Rep: OEB Doc: 128Rh Rev: 0 ONTARIO ENERGY BOARD Volume: 4 April 09, 2002 BEFORE: M. JACKSON PRESIDING MEMBER G. DOMINY VICE CHAIR AND 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 PETER THOMPSON IGUA DAVID POCH GREEN ENERGY COALITION RANDY AIKEN LPMA & WGSPG AARON DETLOR 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 2 [30] EXAMINATION BY MR. PENNY: [42] CROSS-EXAMINATION BY MR. THOMPSON: [194] CROSS-EXAMINATION BY MR. RYDER: [420] CROSS-EXAMINATION BY MR. DETLOR: [499] CROSS-EXAMINATION BY MR. AIKEN: [547] CROSS-EXAMINATION BY MR. JANIGAN: [620] CROSS-EXAMINATION BY MR. BRETT: [734] CROSS-EXAMINATION BY MR. MORAN: [830] QUESTIONS FROM THE BOARD: [908] UNION GAS - PANEL 3 [948] EXAMINATION BY MR. PENNY: [953] CROSS-EXAMINATION BY MR. THOMPSON: [1081] CROSS-EXAMINATION BY MR. JANIGAN: [1149] QUESTIONS FROM THE BOARD: [1210] RE-EXAMINATION BY MR. PENNY: [1223] 9 EXHIBITS 10 EXHIBIT F.4.1: LETTER FROM MERITOR SUSPENSION SYSTEMS COMPANY [39] EXHIBIT F.4.2: PRICE CAP CALCULATION TABLE [145] EXHIBIT F.4.3: EXCERPT FROM UNION GAS'S REPLY SUBMISSIONS IN THE RP-1999-0017 CASE AND EXCERPT FROM TRANSCRIPT, VOLUME 1 [860] 11 UNDERTAKINGS 12 UNDERTAKING NO. G.4.1: TO PROVIDE UPDATE TO EXHIBIT B, TAB 13, SCHEDULE 1 [572] UNDERTAKING NO. G.4.2: TO PROVIDE UPDATE TO EXHIBIT B, TAB 15, SCHEDULE 2 [577] UNDERTAKING NO. G.4.3: TO PROVIDE IMPACT OF REDUCTION TO ONTARIO CAPITAL TAX [806] UNDERTAKING NO. G.4.4: TO PROVIDE UNION'S POSITION CALCULATED WITH REVISED GDP [897] 13 --- Upon commencing at 9:30 a.m. 14 MR. JACKSON: Good morning. Please be seated. 15 I'm getting some signals from the court reporters but I think that it should be working now here, and we have to have our system turned on apparently in order for them to properly hear in the other room. 16 Mr. Penny, have you some preliminary matters this morning? 17 MR. PENNY: I've just two this morning, Mr. Chairman. 18 PRELIMINARY MATTERS: 19 MR. PENNY: The first is that it was realized after the curriculum vitae were filed for the Union witnesses that we had used the copies from the last proceeding that was before you and so the -- a new bundle was filed, purely as an administrative matter, to have the right docket number on the upper right. So, you'll find that there's a second set. That's the only change, just to reflect the fact that they were filed in this proceeding rather than the enabling unbundling proceeding. 20 MR. JACKSON: Thank you for that. 21 MR. PENNY: The second preliminary matter I had, Mr. Chairman, was just a matter of clarification from a question that I asked Mr. Packer yesterday. It's really in the nature of, I suppose, a transcript-reference issue, but -- and perhaps this was obvious to everyone in the room except me, but I misspoke when I asked him a question about revenue-to-cost ratios and I had said that -- I had referred to the revenue-cost ratios to being zero. And, of course, what I meant was the change would be zero or that the revenue-cost ratio would be one. And I did ask Mr. Packer after the evidence was completed yesterday whether he understood the question as I intended it and he said he did. 22 So, I wonder if the -- with the indulgence of the Board, if we could treat that as an evidence correction; that I was asking whether the change could be -- to keep the revenue-to-cost ratio change at zero or otherwise close to one. 23 MR. JACKSON: Yes, Mr. Penny, I think we'll accept that, no trouble. 24 MR. PENNY: Thank you very much, sir. 25 As I indicated the other day, we -- and with the benefit of a discussion before the Board and with the parties, we re-arranged the order of panels to accommodate the availability of our non-Union witnesses. Based on a straw poll of cross-examination, it sounds like we won't have any trouble accommodating that schedule. But just to remind the Board, Messrs. Schoech and Hemphill would like to be finished today because they have other commitments back in Madison, Wisconsin. And Mr. Mintz has to catch a plane to Vancouver tomorrow afternoon, so we're hoping that he will be done by late morning or mid-day. 26 MR. JACKSON: Yes, we'll do our best, Mr. Penny. 27 MR. PENNY: Thank you, sir. 28 MR. JACKSON: For what we can do to control it. 29 MR. PENNY: So with that, I'll ask that the panel members come forward and be sworn. 30 UNION GAS - PANEL 2 31 P.ELLIOTT; Sworn 32 K.HORNER; Sworn 33 R.HEMPHILL; Sworn 34 P.SCHOECH; Sworn 35 MR. MORAN: Mr. Chair, just one preliminary matter. There's a letter from Meritor Suspension Systems Company, which I think should be filed and marked. 36 MR. JACKSON: Yes. 37 MR. MORAN: That would be F.4.1. 38 MR. JACKSON: Thank you, Mr. Moran. 39 EXHIBIT F.4.1: LETTER FROM MERITOR SUSPENSION SYSTEMS COMPANY 40 MR. JACKSON: Mr. Penny. 41 MR. PENNY: Thank you. 42 EXAMINATION BY MR. PENNY: 43 MR. PENNY: Ms. Elliott, let me start with you. You are currently and have been since 1999 the controller for Union Gas Limited. 44 MS. ELLIOTT: Yes that's correct. 45 MR. PENNY: And you've been with Union Gas since 1981. 46 MS. ELLIOTT: Yes, that's correct. 47 MR. PENNY: And you have held positions relating to audit, accounting systems, cost of service, rate design, and financial planning as well as your current position. 48 MS. ELLIOTT: Yes. 49 MR. PENNY: And there is a list of appearances before the Ontario Energy Board attached to your curriculum vitae. 50 MS. ELLIOTT: Yes, there is. 51 MR. PENNY: And you have most recently appeared before the Board in the 1999 matter, 17 proceeding, adopting the PBR plan? 52 MS. ELLIOTT: Yes, that's true. 53 MR. PENNY: And you were responsible for or either prepared or were responsible for the preparation of the financial and accounting evidence that's been filed in this proceeding? 54 MS. ELLIOTT: Yes. 55 MR. PENNY: And do you adopt that evidence? 56 MS. ELLIOTT: Yes, I do. 57 MR. PENNY: Mr. Horner, you are currently the manager of revenue and gas accounting for Union Gas? 58 MR. HORNER: That's correct. 59 MR. PENNY: And you've held various positions with Centra in financial planning, financial forecasts, and general accounting since 1993? 60 MR. HORNER: That's correct. 61 MR. PENNY: You assisted in the preparation of financial and accounting evidence generally, but specifically were responsible and involved in the preparation of evidence relating to the customer rebate charge deferral account? 62 MR. HORNER: That's right. 63 MR. PENNY: And do you adopt that evidence? 64 MR. HORNER: Yes. 65 MR. PENNY: Mr. Hemphill, you are currently a vice-president with Laurits Christensen Associates? 66 MR. HEMPHILL: That's correct. 67 MR. PENNY: And you have a Ph.D. from Ohio State University in resource economics and a master's degree from Indiana State University in economics? 68 MR. HEMPHILL: That's correct. 69 MR. PENNY: And a B.A. from Lewis University in business economics. 70 MR. HEMPHILL: That's correct. 71 MR. PENNY: You've held a number of positions but prior to your current position you were a senior economist with Laurits Christensen? 72 MR. HEMPHILL: Yes, I was. 73 MR. PENNY: You've been the director of resource strategies and -- as well as the director of electricity pricing for Niagara Mohawk Power Corporation? 74 MR. HEMPHILL: Yes. 75 MR. PENNY: You were the cofounder in 1985 for the Centre of Regulatory Studies. 76 MR. HEMPHILL: Yes, I was. 77 MR. PENNY: And you've been employed as an economist with the American Electric Power Service Corporation and the Illinois Commerce Commission. 78 MR. HEMPHILL: Yes, I was. 79 MR. PENNY: I understand that you specialize in the development of market-based -- in your professional career, you specialize in the development of market-based pricing products, incentive regulation programs, unbundling of products and services and other industry restructuring issues? 80 MR. HEMPHILL: That's accurate, yes. 81 MR. PENNY: You've published extensively and I won't go through that publication list, but you've published numerous papers on energy rates and pricing, energy restructuring, and energy regulation? 82 MR. HEMPHILL: That's correct. 83 MR. PENNY: And you've provided testimony and appeared previously before this Board in the PBR case. 84 MR. HEMPHILL: Yes, I did. 85 MR. PENNY: And you've also appeared in -- before other Tribunals on issues such as incentive regulation rates, pricing and other energy restructuring issues? 86 MR. HEMPHILL: That is correct. 87 MR. PENNY: And those appearances included evidence provided before the New York Public Service Commission? 88 MR. HEMPHILL: Yes. 89 MR. PENNY: The Pennsylvania Public Utility Commission? 90 MR. HEMPHILL: Yes. 91 MR. PENNY: And the Illinois Commerce Commission? 92 MR. HEMPHILL: That's correct. 93 MR. PENNY: And participated in the preparation of a report relating to the impact of tax changes on a price cap? 94 MR. HEMPHILL: Yes, I did. 95 MR. PENNY: And, most recently, as a result of information provided by some intervenors last week, you also prepared a brief report on the use of GDPPI periods to set the inflation factor in Union's price cap. 96 MR. HEMPHILL: That is correct. 97 MR. PENNY: And do you adopt that evidence? 98 MR. HEMPHILL: I do. 99 MR. PENNY: And Dr. Schoech, you are also a vice-president with Laurits Christensen Associates. 100 MR. SCHOECH: Yes, I am. 101 MR. PENNY: And you have a Ph.D. in economics from the University of Wisconsin? 102 MR. SCHOECH: Yes I do. 103 MR. PENNY: You got your MA in economics, also at the University of Wisconsin? 104 MR. SCHOECH: Yes. 105 MR. PENNY: And you have a BA from Northwestern University. 106 MR. SCHOECH: Yes. 107 MR. PENNY: You've held positions with Christensen & Associates as a senior economist? 108 MR. SCHOECH: Yes. 109 MR. PENNY: You were an economist with the U.S. Bureau of Census in 1984? 110 MR. SCHOECH: Yes. 111 MR. PENNY: And, in your professional practice, your expertise includes the analysis of productivity measurement, incentive regulation, and econometric cost assessment? 112 MR. SCHOECH: That's correct. 113 MR. PENNY: And you've conducted a variety of productivity studies for telecommunications, electric, natural gas and the postal industries? 114 MR. SCHOECH: That's correct. 115 MR. PENNY: And you advise clients regularly on issues relating to incentive regulation, particularly in the area of price-cap index specification and pricing flexibility. 116 MR. SCHOECH: Yes. 117 MR. PENNY: Your publication list includes a number of papers on productivity and pricing in both the telecommunications and the energy sectors. 118 MR. SCHOECH: Yes, that's right. 119 MR. PENNY: And you have filed testimony, not only before this Board but before the Federal Communications Commission. 120 MR. SCHOECH: Yes, I have. 121 MR. PENNY: And that evidence, in both cases, related to price cap regulation. 122 MR. SCHOECH: Yes. 123 MR. PENNY: You also assisted in and participated in the preparation of the -- both the report on the effective Ontario tax changes on the price cap. 124 MR. SCHOECH: Yes, I did. 125 MR. PENNY: And the choice of time periods for the calculation of the changes in the GDPPI. 126 MR. SCHOECH: Yes. 127 MR. PENNY: And do you adopt that evidence? 128 MR. SCHOECH: Yes, I do. 129 MR. PENNY: Now, Ms. Elliott, I had provided to the parties and the Board a schedule that was prepared by you. 130 Just before turning to that, the OEB determined that inflation should be determined annually in the PBR decision and adopted the use of an annual inflation escalator based on year-over-year growth using four quarters of actual data produced by StatsCan. The decision was released in July of 2001, and what quarters of GDPPI data from the year 2000 did the Board have available to it in -- at the time of the release of its decision? 131 MS. ELLIOTT: At the time the decision was released in July of 2001, the StatsCan information up to and including first quarter 2001 would have been released. So the Board would have had all four quarters of 2000 plus the first quarter of 2001 available. 132 MR. PENNY: And which quarters did the Board, in fact, use? 133 MS. ELLIOTT: The Board> used second quarter 2000 over second quarter 1999, and they referred to the reason they used that in the decision at paragraph 2.288. That would have been the most recent data available when the price cap was to be set if we had been in the customer review process in October. 134 MR. PENNY: And so what inflation factor did -- or what inflation periods from the GDPPI did Union use for the 2002 price cap calculation? 135 MS. ELLIOTT: To be consistent with the Board's decision, we continued from -- from the second quarter 2000 and used the second quarter 2001, and the year-over-year change between those two quarters was the information we used. 136 At the time we filed the information, we used the most recent second quarter 2001 data which was as released at the second quarter of 2000. 137 MR. PENNY: All right. Now, since Union filed its evidence in this matter, it's been -- there's been material provided by intervenors last week and on Thursday - I think it was Tuesday and Thursday of last week - that suggested -- appears to suggest that because the timing of the hearing to set 2002 rates is now into 2002, that the fourth quarter data for 2001 is available and therefore the fourth quarter change from 2001 over 2002 should be used to determine the inflation factor for the price cap. Do you agree? 138 MS. ELLIOTT: No, I don't. 139 MR. PENNY: Why not? 140 MS. ELLIOTT: If you were to change now to using the year-over-year change as at the fourth quarter, you would be excluding from the price cap calculation the two quarters for 2000, the third quarter and the fourth quarter information, and using the first, second, third, and fourth quarter information from 2001 for the 2002 price cap. And then when you went to do the 2003 rate change, we would be double-counting the third and fourth quarter from 2001 and adding to that the first and second quarter of 2002. 141 MR. PENNY: And the table that was passed out to the parties a moment ago, does that illustrate the point that you've just made? 142 MS. ELLIOTT: Yes, it does. The first section on that table is -- 143 MR. PENNY: Just a second. Mr. Chairman, could that be marked as the next exhibit, please. 144 MR. MORAN: That's F.4.2. 145 EXHIBIT F.4.2: PRICE CAP CALCULATION TABLE 146 MR. PENNY: Sorry, Ms. Elliott, to interrupt. Can you explain to the Board what's depicted in this schedule? 147 MS. ELLIOTT: The purpose of this table was really to illustrate what I've just said so that you can see the numbers in the first -- you'll see Union's position being the first six rows on that schedule. The 2001 price cap, the inflation factor in that price-cap calculation was calculated using the change from second quarter '99 to second quarter 2000. And on line 2 under the second quarter 2000, you'll see the 3.9 as the inflation factor, minus the productivity factor of 2.5, to give us a price cap of 1.4 and that was consistent with the Board's decision. 148 Moving across the page, the next calculation is the inflation factor for the 2002 price cap. At the time we filed the information, the second quarter 2001 GDPPI was 107.3. The change from second quarter 2001 -- sorry, the year-over-year change second quarter 2001 over second quarter 2000 produced a GDPPI or an inflation factor of 2.5. When we subtract the productivity of 2.5, we get a zero percent price cap for the year 2002. 149 We've added two columns to this and put in a forecast from DRI for first quarter and second quarter 2002. What you can see there is the GDPPI calculation of the inflation factor for 2003 rates, using the current forecast, would be a negative 2.1. When you subtract 2.5 from that, we would get a price cap of negative 4.6 in 2003. 150 MR. PENNY: And I take it the last column is for illustrative purposes only, to show how the issue would play out over the full term of the PBR. 151 MS. ELLIOTT: That's correct. What you will see is the cumulative impact over the three years of Union's position. 152 If you move down to the bottom of the page, you will see where there's a gap in the 2002 calculation by not using third quarter 2000 and fourth quarter 2000, and then you'll see where the double-counting of third quarter 2001 and fourth quarter 2001 takes place. The difference is the other parties' positions. Over the three years, the cumulative inflation factor would be 1.3 percent, whereas the actual inflation over the same period would have accumulated to 4.3 percent. 153 There's a $21-million variance between the positions here. 154 MR. PENNY: Now, Mr. Schoech and Mr. Hemphill, you prepared additional evidence on this suggestion that the quarter 4 data be used for the purposes of setting 2002 rates. Can you summarize your position on this issue? 155 MR. SCHOECH: Yes, our position is that the proper approach would be to consistently use the quarter 2-to-quarter 2 rate of change in the GDPPI for the duration of this plan. In other words, to use the approach that was adopted by Union. 156 The reason is, and I think the numbers show why, that if you take a look at the cumulative change in the GDPPI over the three-year period of time, it's going to increase -- or in the scenario, it increases from 100.8 to 105.2, or a cumulative increase of 4.3 percent. And our position is that you would like the cumulative inflation factor to track cumulative changes in the economy-wide prices. 157 Now, that accumulation is made up of a quarter-to-quarter change. And, if you take a look at the numbers that Ms. Elliott presented, you see that, by and large, the GDPPI increases quarter over quarter, but there are two quarters in which the GDPPI decreased; that is, when it went from quarter 2 of 2001 to quarter 3 of 2001, there was a decrease in the GDPPI and in quarter -- moving from quarter 3 of 2001 to quarter 4 of 2001, there was another decline in the GDPPI. 158 If the other approach is adopted for setting the inflation factor, namely, setting the inflation factor for 2002 based on the quarter 4-to-quarter 4 rate of growth, those two quarters where you see a decline in the GDPPI will be counted twice and the cumulative change in that inflation factor over a three-year period of time will only be 1.3 percent. 159 MR. PENNY: Thank you, Mr. Schoech. 160 Turning to the issue of Ontario tax, the OEB selected as the basis for the inflation factor in the price cap the Stats Canada Canadian-chain growth domestic product price index. Do corporate income taxes make up one of the elements directly measured by the GDPPI? 161 MR. SCHOECH: No, it is not one of the elements directly measured. The GDPPI is an index of the prices that make up -- the goods and services that make up gross domestic product; and those are goods and services sold to the household sector, goods and services sold to the governments, net exports, and then structures, buildings and equipment that are purchased by businesses for use in future periods. Those are the goods and services that make up the gross domestic product, and the GDPPI is an index of those prices and services. For that reason, no. 162 MR. PENNY: In your opinion, are the effects of changes in corporate income tax nevertheless reflected in the GDPPI? 163 MR. SCHOECH: Yes. 164 MR. PENNY: And how is that? 165 MR. SCHOECH: The reason is that the prices of the goods and services that the Canadian economy produces must cover the costs of the various taxes that are imposed on the Canadian economy and therefore changes in the taxes would be picked up in the changes in those prices of goods and services. 166 MR. PENNY: Now, Ontario has reduced its corporate income tax. What is your analysis of whether this would give rise or should give rise to a non-routine adjustment or whether it will be reflected in Union's price cap through the GDPPI? 167 MR. SCHOECH: Our position is it will be reflected in the inflation factor and that a non-routine adjustment should not be made. 168 MR. PENNY: And how do you deal with the fact that Ontario is only a portion, albeit a substantial portion, of the Canadian economy, whereas the GDPPI measures the national economy? 169 MR. SCHOECH: Well, I think one must recognize that Ontario is not the only province that's reducing its income taxes. It is also the case that other provinces are reducing theirs as well, and so economy-wide you are seeing provincial income taxes go down. The Board expressed some concern that economy-wide prices may not be reflective of Ontario prices, but the fact that all provincial taxes are decreasing should alleviate that concern. 170 MR. PENNY: Are you aware of any regulator involved in setting a price cap PBR mechanism that has allowed non-routine adjustments, either up or down, for general tax increases or decreases. State or federal. 171 MR. SCHOECH: No, we are not aware of any. In our review of the issue, we found three regulatory bodies that explicitly lay out guidelines that would exclude such adjustments. Those regulatory bodies are the United States Federal Communications Commission, the Canadian CRTC, and the California Public Utilities Commission. 172 MR. PENNY: And those are referenced in your report. 173 MR. SCHOECH: That's correct. 174 MR. PENNY: Now, the OEB, in its PBR decision, also expressed concern about a possible lag between the tax change and when the tax change would become reflected in GDPPI. What is your opinion on whether there would be a lag? 175 MR. HEMPHILL: It's very difficult to tell when you have an anticipated change in the cost of doing business, whether there will be a lead effect or a lag effect in terms of the changes in prices. A lead effect is where the business sees that -- it's known to them that there's going to be a change in the cost of doing business and they change the prices ahead of time. There are a number of examples of that. 176 One that was very famous several decades ago was where there was a known change in the cost of sugar because of something that happened. It's not necessary to get into the details, but everyone was alerted that sugar was going to go up and immediately there was a change in the price of candy. That was a lead effect. It was before the businesses actually experienced that cost change. 177 There can also be a lag effect, where once the change in the cost is realized, the prices are changed. So it varies by industry and by situation. 178 MR. PENNY: Now, are tax changes any different than any other factor affecting the GDPPI in connection with possible leads or lags? 179 MR. HEMPHILL: No, there can be lead effects or lag effects for any change that's anticipated, such as municipal taxes, would be one example. 180 MR. PENNY: And is it possible, in your opinion, to empirically measure any lead or lag effect with respect to corporate income tax changes with any reasonable degree of certainty? 181 MR. HEMPHILL: No, it's a very difficult undertaking to try to measure what that would be. 182 MR. PENNY: And even if you could measure a lead or lag effect and adjust for it and use a mechanism like a non-routine adjustment mechanism or Z-factor, what would you have to do in subsequent years? 183 MR. HEMPHILL: You would want to avoid the double-counting, given the fact that the tax effect is going to make its way through prices and it will show up in the GDPPI. If you made a non-routine adjustment in one year, you would have to back it out in subsequent years. 184 MR. PENNY: And, again, are you aware of any reasonably precise means of measuring how and when to back out a change like a corporate tax change out of the price cap mechanism in subsequent years to avoid that double effect? 185 MR. HEMPHILL: I'm not aware of any. 186 MR. PENNY: All right. Thank you. Thank you, Mr. Chairman, those are all my questions. 187 MR. JACKSON: Thank you, Mr. Penny. Is there any agreement as to who would like to question this panel first? 188 Mr. Warren, I see you're here this morning. 189 MR. WARREN: Mr. Chairman, the CAC's position on these issues will be largely articulated in argument. I may have a few questions but I'm going to defer to my older and better colleagues clustered in the back of the room, avoiding their obligations. 190 MR. JACKSON: Mr. Thompson, are you ready to proceed with this panel? 191 MR. THOMPSON: Sure, why not. 192 MR. JACKSON: -- Seeing there's no stampede to volunteer. 193 MR. THOMPSON: I'll volunteer. Why not, on the undertaking I can go again if I miss a topic. 194 CROSS-EXAMINATION BY MR. THOMPSON: 195 MR. THOMPSON: Good morning, panel. My name is Peter Thompson. I represent the Industrial Gas Users' Association. 196 MR. SCHOECH: Good morning. 197 MR. THOMPSON: Just give me a second to get set up here, if I might. 198 Let me start, if I could, with the price cap calculation issue. And in a nutshell, could you tell us, panel, the objective, in your view, of the inflation factor in the price cap calculation? 199 MR. SCHOECH: The objective is to adjust the price cap index. It's the measure of price changes that the Board has adopted to adjust rates from period to period. 200 MR. THOMPSON: And in this particular case, we had the Board set rates for a base year, 2000; would you agree? 201 MS. ELLIOTT: That's correct, yes. 202 MR. THOMPSON: And then in the Board's decision, it adopted the GDPPI as the inflation index to apply to increase those base rates in the year following the 2001 test year. 203 MS. ELLIOTT: The Board adopted the use of the GDPPI as the inflation factor for the price cap formula that had the result of increasing rates in 2001 over 2000 rates, yes. 204 MR. THOMPSON: And would it be fair to suggest that the objective, high-level objective of the formula is to produce, for the year following the base year, rates that will reflect, reasonably, increases in inflation, amongst other things? 205 MS. ELLIOTT: That's the result of the price cap formula, yes. It reflects the inflation factor less the productivity, and in this case we have a productivity factor of 2.5 percent, and the use of the inflation factor in the GDPPI. 206 MR. THOMPSON: Right. And the Board, in determining the inflation factor to be used in the formula for the purposes of setting 2001 rates, used a point-over-point estimate from Q2 of 1999 to Q2 of 2000; is that correct? 207 MS. ELLIOTT: That's correct. 208 MR. THOMPSON: Right. And it came out with an inflation escalator of 3.9 percent. 209 MS. ELLIOTT: Yes. 210 MR. THOMPSON: And now, with the benefit of hindsight, we can go back and look at that inflation allowance for 2001 compared to the annual average increase in GDPPI for 2001. Would you agree? We have the data now to assess whether that 3.9 was high or low for 2001. 211 MS. ELLIOTT: Well, the 3.9 used for 2001 was the actual inflation for the period ending second quarter 2000, and rather than using a forecast rate of inflation, the Board, in their decision, chose to use actual inflation rates on a lagged basis for the price cap, which in this case is second quarter 2001 over second quarter 2000. And that would capture the actual inflation for the period ending second quarter to you in the 2002 rates. 212 MR. THOMPSON: Well, I understand what they did, but I'd just like to start here by determining, if we could, who won or lost in the 2001 price cap calculation by comparing the 3.9 percent that the Board allowed to what we now know is the annual average increase in inflation for 2001. And to help you with that, if you'd look at Exhibit F.2.4, I think this gives us the numbers. 213 MS. ELLIOTT: I'm sorry, was that the exhibit I referred -- 214 MR. THOMPSON: That's the book of materials references for cross-examination Mr. Aiken circulated. 215 MS. ELLIOTT: I'm sorry, give me a minute to get that. 216 MR. PENNY: What page was that, Mr. Thompson? 217 MR. THOMPSON: It's at page 4, and you might just want to have handy page 90 of the Board's decision where the I-factor for 2001, the first year of the price cap, was 3.9 percent. Have you got all that paper, Ms. Elliott? 218 MS. ELLIOTT: Page 4 of Exhibit F.4.2 and page 90 of the Board's decision? 219 MR. THOMPSON: Yes. 220 MS. ELLIOTT: Yes. 221 MR. THOMPSON: And I guess the other document you might want to have in front of you, just to reconcile all of this is F.4.2. The document that was marked -- this is your chart. 222 MS. ELLIOTT: I have that, yes. 223 MR. THOMPSON: And what we have in this -- in Exhibit F.2.4 on page 4, as I understand it, are the GDPPI numbers, that's in the top part of the page, for 1999, 2002, and 2001 for each quarter. Do you see those numbers there? 224 MS. ELLIOTT: Yes, I do. 225 MR. THOMPSON: Okay. And in terms of the numbers for Q2, Q3, and Q4 of 1999, they appear to be -- reconcile with the numbers you show on Exhibit F.4.2. Would you agree? 226 MS. ELLIOTT: Yes, I've gone through the numbers and they match the numbers shown on F.4.2. 227 MR. THOMPSON: So these numbers are accurate, as far as you're concerned? 228 MS. ELLIOTT: Yes, they are. The only number I don't have the reference for is the first quarter of 1999. 229 MR. THOMPSON: Okay. Well, would you take that to be accurate, subject to check? 230 MS. ELLIOTT: Yes. 231 MR. THOMPSON: So, the numbers are showing, as I understand it, in the percentage change year-to-year column down below 2001 - do you see that? - a change of 1.1 percent on average for the year 2001 in actual GDPPI inflation factor. Would you take that number, subject to check? 232 MS. ELLIOTT: Yes, that's the quarter -- the year-over-year change at each quarter between 2001 and 2000. 233 MR. THOMPSON: Producing an annual average change from 2000 to 2001 of 1.1 percent. 234 MS. ELLIOTT: Yes. 235 MR. THOMPSON: Okay. And in the price cap that the Board awarded you for 2001, the increase for 2001 in inflation was 3.9 percent. 236 MS. ELLIOTT: That's correct, yes. 237 MR. THOMPSON: So compared to the annual average, the company got 2.8 percent more than 1.1 percent. That's just mathematics. 238 MR. SCHOECH: The difference between the two numbers, yes. 239 MR. THOMPSON: Okay. And if we were using the annual average change, just as a check on the 2001 price cap that you've calculated here in your table of $10,096,000; do you see that? 240 MS. ELLIOTT: That's the impact of the 3.9 percent inflation less the 2.5 percent productivity on our base revenues for 2001, yes. 241 MR. THOMPSON: But if we went through, in effect, truing up, for actual annual average, just as an illustration, we would have 1.1 percent in line 2; correct? 242 MS. ELLIOTT: Yes. 243 MR. THOMPSON: And then all the other -- we'd have 2.5, negative 2.5 in line 3? 244 MS. ELLIOTT: Yes. 245 MR. THOMPSON: And the difference between those would be negative 1.4 percent; correct? 246 MS. ELLIOTT: That's the math, yes. 247 MR. THOMPSON: And that would produce, I assume, a price cap reduction of $10,096,000? Again, that's mathematics. 248 MS. ELLIOTT: That's mathematics, yes. 249 MR. THOMPSON: And from that vantage point, I suggest we can see from the price cap of plus 1.4 percent in -- for 2001 rates, one could suggest the shareholders were winners by some $20 million, the difference between the two numbers. 250 MS. ELLIOTT: I'm not sure how you would conclude that the shareholders are winners as a result of the price cap calculation that went into rates in 2001. The costs of -- the costs that we encourage to provide service in 2001 would have offset that price increase. 251 MR. THOMPSON: Well, I'm suggesting that you got more than the annual average inflation factor measured by GDPPI for 2001. 252 MS. ELLIOTT: We used a higher rate of inflation in 2001 rates than the actual rate of inflation for 2001. That actual rate of inflation for 2001 will be factored into 2002 and 2003 rates. 253 MR. THOMPSON: All right. Well, the numbers show what they are but ratepayers are prepared to -- and have accepted, if you look at the settlement agreement at Article 8.1, I don't think you need to look this up, the ratepayers have accepted the 1.4 percent positive price cap for 2001; correct? 254 MS. ELLIOTT: Yes, that's correct. 255 MR. THOMPSON: But you could see that they might think they are a little bit behind in dollars, as a result of having done that. 256 So let's move to 2002. And the suggestion that I'm going to present to you as an alternative to this point-to-point business is to take the 2000 average GDPPI which, according to Exhibit F.2.4 is 104.6. would you take that subject to check? 257 MS. ELLIOTT: That's the calculation of the average -- 258 MR. THOMPSON: Average of GDPPI throughout 2000. 259 MS. ELLIOTT: It's the average gross domestic product for the year 2000 as a calculation of those four quarters, yes. 260 MR. THOMPSON: Well, comparing to what we used to do before, we used to, in cost of service, try and develop an estimate of an annual inflation factor by taking four quarters and averaging them, didn't we? 261 MS. ELLIOTT: We used to use an estimate of inflation factor. I don't think it was mathematically calculated. It would have been the DRI forecast of inflation for the forecast period. 262 MR. THOMPSON: But it was for 12 months. 263 MS. ELLIOTT: Yes. 264 MR. THOMPSON: Okay. So taking, then, what I suggest is the same type of number, the 104.6 for 2000 -- and it would appear from these numbers that the average for 2001 is 105.8; would you agree? 265 MS. ELLIOTT: It's the average gross domestic product for 2001, yes. 266 MR. THOMPSON: The annual average GDPPI for 2001. And if the objective of the exercise is to measure the change in the annual rate of inflation from 2000 to 2001, I suggest a reasonable measure of that is the difference between those two numbers which would be 1.2 percent. Would you take that, subject to change, subject to its mathematics? 267 MS. ELLIOTT: That's mathematics. That's the difference between the average gross domestic product for 2001 and the average gross domestic product for 2000. 268 MR. THOMPSON: Yes. And if we use that in the formula, we would then deduct 2.5 percent for productivity and have a price cap for 2002 which I make it to be negative 1.3 percent; is that the mathematics? 269 MS. ELLIOTT: That's the mathematics, but you are changing the methodology that was used and approved for the price cap plan. 270 MR. THOMPSON: Well, that may be a matter of argument. The methodology, I suggest, was one that was intended or -- I'll argue this, but if its purpose is to develop a reasonable estimate of the annual change in inflation from 2000 to 2001, is this not one way of doing it? 271 MS. ELLIOTT: I'm not sure that the Board's methodology was an attempt to provide an estimate. It is using the actual rate of inflation for a period and rolling it into a future period. And if we continue with that methodology, we, over a period of time, will capture the change in inflation over a similar period. 272 MR. THOMPSON: Well, just carrying through with the math, if the Board accepts this suggestion and finds that the use of the annual average is appropriate, then a negative 1.3 percent price cap translates into what, in terms of a dollar amount reduction? 273 MS. ELLIOTT: Negative 1.3 percent price reduction on a base revenue of $729,829,000 would be $9,487,000. 274 MR. THOMPSON: And if we use the annual-average approach, we're not missing any quarters. 275 MR. SCHOECH: I don't see how you would avoid missing any quarters if you transition from a procedure that's based on a quarter 2-to-quarter 2 basis to one that's based on an annual year-to-annual year basis. 276 Now, if you went all the way back to the beginning of the plan and suggested that the Board had specified the procedure incorrectly and that they should have specified it using this alternative formula, and that alternative formula was applied consistently throughout the plan, then you would be picking up all the quarters. 277 MR. THOMPSON: Well, you lose me there. If we're using all four quarters of 2000 for the purposes of determining the 2000 annual average and we're using all four quarters of 2001 for the purposes of determining the 2001 annual average, how are we missing any quarters? 278 MR. SCHOECH: For that one price change you're not missing any quarters. The problem -- 279 MR. THOMPSON: Thank you. 280 MR. SCHOECH: The problem -- what you're missing, though, to explain myself, what you're missing, though, is the cumulative effect, and whether you're missing quarters in kind of a cumulative effect of the price cap plan over the entire period, and that's what I meant by missing quarters. 281 MR. THOMPSON: All right. Well, let's just look in -- under your approach, you're forecasting, well, based on two quarters of actual -- this is Q3 2001 and Q4 2001 of GDPPI and two quarters of forecast, you're forecasting $33 million of rate reductions in 2003; is that -- 282 MS. ELLIOTT: That's correct, yes. 283 MR. THOMPSON: And the approach that I suggested, in effect, brings some of those rate reductions into account in 2002 rates. And my question of you is: Is there not a public interest in moving some of those forecasted 2003 rate reductions into 2002 where we've got all of these positive deferral account balances to recover from customers? 284 MR. SCHOECH: Well, one concern is if you were to switch the methodology to an annual average. I think the whole rate-making process is going to have to be moved back from what the Board originally intended because the numbers for -- the final numbers for 2002 aren't going to be available until I believe it's March of 2003, February or March of 2003. 285 MR. THOMPSON: Well, 2003 is yet to be negotiated; right? The 2003 customer review process hasn't started and the price cap for 2003 will be a matter of discussion in those negotiations. 286 MS. ELLIOTT: But those negotiations need to take place this summer and fall in order to have rates effective in January 1, 2003. We're playing some catch-up here in trying to get rates in place for 2001 and 2002, and changing the methodology, as you've suggested, to use an annual average would mean for 2003, we won't have the information until the end of February 2003. And we can't implement rates on that basis. We need to catch up with the January 1 effective date. 287 MR. THOMPSON: But these, as you point out in your exhibit, these numbers are forecast for -- 288 MS. ELLIOTT: They're forecast as we sit here today. By the time we're filing the 2003 customer review process, the second quarter 2002 information will be available on an actual basis. 289 MR. THOMPSON: And we'll then have third and fourth quarters on a forecast basis. So, we could take two actual and two forecast and develop an annual average for 2003. That wouldn't be a big problem. 290 MS. ELLIOTT: You are changing the parameters of the price cap plan, though. The price cap plan was approved using the -- a calculation of inflation that was based on actual information available from Stats Canada and, to make sure that it was available on a timely basis, in order to implement rates, we're using the second quarter 2000, second quarter 2001, and second quarter 2002 data. 291 MR. THOMPSON: Well, whether I'm changing it or simply modifying it in the public interest may -- is a matter of argument, but it's pretty clear you're stuck on this Q2, Q2, Q2 approach. 292 Just one final question in this area. The numbers in Exhibit F.4.2 on the percent change year to year suggest that the annual average increase from 1999 to 2000 was 3.7 percent. Is that the conclusion you draw from the 2000 line showing the 3.7? 293 MS. ELLIOTT: That's the calculation, yes. 294 MR. THOMPSON: And, in fact, you got the percentage increase to 2000, 3.9 percent, so even if we went back, as has been suggested, you still ended up with more in the 2001 rates than what the annual average change 1999 to 2000 would produce; correct? 295 MS. ELLIOTT: Well, you can see, quarter over quarter, the inflation rate for 2000 was around the 3.7 but it started out at the beginning of the year at a higher level and ended in the fourth quarter at 3.4. That will continue into 2001 and the result of that decreasing inflation is -- in 2001, you see much more volatility in the inflation rate around that average. 296 MR. THOMPSON: All right. Well, I'll move on. I think I have the numbers in the record to base -- on which to base my argument. 297 Let me then move to taxes. There are a couple of issues, as I understand it, where this change in taxes comes up and the first area, if I'm not mistaken, are with respect to pass-through adjustments, WACOG changes, issues 3.2 and 3.4, if I am not mistaken. And I'm looking at the settlement agreement where, in each of those clauses, I'm told Union used the Ontario income tax rate in effect during 2000 in the determination of the carrying costs of gas in inventory. Intervenors are of the view that the current Ontario income tax rate should be used for the calculation of the pass-through adjustments. Are you with me? 298 MS. ELLIOTT: Yes. 299 MR. THOMPSON: All right. Could you just, first of all, give us the dollar impact of using -- for the WACOG changes 2001, the income tax rate that intervenors say should be used? 300 MR. HORNER: In 2001, the rates would have -- pardon me, the flow-through impact for inventory carrying costs would have been $370,000 less. 301 MR. THOMPSON: All right. So the amount at issue in paragraph -- well, it's on page 6 of the settlement agreement, issue 3.2, is about $370,000? 302 MR. HORNER: That's correct. 303 MR. THOMPSON: And the amount in issue for paragraph 3.4 for 2002 is how much? 304 MR. HORNER: I believe the reduction for 2002 for inventory carrying costs would have been about $500,000 less. So the reduction would have been less than what Union's position is. 305 MR. THOMPSON: All right. So this would be an increase, then, in rates of $500,000; is that what you're saying? 306 MR. HORNER: That's correct. 307 MR. THOMPSON: Now, just explain to us, in 25 words or less, why, for pass-through amounts, the actual tax rate shouldn't be used? 308 MS. ELLIOTT: In the pass-through calculation, the only variable that we're passing through is the cost of gas. So we've left the volume at the level in approved rates and we've left the tax rate at the level of approved rates and only passed through the change in the cost of gas. 309 MR. THOMPSON: But I thought pass-throughs were to recover actuals. 310 MS. ELLIOTT: The pass-through is designed to recover the actual cost of gas, not the actual inventory carrying costs. If we were to use actuals, we could update volumes, price, and tax rates, and interest expenses. 311 MR. THOMPSON: Okay. And in terms of -- well, when we used to do it under the cost-of-service basis, we would actually do all that. Did we -- 312 MS. ELLIOTT: We would update -- we would forecast inventory carrying costs, so we would forecast the volume, the cost of gas, the interest rate, and the tax rate in doing the calculation and the rate of return. 313 MR. THOMPSON: And did the Board address this in its decision as to whether you stick with the old parameters or whether they should be updated, whether it's tax rate volumes or whatever? 314 MS. ELLIOTT: I don't -- I can't recall that they specifically addressed the components. They approved our position, our proposal, which was to update for cost of gas, using the 1999 volumes. 315 MR. THOMPSON: All right. And just in terms of the settlement - I was involved in this but on the periphery - intervenors have accepted the volumes, have they? Is that your understanding? 316 MS. ELLIOTT: I don't believe there's an outstanding issue with respect to the volumes, no. 317 MR. THOMPSON: Okay, all right. Well, anyway, I have the amounts and I think that's really all I need to know about that issue. 318 The other aspect of taxes is, I believe, whether these amounts shown in -- I believe it's tab 15 -- Exhibit B, tab 15, should or should not be credited to the revenue requirement. Just to get the numbers in the record, am I -- and I'm looking at Exhibit B, tab 15, schedule 2, page 1 of 2, that the change in income tax there appears to be $1,732,000, and that's for 2001; is that correct? 319 MS. ELLIOTT: That's correct. 320 MR. THOMPSON: And then for 2002, the amount, based on the lower provincial rates, is $3,385,000; is that correct? 321 MS. ELLIOTT: That's correct, yes. And that also is the cumulative effect of the 2001 reductions as well as the 2002. 322 MR. THOMPSON: Sorry, run that -- 323 MS. ELLIOTT: Sorry, if you make the change in 2001, you would reduce rates by $1.7 million. If you make a further change, it would be 3.4, less 1.7. 324 MR. THOMPSON: I think I understand that. So are you saying, then, that if the Board flows through the 1.7 in 2001 rates, the amount to be flowed through in 2002 rates is 3.385 minus 1.7? 325 MS. ELLIOTT: Yes. 326 MR. THOMPSON: Then just a question of clarification. Exhibit B, tab 15, schedule 1, these changes you're showing in lines 1 and 2, the amounts we've just discussed, and then in lines 3, 4, and 5, you're showing deferral account-related impacts. Could you just explain those to us, please. 327 MS. ELLIOTT: What happens on deferral accounts is that for calculation of income taxes in the year, cost of gas is deducted at the actual cash cost, so to the extent that we paid more for our gas than we had included in rates, we will get a tax deduction for that higher cost. So the deduction will come at the rate in effect at the time. And then when we pay the taxes in the following year, when we recover the balance, we will pay the taxes, in this case, at a lower rate. 328 So there's a timing difference on the deferral account balances as to when the tax -- when the tax is paid and when we get the credit for it and that's what these differences are. 329 MR. THOMPSON: So if the Board finds that these tax changes should be taken into account in determining revenue requirement in 2001 and 2002, these deferral account adjustments will follow; do I understand that correctly? Or does the Board have to make a specific finding with respect to those line items? 330 MS. ELLIOTT: There would have to be a separate finding in terms of the accounting for the tax change on the deferral accounts. 331 There are two separate things here. The rates in place today are based on tax rates that were in effect in 2000, so to find that those rates should be updated for the actual tax rate for 2001 and 2002 would reduce the company's rates and the revenue associated with those. The taxes paid on the deferral accounts are a separate item and would need to be dealt with separately. 332 MR. THOMPSON: Assuming the Board finds that the taxes should be flowed through, is the way I describe it, what's the nature of the finding they have to make with respect to deferral accounts? What do they have to say to make sure that those changes are brought into account? 333 MS. ELLIOTT: I haven't completely thought about the language, but I would think it would be in the context of the deferral account disposition that it would have to be -- 334 MR. THOMPSON: Updated? 335 MS. ELLIOTT: Updated for taxes, yes. 336 MR. THOMPSON: All right, thanks. 337 Now, the rationale for not taking these into account, in 25 words or less, is what, again? They're somehow captured? 338 MS. ELLIOTT: Again, it's our position that the changes in the tax rates are captured in the GDPPI and will be reflected in the price cap. 339 MR. THOMPSON: But we've been told that taxes are not a component part of the GDPPI. 340 MS. ELLIOTT: No, we were told that they weren't directly a component part of the GDPPI. But they are a part in that they make up the prices of the goods and services included in the baskets. 341 MR. THOMPSON: Yeah, well, the word that was used was they are "reflected" in the GDPPI. What does "reflected" mean? 342 MR. SCHOECH: What reflected means is that the prices -- take for example an automobile that someone purchases. The price of that automobile must cover the cost that Ford Motor Company or whoever incurs in producing that automobile, and those costs include taxes. So what we mean by reflected is that it's implicitly part of that price. So since the price of the automobile is going into the GDPPI, the tax is implicitly part of the GDPPI as well. 343 MR. THOMPSON: We're talking here about corporate income tax. This is not GST or -- it's not sales tax; right? 344 MR. SCHOECH: Correct, yes. I'm assuming Ford pays corporate income taxes. 345 MR. THOMPSON: Well, you never know in Canada. 346 But is there any hard evidence to show to what extent these taxes are reflected in prices or when they get reflected in prices? Or is all we have is your statement that they will be reflected? 347 MR. SCHOECH: Well, our statement is supported by what we found in our basic economics textbooks when we were going through school, I think, is the basis of that claim. 348 MR. THOMPSON: Do we have any hard evidence as to the timing of when they are reflected? You talked about some cases, the market anticipating, and in some cases there being a lag. It sounds pretty wishy-washy in terms of when all this might happen, as far as I was concerned. Is it wishy-washy? 349 MR. HEMPHILL: No, it's not wishy-washy. First of all, you said in some cases, anticipated; in some cases, a lag. The terminology is that it's an anticipated change so it's something that the businesses know is going to happen. Then it depends on the industry and the type of business as to whether it's passed through on a lead -- has a lead effect in terms of being passed through on prices or passed through with some type of lag. But one thing that is pretty well accepted is that taxes do get passed through to prices, and because of that they'd be reflected in the GDPPI. 350 MR. THOMPSON: Well, pretty tough to cross-examine on this one, but let's go to the non-routine adjustment category. This is the Board's decision, starting at, I believe -- I have it starting at page 96. And if we look at page 98, paragraph 2.324; do you see that, Ms. Elliott? Do you have that? 351 MS. ELLIOTT: I have that, yes. 352 MR. THOMPSON: This specifies criteria for the area of non-routine costs. First, the expense is clearly outside the base upon which rates were derived. These tax reductions would satisfy that criteria; would you agree? 353 MS. ELLIOTT: Yes, these tax reductions are outside the base rates of 2000. 354 MR. THOMPSON: The second criteria is that the cost is material. Would you agree that anything more than $1.5 million dollars is material? 355 MS. ELLIOTT: Yes, that is our position. 356 MR. THOMPSON: And if it's material, then it would have, I suggest, a significant influence on the company's operation; would you agree? 357 MS. ELLIOTT: Yes. 358 MR. THOMPSON: The third criterion is that the costs must be attributable to some event outside management's ability to control. Would you agree that these reductions are outside management's control? 359 MS. ELLIOTT: Yes. 360 MR. THOMPSON: And finally, that these costs must have been prudently incurred. So these reduced costs have been prudently incurred? Taxes are prudent costs. 361 MS. ELLIOTT: Yes, but I think you're still excluding from that definition the fact that the price cap and the price cap formula is based on a rate of inflation, and using an actual rate of inflation will capture the changes in the tax rates. So, on that basis, they don't qualify for a non-routine adjustment. 362 MR. THOMPSON: Well, that's your argument, but the -- we can, I guess, figure out what 1.75 million is of the revenue requirement in terms of percentages, can we not? What is it for 2000 and 2001? We can do that by reference to that document we were referring to a few moments ago. 363 MS. ELLIOTT: We can take the 1.7 million as a percentage of the base revenue, but I wouldn't categorize the base revenue as our revenue requirement for the year. Under a price cap methodology, we aren't calculating a revenue requirement so that we don't have included in there all of the other costs that we're also managing during the year under the price cap formula. So, you've isolated the tax change as one component that has varied during the year on an actual basis and I don't disagree; it has dropped. But we are also managing other costs during 2001, costs that are increasing. 364 MR. THOMPSON: Well, you're missing my point. You tell us this tax change is captured in the GDPPI factor and that is producing in 2001 a $10 million -- well, in combination with the other price cap elements, a $10 million increase; right? So if it's caught up in GDPPI, as I think it's quite appropriate to express, the 1.7 million as the base revenue -- can you just give us that percentage so we'll have it for the record? 365 MS. ELLIOTT: As a percentage of base revenue for 2002, the base revenue being the $729,829,000, the tax rate change of $1,732,000 would be .2 percent. 366 MR. THOMPSON: Thank you. Let's just move to -- oh, yes. I'll move on to another topic here with this Panel of changes to deferred customer rebates charges deferral account. That's issue 11.2 and that's your baby, is it, Mr. Horner? 367 MR. HORNER: Yes, it is. 368 MR. THOMPSON: Okay. And I think we find this described in the settlement agreement briefly at page 21, under 11.2, where you say: "Union is proposing to modify the operation of the deferred customer rebates charges deferral account to collect" -- sorry -- "to include uncollected deferred charges in the event that a customer is financially unable to pay the deferred charge after following normal collection recourse." 369 Could you just explain what you're trying to capture there? 370 MR. HORNER: What we're trying to capture -- well, let me back up a minute. The reason that -- there's really two primary reasons why we're looking to modify the operation of this account. One is that, unlike prior year's deferral disposition, we're looking to dispose of the accumulation of three years of deferred customer charges -- deferred charges. Secondly, given the significant volatility in the gas prices, there's been some significant amounts that have been collected and are gas supply deferral accounts. 371 Given these two items, it's increased the risk to Union Gas of not collecting these deferred charges that have accumulated due to certain customers' ability to actually pay for these costs or, sorry, pay these charges. 372 MR. THOMPSON: So you are really setting up a -- you're trying to add to this deferral account some protection for the risk of bad debt; is that correct? 373 MR. HORNER: What we're really looking at here are, specifically, only those customers who show proof that -- of their insolvency. So I wouldn't consider it similar to what is normally captured in Union's bad debt charge. 374 MR. THOMPSON: Well, why wouldn't you? What you're saying, in effect, if we send out a bill for these deferred charges and it doesn't get paid, we want to add the unpaid amount to this deferral account. 375 MR. HORNER: Like I say, currently that amount would get captured in Union's bad debt. Now, what we're recommending is that, as I mentioned previously, given the delay in the collection of these deferred charges, the accumulation of the three years, and the size of these -- some of these deferred debits, that Union is assuming a much higher risk of non-collection than we would normally otherwise face. 376 MR. THOMPSON: Well, what's your rate of return to compensate you for it? Don't you have risks associated with bad debt wrapped up in your overall rate of return? 377 MS. ELLIOTT: This isn't what I consider to be a normal bad-debt expense, and, yes, bad-debt expense is one of the company's risks that would be taken into account when the rate of return was established. But in this case, we don't have, at the present time, the authorization to bill these customers these charges, so on that basis, we don't actually have the ability to manage the bad-debt risk. 378 So if we had warning signals of a customer who was showing financial difficulty, we would make appropriate arrangements with that customer to collect their accounts. But we can only do that to the extent the accounts and the charges have been authorized. 379 In this case, we're dealing with charges from deferral accounts that haven't been approved and haven't been authorized and too, we run the risk of, in fact, sending that charge to a customer. Following the normal collection practices, the customer files for bankruptcy or goes into receivership or some other proof of insolvency; we're asking for the ability to put that charge from the deferral account into this account and collect it in a future period. 380 We don't expect this to be, in fact, an awful lot of cases. In fact, we hope it will be none. But in the event that there is that -- those circumstances, that isn't our normal bad-debt exposure. 381 MR. THOMPSON: Well, what's the forecast? You must have gone through a list of customers that might fall into this category, forecasted it. We know there's one out there that's facing a $1-million drafting charge. I saw a letter filed from Oxford somebody, is it? 382 MS. ELLIOTT: Oxford Automotive. And I would have to say that that is probably the primary candidate for this account, yes. 383 MR. THOMPSON: But even Oxford is only a million and non-routine adjustments have to meet a certain threshold. Have you got any forecast to suggest that this category of activity could possibly exceed a million and a half? 384 MS. ELLIOTT: This isn't a non-routine adjustment. This is a proposed change to an existing deferral account. The deferral account exists today and it has existed for some time. It collects charges in and rebates to customers where the amount is less than $10 or where we can't actually locate the customer. What we're asking for is an extension of this deferral account where we can locate the customer, but in fact that customer goes in -- shows evidence of financial insolvency and doesn't pay the amount owing. 385 MR. THOMPSON: My question was, have you developed a forecast of amounts that might fall into this category? 386 MS. ELLIOTT: Not specifically, beyond the million dollars for Oxford Automotive, no. 387 MR. THOMPSON: So this is the Oxford adjustment. 388 MS. ELLIOTT: This shows that the circumstances exist out there. Do I know of others? Not specifically by name, no. There is the potential. 389 MR. JACKSON: Mr. Thompson, would this be a convenient place to break? 390 MR. THOMPSON: I just have one other topic; it might take me five minutes if you want to get rid of me but I'm in your hands. Either way is fine. 391 MR. JACKSON: You make it enticing. Let's go on then. 392 MR. THOMPSON: The last topic on this panel's list is price cap calculation and that's a reference to issues 8.1 and 8.2. Just refresh my memory, what's this all about? 393 MR. PENNY: This is what you've already examined on. 394 MR. THOMPSON: No, sorry, change. It's another one, the application of any change in 2002 ROE formula to 2002 earnings sharing. Thank you, Mr. Penny, my Alzheimer's is getting to me. What's that one all about? 395 MS. ELLIOTT: Can you just refer me to the number and the agreement? 396 MR. THOMPSON: Yes, 2.2, is it? This is: "Parties agree to the input of the return on equity formula for earnings sharing will be determined using long Canada bond yields," and so on. 397 MS. ELLIOTT: The issue here is in our original application, we had proposed a change to the Board's formula for determining ROE. In the procedural order, the Board indicated that it would deal with that issue in a separate hearing at a later date. The outstanding issue here is we are continuing to, with our proposal, recommend that the 2002 earnings sharing calculation be based on the revised equity calculation, assuming that the Board deals with that issue and issues a decision in 2002. 398 MR. THOMPSON: All right. So if the Board changes rate of return in the separate proceeding that's been hived off, you're asking that the impact of that decision have effect for the purposes of determining 2002 earnings sharing? 399 MS. ELLIOTT: That's correct. 400 MR. THOMPSON: And you want to argue that in this case or in the rate of return case, or does it matter? 401 MR. PENNY: I think the company's position on that, Mr. Thompson, is we want to preserve our ability to take that position, either in the generic case or in the rate case that would consider it. We're not asking the Board to decide that issue in this case. 402 MR. THOMPSON: So it's a reservation of rights issue. 403 MR. PENNY: Yes, that's correct. 404 MR. THOMPSON: Thanks very much. Those are my questions. 405 MR. JACKSON: Thank you, Mr. Thompson. It's almost 11:00. We're going to break for 20 minutes, and would there be any objection to saying that we will sit until 12:15 just so we can have a bit of a run when we get back. 406 MR. PENNY: That's an excellent idea, Mr. Chairman. 407 MR. JACKSON: Good. So we will rise now until 11:20. 408 --- Recess taken at 11:00 a.m. 409 --- On resuming at 11:23 a.m. 410 MR. JACKSON: Please be seated. 411 Yes, are you ready, Mr. Moran? 412 MR. MORAN: Just a housekeeping matter. Mr. Millyard presented me with some updated evidence with respect to the DSM issue that's coming up. It appears that resolution of 90 percent of the issues that Mr. Neme would be dealing with have be settled. He'll still be coming to deal with the updated 10 percent but there is evidence available. 413 MR. JACKSON: Thank you. Shall we mark that and get it in? 414 MR. PENNY: It's really in the nature of an update to his earlier evidence. So, it's probably sufficient that it simply be attached -- and indeed I think you need the other evidence to understand it, so it might be better just to treat it as being a part of the exhibit number that his evidence has already been given. 415 MR. MORAN: I think that's right, Mr. Chair. 416 MR. PENNY: Just for the Board's information, Union will be filing the flip side of that, if you will, but some updated evidence of its own so that the record is consistent on the issues that will be resolved. Mr. Moran is right, I think most of the matters that were in dispute between the Green Energy Coalition and Union were resolved just in the past week, so we'll only be dealing in the evidence with -- I believe there's two issues that were not resolved, so we'll only need to deal with those two in the evidence. 417 MR. JACKSON: Thank you for that update. 418 Now, Mr. Ryder, are you on? 419 MR. RYDER: Yes, thank you, sir. 420 CROSS-EXAMINATION BY MR. RYDER: 421 MR. RYDER: Yes, my name is Ryder and I act for the City of Kitchener, which is a utility customer of Union. And I'd like to take a shot or two at the price cap calculation issue. 422 Panel, I take it the GDPPI is an actual figure which reflects actual changes in inflation. 423 MR. SCHOECH: Yes. I mean, the GDPPI is an index of prices, and Statistics Canada, when it releases the GDPPI, it would be the -- what prices were actually observed to be at a particular time period. 424 MR. RYDER: And from your interpretation of the Board's decision in 0017, do you see the GDPPI being used in the cap formula as a forecast of the I-factor for the year 2001? 425 MS. ELLIOTT: No, I don't think that it's a forecast of the inflation for the period, it's the actual inflation for the period. And that's the inflation rate that's been approved for use in the price cap formula. 426 MR. RYDER: But the period in question in that case was the calendar year 2001. 427 MS. ELLIOTT: In the Board's decision, they used the second quarter 2000 over 1999 for rates for calendar year 2001, yes. 428 MR. RYDER: Yes. And the hearing in that case was -- in which the evidence was heard, took place in June of 2000; didn't it, Ms. Elliott? 429 MS. ELLIOTT: That's true, yes. 430 MR. RYDER: And the Board used the second quarter data for 2000, as you say. 431 MS. ELLIOTT: The Board used the second quarter 2000 data because that's the data that would have been available if we had been on track for an October customer review process to set rates for 2001. 432 MR. RYDER: And they also used that data because it was the most recent evidence available at the time that the Board heard evidence. 433 MS. ELLIOTT: No, that evidence would not have been available in June of 2000. The second quarter 2000 GDP out of Statistics Canada would not have been released until the end of August. So it wasn't the most recent information available when we were in the hearing and it wasn't the most recent information when the decision was released. 434 MR. RYDER: Now, going to 2002, for this customer review process, what is the most recent GDPPI data available to us now? 435 MS. ELLIOTT: Available to us now, we have the fourth quarter of 2001. The most recent data available to us when we filed or when we were looking at the customer review process for 2002 was the second quarter 2001. 436 MR. RYDER: And based on the most recent available evidence to us now, I take it that the I-factor is minus 0.9 percent. 437 MS. ELLIOTT: If you use fourth quarter 2001 over fourth quarter 2000, the GDPPI would have been a negative .9 percent. 438 MR. RYDER: Now, Union's I-factor for the year 2002 is 2.5 percent; right? 439 MS. ELLIOTT: That's correct, yes. 440 MR. RYDER: And that takes into account data which aims, in second quarter 2001. 441 MS. ELLIOTT: That's correct, that's the change between second quarter 2001 and second quarter 2000, year-over-year, using the four quarters of information. 442 MR. RYDER: And looking at page 4 of Exhibit 2.4, Mr. Aiken's table, the inflation rate, tell me if I'm right in reading this, the inflation rate increases steadily until and including the second quarter 2001, and then thereafter decreases steadily. 443 MS. ELLIOTT: No. The inflation rate, if I look at page 4 of Exhibit F.2.4, first quarter 2001 is 3.8 -- sorry. That was first quarter 2000. Second quarter 2000 over 1999 would have been 3.9, and then it starts to decrease in third quarter 2000; it decreases again in fourth quarter 2000. 444 MR. RYDER: I was looking at the top set of numbers, which is not the inflation rate but the actual inflation is increasing steadily until the second quarter of 2001. 445 MR. SCHOECH: Let me correct you just a bit. The numbers at the -- in the top panel are not the inflation numbers but they are the price levels, the GDPPI levels. And I think that's the source of the confusion. And it is the case that the price levels increase from quarter to quarter, as you are suggesting, until you get to quarter 3 of 2001. 446 MR. RYDER: And then after the second quarter of 2001, the price levels steadily decline; is that correct? 447 MR. SCHOECH: They went down from 106.7 to 105.2 in quarter 3 of 2001, and then from quarter 3 to quarter 4, they go down from 105.2 to 104.5, if that's -- if I understand what you're asking. 448 MR. RYDER: Yes, so they steadily decline. 449 MR. SCHOECH: They decline for two quarters. 450 MR. RYDER: And the watershed, I take it -- 451 MR. SOMMERVILLE: Could I just get clarification on that? As I read page 4, I read quarter 1 of 2001 at 106.9 and then quarter 2 at 106.7; the following quarter at 105.2 and the fourth quarter at 104.5. Is that correct? 452 MR. SCHOECH: You caught me in a mistake. You're right. The numbers you listed are correct and there was a decline between quarter 1 and quarter 2 of 2001. 453 MR. SOMMERVILLE: Thank you kindly. 454 MR. RYDER: The events of September 11th, 2001, has that had any impact on price levels? 455 MR. HEMPHILL: I'm not aware of any impacts on the price levels. I'm not aware of any research that has shown that either. 456 MR. RYDER: Has it had an impact on the economy generally? 457 MR. HEMPHILL: Yes. Yes, it did have an immediate impact on the economy. 458 MR. RYDER: And what was that? 459 MR. HEMPHILL: The economy -- 460 MR. PENNY: Can I ask for clarification about which economy we're talking about here, Mr. Ryder, before we go on any further? 461 MR. RYDER: The Canadian economy. 462 MR. HEMPHILL: I'm sorry, I was speaking in terms of the American economy. I cannot speak in terms of the Canadian economy. 463 MR. RYDER: But in any event, when your numbers stop as of the second quarter of 2001, you don't take into account the impacts of events beyond that. Is that a fair statement? 464 MR. SCHOECH: I'm not sure what you mean, "take into account." What the calculation does is implement a formula that the Board laid out in its decision and we're taking into account the information for -- that's relevant for that calculation. 465 MR. RYDER: Well, let me ask you this, then: Your I-factor for 2002 is 2.5 percent, and do you have confidence that that will bear out to be the actual inflation, that that's an accurate forecast of inflation for the year 2002? 466 MS. ELLIOTT: I think I already indicated that that isn't a forecast of inflation for 2002, it is the actual inflation rate as at second quarter 2001 versus second quarter 2000. 467 MR. RYDER: Yes, I know that. But how will it bear out as a forecast? I mean, how close will that be, to your judgment, as to what the inflation will be for 2000? 468 MS. ELLIOTT: Sorry, we have evidence before us as to what the actual inflation was for 2001 and that's -- the negative .09 was the actual inflation rate for the year 2001 when you look at fourth quarter 2001 versus fourth quarter 2000. That isn't the methodology we're using for the price cap calculation. What we are using is the actual inflation rate for the period -- for 2001 that was the actual inflation rate for second quarter 2000 over second quarter 1999. 469 Continuing that methodology, we use the actual inflation for second quarter 2001 over 2000 of 2.5. Looking forward, it's likely that the inflation rate we'll be using in the 2003 customer review process will be something in the neighbourhood of a negative 2 percent. 470 MR. JACKSON: Mr. Ryder, you may be looking for some very brief answers confirming what you heard with respect to Mr. Thompson's cross-examination this morning, I'm not sure, and you're getting rather long answers and sort of the same ones I think we got this morning. So, I'm wondering how much do you need -- how far do you need to go in this before you are satisfied that you have enough for argument? 471 MR. RYDER: Well, I think I have enough for argument. I'd just like an acknowledgment. But I do agree that the panel's answers to me seem to be excessively long compared to the responsive way they answered Mr. Thompson. But with that -- 472 MR. PENNY: Maybe it has something to do with the question. 473 MR. JACKSON: Yes, and I do think they are trying to be helpful to you, Mr. Ryder. I think it's just a matter that some of us realize that, I think, the some evidence has been gone over again. 474 MR. RYDER: Let me go over the same evidence with respect to the Ontario tax deduction. 475 MR. JACKSON: Briefly, I hope. 476 MR. RYDER: The first tax reduction, when was the date of that, Ms. Elliott? 477 MS. ELLIOTT: If you look at the pre-filed evidence at Exhibit B, tab 15, page 1 of 8, the first income tax reduction was, say, effective May 2nd, 2000. 478 MR. RYDER: Then there's another one January 1st, 2001. 479 MS. ELLIOTT: There was a further reduction, January 1st, 2001. 480 MR. RYDER: All right. So the reduction in January 1st, 2001, that would not have been captured by the GDPPI numbers used by the Board when it fixed the inflation factor for 2001. 481 MS. ELLIOTT: Only to the extent that in the actual 2000 inflation, if there was -- had any impact, the announcement in May of 2000, to the extent that it had any impact on the inflation rate, it could have been captured but it's unlikely that the impact would be captured until 2001. 482 MR. RYDER: Yes. So the tax reduction of January 1st occurred after the second quarter of 2000 and that's why it's not likely that the second quarter 2000 picked it up. 483 MS. ELLIOTT: The announcement was made before second quarter was ended in 2000. The effective date was after second quarter 2000. 484 MR. RYDER: All right. So if it was picked up, it was picked up to a slight degree at best. 485 MS. ELLIOTT: Yes. 486 MR. RYDER: All right. Now, for 2002, are we dealing with a tax reduction implemented on October 1st, 2001? 487 MS. ELLIOTT: Yes, the original tax reduction planned for January 1, 2002 was moved ahead to October 1st, 2001. 488 MR. RYDER: Yes. And your proposed I-factor will be based on the second quarter of 2001. 489 MS. ELLIOTT: Yes, that's the calculation using second quarter 2001 information for 2002. 490 MR. RYDER: So, apart from some unquantifiable final amount, based on anticipation, your I-factor data won't capture the October 1st, '01 tax deduction? 491 MS. ELLIOTT: Yes, I'm not sure of the timing of the announcement of all of those changes but the effective date of the changes was after 2001. 492 MR. RYDER: All right. So, if the Board directed you to use fourth quarter GDPPI for 2002, that would, I take it, in your view, reflect the October 1st, '01 tax deduction? 493 MS. ELLIOTT: Yes. 494 MR. RYDER: Thank you. 495 Those are my questions, thank you. 496 MR. JACKSON: Thank you, Mr. Ryder. 497 MR. DETLOR: Good morning. Mr. Detlor for the Wholesale Group. 498 MR. JACKSON: Yes, Mr. Detlor. 499 CROSS-EXAMINATION BY MR. DETLOR: 500 MR. DETLOR: I just wanted to touch base with Ms. Elliott on some of the evidence she gave earlier, on her direct from Mr. Penny, when she referred to paragraph 2.288 of the decision. And, specifically, your comments at that time, Ms. Elliott, were that you wanted to be consistent with the Board's decision; do you recall that? 501 MS. ELLIOTT: Yes. 502 MR. DETLOR: I'd like to draw you to paragraph 2.247 of the Board's decision. 503 MR. JACKSON: Mr. Detlor, I wonder if we could just ask you -- we couldn't recall seeing you in this proceeding before. We're wondering, are you appearing as counsel for the Wholesale Group or a consultant thereto? 504 MR. DETLOR: That's correct. I was here for the majority of the settlement discussions, and Mr. King from our office, Power Budd, is unable to attend today. 505 MR. JACKSON: Thank you for enlightening the Board on that. You know there's no record of the settlement proceedings, do you? 506 MR. DETLOR: Yes, I do. 507 MR. JACKSON: Thank you. 508 MR. DETLOR: Sorry, then, to paragraph 2.247, which reads, for the record: "Lastly, as a forecast of the behaviour of the economy in the near future, the Board believes that more recent price index data series is superior to old price data. Therefore, the Board determines that reflecting a more current measure of inflation in the price cap is preferable to Union's fixed inflation factor approach." 509 Do you see that? 510 MS. ELLIOTT: Yes, I do. 511 MR. DETLOR: And do you still maintain your position that your use of the 2.5 figure is consistent with the Board's enunciation in 2.247 that it is a forecast of the behaviour of the economy? 512 MS. ELLIOTT: Well, in paragraph 2.247, the Board is looking at Union's proposal which was a fixed inflation rate for the period of the price cap for the PBR term. So what we had put in our evidence was a fixed rate of inflation over five years using the most recent forecast. And what the Board came back with was a decision that said more -- a better measure of inflation would be an annual -- a rate of inflation that varies annually, and chose to use the Stats Canada actual information to do that. So it's relative to our fixed price -- our fixed inflation approach that this paragraph is. 513 MR. DETLOR: Perhaps I will rephrase my question for you. 514 Do you agree that the use of the actual GDPPI index, as approved by the Board in their decision, is a forecast of the behaviour of the economy? 515 MS. ELLIOTT: It's a measure of inflation that's being used for the price cap as a proxy to an inflation forecast. 516 MR. DETLOR: Sorry, can you repeat that? 517 MS. ELLIOTT: Well, the inflation rate approved by the Board is an actual measure of inflation and it's being used in lieu of using a forecasted rate of inflation in the price cap formula. 518 MR. DETLOR: So you don't believe, then, that the -- what the Board is doing is forecasting that for the next year in using the GDPPI, despite the fact that they say at paragraph 2.24, as a forecast of the behaviour. 519 MR. PENNY: No, in fact, they say it's 2.247 where they say that, and if you look at the next paragraph, they say that they want to use year-over-year growth of actual data published by Statistics Canada. 520 MR. DETLOR: Sorry, I was referring back to the consistency of Ms. Elliott's approach with the Board in her earlier statement, that she was trying to be consistent with the Board's decision. 521 MS. ELLIOTT: The consistency referred to in the timing of the information when it's available and going forward, it's our hope to get to a point where we're filing applications to change rates effective January 1 in the summer and fall and on that basis, we are using the most current or the information available at the time of that filing. 522 MR. DETLOR: What we are doing now, is that setting the annual price cap index for the subsequent year, for the subsequent year to this one now; is that what we're doing right now? 523 MS. ELLIOTT: What we're doing right now is we are setting the rates in place for the current year, 2000. 524 MR. DETLOR: And what's your proposal for the year 2002 and specifically with respect to the price cap calculation. 525 MS. ELLIOTT: The proposal for 2002 is to use second quarter 2001 information which is the information that would have been available at the time of filing a 2002 customer review application in the fall of 2001. 526 MR. DETLOR: So what we are doing is, in effect, coming up with a price cap calculation for the subsequent year to this. 527 MS. ELLIOTT: At the present time, we're coming up with -- the price cap calculation under review is the calculation for the current year. We're playing a little catch-up here in order to get on track for 2003. For 2003, we will use the four quarters ending the second quarter 2002. 528 MR. DETLOR: And I would refer you to the decision, again, page 2 of the executive summary. 529 MR. PENNY: Mr. Chairman, this is surely -- putting propositions of argument to witnesses in the guise of cross-examination is, surely, not helpful to the fact-finding process. The decision says what it says and Mr. Detlor has the ability to argue what he wants based on his interpretation of what he thinks the Board meant, whether it's in the decision itself or in the executive summary. 530 MR. DETLOR: Mr. Chairman, there's obviously a disagreement between this party and Union with respect to the interpretation of the decision. And I'm simply trying and attempting to gain a better understanding of what their interpretation of the provisions relating to price cap calculation are. I've got two minutes of questioning on this particular point. 531 MR. JACKSON: Okay. Well, proceed carefully. I think if it's a matter of trying to understand their interpretation so that you know what to argue against, that's one thing; if it's trying to understand, perhaps, whether they were also confused and considered several different alternatives interpretations and then flipped a coin and picked one, that would be another thing. But I don't think there's very much uncertainty that I've heard yet about their interpretation of the Board's decision. 532 MR. DETLOR: Then perhaps, Mr. Chairman, directly to your point, then, Ms. Elliott, or to the panel more generally, after referring to the first paragraph on page 2 of the executive summary which starts off: "The Board finds that the I-factor" -- 533 MS. ELLIOTT: Yes. 534 MR. DETLOR: And then coming to some understanding, as the Chairman put it, as to why or how you got to your position of the understanding, I would simply ask the question whether or not this paragraph could be interpreted to mean that the most recent GDPPI data available at the time of the price cap calculation, whether or not that should be used. And if that's not your position, why not in terms of the interpretation of this provision and Mr. Chairman's direction on this point? 535 MS. ELLIOTT: Well, I don't think we took the direction from the executive summary. We took the direction from the decision itself. And within the decision itself, there are a number of points expanding on the executive summary. And when we look at the paragraph 2.288, the most recent data that would have been available, if prices had been set in October during the customer review process, was the second quarter 2000. And it's from there we used -- we continued to use that methodology, to use second quarter 2001, and we'll use second quarter 2002 to be sure to capture the impact of inflation for the three-year period. 536 MR. DETLOR: Thank you. Earlier on in the cross-examination of Mr. Thompson, you expressed, and I apologize for putting words in your mouth, but some difficulty with Mr. Thompson's suggestion that an average of the four quarters of GDPPI be used with respect to the calculation. Is that a fair survey or assessment of your position? 537 MS. ELLIOTT: I guess my concern is that that changes the methodology that was decided in the Board's -- that was in the Board's decision. The methodology that the Board decided was to use year-over-year changes, second quarter to second quarter. Had they decided to use an average over those four quarters, then they would have proceeded to use an average of the next four quarters. Again, the result would have been to capture the rate of inflation for all of the quarters in the three-year period. 538 MR. DETLOR: Thank you. 539 With respect to the changes in methodology, I would like to turn to the earnings sharing mechanism, and to begin with I need some clarification by either the Panel or counsel, and I'm referring now to the settlement agreement dated March 22nd, 2002, and in particular to item 2.2, 2002 adjustment. 540 MS. ELLIOTT: We have that. 541 MR. DETLOR: I just wanted to clarify because I listened to Mr. Thompson cross-examine Mr. Penny's comments with respect to this matter and I don't know if I take it from Mr. Penny that this is no longer a relevant issue of inquiry, given the hived-off proceeding, especially in the face of the page 5, the first full paragraph. And in there, the last sentence: "Accordingly, Union is seeking a decision from the Board in this proceeding regarding this issue." If we could perhaps get some clarification from the Panel or Mr. Penny. 542 MR. PENNY: Well, I'm not sure what the position of the intervenors is on what they want, but I explained to you this morning, Mr. Chairman, that Union is not seeking anything from the Board per se on this issue. What that sentence is intended to capture is simply that we are -- it's a reservation of rights issue, and if it's infelicitously drafted in that regard, I apologize. But it's decision is, if there's a decision at all, that we're open to making the argument that a change in the ROE should apply to the earnings sharing mechanism in future. But we're not seeking a decision with respect to whether -- to the merits of that position, we're only seeking to preserve our rights to take that position when that issue is resolved and we know what the Board has done with the generic ROE proceeding. 543 MR. DETLOR: Thank you, sir. Those are my questions. 544 MR. JACKSON: Thank you, Mr. Detlor. 545 Mr. Aiken, would you be next? 546 MR. AIKEN: Yes. 547 CROSS-EXAMINATION BY MR. AIKEN: 548 MR. AIKEN: My name is Randy Aiken. I represent the London Property Management Association. I'll have a few questions on income tax and GDPPI issues; however, most of my questions have been covered off by my predecessors here. 549 I want to start off -- if I could have you turn to Exhibit C.20.8. This is a response to the Wholesale Group. 550 This issue deals with the $900,000 reduction in income taxes that Union is not removing from base rates, is my understanding. 551 MS. ELLIOTT: That's correct. 552 MR. AIKEN: Could you turn up paragraph 2.169 in the Board decision. 553 I take it that you've not followed the intent of the Board in the removing of that $900,000. 554 MS. ELLIOTT: We have not removed the $900,000 from rates for 2001. The rationale for that, really, is the fact that the Board also asked in paragraph 2.3.1 that the tax rate changes for 2001 be tracked. So that $900,000 would get captured in the tracking of the tax rate changes going forward, because it's a 2001 change. So there was a small inconsistency between the decision to make the change in rates and to track the impact of that change. So it's tracked in the balances that I went over with Mr. Thompson. 555 MR. AIKEN: Okay. 556 Now, on footnote 2 of appendix C to the decision which is the numerical table of the Board's decision - I don't know if you need to look it up - it says that there is a reduction in fiscal 2000 of $1.9 million due to the reduction in the provincial income tax that took place on May 2nd. That's related to the reduction to, I believe, the tax rate was 14.5 percent, May 2nd of 2000. 557 My question is: I just want to confirm that this $900,000 that is separated out here by the Board was the annualization of that tax reduction, given that it was a tax reduction partway through the year 2000. Base rates were adjusted to reflect that. 558 MS. ELLIOTT: The $900,000 is the full-year impact of the tax rate change in 2000, yes. 559 MR. AIKEN: And if the tax rate change had happened on January 1st, 2000 rather than May 2nd, would you agree that the base rates in 2000 would have been adjusted by the full 2.8 million, the same figure? 560 MS. ELLIOTT: That's quite likely, yes. 561 MR. AIKEN: Moving to Exhibit B, tab 15, schedules 1, 2, and 3, I will be referring to them a number of times. You've indicated to me that the $900,000 was included in the figures that are shown on schedule 1; is that correct? 562 MS. ELLIOTT: That's correct, yes. 563 MR. AIKEN: Is there one specific number where they would be broken out of? 564 MS. ELLIOTT: No. The calculation of those numbers is found on schedules 2 and 3 and it really takes the effective tax rate in 2000 and compares it to the effective tax rate in 2001. So you would have to do that in two steps to get the impact of the 2000 change and then the impact of the 2001 change. 565 MR. AIKEN: Okay. Now, on tab 15, schedule 2, the first page, the tax rate for 2001, 13.63, I take it that's simply the weighted average of the January 1st tax rate and the change on October 1st. 566 MS. ELLIOTT: And the change in 2000, yes. It's the full-year impact of the 2000 change, the impact of the January 1st, 2001, change and the part-year impact of the change that was moved to October 2002. 567 MR. AIKEN: Yes. On Exhibit B, tab 15, schedule 3, could you undertake to provide an update to this schedule to provide the updated deferral account balances? I believe there was an update to tab 13, schedule 1, that would affect both the 2000 and 2001 deferral account balances and the subsequent tax calculations. 568 MS. ELLIOTT: Sorry, could you repeat that? You're asking for an update to schedule 3? 569 MR. AIKEN: Yes. If you'll note down under the footnotes, number 1(D) indicates that these numbers come from Exhibit B, tab 13, schedule 1. Now, that schedule has been updated, there's been a blue page update filed, and I believe the deferral account balance has gone from something like 160 million to 120 million or something in that neighbourhood. 570 MS. ELLIOTT: Okay. We can update this schedule. 571 MR. MORAN: That would be G.4.1, Mr. Chair. 572 UNDERTAKING NO. G.4.1: TO PROVIDE UPDATE TO EXHIBIT B, TAB 13, SCHEDULE 1 573 MR. JACKSON: Thank you. 574 MR. AIKEN: This is probably another undertaking but I think it's fairly simple. Tab 15, schedule 2, page 2, is the 2002 income tax or income statement effect on the tax rate. Would it be possible for you to alter the schedule slightly so that instead of comparing the 2002 tax rate with 2000, the difference was between 2002 and 2001, and what the impact that would have? In other words, instead of 14.83, I'm looking at substituting 13.63. 575 MS. ELLIOTT: We can do that calculation. 576 MR. MORAN: That would be G.4.2. 577 UNDERTAKING NO. G.4.2: TO PROVIDE UPDATE TO EXHIBIT B, TAB 15, SCHEDULE 2 578 MR. AIKEN: I'm going to move now to the GDPPI and I just have a few questions on it. 579 If you could reference page 5 of Exhibit F.2.4, that's the book of materials. There's a pattern here that I just want to bring to your attention and ask you to comment on. 580 The pattern is that, if we look at the second quarter 2001 number, it was available in August and then revised at the release of the third quarter data and that third quarter data was revised when the subsequent quarter data was available. Are you aware of whether this is a common practice for Stats Canada of releasing information and then providing an update or a revised number the following quarter? 581 MR. SCHOECH: Yes, Statistics Canada makes revisions to their reported numbers for each quarter in subsequent quarters. 582 MS. ELLIOTT: The final revision to that information, however, would be in May of the following year. So when they release the first quarter information. 583 MR. SCHOECH: I actually will correct you a bit on that. There actually can be revisions up to four years later. 584 MR. AIKEN: Thank you for that. 585 If we could turn to page 90 of the Board decision, and I'm looking at the table at the top where the Board shows the GDPPI numbers it has used in calculating the 2001 price index, price inflation rate. The second quarter number shown there is 104.7; it's in the second last column. Do you know if that is the original number or the revised number from Stats Canada? 586 MS. ELLIOTT: To my knowledge, that will be the number that was available at the time this decision was released. So it most likely would have gone through a revision. It was the information that was on their web site in July of 2001. It would have originally been released in May, the end of May, so it most likely would have gone through one revision. 587 MR. AIKEN: Actually, wouldn't it have been August? 588 MS. ELLIOTT: Sorry, August. It was August of 2000. So it had gone through several revisions by the time it was used here. 589 MR. AIKEN: When did Union file its price cap evidence? And I'm referring specifically to tab 9 of Exhibit B. 590 MS. ELLIOTT: The evidence in this proceeding? 591 MR. AIKEN: Yes. 592 MS. ELLIOTT: The date on my copy of the pre-filed is November 2001, so I'm going to have to say it was November or early December. 593 MR. AIKEN: Would you take, subject to check, that the evidence was dated November 30th? And that's a letter to Mr. Pudge from, I assume, Mr. Reghelini. Yes, it was -- 594 MS. ELLIOTT: I will, yes. 595 MR. AIKEN: If I could have you now turn to paragraph 2.772 of the Board decision. This deals with the time frame for the customer-review process. My question here deals with the timing of the availability of the GDPPI in August of each year, the second quarter number. 596 Could you take me through the bullet points at the bottom of page 205 and the top of page 206 and indicate where, within those bullet points, that GDPPI second quarter data is available? Maybe, just to be clear, on the -- the first bullet point at the top of page 206 talks about a report -- filing a report with the Board the first week of August. So I assume at that point in time, that would not include the inflation figure for the second quarter. 597 MS. ELLIOTT: No, that is correct. In the report that we would be filing in the first week of August, it would deal with the items that were filed in the late June information package. We would be filing in the end of June, early July, those items that have some judgment or would require some agreement, the non-routine adjustments, gas-cost changes. We wouldn't necessarily be updating those formulas that -- as part of the price cap. That information would be filed in the October package. 598 So this was written on the belief that the price cap was a formula and the factors put into the formula really were pre-determined and not going to be the subject of discussion. 599 MR. AIKEN: Okay, that leads me to my final question on this topic. 600 The second bullet point, the Board decision on the issues would be issued. When the Board issued its decision, would it have access to the GDPPI second quarter figure or in your scenario is that even relevant? It's not relevant to the October rates package. 601 MS. ELLIOTT: It's definitely relevant to the October rates package. I guess the decision, again, would be a decision on the issues and the agreements among parties. I believe this was written, again, with the idea that the price cap was a formula and the values put into the formula were not subject to the company's judgment. They were just simply mathematically calculated and the results would be available at the October -- in the October rate package. 602 MR. AIKEN: If I could have you now pull up your Exhibit F.4.2, it's the one you filed this morning. 603 MS. ELLIOTT: I have that. 604 MR. AIKEN: On line 2, I'm going over to the far right, the minus 2.1, I assume that's calculated as the 105.2 in the second quarter of 2002 versus the 107.3 which is the second quarter 2001. 605 MS. ELLIOTT: That's correct. 606 MR. AIKEN: Now, is it Union's position that going forward into the 2003 customer-review process, the inflation, the actual inflation factor will be based on the 107.3 even though that number has since been revised downwards? And you will see that revised number, the 106.8, on line 7. 607 MS. ELLIOTT: Yes, to the extent that we used the information that was available at the time of filing, which was the originally-issued second quarter number of 107.3, it would be that number we would have to use to compare the second quarter 2002 number against in order to capture all the cumulative impacts. If we changed and compared to a revised number, we would miss the impact of the revision. So, it would be our proposal that we would always compare to the number that was used in rates, even in the case where that number may have been subsequently revised by Stats Canada. 608 MR. AIKEN: Thank you, Mr. Chairman. Those are my questions. 609 MR. JACKSON: Thank you, Mr. Aiken. 610 Mr. Janigan is next. 611 MR. JANIGAN: Yes, I am, Mr. Chairman. 612 MR. JACKSON: Actually, looking at the time, I think that we'd only have a few minutes before we reach 12:15, so it might be appropriate to break for lunch. 613 Are there any other matters that need to be dealt with quickly before we leave? Good. Then we'll be back here at 1:30 and we'll start with Mr. Janigan. Thank you. 614 --- Luncheon recess taken at 12:12 p.m. 615 --- On resuming at 1:35 p.m. 616 MR. JACKSON: Please be seated. 617 Mr. Penny, we have a couple of small matters to talk to you about, but maybe I'll just give you notice of this because I think if, in the interest of finishing with this Panel and particularly those that have to travel, we should defer what we can defer for this afternoon. But perhaps you'd think about what your comments might be on the letter of Mr. Barnett -- Mr. Barnett, I'm sorry, asking for late intervenor status. We will take that up at some point either late today or tomorrow morning. 618 Okay. Mr. Janigan, then, you are on. 619 MR. JANIGAN: Yes, thank you, Mr. Chairman. 620 CROSS-EXAMINATION BY MR. JANIGAN: 621 MR. JANIGAN: I'd like to start, Panel, with the treatment of the income tax reductions, the provincial income tax reductions. And I'd like to put this question to the Panel: If you were designing a price cap reflecting ordinary utility business expenses, I presume that you would not include in expense a base rates that was known to cease during the operation of a price gap. 622 MR. JACKSON: Mr. Janigan, I think that perhaps you're not coming through as loudly as you could. 623 MR. JANIGAN: I will sit a little closer. 624 MR. JACKSON: Thank you. 625 MR. JANIGAN: I'm going to repeat the question. 626 Panel, if you were designing a price cap that reflect ordinary utility business expenses, I presume that you would not include an expense in base rates that was known to cease during the operation of the price cap. 627 MR. HEMPHILL: I'm not entirely sure what it is you're envisioning in terms of this cap, you know, how it's structured. 628 MR. JANIGAN: Let's say you were sitting in on a first instance to design a price cap and you wanted to see what was going to be put in base rates. If you had, for example, a lease that was expiring during the price cap, you wouldn't include all of the lease payments in base rates for all the years of the price cap if you knew that lease was going to expire after the first year of the price cap. 629 MR. HEMPHILL: Yes, I'm trying to be as most helpful as possible but one thing -- you talked about base rates. If you're talking about a cost of service in a cost-of-service approach, yeah, that's what a traditional rate-making process does. It determines what expenses are included and what expenses are not included. If a full year of expenses isn't included, that's a debatable item. You work through it and a decision is made as to what is included in base rates. 630 Trying to be even more helpful, if you're talking about an input price index, where you're -- which is a different type of index than what we have here, what you're identifying are those inputs and the prices of those inputs that directly affect the industry or the business that you're dealing with. And there, if you knew that that input would go away entirely at some time in the future, you would have to deal with that, yes. 631 MR. JANIGAN: And probably I should have been more specific, I would put myself at the very juncture when you are attempting to design the price cap and you are attempting to first fix the base rates that should go into that price cap, let's say for a period of five years, and if you knew the utility only had an expense in the first year that went away, you wouldn't put that in base rates for that entire five-year period, I would presume. 632 MR. HEMPHILL: If you knew that a particular expenditure that was included -- 633 MR. JANIGAN: In base rates in -- sorry, it was included in the revenue requirement now, but would go away during the price cap, you wouldn't include it in the base rates in the price cap. If you were sitting to design it -- if you were sitting down to design it -- 634 MR. HEMPHILL: It would depend when it was going away. Perhaps it would be debatable that an adjustment could be made later if that's something that is known. 635 MR. JANIGAN: Yes. 636 Now, in the event that you did not have the effect of the tax decreases on GDPPI and you knew in advance about the decreases to income tax expenses, would you not make those reductions from base rates? I'm leaving aside the question about the effect of income tax reductions on GDPPI. 637 MR. HEMPHILL: Here we're mixing approaches. I may yield to my colleague in a moment. It appears that your question is mixing approaches. Now you're talking about a price cap index using a -- 638 MR. JANIGAN: No, no, no. I'm still talking about base rates. And the exercise in advance of setting a price cap for those base rates is to ensure that you have the cost of service, all of the costs that are going to be subject to the price cap right, okay? 639 MR. HEMPHILL: For clearness, these are base rates that are being set. But is an index being applied to that in future years? 640 MR. JANIGAN: There will be an index applied to it in future years. 641 MR. HEMPHILL: Is it okay if I ask questions? 642 MR. JACKSON: Absolutely, to make sure that you understand it. 643 MR. HEMPHILL: And this index is based on a measure of inflation for the general economy, such as the GDPPI. 644 MR. JANIGAN: For the purpose of this question, I have asked you to take out the effect of the GDPPI on the particular measure of the income, the income tax reduction. In other words, to treat it like you would any other expense. 645 MR. PENNY: Through you, Mr. Chairman, does Mr. Janigan mean that there is no inflator in the price cap mechanism or we are just supposed to ignore its application for the purposes of this question? 646 MR. JANIGAN: Let's assume that you were going to apply a price cap with an inflator and then I'll take the exception out of it, if it makes it easier. 647 MR. HEMPHILL: If the inflator is based on a measure of inflation for the general economy, then there would be no need for the adjustment because the effects of the taxes would be included. 648 MR. JANIGAN: We've got that. 649 Now, if you did not have that effect upon the inflator and the income tax reduction was to be treated like any other expense, would you not adjust the cost of service going into the price cap to reflect the adjustments associated with income tax? 650 MR. SCHOECH: Well, the answer to that question would be yes. I think what you're talking about is analogous to a tax that was very specific to the industry and there, regardless of whether you're rolling the price cap forward using the GDPPI or not, that type of industry-specific tax wouldn't be picked up by other elements of the plan and it would be appropriate to make a non-routine adjustment. 651 MR. JANIGAN: And in this case, it's not fair to make any deduction from base rates because the income tax change will result in lower prices that will be reflected in the GDPPI and hence lower rates paid by the customers; is that, in essence, your point? 652 MR. SCHOECH: I think our point is that in the case of the income taxes, that changes in income taxes are picked up by the GDPPI component of the price cap plan and therefore to make a non-routine adjustment would enter into the area of double-counting the impact. 653 MR. JANIGAN: They're picked up in the GDPPI because of the lower prices in the economy resulting from the income tax change. 654 MR. SCHOECH: That's correct. 655 MR. JANIGAN: Okay. Now, the reason we have an inflation adjustment in the price cap formula is, presumably, to compensate the company for price increases or inflation in the general economy in which it has to operate; am I correct? 656 MR. SCHOECH: Well, that in combination with the X-factor. The idea was that when you take the increase in the GDPPI plus the input price differential component of the X-factor, that those two things in combination would address the in-price changes that Union would face during the price cap plan. Yes. 657 MR. JANIGAN: And the reason inflation is given to the company, in effect, it represents those elements of the economy, to some extent, that the company can't control. 658 MR. SCHOECH: Well, those increases in those prices would be out of the control of the company, yes. 659 MR. JANIGAN: Okay. Now, the fact that the GDPPI did not go up as much as it might, given the tax reduction, doesn't mean that the company is giving the ratepayers the benefit of that, does it? 660 MR. HEMPHILL: I don't see that at all. I believe that that's what the -- that's the importance of using a general inflationary measure. 661 MR. PENNY: Sorry, Mr. Janigan, would you please permit the witness the courtesy of answering the question you have asked. 662 MR. JANIGAN: I'm sorry. 663 MR. HEMPHILL: I'm finished. 664 MR. JANIGAN: The point I'm making is the company also gets the same benefit of the increase of the GDPPI in terms of the tax decrease, in terms of the products and services that it purchases. 665 MR. SCHOECH: Well, it is true that if there's a general tax decrease, then all companies would have that tax decrease, if that's what you're asking. 666 MR. JANIGAN: Yes. So on the one hand, the ratepayers get the benefit of the decrease in the GDPPI through all of the goods and services that are purchases, including gas from the company, and the company gets that same benefit in terms of their purchases from products and services that are purchases. 667 MR. SCHOECH: Well, the "benefit" that the company is receiving is the recovery of increases in input prices that it would be facing. 668 MR. JANIGAN: But it's also enjoying the benefit of lower prices in the economy in general as a result of the tax reduction. 669 MR. SCHOECH: I'm sorry, you're saying that Union benefits from the lower taxes in the economy because of the services that it provides? 670 MR. JANIGAN: Yes. 671 MR. SCHOECH: What Union benefits from would be any reduction in the input prices that it would include and that would include the input prices for any inputs they purchased from other firms, and also direct reductions in the income taxes. And all of those things combined are what the GDPPI and the input price differential component of the X-factor are designed to capture. 672 MR. JANIGAN: Well, under your scenario, the company also pockets the tax decreases as additional revenue. And this revenue is in no way due to productivity enhancements, is it? 673 MR. SCHOECH: I'm sorry, I'm not sure I follow the line of argument that you're raising. What will happen is that the prices that Union will pay for the inputs it purchases will be reduced in response to this tax reduction. It's also true that the input price component of the price cap formula will also go down. So on that, I don't -- I'm not sure I understand your argument about there being an extra benefit that's showing up here. 674 MR. JANIGAN: Well, let's just look at that additional benefit. That additional benefit is -- comes, in our estimation, from the fact that you wish the entire amount of the reductions in income tax to attribute to the shareholder rather than the ratepayer. In other words, the money -- Union will be paying less money in income taxes and the benefits of that you'd wish to attribute to the shareholder, not to share with the ratepayer as provided in the RP-1999-0017 decision. 675 MR. SCHOECH: Well, all I follow is that if there were non-routine adjustments for the provincial income taxes, that the -- that that non-routine adjustment would lower rates and lead to lower revenues for Union were it the case that the Board decided not to make a non-routine adjustment. 676 MR. JANIGAN: Well, as a result of the income tax reductions, presumably the company will have more revenue, will it not? 677 MR. HEMPHILL: Not necessarily, because their revenues are driven by the price cap index which is based on the GDPPI which has the effects of the tax change in it. Therefore, I don't understand the argument that they are pocketing this, because our argument is that it is being adjusted along with the adjustment in the price cap index. 678 MR. JANIGAN: I'll leave that element for argument. 679 Can you -- I want to deal with another aspect of your argument. What are some of the economic ways in which a tax decrease may not be reflected in the GDPPI? 680 MR. PENNY: It may help if we know whether this is a general tax increase or decrease of general application or what tax it is you're talking about. 681 MR. JANIGAN: We'll assume it's the same kind of general tax decrease that we're talking about in this case. And it might help to say -- it might help if I said it might not be reflected or fully reflected on the GDPPI. 682 MR. SCHOECH: If you're asking what sorts of conditions would need to exist for it not to be reflected in the GDPPI, I believe we've indicated that if there was really no competition to speak of in the Canadian economy, then it could be the case that an input price decrease would not translate to an output price decrease, in other words, a GDPPI decrease. 683 MR. JANIGAN: So, circumstances of market failure or market dominance, patterns of capital re-investment, would that be some of the ways in which GDPPI might not be -- or a tax decrease might not be reflected in GDPPI? 684 MR. HEMPHILL: Economy-wide market failure. 685 MR. JANIGAN: And I assume in your analysis it's up to each company in the market to pass on the price decreases, otherwise the system doesn't work. 686 MR. HEMPHILL: If I could rephrase it. It's not up to each company to pass on, it's just something that naturally occurs within a competitive economy. 687 MR. JANIGAN: Can I find out how careful your search was for the U.S. jurisdictions in which general, state or federal income tax changes are treated as non-routine adjustments? Did you look at the site for every state commission or use a general search engine to look through to find out whether or not the income tax changes are treated as non-routine adjustments in any commissions? 688 MR. HEMPHILL: For every state or jurisdiction where we knew there was a price cap index that used a measure of inflation for the general economy as the driver, we did a search to see if it had arisen, if the issue had arisen regarding income taxes, and then looked to see what determination was made if that issue had arisen. 689 MR. JANIGAN: How many states would that have included? 690 MR. HEMPHILL: I would have to let you know that later. I don't have that information that we looked at. 691 MR. JANIGAN: Can you give me a general estimate? I don't want to have to give an undertaking if I don't have to. 692 MR. HEMPHILL: I agree. I'm thinking in the neighbourhood of maybe between 20 and 30. 693 MR. JANIGAN: Okay. I'd like to deal briefly with the change to deferred customer rebates and changes in the deferral accounts. 694 I take it that you would agree that if this was a circumstance where a new deferral account was being established, Union would be, in effect, taking costs from the PBR mechanism. 695 MS. ELLIOTT: No, I don't think that's the case. These aren't costs that the company -- this is not a bad-debt expense that the company's typically incurred as part of its cost of service. 696 MR. JANIGAN: I understand, though, that this is something in the past that would have been captured through bad debt. 697 MS. ELLIOTT: We haven't had these circumstances in the past, so had the circumstances occurred in prior years, we would have likely come forward with the mechanism at that time. 698 MR. JANIGAN: But you're, in effect, no longer taking the business risk associated with costs which may result if a customer is not financially able to pay after normal collection recourse; isn't that correct? 699 MS. ELLIOTT: What we've proposed manages the risk associated with the disposition of the deferral account balances only, not the normal business risk associated with failure to collect the customer's accounts. 700 MR. JANIGAN: Has Union taken any action to try to minimize risk in this area? 701 MS. ELLIOTT: I think you heard testimony yesterday of the actions that we've taken to inform customers about the charges that will be coming through to them from these deferral accounts in order to try to manage these charges and the risks associated with them. 702 MR. JANIGAN: And -- 703 MR. JACKSON: Are you thinking of the letter to Oxford, for example? Is that what you are thinking of? 704 MS. ELLIOTT: Yes. 705 MR. JACKSON: I thought those charges arose not from disposition of deferral accounts per se but from increases or changes to the manner in which Union charges for certain imbalance situations. 706 MS. ELLIOTT: The costs themselves are part of the deferral disposition. So to the extent that they are recovered from Oxford Automotive, they are not recovered from other customers. In doing that we've increased the risk of recovery of some of those amounts, so both issues are interrelated. 707 MR. JACKSON: I can see an interrelationship, but I think that the advice to Oxford would have perhaps related more to what you intended to charge for the imbalance situation; is that not correct? Or did you also write them with respect to disposition of deferral accounts? 708 MS. ELLIOTT: The action taken was an effort to avoid the customer incurring the charges in the first place, which would have avoided the risk to the utility for covering those charges. 709 MR. JACKSON: And the need to have to put those charges into a deferral account. 710 MS. ELLIOTT: Yes, that's correct. 711 MR. JACKSON: Okay, thank you. 712 MR. JANIGAN: And as I understand it, you're not suggesting that these changes amount to a non-routine adjustment to the price cap. 713 MR. SOMMERVILLE: I couldn't hear that, Mr. Janigan. 714 MR. JANIGAN: As I understand from your testimony this morning, you're not suggesting that these changes amount to a non-routine adjustment to the price cap. 715 MS. ELLIOTT: No. That's correct, we're not. 716 MR. JANIGAN: Finally, I don't think you need to turn it up. It's Exhibit C.39.35. Union indicates that it has not conducted an analysis on the lagged effect of the change in Ontario income tax rates tracked through the GDPPI; is that correct? 717 MR. HEMPHILL: That is correct. 718 MR. JANIGAN: And it would be speculative to suggest what that lag might be. Might it be as long as the three-year price cap? 719 MR. HEMPHILL: Well, first I agree it would be speculative. I could not say. There really has not been such an analysis done, to my knowledge. 720 MR. JANIGAN: Now, I take it that it's the most recent data from the GDPPI that would likely show the effect of any reductions in prices affected by changes to general taxes; would you agree with that? 721 The more recent the information, the more likely it is to reflect -- 722 MR. SCHOECH: The further you go into history, the more time has elapsed since the tax increase was made, and to the degree that there was a time lag, yes, the time lag would have elapsed. 723 MR. JANIGAN: I guess I'm wondering in that circumstance why Union hasn't proposed to use the latest GDPPI data so ratepayers at least can have some optimism that their price -- the prices will be tracked through the GDPPI. 724 MR. PENNY: Is that a question, Mr. Janigan, that you want an answer to, or is that a rhetorical question? 725 MR. JANIGAN: No, it's a question I'd like an answer to. 726 MR. JACKSON: It's actually a statement on which you would like a comment from the witnesses. 727 MR. JANIGAN: I would be happy with that characterization as well, Mr. Chairman. 728 MR. SCHOECH: Well, I think earlier today, we were -- in the table that was put together, we showed the problem that you would use if you effectively ignored two quarters' worth of inflation in terms of the cumulative impact of the price cap on -- as far as it mimics changes to prices in the economy. And the fact that you're leaving out two quarters and effectively double-counting two quarters is, I think, a compelling reason not to change the methodology mid-stream. I think that was -- that's our reason for recommending that the quarter 2-to-quarter 2 be used on a consistent basis. 729 MR. JANIGAN: Thank you very much, Mr. Chairman. Those are my questions for this Panel. 730 MR. JACKSON: Thank you, Mr. Janigan. 731 Are there any other parties that wish to examine this Panel? 732 Oh, yes, Mr. Brett. I'm sorry, Mr. Brett. 733 MR. BRETT: Thanks, Mr. Chairman, I appreciate that. I have just a few questions for the Panel on two issues. 734 CROSS-EXAMINATION BY MR. BRETT: 735 MR. BRETT: The first is the one Mr. Janigan was just speaking to you about, 179-26. That's on page 21 of the settlement agreement. That's the deferred customer rebates charge, 179-26, deferral account. 736 Could you tell me, how long has this deferral account, Ms. Elliott or Mr. Horner, been in existence? 737 MS. ELLIOTT: Can I say as long as I can remember? 738 MR. BRETT: That's fine. That means probably -- I shouldn't say anything. 739 MS. ELLIOTT: I can't give you a date as to when that would be. 740 MR. BRETT: And could you give me a rough idea of the -- in a typical year, what would have accumulated in that account? 741 MR. HORNER: Are you specifically looking for a dollar figure? 742 MR. BRETT: Yes. I'm sorry, I should have been -- a dollar figure, please, yes. 743 MS. ELLIOTT: I don't know. I don't have that information with me. 744 MR. BRETT: Would it be likely, say, under $100,000? 745 MS. ELLIOTT: I guess part of the problem is we haven't disposed of deferral accounts since prior to 1999, so this -- whatever would have accumulated in this account would have accumulated prior to the last rate case. 746 What it typically captures is charges or rebates less than $10 and those amounts where we can't find the customer. And if you look, you know, and assume we have somewhere in the order of 25,000 of our customers moving on an annual basis, that would be probably the maximum number of customers that we couldn't locate. What those amounts would be, I can't say, but I would say it doesn't typically record large amounts. 747 MR. BRETT: So do you think it would be typically under $100,000 a year? 748 MS. ELLIOTT: I'd maybe go up towards half a million dollars. But I'd have to look at some old records to determine what it has captured in the past. 749 MR. BRETT: In the -- yes, there's no number in the evidence that would be helpful, is there, because you're not clearing '99 deferral accounts, or are you here? 750 MS. ELLIOTT: No, we cleared 1999 in conjunction with the original PBR hearing. 751 MR. BRETT: And for the 2000 deferral account, you assumed a change in the scope of the deferral account, so the dollar number in 2000 wouldn't be helpful. 752 MS. ELLIOTT: We haven't cleared the deferral accounts for 2000 so there's nothing in the account for 2000. And the change would take place as the disposition of those accounts happens with this rate order. So, the balance that would accumulate in that account following this rate order would be disposed of, then, either in the 2003 review process or a subsequent proceeding. 753 MR. BRETT: Okay. So in other words, the only thing that would be disposed of in this rate order is any amount that would be in that account in its original definition or configuration; is that correct? 754 MS. ELLIOTT: That's correct, yes. 755 MR. BRETT: And what amount is that? 756 MS. ELLIOTT: There is nothing in the account at this point in time. 757 MR. BRETT: Zero. 758 MS. ELLIOTT: Zero. 759 MR. PENNY: Mr. Chairman, it might assist Mr. Brett that the 2000 rate order resulting from RP-1999, matter 17, dealt with the deferral account balances as of December 31, 1999 and that rate -- the rate order, the Board's rate order says that on line number 7, account number 17926, deferred customer rebates/charges was 1.398 million. 760 MR. JACKSON: Yes. 761 MR. PENNY: That was page 2 of 2, Exhibit E to the rate order. 762 MR. BRETT: Thank you for that. And that would be in respect of the year 1999 only or in respect of 1999 plus -- what year or years would that be in respect of? 763 MS. ELLIOTT: Any balance in that account in 1999 would be the result of dispositions prior to 1999, so it would be 1998 and previous dispositions. 764 MR. BRETT: Because this is a balance left over from a previous disposition of a deferral account. 765 MS. ELLIOTT: Yes. The process would be, we would get a rate order for disposition. To the extent that we had a disposition of deferral accounts in 1998, we'd get the rate order, we'd process the charges to customers and book into this account those amounts less than $10 or those amounts that were billed to customers that we couldn't locate. 766 MR. JACKSON: So that amount that Mr. Penny quoted was, I presume, a year-end balance, 1999? 767 MS. ELLIOTT: Yes, it would be. 768 MR. JACKSON: Yes, and it would be cleared out of that account and then other amounts would go in for the next year. 769 MS. ELLIOTT: Yes. 770 MR. BRETT: Okay, Thank you. 771 Now, with respect to the -- you wish to change the scope of this account to introduce this new idea that you would recover amounts that have been deferred and that you can't recover because of financial difficulties that a customer's got into. And you say that you would start accumulating those funds from the date of the -- of this rate order pursuant to this hearing, whatever comes out of this hearing. You would start then. If you were given approval to do so, that's when you would actually start to record those amounts in this expanded scope fund. 772 MR. HORNER: I'd like to clarify one thing. We're not asking for amounts to go into this account where a company is in financial difficulty. We're asking for amounts to go into this account upon the proof of insolvency. 773 MR. BRETT: Okay. So let's say it's an amount -- to get this, it has to be, first of all, it has to be a deferred amount, something that's gone into a deferral account in the first instance. 774 MR. HORNER: That is correct. 775 MR. BRETT: And when it comes time to clear the deferral account, you can't clear it because the company is in insolvency. 776 MR. HORNER: That's correct. 777 MR. BRETT: But I'm right what I just said a moment ago, that you actually -- I just want to make sure I got this right. You don't actually start to use this expanded scope of this account until after the rate order that's coming from this decision. So in other words, there's no money that's been collected in either 2002, 2001 or 2000 of this -- for this expanded account. 778 MR. HORNER: That's correct. We wouldn't actually start accumulating charges into this account until the rate order is issued. 779 MR. BRETT: Okay. 780 MR. JACKSON: And the fact that we saw nothing in the 2000 account means that the amount cleared from the 1999 account was bang on, you didn't have anything you had to carry forward; is that correct? 781 MR. BRETT: Or, if I may add, is it that you, in respect of the 1999 account, were using a different definition of this. Well, I'm sorry, the Chairman is right either way, I guess. 782 MR. JACKSON: I think it would apply to either case no matter what definition was used. The fact that we see nothing in 2000 is because the amount cleared from the account with respect to the year-end balance for 1999 was the appropriate amount cleared, not a residual carried forward. 783 MS. ELLIOTT: The 1999 deferral account dispositions were actually done as offsets, not as billing adjustments to customers. So that's why you won't see anything in the account. It was done at -- 784 MR. JACKSON: So it was the right amount, in other words, because there was -- as an offset, we weren't giving rise to this problem of even $10 being uncollected or uncreditable. 785 MS. ELLIOTT: That's correct, yes. 786 MR. JACKSON: Okay, thank you. 787 MR. BRETT: All right. Your rationale for this account was -- seemed to me, as I recall, your basic rationale was that gas prices had skyrocketed and since this account dealt presumably with -- well, I guess that's a question. This is a non-gas-supply account, this is a delivery account, first of all; yes? 788 MR. HORNER: It's a non-gas-supply-related account. 789 MR. BRETT: So, for example, for large customers, the M-7s, the M-4s, these people that are all on direct purchase who don't take sales service from you, the fact that the volatility of the gas prices had increased, the commodity had increased substantially, your concern was, I guess, even though they -- that doesn't affect the delivery rate directly, they wouldn't pay the delivery rate either if they fail. Are you with me? The rate -- the deferred amount you are talking about putting into this account has nothing to do directly with gas, with the commodity, it has to do with delivery charges. 790 MS. ELLIOTT: No, the account itself is a non-gas-supply-related account but in fact it captures all unpaid charges from deferral accounts. So the amounts in it, to the extent that the deferral account was a gas-supplied deferral account and those amounts were uncollected or less than $10, they would go into this deferral account. At that point they lose the distinction of being gas-supply related. 791 MR. BRETT: That's helpful. So in other words, this relates to any amount of money under any deferral account that cannot be collected. 792 MS. ELLIOTT: Yes. 793 MR. BRETT: And some of those amounts would have -- all right. 794 In any event, would you agree with me that -- we had this run-up of gas prices in the fall of 2000. I guess the dates of this, I'm a little unclear, I guess this was done in late 2000, so you would have -- you would be looking at the increases in gas prices that occurred through the last half of 2000 and into the winter of 2001. 795 But you'd agree with me that since, say, about March of 2001, certainly April/May of 2001, prices have come down, gas prices have come down and there's no -- I don't think any informed observer expects there to be a spike of the nature that we had in the fall of 2000 and January 2001, February 2001, in the near future. Or do you disagree with that? Do you see a seesaw effect, with prices tripling and quadrupling again? 796 MS. ELLIOTT: I'm not the person to speak to the volatility in the gas prices, but I think the front page of today's paper suggested there was going to be another run-up in prices. 797 MR. BRETT: As you say, you are not the expert but you are the only Panel member I have, and your rationale for putting this extension in place is precisely because of an increase in gas price that occurred in the past. My question, therefore, was put to you on that basis, but I take your -- I didn't read the front page of the paper yet, I'm too busy, but I take your answer. 798 Maybe we can move on to the question on -- just a couple of questions on the tax issue, the income tax issue first. Ms. Elliott, just while I'm getting started here, you are aware that there's been a decrease in the capital tax in 2001 in Ontario? 799 MS. ELLIOTT: I'm not specifically aware of that, no. 800 MR. BRETT: But you've looked at Mr. Mintz -- at Drs. Mintz and Wilson's evidence, and it states in there that the capital tax in Ontario is reduced in 2001. Would you take that, subject to check? 801 MS. ELLIOTT: I will do that, yes. 802 MR. BRETT: And can you give us an indication of what the saving to Union would be. I looked for this in the 2001 statements that you filed just a few days ago and I couldn't see the capital tax split out separately. It was lumped in with the municipal property tax so I couldn't make the comparison between 2000 and 2001 capital tax but I was interested to know what the saving to Union would be of the lower capital tax in 2001 compared to 2000. 803 MS. ELLIOTT: I would have to undertake to provide that calculation. I don't know what it is. 804 MR. BRETT: I would appreciate that. Could I have an undertaking for that, please. 805 MR. MORAN: G.4.3. 806 UNDERTAKING NO. G.4.3: TO PROVIDE IMPACT OF REDUCTION TO ONTARIO CAPITAL TAX 807 MR. BRETT: Having done that, I would ask if you could add one other piece of information to that and that is whether I think your -- for the tax executive in your company, could you just let me know in that response or let the Panel know in that response whether there is any legislation that has been passed or introduced in the legislature in Ontario that would propose a further lowering of capital tax in 2002 or 2003? 808 MS. ELLIOTT: I'll do that. 809 MR. BRETT: Thank you. 810 With respect to the -- really, I have very few points on taxes. I have questions on this for the second Panel, but a couple of questions, Ms. Elliott, on really the policy here. 811 I just wanted to -- in the decision in the 017 decision, I believe it's at paragraph 446 at page 260, I believe. I'm sorry, the decision is 0017. It's volume 1, page 61, paragraph 2.169. You may well have been asked this question this morning. If you have, you can just tell me that you've already answered it. 812 But in this paragraph 2.169, the Board, in its decision last time round on this, said that the Board also makes a further adjustment for 0.9 million to base delivery revenues for 2001 for the annualization of changes in the provincial income tax. And then at the back of I believe it's appendix B of the decision, that's in volume 2, appendix B -- appendix C, I'm sorry. That's the same decision, 0017, volume 2, appendix C, footnote 8. It talks about reduction for impact of lower provincial income tax when it plays out the delivery rates and revenue requirement for 2001. 813 Having that said, you come in and have said, essentially -- well, first of all, as I understand it, you haven't made that adjustment in the filing that you've made this time round. You haven't actually taken out that 0.9 million, you've left that in; is that right? 814 MS. ELLIOTT: That's correct, and in fact Mr. Aiken did raise this issue with me this morning. 815 When we reviewed the Board's decision and looked at all the implications, we found a conflict between the paragraph that asked or made the further adjustment and the paragraph at page 97, 2.318, which directed us to track the effect of all the Ontario tax changes and bring them forward because there was some issue about them being reflected in the GDPPI. So what we've done in this case is tracked the changes to the tax rates in 2001 and 2002 and we're dealing with the issue of those being included in the GDPPI. But you're quite right, we didn't make the change in rates for 2001 of the 900,000 because of that. 816 MR. BRETT: And are you also aware, Mr. Aiken may have mentioned this as well, but at page 260 of volume 2, that's paragraph -- that's the same decision, 0017, page 260, volume 2, item 446. This is one I find people tend to forget. 817 MS. ELLIOTT: Can you just -- I'd just like to get a copy of that volume of the decision, please. 818 MR. BRETT: Item 446. It says: "The Board accepted the use of Z-factors in certain situations. Specifically, the Board has found Z-factors appropriate for changes in legislative and regulatory requirements, changes in generally accepted accounting principles, property taxes, capital taxes, capital taxes, income taxes and delivery/redelivery costs." 819 Now, in light of that statement and in light of the other statement that I read to you before, what you're really doing here, as I see it, is -- and I ask you to comment on this. I guess it falls into the category of a -- are you not just simply coming and asking the Board to change their decision? 820 MR. PENNY: Well, Mr. Chairman, this is surely a matter of argument. It's a question of the interpretation of the Board's decision. Mr. Brett can equally look at page 96, paragraph 2.317, which recognizes that general changes to the economy would be reflected in the price cap. This, it seems to me, is not a matter of evidence, it's a matter of argument. 821 MR. JACKSON: But I think it is a question of what the company is applying for, at least how it is characterizing what it's applying for. Is it saying that it needs clarification because the Board's decision was unclear? Or is it saying that the Board's decision was quite clear but in error and you'd like us to make this change at this time. That's what I hear Mr. Brett asking. What is the company's position, and he's asking an officer of the company. 822 MS. ELLIOTT: In terms of the Z-factors, those Z-factors are appropriate to the extent that they have an impact on the industry specifically. There is a number of similar factors that will impact the economy in general, and it's our position that those are recovered and picked up in the GDPPI and they will be captured in our revenues over the term of the PBR. 823 MR. BRETT: So in effect, you're saying, as I understand it, that you feel the Board's wrong and you'd like to correct -- have them correct it. 824 MS. ELLIOTT: With respect to the $900,000, there is some uncertainty in terms of that impact will be captured in the 2001 tax rate changes. It will be picked up in the GDPPI in future periods or in the current period. And our position is, and when we interpreted the decision, we found there were two directives dealing with the same issue and we've taken the approach to track those changes through the deferral accounts. 825 MR. BRETT: Thank you. Those are my questions. 826 Thank you, Mr. Chairman and Panel. 827 MR. JACKSON: Thank you, Mr. Brett. 828 Mr. Moran, do you have any questions? 829 MR. MORAN: Thank you, Mr. Chair, just a couple of questions. 830 CROSS-EXAMINATION BY MR. MORAN: 831 MR. MORAN: Let me start with you, Mr. Hemphill. 832 I think in your evidence earlier you indicated that it would be okay to do a non-routine adjustment for industry-specific tax changes because you wouldn't expect to see those reflected back in the GDPPI; right? 833 MR. HEMPHILL: That's correct. 834 MR. MORAN: Now, as I understand it, the GDPPI is a Canada-wide index and I'm just wondering how you can explain how the tax changes that we've been discussing all day today, which are Ontario specific, how do those get fully reflected in a Canada-wide index like the GDPPI? 835 MR. HEMPHILL: Well, taxes will increase the cost of doing business or decrease the cost of doing business depending on whether it's an increase or a decrease. Let's use a decrease as the example here. 836 In a competitive industry structure, there's two directions that a company has to be concerned with. One is with customers who have alternatives, and if they don't reflect the cost change in the prices of the products that are sold, other competitors may and they could lose business. So, the incentive is there to reflect something that all businesses are facing, particularly all businesses in comparable -- you know, producing comparable products. There is definitely incentive for them to reflect that in the prices. 837 On the other hand, the other direction that they always have to be concerned with is in the capital markets. And if not reflecting changes in the cost of doing business reflects the profitability of the firm, then they may find themselves having difficulty continuing to attract capital. So in a competitive market, there is -- it's been established as a principle in economics that something like a tax change, income tax change, will ultimately make its way through to the prices of the goods and services. 838 MR. MORAN: All right. So given that explanation and given the fact that the Ontario tax changes are Ontario-specific, and given the fact that the index is Canada-wide, how does that work? 839 MR. SCHOECH: Let me attempt to explain. 840 The difference that we see is that the taxes specific to the industry, because of the size of the industry relative to the Canadian economy, would not have a material impact on the GDPPI. It's just a size issue. And that's why it would be a candidate for a non-routine adjustment. 841 In the case of the province of Ontario, it constitutes approximately 40 percent of the Canadian economy. Furthermore, I think you have to look at the Ontario provincial taxes as part of the family of provincial taxes, and the fact that it's not just Ontario that is reducing corporate income taxes but there are other provinces that are doing it as well. So, our feeling is that the Canadian-wide prices are being influenced by provincial reductions in income taxes, including those in Ontario. And as I said, since Ontario has 40 percent of Canada, economy-wise, just that alone you would see having a material influence. 842 MR. MORAN: All right. So you say a material influence and then you also point to the fact that other provinces might be reducing their taxes. Is there a complete match in other provinces to the reductions in tax that we see here in Ontario? 843 MR. SCHOECH: There's not a one-for-one match. I think the other economists, who are coming on after us, may be able to talk about that in more depth. But, as I understand it, there's a common thread. 844 MR. MORAN: Right. And to the extent that there isn't a match, then it may be that this Ontario-specific tax is not fully reflected in the GDPPI; right? 845 MR. SCHOECH: Well, that may be. That's also true for, say, labour taxes or workman's compensation. If workman's compensation increased in Ontario more rapidly than other provinces then, yes, there would be a bit of disjunction between the two. 846 MR. MORAN: All right. I have an excerpt from the -- from Union's reply submissions in the RP-1999-0017 case. 847 Mr. Chair, perhaps we could mark that as an exhibit. It would be F -- 848 MR. PENNY: Mr. Chairman, I'm happy to have it marked as an exhibit but I would remind Mr. Moran of Rule 19 of the Board's Rules of Procedure, which provide that when documents that are not already in evidence are going to be shown to witnesses, that they be provided 24 hours in advance. We have not seen this previously. But as I say, I'm not objecting to the witnesses looking at this or answering questions about it. 849 MR. JACKSON: Just -- well, I understand your point, Mr. Penny. I'm sorry, would you describe this document again, Mr. Moran. 850 MR. MORAN: It's an excerpt from Union's reply submissions in RP-1999-0017. 851 MR. JACKSON: So I guess Mr. Penny has seen this, or not? 852 MR. MORAN: I would assume. I think he actually wrote it. 853 MR. PENNY: My only point is not this case. Of course we prepared this material and it was now -- it was in July of 2000, excuse me. 854 MR. JACKSON: That's right. And we do appreciate if notice can be given about these documents even if they are from a previous proceeding. But let's just -- it is short and let's make sure that everyone has a chance to read it carefully before being questioned on it. But it is something which I think the Union Panel -- some of the Union Panel may not have too much trouble brushing up on. Let's just see how we can proceed. 855 MR. MORAN: I think the witnesses are still waiting for it. 856 Mr. Chair, I also have an excerpt from the transcript, volume 1, in the same hearing. 857 MR. JACKSON: Okay. 858 MR. MORAN: If we could collectively call that Exhibit F.4.3. 859 MR. JACKSON: Yes, that's acceptable. 860 EXHIBIT F.4.3: EXCERPT FROM UNION GAS'S REPLY SUBMISSIONS IN THE RP-1999-0017 CASE AND EXCERPT FROM TRANSCRIPT, VOLUME 1 861 MR. JACKSON: I guess the same comments, if you like, about practice in our proceedings apply to that as well, but again it seems relatively short and we'll just make sure that everyone has all the time they need. If anyone would like to ask for more time, they can do so. 862 MR. PENNY: The only issue, Mr. Chairman, when I look at these documents is that we've got one page from what, to this point in time, is a 98-page argument. I know it ran considerably more than that. There's a sentence that says that "These issues will be further addressed below." We don't have below. We've got page 23 of some examination-in-chief, it looks like. We, again, don't have the context. If we had been provided with this material in advance, we would have had the opportunity to look at these things in context. 863 Now, the witnesses are put in the position on the stand of having to answer questions about something that has been put under their nose for the first time in two years, with no context. 864 So, again, I'm not objecting to it in this particular case, but the Board staff of all people, it seems to me, should be cognizant of the Board's rules and be conducting themselves in a manner that is appropriate and fair, having regard to the purpose of those rules. 865 MR. MORAN: Mr. Chair, these excerpts are put in entirely in the context of answers that we've only heard for the first time today, so I'm not sure, unless I'm somehow prescient, that I could provide the 24-hour notice that Mr. Penny is insisting on. This is cross-examination in response to answers that were given by witnesses earlier today, so we're doing the best we can. 866 MR. JACKSON: Right. No, I think that that's also a point that Mr. Penny should take into account. And, Mr. Penny, if you would like your witnesses to have any more time on these, we'll certainly listen to that request. 867 MR. PENNY: We'll see where it goes, Mr. Chairman. It may be that we'll want to qualify any answers by going back and looking at the full document. 868 MR. MORAN: If it's of assistance to Mr. Penny, the reference to something being dealt with further below is to the part of the argument entitled "Non-routine Adjustments." We don't think very much turns on it for the purposes of this question. 869 All right. Starting with the first document -- well, let me start with the excerpt from the transcript. If you look at lines 4 to 11, it says -- this is Mr. Birmingham's evidence. "The price cap plan also allows for certain exceptional circumstances which are referred to as non-routine adjustments or Z-factors which are common in PBR plans. These items are very limited and they have been defined in advance. Union does not expect to use these during the five-year term of the PBR with the possible exception of the recently-announced federal and provincial income tax reductions." 870 If you take a look at the other document, the excerpt from the reply submissions, the first full paragraph, VECC and others also argue that "Rates should be adjusted for the impact of tax reductions in 2000 and meter-reading efficiency gains. The tax reductions are a non-routine adjustment and will be addressed further below." 871 In the context of that -- and then there's been a number of other excerpts that have been shown to you today that also deal with the issue of tax; there's various excerpts from the Board's decision itself. I'm just wondering how we reconcile all of that stuff with the idea that the GDPPI is the way to reflect the change in income taxes. 872 MS. ELLIOTT: Well, the transcript and the reply argument, in that case, we were defending our proposal for a fixed price cap that fixed the rate of inflation for five years using the forecast. We did acknowledge that in doing so, that process would not have picked up the impact of tax reductions or increases that were legislated during the term because we weren't using a GDPPI factor that varied annually. The Board's decision, in fact, approved a price cap, the formula of which the inflation factor is varied annually. At that point in time, the federal taxes, provincial reductions are captured in the GDPPI and the price cap. 873 MR. MORAN: Thank you. Just a few more clean up questions, then. 874 With respect to the deferred customer rebate charges issue, I think this would be you, Mr. Horner, I wonder at you could indicate what the rationale is for the $10 limit on that account to begin with. 875 MR. HORNER: I think that might be before my time. 876 MS. ELLIOTT: I think I deserved that one. 877 MR. MORAN: Mr. Brett has started something. 878 MS. ELLIOTT: My recollection is at the time the deferral account was set up, we were dealing with refunds to customers as gas prices were falling, and it was just administratively an issue for us to mail out cheques for less than $10 to customers and we determined and established a $10 limit, that we just wouldn't process those payments to customers. 879 MR. MORAN: And as I understand the rationale for the change that you are proposing, it would be to remove that limit altogether. So you could put in amounts as large as the amount that we've heard about? 880 MS. ELLIOTT: No, no. The process -- the $10 would still apply as basically -- as a matter of administrative convenience. If we're processing $10 amounts and sending bills to customers for the cost to process it and post those bills, it would be more than or as much as $10. We don't process those amounts for the residential general-service customers. 881 When we look to charge or refund money to customers, if we can't find the customer, if they've moved and we have no forwarding address, those amounts will go in. 882 What we're asking for here is an extension that says if we do bill a customer and they come back to us with proof of insolvency that they cannot pay the amount, then those amounts would also go into the account. 883 MR. MORAN: So it's almost like a new account for a new problem, in effect. 884 MS. ELLIOTT: Yes, I suppose we could have asked for a second account. 885 MR. MORAN: Thank you. 886 The final area I just wanted to touch on has to do with the Exhibit F.4.2 and the Exhibit F.2.4. That's the calculation that you prepared comparing Union's position to the position of other parties. 887 If you could turn to page 4 of Exhibit 2.4, and I think somebody might have touched on this briefly already. I'm not quite sure exactly where we are on the point. But if we look at the second quarter for 2001, in the calculation, there's a figure of 107.3 for GDP. 888 MS. ELLIOTT: Yes, I see that. 889 MR. MORAN: And on page 4 of the other exhibit, the equivalent number is 106.7, which, as I understand that, is a result, perhaps, of other revisions that happened later on from Stats Canada. 890 MS. ELLIOTT: Yes. The current information from Stats Canada is 106.7 or 8. When we filed this evidence, the information that was available to us for second quarter 2001 indicated that the GDP was 107.3. 891 MR. MORAN: Right. I'm just wondering if you would be able to redo the calculations with the revised figure of 106.7. Perhaps that's best dealt with as an undertaking. 892 MS. ELLIOTT: We can do that. The simple calculation would be the 106.7 as a change over 104.7. so it's a 2.0 GDPPI, deduct a negative 2.5 for productivity, and we would have a negative .5. 893 MR. MORAN: Can I get you, then, to update that and file it at your convenience. 894 MS. ELLIOTT: I can do that. 895 MR. MORAN: Thank you. 896 That would be G.4.4, Mr. Chair. 897 UNDERTAKING NO. G.4.4: TO PROVIDE UNION'S POSITION CALCULATED WITH REVISED GDP 898 MR. MORAN: Those are all my questions, thank you. 899 MR. JACKSON: Thank you. 900 Can I just clarify, Mr. Penny, before the Board asks its questions, the next Panel, then, would be two people. 901 MR. PENNY: Yes, that's correct. 902 MR. JACKSON: And would it be appropriate if we had any further questions for Ms. Elliott or for Union witnesses specifically, Mr. Horner or Ms. Elliott, to recall them or -- so that we could decide whether we have any questions for the other two and then excuse them? 903 MR. PENNY: If the issue is a question of -- I mean I think -- let me speak to that in two parts. 904 I think the preference would be that all the questions be asked now, but if you're -- just because Ms. Elliott and Mr. Horner can then move on to other things. But I think if implicit in your question is that you are trying to assist us on the scheduling issue, if the Board does think that it has fairly lengthy questions on issues relating to Ms. Elliott and Mr. Horner, then I think in the interests of ensuring that our witnesses are heard and get back then, we are prepared to do that. So I'm in your hands, in a sense. 905 MR. JACKSON: It might mean going to tomorrow morning with Ms. Elliott. It's not that we think we're going to be long, but I'd just rather not get into a couple of lines of questioning. And we do have some questions with respect to the financial statements that have been filed, and I think Ms. Elliott is the most likely person and we'd put her on notice that we have just a couple of clarification questions. I think that in -- we would just rather not risk getting into something that then delayed other witnesses. 906 MR. PENNY: I appreciate that, Mr. Chairman, and I think that is an appropriate way to proceed. 907 MR. JACKSON: Thank you. So let me just check with my colleagues. 908 QUESTIONS FROM THE BOARD: 909 MR. DOMINY: Ms. Elliott or Dr. Schoech, I'm not sure if you can answer this question, but we've had some discussion that the second quarter 2001 GDPPI estimate was altered by Statistics Canada between August and November. And I was looking at page 5 and -- it's not your evidence, it's the information that was filed by Mr. Aiken. F.2.4, page 5. And in there it shows you the value the quarter used and then you have the year-ago value. And if I look at the second quarter 2001, the value goes, as I've just said, from 107.3 to 106.7. If I go to the year-ago value which would then be, I assume, 2000, it goes from 104.7 to 104.7; in other words, the indication there is there was no adjustment to the second quarter in 2000. 910 I just wonder whether you were able to confirm for me that that, in fact, is what happened with regard to the GDPPI in quarter 2, 2000, that there was no adjustment between the August and the November. 911 MS. ELLIOTT: That is correct, there was no adjustment for those factors. 912 When you look at Stats Canada data file now, those factors haven't changed from a year ago, from -- the factors that were in the decision in July of 2001. 913 MR. DOMINY: No, I was wondering whether, in fact, if I went to August 2000 and November 2000, and 104.7 would move into the left-hand column, I went back a year, was there a change at that time? Not that they haven't changed in 2001, but whether they changed in the year of 2000 as they've done for the 2001 data going in. Maybe we can look it up by looking at Statistics Canada. I just wondered whether you knew. 914 MS. ELLIOTT: The only information that I found on their web site is the current information, so I haven't gone back to look at what would have been issued in 2000 on these numbers. 915 MR. JACKSON: I'm just curious, to make sure I've understood this afternoon the distinctions that are being made with respect to whether income taxes would or would not be reflected in the GDPPI. 916 You were asked a question by Mr. Moran about Union's previous position with respect to possibly considering income tax changes as Z-factors and you pointed out that at that time, you were applying for a determination of the price cap which included, I think, a five-year forecast for GDPPI; is that correct? Is that the way the inflation component was determined? 917 MS. ELLIOTT: That's correct, yes. 918 MR. JACKSON: And so in that five-year forecast of GDPPI, the effective income tax changes would be in there to the extent that any of the forecasters that you were relying on were able to forecast; is that correct? 919 MS. ELLIOTT: The forecast we would have used at the time would have been in 1999, late 1999. I'm not sure that the forecasters would have predicted the size and extent of the income tax changes that happened in 2000. 920 MR. JACKSON: I think I would tend to agree with you that it would be pretty hard to forecast that. The best they might do is have a sense of what the political winds were that were then blowing and whether or not the trend would be down or up, perhaps. But I can certainly see that it would be difficult to forecast. But nonetheless, the extent that they wanted their forecast to be as accurate as possible, they would have reflected any knowledge or thoughts they had about income tax; wouldn't they? 921 MR. SCHOECH: I'd have to guess, but I would guess that they would have taken that into account. 922 Now, in terms of our analysis of Union's price cap plan, the implication of that is if we had missed some projected income tax reductions, then we, in fact, underestimated the stretch factor in the Union proposal of the 1.9 percent per year. And the reason was that that the analysis, effectively, was -- presuming that that 1.9 percent was not incorporated in any forecast reductions, so that would be how that assumption played into our analysis of the plan. 923 MR. JACKSON: I'm sorry, I'm perhaps just not keeping up with you fast enough here. But you're saying it would have come in through the determination of the stretch factor and not through the forecast of the GDPPI; is that right? 924 MR. SCHOECH: Well, I'm sorry, the forecast, the DRI forecast, may or may not have had some projections on income taxes. And my guess is that they used the best information they had available at that time to make some projections. When that projection led to a 1.6 percent forecast, I believe it was, when we asked the question whether or not 1.6 percent was reasonable or not, we effectively calculated what we implicitly there thought would be in terms of a stretch factor. But it was kind of ignoring the possibility that there may be some tax reductions that would then be picked up also in the non-routine adjustments. So, that's why I meant that -- what I meant by saying that our analysis may have been conservative in estimating the proposal at the time. 925 MR. JACKSON: Yes. And to the extent that you knew these benefits would be flowed-through to customers because of Union's then-position, you would not have set quite as large a stretch factor because you wouldn't have to use the stretch factor, if you like, to reward the ratepayers for that cost change; it would already have been taken care of through some other method. 926 MR. SCHOECH: That's right. 927 MR. JACKSON: Okay, I think I understand that and I think now I can make the link with this methodology. Thank you very much. 928 So Mr. Penny, then, those are the Board's questions save and except for the few questions I think we have of Ms. Elliott. 929 MR. PENNY: All right. Thank you, Mr. Chairman. I have no questions in re-examination for this Panel. 930 MR. JACKSON: Thank you. 931 Thank you, gentlemen, for being here. I hope you catch your plane. 932 MR. SCHOECH: Thank you. 933 MR. PENNY: Mr. Chairman, were you proposing to take an afternoon break or to go right through? 934 MR. JACKSON: Let's take a short break. And it may be rare for us, but we're going to try to be back in 15 minutes because we have -- we do have a meeting at 4:00 that we're aiming for. If we have to flex, we can but -- 935 MR. PENNY: All right. 936 MR. JACKSON: -- let's keep this moving. 937 MR. PENNY: Absolutely. I mean we could take a shorter break, for that matter, or none. I'm happy to keep moving. 938 MR. JACKSON: I appreciate that offer, too, but I think the court reporter appreciates a break, so we'll do 15 minutes. Thank you. 939 MR. WARREN: Mr. Chairman, just before you rise, I'm probably the only person in the room who believed there was some chance we'd get to the fabled but thus far not seen Panel 2 today, and it's clear we're not going to get to them. I have no questions for the next panel, Panel 4. Unfortunately, I can't be here tomorrow; I have to be in Windsor to argue an appeal, so I will have to take -- I will do my best to read the transcript tomorrow night and I'll have to take my place in the queue for the expectation of Panel 2 when I return on Thursday morning. 940 MR. JACKSON: Is that satisfactory to you with respect to tomorrow, or is there -- you're missing something tomorrow, did you say? I'm sorry. 941 MR. WARREN: Well, I was actually hoping, frankly, that I could lead in the cross-examination of Panel 2 but I can't -- but I can't. It would be unrealistic of me to expect that at this point. So I have to take -- I will have to see the state of the game when I return on Thursday morning. But all I was saying is that I will try and read the transcript of tomorrow's proceeding when I return tomorrow night and take my place in the queue on Thursday morning. 942 MR. JACKSON: Okay. I hope that doesn't disadvantage you, and we'll see you on Thursday morning. 943 --- Recess taken at 2.55 p.m. 944 --- On resuming at 3:15 p.m. 945 MR. JACKSON: Please be seated. 946 Mr. Penny, we're just looking for a particular document. 947 MR. PENNY: I wonder if the witnesses could be sworn. 948 UNION GAS - PANEL 3 949 J.MINTZ; Affirmed 950 T.WILSON; Sworn 951 MR. JACKSON: We have it. 952 MR. PENNY: Thank you, Mr. Chairman. 953 EXAMINATION BY MR. PENNY: 954 MR. PENNY: Professor Mintz, let me start with you. You have a Ph.D. in economics from the University of Essex. 955 MR. MINTZ: That's correct. 956 MR. PENNY: And an MA in economics from Queen's University in Ontario. 957 MR. MINTZ: That's also correct. 958 MR. PENNY: And you have an honour's bachelor of -- a BA in economics from the University of Alberta. 959 MR. MINTZ: And that is correct. 960 MR. PENNY: You are presently the Arthur Andersen professor of taxation at the Rotman School of Management with a cross-appointment in the department of economics. 961 MR. MINTZ: Yes. 962 MR. PENNY: And you are also currently, and have been since 1999, the president and chief executive officer of the C.D. Howe Institute. 963 MR. MINTZ: That's correct. 964 MR. PENNY: You have been an associate dean of the faculty of management at U of T? 965 MR. MINTZ: Yes. 966 MR. PENNY: And you, as well, been a professor of economics with the department of economics at Queen's University. 967 MR. MINTZ: That's correct. 968 MR. PENNY: You've spent some time with the Department of Finance as a special advisor to the assistant deputy minister, corporate tax research. 969 MR. MINTZ: Yes. 970 MR. PENNY: And among your other scholarly and professional activities, you have been, and are presently, on the board of governors of the National Tax Association for the United States. 971 MR. MINTZ: Yes, that's correct. 972 MR. PENNY: And in 1993 to 2001, you were editor-in-chief of International Tax and Public Finance. 973 MR. MINTZ: That's correct. Published by Kluwer Academic Publishing. 974 MR. PENNY: And you have also been the co-director of the International Centre for Tax Studies at the University of Toronto. 975 MR. MINTZ: It's now called the International Tax Program under the Institute of International Business. Yes. 976 MR. PENNY: I won't go through your extensive publications, but is it fair to say that you have written extensively on the subject of business tax and tax in relation to other economic matters? 977 MR. MINTZ: Yes. Could I just add one piece, which I think is relevant to my qualifications. I was also the Clifford Clark Visiting Economist at the Department of Finance in 1996 and '97. I chaired the technical committee on business taxation that came out with a report on corporate tax reform in Canada which actually was the precursor to a lot of the changes that we've seen today. 978 MR. PENNY: Thank you. 979 And with respect to the evidence you find filed in this proceeding, there is a report of January 18th, 2002, which, in these proceedings, has been filed as Exhibit B, tab 15, appendix D; and a more recent brief report that deals with GDPPI calculations filed in this case as Exhibit F.3.3. You participated in the preparation of those reports? 980 MR. MINTZ: Yes, I did. 981 MR. PENNY: And do you adopt that evidence for today's purposes? 982 MR. MINTZ: Yes. 983 MR. PENNY: Thank you. 984 Professor Wilson, you graduated with an honours BA from UBC in 1957. 985 MR. WILSON: Yes. 986 MR. PENNY: And you entered the Harvard Graduate School in September 1957 and received a master's in economics in June of 1959. 987 MR. WILSON: Correct. 988 MR. PENNY: And you received your Ph.D. from Harvard in economics in June 1961. 989 MR. WILSON: That's right. 990 MR. PENNY: Among other teaching positions, you have been an assistant professor at Harvard University in economics. 991 MR. WILSON: Many years ago, yes. 992 MR. PENNY: And you came to Toronto, you've been an associate professor at the University of Toronto in the department of economics. 993 MR. WILSON: For one year. 994 MR. PENNY: You were the -- a professor of economics of the University of Toronto from June 1968 until 2001. 995 MR. WILSON: That's right. 996 MR. PENNY: And you are currently professor emeritus with the University of Toronto. 997 MR. WILSON: Yes. 998 MR. PENNY: You have served as the director of the Institute for Policy Analysis for the University of Toronto. 999 MR. WILSON: Yes, for six years. 1000 MR. PENNY: You have also been the coordinator of econometric forecasting at the Institute for Policy Analysis. 1001 MR. WILSON: Yes. 1002 MR. PENNY: And you were a Director of Economics for the department of political economy at the University of Toronto. 1003 MR. WILSON: Yes. 1004 MR. PENNY: You have been the chair of the department of economics, that was from January 1983 to June 1985? 1005 MR. WILSON: Correct. 1006 MR. PENNY: And you have been a member of the academic board of the University of Toronto. 1007 MR. WILSON: Yes. 1008 MR. PENNY: You are the vice-chairman of the budget committee of the academic board. 1009 MR. WILSON: Not currently. I was. 1010 MR. PENNY: Sorry, you have been. And you are currently the director for policy and economic -- for the policy and economic analysis program of the Institute for Policy Analysis at the University of Toronto. 1011 MR. WILSON: Yes. 1012 MR. PENNY: And you've been the director since 1987. 1013 MR. WILSON: Correct. 1014 MR. PENNY: And you are also the area coordinator for business economics for the Rotman School of Management. 1015 MR. WILSON: That's right. 1016 MR. PENNY: In terms of your other professional experience, you are a member of the John Deutsch Institute of Economic Policy at Queen's University. 1017 MR. WILSON: I'm a member of the advisory committee. 1018 MR. PENNY: Sorry, of the advisory committee, yes. 1019 You are a member of the editorial board for the publication Canadian Business Economics. 1020 MR. WILSON: That's right. 1021 MR. PENNY: And you are -- and you are the chair of the national accounts advisory committee for Statistics Canada. 1022 MR. WILSON: That's correct. 1023 MR. PENNY: And as well you are a research fellow with the C.D. Howe Institute. 1024 MR. WILSON: That's right. 1025 MR. PENNY: And again, I won't review with you your extensive list of publications, but you have written extensively on matters relating to inflation, business tax, and other matters relating to economics and statistics. 1026 MR. WILSON: Yes. 1027 MR. PENNY: And I see that you have also been qualified to testify as an expert witness in economics before the Canadian Radio-television and Telecommunications Commission and an Ontario joint board consisting of the municipal board and the environmental board and as well before the Federal Competition Tribunal. 1028 MR. WILSON: That's correct. 1029 MR. PENNY: And Mr. Wilson, you already participated in the evidence I outlined earlier, the perspectives on corporate tax calculations and the appropriate GDPPI calculations, and do you adopt that evidence? 1030 MR. WILSON: Yes. 1031 MR. PENNY: Thank you. 1032 Now, just by way of a brief overview, Professor Mintz, the Energy Board, as you're aware, in its decision establishing the price cap formula for Union, expressed concern whether Ontario corporate income tax changes would be reflected in a national GDPPI. 1033 First of all, in your opinion, are changes to corporate taxes generally reflected in the gross domestic product price index? 1034 MR. MINTZ: Yes, and in my view, the changes that occur with respect to corporate taxes would be reflected in price -- in prices that are being charged by businesses in order to recover their costs, including tax costs. 1035 MR. PENNY: Can you just explain in theoretical terms why that's so, or in economic terms. 1036 MR. MINTZ: Just to first start with a basic principle in economics, businesses will try to maximize profits, and in choosing their levels of production, they will choose the level of production in which price will be equal to their incremental costs of production, price being the extra revenues they get from producing more and incremental costs of production being the costs that they have to incur. 1037 And if those costs are higher than the price, then they will cut back their output, and if their costs are below the price, then they'll increase their output but they'll basically settle at the point where prices are equal to their costs. And those costs will include taxes that will be paid by companies as well as the costs of using various inputs in the production process, such as labour and capital. 1038 As a result, the taxes are really embedded in those costs including the corporate income taxes as well as other taxes paid by companies, including payroll taxes property taxes, et cetera. 1039 MR. PENNY: Thank you. 1040 Now, what percentage of Canada's corporate profits are incurred by Ontario corporations? 1041 MR. MINTZ: Based on the data that we had available to us, we have calculated that approximately 43 percent of profits are really earned by companies in Ontario, in Canada. 1042 MR. PENNY: All right. And you say in your report that other provinces as well as Ontario - we've already heard that Ontario is reducing corporate tax - but you say in your report that other provinces are also reducing provincial corporate income tax. Which ones, and which by how much? 1043 MR. MINTZ: Okay. Well, there are several provinces that have started to cut corporate income taxes. This has been a process that began in -- in the year 2000 and has been continuing. And, in fact, we don't even see the end of it yet as there will be continued reductions in corporate income tax rates. 1044 The major provinces in terms of where corporate income is earned outside of Ontario are Quebec and Alberta, which have approximately 20 percent of total corporate profits. Alberta has been -- has cut initially its corporate income tax rate. The general rate was 15.15 percent which they have now cut to 13.5 percent. They are planning further cuts to 11.5 percent. In Quebec, their rate was around 9.1 something, I forget the exact rate, but they had cut their rate by an amount recently and they have plans actually or at least have been talking about doing further cuts. 1045 The other major province is British Columbia which introduced a rate cut in the year 2002, January 1st, of 3 points. And once you include those four provinces, Ontario, Quebec, Alberta and British Columbia, that's about 90 percent of corporate taxes in Canada. The other six provinces will be responsible for the others. 1046 New Brunswick was the other province in 1991 that had cut corporate income taxes by a point, and in fact in the recent budget that just came down, New Brunswick just announced another cut in its corporate income tax rate. 1047 I should emphasize also that corporate income tax rates are not the only thing that has been cut for businesses. There have been reductions in capital taxes; there has also been some reduction in property taxes in some jurisdictions. 1048 MR. PENNY: This is outside of Ontario, you're referring to. 1049 MR. MINTZ: Some of them are outside of Ontario. And even the sales tax exemption, for example, British Columbia brought in a sales tax exemption in 1991 for machinery, machinery used in manufacturing and certain other activities. 1050 MR. PENNY: Sorry, what year was that, the last one? 1051 MR. MINTZ: That was in the year 2001. 1052 MR. PENNY: So coming back to the Energy Board's concern as expressed in the decision about the effect that tax changes in Ontario will have on a national inflation measure, what do you conclude about the effect of Ontario tax changes and their showing up in the GDPPI? 1053 MR. MINTZ: Well, because of the large size of the Ontario economy, certainly there will be a significant impact on the GDPPI as a result of savings and taxes paid by businesses in Ontario, because Ontario is, you know, responsible for at least 40 percent of production in Canada. And so there will certainly be an impact through the GDPPI. 1054 MR. PENNY: And what about the relationship of Ontario to -- and the fact that other provinces are also reducing corporate income tax and other taxes? 1055 MR. MINTZ: Because of the fact that there is simultaneous reduction going on in corporate taxes in recent moves by the provinces, maybe perhaps reflecting tax competition amongst the provinces, one could conclude that actually for just 2001, for example, the reduction in Alberta, Quebec and New Brunswick, as well as Ontario, will all have an impact in reducing the GDPPI as a result of the savings and -- in tax costs faced by businesses in those provinces. And that comprises about 81 percent of total corporate profits in Canada, of which Ontario's rate cut, once you -- if one could calculate an average, would not look very different from the typical change occurring in the country. 1056 MR. PENNY: All right. 1057 Now, the Board also expressed some concern about the potential for a lag effect on the relationship between tax -- corporate tax increases or decreases and them showing up in the GDPPI. Is there, in your view, a delay in how long it takes before changes to tax appear in the GDPPI? 1058 MR. WILSON: Let me respond to that initially. 1059 There probably will be a lag just as there are lags in response to other factors which have an impact on GDPPI. But one factor that should also be taken into account, as the previous Panel had indicated, there can be a lead factor. And what we're looking at here are tax changes that have been announced that are going into effect for several years into the future. The federal tax reductions, for example, are part of a five-year tax reduction plan. 1060 Ontario has a schedule of announced tax changes. Now, to the extent that business believes these tax changes will occur in the future, they may be taking action already, probably will be taking action already in anticipation of the impact of those future tax changes. So although the -- any surprise tax change will feed through with some lag before it affects -- it will have an initial effect, then. It will be some time before you get the full effect on the GDPPI. If there is an announced future change, that could affect the GDPPI before it actually affects the -- before the actual statutory rate change comes into effect. 1061 MR. PENNY: Now, you mentioned other factors. What about other factors that go into the GDPPI? Are there also potential for lead or lag effects with respect to those? 1062 MR. WILSON: Yes, there are. For example, if there's a sharp change of depreciation of the Canadian dollar, which means the cost of imports and the Canadian-dollar price of our exports would go up, that will have an initial impact on the GDPPI. Our model has it as PGDP, so I get tongue-tied on this one. Anyway, the GDPPI, that will have an initial impact but the full impact will take some time as the change in the cost of imports feeds through the economy as wages respond to the higher inflation and so on. 1063 MR. PENNY: Now, is it practical, in your view, to adjust a price-cap formula like that that's been approved for Union through the Energy Board to take account of leads or lags resulting from Ontario tax changes? 1064 MR. WILSON: I don't think it would be practical. I think it would be a very complex task because you would be having to track these estimated leads and lags on all the different factors and, remembering that you did take into account a lead, say -- pardon me, a lag -- in response to an unanticipated tax reduction, that then you would have to reverse it gradually over time as the full impact fed through. 1065 MR. PENNY: And why do you have to reverse it? 1066 MR. WILSON: Well, otherwise you will be double-counting it. If the tax change, as my colleague indicates, is going to eventually affect the GDPPI, if you first take that into account because of a lag in the adjustment, then you've got to remember to do it to reverse that. And it may not be that you reverse it in one year; it may be over two or three years. 1067 MR. PENNY: All right. Do you also have to track the effects, the lead and lag effects of the changes in other provinces' tax rates if you were to adjust to this empirically? Or try to. 1068 MR. WILSON: Well, yes. If you were going to start singling out Ontario changes and adjusting, say you recognize the Ontario impact is not one for one because its 40 percent of the economy, but if you make an adjustment for the Ontario tax change then you would have to monitor the average of the rest of the provinces and make corresponding adjustments if they reduced taxes. So in a hypothetical case, not the actual one we're talking about, the Ontario cut -- initiated a tax cut, and there were no tax cuts in other provinces, and you were to make an adjustment in the first year to reflect the fact that that in and of itself wouldn't be reflected in the national price index, but then a year later, all the other provinces followed suit, or the one that my colleague mentioned, the big ones, follow suit, then you'd have to again reverse it. In the case we are looking at, there are simultaneous reductions going on in several major provinces. 1069 MR. PENNY: So is the issue of lag something, in your opinion, that the Energy Board should be concerned about in the operation of its price cap formula? 1070 MR. WILSON: Concern, I guess that's kind of a -- I guess you're concerned about everything. But I don't think that you want to be monitoring and trying to fine-tune this adjustment to take account of lags. I mean if you are to do that for taxes, then in the next hearing someone is going to raise an issue of something else, a sharp change in world prices and what's that going to do with the formula. If world prices have suddenly gone up, that may have an impact over the next several months on the GDPPI and Union can argue they are going to be penalized because that isn't already taken into account. I think you don't want to get into that game of fine-tuning that price-cap formula. 1071 MR. PENNY: Okay, now. Since your evidence was filed just last week, in fact, I gave you some information filed by an intervenor, the implications of which seemed to be that the second-quarter-over-second-quarter method of measuring year-over-year inflation that was adopted by the Energy Board in its decision should be changed to reflect more recently available data from the fourth quarter of 2000 and 2001. And I ask you to address that question in the additional report that you filed. Do you believe that a change from comparing second quarter to second quarter data to comparing fourth quarter to fourth quarter, or for that matter year-over-year measure is appropriate in the operation of this price-cap plan? 1072 MR. WILSON: No, I don't. The big problem, let's just take the case of going from second quarter-over-second quarter to fourth quarter-over-fourth quarter on the grounds that we've got all this data now, is that you're then throwing away two quarters of history: The period from the fourth quarter to the second quarter of a year ago when prices went up, or I may have got it wrong. You're throwing away two quarters of history when prices went up and what you want with a price-cap formula is to roughly track the level of the GDPPI and by throwing out that six months of increase with that skipped calculation, you would then for the rest of the period of the PBR, you would find your prices tracking below the level of the GDPPI. And that would be compounded if next year you went back to using the second quarter-over-second quarter thing. So I would think you want to have a consistent procedure that you then use year by year. 1073 MR. PENNY: And how does it become compounded when you go back on to your rates schedule to second quarter. 1074 MR. WILSON: Then you would double-count the unusual decrease in the GDPPI that occurred in the second half of 2001. Because that would enter both the fourth quarter-over-fourth quarter calculation and would enter the second quarter 2001-to-second quarter 2002. And as our report indicates, with both of those factors in, you would then have a bias of almost 3 percent with the price level being 3 percent too low for the remainder of the period. 1075 MR. PENNY: Right. Thank you, Mr. Wilson, and thank you Professor Mintz. 1076 Mr. Chairman, those are my questions. 1077 MR. JACKSON: Thank you, Mr. Penny. 1078 Who is ready to proceed first in their questions? 1079 MR. THOMPSON: Mr. Chairman, I would be happy to go. 1080 MR. JACKSON: Thank you, Mr. Thompson. 1081 CROSS-EXAMINATION BY MR. THOMPSON: 1082 MR. THOMPSON: Panel, did you hear my cross-examination of the earlier panel today? Were you listening over the whatever it is? 1083 MR. MINTZ: At times. 1084 MR. THOMPSON: You were? 1085 MR. MINTZ: At times. 1086 MR. THOMPSON: And I suggested to that panel that one could use an average annual GDPPI change from 2000 to 2001 as a proxy for measuring change; do you recall that? 1087 MR. WILSON: Yeah. 1088 MR. THOMPSON: And would you agree that if you used the average annual approach, 2000 to 2001, you don't throw out any quarters? 1089 MR. WILSON: I would not -- I'm not sure I can agree with that. 1090 MR. THOMPSON: Why not? 1091 MR. WILSON: I'd have to do the arithmetic, which I can do overnight, just to check it out. But I think you're still going to have the problem that by switching from the second quarter to the second quarter to doing an annual average, you're going to be omitting or reducing the weight of some quarters. 1092 But I think the use of an annual average, particularly a calendar-year average would be appropriate if the hearings were in the spring; then you would have all that data but if you've got a normal pattern with your hearings in the fall, the choice would be between the second quarter-over-second quarter approach which the Board has adopted or using an annual average where you're using four quarters ending in the second quarter. You could do that if you felt you wanted to smooth the rate of inflation more than you get with the quarter-over-quarter -- second quarter-over-second quarter approach. 1093 MR. THOMPSON: The object of the exercise is to develop a proxy for inflation in the year in which rates are being set; correct? 1094 MR. WILSON: I think the object of the approach is to try and track the input costs. This is a proxy for the input costs that the regulated utility faces. And so it's more of a historical tracking. You could argue that they are always in the normal course of events because you are not using a forecast for the next year, you're catching up to where you should be. And I think the one that you could say over picking the second quarter is you are getting the price level of the price cap -- adjusted up to where it would be approximately in the middle of the year. It might be a little better if you averaged the second and third quarter, but if you are working with data around the end of the summer, you are only going to have the second quarter. And, over time, that approach will track a level of GDP reasonably well. 1095 I think when you switch from one regime to another, and as I say I have to do the arithmetic on your proposal of the year-over-year, when you switch from one regime to another, you are going to have an adjustment one way or another which could throw you off on the level. So if you were to decide to switch regimes, you'd want to make some sort of special level adjustment to eliminate that bias. 1096 MR. THOMPSON: Well, not to dwell on this too long, but the Board's allowance for a 2001, based on the data they used from 1999 to 2000, was an inflation factor of 3.9 percent; did you hear that? 1097 MR. WILSON: Yeah. 1098 MR. THOMPSON: And the data, year-over-year annualized, shows that for 2000 over 1999, the annual average was 3.7 percent, so less than what the Board allowed. I'm suggesting to you that the 3.9 versus the 3.7 suggests that by switching to the annual average approach that I'm suggesting, we don't lose anything in the '99-to-2000 adjustment. Would you agree with that? 1099 MR. WILSON: Well, I don't really see the point of going back that far. I mean, if you wanted to go to an annual -- using four quarters, I think you have to look at the timing of when you're making decisions. And you could -- as I said, if you think of the normal hearing process being late summer/early fall, you could use the four-quarter average ending in the second quarter. And if you wanted to switch to that regime, you could go back and recalculate all past changes and then make some adjustment to the levels. 1100 The problem with even that approach is you'll be, on average, at a slightly lower price level because normally the GDP price index has been going up. The last three quarters of 2001 was an aberration when it went down. So, normally, if you use that, you're going to be tracking somewhat below the average price level as of mid-year. 1101 The second quarter over second quarter brings you up to date as of that point. 1102 MR. THOMPSON: All right. Well, let's move on. I discussed this with the earlier Panel and it's probably largely a matter of argument. 1103 In terms of the changes in GDPPI from quarter to quarter, does Statistics Canada identify the causes for changes? 1104 MR. WILSON: Statistics Canada collects the data and then other people can analyze it. They can analyze the components of inflation so one can determine, say, what was the role of export prices, for example, in inflation over some period, or what was the role of decline in machinery equipment and software prices. But Statistics Canada is not -- their mandate is not to identify causes. I mean, their mandate is to be the data-collection agency and that they do analyze their data but I don't think they tend to come out and say, well, the cause of inflation was that the Bank of Canada lost control of its money supply or something. That would be, in a sense, putting their head in the lion's mouth if they were to do that. But other people, of course, can use their data to analyze and break down what the cause was. 1105 MR. THOMPSON: And you are some of those "other people," are you? This is the kind of thing you can do? 1106 MR. WILSON: I have done in the past. 1107 MR. THOMPSON: I guess my point is there's no hard evidence from you or anybody else showing that the changes in these GDPPI numbers that are before the Board reflect Ontario provincial income tax reductions. That analysis is not before us; agreed? 1108 MR. WILSON: Yeah. 1109 MR. MINTZ: Yes. 1110 MR. THOMPSON: And in your testimony, and this is the Perspectives on Corporate Tax Changes on this lag issue, you tell us at page 5: "Intuitively," is the word you use, "Intuitively changes in corporate taxes affect the costs of capital investment and will thereby result in lower product prices, although it could take some time before the full adjustment is realized." 1111 That's what you said in your pre-filed evidence. 1112 MR. WILSON: That's correct. 1113 MR. THOMPSON: Do you stand by that today? 1114 MR. WILSON: I stand by it, although I think at the time we were so focused on the issue of lags and whether they mattered and so on, how you cope with them, that we forgot about the question of leads or the expectation of future changes. 1115 MR. MINTZ: Announced changes, not even expectations. 1116 MR. WILSON: So that if announced changes that are credible changes, and I emphasize the credibility, what we're looking at with both the provincial, not just Ontario but other provinces as well, and the federal corporate tax reduction plans are credible plans because of the fiscal situation of both the provinces and the federal government. So some of those future changes could already be impacted, but I still stand by the general statement. I mean, if you are dealing here with the initiation of tax cuts, like a lot of other factors, it's going to take time before its fully realized. 1117 MR. THOMPSON: But when you wrote the evidence, and you said it could take some time, are you in a position to help us with how long you thought it would take? Is it years, or can you help us at all with that issue? 1118 MR. WILSON: Well, that's a very hard question in that in lots of models, we have a macroeconometric model that's got all sorts of lags built into it and if we plug something into that model to determine -- I mean in a lot of cases in economics, things gradually adjust. 1119 So you might have something where you say get two-thirds of the adjustment in one year and then you're down to the -- so one-third is left to readjust. The end of the second year there's one-ninth to adjust, but it may take in perpetuity for absolutely a 100 percent adjustment so you then use a rule of thumb, like how long does it take to get 90 percent or how long does it take to get 95 percent of the adjustment. This partly has to do with the properties of the equations estimated to deal with the lags. So one could do that sort of exercise. 1120 On the other hand, the lags that are empirically estimated in these models represent the kind of average effect that occurs when events occur, and doesn't take into account the issue that we've added that expectation can be affected by future commitments for tax changes or future commitments on other dimensions. So it's very hazardous to take even a well-built model and just mechanistically use it to determine lags. 1121 MR. MINTZ: I will just add one other point. When you have announced corporate income tax rate cuts, you actually give a little kick to the -- to investment by actually having even a more -- a larger reduction in the cost of capital and the reason for that is that companies, when they spend money on capital, they will get their depreciation and other types of write-offs under the corporate income tax which they can deduct at a relatively high rate during the period when the rates are still high, but in anticipation of the lower rate in the future that will earn the income and therefore they will be actually taxed at a lower rate so you actually end up encouraging more immediate investment by companies when you announce rate cuts over time. And in fact, this has often been the practice of many governments, including the Canadian governments, in that they actually often announce corporate rate cuts over several years because they actually want to encourage more investment that way. 1122 MR. THOMPSON: Well, when you wrote this testimony, you were focussing on the length of time it would take before the full adjustment is realized. Now you've kind of shifted gears and you are emphasizing anticipation, but there's no hard evidence from you people that that is what is causing these particular rates in these particular years for the GDPPI. Have I got that straight? 1123 MR. MINTZ: You mean in terms of the GDPPI itself or in terms of the impact on investment? 1124 MR. THOMPSON: Well, we're seeing a decline here in 2001 from 2000, whether you go quarter by quarter or average annual, as I've suggested. 1125 MR. WILSON: The decline in the GDPPI. 1126 MR. THOMPSON: Correct. Is that right? 1127 MR. WILSON: Yes. But if you look at that -- 1128 MR. THOMPSON: Just let me put my question. 1129 MR. WILSON: Okay. 1130 MR. THOMPSON: You've talked a lot about anticipation and this may do this and it may do that in your pre-filed evidence; you talk about it could take some time before the full adjustment is realized. The point I'm trying to just nail down is there's nothing in your evidence that tells us how much, if any, of this decline in these numbers is attributable to Ontario provincial tax changes. Is that correct? 1131 MR. WILSON: I don't think there's anything in this particular -- these two statements. But I would like to point out if we're looking at the price decline in the GDPPI in the second half of 2001, that's wholly due to the decline in prices of exports. It's related to the declines in energy prices and other commodity prices that occur. If we look at the GDPPI for domestic final demand, we find that that index is still creeping up over the second quarter. So this was strictly driven by the decline in world prices for energy and commodities and perhaps exacerbated by depreciation of the Canadian dollar that tended to go along with it. So that's where that decline came from. 1132 MR. THOMPSON: All right. And just as -- I've got two other questions that I wanted to ask. Is the -- regardless of what method you use to calculate the change in -- from 2000 GDPPI to -- sorry, from 1999 to 2000 GDPPI which influences 2001 rates, the change in GDPPI from 1999 to 2000 will not catch tax reductions applicable in 2001; correct? 1133 MR. MINTZ: Actually, the announced changes in several provinces occurred in 2000 itself, in the budgets in 2000. And so some of the changes that actually occurred in 2001 were already anticipated in 2000. And so therefore, it may have been that businesses may actually have started reacting to those changes in 2000 and therefore, increasing their investments, increasing output that therefore results in a reduction in prices overall. 1134 MR. THOMPSON: Let me rephrase it. 1135 The change in GDPPI between '99, 1999 and 2000 will not capture any tax reductions that take place in 2001. I take your point if the announcement has some impact it could be caught. 1136 MR. MINTZ: Mm-hm. 1137 MR. THOMPSON: But the actual impact of the de facto reductions in 2001 would not be caught. 1138 MR. MINTZ: Yes. 1139 MR. THOMPSON: Agreed? 1140 MR. MINTZ: I'm not sure because of the fact that people may have reacted in 2000 and therefore there may have been some impact in 1999 to 2000 but I would expect the larger impact would be in the following year as you've -- or supposing in your question. 1141 MR. THOMPSON: And then taking it forward to the next year, if we go from whatever method one uses from 2000 to 2001, it will not catch the impact of actual tax reductions that take place in 2002. Do we agree? 1142 MR. MINTZ: Mm-hm. 1143 MR. THOMPSON: You have to answer yes -- 1144 MR. MINTZ: Except for the announced impact, yes. 1145 MR. THOMPSON: Thank you. Those are my questions. 1146 MR. JACKSON: Thank you, Mr. Thompson. 1147 Who's next? Mr. Janigan? 1148 MR. JANIGAN: Thank you, Mr. Chairman, I will be brief. 1149 CROSS-EXAMINATION BY MR. JANIGAN: 1150 MR. JANIGAN: Panel, I wonder if it's possible, you have been kind enough to illustrate and refer to a number of different tax reductions, corporate tax reductions that have been taking place in other provinces besides Ontario. Is it possible that the effect of these corporate tax reductions could be quantified in the form of an undertaking that uses the calendar years 2000, 2001 and 2002 and comes up with a weighted average for these reductions based upon the individual provincial contribution to components of the GDPPI? Is that possible? 1151 MR. MINTZ: I don't think it is possible. I think it's extremely difficult and, in fact, one that would be a real challenge, I think, for any expert to do. The reason for that is that the -- when it comes to the corporate income tax itself, when you're lowering the rate, the impact actually on businesses will depend on questions such as the degree into which they are leveraged. 1152 For example, because interest is deductible from the corporate income tax base, those companies that tend to be more levered will tend to have, the impact will tend to be smaller for them relative to other companies that tend to be less levered, in terms of getting the benefit of the corporate rate reduction. It will also depend on their depreciation deductions, inventory cost deductions in terms of the overall impact on the business. 1153 In addition, you have complexities in which there are some companies in the current year that may not be paying taxes because they may be running losses or using loss carry-forwards from previous years. So therefore one has to take that into account. And then you also have companies that -- particularly foreign-controlled companies which may operate in Canada and there's a question about how the Canadian tax might interact with foreign taxes, particularly if those Canadian taxes are creditable against foreign taxes as well. 1154 So what you need to do is sort of have enough data to segregate these different types of situations in order to analyze the impact of a tax cut. And then from there, one can then get how it impacts on the cost of doing business, in which I would argue that tax cuts would lead to a lower cost of doing business for companies, which would then, because of competitive pressures, cause their -- cause them to lower their prices. And that would, in the end, result in the lower GDPPI. But how you can segregate all those different contributions of different corporate rate cuts, I think, is quite a challenge empirically. I can understand how to do it theoretically, but it would be very difficult from an empirical point of view doing that because the kind of data for that calculation analysis is very hard to get. 1155 MR. JANIGAN: As I seem to recall in your evidence in chief that you attempted to speak about the impact of these corporate changes by using the percentage of corporate profits that each province contributes on a Canada-wide basis. And I assume that the percentage of corporate profits is a pretty good proxy for components of the GDPPI, and that's the reason you used them. 1156 MR. MINTZ: It -- the corporate profits are not necessarily a good -- are not necessarily indicative of the degree into which the prices might change. The reason -- corporate profits itself would give you an indication of how much tax can be saved, although you have to remember there's a difference between corporate profits as Statistics Canada or a company might measure in terms of book income, and what tax authorities allow in terms of taxable income. There's a difference there because governments will provide tax depreciation that's different from what books would use for accounting purposes. Inventory cost deductions may be different than what you use for accounting purposes, et cetera. So therefore just translating profits into the actual impact on the amount of taxes paid is the first complexity. And then of course the impact on the cost of doing business will depend on things like capital intensity of the firm. 1157 Those firms that tend to be more labour intensive, for example, the reduction in the corporate income taxes will have a lower impact than, let's say, companies that are more capital intensive. 1158 MR. JANIGAN: Let's take the first part of that analysis because I think that the percentage of corporate profits was used as -- in your examination-in-chief, and I attempt to illustrate how many provinces were, in fact, engaged in this kind of activity. 1159 MR. MINTZ: And the size; part of it was to emphasize that Ontario is a very big part of the Canadian economy and therefore has a big impact on the GDPPI in principle. 1160 MR. JANIGAN: If you use corporate profits as the variable is it possible that you could do a weighted average based on the provincial income tax changes in 2000, 2001 and 2002? 1161 MR. MINTZ: Well, one can always calculate whatever average one would like, but I'm not sure whether it's meaningful. 1162 MR. JANIGAN: But you could do that? 1163 Could I get an undertaking to that effect? 1164 MR. JACKSON: I'm sorry, could you explain just how you would like to use this? 1165 MR. JANIGAN: Essentially, we would -- in evidence in chief, it was indicated that a number of provinces, in addition to Ontario, were reducing their corporate income tax. And one of the ways in which it was illustrated that the size and the extent of these reductions in terms of going across the board was the percentage of corporate -- of corporate profits that were captured within individual province. And so that to what -- if we are attempting to measure what the impacts of income tax reductions are on corporate income across the board which - it is positive - that will have ultimately an impact on the GDPPI, one way of doing that is to look at the variable of percentage of contribution to corporate profits by individual province weighting -- doing a weighted average in relation to that contribution towards corporate profits, and then looking at that for the calendar years 2000, 2001, and 2002. 1166 MR. MINTZ: I think it would be -- 1167 MR. SOMMERVILLE: As I understand it, Mr. Janigan, what you're looking for is the rate of reduction varied with the percentage that the reducing provinces contribute to corporate profits in Canada. And you'd like an analysis that weights it in that fashion. 1168 What I understand the witness to be saying is that's not necessarily a dispositive calculation but that -- I think that's what you're looking for. 1169 MR. JANIGAN: Yes, that's right. Thank you, Mr. Sommerville. 1170 MR. JACKSON: Mr. Penny, you had -- I think you were about to make some comments with respect to whether or not you thought that this would be appropriate or not. 1171 MR. PENNY: Well, no, I was going to ask the question that you asked, Mr. Chairman. We've heard the answer, and Mr. Sommerville has, I think, clarified the point. What I -- where I think we are on it is that it is physically possible to do it but it isn't going to tell us very much, based on what the witness has said. And I'm in your hands as to whether you think it would be helpful based on the evidence. 1172 MR. JACKSON: Can we -- 1173 MR. MINTZ: Could I just add -- maybe add one thing, just to give you an idea of the complexity that's involved in trying to do what's suggested. 1174 There's a book I published in the fall, Most Favoured Nation, which looks at the impact of taxes and subsidies on the cost of doing business, comparing Canada to the U.S. That is the kind of methodology that one would have to do in order to do the kind of analysis in terms of how it would potentially impact on GDPPI. It's extremely difficult to do it, you know, in a way that one would like to make sure that you're -- you know, that one is getting the exact impact on GDPPI. But the number that you would not be doing is to just simply take the statutory tax rates, where you have to, let's say, break down manufacturing from resource sectors and other sectors because there's been different rate cuts for them, and also you have to distinguish between small and large businesses as well, but you -- even if you knew the statutory rate reductions, you can't simply multiply them by profits, because the amount of tax paid by companies is based on their taxable income. 1175 And so what you need to know is the ratio of taxable income to profits in order to do the calculation. And that is something that is not privy to people in terms of data. The only kind of data that I know of that is available is sitting at the Canada Customs and Revenue Agency and the Department of Finance and that's very confidential. 1176 MR. JACKSON: Mr. Janigan, that makes sense to me; that it's very hard to do what you're asking because we don't know the taxes payable, we just know the tax provision that is on the financial statements. And I'm not sure whether this would give you the information you want. And I'm also trying to think about all of the other complexities that cross-examination has referred to today and wondering whether, without wanting to deny you any information with respect to argument, but whether the other complexities and variables don't swamp this one. 1177 MR. JANIGAN: Well, Mr. Chairman, on top of page 5 of the evidence that was filed in January, the Panel notes that -- makes the observation that, given that four-fifths of the corporate profits are earned in three provinces, all of which are reducing the corporate income tax rate, the GDP deflator used for the price-cap index would be affected significantly by provincial rate reductions. 1178 I wasn't the one that chose corporate profits as the indicator of the degree of effect of that provincial -- decreases in provincial income tax will have, or potentially have, on the GDP deflator. What I understand my -- what the Panel tell me now is that this is not the percentage of -- that is contributed towards corporate profits by individual provinces, this is not necessarily a good indicator of what the impact will be on the GDPPI which -- I'm content with that answer. 1179 But if that's how we should treat this part of the evidence, if there is some significance to be associated with the fact that there is significant contribution of corporate profits by provinces that are reducing, then all I can suggest is the weighted average based upon their contribution to corporate profits may be of some use in determining that issue. But I'm not -- you know, I'm not off on a frolic of my own here. This is something that's derived from the evidence. 1180 MR. PENNY: And Mr. Chairman, I think that Professor Mintz spoke to that exactly when he said a few minutes ago that it's theoretically possible and that's what's being spoken of there. But when you get down to the empirical level of actually doing it, that you have to take account of all these complexities. So I think there's no inconsistency here, it's simply a question of going from a directional, theoretical model to what you would actually have to do if you were going to land on the ground. 1181 MR. JANIGAN: I'm content with the response that this would not be a useful exercise and we'll do it to that extent in any argument. 1182 MR. JACKSON: And that there probably were certain assumptions made when the witnesses made the relationship to corporate profits in that in practice, if you were to measure this, this would result in a significant amount of work in order to take account of all of the factors. And I think that your questioning has illuminated that for us and I'll let the witnesses comment in a minute. But I think that we have seen that corporate profits, as reported alone, are not definitive in this. Would you agree with that? 1183 MR. MINTZ: I think so. I think -- the statement about the portion of corporate profits that are in Ontario, Alberta, Quebec, and other provinces was used to indicate the overall, or at least what we would expect to be the kind of impact on the GDPPI, without saying necessarily that it's going to be 43 percent exactly in which the corporate rate reduction in Ontario would get reflected in the GDPPI itself. It could be 48 percent; it could be 37 percent; it could be 60 percent. You know, it's -- that's the -- until you go through all the exact calculations, which would be extremely difficult to do, the point is that Ontario is big and it will have a really large impact on the GDPPI deflator. 1184 MR. JACKSON: Mr. Janigan, are you comfortable enough with that? I think I see it as a generalization. 1185 MR. JANIGAN: I think that I'm content to move on, Mr. Chairman, and I thank you for your assistance in this matter. 1186 MR. JACKSON: Thank you for bearing with us. 1187 MR. JANIGAN: On page 6 of your January evidence, I want to explore the second paragraph that you set out there. It indicates: "Furthermore, the temporary effects of tax changes on profitability provide incentives for investment which accelerate the adjustment to efficient levels of capital in all industries. To eliminate the transitory effects through temporary adjustments to the price cap formula lowers the profitability of the utility industry relative to other industries and therefore reduces the incentives for productivity-enhancing capital investments in the utility industry. This would make it more difficult for the utility industry to attract capital and hence delay the achievement of efficient levels of capital in the utility industry." 1188 Now, in light of that section, I wonder if you could tell me what happens to corporate tax reductions under cost-of-service regulations, under cost-of-service regulation of a utility? 1189 MR. PENNY: Mr. Chairman, neither Professor Mintz nor Professor Wilson are experts in cost-of-service regulation. 1190 MR. JACKSON: Mr. Janigan, are you -- do you want them to say that? 1191 MR. JANIGAN: I will -- I take it you adopt the answer of your counsel? 1192 MR. WILSON: Sorry? 1193 MR. MINTZ: Yes. 1194 MR. THOMPSON: We're sorry for him too. 1195 MR. PENNY: Personally, I'm happy. 1196 MR. JANIGAN: Okay. 1197 Finally, my last question. Are either of you two -- have either of you two gentlemen on the Panel conducted any econometric studies or models which show a positive relationship between income tax reductions and changes in the GDPPI? 1198 MR. WILSON: A negative reaction? 1199 MR. JANIGAN: That's right. 1200 MR. MINTZ: The only exercise which is -- which would be akin to that was be one in which actually my colleague probably was more involved with some of this than we were although we did some original work together on it. It was the switch from going from the manufacturers' sales tax in Canada which was, you know, a tax at the manufacturing stage to the goods and service tax which was a tax at the consumer stage, back in 1991. 1201 Now, at that time, prices or the GDPPI would reflect taxes that were paid at the manufacturing level but one didn't really know exactly what would happen if you eliminate the tax on manufacturing goods, how that would impact on the -- on prices in the economy. And the Department of Finance made the assumption that it was fully reflected in the GDPPI by eliminating the manufacturers' sales tax and therefore prices would go down by the full amount of the manufacturers' sales tax relative, let's say, to a bundle of goods. And then the GST would add on to prices as a result. 1202 Both my colleague and I did some work a little bit earlier on, not really any deep empirical work, but we had some concerns about that assumption. But I do know that the Department of Finance conducted a survey and it was fairly close, actually, in terms of the reaction that prices have to the manufacturers' sales tax. 1203 Now, the reason I mention the manufacturer's sales tax even though it is a very different tax than the corporate income tax -- I've always listened to the way that one looks at corporate income taxes. It's very similar in some ways to a sales tax except that it's really on the capital component of costs and not on all the costs of the firm, as opposed to a sales tax which you can think of which adds to the total cost of the firm in terms of what's being sold. Therefore, if you think of it akin to that idea, then at least there's a little bit of evidence in respect to that that would suggest that there is a full compensation in terms of tax reductions on costs that would lead to lower prices. 1204 MR. WILSON: The fact that that -- if I could just add, the replacement of the MST by the GST did change the composition of the weight of taxes on the different components of the final demand. The objective of this tax reform was to place the sales tax burden on consumption. The old MST, despite the various exemptions within it, nevertheless, did have a burden on exports and on investment goods. And so moving from that, that system, to the GST system did have effects on the relative prices. 1205 There was work done in the Department of Finance by Hamilton and Wally where the general equilibrium model -- looking at these impacts in identifying the would-be effects that would stimulate investment coming out of that particular tax reform. 1206 MR. JANIGAN: Thank you, Mr. Chairman, those are all my questions for this Panel. 1207 MR. JACKSON: Thank you, Mr. Janigan. I know I said that we had a meeting at 4:00, and I've used some modern technology to delay it. Shall we keep going? 1208 Okay. Who would be next questioning this Panel? Mr. Moran, have you any questions for this Panel? 1209 MR. MORAN: I don't believe so, Mr. Chair. 1210 QUESTIONS FROM THE BOARD: 1211 MR. JACKSON: I just tried to recall one query that came to my mind as you were giving your evidence this afternoon, and it was in reference, I think, to your comment about where would we stop if we adjusted for this. And I think you mentioned other world prices impacting the GDPPI as well. So, for example, things like changes in energy prices do affect GDPPI, don't they? 1212 MR. WILSON: Yes. That was the very large decline that pretty well -- energy was most of that story in the second half of last year. 1213 MR. JACKSON: Yes, indeed. 1214 And yet that's something which we have specifically isolated as something that should be treated on a pass-through basis, notwithstanding that that the GDPPI is part of our price cap and would be applied to any energy costs of running the distribution system. So are we being inconsistent in doing that? 1215 MR. WILSON: I would -- I wouldn't say you're being inconsistent because you're dealing with the specific -- they buy natural gas; you're not dealing with all energy, which includes oil, of course, and electricity and coal. And you're treating them as if they are selling, in a sense, a transportation and distribution and delivery service. 1216 So then the question is is the GDPPI, as a broad index, the best price index to choose to represent their -- what happens to their input costs as a result of general economy-wide developments. And it may well be that one could choose a better index. It might be, after this experience last year, where you realize how much the export deflator can move that around and that doesn't have much to do with their input costs, that a GDP, let's say, confined to final domestic demand might be a superior. I just say "might." I think it requires some research. 1217 MR. JACKSON: Yes. 1218 MR. WILSON: Another alternative might be the core consumer-price index because one of the factors that's important for any company is their labour costs and the most important inflation driver on labour costs is the consumer price index. And the core kind of smooths out some of these energy and food price things that you want. 1219 So there would be various alternatives. I wouldn't think it would be inconsistent. It would be a matter of saying, can we find a better index that would give a more reasonable proxy for the set of input prices that they face, including their wage costs. 1220 MR. JACKSON: Okay. Thank you for that. Those are all my questions, too. 1221 So, Mr. Penny, unless you -- do you have any redirect? 1222 MR. PENNY: I have only one question in re-examination, Mr. Chairman, and it touches a little bit on what Mr. Wilson just said, although it arose out of a question that I believe was put to him by Mr. Thompson, the first cross-examiner. 1223 RE-EXAMINATION BY MR. PENNY: 1224 MR. PENNY: And it had to do with your answer that indicated that the run -- what you described as the unique or unusual run-down in prices was largely driven by export rather than domestic demand. And I wondered what the implications for the application of the price cap for Union would be if the fact that the main driver of that particular price deflator was -- that it was exports. 1225 MR. WILSON: Well, it could be that that would be an aberration that would be particularly harmful in the sense that a price change driven by export -- driven, let's say, by energy price decline, given that they have got this pass-through mechanism in their own pricing, could mean that they are not buying other energy inputs. It's not like they get a bargain, they're buying a little bit of this gasoline to run things but they are not buying a disproportionate amount of energy. So that may be misrepresenting. 1226 It may be that when an event occurred, the GDPPI got particularly out of line with, say, a true index of their input costs. Like, if you had unlimited resources and could go into Statistics Canada and get them to construct a special index for it, let's call it the ideal index, maybe the GDPPI, in the long run, might not be a bad proxy. But when events like that occur in the second half of the year, that sudden plunge in energy prices, that could be a distortion which would push it away from the ideal index. 1227 So when I think about what you might want to do, it'd be that -- try to get maybe some detailed evidence on what it is that -- what are Union's inputs and how they are moving over time and experiment with different indexes that Statistics Canada publishes and see whether one can find a better index to track those than the one you are using now. 1228 I'm not recommending you do this within this window of the performance-based regulation; maybe when you come to rethink the next round would be the appropriate time. And it could be a large kind of research activity to actually do that properly. 1229 MR. JACKSON: I appreciate your suggestions in the spirit in which they are given. 1230 MR. PENNY: Thank you, Mr. Chairman, those are all my questions, so we're done. 1231 MR. JACKSON: So we're done for the day. We meet again at 9:30 tomorrow morning. 1232 MR. PENNY: Yes, and we'll be proceeding with the gas supply panel at that time. 1233 MR. JANIGAN: Mr. Chairman, I wonder if, on behalf of Mr. Warren and myself, I can make a request of the Panel. 1234 The gas supply panel, in particular the evidence dealing with Alliance-Vector, the way in which Mr. Warren and I have divided up the work, Mr. Warren was to proceed first in his cross-examination, and essentially to proceed out of order at this point in time is going to involve a considerable amount of work on my part and may, in fact, be not as helpful to the Board as it might have been had the order been preserved. 1235 We've done a quick canvass of those who have questions for the Alliance-Vector and apparently only Mr. Warren and myself are the questioners. 1236 MR. PENNY: I don't think that's correct, because I know Mr. Vegh has questions. In fact, that's his principal interest in this hearing is with respect to that Panel. 1237 MR. JACKSON: And ECG has some questions in that area. 1238 MR. JANIGAN: It was a canvass of the counsel that were in attendance this afternoon. 1239 MR. JACKSON: Yes. But with that refinement -- 1240 MR. JANIGAN: I think it's still possible that we may be able to proceed on Thursday morning and finish that Panel in the course of that day, in the event that we elected to proceed on Thursday morning in that fashion. I agree it's an indulgence and in fact -- if, in fact, the other -- if it was decided that the other counsel, apart from Mr. Warren and myself, would wish to proceed ahead of us, I think that that might be possible as well tomorrow morning. 1241 MR. JACKSON: Well, we do have a Board meeting tomorrow as well, so that we do have to sit a shorter day. So, Mr. Penny, I wonder -- I think we could ask our few questions of Ms. Elliott in the morning. 1242 MR. PENNY: Mm-hm. 1243 MR. JACKSON: And if we then got started on the other Panel, do you think we would go over to the following day or -- 1244 MR. PENNY: Oh, I'm quite sure that we'll end up going over to the following day, and indeed I've -- I effectively undertook to Mr. Warren that he would not be deprived of his right to cross-examine because he had to be in Windsor at an appeal tomorrow. That, in my submission, isn't really the issue; the issue is making efficient use of the time available to us. 1245 Now it may well be that by the time the Board has asked its questions of Ms. Elliott and if Mr. Janigan can arrange with Mr. Vegh and I assume ECG would be going first anyway, that will use up the morning and will be at 1:00 and all will be fine. My only point would be that if we've got an hour or some decent amount of time that we ought not to just let it go to waste and Mr. Janigan is an accomplished counsel, knows this area well, has cross-examined many times and there's no reason why we can't use that time effectively, if in all likelihood -- 1246 MR. JANIGAN: I will be including that in my cost claim, by the way. 1247 MR. PENNY: He can also put it on his CV, for what it's worth. 1248 We're very reluctant to see time go down the drain that could be used effectively. So my only suggestion would be that Mr. Janigan be prepared to at least start with his cross-examination tomorrow, in the event that -- that there's time for him. 1249 MR. JACKSON: All right. I think that -- to be perfectly frank, the panel members could use some lunch too so if everyone were very generous, we could break before 1:00. So -- 1250 MR. PENNY: Lunch is important, Mr. Chairman. An army marches on its stomach. 1251 MR. JACKSON: So let's just see how we go tomorrow, and, Mr. Janigan, I think the forecast looks like you will probably be able to follow Mr. Warren, but that is not a commitment. Fair enough? 1252 MR. JANIGAN: Thank you. 1253 MR. JACKSON: Thank you. See you tomorrow. 1254 --- Whereupon the hearing adjourned at 4:30 p.m.