Rep: OEB
Doc: 129LT
Rev: 0























ONTARIO ENERGY BOARD

Volume: 9

April 17, 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

ROBERT ROWE

ENBRIDGE CONSUMERS GAS



7
TABLE OF CONTENTS

8

PRELIMINARY MATTERS:

[15]





SUBMISSIONS BY MR. PENNY:

[78]





9
EXHIBITS

10

11
UNDERTAKINGS

12

13
--- Upon commencing at 9:53 a.m.
14
MR. JACKSON: Good morning. Please be seated.

15
PRELIMINARY MATTERS:

16
MR. JACKSON: Mr. Penny, I should just perhaps put on the record why we're a little late starting this morning; because we've had a call from your client wondering why he couldn't hear the broadcast. He and she and whoever. So, we are little late starting because as a courtesy we were asking Board staff to talk to Union's staff and just give them a heads up as to what questions the Board might have to ask this morning and I guess it took a little while longer than expected. So that accounts for our somewhat delayed start, this morning.

17
MR. PENNY: That's fine, Mr. Chairman.

18
MR. JACKSON: But I hope it's been fruitful.

19
MR. PENNY: I'm sure it has.

20
MR. JACKSON: Good. Thank you.

21
Mr. Penny, I guess -- we may have just solved one of our problems. We've been asking staff about the additional correspondence from Oxford Automotive, but given that we were scrambling to find it maybe Mr. Reghelini, who probably knows the materials filed far better than anyone else in the room, would advise you or put on the record just where that was answered for us.

22
MR. REGHELINI: Just to clarify, Mr. Chairman, are you asking for Union's response?

23
MR. JACKSON: Yes. Do you know what date you filed that?

24
MR. REGHELINI: Actually, we do have some correspondence outstanding that we have to send into the Board on those letters, so it has not been filed yet.

25
MR. JACKSON: Okay. Thank you very much for that. It was just -- we were looking at the letter from counsel with respect to the last package we got and let me just quote from that. It had said that, "attached are Union's remaining undertaking responses in the above-noted proceeding," so we just wanted to make sure that we really did have all of the remaining undertakings. So you say there's still some outstanding? Can you tell us if there are any others.


26
MR. REGHELINI: To my knowledge, we don't have any undertakings outstanding, but we did have to get a responses in terms of correspondence. I wasn't aware that these were --

27
MR. JACKSON: You are distinguishing between undertakings that are actually given a number and undertakings that maybe your counsel gave that were not given a number.

28
MR. REGHELINI: That's correct. But this is the only outstanding item, let's call it, that I'm aware of, is the company's written -- a written response with respect to the customer letters that were filed in this case.

29
MR. JACKSON: Okay. Now, with respect to Exhibit G.7.1 which we have received, I guess yesterday, responding to questions from the Board, I wonder if I could maybe just take you through a few questions with respect to that.

30
Mr. Penny, how would you like to handle that? Is Mr. Reghelini here this morning to speak to the Board's questions on this?

31
MR. PENNY: Yes, that's correct, Mr. Chairman.

32
MR. JACKSON: Thank you.

33
So on page -- well, unfortunately it's labeled page 1 of 2, but it's the second page and it follows page 1 of 2; and it deals with the reporting that we inquired about. And a very rough calculation of the delays in the filing after the quarter would be, I guess, the order of 100 days for the first one; something around 90 days for the second; something around 55 for the third; something around 122 for the fourth; something around 82 for the next item. The second quarter results were never filed, 93 days for the next quarter results and 87 for the next. So I was just wondering -- now, I take it if we can get this reporting done on the public record the way we asked for it to be done coming out of the 17 case, that we may be able to track this better, but what sort of time lines would you think you'd need after a quarter in order to file these reports with the Board Secretary?

34
MR. REGHELINI: I guess before I address the time lines necessary, I think you have to look at the time lines or filing the quarterly reports identified here in the time frame in which we were operating. At the time, we had an application before the Board to change the method of regulation and we weren't -- we weren't sure how we should be reporting or what our earnings were because we didn't have 2000 rates until -- we didn't have 2000 rates confirmed until July of 2001. And at the same time, we were being told that we were going to have a decision on 2000 rates shortly, in the time frame of one month. And that understanding continued for a period of months and that's why the delay occurred in the filing of 2000 results up until a point. And then the energy returns officers told us well, just file something, get it in because it had been -- half the year had gone by.


35
So in many ways, we were catching up after that so I wouldn't anticipate that going forward. Our filing of these quarterly reports would be for as extended a timeline as you see here, but I think what we would need is something like 60 days from the end of the quarter to be confident that we could get reports in on a regular basis, on a timely basis.

36
MR. JACKSON: Okay. Thank you for that. I think we should give that some thought and see if we can establish something that is practical and yet useful -- I mean practical for you in terms of filing relatively accurate statements, although the quarterly statements, of course, can be adjusted, I guess, at the end of the fourth quarter if there are adjustments to be made. But nonetheless, if you need 60 days to do it, we'll reflect on that.

37
MR. MORAN: Mr. Chair, I just wanted to go back to the Oxford Automotive matter. There seemed to be some confusion about whether there was an undertaking number assigned to it.

38
MR. JACKSON: Yes.

39
MR. MORAN: The undertaking number is G.3.3, if that assists Mr. Reghelini.

40
MR. JACKSON: Right. But I think that perhaps there was some additional papers, Mr. Reghelini is saying, that Union had agreed to file over and above that because we are aware of that undertaking number response.

41
MR. MORAN: I think that one was intended to cover the contract and correspondence in response to Mr. Sommerville's request.

42
MR. JACKSON: We may have done some discussion because Union seems to think that there is some additional material.

43
MR. REGHELINI: Mr. Chairman, G.3.3 has been responded to and that was a specific request for communication that went to customers, and specifically Oxford Automotive. What I was referring to as sort of a general request. I had indicated that Union would file a letter with the Board responding primarily to Barnett, but to the customer complaints that were filed in the letters as part of this case, and that's what remains. And we will endeavour to get that in this week.

44
MR. JACKSON: Thank you, Mr. Reghelini, I appreciate that.

45
It's a small point but I know staff asked you about it. We might as well just have you put an answer on the record. Under schedule 1, the other category of 2.4 million, what does that include? That's in footnote number 4.


46
MR. REGHELINI: That includes interest on debt to Centra Manitoba, but primarily it's the net proceeds from asset dispositions.

47
MR. JACKSON: Okay. That's fine. And these are -- obviously one would normally think if these are in the utility column they are utility assets, right, that are being disposed of? It's maybe a peculiar question to ask but we've not necessarily had clarity about what should be considered utility and non-utility. And maybe I shouldn't have asked you that question, but given that we've had so much trouble with what utility means, I'll just ask it anyway.

48
MR. REGHELINI: Sorry and the question is?

49
MR. JACKSON: These net proceeds from asset dispositions, these are dispositions, I would take it, of utility assets; is that correct?

50
MR. REGHELINI: I guess the reason they appear in the adjustment column is to be clear that these are proceeds that are -- that belong to the shareholder as opposed to customers and that's why they appear in that column in that presentation.

51
MR. JACKSON: Okay. So that they are non-utility asset dispositions then, are they?

52
MR. REGHELINI: I guess as you identified, it's -- there's a little bit of unclarity as to what non-utility and utility means. What Union had been doing has been if something was -- pertained to the shareholder, that's why it was put in the non-utility column. So perhaps when these things are reviewed in -- this summer as part of the 2003 customer review process, a clearer presentation of these will be made that can explain --

53
MR. JACKSON: Okay. Because the return on the equity supporting utility rate base is considered utility earnings, isn't it, normally? I'm just stepping back a step, you know. I mean we determine what a fair return will be and we -- when you report to us what your earnings have been on your utility operations, that's utility, isn't it?

54
MR. REGHELINI: Correct.

55
MR. JACKSON: Yes. So it's very peculiar to me, I might just say, because I'm sure it will help the discussion as we go forward, why any other utility earnings would be considered to be non-utility. But you'll work that out, I know, with Board staff, probably.

56
MR. REGHELINI: Sure.

57

MR. JACKSON: Okay. Could you just tell us how much of the 2.4 those net proceeds from asset disposition are?

58
MR. REGHELINI: About 1.7 million.

59
MR. JACKSON: Thank you. Okay. Now, one other place where we all had just a little bit of trouble understanding is, that if you look at the bottom of schedule 1, line 21 and you look at the 124.1 and the 108.1, and then you go over to where that is used in order to calculate a percentage return in line 5 on schedule 3; do you see that the 121.4 carries over there from schedule 1 but the 108.1 does not? It carries over as 107.7, it would appear, and I think that you had an explanation which you gave staff. And in the shortness of time this morning, I'm not sure that the Board understood it so why don't we just put it on the record.

60
MR. REGHELINI: Sure, that's an artefact that arises from the fact that we're transitioning from cost-of-service regulation to PBR regulation as we go from 2000 to 2001. Under PBR what you see is that the return on common equity on schedule 3 ties to the utility earnings to common on schedule 1 for the year 2001.

61
MR. JACKSON: Yes.

62
MR. REGHELINI: If -- under cost-of-service, what we would do is we would put the -- on schedule 3, rather than put our actual earnings into that column of return, instead we would put the allowed rate of return in column E and calculate what the allowed earnings would be. That calculation would then be used to take the difference between the allowed return on schedule 3 and the actual return on schedule 1 to come up with a net sufficiency or deficiency that occurred on an actual basis in that year. In the context of PBR, where we're no longer regulated on an earnings basis except for to the extent there's any earnings sharing, the formula sets what the rates will be and so our presentation here just was to report actual in both those places: Schedule 3 and schedule 1 for the year 2001.

63
MR. JACKSON: Okay. You see, I thought the schedule being headed up, "Calculation of rate of return," it was the calculation of rate of return related to the financial reports you were filing this time, but I see -- I do understand your explanation. The 10.62 is the allowed rate of return on equity for 2000; is that correct? That's what I understood you to be saying. And that if I multiply the 10.62 times the 104.4 that I should get the 107.7. You know, if you think this is -- I'm not suggesting you do, but I'm just sensing some of the other people in the room get a little bit bored by looking at this detail and you think we could work it out behind the scenes but we don't seem to be able to and I'd like some of this record clear before you do your argument.

64
MR. REGHELINI: Actually, I would actually like to just do a confirming calculation, if that's possible.

65
MR. JACKSON: Yes, certainly.

66
MR. REGHELINI: And you want us to do that before we begin the argument then?

67
MR. JACKSON: Well, if it helps you, I've just done it and it's -- the 10.62 the times the 101.4 does come out to 107.73, say, so it does -- that does confirm. So the only outstanding question is 10.62 the Board -allowed rate of return for the year 2000.

68
MR. REGHELINI: I guess my recollection was that there was a 9.75.

69
MR. JACKSON: Yes, that was my recollection too. That's why I thought that the 107.7 was a typo.

70
MR. REGHELINI: I think what I need to do is I need to call back to Chatham and just find out what's going on. There may be a calculation error going on in that schedule.

71
MR. JACKSON: Okay. Thank you, Mr. Reghelini, I do appreciate that. So if you'd like to advise us of that at the end of the proceeding today, that's acceptable to us.

72
MR. REGHELINI: We can do that.

73
MR. JACKSON: Good.

74
Now, Mr. Warren -- unfortunately, Mr. Wightman has just gone to see something but I just might ask you if you might help me and recall were there any other questions which we gave staff to talk to Union about that you can recall?

75
MR. MORAN: My understanding is that was all we had.

76
MR. JACKSON: I think it is, too.

77
Mr. Dominy, can you help with any? No. I think that covers the ones we thought we should get on the record. Okay. I think then that we turn to you Mr. Penny and argument-in-chief.

78
SUBMISSIONS BY MR. PENNY:

79

MR. PENNY: Yes, thank you, Mr. Chairman. Just by way of preliminaries, there are two things that the Board should have before it: One is a single page with an outline of 10 points on it, and that is the order, the headings that I propose to address in that order and I'll explain why we adopted that approach in a second. The other -- in order to avoid having you pull out books or various things, I have prepared something I've called a compendium of evidence, which is simply extracts from a number of different pieces of the evidence or decisions that I propose to refer to in my argument. So that's for the convenience of the Board. It's perhaps slightly misdescribed in that it is not just evidence. There are some precedents and judicial authorities in there that I also propose to refer to, but we'll get to that in due course.

80
The final matter I thought before starting the argument I would just offer up to the Board, but I didn't place these on your desk is, I know some of the Board members will have this, it's a map of the Union system that shows where the pipelines are. This has been made available to the Board and parties in the past, and I know Mr. Sommerville, in particular, hasn't done a lot of Union cases before and I thought it might just, purely for informational purposes, might be helpful to have that just to -- I find it helps me to just mentally orient what it is we're talking of by seeing where it is. This is not totally up to date in that the Alliance-Vector lines are not shown on it, but other than that it's effectively a decent representation of the Union -Centra system. So I just wanted to offer that up and if the Board would find that helpful, we can provide it.

81
MR. JACKSON: Mr. Penny, I think we first had this discussion when I first came on the Union panel and I did appreciate it. So thank you very much, we'll take it.

82
MR. PENNY: All right. Thank you, sir.

83
MR. PENNY: So the outline of argument. We gave a bit of thought to how to come at it and I know this is different from the order in the ADR, but the logic it have seemed to us to be -- to follow essentially the logic of the Board's decision in determining rates. So that the starting point would be to determine the price cap, what the price cap index is, then you go through the issue of non-routine adjustments, whether there are any, then you would go through the pass-throughs, then you would have to deal with deferral accounts, then you would -- the -- at the point of dealing with earnings sharing, and then after that you would deal with any subsidiary rate issues. So that's the logic of the outline.

84
So let me start with the calculation of the price cap, issue 2.

85
The pricing formula approved by the Board to adjust Union's rates was set out at page 76 of the decision and that's at page one of the compendium, and that's a paragraph 2.233. And the -- it sets out there that the PCI equals inflation less the X-factors, plus or minus the Z-factors or non-routine adjustments, plus or minus pass-throughs, and that produced 1.9 percent, as originally proposed. And then it was -- and then so the Board went on to say, "where the price cap index is determined by adjusting prices for the forecast growth in inflation, offset bit a productivity factor, adjusted as required for the impact of external factors beyond the reasonable expectation of management's control. Such external factors are considered not non-routine and called Z-factors, or relatively routine, predefined and are referred to as pass-through items."

86

So the price cap index, which is used to adjust base revenue, is derived by taking inflation less productivity, adjusting for any non-routine adjustments and then adjusting for any pass-through items. And the Board found at page 80 of the decision, which is at page 2 of the compendium, that the inflation factor should be determined annually rather than fixed, as Union had originally proposed for the PBR term.

87
Paragraph 2.248 says, "The Board finds that the inflation factor should be determined annually. For the purpose of determining the annual price cap index, the Board adopts the use of an annual inflation escalator based on a year-over-year growth for four quarters of actual data, published by Statistics Canada for the Canadian Chain Gross Domestic Product Price Index."

88
Now this passage, in my submission, makes it clear that the purpose of the inflation factor is to measure year-over-year inflation, and the Board specified here how that was to be done. That is, year-over-year growth over four quarters of actual data published by Statistics Canada. Three components: Year-over-year growth; four quarters; and using actuals, not forecasts.

89
And then at pages 89 and 90 of the decision, the Board gave further direction and prescribed precisely how the inflation factor is to be determined to derive the price cap for 2001 and for each year thereafter during the PBR term. And at the bottom, starting at the bottom of the page, this is now at page 3 of the compendium or page 9 of the Board's decision, in the last paragraph, starts, "The Board has calculated that using the most recent data that would have been available for GDPPI, if the price cap had been set in October during a customer review process. Union's price cap index for would be as follows:" And then it sets out in tabular form the various quarters and underneath the calculation of the price cap escalator.

90
Then just dropping down to 2.290, the Board found that, "Based on the evidence in this proceeding, for the first year of the price cap plan the Board finds an I-factor of 3.9 percent." And that, of course, was the difference between Q2-2000 inflation measure and Q2-1999 inflation measure, as determined by the GDPPI.

91
"For the term of the trial price cap plan, the Board finds, based on an input price differential of minus 1.1 percent and a stretched productivity factor of 1.4 percent, an X-factor of 2.5 percent." So that, of course, remains mixed.

92
Then the Board> concludes, "Therefore, for the year 2001, the Board finds a price cap escalator, before Z-factor and pass-through considerations, of 1.4 percent for the first year of the plan."

93
Now that is exactly what Union did in calculating the price cap for 2001 which was accepted for all parties. And it was by applying exactly the same methodology that Union calculated the price cap for 2002, but that was not acceptable to the parties.

94
Union's evidence on this can be found at Exhibit B, tab 9, page 2 and is also illustrated at Exhibit F.4.2 in tabular form, and I'll come to that in a moment.


95
There are two issues that need resolution before you, or that come up out of this calculation. The first is purely the methodology, which data to use to determine the inflation factor, and then the second is a smaller issue, but I think still needs to come to grips with, and that arises from the fact that the StatsCan data -- or that StatsCan updates its data from time to time. So I will deal with those two issues in sequence.

96
The principle dispute arises from the fact that some intervenors want to use a different measure of inflation for 2002 than the Board used for 2001 despite the fact, in my submission, that the Board decided that this methodology was to be used not only for 2001 but in each year thereafter for the full three-year term of the PBR. And that's of course a reference back to paragraph 2.287. It's Union's position, supported by not only the language of the Board's decision itself but also by four experts who testified before you, all PhDs in economics, that there can be no change in the inflation measure. It's our submission that there can be no change for two reasons.

97
First of all, any change in the methodology mid-stream, will introduce a bias into the year-over-year measure of inflation, and secondly, the specific change being advanced, in our submission, is opportunistic and devoid of any principled justification. That is, the change being advanced by the intervenors.

98
I hardly need say that Drs. Hemphill and Schoech and Mintz and Wilson are eminently qualified to assist the Board on issues like this because of their extensive expertise and experience. Drs. Hemphill and Schoech, in the establishment and operation of incentive rate mechanisms, and Drs. Wilson and Mintz in connection with economic policy and research, and especially in Dr. Wilson's case, in relation to StatsCan inflation measurement.

99
Dr. Wilson, you may recall, is not only the director of the Policy and Economics Analysis Program at U of T's Institute for Policy Analysis, but is the chair of the National Accounts Advisory Committee for Statistics Canada. And, to state the obvious, there is, in my submission, significantly no other evidence before the Board to contradict what all these experts say is the right approach given the decision that the Board has already made.

100
So what is the intervenor position? Well, to some extent we'll, I guess, have to hear intervenor argument before knowing fully what all those possibilities might be, but one indication of at least one position can be found in the ADR agreement at page 17 which is at page 5 of the compendium. And in the section dealing with 2002, with the 2002 price cap, 8.2, it says that, "Intervenors are proposing a price cap for 2002 using the fourth quarter 2000 GDPPI to the fourth quarter 2001 GDPPI reported by Statistics Canada which results in a change in GDPPI of minus 0.9 percent."

101

Both the distorting and the opportunistic nature of this proposal are graphically illustrated by Exhibit F.4.2, which is the next page, page 6 of the compendium. In this schedule, line 1 shows that Union has done the inflation calculation consistent with the Board's decision. It measures year-over-year inflation of four quarters of actual data for 2001 and for 2002 using the second quarter actual data. For illustrative purposes, we've shown how that plays out into 2003, or how it might play out, by using forecast numbers for the first and second quarters of 2002. But Q2, 2002 data will be available at the time of the -- the actual data will be available at the time of the 2003 rate setting process that will commence this summer.

102
The proposal of the intervenors is shown in the lower half of the schedule and the concept -- just before -- just dealing with the concept before turning to the numbers, the concept apparently arises from the notion that the most up-to-date information available at the time of rate setting should be used to determine the price cap. And one of the justifications for this that we heard put to Union in cross-examination was that the executive summary of the Board's decision lent some credence to this argument.

103
The sentence relied upon, as I understood it from the question that was put to the panel is in the executive summary of the decision at page 7 of the compendium in the first paragraph. And that's the sentence that says, "The Board finds that the I-factor should be calculated as the year-over-year increase reflected by the most recent data for the Canadian Chain GDPPI available from Statistics Canada prior to the time at which the annual price cap index for the subsequent year would be set on a going forward basis."

104
Now that, I will say right now, is of course somewhat different from what the decision itself says, and that's going back to page 3 of the compendium, page 89 of the Board's decision, in paragraph 2.288, where the -- where the Board says that it, "has calculated that using the most recent data that would have been available for GDPPI, if the price cap had been set in October during a customer review process."

105
Now, this reliance -- in relationship to this apparent reliance upon the executive summary -- I've been practising business litigation for about 20 years now and I can say with confidence that this is one of the most preposterous arguments that I've ever heard. The Board's decision could not be clearer on this point. It says that it's, "the most recent data that would have been available ... if the price cap had been set in October during the customer review process." And by the selection of the Q2 data -- this is very significant, in my submission, in the context of the timing of the decision because this decision came out in July of 2001 and data for all of 2000 was available at that time.

106
Therefore, the Board could have used Q4 -- over Q4 data -- they could have used Q4, 2000 over Q4, 1999 to derive the inflation factor for 2001, but the Board expressly did not do so and said that it was using Q2 data precisely because that was the most up to date data that, "would have been available" to Union in the ordinary course of its rate setting schedule as contemplated with a customer review process in the summer of -- that would have been in the summer of 2001 and then a rate hearing on any disputed issues in the fall preceding the year for which the rates were being set. And that was, as the Board found, the Q2 data from 2000 over the Q2 data from 1999.

107

To suggest that the executive summary somehow qualifies the plain words of the decision, in my submission, stands the proper hierarchy on its head. Now the Board will know better than me, but I dare say that the executive summary may not have even been written by the members of the Board. It is exactly what its name indicates, a summary for the reader who merely wants a high-level understanding of the basic direction or the principles that underlie the decision. It's not expected to set out the details of the methodology, and in any event, it certainly does not take precedence over or frankly even inform the decision itself. It has, in my submission, no juridical status whatsoever.

108
Now altogether apart from this, the intervenors' proposal, as contemplated in the ADR at least, violates the requirement established by the Board that the inflation factor measure year-over-year change of four quarters of actual data. If we go back to the schedule F.4.2 which is at page 6 of the compendium, this is shown by the calculations that reflect the intervenor position.

109
The reason that this approach violates the Board's direction that the inflation factor measure year-over-year change of four quarters of actual data is because by going to Q4 data for 2000 rates, the proposal leaves out 2 quarters of data, and those, by the way, happen to have reflected higher inflation. This creates a bias in 2002 and changes what would have been under the Board -approved methodology a 2.5 inflation increase into an inflation decrease of 1 percent. So you can see that by comparing line 2 of the Union position under the second major column which deals with 2002 rates, the inflation differential is 2.5 percent, and then if you were to go over to the intervenor position on line 8 you'll see that the -- that the dropping of that data, and in fact the compounding of the data a second time, produces a minus 1 percent.

110
So this summer when Union is on schedule and is in the customer-review process, and in a rate hearing in the fall, only Q2 data will be available. So again, if we were to go following the Board's direction that actual data be used, not forecast data, we then have to go back to Q2 data. And going back to Q 2 data compounds the bias by not only dropping out two quarters of higher inflation but double counting two quarters of lower inflation, that is, the effect of Q3 and Q4 of 2001.

111
And this, as the exhibit shows, generates a cumulative bias over the three years of -- a cumulative bias of 3 percent because by the Board -approved methodology, looking at line 2, we have a cumulative inflation change of 4.3 percent, but looking at this hybrid version that's been proposed by intervenors actually produces something that didn't happen which is an apparent cumulative bias of only 1.3 percent. So there's a bias of 3 percent built into that methodology that tinkers with what the Board directed in EBRO -- in RP-1999 matter 17.

112
The bias, as I would also point out to you also in the evidence of Drs. Hemphill and Schoech and Wilson and Mintz that's filed at Exhibit 3.2 and Exhibit 3.3, and the universal position of all those experts is that the methodology should not change in mid-stream. The intervenors who proposed the use of Q4 data for setting 2002 rates are engaging, in my submission, in the worst sort of strategic and opportunistic behaviour and propose a methodology that is in direct conflict with what the Board adopted in the matter 17 decision.

113

In the absence of clear and compelling evidence that the inflation methodology is not doing what it was intended to do, in my submission, there's no basis for any change. Not only is there no such evidence in this case, but all the evidence points to the fact that the Q2-over-Q2 methodology ordered by the Board is doing exactly what it was intended to do. It measures the year-over-year change in inflation over four quarters of actual data using the most recent data that would be available if the price-cap adjustments were being made during the summer CRP and the fall rate hearing process to set rates for 2002. And that is actually what the Board did for 2001 and there is no basis to change, it in my submission.

114
Now there's a second issue here, as I said earlier, which arises. A more minor issue, but nevertheless an issue which arises from the fact that StatsCan sometimes updates its information. Now in fairness to everyone, I doubt whether anyone was aware or at least thought about the possibility that StatsCan might update the Canadian Chain Gross Domestic Product Price Index data that it had published, and this does now, however, we know happen from time to time. So is this something to be concerned about?

115
Now I submit, in substance at least, that it is not something to be concerned about for the simple reason that there's no reason to think that there is any bias inherent in StatsCan updates. So in other words, there's no reason to think that they will trend over time to reflect increases from what was originally published or decreases because StatsCan is not in the business of trying to get inflation up or down. It's simply in the measurement business. So there's absolutely no reason to think that there would be any bias inherent in what StatsCan was doing and those updates should be a wash.

116
So in principle there's no reason to be concerned about it and the only danger, in my submission, is more in the nature of process or procedural. And that is once again that you might have parties strategically seeking to have the Board adopt or not adopt information depending on the effect of the update on the calculation of the inflation factor. So you might end up with, if the update tended to taken inflation down, the intervenors would be saying update, Union might be saying don't update.

117
So the principled approach, in my submission, is the one that has already been adopted by the Board in the RP-1999 case, the data used, in my submission, should be the data available for use at the time that the price cap would be set assuming Union is on its rate schedule. So again, that matter is being decided in the fall of the year.

118
That is the data that Union used in its evidence at tab 9, page 2 and the data that Union used for the purposes of F.4.2.

119

The affected information in this case is the Q2, 2001 data, which as you've heard was adjusted downward in subsequent months from 107.3 to 106.8. So in our submission, the appropriate course is to adopt the consistent approach of using the data available at the time rates would have been set on the usual cycle. Whichever approach the Board adopts, however, to this question of the updates, and whether the Board decides to use the 107, or the 106.8 in this particular case, and our submission of course is that it should be left at the original value because that's what was available at the time rates would have been set. But whichever approach the Board adopts in handling these updates, whether at the time rates would have been set or using the most current data which just happens to be available, once that approach has been selected and adopted or -- I should say it this way, once the number has been used and adopted in the formula to set the price cap for a given year, it should not be changed, in our submission, regardless of whether there are then any further updates, because this would again have the effect of distorting the year-over-year comparisons, and therefore, distorting what the actual inflation change would be for the purposes of the price cap index for one period over another.

120
So those are my submissions on the appropriate choice of the GDPPI and how to deal with the fact that there is some updating to the information.

121
I will now, then, turn to the generic question of whether there are any additional non-routine adjustments to the -- that are appropriate in this case in addition to the one that was agreed to in the ADR. And that, you will recall, had to do with changes to regulations dealing with pipeline integrity. So the two issues that are on the table here are really -- there's really just one, in our submission, it's the Ontario income tax change. I'll speak very briefly to the issue of weather normalization as well.

122
So the Ontario -- the effect of Ontario income tax change -- of corporate income tax changes. As a starting point for consideration of this issue, it has to be remembered that Union's original proposal in matter 17 was to fix inflation based on a forecast and keep a fixed inflation rate in place for the entire proposed five-year term. Under that approach, Union proposed that changes to tax legislation, even tax changes of general application, would flow through as non-routine adjustments. But Union noted during the case that this would change if the Board went to an annual inflation adjustment.

123
You can see that from evidence given by Mr. Birmingham which was marked as Exhibit F.5.2 in the proceedings and I've reproduced here at page 10 of the compendium. This was evidence given by Mr. Birmingham in connection with questions being put to him by Mr. Janigan and there's a passage marked at line 13 which starts: "The one comment I would make, Mr. Janigan, is that to the extent that the inflation factor was adjusted annually, I do not think that there is an impact on the non-routine adjustments, and that is: Right now Union is proposing a fixed cap which, because it is fixed, we are suggesting that the economy-wide legislative and regulatory-type changes then be incorporated in our non-routine adjustments."

124
"But to the extent that we went to an annual inflation adjustment, then I think what would happen is that you would then go to more of an industry-specific non-routine adjustment for those items, because presumably the economy-wide impact would, at least to some extent, be captured in the annual inflation factor."

125
Now at the urging of essentially every intervenor in the case, as I recall, the Board, as we've already discussed, adopted an annual inflation adjustment approach, and so clearly, Union's original proposal went by the wayside. But the question remains however: What to do with corporate income tax changes and particularly those at the provincial level.

126
Now this issue was addressed by the Board in the decision at pages 96 and 97 and those pages for your assistance I've reproduced at page 13 of the compendium.

127

Under the heading "Board Findings, Non-routine adjustments," the Board said, "Most parties agreed that a provision for non-routine items is appropriate for a price-cap plan. The Board accepts this and the view of Dr. Bauer that Z-factors provide a safeguard against events entirely outside of management's control and against which no meaningful precautions exist." Now I'm going to come back to the Dr. Bauer piece in a second.

128
"The Board agrees with the intervenors that the use of Z-factors limited to changes in legislative and regulatory requirements and generally accepted accounting principles specific to the natural gas business is appropriate."

129
That's a very significant statement there; specific to the natural gas business.

130
Then the Board goes on, "In principle, the Board believes that in the long run economy-wide changes are captured in economy-wide indices, such as the GDPPI and therefore are captured in the price cap. It must be noted, however that the GDPPI is a Canada-wide index, whereas ideally, if the index is to reflect the changes in costs to Union, the Board would want an index for the region of Ontario served by Union. Furthermore, the Board recognizes that changes in costs can take some time to be reflected in the GDPPI. In determining base rates, it is important to reflect the impact of known changes. In setting rates for subsequent years under the PBR plan, some cost changes related to unforeseen externally driven events which are not specific to the industry and have an economy-wide impact may be appropriately considered to be covered by revenues resulting from application of the price cap."

131
Again, significant sentence and I place emphasis upon that.

132
"The introduction of thresholds, off-ramps and the customer review process provide a protection for both the Company and the customer in the instance that there are significant major impacts resulting from such changes."

133
And then there was an expression of concern, at the top of the next page, about the application of that general principle however, and the Board says, "For example, in the case of changes in provincial income taxes, the Board doubts that this will be fully reflected in a Canada-wide GDPPI and in any event would be concerned about a time lag involved. The Board directs Union to track the effect of changes in the Ontario Income Tax and to bring forward the cost changes to be considered through the customer review process as an adjustment to rates."

134
So that's what this issue is all about. The company has obviously taken the Board's concern seriously and we've gone out and researched that issue, hired experts to address it, and we are now coming before the Board in accordance with this direction having tracked what those changes were to make recommendations as to how to deal with them. And as the Board knows, our recommends and proposal is that no adjustment be made in that connection.

135

Now the Board, in coming to this conclusion that it did, that I've just outlined, accepted Dr. Bauer's view on the issue of Z-factors or what we are calling non-routine adjustments. And it is worth looking at what that evidence was, and that's been reproduced -- that was also reproduced in the exhibit we looked at a moment ago and it's at page 8 of the compendium. This is an extract from the pre-filed evidence of Dr. Bauer in the 17 case and this page has the relevant passage that relates to what the Board had referred to and you'll see in the bottom half of the page, there's two underlined passages that speak to this issue.

136
First, Dr. Bauer said, "As changes that affect the entire economy are generally reflected in the inflation rate, one of the drivers of the price cap index, only factors affecting the natural gas distribution industry ought to be considered."

137
Then in the next paragraph, in criticizing the Union proposal as it was at the time, Dr. Bauer says, "From this perspective, several of the non-routine adjustment factors are too broad-based. The main legitimate non-routine adjustment factors are related to legislative and regulatory change as well as changes in generally accepted accounting principles. However, only changes affecting specifically gas distribution utilities, and not changes affecting the entire economy, should be considered."

138
Now, Dr. Bauer is not the only one to express this view. In this case now, in this very case, matter 29, you have again leading Canadian experts on tax policy and business tax issues and on tax- and inflation-related issues testifying to the same effect. Similarly you have Drs. Hemphill and Schoech, experts in incentive and performance-based regulation, giving the same opinion.

139
There is on this issue, in my submission, no contrary evidence. I ask you to consider and to indeed draw the information especially given the past sponsorship of Dr. Bauer's evidence by intervenors such as the CAC, VECC and IGUA, is that the reason for the absence of any opposing evidence on this issue is because no expert could be found who could credibly say otherwise.

140
We also know that not only do the witnesses in this case take the view that no specific adjustments should be made for tax changes of general application, but other regulators who have considered the issue in relation to price cap incentive plans have done so as well. And I want to refer you to three of those regulatory bodies. If you would turn with me to page 15 of the compendium, that is some extracts from a decision of the Federal Communications Commission. Now I apologize that someone in highlighting this had used obviously a blue or pink highlighter and as those of us who use photocopiers a lot know, blue always blacks everything out, so lawyers always use yellow. But what the black part says is, "In the matter of policy and rules concerning rates for dominant carriers." And then the particular report is called "second report and order of the FCC.

141
This case concerned -- this case started as incentive regulation for AT&T and then this particular component of the decision expanded that to other local exchange carriers, and I've reproduced here both the second report, the relevant passage on tax from the second report and order and then behind that, there's an earlier iteration of this called "a report and order of second further notice of proposed rule-making," and I'll refer to both of them. It appears, in general terms is, that what happened was the FCC engaged in a kind of generic approach about some rule-making and what the rules of the game would be and then held cases subsequent to that to decide the issues in relation to the carriers.


142
So dealing first with the FCC decision itself of October 4, 1990. This again is price cap regulation using a GDPPI-like deflator. On the first page extracted, it's page 16 of the brief, paragraph 176 of the decision under the heading, "Tax law changes," the FCC said, "We find that tax law changes are presumptively endogenous..." Now they use this expression endogenous and exogenous and they mean by endogenous, within the cap and they mean by exdogenous, outside the cap.

143
"... despite the arguments of a number of LECs that the GNP-PI will not reflect the costs of tax law changes. As explained in the Second Further Notice, the GNP-PI is a very broad-based price index that measures changes in all costs -- including tax costs -- that affect prices in the economy. To grant LECs" -- and that means local exchange carriers -- "an exogenous treatment of tax changes that are already accounted for in the GNP-PI would be to double-count their effect, a result that is inconsistent with the goals of price cap regulation to encourage cost based rates. Indeed, we have tried to avoid the possibility of such double-counting in our treatment of tax law changes for AT&T by presuming such tax law changes to be endogenous.

144
"Nevertheless, if there are tax law changes imposed at any level of government that uniquely or disproportionately affect LECs, as a class or individually, LECs may request exogenous treatment. We note that a number of parties appear to advocate this treatment. As with AT&T, the LECs that request exogenous treatment for such changes must overcome the presumption that the tax law changes are endogenous."

145
What's interesting to note here as an aside, Mr. Chairman, is that this is obviously a case that took place where taxes were increasing and so the utilities are seeking to have specific relief. I suppose what that tells you is that these issues, parties' positions on these issues, depend on who's ox is getting gored. But it's my submission that the issue should be dealt with as a matter of principle and not turn on the question of whose ox is getting gored.

146
Now paragraph 178 goes on to say that the, "LECs argue that tax law changes should be given expedited treatment as exogenous because they are reflected only gradually in the GNP-PI when they should be recognized at the time that they change." So this is now the lag issue.

147
"The timing and extent to which tax law changes are reflected in the GNP-PI are empirical questions that are unknowable. As stated in the Second Further Notice, the flow-through of corporate taxes to prices, and thus to price indexes, has long been a complex and controversial topic in the literature of public finance that cannot, and need not, be resolved as part of this price cap proceeding."

148
That may resonate with the Board members, having heard the evidence of Drs. Hemphill, Schoech, Wilson and Mintz that that is precisely the case. That whether there's the lag or indeed the lead is something not empirically demonstrable on the basis of any known modelling.

149

The -- I then want to turn to the discussion of these issues in that report and order on the second further notice of proposed rule-making. And if you would turn to page 20 of the compendium, that contains the more extended discussion which really -- this constitutes the background to what the Board then later held in the October 4, 1990 decision.

150
At page 20, at paragraph 272, it's got the discussion, and some of this is repetitious of what went -- ended up in the decision, but it also expands a little bit on some of the points.

151
"It appears that our proposal to treat tax law changes as exogenous" -- and I should have explained to the Board that in the first order of proposed rule making, they had actually proposed, just as Union originally did, that the tax changes be flow-throughs and then they got comment on that. And now the FCC is coming back saying well, it appears that we were actually mistaken when we proposed that, and they say the reason was because it, "was at once overly-simplified and too complex. We agree with the parties who contend that treating tax law changes of all sorts as exogenous would likely result in significant double-counting of cost changes already reflected in the GNP-PI. At the time at the same time, we believe that if there are tax law changes which affect AT&T uniquely or disproportionately, and which are significantly large that endogenous treatment would render price cap rates unreasonably high or low, then those changes should be treated as exogenous cost adjustments. We therefore do not adopt our proposal. Instead, tax law changes will be presumed to be endogenous, but AT&T will be permitted to request exogenous treatment."

152
"An entity as large as AT&T, with employees and property spread throughout the country, is subject to many different kinds of taxes imposed by a multitude of taxing jurisdictions. These taxes change routinely from time to time, and are part of every company's ordinary risk of doing business. The overall effects of such tax law changes on prices are, to some extent, reflected in price indexes."

153
"In one sense, BellSouth is correct that questions about how, to what extent, and when tax law changes are reflected in the GNP-PI are empirical questions are, as yet, unanswered. However, BellSouth's implication that those answers could easily be discovered is not correct. The flow-through of corporate taxes to prices and thus to price indexes, has long been a complex and controversial topic in the literature of public finance. We cannot, and need not, resolve that debate here."

154
"The parties who argue that the GNP-PI may reflect the impact of tax law changes on the prices AT&T pays for the goods and services it buys, but that it does not reflect the impact of those changes on the carrier's own tax expense, take too restricted a view of the GNP-PI and its role in our price cap formula. First, it is incorrect to view the GNP-PI as merely a measure of the costs of the things AT&T must purchase. As a very broadly based price index, it measures changes in all of the costs which affect the prices in the economy. Tax costs are among that broad totality of costs. Second, we do not use the GNP-PI in our formula to represent the percentage by which each, or any one, type of cost faced by AT&T will rise or fall. Rather, it is used to indicate how AT&T's prices should be allowed to rise or fall in response to the rising and falling of all of its costs, whether paid to outside suppliers, to its own managers, workers, creditors and shareholders, or to the tax collector."

155

So in my submission, this is exactly on point because that is precisely the purpose of the price cap and the inflation factor in this case. It's not intended to simply be a measure of particular things that Union has to go out and buy in the marketplace, it's used to indicate how Union's prices should be allowed to rise or fall in response to the rising and falling of all of Union's costs, whether those are paid to outside suppliers, to its own employees, to creditors or, as the FCC says, "to the tax collector."

156
Now, to similar effect, at page 22 and 23 of the compendium is a decision of Canada's own CRTC in connection with the price cap regulation of Telus. And, the -- we don't need to go into all the facts of this case, but this is again price cap regulation based on an inflation-related measure or price cap index. And at page -- paragraph 105, excuse me, page 23 of the compendium, the Commission states its conclusion on the question of Z-factors. I just pause to note that there was a discussion earlier about tax-related issues and the -- and this is the submission's conclusion, "The Commission determines that a Z-factor or exogenous factor adjustment will be considered for inclusion in the PCI for events or initiatives which satisfy the following: 1, they are legislative, judicial or administrative actions which are beyond the control of the company; 2, they are addressed specifically to the telecommunications industry; and, 3, they have a material impact on the Utility segment of the company."

157
So in our submission, it would be 2 in this case that would not be met by the Ontario corporate income tax changes because those, of course, are tax changes of general application and do not have any specific or disproportionate impact on the utility industry.

158
Page 25 we have reproduced an extract from a paper prepared by the California Public Utilities Commission about its own cases. I had trouble finding the case itself and so I apologize for not providing you the entire case. But this is a summary of that case prepared by the regulator itself, or by staff of the regulator, and this deals with a California Public Utilities Commission decision relating to Southern California Electric which was under a price cap plan.

159
At page 26 of the compendium you'll see that there is a heading, "II.B.4 SCE Base Rate PBR Z-Factors and Exclusions." And the Commission indicated in that case that, "To account for major events beyond the utility's control, such as changes in tax laws or natural disasters, the Commission includes a Z-factor provision in the SCE PBR. To be eligible for Z-factor treatment, the event must be analogous to those outlined in the --" Sorry, I said Southern California Electric; it's Southern California Edison, my apologies. "To be eligible for Z-factor treatment, the event must be analogous to those outlined in the telecommunication's New Regulatory Framework as summarized below: The event causing the cost must be exogenous to the utility; the event must occur after implementation of the PBR; the utility cannot control the costs; the costs are not a normal part of doing business" -- that one would not be met, in our submission, on this case -- "an event affects the utility disproportionately" -- again, that requirement would not be met, in our submission, in this case, and -- "the PBR update rule must not implicitly include the cost." That, again in our submission, on the evidence before you, would not be met in this case because the evidence before you is that the price cap index does implicitly include the amount related to the corporate income tax change.

160
So, in my submission, on the basis of those authorities, the weight of authority is that tax changes under a price cap plan that are not specific to the industry or to the utility are assumed to be endogenous or captured by the plan and are not the subject of specific adjustments.

161

Now with that background, let's turn back to the Board's specific concerns expressed at the top of page 97 of the decision about the two issues. First, whether changes to provincial corporate income tax will be fully reflected in a Canada-wide GDPPI and, second, whether there would be concern about a time lag involved between when a tax change took place and when it would be reflected in the GDPPI. The decision said to track those changes and come forward with a proposal, and so Union has done that. The have been tracked and they are identified, I don't think it's necessary to turn it up, but those amounts are identified in Exhibit B, tab 15, schedule 1, updated. And Union has come forward with a proposal for how to deal with those tax changes, and the proposal is of course that no adjustment be made because the effect of the tax changes will be reflected in the inflation factor and any explicit adjustment would lead to double-counting, as the FCC found in the AT&T case. That proposal is supported by the evidence of Drs. Hemphill and Schoech and Drs. Mintz and Wilson and the evidence on this issue is at Exhibit B, tab 15, appendices C and D.

162
Now we rely on the totality of that evidence, but I want to refer to a few passages specifically in argument today. At page 28 of the compendium there is an extract from the evidence of Drs. Hemphill and Schoech and there is an underlined passage there. It says, "While a non-routine adjustment for provincial income tax legislation would be appropriate for the original Union Gas proposal, under the plan adopted by the Board it is appropriate only to make adjustments for taxes specific to the gas distribution industry, or for taxes that disproportionately affect that industry. The reason is that future changes in general taxes, including federal and provision income taxes will be reflected in changes in the GDPPI.

163
Then at the bottom of the page they go on to say, "To treat the tax change as a non-routine adjustment would effectively double-count the impact of the tax change: first through the non-routine adjustment and second through the impact of the tax on the GDPPI.

164
"If the government increases the tax rate this will increase the cost of doing business across the economy. Without market adjustments to the prices of goods and services produced by economy, the economy's output prices, economic activity will be become unprofitable. Instead, the market economy reaches a new equilibrium with higher output prices. These output prices are components of the GDPPI. Conversely, if the government reduces the tax rate, market forces will drive output prices down. In the technical terms to used to describe the price cap index, a tax increase will increase input prices in the economy and vice versa. Absent other changes in input prices or changes in total factor productivity growth, those input price changes must be passed through to output price changes."

165

Now Drs. Mintz and Wilson in their report make a similar point. And if you turn over to page 31 of the compendium there is a couple of brief extracts from that. And at the bottom of page 31 of the compendium, they say that, "In principle, federal and simultaneous provincial tax changes that are fairly broad in application would affect all or a large portion of the economy. The price-cap index will fully reflect such general changes in corporate tax rates. However, industry-specific or sectoral-specific changes in taxes would have only a partial effect on the index, with the effect depending on the industry or sectoral share of total output. Given that four-fifths of corporate profits are earned in three provinces, all of which are reducing corporate income tax rates, the GDP deflator used for the price-cap index would be affected significantly by provincial rate reductions. The 2001 provincial tax rate reductions that took place in Ontario, Quebec, Alberta, and New Brunswick would result in lower costs and prices as reflected in the GDP price deflator. The GDP price deflator in 2002 will be further affected by the already announced corporate rate reductions such as in British Columbia and Manitoba. Therefore, reductions in Ontario corporate income tax cannot be looked at in isolation in assessing, at a national level, the impact of changes to corporate income tax on the GDPPI."

166
"The federal and provincial corporate tax reductions will therefore be reflected in the GDPPI. Since Ontario's rate reduction is comparable to planned reductions in other provinces, one can view the provinces as simultaneously reducing corporate income tax rates. Overall, the GDPPI will reflect the many changes occurring across Canada with respect to corporate tax reductions and Ontario's reductions cannot be judged as being out of proportion to other provincial changes."

167
These are not startling conclusions, members of the Board. They are entirely consistent with the conclusions of other regulatory tribunals on similar issues. The evidence before you is that Ontario taxes are reflected in the GDPPI. Although Ontario is less than the whole Canadian economy, it is nevertheless a very substantial part of it, and when you combine that with the fact that many other provinces, which collectively represent over 80 percent of the corporate income tax collected in this country, that they are also reducing corporate income taxes, this further reduces any dilution of the impact of Ontario tax changes on the GDPPI.

168
So in our submission, there is no basis for an adjustment.

169
The second concern that was expressed by the Board had to do with possible lags between when the tax was introduced and when it might be reflected in GDPPI. The fact is that there are lags and there are leads but there is no satisfactory empirical means of measuring either. And the tax changes as -- and tax changes, as it turns out, are not unique in this regard.

170
If you'd turn to page 33 of the compendium, this is an extract from the evidence of Christiansen and Associates. In the middle of the page the underlined portion they say, "One must recognize the changes in taxes are only one of many factors that affect economy-wide input measures. Input price changes can come from a variety of sources, such as the increases in the prices of raw materials, such as gasoline, higher wage settlements with unions, or changing exchange rates. Some of these factors may lead to higher input prices, while others may reduce input prices. In each instance, there is at least a one-year lag caused by the use in the approved PBR plan of a prior-year's GDPPI to establish the inflation adjustment for the subsequent year. There may also be some lag between a change in input prices and the resulting impact in the GDPPI. It would be infeasible to account for each of the temporary disjunctions between input prices and output prices."

171
Then they go on to say, "Furthermore, even if one could identify all instances where there is a lag between a cost change and its impact on the GDPPI, correctly adjusting the price cap index for the lag would require more information than is available. Not only must one know that the input price increase will not immediately be reflected in the GDPPI, but one must also know when the tax reduction will eventually be reflected in the GDPPI."

172

Then they go on to show an example, but what in effect they say is that if you are going to take it out, then you have to have a way of putting it back in once the lag is -- the so-called lag has been overcome.

173
Their conclusion, "It is undesirable and unnecessary to make non-routine adjustments for provincial income taxes under the a Board's adopted price cap plan. That is because changes in these taxes will be reflected in the price cap index through the GDPPI, as other regulatory bodies have already determined. Any additional adjustments for the tax changes will inevitably lead to doublecounting."

174
Now Professors Mintz and Wilson came to the same conclusion. And at page 35 of the compendium, their issue on adjustment -- Dr. Wilson speaking to adjustment lags says, "To incorporate lag effects in assessing corporate rate reductions on the GDPPI, one would need to quantify the impact of tax reductions on a price deflator over time as well as the length of the time for lagged responses. Estimates are far from being precise since a degree of uncertainty would be encountered in determining the exact impacts over time. Given the imprecision of measuring the impact of tax changes on the GDPPI as well as the adjustment process, it would be difficult to quantify the impact of lag effects on rates over time."

175
And you will recall that is exactly the conclusion, of course, that the FCC came to in the AT&T case.

176
"Incorporating lag effects would also be quite difficult to do over time. For example, tax changes occurring prior to the period in question would need to be assessed in terms of their impact on years during the plan. Thus, it would be necessary to document not only the impact of 2001 corporate rate changes on the GDPPI deflator this year and in the future, but also past tax changes on the current and future GDPPI deflator."

177
Again, their conclusion at the bottom of the page, "We conclude that it would be inappropriate to adjust the price cap formula to take in into account these effects. General tax changes -- such as those occurring with respect to corporate tax in several provinces -- will be reflected in the GDPPI and require no adjustment to the price cap formula. To the extent there were tax changes specific to the gas-distribution industry, these would likely not significantly affect the GDPPI and could be taken into account through appropriate adjustments to the price-cap formula.

178
This was also addressed briefly in oral testimony and that is at page 37 of the compendium where Mr. Wilson said, starting at paragraph 1059, in response to a question about tax changes in appearing in the GDPPI, said, "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 has 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 a part of a five-year tax reduction plan."

179
And, I pause to say, as are some of the Ontario tax changes and, for example, British Columbia tax changes, as was set out in Dr. Mintz's evidence.


180
"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."

181
And to similar effect on the next page of the compendium, -- no my apologies, page 39 of the compendium, this got a little bit out of order. But at page 39 of the compendium is the evidence of Dr. Hemphill in answer to a question from Mr. Thompson suggesting this all seemed kind of wishy-washy. Mr. Hemphill says, "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 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."

182
So in summary, the evidence before you does not, in my submission, support the conclusion that there is necessarily a lag at all; that if there is, that there is anything that distinguishes tax changes from anything else or that the lag or lead, assuming they exist, can be measured or adequately accounted for through any reasonable empirical process. Assuming there is a lag or a lead effect, trying to account for it vastly complicates the operation of the price cap mechanism which, frankly, in its concept at least, was supposed to be fairly simple and fairly mechanical. As this case has proven, virtually every issue that involves significant funds which offers the slightest opportunity for strategic advantage will be seized upon and litigated. So going down the path of trying to overcome the lag or lead effect will do nothing more, in my submission, than add another layer of complication and another source of potential dispute. Trying to account for lags and leads would simply lead, in my submission, year in and year out to disputes over the measurement and effect of these phenomenon.

183
As Drs. Schoech and Hemphill put it, it is preferable to maintain the plan's simplicity and not introduce attempts to make explicit yet necessarily imprecise adjustments for changes to provincial income taxes in each year of the plan.

184
Now, this leaves the final issue of the adjustment for 2000 Ontario corporate income taxes, which involves approximately $900,000. And at page 40 of the compendium, there page 61 of the Board's decision is reproduced and it's paragraph 2.169 that -- the sentence that says that, "The Board also makes a further adjustment of $0.9 million to base delivery revenues for 2001 for the annualization of changes in provincial income tax."

185

Now as Ms. Elliott said in her evidence, the Board's direction to capture the effect of tax changes and to come forward with a proposal on how to handle them seemed conceptually, to us at least, to catch this adjustment as well, and this is especially true in light of the Schoech-Hemphill evidence that I read to you from page 5 of their evidence, and for that matter of the Wilson-Mintz evidence that spoke about prior tax changes and their effect on current GDPPI.

186
But having said that, obviously, if the Board feels that that matter was decided and the adjustments should be made irrespective of the bigger tax issue, Union will make that adjustment. That's part of what's been tracked and part of what is in the tax adjustment amount. But to the extent that the analysis of the experts on the Ontario tax issue generally is accepted and is thought to, by the Board, have an impact on the 2000 Ontario tax adjustment, then Union asks the Board to consider this adjustment in light of that evidence and therefore suggests to the Board that to the extent that that adjustment is caught by this analysis, that it may not have been a matter decided and that the adjustment need not be made. But just to reiterate, I say to the extent the Board finds that that was not an adjustment that was intended to be caught by the review of the general tax issue, obviously the adjustment will be made and that will flow through into rates.

187
In summary, Union, therefore, submits that based on both the findings of the Board in matter 17 as to the treatment of economy-wide factors and their reliance on Dr. Bauer, et cetera, the evidence before the Board in that case from Dr. Bauer and the evidence before the Board in this case from the experts I've mentioned, which is the only evidence on the issue and is entirely consistent with Dr. Bauer and with regulatory precedent, the Board should not approve any adjustment for Ontario corporate income tax changes. To do otherwise would be to double count the effect of those changes under the floating inflation price cap model that has been adopted for Union for the three-year term.

188
Now, the next issue, Mr. Chairman, on the non-routine adjustments front is weather normalization. We -- it's on there only because -- in this place -- only because originally the evidence did contemplate possible adjustment for weather normalization. As the Board has heard, Union is not seeking anything from the Board in connection with that. So there is indeed no non-routine adjustment sought. We have not heard what parties' positions on this are at this point, so I have nothing to respond to, but Union's position is that, because it is not seeking anything from the Board in respect of weather methodology, that there are no issues that require disposition in this case.

189
If and when there are rate or earnings impacts, they will be reflected in the material provided and be brought forward and dealt with in the prescribed process that's in place at the time.

190
MR. JACKSON: Mr. Penny, I was just wondering if it would be appropriate to take a break during your --

191
MR. PENNY: I think it would be entirely appropriate and this is as good a time as any because I was just about to move on to another issue.

192

MR. JACKSON: That's great, now -- but before you move off this issue, I was just wondering if you could help us with one thing. If you remember, on listening to Mr. Wilson's evidence, Dr. Mintz and -- Drs. Mintz and Wilson, I think I've got that right, I hope I have, the question came up at, I think, somewhere around 1200 or 1215 of the transcript about whether the comments which they were making with respect to income tax wouldn't apply to other drivers of the GDPPI, specifically energy costs. And they said yes, indeed, it would, and we asked them weren't we being inconsistent then in accepting that the principle energy cost, natural gas price changes, for example, to Union for its operations should be passed through. When they were giving us all these good arguments that anything in the GDPPI should not be passed through. So I was wondering if Union thought about that in terms of its argument-in-chief and could give us any more help on that.

193
Curiously, Mr. Wilson said, "I wouldn't say you are being inconsistent because you are dealing with the specific; they buy natural gas." And my only observation is, yes, and they also pay income taxes. That's -- you know -- they specifically pay income taxes, too. Now I think you've given us a lot of good food for thought this morning, without a doubt, and it may very well be that you've shaped our thinking with respect to income taxes, but what about other pass-through items, then? And, I guess, that's an issue. So, I leave you with that in case you do want to say anything on it and then you can have the break to think about it or you may just wish to deal with it in reply.

194
MR. PENNY: Thank you, Mr. Chairman. I would appreciate the break to think about that one.

195
MR. JACKSON: Thank you, Mr. Penny. We'll break for 20 minutes, please. Thank you.

196
--- Recess taken at 11:25 a.m.
197
--- On resuming at 11:50 a.m.
198
MR. JACKSON: Please be seated.

199
MR. PENNY: Mr. Chairman, there's a workman tinkering outside the door and I would ask Mr. Wightman to close it, but in the mean time, Mr. Reghelini wanted to speak to -- just take one minute to speak to the schedule and then I have a brief but perhaps not complete response to the issue that you raised just before the break.

200
MR. JACKSON: Thank you for that.

201
MR. REGHELINI: Yes, Mr. Chairman, we were speaking, prior to the beginning of the argument, about schedule -- about Exhibit G.7.1 and I've gone back and I've had a look at that. And, in fact, in making the changes that you had requested in respect of the 2001 reporting that's on those schedules, there, in fact, became a problem with the spreadsheet that affected 2000. We've got people back in Chatham that are working to put together new schedules. What we'll do is we'll file a corrected page as soon as possible and distribute that so that everyone has it without the error. And I also went back to the PBR decision just to confirm what the allowed rate for return for was for the year 2000; it was 9.95.

202

MR. JACKSON: Thank you, Mr. Reghelini. I appreciate that.

203
MR. PENNY: Mr. Chairman, with respect to the question that you posed concerning what Mr. Wilson said, I do want to think about it a little more so I may, perhaps, end up saying more about it in reply. But let me start by saying that, just briefly now, in the few minutes I had to think about it, that the -- I start with the proposition that there's really no relationship between the price cap index and the commodity price. The commodity price is not set by the price cap, it's effectively set under cost of service. And so -- and I guess another thing to say is that these are costs that are unique to the gas business, so other businesses don't buy huge quantities of commodity and then just resell it to customers. Union's of course not using this commodity in the conduct of its own business, que business, it's reselling it to customers, and that's why their pass-throughs -- or in effect, if we didn't have this pass-through term, the pass-through terminology really just derives from the fact that this was historic and is routine -- but we would be calling these non-routine adjustments, today. If there were no history to it we would look at it and say this is a cost that is quite unique to the utility businesses because other businesses aren't buying energy and reselling huge volumes of it to other people. Other businesses are just buying energy to keep their factories warm or to keep the offices warm so it would be a Z-factor or a non-routine adjustment in any event.

204
Taxes, as I've tried to say, are of course not specific to the natural gas industry and so -- that's conceptually is a point of -- significant point of differentiation between them. Mr. Wilson was speaking about -- I think that discussion arose from Mr. Wilson's comment that a large portion of the GDPPI effect in the relevant period was attributable to export and that energy was a significant part of that. But again, I would say that there is a lot more in there than just natural gas prices, and he made this point, there's oil and coal and everything else.

205
MR. JACKSON: Yes.

206
MR. PENNY: And so that's an aspect of the issue which I think is relevant. Other energy costs of Union's are not passed through, such as their electricity costs and again, que business, Union does not necessarily have more energy costs than any other business, it's because it sells the commodity that makes it different and constitutes a Z-factor for the commodity.

207
MR. JACKSON: I think indeed you have treated at least part, if not the major part, of Mr. Wilson's focus in his response which was on the commodity involved and the commodity costs involved in the purchase and sale of gas business which you do. I think I was thinking more in terms of the fact that I think we have talked about pass-through of gas costs of operations and it was that area that was coming to my mind. But again, you have another opportunity to come back to that and you're quite right that to the extent that electricity is an energy cost of Union's distribution-system operations you don't ask to treat that on a pass-through basis. But I think many of the pumps on your system may be run using natural gas as a fuel, and at this point in time I am at a loss to say what sort of percentage the compression facilities would depend on electricity energy costs for operations.

208

MR. PENNY: I understand that, Mr. Chairman, that's a fair point although I think that the -- if you looked again, stepping back, if you looked at the industry, I think the same logic as with the commodity itself applies with most of these other -- so inventory carrying costs, again same kind of thing, most businesses don't carry a large cost that derives from hanging on to something for other people for a long period of time. So there is something unique about that.

209
MR. JACKSON: I'm with you and I think you've moved back to the costs associated with the purchase and sale of gas business.

210
MR. PENNY: Yes.

211
MR. JACKSON: Fair enough. Just as long as you understand that that's not what I am thinking of.

212
MR. PENNY: Well, as I said, it's --

213
MR. JACKSON: I say, I would have to say per se to in my comment, at the end of my comment there, because to the extent that you are holding some gas in storage for load balancing and flexibility purposes that you associate with the costs of operating your distribution system, there's a little bit of inventory but the major portion of inventory is with relation your business of purchase and sale of gas business.

214
MR. PENNY: Let me reflect on it more, Mr. Chairman, and as I said at the outset, I'll present a more comprehensive answer in due course.

215
MR. JACKSON: Thanks for that.

216
MR. PENNY: But I appreciate the notation of concern about that, it's very helpful, in fact, to know what's on the Board's mind on the Board member's minds. It enables us to try to be more responsive.

217
MR. JACKSON: Thank you.

218
MR. PENNY: I was going to turn now to item 4 just very briefly, it's an issue also slightly tax-related, has to do with the pass-throughs and the unresolved issue here is inventory carrying cost pass-through.

219

The Board in the matter 17 decision approved the pass-through of the effective changes in the weighted average cost of gas on delivery rates and these WACOG pass-throughs as approved are for the commodity price variances only. That is, there are no pass-through for volume variances or for any other variance associated with these costs and delivery rates. So the only volume-related pass-through was one that was specifically approved by the Board in respect of unaccounted for gas. There are none nor for any other component, and certainly no adjustments for inventory carrying cost pass-through, and no adjustment for any other cost that might vary in connection with the calculation of that amount. So the ADR agreement settled the pass-through proposals for unaccounted for as volume and WACOG change impacts on unaccounted for and on compressor fuel and company-use gas, but what was left unsettled and for determination for the Board is the pass-through of WACOG change impacts on inventory carrying costs that should be included in rates.

220
Union's applied the actual approved WACOG changes that occurred in 2001 to the inventory volume included in the 1999 approved rates; that is, of course, the number that doesn't change. So that methodology was used in arriving at the 2001 pass-through item -- pass-through amount and also the 2002 pass-through amount. The unresolved issue here is the appropriate provincial tax to use in calculating the tax component of the inventory carrying cost pass-through. So for both 2001 and 2002, Union calculated the tax component of the inventory carrying cost pass-through amounts using the Ontario income tax rate included in approved base rates from which the PBR are derived, and that is the 2000 tax rate.

221
Mr. Horner testified on this issue at Volume 4, paragraphs 304 to 307 and identified the amounts that are in issue. And the proposed 2001 pass-through increase is about $370,000 greater than it would otherwise be if the 2001 Ontario tax rate were used, and for 2002, the proposed tax pass-through reduction would be about $500,000 less if 2002 tax rates were used. And the net result over the two years is that rates are actually lower by approximately $140,000 when the pass-throughs are calculated as filed in Union's proposal, as opposed to the method apparently being advocated by some intervenors.

222
Use of the 2000 tax rate is appropriate, in my submission, because the pass-through is only for price variances caused by changes in the approved WACOG included in delivery rates. All the other variables underlying the calculation of inventory carrying costs remain unchanged from those approved by the Board in its matter 17 decision. That was described by Ms. Elliott at Volume 4, paragraphs 308 through 310. The approved pass-throughs result in Union being at risk for volume changes underlying capital structure return on common equity or short-term debt rates so -- and the Board specifically alluded to this in the decision in connection with the volume, the Board said that Union should be at risk for volume changes and, we presume, for any other potential variances that might relate to that as well. But the focus here was just on tax rates.

223
What the Board approved was an annual adjustment limited to price variances from changes in WACOG. No changes to the pass-through methodology, in our submission, should be made, no other changes should be made while the PBR plan is in progress. So that's all I have to say about that issue.

224
Turning to the deferral account issues, number 5, I'll speak of the prudence of contracting with Alliance and Vector pipelines.

225

Mr. Chairman, this issue has been around for a while and the history of these contracts will be somewhat familiar with the Board. This is because the Board issued a decision directing the inclusion of the Alliance and Vector capacity in the unbundled vertical slice of upstream capacity that would be allocated to new direct-purchase customers in EB 2001 matter 441. The Alliance contract, as you've heard, was entered into in September 1997. The matter came originally before the Board in RP-1999-0017, although since no gas was yet flowing from the pipeline there was no need for a Board decision at that time. And then the matter of course came back before the Board in matter 441 when Union sought approval to include the Alliance-Vector cost consequences which was now on stream and flowing gas at that time in the vertical slice and to approve recovery of the costs.

226
At that time, the Board directed that the Alliance-Vector capacity be included in the vertical slice, but at the urging of the intervenors, put over to this hearing, the issue of the recovery of those costs and whether they were prudent. And I've reproduced in the compendium a couple of paragraphs from the Board's decision in that case, page 43 of the compendium.

227
At paragraph -- starting at paragraph 5.6, the Board said that, "Other parties indicated that, were the Board to provide an opportunity through an expanded process, they would file evidence to test the prudency of Union's decision to enter into the Alliance and Vector contracts. However, they provided little indication in their submissions of the nature of this evidence or the basis on which they would challenge the prudency of Union's decision.

228
"The Board notes that the Alliance-Vector premium to TCPL now exceeds the upper limit of the forecast range given in Union's original assessment.

229
"The Board recognizes that in all cases of prudency review of past actions there is a potentially false clarity of hindsight and that decision in current circumstances may appear to have been rash may well have been perfectly rational at the time they were taken. In this regard, the Board understands Schools' position that a prudency review in this matter may well result that in finding that Union's actions were prudent but that, because the issues under consideration were complex, the issue would merit reserving on the decision of prudency and providing for a more careful review of through a subsequent customer review process."

230
"In order to balance these conflicting requirements the Board finds that it would be in the public interest to include the ... contracts in the ... vertical slice --" but to defer the issue of prudence to this case.

231

So the parties, in my submission, have known since at least 1999 that this was an issue. There has been ample opportunity to file evidence challenging the prudence of the contracts; significantly, no such evidence has been filed and the only evidence before you is the company's. And in my submission, it tells a compelling story. Union has about a million customers, roughly half are system gas customers, the other direct purchasers make their -- now, I should say, make their own arrangements for commodity -- sorry, make there own arrangements for commodity purchases. And since upstream unbundling was approved, in theory at least, now look after their own upstream transportation arrangements, as well as the molecule purchases. But prior to that Union had the responsibility and the obligation to ensure that sufficient gas was delivered to Ontario to serve the needs of all its customers and that it had sufficient pipeline capacity to move all of the gas, both system and direct-purchase gas, to serve the needs of its customers.

232
Since almost no natural gas is produced in Ontario, this necessitated the need to contract for pipeline capacity upstream of Union's distribution, transmission and storage system, to transport gas from supply basins outside of Ontario. And it was to ensure that upstream capacity was available to Union's customers that contracts were entered into with Alliance and Vector.

233
As you've heard, the Alliance pipeline is about 1900 miles long and it's designed to move about a billion cubic feet a day. It starts near Fort Saint John in British Columbia, extends down through the main gas producing regions of Alberta and ends near Chicago. The Vector pipeline is about 340 miles long, it's also designed to ultimately transport about a billion cubic feet a day away from the Chicago hub, and it will transport gas to parts east, Indiana, Michigan and to the St. Clair River, where Vector crosses into Canada, to Dawn.

234
In 1997, Union contracted on the Alliance pipeline and in 2000 on the Vector pipeline for roughly 84,000 gJs or roughly 80 million cubic feet a day of capacity for an initial term of 15 years. And I would say on that that these were precedent agreements and neither the minimum term nor the price which was to be NEB -approved tolls were negotiable. All shippers on those pipelines got the same terms. Union did, as you heard, however, obtain a most-favoured nations clause to protect it against the possibility of other customers getting better terms, so that if anyone did get better terms, those terms had to be offered to Union as well.

235
These were precedent agreements and neither the price nor the term were the subject of negotiation. It was take it or leave it.

236
As a firm shipper, Union may also utilize authorized overrun service on the Alliance pipeline and that enables Union to ship on a toll-free basis up to 16 percent in excess of its firm capacity. So in other words, Union can ship about 12.8 million feet a day in excess of its contracted capacity without incurring any additional charges, demand charges.

237
Union's Alliance firm contract and the AOS entitlements totalled -- are equivalent to about 92.8 million cubic feet a day of capacity. In addition, given that the gas that is coming down this pipeline has a higher energy content compared to normal pipeline-quality gas, Union expects to receive an additional 6.5 million cubic feet a day in addition to both its form transport and AOS entitlements. That gives Union, for the price of 80 million a day, a total capacity of 99.3 cubic feet a day. And these, in our submission, are significant benefits to Union and its customers under the Alliance contract.

238

Now, I'm not going to review the whole history of the contract; it took us a whole day to do that in the hearing. But just briefly, September 1996, Union entered the TCPL queue for service commencing November 1, 1998. On February 24, 1997 Union received notification from TCPL that Union would not be receiving capacity for service, any service commencing in November 1998. But Union was still interested in the proposed TCPL expansion and remained in the queue for service commencing the following year, November 1999. However, in the spring of '97, Union was notified that there was likely to be a delay in the Nexus project and then, as we've heard, that project was ultimately cancelled later in the summer of 1997. It was the cancellation of TransCanada PipeLine's Nexus project with no announced replacement that, in combination with growing demand for firm capacity to Union's franchise, caused Union to consider alternatives other than TransCanada Pipelines. And the Alliance pipeline project was identified as a transportation option that would both meet Union's need for incremental capacity and provide an alternative transportation route to bring western gas to eastern Canadian markets.

239
So -- Union then entered into some discussions with Alliance, and as you've heard this was well in advance of any Westcoast interest in that project, and this culminated ultimately in an agreement in September of 1997, with an actual precedent agreement being executed in November of '97.

240
Originally, the commencement date was to be November 1, '99 but subsequent construction and regulatory delays resulted in a December 1, 2000 in-service date. At the time of signing the Alliance pipeline agreement it was estimated that the delivered cost of the transportation to Dawn would be on a range of a cost between 11 cents per gJ below TCPL to about 8 cents a gJ above the then-prevailing posted TCPL eastern zone tolls.

241
You have heard that the contract was regarded as reasonable because Alliance introduced a new competitive alternative to TransCanada in accessing western Canadian gas and that alternative was expected to bring future competitive benefits beyond any possible cost differential in the route's early years. Alliance offered low-cost expendability to meet future capacity requirements which would put downward pressure on tolls once the expansion occurred. Importantly, all alternatives to TCPL at the time were only available at a premium to TCPL rates, which was of course an indicator of a need for additional long-term capacity to be built to Ontario. But most importantly, TCPL capacity was not available. TCPL had no further expansion plans in place and it would not and could not guarantee any future expansions.

242
At the time that Union signed with Alliance, it also had discussions underway with various parties to move the gas from Chicago to Dawn, and there was initially a tentative agreement for capacity on a proposed TriState's pipeline. But when it was determined that TriState was not going to proceed, Union then looked at Vector and executed a contract with Vector for July 19 -- on July 19, 2000.

243
It's important to note that the firm capacity that Union took on Vector was matched to the firm capacity on Alliance, although it didn't include any capacity related to the authorized overrun and the higher energy content because of the variable nature of those volumes. So what they've done is, that any additional gas arriving in Chicago pursuant to the AOS or the higher energy content is sold, and then proceeds from those sales are used to effectively reduce the cost of transporting on Alliance.

244

Now I have long ago learned not to try and guess from Mr. Warren's or Mr. Janigan's cross-examinations what arguments they will advance, and so we will have to await those arguments to see why or if, based on the evidence on the record, they maintain the position that the Allance-Vector contracts were not prudent. But I do want to say that it is significant in this case that we are in this position, i.e., the position of not knowing precisely what it is they don't like about these contracts because -- and the reason is because there is no evidence, there is no report, no properly-qualified expert who has testified before you in this case, or in any other, to say that the Alliance-Vector contracts were not reasonable measures at the time they were entered into.

245
The intervenors have had years to think about this and notwithstanding all that time, and indeed notwithstanding an 11th hour motion to file some evidence, and an 11-and-a-half hour withdrawal of that motion, the reasons -- and the reasons, I should say, for that withdrawal of that motion are a mystery to me and they are a mystery to the Board, there is not one tittle of evidence to support the claim that entering into these contracts was imprudent.

246
So what are the principles that the Board should apply in its review of this issue? Well, the Board touched on one of the important ones in the 441 passage that I read earlier that related to the dangers of hindsight, but I think it will be useful to look at some of the thinking on this issue from other regulators. And I want to turn the Board's attention to a decision of the FERC, the Federal Energy Regulatory Commission concerning New England Power and a paper that was prepared by the National Regulatory Research Institute at the request of U.S. utilities on the prudence test as it has emerged from U.S. regulatory jurisprudence.

247
So the New England Power Company cases starts at page 45 of the compendium. This is a 1985 decision of FERC that relates to New England Power's desire to recover the costs of its share of a nuclear energy project that was started but never finished. New England Power was a minority shareholder in a project headed by Boston Edison to build a nuclear generating station in Plymouth, Massachusetts and over the course of several years, the consortium spent hundreds of millions of dollars on the project to decide at a point in time that, as a result of cost overruns, the project had become uneconomic and it was cancelled.

248
This is a very significant case of -- at least on its face, where not only did the ratepayers pay -- they were being asked to pay a lot for this, they didn't even get anything for it at the end of the day. So this would be a much more compelling case, I would have thought, even though -- much more compelling than the one before you where the ratepayers are at least getting the benefit of the Alliance-Vector capacity.

249
The background to this was that Boston Edison, which was the lead investor in this project, had filed with the Massachusetts Department of Public Utilities to recover from ratepayers its share of the net costs of this project, and its share was approximately $278 million. And the state regulator, the Massachusetts regulator, allowed Boston Edison only to recover its investment in the project through to a certain point in time. And the Massachusetts regulator had concluded that Boston Edison had been imprudent in failing to cancel the project by that point in time, and therefore refused recovery of any of the costs incurred after that time.

250

So here is a case where the principle investor in this project had already gone for recovery before the state regulator and been denied. In this case, New England Power ended up before the -- before FERC and the issue was whether New England Power was entitled to recover its costs, as an 11 percent shareholder in this project, which were in the tens of millions of dollars and in -- FERC ultimately ruled that they were entitled to recover those costs.

251
The principles that were applied by the FERC in deciding this case start at page 48 of the compendium. And in a black-lined passage there they are reviewing the background jurisprudence and they start this passage by saying: "The Supreme Court of the United States early recognized that the determination of what is just compensation for a public utility involves consideration of the utility's conduct in incurring its costs. In discussing what constitutes an adequate rate of return for a public utility, the court stated that the return 'should be adequate, under efficient and economical management, to maintain and support its credit and enable it raise the money necessary for the proper discharge of its public duties.' In another opinion issued the same year the court held that while a State utility commission had a duty to establish reasonable rates and charges, it was not empowered to substitute its judgment for the directors of the company, or to disallow operating expenses unless management had abused its discretion. Justice Brandeis, in a dissenting opinion in that case, stated that a utility should be allowed to earn a fair return on the amount prudently invested in it, and that: The term prudent investment is not used in a critical sense. There should not be excluded from the finding of the base, investments which, under ordinary circumstances, would be deemed reasonable. The term is applied for the purpose of excluding what might be found to be dishonest or obviously wasteful or imprudent expenditures. Every investment may be assumed to have been made in the exercise of a reasonable judgment, unless the contrary is shown."

252
Then it goes on in the next paragraph to say, "The Court subsequently held that regulation cannot be frustrated by requiring a rate to compensate for extravagant or unnecessary costs, but that good faith is presumed on the part on the utility absent a showing of inefficiency or improvidence."

253
And then if you -- so that's some of the discussion of the principles. And then if you would turn to page 50, you'll see in another black-lined passage the Federal Energy Regulatory Commission summarizes what it has seen by way of the review of the authorities in the passage starting, "Consistent with the cases discussed herein, we reiterate that managers of a utility have broad discretion in conducting their business affairs and in incurring costs necessary to provide services to their customers. In performing our duty to determine the prudence of specific costs, the appropriate test to be used is whether they are costs which a reasonable utility management, or that of another jurisdictional entity, would have made, in good faith, under the same circumstances, and at the relevant point in time. We note that while in hindsight it may be clear that a management decision was wrong, our task is to review the prudence of the utility's actions and the costs resulting therefrom based on the particular circumstances existing either at the time the challenged costs were actually incurred, or the time the utility became committed to incur those expenses."

254
And I pause there to say, Mr. Chairman, that it's Union's position that the evidence does not even disclose that management's decision was wrong, much less that it was imprudent.

255

At page 51 of this decision, the Commission then applies this reasoning to the case of New England Power and interestingly they say, in a passage black lined on page 51, "We do not think it fair, equitable or logical to conclude that all of NEP's post-June 1980 costs are imprudent simply because a State commission has found that from the standpoint of another utility's ratepayers, those costs were imprudently incurred. It is one thing for the judge to permit a State commission decision to shift the burden of going forward with evidence, but quite another to allow that decision implicitly to determine the reasonableness of particular costs from the viewpoint of NEP's customers. Unlike the judge, who focused on NEP's conduct only do you remember one time period but then applied his findings to cost incurred in a later time period, we think it is first necessary to look at the situation from the standpoint of NEP's ratepayers as it existed in 1980 and 1981, when the specific costs at issue were expended. If those costs appear questionable, then the events that preceded them become relevant."

256
And then they say that, "The record does not support a finding that NEP was imprudent during 1980 and 1981 in keeping open the option of completing Pilgrim II," which was of course the project.

257
For understanding's sake it is -- the process that's followed in the United States is a little different than up here, and the references to the judge having made findings -- is a reference to the fact that under U.S. procedure, there is a judge called an administrative law judge that often hears matters at a preliminary basis. And in this case, the case had gone for an administrative law judge, he had effectively ruled against NEP and that was appealed to FERC, and FERC overturned the decision of this administrative law judge.

258
Then at page 53 of the compendium, the conclusion is stated where the commission says, "We conclude that during the disputed time period NEP acted as any other reasonable utility in its position would have acted, given the same circumstances and the same facts known to the company at the time."

259
Now, in my submission, there is useful learning in this case for application here, the principal learning is of course the exclusion of hindsight and the determination of reasonableness, based on what was known at the time for the time period involved. It's also interesting, though, that the FERC was very scrupulous in excluding from consideration any consideration of the fact that the Boston Edison proceeding had already been determined. And they do that by saying whatever was the evidence in that case, it's got no application to this case, and they disregarded it entirely.

260
That obviously presents a bit of a parallel as a result of the odd procedure that the intervenors have seemed to follow here with the purported attempt to get Mr. Stauft's evidence in another case before the Board in this case and so that -- the learning from the FERC decision is appropriate to that issue as well.

261
The other authority that I want to refer to by way of what principles the Board should apply in its consideration comes from a report that was prepared by the National Regulatory Research Institute with funding provided by the member commissions. This is a report on the question of the prudent investment test in the 1980s, and one of the things this report does is review all of the state-commissioned jurisprudence up until that point in time and extract from that jurisprudence some themes or conclusions or principles. The executive summary I've provided as well as the specific passages that relate to this issue, but let me refer you to page 57 of the compendium where the -- where we have the summary of the four principles that were extracted from the jurisprudence.


262
"Review of the many recent state commission applications of the standard suggests four guidelines for successful use of the prudent investment test. These are, first, that there should exist a presumption that the investment decisions of the utilities are prudent. The presumption of prudence can be overcome, however, by an allegation of imprudence that is backed up by substantive evidence creating a serious doubt about the prudence of the investment decision. Once the presumption of prudence is overcome, a commission needs to decide on the legal standard for judging prudence. The second guideline is to use a standard of reasonableness under the circumstances. This is, to be prudent, a utility decision must have been reasonable under the circumstances that were known or could have been known at the time the decision was made. A corollary to the standard of reasonableness under the circumstances is a prescription against the use of hindsight in determining prudence. Observing this proscription is it the third guideline. The proscription against hindsight makes it unwise for a commission to supplement the reasonableness standard for prudence with other standards that look at the final outcome of a utility's decision, though consideration of outcome may legitimately have been used to overcome the presumption of prudence. The fourth guideline is to determine prudence in a retrospective, factual inquiry. The evidence needs to be retrospective in that it must be concerned with the time at which the decision was made. Testimony must present facts, not merely opinion, about the elements that did or could have entered into the decision at the time. Often the evidence for a state commission's retrospective factual inquiry is developed through a staff investigation. Such a staff investigation can look at the past in great detail and therefore can be time consuming and expensive."

263
Now, I wanted to refer you to just briefly to a couple of the substandard portions of the report that lie behind that summary. At page 62 of the compendium, we have at the bottom of the page, "The presumption of prudence." And the report says, "When applying the prudent investment test, state commissions have taken seriously Justice Brandeis' admonition regarding prudent investments: 'Every investment may be assumed to have been made in the exercise of reasonable judgment unless the contrary is shown.' Commissions have interpreted this as requiring a rebuttable presumption of prudence. It has been held that without 'affirmative evidence showing mismanagement, inefficiency or bad faith,' an investment decision is presumed to be prudent. In the absence of such an affirmative showing, at least one court has stated that a commission cannot disallow a utility's expenses. Thus, for example, unless a particular management decision associated with the planning or construction of a power plant is challenged, the full original cost of investment in the power plant is presumed to be prudent and includable in rate base. The presumption of prudence makes for efficient regulation in that commissions are not required, or allowed, to review the prudence of all utility decisions regardless of their number, importance or result."

264
And then if you would turn with me to page 67 of the compendium, there is a brief passage on the proscription against hindsight which expands a little on what was in the summary. And that says that, "A proscription against the use of hindsight in applying the prudence standard is a corollary to the 'reasonableness under the circumstances' test. The decisions of the utility are not subject to 'Monday-morning quarterbacking.' Instead, they are to be judged in light of the conditions and circumstances that were or should have been known to the utility at the time of its decision. In our view, the proscription against hindsight makes it unwise for a commission to supplement the reasonableness test with some form of final outcome test unless the final outcome test is used solely to overcome the presumption of prudence."

265

And with respect to this retrospective factual inquiry, the report goes on to say, "Once the presumption of prudence is overcome" -- that is, if it's overcome of course -- "there is a need to develop evidence about whether the investment decision was prudent or imprudent. To accomplish this, state commissions engage in retrospective, factual inquiries.

266
"Evidence for prudence or imprudence needs to be retrospective, or backward looking, in that it must be concerned with the time at which the decision was made. It must present facts, not merely opinion. These facts should cover all the elements that did or could have entered into the decision, including all relevant data, information, decision-making tools and the circumstances at the time."

267
So, in summary of those principles, in retrospective, or backward looking, in that it must be concerned with the situation, in my submission, Union is entitled to a presumption of prudence. And this, as the report says, is simply a common-sense issue because otherwise, if there wasn't a presumption of prudence, then every decision that management ever made about anything would be potentially on the table. It's of course a rebuttable presumption, but there is, in my submission, a complete lack of any substantive evidence, as both the cases and the report say, to create a serious doubt about the prudence of the Alliance-Vector decision. So in my submission, you don't even get past first base on this one on the record in this case.

268
Now, the second issue, the standard of reasonableness, was Union's conduct reasonable in the circumstances having regard to the information and circumstances that were presented to Union at the time and of course the relevant time is '96, '97. Mr. Warren is a good lawyer, he's experienced in these matters. He cross-examined the panel on this basis for hours. And although, in my submission, he toiled mightily at it, all the cross-examination did was reinforce that Alliance-Vector was the only, the only viable option.

269
There was cross-examination on TCPL and whether that capacity was available. The evidence is clear, in my submission, that TCPL capacity was not available. TCPL did not proceed with its Nexus project and there was no other capacity available.

270
What about other pipelines? Mr. Warren put Northern Border to the panel. As Mr. Baker said in re-examination, at volume 6, paragraph 1038, Northern Border was not an option, it didn't even make it on the table because the contracting period for Northern Border was in mid-1995 and it was fully subscribed immediately. So this was well before Union was even looking for incremental capacity.

271
Another possible alternative was other alternative pipelines in addition to Northern Border, but the evidence, in my submission, has shown repeatedly that all alternative pipeline capacity at the time was trading at a substantial premium. Capacity was tight and getting capacity at toll was simply not possible. This was true of TCPL capacity, and it was true of other capacity.

272

Then the last principle alternative might have been, it's suggested, spot purchases at Dawn. And let's reflect on this for a moment and what this means. The suggestion seems to be that Union not contract for any incremental pipeline capacity. So forget acquiring transportation capacity for that 80 million cubic feet a day that Union identified as being required by the system and just buy spot gas, as you need it, on the Dawn market. That's the suggestion. Mr. Baker and the other panel members testified repeatedly that this was not a viable option for at least two reasons.

273
First, Union would not and still would not regard it as prudent to leave that level of commodity requirement without firm sources of supply and therefore without the related firm sources of upstream capacity to bring it to Dawn. Even at today's prices, with secondary markets trading at a discount, Union would not leave that amount of capacity exposed to spot market prices.

274
Secondly, while today Dawn has become a bit of a trading centre, one of the reasons for that is the very fact that the Vector pipeline was built. That has enhanced the ability of parties to trade gas at Dawn. In 1996-1997, Dawn was not a robust market; the evidence is clear. Now, one indicator of the relative size of that market was, it has been suggested, the level of transfer titles. And as the Board has heard, that is nothing more than a proxy because there's no other way of measuring it. An attempt was made to use that as a proxy but that does not, as we've heard, tell you how much physical supply is actually -- and I say particularly uncommitted physical supply -- is actually available at any given time. This of course would be particularly the case for periods when Union would most need the supply, i.e., on cold days in the winter.

275
All title transfers tell you is how much gas has been flipped from one buyer to another and whether it would have been available for purchase by Union, and at what price is completely uncertain. So in my submission, the evidence clearly demonstrates that Alliance-Vector was not only reasonable but the most attractive alternative available. So that's reasonableness. Now let's turn to the proscription against hindsight.

276
One would gleam from listening to the cross-examination in my submission all violate the prescription against hindsight. To take Mr. Warren's cross-examination for example, he asked the witnesses repeatedly, "could it not have been predicted that," over and over again, "could you not have predicted that X would happen, Y would happen?" What parties are doing is taking today's circumstances and then saying explain why you didn't foresee this. And that approach, in my submission, stands the principle on its head. It stands the proper analysis on the head, on its head. The Board must look only at the circumstances that were reasonably known to Union at the time, and there is no basis, in my submission, for a conclusion of imprudence looked at that way.

277
Finally, the fourth piece of the test has to do with the retrospective analysis and determining whether there is -- there are substantive -- there is a substantive, factual basis for first, overcoming the presumption prudence and then if you can overcome that, for a conclusion based on these tests of whether the contract and the investment was prudent.

278

And so I say even if the initial presumption of prudence were overcome, which is not the case, I say, and I say on the record you cannot even come to that conclusion. But even if you came to that conclusion, you then have to ask are there facts before you, not just opinions or possibilities, but demonstrated facts which clearly demonstrate that based on the circumstances at the time it was negligent for Union to have contracted for Alliance-Vector capacity. And there are, in my submission, simply no such facts.

279
Finally on this issue, Mr. Chairman, it's, in my submission, worth recalling that the construction of Alliance and Vector and the tolls which both those pipelines may charge were subject to regulation and were approved by the National Energy Board and the -- the Federal Energy Regulatory Commission. The National Energy Board decision approving the construction of the Alliance pipeline is actually worth looking at on this point and I've reproduced an extract from that decision because it's quite long at page -- starting at page 73 of the compendium. This is the decision of the NEB that approved the construction of the Alliance pipeline and I just pause to say that this was not some hair-brained, speculative scheme by a bunch of cowboy producers in Alberta as perhaps may have been suggested. This was a carefully researched and thought out proposal that received careful scrutiny and consideration by the National Energy Board.

280
And in the section of the decision chapter 3, called, "Potential Commercial Impacts," under the heading of, "Competition and Netbacks," there's a long discussion of a number of issues and then the Board's conclusions are stated starting at page 74 of the compendium, page 34 of the decision. And you'll see there it says, "The Board is of the view that Alliance is a well-conceived project that will provide an innovative alternative to the existing gas transportation infrastructure. While difficult to measure, the Board believes that there will be large long-term competitive benefits from the Alliance project. The Board agrees with those parties who argued that Alliance will provide benefits by offering producers an alternative transportation service and by increasing competition among pipelines."

281
"The Alliance project is strongly supported by natural gas producers in the WCSB who, through CAPP and the WCPG, expressed their desire for choice. The desire for competition and choice is also clearly recognized in the Accord by the gas producers, NGTL and TCPL. Alliance also appears to have received support from natural gas LDCs in eastern Canada." And I pause to say there, Union being one of them. And the fact that Union supported it was a relevant consideration in the NEB's decision.

282
That goes to the point, I again say parenthetically, that the NEB might well not have approved this project had there not been long-term contracts in place for shippers.

283
MR. JACKSON: We have heard, have we, Mr. Penny, from Union's witnesses, that their contracting was not necessary to move this project forward; is that correct?

284
MR. PENNY: Not their particular one, that's correct. That's correct.

285
MR. JACKSON: Right.

286
MR. PENNY: They represent a -- I think it was 8 percent of the capacity.

287

MR. JACKSON: So once they've come on board, the NEB has observed that they're on board.

288
MR. PENNY: Yes.

289
MR. JACKSON: But there's no way that we could infer that anything different from what your witnesses said that --

290
MR. PENNY: Well, in fairness, I think what the witnesses were speaking to was the investment rather than the NEB approval. That's my recollection, at least. But my only point, I don't want to make too big a deal out of this, but my only point is that the NEB in part relied upon that fact, and I really take it no further than that.

291
MR. JACKSON: That's fine. No I just wondered if I was remembering the evidence correctly.

292
MR. PENNY: You were. And my recollection is that the focus was whether it was necessary from the investor's point of view for that project to go forward, rather than whether it was necessary from the NEB's point of view. I'm not sure anything turns on that distinction.

293
MR. JACKSON: No, and it in fairness I may have made a leap. I thought whether it was the project would go forward that was being addressed not just the investment possibly in the project that would go forward.

294
MR. PENNY: You may well be right, Mr. Chairman, and I'll check that.

295
MR. JACKSON: Thanks.

296
MR. PENNY: It goes on to say, "It is difficult to predict the specific impact that the Alliance project on gas prices in Alberta and on producer netbacks once it is built. The Board believes that, in the long term, the Alliance pipeline will help ensure that there is adequate transportation capacity from the WCSB to the major market centres and that the pipeline will have a positive impact on producer netbacks. In the short term, it is possible the Alliance might even reduce netbacks to producers, relative to what they might be in the project's absence. However, such a result would be the consequence of the lumpy nature of the project which would result in a very large addition to gas export capacity upon start-up."

297
"The Board is of the view that the long-term competitive benefits of the Alliance project will be significant and will extend beyond those directly participating in the project as owners and shippers. Arguably, the presence of Alliance has already contributed to positive changes in the natural gas transportation industry."

298
So in conclusion on this issue, Mr. Chairman, it is my submission that there is no evidence before you upon which you could make a finding of imprudence with respect to this contract, and indeed all of the evidence is entirely consistent with the fact that this was a reasonable choice for Union, given the circumstances it faced at the time and that the cost consequences of those contracts should be flowed through.

299
The second --

300
MR. SOMMERVILLE: Mr. Penny, I've got a question on this aspect of the argument. I haven't had a chance to read the authorities with any precision at this point, but they seem to be very categorical. In your view, are there any circumstances in which an action undertaken, prudent at the time when it was undertaken, can become less insulated from criticism because of market consolidation or vertical integration in an industry or outside factors? Is that something that should be taken off the table in all cases?

301
MR. PENNY: I'm always reluctant to say 100 percent or all of time, but on this one I'm pretty confident in saying that the answer to that is yes. It would be our submission that there are effectively -- barring something that I can't think of right now -- that effectively, the issue of prudence is always to be decided on the basis of the facts and circumstances that were own known or ought reasonably to have been known to management at the time, and that subsequent market changes should never change that evaluation. As the authorities indicated, subsequent -- the relevance of subsequent activity might be taken into consideration in determining whether that presumption of prudence should be overcome or not, but should not be taken into account in the -- if the presumption is overcome, should not be taken into account for the actual detailed analysis of whether the decision was, in fact, reasonable at the time.

302
MR. SOMMERVILLE: Thank you.

303
MR. JACKSON: Mr. Penny, I think this is on the same area you've just been covering and I wonder if you would just help me, because otherwise I will be looking this up myself in any event. But it seems to me, in the terms of the reasonableness of the decision that was taken at that time, one has to look in part at the reasonableness of Union's forecast of what it would have to be standing by ready to sell, in terms of the commodity. And it seems to me that I've read, either in this proceeding or perhaps during the RP-1999-0017 proceeding, some previous industry reports or decisions of the Board that summarized a requirement for Union to be the supplier of last resort, indeed, and maybe you could help me with how far that went. Was it reasonable for Union at that time to look at the market and the extent to which competition was working well in the market and then to forecast out that it would need the supply capacity that it was contracting for because it would be continuing to serve this much volume of the commodity and that competitors in the marketplace would not erode that level of commodity sales that had to be served.

304

I hope the question is relatively clear. It goes to the forecasting assumptions and I wouldn't want to play with them in small amounts. It's just that it seems to me that maybe Union was assuming that the marketplace didn't look competitive enough to take care of itself then and they were pretty sure that with the attributes it had, it wouldn't become competitive enough in the future. And then they -- so they'd better contract for a pretty large amount. And that may have been the reasonable mind set of forecasters at that time. I was just wondering if you could help me on that.

305
MR. PENNY: Well, Mr. Chairman, I think there's a number of points in there. It certainly was the case that at the time, Union had a statutory obligation to provide service and not only distribution service but commodity service so that -- and I believe --

306
MR. JACKSON: That was the Public Utilities Act obligation?

307
MR. PENNY: Yes. And I believe while it isn't -- while it isn't a -- I believe there is a reference in the evidence to that fact, in the pre-filed.

308
MR. JACKSON: Yes.

309
MR. PENNY: The -- Union still has roughly half of its customers on system gas.

310
MR. JACKSON: Yes.

311
MR. PENNY: The vertical slice, the whole issue of upstream unbundling, was not on the table at that time. So the whole issue of moving that out to direct-purchase customers was not something within the reasonable contemplation in 1996, I believe.

312
MR. JACKSON: Yes. I just want to make sure I'm absolutely clear to you here in my comments. I know we're talking about upstream transportation, but it's upstream transportation to bring a commodity to Ontario that Union thought it was going to have to sell. I don't think you were just speculating on upstream transportation; correct?

313
MR. PENNY: No, that's correct. And the evidence shows that they identified -- it's really a need of the commodity that they identified for around the 84 million cubic feet a day.

314
MR. JACKSON: Yes.

315
MR. PENNY: And that was based on their best assessment of what their future needs were going to be.

316

MR. JACKSON: Right. Right. And I was just looking for all the help I could get to sort of see that as clearly as I could in the evidence before us. You shouldn't take anything from this other than I'm looking to make the writing job easier.

317
MR. PENNY: I guess I'm thinking back to -- more specifically, to the point that you've raised, Mr. Chairman, and I will say this, and this is something that the Board alluded to in the matter 17 decision, in fact, and that is that -- and it's quite pertinent to your question about the competitive market. That is that no one else was stepping up to seek any long-term capacity and the -- for example, the direct purchase, the REM market. We heard in the 499 case -- sorry, not 499, in the matter 17 case, what-- we heard evidence on that issue that none of the brokers were willing to contract for long-term capacity, and you don't build pipeline capacity without long-term commitments. So to that extent, clearly the perception on Union's part, well justified on the basis of the facts, was that if there was to be additional capacity and they needed it because there was a short fall, if there was to be additional capacity that the competitive market, as you described it, was not going to meet that need.

318
MR. JACKSON: What I have to think about there, and I'm again just sharing some thinking with you at this point and nothing more, but what I have to think about there is whether the competitors in the market weren't just observing that the producers had committed to build this pipeline and that they didn't have to provide a commitment, and therefore, there would be transportation available from this pipeline without their having to commit for 15 years to any significant volume. And I guess, related to that and going the other direction because I'm just thinking about another of factors, it may very well be that if you didn't commit you would all get committed to people that wanted to go farther, to Quebec or to New England, I don't know. So those are questions which I will be trying to resolve. But I thank you for your help.

319
MR. PENNY: Well, and it again touches on this issue that the Board alluded to briefly in the 17 decision about this issue. There is, I think, in economic theory something called the greater fool theory that involves saying well, if somebody has to commit to do it, it's not going to be me. We'll just let somebody else do it and then I'll sit back and later on I'll take the benefit of it. And if that -- of course if that theory applied and if everyone thought that way, then no one would ever make the commitment, and on this scenario, the pipeline could never be built.

320
MR. JACKSON: Or it might be built and it might run right past Ontario.

321
MR. PENNY: Or it might be built and it might not come to Dawn, exactly. Exactly.

322
MR. JACKSON: Okay. Thank you. You've given me more to think about.

323
MR. PENNY: Now Mr. Chairman, I wanted to turn to the LRAM issue which is 5B.

324

MR. JACKSON: Now, Mr. Penny, my colleagues here have just pointed out to me the time. But my understanding, and I'd just like to check with the court reporter, was that we might only be able to sit for the morning. Now we're certainly willing, I think -- I will double-check with my colleagues but we are willing to go until you finish. Can you give always little estimate of time and then I'll check with the reporter?

325
MR. PENNY: I think I have about -- I will probably be about an hour to an hour and a half to finish.

326
MR. JACKSON: Thank you, Mr. Penny. I was under some idea that the court reporters couldn't stay with us too long this afternoon so would you -- let me just clarify with the court reporter.

327
Mr. Penny, is this a convenient spot then, would you like to have it now or --

328
MR. PENNY: Absolutely, this is very convenient. I'm just about to move on to a totally different issue.

329
MR. JACKSON: Thank you, I think that's a wise approach then. So we will return at -- it's five to, by the clock in the room, so we will return at 2:00. Thank you, Mr. Penny.

330
--- Luncheon recess taken at 12:55 p.m.
331
--- On resuming at 2:22 p.m.
332
MR. JACKSON: Thank you. Please be seated.

333
MR. PENNY: We have to sacrifice lights to get the power on?

334
MR. JACKSON: That's right. It's ironic that it's the Ontario Energy Board and I do see that we've sacrificed lights. But we've sacrificed, I hope, the hottest lights in this room too so we may all feel more comfortable. If you can hear me that's always important, you don't need to see me.

335
You've got enough light to proceed?

336
MR. PENNY: Absolutely. I meant to say at the outset, Mr. Chairman, that I normally like to do argument on my feet because that's what I'm used to, but I had asked Peter O'Dell whether he could find the lectern and he said it must have gone into storage. I must apologize. It seems somehow inelegant to me to be delivering argument from a seated position but I certainly mean no disrespect to the Board in that regard. It was my preference to have done it up, but here we are.

337
MR. JACKSON: I'm sorry we couldn't accommodate it. It does seem to me that it's the least we could have done for you. So next time.


338
MR. PENNY: Thank you, sir.

339
MR. JACKSON: Thank you.

340
MR. PENNY: So where I left off was at issue 5B, so I'll just dive into the issues relating to the lost revenue adjustment deferral account.

341
There are two issues. First, there is the issue of the quantification of the DSM savings as a result of the measures that are currently in place. And as the Board has heard, what started out as a dispute about just about every one of Union's measures was, through negotiation and review of more detailed information and through Union's updates to use the best information based on the recent evaluations and so on, those were whittled down to two. And the two matters in issue are the free-driver rate for the information furnace measure and the appropriate way to quantify the effective DSM measures in their start-up year. The amounts in issue relating to those two issues are at Exhibit F.7.1. It's 1.261 million for the free-driver rate on the furnace measure and it's 2.543 million with respect to the -- at least as GEC would have it -- with respect to the start-up issue.

342
The second issue in dispute is a much more fundamental one, and that is whether there should, in fact, be anything in the LRAM deferral account and indeed, whether the company has to pay money to customers as a result of its DSM activities. And that issue turns, I will submit, on one question of fact, and that is whether the DSM savings specifically targeted for 1999, 2000, and 2001 are embedded in Union's rates for those years. And we say the evidence is clear that they were not.

343
Let's deal with the quantification first. The furnace information measure is described at the pages 6 to 13 of the yellow page updates, Exhibit B, tab 10. Essentially, over 50,000 customers replace their furnaces annually. On the basis of Union's methodology, 30 of those purchase a high-efficiency furnace. About 75,000 of those are program participants, meaning that they receive an incentive for doing so. And therefore, roughly 23,000 customers a year buy a high-efficiency furnace without receiving any incentive.

344
Now, Union, as you heard, spends about half a million dollars a year on educating customers and promoting high-efficiency furnace. It does so through material distributed directly to customers and through working with the heating ventilation and air-conditioning community, that's HVAC in the vernacular. The distributed material by Union includes bill inserts, cost comparison sheets and wise energy use guides. Some of these educational programs have been in place for up to seven years and these educational initiatives are designed to try to transform the market; that is, to fundamentally effect customers's perceptions of high-efficiency equipment and to, in effect, make it the norm rather than the exception.

345
The purpose of this customer education activity is to generate spillover or free drivers. In other words, to get people to buy high-efficiency furnaces even if they do not participate in an incentive program.

346
Union has testified that it would not be spending that money if it didn't think that it was going to cause more people to buy high-efficiency furnaces than would otherwise be the case. Mr. Neme, the consultant hired by GEC, essentially agrees with this. At volume 8, paragraph 334, he agreed that it was a reasonable expectation on Union's part that the expenditure of these funds would make the home equipment replacement program more effective.

347
So the question and the dispute is about how many of those 23,000 unit customers who we know buy a high-efficiency furnace every year were influenced to do so by the information program. Union is taking what is, in my submission, the rather modest assumption supported by a study conducted by recognized experts in survey design and analysis that 15 percent, 15 percent of those 23,000 customers per year, were influenced by this widespread and long-standing market transformation campaign to promote high-efficiency furnaces.

348
Now, Mr. Neme agreed that it's not zero and that's at volume 8, paragraph 335 to 338; his problem is that he's not convinced that it's 15 percent either. And the problem with the 15 percent is essentially that he does like the study, and when you look back at his evidence, there are two things he says he doesn't like about the study. He says first that the HVAC dealers should have been interviewed as well as customers, and secondly, he didn't like the way some of the questions were asked. You can find that testimony at volume 8, paragraphs 214 and 215.

349
Union has hired independent firms with expertise to conduct and analyze this survey. There was one firm that conducted the field research and another firm that analyzed the data. Hundreds of customers were interviewed. This, in my submission, is pretty good evidence as these things typically go. In my submission, Mr. Neme has no demonstrated expertise in survey research or statistical analysis. There is no evidence before you that interviewing HVAC contractors or asking slightly differently worded questions would have made any difference to the result. So in my submission, to overturn the 15 percent free-driver rate used for this measure, and remember Union is only saying that 15 percent of those 23,000 customers who buy a high-efficiency furnace, or only 3,500, were influenced to buy one as a result of the information furnace measure. In order to overturn that assumption, GEC, in my submission, has to do better than just complain that they didn't like the survey.

350
There is sufficient evidence before the Board to support the claim to the DSM effect of 3,500 high-efficiency furnaces being due -- being purchased due to the customer education that Union has done. And this amount, which is I've indicated, 100 percent of it is 1.261 million, should not be deducted, in our submission, from Union's LRAM claim of some $9.2 million.

351
Now, the second issue, the second quantification issue, is not really measure-specific; it is more in the nature of whether simplifying assumptions are accurately reflecting what is actually happening in a particular year. For the purposes of Union's calculations in this case for the DSM measures instituted in 1999, 2000, and 2001, Union included 100 percent of the savings for those new measures in each year. This simplifying assumption included the assumption that there was no DSM activity from prior years for which no rate recovery had been obtained, having any effect in 1999, 2000, and 2001.


352
Now, as I understand it, the criticism of this approach is that because not all programs start on January 1st, Union is claiming too much in the first year of each -- in the first year each new measure. Mr. Neme's approach, which he agreed was also based on a simplifying assumption, is to take half the savings for the first year and the full savings thereafter. Now, I suppose we might say that Union would agree with this as far as it goes, but the problem with simplifying assumptions is, of course, that they are perhaps too simple. Union submits that if it's assumption, that 100 percent of the savings are realized in the first year, is to be revisited then the other assumption, that there is no DSM savings from a prior year which is effective in 1999, for example, must also be revisited.

353
Implicit in Mr. Neme's criticism and in his adoption of the half-year rule for the first year of a measure and the full effect thereafter, is the notion that DSM impacts are felt in years after they are introduced or initiated. So Union is submitting that if we reevaluate the going-in assumption then we have to look at the 1999, 2000, and 2001 effects, that is the effects in those years of its 1998 DSM plan.

354
Union has not sought to recover for lost margin due to the 1999 effect of programs instituted in 1998 and this is largely due to the simplifying assumption adopted for the treatment of new 1999 programs. But it's our submission that Union could make that claim under the terms of the ADR agreement in the 499 case and under the terms of the accounting order which governs this account. And that's because neither are limited to measures implemented in 1999 or following. The account is to capture the margin impact of all DSM savings realized in 1999 and thereafter.

355
So the fact, in my submission, that Union did not have an LRAM account in 1998 is completely irrelevant to this point. Union would not be seeking the margin impact and is not seeking the margin impact of DSM in 1998 when it didn't have an LRAM account, it's seeking, or it would be under this revised methodology, the margin impact of DSM in 1999 when it did have an LRAM account.

356
Now, we know that there is margin impact because as the Board knows, Union was not in for rates in 1999 and so there has been no rate adjustment to capture the reduced volumes -- in 1998, excuse me -- there was, we were not in for rates in 1998. So there has been no rate adjustment to capture the reduced volumes resulting from DSM savings relating to the 1998 DSM plan.

357
So where does all this take you? Well, it goes to the point that Union has not claimed 1999 margin impacts from a measure started in 1998 but, in my submission, it could. So if we are readjusting the first year of 1999 we should recognize that there is continuing 1999 effect or, in other words, DSM savings realized in 1999 from the prior year's program, and so that half of that effect at the very least should be recognized in making the 1999 adjustment so it's, in effect, a wash.

358
The financial effect of that is shown in the yellow page update, Exhibit B, tab 10, table 4 which was under the alternate method provision, line 9. The actual DSM impact in 1999 from the new measures that were instituted in '98 is 1.766 million. And Union, in that alternate method table that I just outlined or just indicated to you, has reflected half of that, or 883,000, and that's, as I say, effectively a wash against the reduction to the 1999 measures that is proposed by GEC.


359
Now, let me turn to the LRAM methodology question that is vexing Mr. Gibbons. As I said at the outset, the entire issue turns on one question of fact. And the question of fact is whether the 1999, 2000, and 2001 DSM savings targets from the 1999 DSM plan were embedded in Union's rates in 1999, 2000, and 2001. On the record, the only answer to that question we say is no, they are not.

360
Before going to the analysis, I just want to talk for a moment with about the concept of how DSM savings targets become embedded in rates and let me take a simple example. Let's say that a distribution system has 10 customers and each takes 10 units a year, and we'll assume that the distribution system costs $100 a year to operate. In that scenario, rates have to recover $100 so each customer would have to pay a dollar a unit for the service. To illustrate the point of how savings might get into rates, let's assume that half the customers or five of them reduce their demand through efficiency measures by a half. So now five of the customers are only using five units a year per customer, for a total for all 10 customers of 75 units rather than 100. The system still costs $100 to run, but on the old rates of $1 per unit there are only 75 units so there will be only $75 recovered.

361
If the lost margin associated with those efficiency savings were going to be recovered in rates, the lost revenue of $25 in my example has to be recovered as well, and that would be done by dividing the total cost of $100 by the DSM reduced through-put of 75 units to get a new rate of, I think it works out to $1.33 per unit. And it is the lost revenue associated with that $25 in my example that we are talking about whether we say DSM savings were ever embedded in rates. And if the $25 is not recovered by increasing rates to the $1.33, then if there were, for example, a lost-revenue deferral account, the $25 shortfall accumulates in the lost revenue account and that would be recovered from customers later.

362
Now that brings me to the next step in the analysis which is, in my submission, it is important to realize that other than timing issues, ratepayers are essentially indifferent to whether the lost revenue is recovered in rates or through a deferral-account mechanism. And Mr. Baker outlined that in his examination-in-chief at volume 7, paragraph 195 to 197. That I have reproduced in the bundle. If you'll give me a moment, I'll take you to it.

363
MR. MORAN: Page 76.

364
MR. PENNY: Page 76, thank you. And Mr. Baker says there, "I thought it might be helpful just to illustrate by way of a simple example. If you take a scenario, one where forecast DSM savings in a given year are $10 and that amount is built into rates - so customers will pay and the utility will recover that $10 through rates - if the actual DSM savings that year turn out to be $15, the operation of the LRAM account will capture the difference between the $15 actual savings and the $10 included in rates. So the LRAM balance would have a $5 balance. Subsequently, that balance would be recovered by the utility through the clearing of the LRAM account."

365
"So in total in that example, customers have paid out and the utility has recovered $15; $10 initially in rates and $5 through the operation of the LRAM account."

366

"So if you look at that same fact in a second scenario, so assume the DSM savings that are forecast are $10 but assume in that scenario there's no amount built into rates so customers don't pay anything through rates and the utility, it doesn't recover anything through rates; and again if the actual savings turn out to be $15, the LRAM captures the difference between the $15 of actual savings and the amount that was included in rates, in this case, zero, so the LRAM account would have a balance of $15. And again, that balance would be subject to the audit result and the DSM savings would be recovered through the disposition of the LRAM deferral account. So in both cases customers have paid, and the utility will have recovered $15."

367
In my submission, what this really illustrates is my opening point, which is the whole dispute here turns on a question of fact. And that question of fact is whether those program targeted savings for those specific years are, in fact, embedded in Union's rates. If they're not, then Union's entitled to the recovery; if they are then it would be double counting and Union would clearly not be entitled to recovery.

368
Now, part of the issue also turns on what is the purpose of an LRAM. And we say the purpose of an LRAM account, and I think there's virtual agreement on this among all parties except for Mr. Gibbons for reasons that I'll turn to for a moment, that the purpose of an LRAM account is to act as a revenue-neutral mechanism to track distribution margin impacts attributable to DSM activity as compared to forecast levels embedded in Union's rates. And Mr. Neme, for example, testified to this at Volume 8, paragraph 246. That's at page 77 of the compendium, starting at paragraph 246.

369
The question was, "Can you agree with me that the purpose of an LRAM is to make the utility indifferent to variances in gas through-puts which are the result of demand-side management activities?"

370
Answer: Yes.

371
Question: And it is supposed to be a revenue-neutral mechanism to track distribution margin impacts attributable to DSM activities as compared to forecast levels reflected in the utilities rates?

372
Answer: Yes.

373
Question: Indeed, I think your report says that Union Gas is entitled under the lost revenue adjustment mechanism to compensation for lost revenues if its DSM programs generated more savings than were incorporated into the sales forecast upon which its rates were based.

374
Answer: That's correct.

375

Question: And similarly, Union would be obliged, I take it, to reimburse customers if its DSM savings were less than the volumes that were incorporated into the sales forecast upon which Union's rates were based.

376
Answer: Yes."

377
And then the question, "Question: Now your report raises two basic issues, and the first is whether projections of the savings Union would realize under its DSM plan from 1999 to 2001 were incorporated into the sales forecast upon which rates were based.

378
Answer: Correct. I did not address that issue.

379
Question: And if ... The DSM targets were not reflected in 1999, 2000, or 2001 rates, I take it that Union would be entitled to recovery of all of its lost revenue for that period.

380
Answer: Yes, the general principle that I've laid out is that the purpose, as you stated earlier, of LRAM is to make the company indifferent between -- or with respect to the amount of savings that its DSM programs in a particular year are generating. And to the extent that they have underperformed relative to what was in the forecast that was incorporated into rates, they owe the ratepayers money; to the extent that they overperformed, the ratepayers owe them money.

381
Question: To the extent they overperformed relative to what is embedded in the rates, they are entitled to reimbursement.

382
Answer: That's the general principle of LRAM."

383
Now, in my submission, the record is replete with references to the fact that there were never any planned 1999, 2000, or 2001 DSM savings actually incorporated into Union's forecast for its 1999 rates. And one citation is at Volume 7, paragraph 205 at page 79 of the compendium, where Mr. Baker said, "First and most importantly, there were never any DSM -- 1999 DSM planned savings incorporated into Union's forecast for its 1999 rates. Union's 1999 volume forecast was based on actual historical consumption normalized for 30-year weather, and there was no adjustment in Union's 1999 volumes or margins for the 1999 projected DSM planned savings."

384
"If there was to be an adjustment for those 1999 forecast DSM savings, this would not have been done or incorporated into the normalized average consumption methodology which was the underpinning of Union's forecast. It would have been a separate and explicit adjustment to Union's volumes, revenues and margins in that case. And in the 499 ADR agreement, where the LRAM was established, and --" Sorry, that's the end of it. I don't think we need the rest.

385

Then a little further on at page 80 of the compendium, Mr. Baker adds, starting at paragraph 239, the question, "Now, you've told us there was not, in fact, any DSM-plan-related lost revenues embedded in the 1999 rates. Have any DSM plan savings been incorporated into any rates subsequent to 1999?"

386
Mr. Baker, "No, they haven't. As the Board is aware, 1999 was the starting point for PBR. As I said, there's been no specific DSM forecast amounts or margins in either 2000 or 2001 as well, and I think that members of this Panel will be well aware of this fact, that there was no adjustment made in 2000 in the rates that were determined in the RP-1999-0017. Similarly, the Board will be aware in this case that there's no request for agreement --" I think that should be "or agreement to adjust 2001 rates for the 2001 DSM plan savings."

387
Now, you've seen and heard that the DSM evidence from EBRO 499 did contemplate that the DSM targets for '99 would be reflected in the through-put fast forecast for determining revenue. But as Mr. Baker has stated repeatedly, and Mr. Baker is a senior officer of the company and he was in fact in charge of the regulatory group at the time and was the case manager and was himself directly involved in the ADR settlement conference and agreement, as he has stated repeatedly in his evidence, while that was contemplated at the time that the evidence was prepared, it never happened. During the ADR, the through-put -- the agreement on the through-put and therefore on the revenue forecast was simply to take the trend line from the 1993 to 1997 data and apply that trend to the through-put forecast. So there was clearly no explicit DSM adjustment in that process.

388
Then in RP-1999 matter 17, there was explicit evidence on this point. The deferral account that was brought forward in that evidence for the LRAM recorded a positive balance of $1.6 million which represented 100 percent of the 1999 target. As Mr. Baker said in evidence, if the 1999 DSM targeted savings had been reflected in rates, Union would have had to double its DSM savings over target in order for this much to be showing up in the deferral account. And in my submission, everyone knew that that did not happen. But more to the point, there was explicit testimony given by Mr. Fogwill in that case which stated unequivocally that there was no 1999 DSM savings in rates and that the amount calculated was off a base of zero. And that appears at pages 81, 82, and 83 of the compendium and it comes from Exhibit F.5.3 which was marked in this case. And at the bottom of page 81, there is a question from the presiding member which is:

389
"You have an expectation of what the results of the DSM might lead it, and if you are in a cost-of-service model that expectation would have been built into the forecast of the volumes that you expected to sell."

390
Mr. Fogwill: No, they are not.

391
Question: They wouldn't have been in the cost-of-service model?

392
Answer: No, they are not built into the forecast, they are separate."

393
And then down below in response to another question:


394
"The lost margin with respect to an excess over a planned amount if the planned amount isn't already in your cost-of-service forecast?

395
Answer: The benchmark for the shared savings mechanism," excuse me, the shared savings mechanism, which is different -- "the pivot point for the shared savings mechanism is 75 percent. The benchmark for where we would start the lost revenue adjustment calculations is at zero."

396
Then over to page 83: "And the reference point for the latter," that is the lost revenue adjustment mechanism, "is zero, isn't it?

397
Answer: That's right, because that saved energy is not included in the forecast."

398
So whatever expectations were at an earlier point in time, in my submission, the record is clear that the 1999 DSM plan targets for 1999, 2000, or 2001 were not, in fact, built into Union's load forecast or embedded in rates.

399
Now, what is interesting about this, however, from the perspective of Mr. Gibbons' argument is that he doesn't care. And I asked him about this in cross-examination at Volume 8, paragraph 513 and that's at page 84 of the compendium and I asked him in cross-examination, "if my note is correct, in reference to the preparation -- in relation to the year 2000, I think you said when Union prepared its 2000 load forecast. And I wanted to ask you when you say Union did a 2000 load forecast.

400
Answer: Well, in their PBR case, they came forward with a proposed load forecast or volume that should be used to set rates. It was the same as the EBRO 499 load forecast or volumes.

401
Question: So Union didn't do a 2000 load forecast, it was relying upon the 499 forecast.

402
Answer: Yes, they were reusing the 499 load forecast, that's absolutely correct."

403
Then he goes on to say, "Given that the LRAM methodology that Union was proposing, they were obliged to make sure that their load forecast properly reflected the impact of DSM volumes. And so presumably, if they were doing their job correctly, when they were recommending that the same load forecasts will be used again in RP-1999-0017, they were believing or should have believed that load forecast would accurately capture the impact of DSM.

404
Question: So you don't care whether any of these forecasts were in rates or not; your methodology applies whether, in fact, any of these forecasts were in rates or not, doesn't it?

405

Answer: Absolutely, sir. Our position is very simple, there was a methodology that was approved and that's the methodology that should be used, and it's Union's obligation as the company to make sure that they come forward with a correct load forecast."

406
So it's a matter of complete indifference to Mr. Gibbons whether Union has recovered these lost volumes in rates or not. In fact, it seems he appears to be prepared to assume that they weren't. His position is that if they weren't, they should have been, based on something that was said in EBO 169-3. And from his perspective, that's the end of the matter. If, as he puts it, Union did not prepare what he calls a "correct" load forecast, well that's too bad. So Mr. Gibbons's argument is, in effect, that the LRAM is not, as Mr. Neme says, a revenue-neutral mechanism. It is a punitive device to punish Union for not preparing a load forecast in accordance with a 1993 generic decision of the Board on integrated resource planning.

407
Mr. Gibbons clearly disagrees with Mr. Neme when Mr. Neme says at paragraph 256 that I read earlier that if the DSM targets were not reflected in 1999, 2000, and 2001 rates, Union is entitled to recovery of the margin on all, all, of its lost revenue for the period.

408
Mr. Gibbons says whether it was in there or not, it should have been and because it's not, Union has to pay the price.

409
Now, what this means, in my submission, is that the numbers that Mr. Neme calculated both in table 4 of his own report and in F.8.2 for Pollution Probe, to show what he calls this variance method, that those numbers are a fiction. Table 4 was prepared assuming that Union was already getting rate recovery for lost volumes from targeted DSM activity in 1999, 2000, and 2001. The amounts Union was assumed to be recovering for those lost volumes is at pages 86, looking at 86 and 87 of the compendium. So, page 86, if you look at the bottom of the page under table 4, this is Mr. Neme's calculation which I believe includes his arguments on the furnaces, his arguments on the timing issue, but also assumes the -- if I'll call it the Gibbons approach or what he calls the variance method, and that number, of a negative $3 million -- on that theory that would be an amount that Union actually has to reimburse to customers. And his testimony was, as well the testimony of Ms. Platis, was that that table assumes 1.3 or 1.6 million for 1999 was already being recovered in rates; 1.69 million was already being recovered in rates for 2000; and 1.7 million was already being recovered in rates for 2001. And I say it's a fiction because the clear evidence from this hearing that those amounts in respect of 1999, 2000 and 2001 DSM targets were not, were not embedded in rates. And Ms. Platis could not have been clearer on this: At page 88 of the compendium and the evidence is replete with these references -- Mr. Baker said it and Ms. Platis has said it and it's consistent with the evidence that I've just reviewed with you. Ms. Platis was explaining table 4 in her evidence in chief and her estimates are a little different because Mr. Neme changed, yet again, changed his tables the night after Ms. Platis testified, but they are more or less -- they're fairly close. "For 1999," she says, "I estimate that it's 1.4 million" -- that's the amount that's assumed to be embedded in rates for those years. "For 2000, it's 1.69 million, and for 2001 it's 1.728 million."

410
"Question: Were those amounts actually in your rates for 1999, 2000, or 2001?

411
Answer: No."


412
Exactly the same analysis applies to the other numbers that Mr. Neme calculated for Pollution Probe, which are also at F.8.2, that those numbers -- because they assume that those recoveries are already embedded in rates, those numbers are a fiction. So at the end of the day, Union went through a rate proceeding in EBRO 499, there was an ADR agreement. It provided that Union was entitled to record in a lost revenue adjustment deferral account the margin impact of all DSM savings realized effective January 1, 1999. The Board issued a rate order, that constituting Union's legal authority to collect rates and record amounts in the deferral account. The accounting order provides that Union shall establish a deferral account to record the margin impact of all DSM savings realized commencing January 1, 1999. I won't read them again but I have attached those relevant excerpts from the agreement and the accounting orders at pages 89, 90 and 91 of the compendium. Union acted in good faith; pursued DSM in 1999, 2000, and 2001; recorded the accrual on its financial statements; and now, to its great surprise and shock, finds that Mr. Gibbons thinks that the amount of the 1999, 2000 and 2001 DSM targets should have been in rates. And because of that, Union -- and because they weren't, Union should now be punished to the tune of about $10 million.

413
And in my submission, this argument is utterly meritless, and it should be rejected. Now, for the reasons I've outlined, subject to one final qualification, Union is therefore seeking the full amount recorded in the account of 9.269 million as set out in the yellow page update Exhibit B, tab 10, table 1 update. That brings me to the final and very different question, very different question posed by the Board not about whether the 1999, 2000, or 2001 DSM-planned targets are embedded in rates but whether some other historic DSM level of savings is baked into rates, not by virtue of explicit adjustment to the statistically derived through-put forecast, but by virtue of the operation of the ADR agreement which relied on a statistical regression adjustment to the through-put forecast. And the answer to that is, I believe, a qualified yes. And I'll explain both why it's yes and then what the qualification is.

414
The answer to that question, I think, is set out at Exhibit F.8.1, which I've reproduced in the compendium at page 92, it's the last page of the compendium. And this was spoken to by Mr. Baker at Volume 8, paragraphs 100 to 156. The answer to the question is that the statistical analysis that produced the through-put forecast was based on 1993 to 1997 actual consumption, and because there was DSM -- because there were DSM programs in 1995, '96 and 1997, there is some DSM savings in there and to the extent those activities are reducing volumes, not 1999 but say in 1997, that is essentially -- that is essentially being recovered in rates, in the 1997 rates.

415
Now, the DSM agreement said: Take the trend from the 1993 to 1997 data and apply the trend that's generated from that to the normalized average use per customer or what everyone calls NAC. And the Board wanted to know whether there was any DSM savings embedded in that determination. And the answer is based on the 1995, 1996, and 1997 targets: Yes, a little bit.

416

The five-year average trend from the ADR agreement was a declining use of some 22 metres cubed in total and that, as Mr. Baker said, is produced by all kinds of things: Different housing stock, weather, whatever. To respond to the Board's question, Union went back, however, to determine, based on DSM savings targets that 2 metres cubed of those 22 were attributable to the historic DSM that occurred in the test -- in the study period. It was in the '95, '96, '97. To be clear, the 2 cubic metres is in no way a forecast of what will actually happen in '98 or '99; that's the very adjustment that was not made. The 2 metres cubed represents the trending forward effect of existing DSM activity, up to 1997, that was implicitly in the volume forecast through the use of a five-year average and the trend extension of that average that was agreed to in the ADR. So to that extent, to the extent of 2 metres cubed per year of consumption per residential and small commercial customer, that DSM savings was implicitly recognized in the 1999 through-put forecast. So accumulating that declining trend for '98 and '99 -- so it's really 4four metres cubed -- it produces a 1999 effect of $438,000 and that's on the extreme right-hand column of line 14.

417
I pause to note that that effect does not continue in 2000 or 2001 because as the Board knows, the 1999 volumes were fixed as the basis for the PBR plan. So by virtue of the fact that the volumes are not adjusted at all in -- 2000 to 2003, neither the NAC decline in the 499 agreement of the 22 nor the DSM portion of that, the 2, continue past 1999.

418
Now, I said it was a qualified yes, and the reason I said qualified is because if all else were equal, Union might concede that the balance in the LRAM deferral account would be reduced by the amount of that $438,000 that is implicit in DSM savings in rates.

419
But as you've heard before, all else -- I'm sure you've heard this before -- all else is not equal. And that really brings us to lines 15 to 17 of page 92. This deals with the question that I've alluded to before, of DSM measures implemented in 1998. Union, for the reasons I've already outlined earlier, is not seeking recovery in this case at least based on our methodology -- and our methodology meaning seeking the 100 percent recovery for 1999 programs initiated in 1999 -- is not seeking recovery for the 1999 effect of DSM savings realized in 1999 from programs instituted in 1998.

420
As I've argued, Union could seek recovery of that amount as it is clearly caught by the terms of both the settlement agreement in 499 and the accounting order and involves no double recovery because 1998 savings were clearly not embedded in rates.

421
As line 17 shows you, the annual lost margin associated with DSM measures commenced in '98 but effective in subsequent years, '99, 2000, and 2001, the annual effect is $1.6 million. So the cumulative effect of this lost margin realized in 1999, 2000, and 2001 is about 4.8 million or about 10 times the implicit effect for the NAC adjustments that are embedded in rates as a result of the ADR agreement in 499.

422
So again, in my submission, if adjustments to account for the historic NAC decline that is implicitly embedded in rates were to be contemplated similar peculiar to my argument about the 50 percent rule, Union would be seeking recovery of the effects realized in 1999, 2000, and 2001 in accordance with the accounting order that governs this account.

423
So in effect, we're saying it's more than a wash. And while on the strict analysis and the -- there was an amount implicitly built into rates as a result of the historic DSM from 1995 to 1997, that is more than compensated by the foregone amount in '99, 2000, and 2001 which would be, in our submission, recoverable under the terms of the accounting order.

424
So that concludes my submissions on the LRAM-related issues and in effect concludes my submissions on the four discrete issues that we spent most of our time focussing on here, that being the GDPPI, the Ontario tax change, the prudence of Alliance-Vector and the LRAM account.

425
I now propose to turn to a series of additional issues. I hope I won't be too long. I'll breeze through these as quickly as I can, but I think it's important to advise the Board about why it's an issue and what Union's position and argument on those issues is.

426
So 5C, other deferral account issues. There are two other deferral account issues. The first relates to the incremental unbundling costs deferral account; and the second, there are a series of changes to deferral accounts that are being sought.

427
So dealing with C(i), the incremental unbundling costs deferral account. This is purely an matter of clarification that the Board should deal with in this decision. And you may recall that it results from the parallel proceeding in matter 78 and the crossover between that case and this case.

428
In procedural order number 8 in RP-2000-0078, it was determined that the prudence and allocation of account 179-101, that's the incremental unbundling cost deferral account, would be determined in the matter 78 proceeding while the disposition of the account would be decided in this proceeding. As a result, the settlement agreement this proceeding provides, and Union is asking the Board to reflect in its decision in this case that whatever the prudently incurred cost that the Board approves through the 2000 matter 78 proceeding as recorded in that account be approved through disposition, through a rate order pursuant to the Board's decision in this case. So it's purely a technical matter to make sure nothing falls through the cracks. You are deciding the substance of the issue in matter 78, but we need an order in this case to clear the deferral account, depending on what your decision is on that matter in the 78 proceeding.

429
Then, turning to changes to deferral accounts, there's several -- well, there's two. The two proposed -- there were two that were not settled through the ADR process and the two proposed changes relate to the deferred customer rebates and charges account and the other purchased gas costs account. So let me turn briefly to the deferred customer rebates issue.

430
This account exists today and Union is asking for an amendment to the -- to what qualifies to go into that account. It's a very specific and narrow amendment. The account is currently used to record deferred amounts owing from or to customers who have moved, either where the outstanding amount is $10 or less, or where the customer can no longer be found.

431

The specific change requested is to permit, in addition to the amounts currently provided for, the recording of amounts from deferral account dispositions, not ordinary charges in the ordinary course of business, but from deferral account dispositions charged to customers which, following normal collection procedures, remain uncollectible because of demonstrated insolvency on the part of the customer. So it is quite narrowly defined, it's deferral account dispositions only and only cases where they are proven to be uncollectible because of demonstrated insolvency.

432
The proposed change to the operation of this account arises really from the unique circumstances of this case in which Union is disposing of significant deferral account balances that have accumulated over three years, that's 1999, 2000, and 2001, and secondly balances that were also significantly impacted by an unprecedented level of commodity price volatility. And you can find evidence on this from Mr. Horner at Volume 4, paragraph 370.

433
So, this is a highly unique situation that's not caught, in our submission, by normal business risk on unpaid accounts and therefore, we ask for the -- for the account to be expanded to include these unusual payments that are coming due as a result of the circumstances I've just outlined.

434
Issues of materiality under the PBR process would be dealt with at the time of disposition and by that I mean that the question of whether the amounts were material enough to qualify for disposition under the price cap plan would be reserved for disposition of that account.

435
The second issue relates to the other purchased gas costs account. Union is proposing two changes to this account: The first, which is just a change to the method of accounting for inventory reevaluations, was settled for the ADR, but the second concerns the treatment of dispositions from this deferral account in circumstances where a direct-purchase customer has failed to balance at the end of its contract or by renewal date within the 4 percent tolerance that's specified in their contract. And that's the issue that did not settle.

436
So currently, when a direct-purchase customer fails to balance and has not delivered sufficient gas to stay within the 4 percent tolerance, the customer is charged for the gas required to balance the contract for the year at the then-current approved WACOG. And then upon disposition of Union's deferral account balances for the year, Union would levy an additional amount, which would be based on the difference between the WACOG amount that would have been charged and the average cost of Union's spot purchases made during the quarter in which the direct-purchase customer failed to meet its contractual annual balancing requirement. And this has the result that if Union did not happen to make spot purchases in that quarter, then no additional charge beyond WACOG would be levied.

437
Any additional amount that is levied in respect of imbalances though, on deferral account disposition, then serves to reduce the balance in the account that would otherwise have to be recovered from customers. So these charges benefit the customers who are not guilty of contract breaches.

438
The reason for the change is that the current method has been found to provide insufficient incentive for direct-purchase customers to honour their contractual requirements to balance annually. A number of direct-purchase customers have made the economic decision to rely on system sales -- on the system sales portfolio to balance because Union's charges under the current method don't reflect the market price of gas at the time. And this phenomenon was described by Mr. Packer, at Volumes 3, paragraphs 828 to 830, and as a result, other franchise customers are being exposed to cost impacts from direct-purchase customers who fail to honour their contract.

439
The proposed change to the deferral account disposition method calls for Union to levy a charge on direct-purchase customers upon their failure to balance to within the 4 percent annual balancing tolerance, calculated on the basis, not of WACOG, and then the average cost of actual spot gas purchases, but calculated on the basis of the highest daily spot market price during either the month of or the month following failure to balance.

440
Union would then immediately reduce the balance in the other purchased gas cost account for the amount charged above Union's approved WACOG. Levying the charge at the time of the contract violation will, first strengthen the link between the violation and the cost consequences and second, by using the proposed method, the amount charged would reflect the market prices in place at the time that the direct-purchase customer made the decision not to balance. This, we submit, will create the necessary added incentive for a direct-purchase customer to balance themselves without relying on Union's system portfolio. As a result, Union's in-franchise customers who are primarily system sales customers will not be exposed to cost imposed by direct-purchase customers failing to honour their contractual commitments and who seek to draft on Union's system's supply.

441
So that's it for the deferral accounts. Now just a quick word on earnings sharing, item 6. The application of the earnings sharing mechanism will occur in the next customer review and rate hearing process in the summer and fall of 2002. So there's nothing being sought with respect to earnings sharing in terms of dollars in this case. However, Union's application in this proceeding did originally include a request for the Board to review the formula for establishing allowed return on equity and to apply any revision to the formula to the earnings sharing mechanism for 2002.

442
Now, in the mean time, Enbridge in 2001 matter 32, also requested a review of the formula and for changes to the formula to be reflected in their allowed rate of return for 2002 rates. As a result, the Board subsequently determined that for administrative reasons, the review of the ROE formula should be conducted through a separate phase of the Enbridge proceeding, and in the case of Union, through a separate but as yet undetermined process. And by raising this issue now, Union is simply reserving its right to have the formula reviewed and to have it -- to argue at least to have it apply to any 2002 earning sharing in whatever the relevant proceeding is before the Board in assuming, of course, that the Board has made a determination on the formula by that time. So this is a reservation of rights issue, and the parties, of course, are on notice that that will be Union's position when we get to the question of earnings sharing, if and when there are any to be shared.

443
Item 7, allocation of rate adjustments and deferral account balances. The allocation of rate adjustments was largely settled, except for the allocation in rates of the impact of eliminating the DCC. The allocation of deferral account balances was settled except for the allocation of the direct revenue payments deferral account. And again that refers to the DCC. And then the transportation and exchanges account, that was 179-69.

444
The allocation of the direct-purchase revenue account is related to the issue of the allocation in rates of the elimination of the DCC, so I'm going to talk about those two issues together. So let's look first at the DCC elimination from rates.


445
As the Board knows, it's contemplated, and was contemplated in the last case, that this delivery commitment credit would be terminated and that rather than dealing with this through an explicit payment to customers who obligate their deliveries that, rather the benefit be reflected in rates rather than through an explicit payment. But Union currently pays, and has been paying, a delivery commitment credit to compensate direct-purchase customers for their obligated deliveries. And those obligated deliveries provide an avoided facilities cost benefit, if I can call it that, to all customers.

446
This is because Union can rely on the obligated deliveries on a firm basis for 365 days a year and thus avoid the need to construct new facilities. The obligated deliveries are relied upon to ensure, in effect, ensure the integrity of Union's integrated system. The payments are made to customers on the basis of the volume of their obligated deliveries; however, the cost of paying the DCC has been allocated to all customers on the basis of design day demand and that was done to reflect the fact that customers benefit from avoided facilities costs and that benefit, because it's a benefit from avoided facilities costs, is allocated in proportion to their design day demands, i.e. what -- how the facilities, if they had to be built, would have been allocated to those customers.

447
The allocation of the costs of paying the DCC in rates differs from the distribution of the payments because those that provide the obligated deliveries do not necessarily benefit from the avoided facilities costs or at least not in proportion to the deliveries that they make. So there is, in that sense, a mismatch between the two. Mr. Packer summarized the history and operation of the DCC and dealt with this issue in detail at transcript Volume 2, paragraphs 823 through 844.

448
Now, in the RP-1999-0017 proceeding, Union proposed the elimination of the DCC payments on a revenue-neutral basis and that was agreed to in the ADR agreement. Union's evidence on the elimination of the DCC and how it was to be done was set out in some detail at Exhibit B, tab 1 of the matter 17 evidence at pages 26 to 30. And parties agreed with Union in the ADR agreement, and this is set out at appendix D to the RP-1999-0017 decision, at the issue numbered 1.2.4, the parties agreed to the elimination of the DCC. And it was agreed that it would be done on a revenue-neutral basis.

449
Now, although the DCC payments are to be eliminated, the obligation to deliver remains. And so the benefit through avoided facilities costs provided by those obligated deliveries also remains. The only change is that the compensation mechanism for the provision of those obligated deliveries is changing from a direct cash payment, if you will, to the direct-purchase customer. That's being changed into a rate reduction done on a dollar-for-dollar basis by rate class. So Union's proposal does eliminate the DCC on a revenue-neutral basis. Customers' rates for a class are being reduced by an amount equal to the DCC payment that customers in that class formerly received for their obligated deliveries. So that's the proposal for elimination from rates.

450

Now, then, turning to the direct-purchase revenue payments account, which is the flip side of this issue, Union records in this account variances in amounts included in rates for revenues and payments of the DCC to direct-purchase customers. Union has allocated the balances in this deferral on the basis of design day demand consistent with the method previously approved by the Board and consistent with the avoided facilities cost benefits received by each rate class. So in our submission, we've done what we said we were going to do and what was agreed to. We will be this year eliminating the payments, we will be reducing the rates on a revenue-neutral basis, and we will be allocating the cost on the basis -- the effective cost on the same basis we always did, on an avoided facilities cost benefit basis.

451
Then, there is the final issue on deferral account allocation which relates to transportation and exchanges. And all I can say about this, as described at Exhibit B, tab 13, appendix A page 3 in the evidence, this account is used to record differences between actual and forecast net revenue from transportation and exchange services. Balances in this account have been allocated in proportion to available capacity provided. This was spoken to by Mr. Packer at Volume 2, paragraph 142. This is a method that's been approved for use in previous cases and Union is simply applying the allocation method applied this those previous cases.

452
The City of Kitchener -- but rather than guessing what that is, we will wait to see what they say or why they say the Board should depart from the existing, approved methodology. Union, certainly, at this stage is aware of no basis to do so.

453
Then item 8, rate schedule changes.

454
There are several items to touch on here. Union's proposed rate schedule changes are described as Exhibit B, tab 14 and you may recall that that's where we find the black-lined versions of the proposed rate schedules which are in exhibit, appendix A, excuse me, to that exhibit. There are, I believe, four issues in dispute: The first is a failure-to-deliver charges that relates to classes R-1, T-1 and T-3.

455
When those -- when customers in those rate classes fail to deliver under the terms of their contract, the existing rate schedule specifies that there can be a failure-to-deliver charge of $2.31 a gJ applied to all undelivered volumes and then in addition to the failure-to-deliver charge per se, Union has, by virtue of its contract, the right to claw back daily delivery commitment credit, or DCC, payments that were paid out for the contractually required deliveries for the period of the contract start date to the time of failure to deliver up to a maximum of 365 days. And -- the contract provides for the DCC claw back because the contractually required deliveries are supposed to be firm and if, as a result of -- and if as a result of the failure, failure to deliver -- the contract has been breached, of course, because the customer has failed to make firm deliveries. And so that's why the contract provides for the claw back of this benefit since -- on the presumption the benefit has not, in effect, been delivered because the firm deliveries weren't there.

456
As indicated previously, the DCC is paid to compensate customers for these obligated deliveries which provide this avoided facilities cost benefit. When customers fail to deliver, additional costs are imposed on all the other customers because of Union's need to replace the undelivered volumes. Now, the combined effect of the failure-to-deliver charge and the DCC claw back provided the incentive to customers to live up to their contractual obligations. But with the elimination of the DCC, obviously the DCC claw back will not be available anymore as part of the -- as one of the arrows in the quiver, so to speak, of disincentive to violating the contractual terms, so Union is simply proposing to increase the failure-to-deliver charge to provide a level of disincentive that would be similar to that to which currently exists as a result of the ability to claw back the DCC.


457
Union's calculated the increase in the failure-to-deliver charge by taking the equivalent of 12 months of DCC claw back, divided by 30 days, to arrive at an increase in the failure-to-deliver charge of $1.34 a gJ. So the result is that for each day of failure, the equivalent of what would be approximately 12 days of DCC claw back will be charged through the new failure-to-deliver charge.

458
Now, I think we've said this on a number of occasions, or the witnesses have, that Union actually hopes that the charge is never levied because it's a lot simpler for Union if the deliveries are made as scheduled. And in fact the whole point of this charge is to have it sufficiently large so as to discourage opportunistic or strategic behaviour depending on the price of gas and discourage customers from failing to deliver and/or gaming the system and therefore avoid costs being imposed on customers, as a whole, by those who break their obligations and are just either drafting on the system or strategically positioning themselves because the price of gas is high.

459
The second rate schedule change in dispute has to do with the T-1, T-3 diversion of gas issue. You will recall that the part of the change is to remove wording from the T-1 and T-3 rate schedules that is no longer meaningful or is now inconsistent with the revised Ontario Energy Board Act 1998, and these were discussed by Mr. Packer at Volume 2, at paragraphs 603 to 605. Union is also proposing the change the charge for T-1 and T-3 customers that do not maintain a positive storage balance, really to make it consistent with the proposed charges applicable for direct-purchase customers that fail to balance. So everything that I said about the 4 percent tolerance on the direct-purchase customers failing to balance is, in effect, transferred to this issue as well. When T-1 and T-3 customers cause their storage to go into negative balance, they are drafting the system and they are imposing costs on Union's other in-franchise customers as a result of the need for Union to replace gas in storage that Union had, in fact, purchased and stored to meet the system customer needs. So the new charge is proposed to be the highest spot price at Dawn in either of month of the occurrence or the next month following, and the revised charge, Union believes, will create more effective incentives for customers to meet their contractual terms and to avoid imposing costs on the other customers.

460
The third issue in dispute has to do with the C-1 storage and transportation rate. These, as the Board will be aware, are market-based charges approved by the Board on the basis of a cap, and they've been around for a while. In fact, some of the history of this practice and some of the cases in which they have been approved are listed in undertaking answer G3.1. Union's simply requesting an increase, no methodological change, it's simply requesting an increase in the maximum rate for C-1 storage and short-term firm transportation services to the rate that already exists, and the only reason for increasing the maximum is that the existing maximums do not ensure that Union has the ability to capture the full market value of the services provided to ex-franchise customers under this rate schedule. Mr. Packer explained this at Volume 3, paragraphs 582 to 587.

461

Union's making this request of the Board pursuant to the general rate-making powers of the Board under section 36 of the Act, and Union is seeking the continuation of the Board's long-held practice of finding as just and reasonable, C-1 rates for storage and short-term firm transportation negotiated at market rates limited by a Board -approved maximum, maximizing the value received for these services and these -- I pause to say services to ex-franchise customers -- will ensure that Union's in-franchise customers, through their 75 percent share of deferred S and T transactional service margin and Union's shareholders through their 25 percent shares of the deferred interest transactional service margin benefit to the greatest extent possible from the market value of capacity on Union's system -- this is Union's asset, remember -- that is not required to meet in-franchise needs.

462
Having a maximum rate below the level to capture the full market value will provide the ex-franchise customers with the ability to receive service at below-market rates which they, in turn, could sell themselves to capture the difference between Union's current maximum rate and the market value. So this would allow the ex-franchise customer to obtain a benefit from Union's system that would otherwise be occurring to Union's in-franchise customers to the tune of 75 percent and to the Union to the tune of 25 percent. So that's the reason for our request that the level of C-1 storage and transportation charges be raised. Again, I emphasize no methodological or principle change at all, simply to reflect increased market value.

463
And then finally, there is the issue of customer-supplied fuel for M-13, M-16 and C-1. Union is seeking changes to the rate schedules to allow for customer-supplied fuel. Mr. Packer clarified at Volume 3, paragraphs 886 to 897, that although the pre-filed evidence indicates that the provision of customer-supplied fuel was composed to be at Union's option, the actual wording changes sought to the rate order would not provide Union with the authority to require a customer to supply fuel if served under those rate classes. So it's Union's -- in fact, it's Union's expectation that customers served under these rate schedules will want to supply their own fuel, but Mr. Packer confirmed, on behalf of the company, that if the customer wanted Union to continue to provide its own transmission fuel, that Union would continue to do so. So I suspect that this effectively ends the dispute about this issue, but we'll see what others have to say about it.

464
Finally, we have the issue of rate implementation. The original evidence on rate implementation was at Exhibit B, tab 19. Union's initial application sought deferral account disposition of the gas supply commodity deferral accounts through a one-time charge on April 1, 2002. Union also proposed April 2002 for the implementation of an interim delivery rate rider for the general service rate classes. This rider was to include the disposition of all the other deferral accounts to be disposed.

465
For the contract rate classes, Union sought to dispose of gas supply commodity-related deferrals on April 1 with the implementation of delivery rate changes in July. And then the retroactive portion of the rate relief granted together with the disposition of the other deferral account balances was proposed to be recovered through equal monthly installments from the time of the Board's rate order until the end of the year. At that time, a rate order from the Board was projected for July of 2002. So by the time of the ADR, though, it was apparent that the proposed April 2002 implementation date could obviously not be met so Union filed an update to Exhibit B, tab 19 on April 3rd, and this update describes Union's proposed new implementation plan. Mr. Packer walked through that plan and explained the reasons and the rationales underpinning the revised proposal at volume 2, paragraphs 143 through 147.

466
Bottom line, Union is now proposing collection from general service customers of the gas supply commodity and all over deferral account balances together with the accumulated rate retroactivity for 2001 and 2002 through a one-time charge based on consumption in 2001. I won't review them all now, but as I said, Mr. Packer reviewed all the reasons for that in the transcript reference that I just gave you.

467
Union's proposals with respect to the contract rate classes remain unchanged although consistent with the original proposal, the period of time over which the installments for the deferral balances and rate retroactivity would be collected will be reduced to reflect the timing of the Board's decision and the implementation date of new rates. For contract customers whose net disposition is a credit, Union will pay the credit in a one lump sum rather than through installments.

468
Upon receipt of the Board's decision, Union proposes to prepare a draft rate order reflecting the decision to be filed for approval of the Board, and a copy of that draft rate order would, as is now the practice, be made available for review by any intervenor wishing to do so.

469
Then item 10, Mr. Chairman, which was the question you posed at the very outset. I don't think we have a lot to say about this, but this has to do with the status of PBR. Let me just say this: Union's primary objectives in PBR are outlined in the evidence in that case, and to boil them down, there were essentially four. They were predictable and stable rates minimizing retroactive adjustments; greater pricing flexibility to meet various customer needs; opportunity to be rewarded with higher earnings for improved performance; and lighter-handed regulation through alignment of the interests of the stakeholders, that is shareholder, customer and the regulator.

470
In fairness, I think Union's position is that it is probably too early to tell at this stage if the plan is working to achieve those objectives. The effectiveness of the plan has so far been affected by at least three significant facts, one is the PBR decision was issued in July of 2001, of course the rate order did not become effective until November 2001, and then we've had the so far the inability to get on to the rate cycle as originally proposed so as to be able to set rates ex ante instead of ex post.

471
But let me say in terms of the four objectives very briefly, 2003 will be the first opportunity to try and achieve predictable rates, and obviously to date retroactive adjustments have been required for 2000, 2001, and 2002 and as a result, customers and the company have not been able to know what their distribution costs or revenues would be prior to the start of the year and prior to finalizing their internal budgets.

472
With respect to the second objective of flexibility, as the Board will know from looking at the answer to the recent interrogatory, Union has not, as yet, served any customers under the approved pricing flexibility given that limited time frame that we've had. It's yet undetermined what scope for superior earnings will be available to the company in respect of improved performance, and with respect to the bigger picture of the regulatory system generally, the approved PBR plan requires a properly-constituted annual rate application including provision for written interrogatories in the usual litigation process leading to a hearing. There continues to be significant interest in cost allocation and rate design issues. The Board has conducted two on-site audits and appears to want increased scrutiny.

473
As a result, Union has, in fact, reinforced its resources devoted to regulation back to a level comparable to that which existed prior to 1999.

474

At the end of the day, Union's assessment of PBR probably cannot be made until at least one year has transpired when the plan has had a chance to work as originally contemplated; in other words, to set rates in advance of the year for which they would apply. So I guess to summarize this position, Mr. Chairman, I think we'll be in a better position to answer this question next fall is what it boils down to.

475
So that concludes my argument-in-chief, Mr. Chairman. I want to thank you for your patience. I was longer than I expected and perhaps went into a little more detail on these issues than has been the norm, but I hope it's been helpful to the Board.

476
I wanted to, in addition, thank the reporters, not only for their attendance today, but just on behalf of my -- both myself and the company. I think they've done an excellent job throughout the hearing and the transcripts were of really quite high quality, I thought, so I'd like to just put that on the record.

477
So thank you very much, sir.

478
MR. JACKSON: Thank you, Mr. Penny.

479
The Board would like to repeat that thanks to the reporters, and thank you for the detail you have provided us here today. I do think that will be very helpful, Mr. Penny, and are there any other matters? What about the dates for argument? Is there anything more that needs to be said on that the dates for reply argument? I think I was asked to consider adding a couple of days to the date for reply argument from intervenors possibly to narrow the gap to 10 days between the date that that is due and the date we agreed upon for Mr. Penny.

480
Can you help me there, Mr. Moran?

481
MR. MORAN: Mr. Chair, I think the proposal is intervenor argument would be submitted by Friday, May 3rd and Union's reply argument by Monday, May 13th. I think that's just to give the intervenors a bit of breathing space because of their involvement in other processes.

482
MR. JACKSON: Yes, and I think we talked about the Wednesday instead of the Friday when we talked about it.

483
MR. MORAN: We did, that's right. So this would add on two days.

484
MR. JACKSON: Two days. Mr. Penny, is that acceptable?

485

MR. PENNY: I -- that was the first I'd heard of that. The -- I think I might ask for the indulgence of perhaps one additional day given that it's being shortened, so I wonder if we could just move out by one day when the Union argument would be due so instead of the 13th, the 14th, if that would be acceptable to the Board?

486
MR. JACKSON: I think that that's perfectly acceptable.

487
MR. PENNY: And we won't use it if we don't have to. If we've got it done sooner, we'll file it sooner.

488
MR. JACKSON: Absolutely.

489
MR. PENNY: That would be appreciated.

490
MR. JACKSON: Well, my thanks, then, to those who are still here: Mr. Moran, Dr. Wightman, and you will see the rest in writing. We are adjourned, thank you.

491
--- Whereupon the hearing adjourned at 3:43 p.m.