three pages of evidence on the delivery commitment credit elimination. This was in last year's, the big case, the case that was notable for its long litigation on PBR and its successful settlement on unbundling. One of the smaller things that appears to have been settled was the delivery commitment credit elimination. There was, I say, three pages of evidence in here, in that case, starting at page 27. Do you have that, Mr. Packer? 910 MR. PACKER: Yes. 911 MR. BRETT: Over on -- this is the evidence that starts off by saying that the DCC is -- that we're proposing to remove the DCC for the reasons where people are now. I've heard a couple of times that no one understands it, that it requires deferral accounts which aren't good things to have under PBR, and that it's unique to the -- no one else in the world has it, at least no other pipeline company has it. 912 The question I wanted to ask you was the -- in the paragraph starting at line 8 on page 28, I want to deal a little bit with how you're dealing with the -- on the one hand, the M-2, M-4, M-5, M-6 to M-10 class and how you're dealing with the M-7 rate class, in the way in which you are implementing the removal of the DCC. And your general objective, which is spelled out in this little paragraph on line 8, which you have spoken to on a couple of occasions in the last day or so, is that you wanted to do this in a way that minimized the impact on individual customers; is that fair? 913 MR. PACKER: That's fair, yes. 914 MR. BRETT: Okay. And now -- when we look at that -- I want to apply that principle in two different situations. First of all, with respect to the M-2 class, Mr. Packer, you're aware that of course that Union's M-2 rate class has a fairly broad range of entities in it in the sense that it includes residential customers and very small commercial customers. It also includes, for example, many, many school boards, individual schools and in other words, some individual multi-family apartment buildings, some sort of medium-sized commercial entities. Would you agree with that as a general proposition? 915 MR. PACKER: Yes. 916 MR. BRETT: And, for example, if a school board were to have gone into a direct-purchase arrangement and signed a bundle-T arrangement with Union, and its facilities were either all or nearly all individually in the M-2 rate class, then it would have received a -- when the DCC was in existence, it would have received a DCC payment as a direct purchaser with an obligation to deliver; correct? 917 MR. PACKER: Yes. 918 MR. BRETT: And when you remove that, in the case of that direct-purchase customer that I've just described, when you change -- when you remove the DCC, and given the way in which you did it or propose to do it in this case, the M-2 customer in question, the school board would lose the DCC payment and it would gain -- it would still be paying a portion of the delivery charge for its class on which that DCC had originally been based, as I understand it, on a class basis. So that, would you agree with me, and -- from my example, the individual school board in that instance would actually be worse off as a result of the removal of the DCC and the way in which you're removing it. It wouldn't be neutral. 919 MR. PACKER: I guess I would accept that as a possibility. I haven't gone through a calculation, but I'll accept that as a possibility, yes. 920 MR. BRETT: Okay. And you'd accept that, without -- sort of based on the notion that effectively, that the direct-purchase customer I've described would be a part of a relatively small group of direct-purchase customers in a rate class that consisted largely of people who were not direct-purchase customers. 921 MR. PACKER: What I wrestle with is the objective that you draw my attention to. To minimize the impact on individual customers was our objective, we tried to do the best we could. In the M-2 class, we have the payment that was going to a broker who may or may not have been passing it along which we're now going to reduce delivery rates by. So, we knew of that and we were up front about that anomaly. There's -- I guess there's potentially a second anomaly which is the one you just talked about, and that is the fact that you had large C/I M-2, commercial/industrial M-2, customers who may have been paid the payment and that are now being part of a larger rate class. That's not to say that the -- because there's different blocks within the M-2 class, that's not to say that we couldn't try and eliminate it in a block that kept commercial/industrial customers as indifferent as possible. 922 MR. BRETT: Mm-hm. That would be sort of analogous to what you had done with the M-7 class, although in the case of -- I'll get to M-7 in a moment, but in the case of -- it seems to me on the -- I mean in essence -- well, as a separate question, I guess, I don't want to confuse the two things, but as a separate question it looks to me that in the case of the M-2 and the M-4 that you've -- let's just stick with the M-2 -- that you've really -- you've held harmless, you've tried to hold harmless people on a -- customers on a class basis. Whereas in the case of the M-7s, you have truly tried to hold people harmless on an individual customer basis because you have, I think in the M-7 case, you have used the range rate concept to effectively, if I can use the phrase, custom tailor the rate such that each M-7 customer does not lose anything in the transition. 923 MR. PACKER: I'm not sure I would limit the customer specific aspect of this just to the M-7/T-1 rate classes. What we did is we looked at rate class' commodity charge, and if there was room in them, in the commodity charge, for a reduction to reflect the DCC elimination, then that's what we did. Which should keep most individual customers indifferent because the DCC payment was a commodity-based payment and the reduction to delivery rates would have been done on a commodity basis. 924 We didn't have that ability in the M-7/T-1 classes because the commodity was too large to absorb the delivery commitment credit reduction. So we had to look at the demand charge as a way of reducing rates, and as a result of changing demand charges, we needed an ability to tailor that to individual customers because each customer's impact would be different based on their load factor if we didn't have that flexibility. 925 MR. BRETT: Perhaps just to come back and finish off that first point, would it be possible for you to do a calculation which would illustrate -- which would be able to give us a little more information on whether, in certain instances at least, for an M-2 direct-purchase customer like a school board that I've described, there could be for that specific customer a negative impact from eliminating the DCC in the way in which you have? Is that a possible -- could you do that? 926 MR. PACKER: We could try to do that, yes. 927 MR. BRETT: I'd appreciate that if you could. That would -- 928 MR. MORAN: That would be G.3.5, Mr. Chair. 929 MR. JACKSON: Thank you. 930 UNDERTAKING NO. G.3.5: CALCULATION OF EFFECT OF PROPOSED NEGATIVE EFFECTS OF ELIMINATING THE DCC IN UNION'S PROPOSED MANNER ON AN M-2 DIRECT-PURCHASE CUSTOMER, I.E. A SCHOOL BOARD 931 MR. BRETT: Mr. Packer, would there be any customers, any individual customers, sticking with the theme of the elimination being done on such a manner to minimize the burden on individual customers, would there be any individual customers as a result of this method who as a result of this method of elimination would actually be better off? 932 MR. PACKER: There's a possibility that a system-supplied M-2 customer would be better off because in the -- the DCC -- while the DCC existed, they weren't getting paid the DCC. But as a result of reducing delivery rates, everybody's delivery rate gets reduced. 933 MR. BRETT: That's a fair point. I was thinking actually of direct-purchase customers, but what about any direct-purchase customer in any of the rate classes? Could an M-7 customer conceivably be better off because of the rate that was struck for him under the range rates? 934 MR. PACKER: I don't see how an M-7 or T-1 customer would be better off. 935 MR. BRETT: That is because, as you were saying earlier, or as I was putting to you earlier and I guess I should ask for confirmation, you -- as you describe, in the process over on page 29 of that same exhibit, that you effectively -- well, I guess it's the second sentence. From the sentence beginning on line 13: "Each individual customer's demand charge will be calculated in a manner that keeps their effective cost the same as it was prior to the DCC being eliminated." 936 So effectively, you fine tune it to the point where you just -- where the M-7 customer breaks even as a result of the elimination of the DCC? 937 MR. PACKER: That's correct. That's our objective in setting the demand charge. 938 MR. BRETT: He couldn't end up ahead of the game, ahead of where he was before. 939 MR. PACKER: The discipline, I guess, from that -- that precludes that from happening is that once we eliminate the DCC, when we're setting the price within the range, the customer is going to have the knowledge of what they paid prior to the DCC being eliminated and that will form the foundation of their expectations with respect to where their demand charge will be set. Anything that we did below that would be a shareholder exposure. We've only got so much money to -- that's been included in rates to remove so if we -- 940 MR. BRETT: I see. It wouldn't be in your interest to do that is what you're saying, is it? 941 MR. PACKER: No. 942 MR. BRETT: Now, one of the practical problems in this exercise, in addition to the principles that are to play is, I think you mentioned at least once in responding to an earlier set of questions on another topic, I think it was Mr. Quinn, I believe, in any event, you also mention it in your evidence in 499 that if you simply remove the DCC and let the chips fall where they may, as it were, in terms of costs, that the delivery rates for some of the M-7 customers and the T-1 customers would increase very dramatically. And I think you cited numbers somewhere in the range of 40 percent, 35 percent increase in delivery rates for some M-7 and some T-1 customers. Is that on track? 943 MR. PACKER: Maybe -- 944 MR. BRETT: That's one of the things you think about. Go ahead. 945 MR. PACKER: There's a couple of considerations. The one that you reference is if a M-7 or T-1 customer looked at their effective costs while the DCC was in existence and then looked at what it would be if the DCC is eliminated and the amount of costs that had been included in their rate is removed, I think it would be about a 35 increase to M-7 and a 49 percent to T-1. That's one consideration. 946 I guess the other more compelling consideration is looking at why the DCC existed in the first place and in the system benefit that obligated deliveries provide. What the DCC did and what our proposal does is it recognizes the system benefit that obligated deliveries provide and provides that recognition back to the customers who are obligated in their deliveries, and by virtue of that, reducing the facilities requirements that we have. 947 MR. BRETT: The -- I don't know whether you can -- well, I shouldn't start so negatively. The -- I think you probably can answer the question. I don't recall seeing any evidence, the -- often times there's a -- either in the evidence filed in chief or in answer to interrogatories there's a sort of an impact on customer bill section of the tables which shows effectively the impacts of overall customer bills given changes in rates, in delivery rates. And I guess what I'm looking for from you is a general sense for M-7 customer who's got a typical load factor for such a customer. I don't know what that would be, it might be 60 percent, it might be 50 percent, it might be 70 percent, but for a customer in that range, what portion of his total gas bill does his delivery charge, does the Union delivery charge represent? 948 I mean if I were hazarding a guess, I would say in the range of 5 to 10 percent. Would that strike you as in the ballpark or low or what would your -- what would your sense of that be? 949 MR. PACKER: That's not a bad ballpark. 950 MR. BRETT: Okay. Mr. Chairman, I have a long -- not a long, but I have a significant amount of material here that really would take us through the history of the DCC, how it got started in EBRO 412 and how it evolved and -- but on reflection, I don't think I need to go through this. I think you all are going to have read that background material. You could, as you put it yourself the other day, there was a rather complicated and curious history. I mean it started off in one manner, it was later rationalized partway through on the basis of some costs. Just perhaps to punctuate the last little bit of the drama, you had said in 499, your proposal in 499, as I recall, Mr. Packer, after doing a fair bit of analysis that the DCC should continue, it should be raised slightly. It was tweaked slightly to reflect some allocations of avoided facilities cost, but you recommended that it continue. That was the recommendation. 951 MR. PACKER: I think that's by and large correct. We had proposed that it be continued and it be calculated based on avoided facilities costs. 952 MR. BRETT: Right. 953 MR. PACKER: What we were proposing to do in eliminating it as we are as well is effectively recognizing the benefit that obligated deliveries provide. Rather than have an explicit payment, that payment is being netted off of delivery rates. 954 MR. BRETT: But those, and I don't quarrel with that. I think there's no doubt that that was part of the -- certainly part of the origin of this, in my view, in my reading of the cases, was that the Board declined in the early days to permit you to specify a delivery point and over time, it -- you -- this idea of a credit evolved in the first instance to sort of persuade the bundled -- in today's parlance or in yesterday's parlance, the unbundled T-customer to provide a firm delivery and then later to have buy/sell customers provide firm delivery but that firm delivery commitment's been around for a long time, of course, and yet in the statement, in the settlement conference on 0017, basically one of the things we say is or we say, I guess, is that well we're eliminating it now because it is no longer necessary. 955 In fact, I think I would suggest to you, and you'd probably agree that it probably wasn't necessary for quite some time. I mean there had been firm commitments to deliver in place under both bundled T contracts and previously before they were eliminated buy/sell contracts. I mean for quite some time, you had to deliver. You didn't deliver, you were penalized and there were provisions there to deal with you if you didn't deliver gas and so they unnecessarily perhaps, but that's -- that was that's something that's been the case for a while, wouldn't you agree? 956 MR. PACKER: That was a fairly long question. I guess I may have missed some of the question after you suggested the reason that we had proposed the DCC be eliminated because it wasn't needed. I don't think that's what the evidence says. I think there are three reasons listed why we are proposing to eliminate it. I think we are eliminating the payment but we are basically imposing to ingrain that recognition in delivery rates and I think there is a rationale for that. It's that those obligated deliveries provide a system benefit, and we don't see any reason why that shouldn't be recognized rather than recognizing it through an explicit additional payment to somebody where we're recognizing it as a reduction to rates. 957 MR. BRETT: Right. I don't -- my -- I agree that you did give those reasons and they were the three reasons that -- in the evidence that we talked about earlier, but I just note here that in this text in the settlement contract, it says that terms and conditions of all the existing direct purchase arrangements contain a contractual obligation to deliver which provides Union with the ability to continue to rely on these volumes from the system design and integrity perspective and provides Union with the ability to authorize in advance all upstream transportation capacity assignments/diversions rendering the DCC unnecessary. So as a final sort of gloss on this, what this is saying, I think, is that the DCC is no longer considered necessary to have. 958 MR. PACKER: I agree that the contractual provisions require parties to obligate their deliveries. I guess I don't see that necessarily as being a reason not to recognize a benefit those deliveries provide the system. 959 MR. BRETT: All right. That's fine. 960 Mr. Chairman, those are all my questions. Thank you. 961 MR. JACKSON: Thank you, Mr. Brett. Are there any other questions for this witness? Mr. Moran? 962 MR. MORAN: Mr. Chair, at this point I only have a couple of questions based on everything that's gone on so far. 963 CROSS-EXAMINATION BY MR. MORAN: 964 MR. MORAN: Mr. Packer, as I understand it, the delivery point for system gas is Parkway, right? 965 MR. PACKER: Not necessarily. 966 MR. MORAN: Not necessarily. There were other delivery points for system gas. 967 MR. PACKER: Our portfolio is made up of a number of U.S. transportation routes. Some of that gas arrives at Parkway, some of it arrives at Dawn. 968 MR. MORAN: All right. With respect to the direct purchase gas, is the delivery point always Parkway for delivery point purchase. 969 MR. PACKER: No. 970 MR. MORAN: If it's not Parkway, is there always a DCC paid for that? 971 MR. PACKER: Yes, and that was always recognized in our proposal of EBRO 499. It's a system benefit related to storage and transportation. One of the considerations was that we didn't want to inhibit the entry of U.S.-sourced gas. 972 MR. MORAN: And the system benefit being -- 973 MR. PACKER: Storage. 974 MR. MORAN: And is there a similar system benefit with respect to system gas? 975 MR. PACKER: I don't differentiate -- the benefit is derived from gas arriving in a particular place and time where you can count on it. So there's no difference between a direct purchase supply landing at a particular point and system gas arriving at the same point. 976 MR. MORAN: Right. So there might be avoided facility costs associated with other kinds of gas in other words, right? 977 MR. PACKER: Yes. 978 MR. MORAN: With respect to the failure to balance charge which you've been asked numerous questions, I just have a couple of follow-up items. As I understand the main rationale for the request, it changes to bring some discipline to the process to create a disincentive, in other words, so that people will be less likely to balance outside of the 4 percent variance, right? That's the overall rationale. 979 MR. PACKER: There's really two aspects to it. There's an intent to try to drive some discipline, and the other being that discipline isn't present, then those customers could cause other customers' costs to go up as a result of that. 980 MR. MORAN: Right. And as I understands part of your evidence as well, typically the decision not to balance within the 4 percent variance is one that appears to be an intentional business decision? 981 MR. PACKER: Right. Parties should be aiming towards zero. The reason there's a 4 percent tolerance is to handle those things that come up at the last minute. Our experience, when we started communicating to customers that we would need to change our methodology, was that they were advising us that they wouldn't be balancing to within 4 percent because it wasn't economic for them to do so relative to what they thought our charges would be. 982 MR. MORAN: So typically it's an intentional decision that's based on a business decision; is that right? 983 MR. PACKER: I would think generally yes, that's true. 984 MR. MORAN: So to the extent that that somebody makes that kind of a decision and then later on, after the fact, you propose to increase the charge retroactively, how does that bring discipline or create a disincentive as opposed to what would happen going forward? 985 MR. PACKER: When customers -- what was happening is people were calling in saying, I don't like the price I'd have to pay to buy gas to bring it to balance. What were your charges going to be? Our initial response to that is under the terms of the contract that you signed, you have an obligation to balance so you shouldn't be trying to determine what the economic outcomes of each approach would be. When they pushed more to ask, well, what is your -- how will it be calculated, we advised them that the old methodology was our average cost of spot and a quarter, but that we would be looking and seeking the Board's endorsement to change that so that it wouldn't be advantageous for them to rely on us to balance. 986 I take issue with your characterization that it was retroactively. We were advising customers that, in our view, the Board would view it the same way we did, that it was inappropriate for someone to rely on us for balancing when they were a direct-purchase customer, and as a result of that we incurred additional costs that may be visited on other customers. 987 MR. MORAN: In one of the exhibits, 2.3, this is the letter from P. Barnett Construction Inc. I don't know if you've had a chance to review this letter or not. 988 MR. PACKER: I skimmed the letter; I'm not familiar with this particular account. 989 MR. MORAN: In looking through the letter, the suggestion that seems to come out of the letter is that as a result of the actual date that's involved? It's more difficult to balance when the date falls in the winter peaking time of year rather than a summer peaking time of year and there was some discussion about changing the balancing date requirement. How was that factored into this issue, given that it is more difficult to balance when prices are starting to climb, typically, in the wintertime? 990 MR. PACKER: Your assumption is that the customer has to balance in the last month their contract is due to expire. That's not the way I would view it. The customer -- 991 MR. MORAN: I'm just going on what's in the letter. It's not my assumption particularly. 992 MR. PACKER: The customer has the ability to bring in gas in the summer, regardless of when their contract expires, if they anticipate that they are going to be out of balance when their contract expires. Typically, the way the contract expiry date is defined is based on when the customer chose to go from system supply to direct purchase, so a lot of -- for a lot of reasons, it's driven by the customer's initial request to go direct purchase. 993 MR. MORAN: I just have one last question and that's with respect to the proposed changes to, for example, rate T-1 as we see it in Exhibit B, tab 14, appendix A. I wonder if you could just turn up page 5 of 5. 994 MR. PACKER: I have it. 995 MR. MORAN: In paragraph 2 under other services and charges on page 5 of 5. 996 MR. PACKER: Sorry. I'm sorry, I have the wrong 5 of 5. 997 MR. JACKSON: Was that tab 13? 998 MR. MORAN: Tab 14. 999 MR. PACKER: I have it. 1000 MR. MORAN: In paragraph 2 on page 5 of 5, under the services and charges, there's that language that was the subject of some discussion earlier on about diversion and what you are proposing to delete and so on. 1001 MR. PACKER: Yes. 1002 MR. MORAN: And this is just a follow-up for clarification. Given the questions and answers that we've already had on the record with respect to this issue, now that those sentences -- assume that those sentences have been taken out, and all that is left the two sentences, "the availability of the right to divert gas will be based on Union's ability to accommodate the diversion. Price to be charged for the right to divert shall be determined through negotiation." I wonder if you could just indicate what definition of divert you are using, given just those words left? 1003 MR. PACKER: I think the definition that I would use is a customer's request to take gas that they would otherwise be delivering to us and do something else with it. So, take gas that would have been coming in at Parkway, for example, and request that that gas not be delivered in a particular period of time and take that supply somewhere else. 1004 MR. MORAN: Is that what you would limit it to basically, just that concept alone? 1005 MR. PACKER: I think that covers off how I would view a diversion, yes. 1006 MR. MORAN: Thank you. Those are all my questions. 1007 Thank you, Mr. Chair. 1008 MR. JACKSON: Thank you. I wonder if you could just check that reference one time for me, tab 14; I did not find it there. 1009 MR. MORAN: Exhibit B, tab 14, appendix A. 1010 MR. JACKSON: Appendix A. Thank you. That's helpful. There are too many exhibits with just exactly five pages. Thank you for that, Mr. Moran. 1011 QUESTIONS FROM THE BOARD: 1012 MR. DOMINY: Mr. Packer, earlier today you were making reference to the material that was filed at the beginning of this proceeding, updates, and you referred to deferral account balances. I was wondering if you could just help me understand the difference, because you had talked about why you'd changed the way in which you were going to recover it and that, previously, you were concerned that the -- adding the balances on the gas cost together with the other deferral accounts would be too large for customer impact. So, I was looking at the reference, I think it's B, tab 13, page 1 of 2 updated addendum. That was filed at the beginning of this hearing. I'm taking it that the table at the bottom of that page which shows you the gas supply commodity rated deferral account balances which shows that there's a -- let's take M-2 as an example. There's a $35 credit in 1999-2000 then a $34 debit in 2001 and they sort of cancel each other out. Whereas previously in the evidence that had been filed, it showed that the -- there was a credit of about $23 if you added 1999 and 2000 together but a debit of another $70 for 2001. 1013 MR. PACKER: Right. 1014 MR. DOMINY: I was wondering if you could just give me a little bit of an explanation why there's this wide swing between the two numbers. 1015 MR. PACKER: At the time we filed our original deferral account disposition evidence, we weren't sure what the Board would do with our proposal and increase the commodity rate rider. 1016 If you looked at the top of page 16, you can see that that was our estimate at the time of what the charges would be if the commodity rate rider was increased. It's quite a difference between the 2001 balances on the -- on page 15 and on page 16. 1017 MR. DOMINY: Then how does one explain page 2 of 2, the updated addendum, which is the other purchased gas costs deferral account and there, the debit is something in the order of 93 million for 2001. How does that relate to the previous statement with regard to the gas supply commodity related deferral accounts having a more limited impact? Is that covered off by that? What I'm trying to say is, is the impact on the M-2 customer shown for 2001 on page 1 of the updated addendum the result of the $93 million shown on page 2. Is that what the effect -- the $93 million balance showing in 2001 calculates up into a $34 million -- $34 charge for M-2 -- a typical customer? 1018 MR. PACKER: In part. The deferral account balances shown on page 2 of the update total the $93.7 million. There are components in that total that we treat as delivery-related. Balancing would be one and flexibility would be another. Those are costs that we typically recover through deliver rates, so it's not -- whereas the per-customer impacts identified on the prior page are really restricted to the -- what's recovered in our commodity charges. The balances that shown up on page 2 have more than just what's in our commodity charge identified. 1019 MR. DOMINY: Okay. And earlier on you had told me that Union had spent about $13 or $13.50, I understood, for spot gas purchases they made in January of 2000. Was it -- 2001? 1020 MR. PACKER: 2001, yes. 1021 MR. DOMINY: Yes. But then you gave me some other numbers, I think you quoted 780 plus 150 and I didn't understand those 780 and 150 numbers. Could you explain to me what they are. 1022 MR. PACKER: The spot information I gave you, that was the cost related to our winter spot purchases. The other values I gave you were some information that had been filed on our gas supply evidence which showed what the cost to firm supply to Empress would have been. And the reason I added $1.50 is you'd have to transport it to the eastern zone and take the eastern-zone transportation toll and you add fuel to it. I was proxying that at $1.50. I was just trying to give you some sense of -- not only were our costs for spot fairly significant, but when you looked at what the customer would get charged for WACOG relative to our particular supply costs in that month, there's also a big difference between the two amounts. 1023 MR. DOMINY: So in other words, the -- I think it was $6, something like that, in the -- F.2.3 I think was the -- the letter that came in from Oxford, there was a number which said 15.5 minus six-point-something, and it was that difference which you were going again multiplying up by the 109,000 gJ to arrive at the charge that you were going to levy against them. The 6.14 was the WACOG at the time, was that -- 1024 MR. PACKER: That's correct. 1025 MR. DOMINY: And so what you're saying is it -- if you said: Well what were we paying for gas in those months on a firm basis, that was the 7.8 plus the 1.5. 1026 MR. PACKER: I don't want to mislead the Board. The 7.81 was a convenient way for me to describe that. It was an Empress price. Again, we had risk-management activities or something in there. Our cost may have been a little bit less and I wanted to give you a sense of what anybody buying firm gas at Empress for that month would have been paying. 1027 MR. DOMINY: The last question that comes out of it is, this is purely hypothetical, is supposing all they paid was the six point something dollars per gJ, that would -- and I was a system customer taking gas at that time. I would have been paying more for my gas for that month than the 6.8 because I'd be paying whatever the WACOG is and then subsequently you would be collecting from me a deferral account, if the Board were to approve it. 1028 MR. PACKER: That's correct, yes. 1029 MR. DOMINY: Okay. I think I understand what those numbers were intended to illustrate. Thank you. 1030 MR. JACKSON: Thank you, then. If there's no further matters? Mr. Penny, do you have one? 1031 MR. PENNY: Well, I have -- as much as I would like to let Mr. Packer go home after this ordeal, I do have one area of re-examination if the Board will permit the questions. 1032 MR. JACKSON: Yes, yes. Of course. 1033 RE-EXAMINATION BY MR. PENNY: 1034 MR. PENNY: It essentially all arises out of Mr. Ryder's cross-examination. 1035 Mr. Packer, I'm going to ask you some questions that relate to the DCC. You've said in response to questions from Mr. Ryder around paragraph 723 of the transcript that the payment of the delivery commitment credit avoided new facilities construction. And I wanted you to explain what new facilities the DCC avoided, historically. 1036 MR. PACKER: If we couldn't count on obligated deliveries arriving on our system, we would have had to construct a different -- sorry, additional facilities, transmission facilities between Dawn and Parkway. We would have also required more storage facilities to be able to lift that gas out of storage on a design day. It's really the combination of Dawn-Trafalgar storage and transmission facilities. 1037 MR. PENNY: And in the context of those same questions around the same area of the transcript, you referred to a benefit arising from obligated deliveries. What is that benefit? 1038 MR. PACKER: The benefit that obligated deliveries provide is a reduction in the amount of facilities we'd need to meet our firm obligations. So as a result of being able to rely on those obligated deliveries, we haven't built as much storage and transmission facilities to support our demands. 1039 MR. PENNY: And then you indicated that you had allocated the cost of the overall DCC payments on the basis of Dawn-Trafalgar design-day demand? 1040 MR. PACKER: That's correct, yes. 1041 MR. PENNY: You said that in answer to a question of Mr. Ryder's. First of all, what does that mean, and why do you allocate on the basis of design day demand. 1042 MR. PACKER: The reason we allocate on design-day demand is as a result of, it's design-day demand that drives requirements. So when you build facilities, most of the time the allocator is design day demand, and that is the allocator for Dawn-Trafalgar facilities. So we've allocated the costs associated with the delivery commitment credit the same way we would be allocating the facilities we would have needed to construct had we not had the ability to rely on those obligated deliveries. 1043 MR. PENNY: And who are the principle beneficiaries -- sorry. Who would be the principle beneficiaries of new facilities if there were no obligated deliveries? 1044 MR. PACKER: The principal users of those facilities would be general service M-2 customers. 1045 MR. PENNY: All right. Then, later in the transcript, I think around paragraph 733 and so on, Mr. Ryder had asked you some questions that related to -- you will recall to that bundle of material that Mr. Aiken had prepared. He took you to the allocated cost to T-3; it was roughly 1.5 million, and then a reduction in rates to T-3 of approximately 1.35 million. Do you recall that? 1046 MR. PACKER: Yes. 1047 MR. PENNY: And that resulted in a difference of $144,000, I think it was. 1048 MR. PACKER: Yes. 1049 MR. PENNY: And why did those numbers not match exactly? That is, the allocated cost of the DCC and the rate reduction of the DCC? 1050 MR. PACKER: Because the benefit that a customer of that class was providing is different than how the costs would have been allocated. So to the extent there was a difference between what was included in somebody's rate and the payment that we were providing to the customer, if the payment was greater, then they were providing more of a benefit to other customers or they were providing a disproportionate benefit to other customers. And the reverse would be true if the numbers were reversed. 1051 MR. PENNY: Now Mr. Ryder also suggested to you that there was no cost causality of that $144,000 because the DCC payments no longer existed and you disagreed. But I want to ask you to explain the basis of your disagreement. Why is it that -- to take that example, again, that that $144,000 net amount is still appropriately embedded in T-3 rates, in your view? 1052 MR. PACKER: Because the payment that was otherwise going to be provided to the rate class reflected the benefit that the customers were getting. The fact that we've proposed to reduce delivery rates doesn't change that benefit, and there is the $144,000 difference between the benefit that obligated deliveries provided from that class relative to the costs that were included in rates for that class. 1053 MR. PENNY: So if rates were reduced in relation to the DCC payments system not by the amount of the former DCC payments to a class but by an amount that was necessary to keep revenue to cost ratios near zero, would M-2, M-9 and T-3 customers be receiving a rate reduction that was more or less than the amount that they had received by way of DCC payment? 1054 MR. PACKER: They would be receiving a rate reduction that was more than the benefit their obligated deliveries provided. 1055 MR. PENNY: And similarly if M-4, M-7 and T-1 rates were reduced not by the amount that they were paid for the benefits resulting from their obligated delivery but by the amount that would hold their revenue to cost ratios to zero, would those rate classes are receiving more or less than what they were being paid way of the DCC? 1056 MR. PACKER: They would be paid less than their obligated deliveries provided to the system. 1057 MR. PENNY: And if rate reductions were done on the basis that I just outlined, would that reflect revenue neutrality to those rate classes? 1058 MR. PACKER: No. The way they we were perceiving or describing rate -- revenue neutrality was to offset the delivery rate by the amount we were paying through the DCC. 1059 MR. PENNY: And then in a discussion you had with Mr. Quinn, the issue arose as to whether any change in weather methodology would affect storage allocations to T-3, to the T-3 rate class. I believe you indicated that it would not, but you did not give an explanation for that at the time and I wonder if you would do that. 1060 MR. PACKER: Sure. I think there is two reasons why I gave that answer. The first one is our only T-3 customer, the only T-3 customer that exists in our system is a customer who signed a multi-year arrangement. In any event, there wouldn't be any impact on them as a result of that multi-year arrangement being in place. The second reason I gave that response is evident by our weather normalization methodology change evidence. The only rate classes that had a volume impact as a result of us implementing the new methodology were general service rate classes, M-2, rate 1 and 10, I believe. It was really for those reasons, the T-3 customer having a longer term contract with us and the fact that we were proposing to apply the new weather methodology to rate classes that didn't include M-9 or T-3. 1061 MR. PENNY: Mr. Packer, my final question, I think, arose from some questions that Mr. Vegh asked you about the C-1 rate change, and I simply wanted to clarify who are the customers who typically use the C-1 rate are they ex-franchise or in-franchise customers? 1062 MR. PACKER: The C-1 rate schedule, it's really an ex-franchise rate schedule, so for the most part, we don't get in-franchise customers within that rate schedule. The customers who contract for C-1 storage are primarily ex-franchise customers, either brokers, LDCs in the States. They are customers who may be more closely aligned geographically with storage in Michigan than storage in Ontario. 1063 MR. PENNY: All right. And just one more question, Mr. Packer, it related to the implementation plan, that is, your rate change implementation plan, and you had alluded to -- as a -- one of the concerns about adopting a -- one of your concerns about adopting a phased approach had to do with getting calls about rate changes during the fall when you're getting light-up requests, and I wonder if you could outline the reasons why that's a concern. 1064 MR. PACKER: Our experience has been that if -- regardless of whether you've explained to customers why there's a change on their bill, if you implement a rate change of this nature and have installments as a function of that, customers will call in every month. It's not just the first month and then they understand why it's there and they don't call in next month. To the extent that there's a collection through installments, they will call in every month that the installment is in place, so to the extent we don't recover all of the outstanding amounts in August, we definitely will be in the light-up season when the customers are calling in to talk about the installments. 1065 MR. PENNY: And why does that create a concern if customers are both calling about their bill and about lighting up their furnaces. 1066 MR. PACKER: It has the potential to just overload our system so that nobody can get through in a way that meets their needs. The worst case is people who want to have their furnace lit up can't get through or have to wait on the phone for periods of time longer than they would like to talk to us. 1067 MR. PENNY: Thank you Mr. Packer. 1068 Thank you, Mr. Chairman. Thank you for your patience. Those are all my questions 1069 MR. JACKSON: Thank you. And we will resume at 9:30 tomorrow morning and who we will see first. 1070 MR. PENNY: You will see Ms.Elliott and Mr. Horner together with Mr. Hemphill and Mr. Schoech. 1071 MR. JACKSON: Thank you very much, Mr. Penny. 1072 --- Whereupon the hearing adjourned at 4:25 p.m.