1 1 RP-1999-0017 2 THE ONTARIO ENERGY BOARD 3 4 IN THE MATTER OF the Ontario Energy Board Act, 1998, 5 S.O. 1998, c. 15 (Sched. B); 6 AND IN THE MATTER OF an Application by Union Gas Limited 7 for an order or orders approving or fixing just and 8 reasonable rates and other charges for the sale, 9 distribution, transmission and storage of gas in 10 accordance with a performance based rate mechanism 11 commencing January 1, 2000; 12 13 AND IN THE MATTER OF an Application by Union Gas Limited 14 for an order approving the unbundling of certain rates 15 charged for the sale, distribution, transmission and 16 storage of gas. 17 18 B E F O R E : 19 G.A. DOMINY Vice-Chair and Presiding Member 20 M. JACKSON Member 21 22 Hearing held at: 23 2300 Yonge Street, 25th Floor, Hearing Room No. 1 24 Toronto, Ontario on Tuesday, June 13, 2000, 25 commencing at 0900 26 27 HEARING 28 VOLUME 1 Les Services StenoTran Services Inc. 613-521-0703 2 1 APPEARANCES 2 JENNIFER LEA/ Board Staff 3 MICHAEL LYLE/ 4 JAMES WIGHTMAN 5 6 MICHAEL PENNY/ Union Gas Limited 7 MARCEL REGHELINI 8 9 ROBERT B. WARREN Consumers Association of Canada 10 (CAC) 11 12 THOMAS BRETT Ontario Association of School 13 Business Officials 14 15 PETER THOMPSON Industrial Gas Users' 16 Association (IGUA) 17 18 MICHAEL JANIGAN Vulnerable Energy Consumers 19 Coalition (VECC) 20 21 MURRAY KLIPPENSTEIN Pollution Probe 22 23 IAN MONDROW Heating, Ventilation and 24 Air Conditioning Contractors 25 Coalition Inc. 26 27 BETH SYMES Alliance of Manufacturers 28 and Exporters Canada Les Services StenoTran Services Inc. 613-521-0703 3 1 APPEARANCES (Cont'd) 2 3 MARK MATTSON/ Energy Probe 4 THOMAS ADAMS 5 6 GEORGE VEGH Duke Energy, Coalition for 7 Efficient Energy Distribution 8 (CEED), TransCanada Gas 9 Services, PanCanadian 10 Petroleum, Dynegy Canada, 11 Suncor/Sunoco, CanEnerco 12 Limited 13 14 ZIYAAD E. MIA Coalition for Efficient Energy 15 Distribution (CEED), 16 TransCanada Gas Services, 17 PanCanadian Petroleum, Dynegy 18 Canada, Suncor/Sunoco, 19 CanEnerco Limited 20 21 DAVID WAQU COMSATEC INC. 22 23 STANLEY RUTWIND TransCanada PipeLines Limited 24 25 RICHARD KING/ The Wholesale Group and the 26 CHARLES KEIZER/ Major Energy Consumers And 27 PETER BUDD Producers (MECAP) 28 Les Services StenoTran Services Inc. 613-521-0703 4 1 APPEARANCES (Cont'd) 2 3 PETER SCULLY Association of Municipalities 4 of Ontario 5 6 TANYA PERSAD Enbridge Consumers Gas 7 8 ANDREW DIAMOND/ Enron Capital Corp. 9 JOHN ROOK 10 DWAYNE QUINN/ City of Kitchener Utilities 11 ALICK RYDER 12 13 DAVID POCH Green Energy Coalition (GEC) 14 15 MICHAEL M. PETERSON Nova Chemicals 16 17 RANDY AIKEN London Property Management 18 Association 19 20 VALERIE YOUNG Ontario Association of Physical 21 Plant Administrators 22 23 MARY ANNE ALDRED HYDRO ONE NETWORKS 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 5 1 Toronto, Ontario 2 --- Upon commencing on Tuesday, June 13, 2000 3 at 0900 4 THE PRESIDING MEMBER: Thank you. Please be 5 seated. Good morning. 6 We will not be issuing a decision on the 7 motion right away, but it will be issued shortly. 8 PRELIMINARY MATTERS 9 THE PRESIDING MEMBER: I suppose we start off 10 by finding out what is happening in terms of the 11 sequence of examinations. 12 MR. PENNY: Yes, Mr. Chairman. I will speak 13 to that. 14 After we broke yesterday, we did confer on it 15 and saw our way clear to make the proposal which is 16 outlined in a sheet which you should have and which was 17 made available to the parties, which does break the 18 first -- what was originally contemplated to be the 19 first -- section into two. 20 So the first, dealing with the overview issue 21 and the one-time adjustments. Then the second, dealing 22 with the formula. Then we will move on to the other 23 related issues. 24 THE PRESIDING MEMBER: Thank you, Mr. Penny. 25 Ms Lea, you looked as though you wished to -- 26 MS LEA: I'm sorry. 27 Mr. Penny, are you done? I was going to ask 28 if you wanted an exhibit number. Les Services StenoTran Services Inc. 613-521-0703 6 Preliminary Matters 1 MR. PENNY: Well, I was going to move on to 2 one other preliminary matter. 3 MS LEA: Certainly. 4 THE PRESIDING MEMBER: Okay, Mr. Penny. 5 MR. PENNY: The only other preliminary matter, 6 Mr. Chairman, is in respect of evidence filed on settled 7 issues, we have simply provided the Board with a series 8 of affidavits from people who participated in the 9 preparation of unbundling evidence so that that evidence 10 is properly proved and before the Board. 11 THE PRESIDING MEMBER: Thank you, Mr. Penny. 12 MS LEA: Can we give the bundle of affidavits 13 Exhibit No. A -- "A" for "Apple" -- 8, please. 14 EXHIBIT NO. A-8: Bundle of Affidavits 15 --- Pause 16 THE PRESIDING MEMBER: Are you okay? 17 MS LEA: I'm sorry. I was just inquiring of 18 Dr. Wightman as to whether the exhibit list was ready 19 and apparently it's not. 20 Just for the information of parties, 21 undertakings in this hearing will be under the "G" 22 series and exhibits filed in the hearing that are not 23 part of Union's filing will generally be under the "F" 24 series of exhibits -- "F" for "Freddy". 25 We hope to have that exhibit list ready 26 shortly. 27 THE PRESIDING MEMBER: Thank you, Ms Lea. 28 So the only exhibit is the bundle of Les Services StenoTran Services Inc. 613-521-0703 7 Preliminary Matters 1 Affidavits? 2 MS LEA: That is under Administration, A-8, 3 please. 4 THE PRESIDING MEMBER: There is no exhibit 5 number on the witness schedule? 6 MS LEA: I don't think it's necessary. 7 Thank you. 8 THE PRESIDING MEMBER: Are there any other 9 administrative matters that need to be dealt with this 10 morning? 11 I do notice that there are some new people 12 here this morning who may wish to enter appearances. So 13 perhaps we could move on to appearances for those who 14 were not available yesterday. 15 I believe Mr. -- oh, Mr. Quinn entered your 16 appearance, that's right. 17 MR. PETERSON: Michael Peterson, Mr. Chair, 18 for Nova Chemicals. 19 THE COURT REPORTER: I'm sorry, Mr. Peterson, 20 is that "S-O-N", "S-E-N"? 21 MR. PETERSON: "S-O-N". 22 THE COURT REPORTER: Thank you. 23 MR. AIKEN: Randy Aiken for the London 24 Property Management Association. 25 THE PRESIDING MEMBER: Would you come forward 26 to the microphone, please? 27 MS YOUNG: Valerie Young for the Ontario 28 Association of Physical Plant Administrators. Les Services StenoTran Services Inc. 613-521-0703 8 Preliminary Matters 1 MS ALDRED: Mary Anne Aldred for Hydro One 2 Networks. 3 THE PRESIDING MEMBER: Mary Anne? 4 MS ALDRED: Aldred, A-L-D-R-E-D. 5 THE PRESIDING MEMBER: Thank you. Good 6 morning. 7 MS ALDRED: Hydro will be appearing to do some 8 cross-examination. We will advise the Board before we 9 appear to do that. 10 We are here because we are committed to the 11 principles of PBR, seeing that they are applied in a 12 beneficial way in the context of Ontario. 13 THE PRESIDING MEMBER: Thank you. 14 Dr. Wightman, is Hydro One a listed 15 intervenor? 16 MR. WIGHTMAN: I believe so. I will verify 17 that for you. 18 MS ALDRED: I'm sorry, I can't hear. 19 MS LEA: Are you a registered intervenor? 20 MS ALDRED: Yes, we are. 21 MS LEA: All right. Thank you. 22 THE PRESIDING MEMBER: Thank you. I'm sorry, 23 I just wanted to check that. 24 There are no other matters, administrative 25 matters? 26 Then, Mr. Penny, I believe it is your first 27 panel. 28 MR. PENNY: Yes. Thank you, Mr. Chairman. Les Services StenoTran Services Inc. 613-521-0703 9 Preliminary Matters 1 The first panel, as the schedule indicates, 2 will start with Issues 2.1 and 2.2.1. 3 Before you are two representatives of Union 4 Gas who are well-known to the Board, Ms Pat Elliott and 5 Mr. Rick Birmingham. 6 Ms Elliott, you are the Controller of Union 7 Gas? 8 MS ELLIOTT: Yes, that is correct. 9 MR. PENNY: Prior to that you were a Manager 10 of Financial Planning? 11 MS ELLIOTT: Yes. 12 MR. PENNY: You have been with Union Gas since 13 1981? 14 MS ELLIOTT: Yes. 15 MR. PENNY: You are a chartered accountant? 16 THE PRESIDING MEMBER: Excuse me, Mr. Penny. 17 Do we not swear the witnesses? 18 MR. PENNY: You are absolutely right, 19 Mr. Chairman. I dove into this too quickly. 20 RICK BIRMINGHAM 21 PAT ELLIOTT 22 MR. PENNY: My apologies, Mr. Chairman. 23 THE PRESIDING MEMBER: Thank you. 24 Carry on. 25 EXAMINATION-IN-CHIEF 26 MR. PENNY: Ms Elliott, you are a chartered 27 accountant? 28 MS ELLIOTT: Yes, that's correct. Les Services StenoTran Services Inc. 613-521-0703 10 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 MR. PENNY: You have a Bachelor of Mathematics 2 from the University of Waterloo? 3 MS ELLIOTT: Yes. 4 MR. PENNY: You, I daresay, have testified 5 before this Board on a number of prior Union cases? 6 MS ELLIOTT: Yes, I have. 7 MR. PENNY: And covering areas relating to 8 accounting, rates and other financial matters? 9 MS ELLIOTT: Yes, that's correct. 10 MR. PENNY: Ms Elliott, I understand that 11 prior to adopting -- well, first of all, you were 12 involved in the preparation of the evidence filed with 13 respect to performance based regulation in this case? 14 MS ELLIOTT: Yes, I was. 15 MR. PENNY: Prior to adopting that evidence, I 16 understand that there is an update or a correction that 17 you wish to make? 18 MS ELLIOTT: Yes. This morning we will have 19 available a package of schedules which will reflect two 20 changes, and I will just reference them on Exhibit B, 21 Tab 2, Schedule 1. 22 This schedule summarizes the impact of Union's 23 proposal. 24 The first change will be at line 2, the 25 "Change in accounting for pension and other post 26 retirement benefits". It had previously been noted on 27 that schedule as a $7 million adjustment. 28 In supplemental evidence dated March 24, that Les Services StenoTran Services Inc. 613-521-0703 11 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 amount was amended to $6.8 million. 2 The second change is on line 6 with respect to 3 the "X" factor and Union's historic rate of total factor 4 productivity growth. 5 In reviewing the material, we discovered that 6 we had made an error in the input growth rate and the 7 impacts of that error will be to increase Union's total 8 factor productivity from a minus .8 per cent to a 9 minus .7 per cent. The impact of that on the price cap 10 is to reduce the price cap from 2 per cent to 11 1.9 per cent. 12 The package of evidence will go through the 13 written and the various schedules that need to be 14 updated to reflect that change so that the evidence is a 15 consistent package. 16 MR. BRETT: Excuse me. Could I just have the 17 number for line 2 again, the change for line 2? 18 MS ELLIOTT: The change for line 2 should read 19 now $6.8 million. 20 --- Pause 21 MR. PENNY: Thank you. 22 Subject to that change and subsequent filings 23 that we will update for that change, do you adopt the 24 evidence on performance based regulation that has been 25 filed in this case? 26 MS ELLIOTT: Yes, I do. 27 MR. PENNY: Mr. Birmingham, you are the 28 Vice-President of Market Management? Les Services StenoTran Services Inc. 613-521-0703 12 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 MR. BIRMINGHAM: That's right. 2 MR. PENNY: And prior to that, you were the 3 Vice-President of Regulatory Affairs. 4 MR. BIRMINGHAM: That's correct. 5 MR. PENNY: I gather you have been with Union 6 Gas since 1989? 7 MR. BIRMINGHAM: That's right. 8 MR. PENNY: You, sir, are a chartered 9 accountant? 10 MR. BIRMINGHAM: I am. 11 MR. PENNY: And also have a Bachelor of 12 Mathematics from the University of Waterloo? 13 MR. BIRMINGHAM: I do. 14 MR. PENNY: And you have testified as a 15 witness before this Board in EBO 177-17 and 16 E.B.R.O. 462. 17 MR. BIRMINGHAM: That's right. 18 MR. PENNY: Mr. Birmingham, you participated 19 in the preparation of the evidence on performance based 20 rates that has been filed in this proceeding? 21 MR. BIRMINGHAM: Yes. 22 MR. PENNY: Do you adopt that evidence? 23 MR. BIRMINGHAM: I do. 24 MR. PENNY: Can you describe, Mr. Birmingham, 25 your involvement in the development of the PBR proposal 26 that is before the Board in this application? 27 MR. BIRMINGHAM: I was given the executive 28 responsibility for developing the performance based Les Services StenoTran Services Inc. 613-521-0703 13 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 regulation proposal. We assembled a project team inside 2 of Union, roughly in the spring of 1998, and Ms Elliott 3 was the team leader of that project team. 4 We developed a high-level proposal for 5 discussion with customers and other interested parties 6 in the fall of 1998, and we developed further proposal 7 details over roughly the next year in conjunction with 8 individual small group and large group meetings with 9 interested parties. 10 MR. PENNY: Can you describe that process of 11 individual meetings with the groups and parties? 12 MR. BIRMINGHAM: It started with, as you say, 13 a very high level proposal, and we initially went out in 14 the fall of 1998 and met with individual intervenors and 15 interested parties. 16 Further to those discussions, then, we amended 17 our proposal, developed some more details, brought 18 forward a revised proposal, moved on to small group 19 meetings from there, further amended the proposal, dealt 20 with large group meetings as well as individual 21 meetings, depending on the interest and the needs of the 22 individual customer group. 23 That concluded roughly with a four-day session 24 on unbundling and performance based regulation at the 25 end of July of 1999, at which time parties indicated 26 that they were interested in moving to the formal 27 regulatory process at that time, and Union prepared its 28 evidence pursuant to that. Les Services StenoTran Services Inc. 613-521-0703 14 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 MR. PENNY: What was the scope of that 2 consultation, in terms of the types of parties and 3 groups that were involved? 4 MR. BIRMINGHAM: It included all of the 5 parties that would be the normal intervenors in a rates 6 proceeding and, in addition, included anybody else who 7 wanted to participate. So that would include individual 8 customers who might not participate in the rates 9 proceedings or would participate through an association 10 or a broader group. 11 MR. PENNY: Thank you. 12 Now, since the filing of your evidence, 13 Mr. Birmingham, there have been many interrogatories and 14 there has been a substantial volume of intervenor 15 evidence filed. As well, there has been now a 16 Settlement Agreement which has been put before the Board 17 on most of the unbundling issues. 18 I understand that you have an opening 19 statement or road map which provides an overview of the 20 key elements of the application in response to some of 21 the themes which have emerged in the intervenor evidence 22 and addresses the impact at a thematic level of the 23 unbundling Settlement Agreement. 24 MR. BIRMINGHAM: That's right. Thanks very 25 much, Mr. Penny. 26 MR. PENNY: Can you give us that overview, 27 please? 28 MR. BIRMINGHAM: I will. Les Services StenoTran Services Inc. 613-521-0703 15 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 We did want to provide an overview for the 2 Board's benefit and to provide some context for both the 3 application and the cross-examination that you will hear 4 on the evidence. 5 We also thought it might be helpful to provide 6 some clarification on what Union sees as some 7 misunderstandings with respect to the evidence, and that 8 comes out of the evidence that was filed by intervenors 9 and through some of the interrogatories. 10 The proposal is a fixed price cap of 1.9 per 11 cent, whereby Union's prices for regulated services are 12 subject to an overall annual increase of no more than 13 1.9 per cent. This approach to setting just and 14 reasonable rates would apply initially for the years 15 2000 to 2004, or a five-year term. 16 I think it's important to recognize that price 17 cap regulation or rate cap regulation sets unit prices 18 via a formula and does not attempt to determine how 19 those unit prices should be set in relationship to cost. 20 That's what cost of service regulation does. 21 Price cap regulation decouples costs and 22 prices and provides greater incentive for productivity 23 from the utility. That incentive gives the utility a 24 chance to commit to and meet the higher productivity 25 level normally included in the pricing formula, and also 26 to be rewarded financially for exceeding even that 27 higher level after the cost to increase productivity are 28 accounted for. So it is a fundamentally different Les Services StenoTran Services Inc. 613-521-0703 16 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 approach. 2 The Board recognizes, in their Decision with 3 Reasons in RP-1999-34 at paragraph 2.1.14, where they 4 acknowledged that PBR is not just light-handed cost of 5 service regulation but rather a fundamental shift in 6 historical cost of service regulation and that it 7 provides utilities with the incentive for behaviour 8 which more closely resembles that of competitive cost 9 minimizing, profit maximizing companies. 10 I think the Board also recognized this in 11 their Decision in E.B.R.0. 497-01 for Enbridge Consumers 12 Gas, where they stated at paragraph 3.0.5: 13 "The company's proposal can be viewed 14 simply as a mechanism for adjusting a 15 company's O&M budget within a cost of 16 service framework." (As read) 17 And further, at 3.0.4: 18 "The Board agrees with intervenors that 19 the end state of PBR for Enbridge 20 Consumers Gas should be a comprehensive 21 PBR plan, based on either revenue cap 22 and/or rate cap principles." (As read) 23 In Union's view, the Board was acknowledging 24 that the fundamental shift away from cost of service 25 regulation had not yet taken place but that it should. 26 Union has a comprehensive PBR proposal. The 27 proposal begins with the Board approved rates for 28 E.B.R.O. 499. Union has used this starting point Les Services StenoTran Services Inc. 613-521-0703 17 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 because it is important to have a base which is just and 2 reasonable as determined by the Board. It is also 3 important to have a methodology which is consistent with 4 the Board's past practice under cost of service 5 regulation, that is, the setting of rates is measured 6 against the most recent approvals, not against some 7 other yardstick. 8 This approach also adheres to the Board's 9 approach of prospective ratemaking, which is why Union 10 did not propose the use of the 1999 actual financial 11 information. The use of 1999 actual information will be 12 retroactive ratemaking which the Board has consistently 13 rejected. 14 Next, the evidence will show that Union 15 proposes certain one-time adjustments to address 16 specific findings of the Board in E.B.R.O. 499 and to 17 recognize the move to PBR. 18 There are three categories of adjustments. 19 The first one is those items dealing with the 20 past regulatory approach for unaccounted for gas, Y2K 21 costs and the amortization of accumulated deferred 22 taxes. 23 The second is a non-routine adjustment for the 24 revised accounting for post-retirement and pension 25 benefits for employees. 26 The third one is the removal of certain 27 regulatory costs. Union could have considered this in 28 determining the stretch factor related to the Les Services StenoTran Services Inc. 613-521-0703 18 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 productivity commitment within the pricing formula, but 2 wanted to have explicit recognition of one of the 3 benefits of PBR. 4 The evidence will show that Union is proposing 5 a fixed price cap of 1.9 per cent. The 1.9 per cent 6 annual overall cap is determined by three factors. 7 The first factor is a forecast of inflation 8 over the five-year term. Union has used the Canadian 9 Gross Domestic Product Price Index or GDPPI as the 10 inflation index. We chose GDPPI as it is well accepted 11 for the purpose of PBR plans and best reflects the types 12 of goods and services used by Union. 13 The second factor is the productivity 14 differential. That measures Union's actual productivity 15 over a ten-year period against the Canadian economy. 16 And, of course, Union was regulated by the Board over 17 that ten-year period. 18 The methodology used is known as total factor 19 productivity determination, or TFP, and is the most 20 widely used analytical framework in industry to measure 21 productivity. Union will be calling its external expert 22 witnesses from Christensen Associates to testify to the 23 computation of TFP as well as other PBR matters. But 24 this computation generates a productivity differential 25 of minus 0.7 per cent. I think it is important to 26 properly interpret that result. The evidence will show 27 that a negative TFP does not mean that Union has been 28 inefficient. In fact, a number of other measures such Les Services StenoTran Services Inc. 613-521-0703 19 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 as O&M per customer would indicate improving efficiency. 2 What a negative TFP does mean, however, is 3 that input costs were increasing more rapidly than 4 output compared to the national average. This is not 5 surprising given that use per customer has been 6 declining, that cost inflation and legislative changes 7 such as pay equity have increased the input costs. 8 There have been increases in other costs such as 9 regulatory expenses and demand-side management with 10 output which is not measured by the TFP, and that there 11 has been no significant technology advancement in the 12 natural gas industry. It's not like the telecom 13 industry. 14 I would also note that the evidence will show 15 that this compares well with the Statistics Canada 16 reporting the TFP for the Canadian natural gas industry 17 of minus 2.3 per cent and that the entire Canadian 18 economy was only 0.3 per cent. 19 The third factor that goes into the price cap 20 is a stretch factor. A stretch factor is included in 21 the pricing formula to recognize that price cap 22 regulation will provide a greater incentive for 23 productivity and that customers should receive a share 24 of those potential productivity gains. 25 Productivity gains come with a cost in order 26 to achieve them. This and the other parameters of the 27 plan, including the history before this Board, led Union 28 to propose a 0.4 per cent stretch factor. Les Services StenoTran Services Inc. 613-521-0703 20 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 So the three components, that is inflation 2 based on GDPPI, the productivity differential which is 3 based on the TFP framework, and the stretch factor, 4 resulted in a net price cap of 1.9 per cent. 5 The 1.9 per cent annual price cap translates 6 into approximately $14.9 million of revenue on a pre-tax 7 basis for Union to manage all of its costs and 8 exposures. That is other than those that are limited 9 and defined as pass-through items or non-routine 10 adjustments. This means an impact of about 60 cents a 11 month for an M2 customer in Union's southern operations 12 area. 13 Another way to measure the impact of Union's 14 proposal is to look at the return in equity impact in an 15 extreme scenario. If you assume that Union could manage 16 all of its costs, all of its exposures, inflation, 17 declining use per customer, to zero so that its costs 18 were flat, then the impact of the price cap, that is the 19 $14.9 million, would be less than 100 basis points on 20 equity, or about 0.9 per cent. It is clearly a 21 reasonable outcome even from what we would view as an 22 unrealistic scenario. 23 Another element of the PBR proposal are the 24 pass-through items. Again, there are three. 25 The first one is the impact of gas cost 26 changes including upstream toll changes. That is as 27 they affect the commodity costs for system gas, gas 28 supply transportation charges, unaccounted-for gas Les Services StenoTran Services Inc. 613-521-0703 21 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 value, the inventory carrying cost value and the 2 compressor fuel value. These are all related directly 3 and only to gas commodity changes and upstream 4 transportation toll changes. 5 The second one deals with unaccounted-for gas 6 volumes. It maintains the use of the Board-approved 7 weighted volume approach but applies it as a ratio. It 8 still results in a regulatory lag against the actual 9 volumes which are incurred in a given year, which 10 maintains the incentive for Union to manage those 11 volumes. 12 The final pass-through item is a return on 13 equity adjustment for the 1999 rate base investment 14 level using the Board-approved formula. That adjustment 15 adjusts the cost of equity associated with the existing 16 investment level as approved by the Board in 17 E.B.R.O. 499. 18 The equity return, and for that matter the 19 cost of debt associated with new capital investment 20 during the PBR period, is managed within the price cap 21 parameters and is consistent, in our view, with capital 22 productivity in the context of a comprehensive PBR plan. 23 Union's evidence will show that because the 24 inflation factor does not capture changes in interest 25 rates as they affect Union, there would be no way to 26 manage the changes in the equity return for the existing 27 investment unless the existing return on equity pass 28 through as they affect Union. There would be no way to Les Services StenoTran Services Inc. 613-521-0703 22 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 manage the changes in the equity return for the existing 2 investment unless the existing return on equity pass 3 through is maintained. 4 The price cap plan also allows for certain 5 exceptional circumstances which are referred to as 6 non-routine adjustments or Z factors which are common in 7 PBR plans. These items are very limited and they have 8 been defined in advance. Union does not expect to use 9 these during the five year term of the PBR, with the 10 possible exception of the recently announced federal and 11 provincial income tax reductions. 12 The plan allows for some limited pricing 13 flexibility which allows Union to consider such items as 14 the relative price change of rate classes and the impact 15 on asset utilization and alternate fuel competition. 16 The amount of flexibility is generally limited 17 to 3 per cent or roughly 1.5 times the overall cap, with 18 any amounts unused in one year being banked and possibly 19 applied to future years to a maximum of 4 per cent. If 20 the full 3 per cent flexibility is used, then the effect 21 is roughly 94 cents a month for M2 customers. 22 I would also note that the pricing flexibility 23 proposal allows for the continuation of the rate 24 harmonization proposal approved by the Board in 25 E.B.R.O. 499. 26 Union has included an off ramp for a 27 significant decline in Union's financial position caused 28 by the PBR parameters. It is in everyone's best Les Services StenoTran Services Inc. 613-521-0703 23 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 interests to ensure that the utility can continue to 2 access financial markets and investing capital to grow 3 its system and serve customers. The onus would be on 4 Union, though, to demonstrate that it is the parameters 5 of the PBR plan that cause the financial decline if the 6 utility was to use the off ramp provision. 7 Union is also requesting the Board's approval 8 to permit negotiated rates with customers. This option 9 allows the utility to better meet individual customer 10 needs, especially related to the possible load lost on 11 its system while insulating other customers from the 12 effect of negotiated prices. 13 Union will be asking for the ability to 14 continue to sell storage at market prices, except for 15 the storage used to serve enfranchised end users or 16 their marketers. Therefore, any new storage 17 developments that are not required by enfranchised 18 customers, all ex-franchised contract renewals, and any 19 unbundled storage which is allocated to but substituted 20 by an enfranchised customer would be priced at the 21 market rate. 22 The evidence will show that Union has proposed 23 five service quality measures to ensure that a minimum 24 acceptable level of service continues to be provided, 25 regardless of the strength of the productivity incentive 26 within the price cap plan. These five items are 27 currently measured and they are developed in conjunction 28 with Enbridge Consumers Gas for consistency. Les Services StenoTran Services Inc. 613-521-0703 24 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 One of those measures is a form of shared 2 savings mechanism for Union's DSM commitment. But in 3 keeping with the approach to service quality measures, 4 it does not provide strong incentives to materially 5 increase the amount of energy efficiency and the utility 6 resources for DSM. Union's view in this regard is that 7 the Board and the company have generally been satisfied 8 with the existing level of effort and accomplishment 9 associated with the DSM plan. 10 Union on its own cannot generate a business 11 case for significant increases over the current levels 12 and we have had no indication from the Board in their 13 last few rates cases that they are unhappy with their 14 achievements from a public interest standpoint. And 15 that is why we have taken the approach which will be 16 described in the evidence. 17 I should also mention that to the extent that 18 other service quality measures are wanted by customers 19 or by the Board, for example, through the distribution 20 access rules, Union is committed to developing new 21 measures and the related data accumulation and reporting 22 details through the customer review process. 23 With respect to the customer review process, 24 Union will describe a process which allows interested 25 parties to be involved in certain aspects of the PBR 26 plan. For instance, the support for and the calculation 27 of the annual past few adjustments would be addressed in 28 the customer review process as would improving Les Services StenoTran Services Inc. 613-521-0703 25 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 compliance with the price cap parameters. And it is 2 important to note that any unresolved matters would be 3 taken to the Board for resolution. 4 Union will also propose how to deal with the 5 regulatory framework after the initial five year period. 6 This approach would have the components of the pricing 7 formula reset based on industry-specific data and 8 approved by the Board for implementation. 9 And finally, Union will be asking for the 10 disposition of its deferral account balances in this 11 application. But with respect to PBR, Union will be 12 requesting the Board to eliminate two deferral accounts 13 immediately after the disposition of existing balances. 14 Those two deferral accounts are the deferral account for 15 the storage and transportation transactional revenue and 16 for the market premium associated with long-term 17 storage. 18 These revenues, should there be any, would 19 accrue to the company chairing the PBR term to manage 20 its commitments under unbundling and its exposures under 21 PBR, and in that respect, will be like all other revenue 22 streams. 23 One of the things that Union attempted to do 24 in setting the parameters of its PBR plan is to look at 25 it from a customer standpoint; that is what will 26 customers get from PBR. And the evidence will show that 27 there is a limited cost; that is, M2 residential 28 customers will know that they will pay no more than Les Services StenoTran Services Inc. 613-521-0703 26 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 roughly 94 cents a month as an increase for all of the 2 PBR benefits, and that assumes the full effect of the 3 three per cent flexibility. 4 And for that, they receive more predictable 5 and stable delivery rates. For instance, commercial and 6 industrial customers are better able to set their energy 7 budgets. They receive protection from the impact of 8 delivery -- sorry -- of declining use per customer. 9 That is roughly one to one and a half per cent on an 10 annual basis or about five million dollars pre-tax. 11 They will receive protection from the impact of any 12 asset utilization losses and we are starting at a very 13 high point in terms of the asset utilization on Union's 14 system. 15 They receive protection from large 16 inflationary increases. Those increases could come in 17 the forms of wage settlements, for instance, the 18 recently settled CAW contracts, and we are starting at a 19 low point of inflation. And certainly the Bank of 20 Canada believes this risk is real based on the recent 21 interest rate increases. 22 Customers will receive protection from the 23 cost of new investments to expand Union's system. And 24 that isn't just storage transmission and distribution 25 investments, but other investments such as computer 26 hardware and software. They will receive protection 27 from the cost to achieve the higher productivity levels. 28 They will receive protection from any warm weather Les Services StenoTran Services Inc. 613-521-0703 27 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 trends. They receive an upfront commitment to higher 2 productivity than Union has been able to achieve 3 historically. And they will receive additional service 4 choices; that is end users who contract directly with 5 Union may negotiate different rates and terms and 6 conditions than those found on the rate schedules. And 7 the price cap proposal insulates other customers from 8 the effects of any negotiated rates. 9 In addition, marketers who contract with Union 10 on behalf of their customers can use the unbundled 11 services and the price cap parameters to effectively 12 lock in the margin for all of the services which the 13 market will provide to their customers. 14 And finally, they receive protection from 15 exposures caused by the offering of the unbundled 16 services. And this is consistent with the Settlement 17 Agreement which was filed with the Board on June 7th. 18 The exposures that Union is looking to manage under the 19 PBR are the following. 20 We have made a commitment to offer storage at 21 the posted rate to end franchise customers including new 22 customers even though the cost to develop new storage 23 exceeds the embedded cost-based rate. And that is at 24 section 1.3.7 of the Settlement Agreement. 25 The optional nature of the standard storage 26 service and of the standard peeking service subject to 27 certain conditions may require Union to mitigate and/or 28 absorb any stranded costs over the five-year term of the Les Services StenoTran Services Inc. 613-521-0703 28 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 PBR plan. And that is at section 1.3.2 of the 2 Settlement Agreement. 3 The change to some of Union's administrative 4 practices such as a more frequent movement from bundled 5 services to unbundled services during the year and a 6 more frequent redistribution of unbundled storage will 7 require systems and personnel costs that were not 8 originally contemplated in our proposal. And that is at 9 section 1.3.5 of the Agreement. 10 We have made a commitment to maintain the $5.5 11 million of S&T transactional revenue currently in rates 12 despite the fact that customers will now use the asset 13 capability themselves which generated those services. 14 And we have committed to manage the increased 15 compressor fuel on the Dawn-Trafalgar system for 16 customers who elect the unbundled service, replace their 17 22-day parkway obligation with winter peaking service 18 and choose to deliver at Don. 19 On a final note, Mr. Chairman and Dr. Jackson, 20 the evidence will show that the Board can use Union's 21 proposal as the basis for its decision. That is as it 22 is consistent with the Ontario Government's direction, 23 it is consistent with the evidence that Union filed in 24 E.B.R.O. 493 and 494 and in E.B.R.O. 499 about its 25 intentions respecting the changes to the regulatory 26 framework and we are fulfilling the commitments that 27 were made at that time. 28 It is consistent with the Board's direction to Les Services StenoTran Services Inc. 613-521-0703 29 ELLIOTT/BIRMINGHAM, in-ch (Penny) 1 Enbridge Consumers Gas respecting the need for a 2 comprehensive PBR proposal for Ontario's natural gas 3 utilities. It is consistent with the direction which 4 the Board has set out for the electricity distribution 5 utilities, albeit on a transitional basis as those 6 utilities are significantly different than Union Gas. 7 And it meets the Board's draft PBR objectives and that 8 has been documented in response to Exhibit C5.24. 9 Thank you for your attention. That concludes 10 my opening remarks. 11 MR. PENNY: Thank you, Mr. Birmingham. That 12 concludes the examination-in-chief, Mr. Chairman. 13 THE PRESIDING MEMBER: Thank you, Mr. Penny. 14 Now, I am not clear who is first up to bat on 15 the cross-examination. I am sorry. There is a question 16 pending. 17 MR. PETERSON: Mr. Chairman, could I just ask 18 a point of clarification. 19 Mr. Birmingham discussed the elimination of 20 the S&T transactional revenue and the storage market 21 premium. I spoke to Mr. Penny earlier. I understand 22 that to the extent that one wants to ask questions 23 concerning the appropriateness of the elimination and 24 the overall impact on revenue sharing, I understand that 25 those questions should be asked to the second panel and 26 not to the panel that is actually dealing with the 27 deferral accounts. I am just wondering if Mr. Penny 28 could confirm that. Les Services StenoTran Services Inc. 613-521-0703 30 ELLIOTT/BIRMINGHAM 1 I had understood that the deferral accounts 2 were just the actual dollars and cents. 3 MR. PENNY: I think that is correct. I think 4 what is contemplated the deferral account piece is 5 really just the, if you will, the technical review of 6 the amounts in the deferral account, why they are there 7 in the clearing of those accounts. To the extent that 8 there are changes with past practice are being asked for 9 because of the PBR they really are part of the risks 10 that Union -- part of the discussion of the risks and 11 benefits that Union believes arise out of the PBR. So I 12 think it more appropriately sits there. 13 THE PRESIDING MEMBER: Thank you, Mr. Penny. 14 Is that all right, Mr. Peterson? 15 MR. PETERSON: That is fine, Mr. Chairman. We 16 will not have any questions for the first panel and with 17 your permission will be withdrawing. 18 THE PRESIDING MEMBER: I think Mr. Warren had 19 indicated that he would -- 20 CROSS-EXAMINATION 21 MR. WARREN: Thank you, Mr. Chairman. 22 Mr. Birmingham, could I since it is fresh in 23 our minds stay with your opening observations this 24 morning, and I have a couple of questions just by way of 25 follow-up. 26 As I understood, my note of your observation 27 was that you wanted to provide the Board with a road map 28 and that in doing so you also wanted to address what Les Services StenoTran Services Inc. 613-521-0703 31 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 were some errors in the perception of your proposal that 2 has been introduced through the evidence of certain 3 intervenors. Did I understand you to say that? 4 MR. BIRMINGHAM: That's correct. 5 MR. WARREN: And I didn't hear you, in your 6 opening observation, address that question or address 7 that issue of what you perceive to be the errors in the 8 perception of your evidence which you had derived from 9 the evidence of the intervenors and I wonder if you 10 could outline those. 11 MR. PENNY: Well, in fairness, Mr. Chairman, 12 the opening was schematic in nature. Mr. Birmingham, in 13 fact, did refer a couple of times to misconceptions. It 14 wasn't intended to be a specific point-by-point 15 refutation, first of all. 16 Secondly, it seems to me that the breadth of 17 the question is really inappropriate. If Mr. Warren 18 wants to ask about a particular piece of evidence on the 19 subject of one-time adjustments, or whatever, then let 20 him do that, but to ask Mr. Birmingham to simply recite 21 everything that he doesn't like about the intervenor 22 evidence seems to me is not helpful and really not 23 appropriate. 24 THE PRESIDING MEMBER: Mr. Warren. 25 MR. WARREN: I hate to start on a sour note, 26 so I won't, Mr. Chairman, but simply when the witness 27 says in his opening observations that he is going to 28 address the errors that have crept into the -- that have Les Services StenoTran Services Inc. 613-521-0703 32 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 been introduced by the intervenors, I simply wanted him 2 to do that, but if he is not in a position to do that 3 then we will move on. 4 Mr. Birmingham, the second question, which I 5 ask with some trepidation now, arising out of your 6 observations this morning was that you described a 7 process that began in the spring of 1998 and you 8 indicated you developed a proposal for discussion with 9 customers beginning in the fall of 1998. At a high 10 level, Mr. Birmingham, was your original proposal a 11 proposal for a fixed price cap at 2 per cent? 12 MR. BIRMINGHAM: No, it wasn't, Mr. Warren. 13 The proposal initially was for a fixed price cap, but 14 the feedback that we had from the customers and 15 intervenors is that they would not be interested in 16 discussing a fixed price cap that was materially 17 different than inflation. 18 MR. WARREN: Your original proposal was what? 19 MR. BIRMINGHAM: It didn't actually have the 20 number included in it, but I will have to take that 21 subject to check because it has been awhile. 22 MR. WARREN: Perhaps we could do it this way. 23 Could you describe for the Board the material changes in 24 your proposal from the proposal that's before the Board 25 this morning as you outlined it this morning? What were 26 the material changes that arose as a result of the 27 discussions with the intervenors that terminated in July 28 of 1999? Les Services StenoTran Services Inc. 613-521-0703 33 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MR. BIRMINGHAM: At this point, Mr. Warren, I 2 wouldn't be able to describe all of them as an example. 3 One of the things that we had tried to do was 4 to propose some initial adjustments that would remove 5 the need for some of the pass-through adjustments, as an 6 example, with respect to unaccounted for gas or the 7 interest rate risk associated with the return on equity 8 for the existing rate base, and it was feedback on those 9 types of things that caused us to eliminate those types 10 of things from our proposal. So there are a number of 11 areas where we amended our proposal on the basis of that 12 feedback, but I do not have a complete list. 13 MR. WARREN: Thanks for that. 14 Panel, the first issue, 2.1 "Overview and 15 Rationale (Including Implementation)", I want to ask 16 questions broadly in two categories. One is, in terms 17 of the rationale, I want to get an understanding of the 18 size and scale of the company to whose operations the 19 PBR will apply. And the second area I want to cover is 20 the question of implementation and timing, particularly 21 with respect to 2000. 22 Can I ask you first to turn up a CAC 23 interrogatory which is Exhibit C3.28. 24 --- Pause 25 MR. WARREN: Do you have it? 26 MR. BIRMINGHAM: Yes, sir, we do. 27 MR. WARREN: Now, in that answer you indicate 28 that -- you refer to Union's restructuring being Les Services StenoTran Services Inc. 613-521-0703 34 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 required for a number of reasons, and I wonder if I 2 could begin by asking you to describe what Union's 3 restructuring has been? 4 MR. BIRMINGHAM: The restructuring, really, is 5 a longer term initiative, Mr. Warren. It starts with 6 redefining roles and giving people broader areas of 7 accountability in the context of redefined business 8 processes, and that's in fact what we're in the middle 9 of now is that we have redefined the roles, tried to 10 implement a more efficient business process, make 11 investments in hardware and software to improved 12 efficiency of our operation. 13 MR. WARREN: In C3.28, the CAC asked for a 14 complete organization chart for 1998, 1999 and the 15 current one, incorporating the most recent changes in 16 staff and structure. Can you provide that to us, 17 provide those documents to us? 18 --- Pause 19 MR. BIRMINGHAM: Clearly, they are available, 20 Mr. Warren. We just do not see how they are related to 21 the current proposal, and that was the essence of our 22 response in the last paragraph of that interrogatory. 23 MR. WARREN: Let me ask this question. Has 24 the reorganization resulted in fewer senior managers in 25 the company? 26 MR. BIRMINGHAM: Yes. 27 MR. WARREN: How many fewer senior managers? 28 MR. BIRMINGHAM: I don't have that number with Les Services StenoTran Services Inc. 613-521-0703 35 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 me. 2 MR. WARREN: Would you undertake to provide me 3 with that number? 4 MR. BIRMINGHAM: I can, Mr. Warren. I just 5 don't see how it is related to the evidence in this 6 application. 7 MR. WARREN: Mr. Chairman, the issue which I 8 wanted to address in this area was the question of what 9 is the size, nature and extent of the reorganization 10 which the company has done both generally and 11 specifically in relation to PBR. In my respectful 12 submission, the Board and the intervenors should know 13 what is the nature of the company to which PBR will 14 apply? Is it the same size of company providing the 15 same cluster of services as, for example, when the Board 16 last considered the company in a contested rate hearing 17 two cases ago, is it substantially smaller, in what ways 18 is it smaller, what costs are associated with it, and so 19 on and so forth. Those questions are relevant to, among 20 other considerations, the cost base going in. 21 Frankly, I'm astonished at a refusal to 22 provide what seems to me to be basic information about 23 what this regulated utility has been doing with its 24 affairs in terms of structure in the last two years, so 25 I would ask, Mr. Chairman, that the panel be directed to 26 provide: (a) the organization chart for 1998, 1999 and 27 the current one to provide me with answers on the 28 questions of what employees have been reduced in what Les Services StenoTran Services Inc. 613-521-0703 36 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 areas and for what reasons. 2 Thank you, Mr. Chairman. 3 MR. PENNY: Mr. Chairman, if I can respond to 4 that. 5 This really is an issue that goes beyond just 6 the particular question that Mr. Warren has asked. 7 Mr. Birmingham's reluctance to get into this 8 really goes to a principled basis, which is that what 9 the company may plan to do during the term of the PBR 10 is, in our respectful submission, not relevant and not 11 really something that should concern the Board. 12 If where we end up is that the company has to 13 deal with all of its potential plans, some of which may 14 work, some of which may not, some of which may succeed 15 in productivity improvements, some of which may flop and 16 result in financially adverse consequences, the entire 17 purpose of the performance based regulation model will 18 be undermined and really eliminated. The company's 19 incentives to try to plan for efficiencies in the future 20 will be undermined and eliminated because all of those 21 things will be sought by Mr. Warren and others as the 22 basis for making adjustments. 23 So the issue really is a fundamental one, in 24 the sense that it goes to plans in 2000 and forward 25 which are very much the subject of the PBR proposal that 26 is before you. 27 MR. WARREN: Mr. Chairman, I'm sorry. 28 Mr. Penny responded to a question I didn't ask but was Les Services StenoTran Services Inc. 613-521-0703 37 ELLIOTT/BIRMINGHAM 1 going to ask. 2 I was dealing, in my submissions, just with 3 the narrow question of the organization that had taken 4 place to date. I'm wondering if now is the appropriate 5 time to address -- (a) to respond on that issue, but 6 also to address the broader issue which Mr. Penny has 7 asked for and Mr. Penny has addressed, which is a 8 question I was going to get to in a little while, which 9 is the planning which has been done for PBR and the 10 internal approvals process that had taken place and, 11 frankly, the plans that had been put before senior 12 management for approval of the scheme or the proposal 13 which is before the Board. 14 Would the Board like to move to that broader 15 issue now, in which case I will make submissions on it? 16 The other factor, Mr. Chairman and 17 Dr. Jackson, is that other members -- other intervenors 18 may well wish to make submissions on this point. I 19 don't wish to preclude others or pretend that I can 20 represent their views on this issue. 21 There are two questions: Do you want the 22 broader issue addressed now, Mr. Chairman? 23 Secondly, the question of other intervenors 24 may want to say something. 25 THE PRESIDING MEMBER: Thank you, Mr. Warren. 26 --- Pause 27 THE PRESIDING MEMBER: It seems to me, 28 Mr. Warren and Mr. Penny, there are two different issues Les Services StenoTran Services Inc. 613-521-0703 38 ELLIOTT/BIRMINGHAM 1 here. There is the issue of what is the base from which 2 we move forward with the PBR -- that is the 1999 3 information -- and whether the base, as approved in the 4 499 Decision, is an appropriate base and what 5 adjustments need to be made to it. 6 I believe that was the basis of your initial 7 question, which was looking at the organizational 8 structure that existed in 1999 and 1998 to see if there 9 had been changes in the level of resources. 10 The second issue that I understand you are 11 saying is that in making a decision to go to PBR, what 12 knowledge does the company have of future plans or 13 management changes they might be anticipating in the 14 future to look at, what PBR. 15 So I think there are two different issues and 16 I think it might be useful to have submissions from any 17 parties who wish to make submissions on this. We might 18 want to hear them now so we can decide what would be the 19 best way. Am I correct in my -- 20 MR. WARREN: You correctly, and I think 21 directionally, described the two issues, Mr. Dominy, and 22 perhaps if other parties want to make submissions on the 23 point I can then respond to Mr. Penny's objection. 24 MR. PENNY: Just so I'm clear, Mr. Chairman, 25 then, are you inviting submissions just on the first 26 issue that arose out of Mr. Warren's specific question 27 or are you inviting submissions on both issues at this 28 point? Les Services StenoTran Services Inc. 613-521-0703 39 ELLIOTT/BIRMINGHAM 1 THE PRESIDING MEMBER: Let's deal with the 2 first one first. 3 MR. PENNY: All right. Fine, thank you. 4 THE PRESIDING MEMBER: Mr. Brett. 5 MR. BRETT: Mr. Chairman, on the first issue I 6 would like to support Mr. Warren's request. It seems to 7 me the issue, in a nutshell, is the fairness of the 1999 8 approved rates as the basis from which to start. One of 9 the issues that is relevant to that, it seems to me, is 10 the changes that have taken place in 1999, relevant to 11 1998. 12 I mean, there is evidence, sketchy evidence to 13 suggest that a number of man-years were reduced in 1999, 14 something like 170-odd. There is some evidence about 15 average costs. But it is important, in my mind, to get 16 a sense of what changes were made in 1999 relevant to 17 1998. Presumably, these changes carry forward into the 18 PBR years. 19 For that reason, I think it is important to 20 have as clear a picture as we can of the organizational 21 changes and the man-year changes that took place in 1999 22 and when in 1999, because it is clear that there is a 23 substantial revenue sufficiency in 1999, delivery 24 sufficiency, and now that we have the numbers in there 25 is a substantial difference between the approved rates, 26 the approved levels of O&M for 1999 and cost the of 27 service for 1999 and the actual numbers. 28 So anything that would explain that and Les Services StenoTran Services Inc. 613-521-0703 40 ELLIOTT/BIRMINGHAM 1 explain its impact on the fairness of using either the 2 actuals in 1999 or the Board approved 1999 numbers it 3 seems to me would be helpful to the Board in trying to 4 address that first issue. 5 Thank you very much. 6 THE PRESIDING MEMBER: Thank you, Mr. Brett. 7 Are there any other parties who wish to 8 comment? 9 Mr. Vegh. 10 MR. VEGH: Yes, sir. I'm not sure whether 11 this goes to what is being described as the first issue 12 or the second issue or whether this is in fact a third 13 issue that falls out of the two of them, but I am 14 concerned about the tenor of Mr. Penny's response to 15 Mr. Warren to the effect that questions asked with a 16 cost of service bent in effect are irrelevant because we 17 are moving to PBR. 18 There is an issue in this case as to whether 19 this is the appropriate time to move to PBR. My clients 20 are taking the position that we should not be moving to 21 PBR at this time. 22 So it is question begging, in my submission, 23 to say that we should not be asking any questions that 24 go to cost of service and adjustments to cost of service 25 because we are going to PBR. 26 So questions related to whether -- or a 27 comparison of what the cost of service is today as 28 opposed to 1999 are relevant, in my submission. Les Services StenoTran Services Inc. 613-521-0703 41 ELLIOTT/BIRMINGHAM 1 THE PRESIDING MEMBER: Mr. Ryder. 2 MR. RYDER: Yes, I support Mr. Warren on this 3 issue. I mean, clearly there are competing positions 4 with respect to the derivation of the base rate and the 5 position of the intervenors should not be preempted by 6 the lack of information that is relevant to their 7 position and, therefore, to the issue before you. 8 THE PRESIDING MEMBER: Mr. Thompson. 9 MR. THOMPSON: Yes, I support Mr. Warren as 10 well. 11 It is my submission that you should bear in 12 mind the evidence of intervenors on this point, and in 13 particular Dr. Bauer who states fairly clearly that it 14 is, in his opinion, inappropriate to move to PBR while 15 the company is in a state of major change. 16 So the first question that Mr. Warren has 17 asked, as I understand it, is essentially what is the 18 state of change at the end of December 1999, and that 19 is, I submit, very relevant to Dr. Bauer's point. 20 The second question he is asking is: What is 21 the state of change now and when are the changes likely 22 to end? 23 In my submission, that also is very relevant 24 to Dr. Bauer's concern as to whether you should even use 25 a 1999 base adjusted going forward for PBR, and then, if 26 you do, what are the appropriate adjustments. 27 IGUA in its evidence submits we should, at the 28 very least, normalize changes as they exist at the end Les Services StenoTran Services Inc. 613-521-0703 42 ELLIOTT/BIRMINGHAM 1 of 1999 as an adjustment to the base. I know I am 2 speaking to the second question as well, but I thought I 3 might as well put it all on the record. 4 In addition, it is certainly my client's view 5 that before the Board could approve use of the 1999 6 material adjusted in some appropriate way as a base for 7 a PBR you should have some information about 2000 and 8 the impacts on 2000 before you make a finding that the 9 1999 base is an appropriate way to proceed. 10 There again, Dr. Bauer points out a 11 retroactive move to PBR is highly unusual and Mr. Penny 12 is in effect saying, "Well, our plan starts January 1, 13 2000, therefore, all information requests pertaining to 14 what has happened after that date are not relevant." I 15 submit that is not reasonable in view of the issues that 16 have been joined in the proceeding on the evidence filed 17 by others. 18 Thank you. Those are my submissions. 19 THE PRESIDING MEMBER: Mr. Mattson. 20 CROSS-EXAMINATION 21 MR. MATTSON: Thank you, Mr. Chairman. 22 I won't reiterate my other friend's comments. 23 I support Mr. Warren's request to ask these questions. 24 I just note, Mr. Chairman, that my client's 25 view on this is that there has not been an order from 26 government or from this Board that Union bring forward 27 this PBR application. Therefore, it falls under 36 or 28 section 6 where the burden of proof is upon Union to Les Services StenoTran Services Inc. 613-521-0703 43 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 show that their application for the rate application 2 using the PBR formula benefits customers. They have to 3 establish that. 4 It is their burden of proof to establish that 5 this plan is in the way -- is in the public interest and 6 benefits customers. It is in the Act. The government 7 has not issued a policy directive. The Board, while it 8 has assisted the utility and the parties in looking at 9 the opportunities of PBR and the opportunities and the 10 potential benefits for customers, it hasn't ordered 11 Union to do anything. This is Union's application. It 12 is their burden of proof and you need to have the 13 evidence before you upon which you can accept this plan 14 to go forward and say with certainty that it benefits 15 customers. 16 So I think we do need to look at which phase 17 is the appropriate one. We need to look at what the 18 benefits are and I think this should be open at least 19 with respect to the cross-examinations. Certainly, the 20 company should be more willing to bring information 21 forward. 22 THE PRESIDING MEMBER: Thank you, Mr. Mattson. 23 Mr. Janigan. 24 CROSS-EXAMINATION 25 MR. JANIGAN: Thank you, Mr. Chair. 26 Very briefly, the company has submitted that 27 the PBR is about decoupling costs from prices. In 1999 28 prices were not decoupled from costs. It is entirely Les Services StenoTran Services Inc. 613-521-0703 44 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 appropriate that we explore the appropriate -- the costs 2 that were expended and the state of the company in 1999 3 to establish the requisite base. 4 As well, as Mr. Thompson has indicated, the 5 evidence, at least from Dr. Bauer, is that retroactive 6 PBR is a very unusual circumstance. It's important that 7 the Board has before it the appropriate information to 8 set the rate base should the Board decide upon a 9 different term for the start of the PBR. In other 10 words, the 2000 information is highly relevant if the 11 Board decides that in fact PBR should not be retroactive 12 to January 1st, it should start, for example, later in 13 this year. In which case, then, the 2000 information 14 may be highly relevant for the Board in setting the rate 15 base. 16 So I realize I am speaking somewhat to the 17 second point, but I think it is included as part and 18 parcel of the argument behind the first. 19 THE PRESIDING MEMBER: Thank you, Mr. Janigan. 20 Any other parties who wish to comment before I 21 pass it back to Mr. Penny? 22 Mr. Penny. 23 RE-EXAMINATION 24 MR. PENNY: Thank you, Mr. Chairman. 25 Briefly, in reply, the evidence that 26 Mr. Warren started with, the C3.28 sets out essentially 27 three reasons for the restructuring, the first two of 28 which describe the process that Union followed in order Les Services StenoTran Services Inc. 613-521-0703 45 ELLIOTT/BIRMINGHAM re-ex (Penny) 1 to meet the commitments that were made in 499. In other 2 words, the levels of recovery that Union agreed to in 3 the ADR process, the 499, and which was approved by the 4 Board, required Union to take measures to meet those 5 commitments. That has already been done. Those 6 commitments were made in 499. The rate recovery was 7 lower, it was agreed to, and that customers have the 8 benefit of those changes. So that deals with historic 9 fees. 10 The third reason for the restructuring is 11 clearly forward looking, to prepare the company to 12 manage under a PBR price cap of 2 per cent. This 13 restructuring occurred at the end of the year in 1999 14 and, in my submission, it does fall within the scope of 15 activity that is forward looking rather than historic. 16 The evidence shows that it was a step, it was a measure, 17 taken to enable the company to manage under a PBR price 18 cap. 19 The second issue I wanted to raise is that 20 the -- in respect of this issue, that is the 1999 21 restructuring information, there is no issue of 22 retroactivity about that at all. That clearly gets into 23 the third -- no, I am sorry -- into the second issue 24 which I took from your direction, Mr. Chairman, that we 25 are not mooting at this moment. So I will reserve my 26 additional comments dealing with 2000 and beyond to the 27 occasion in which that arises. 28 --- Pause Les Services StenoTran Services Inc. 613-521-0703 46 ELLIOTT/BIRMINGHAM re-ex (Penny) 1 THE PRESIDING MEMBER: Dr. Jackson. 2 MEMBER JACKSON: Mr. Penny, before we move on 3 to the second issue about the forward-looking 4 information there is one underlying question that I 5 have, and it may just be that I haven't completed my 6 reading of all the material yet. 7 But if the Board were to turn down this PBR 8 proposal, will there be sufficient cost-of-service data 9 on the record for the Board to follow its usual 10 procedure of fixing rates for this company with 11 appropriate data that is forward looking and will the 12 base year 1999 be sufficient as a base for the 13 traditional cost-of-service methodology? Is there an 14 alternative, a fall back, or do we just say no to PBR 15 and trust that your current rates are sufficient? 16 MR. PENNY: I think the answer to that, 17 Dr. Jackson, is clearly no, there is not -- that the 18 record does not contain cost-of-service information for 19 setting rates beyond 1999 on a cost-of-service basis. 20 So if the Board turned down the PBR proposal 21 the 1999 rates would continue in place, subject to the 22 usual parameters, which is that the Board might ask the 23 company to come in on the basis of advice from ERO or 24 the company may decide that it requires an application 25 to adjust those rates on a cost-of-service basis. 26 But the narrow answer to your question is no, 27 is that the filing does not contain information for 28 cost-of-service rate setting for the year 2000. Les Services StenoTran Services Inc. 613-521-0703 47 ELLIOTT/BIRMINGHAM 1 MEMBER JACKSON: Thank you. 2 THE PRESIDING MEMBER: I think it would be 3 useful now to hear comments with regards to the second 4 aspect of this issue before we make our finding on the 5 two issues. 6 So Mr. Warren, would you like to address that? 7 MR. WARREN: Thank you, Mr. Chairman. 8 I guess I should have adopted the reply 9 submissions of my friends in support of my position on 10 the original point. 11 Let me move to the second point. 12 THE PRESIDING MEMBER: Mr. Warren, does that 13 mean you wish to add something? 14 MR. WARREN: No, I'm sorry. They have been 15 covered off adequately. Thank you, Mr. Chairman. 16 Let me deal with the second point and provide 17 the context within which I was going to ask a question. 18 The issue before the Board with respect to the 19 base has been covered off in the submissions on the 20 second -- on the first point. The question then turns 21 to looking forward to the appropriateness of the, for 22 example, the elements of the formula. We can over 23 several weeks be engaged in, and will be engaged in, an 24 assessment of various figures based on the ways in which 25 experts propose to arrive at the appropriate PBR 26 formula. 27 What we can have, however, is and threaded 28 throughout the submissions and the evidence and the Les Services StenoTran Services Inc. 613-521-0703 48 ELLIOTT/BIRMINGHAM 1 submissions on those points will be assertions by Union, 2 for example, that it has risks which can be managed and 3 that these numbers are the appropriate numbers. 4 What we don't have and wouldn't have and which 5 in my respectful submission would really inform the 6 debate would be Union's own estimates, its own 7 projections of how PBR will work. What is the size of 8 the companies that will be required going forward over 9 the next five years to provide service to customers? 10 What are the likely range of efficiencies that can be 11 achieved? Where those efficiencies are and what 12 meaningfully are the risks? Do the companies' own 13 internal analyses really support the notion that some of 14 the factors which are described as risks are in fact 15 risks? 16 Now, in my respectful submission that really 17 informs the information, really energizes, if you wish a 18 bad pun, the information which is before the Board. 19 Because we can all then have a realistic sense of 20 whether all parties are going to be treated fairly under 21 this regime. The fact that we have Union's projections 22 doesn't mean that the Board will scale back on what it 23 allows Union. It will have a more realistic sense of 24 whether or not the formula is really consistent with 25 their sense of where they can achieve efficiencies, 26 where their risks are. 27 And on our side, the intervenor side, we come 28 away from PBR with a better sense that it reflects a Les Services StenoTran Services Inc. 613-521-0703 49 ELLIOTT/BIRMINGHAM 1 realistic assessment by Union of what the next five 2 years looks like. 3 Dr. Bauer in his evidence, which is sponsored 4 by my client and by Mr. Janigan's client, speaks to the 5 importance of getting things right at the outset. And 6 it is essential in my respectful submission that all of 7 the parties and the Board have a sense going forward 8 into a five-year PBR regime that we have got it right at 9 the beginning, that everybody has been treated fairly, 10 that we have as much information as we can about the 11 PBR, not simply theories or formulae, but as much hard 12 information as we can about it going forward. 13 In my respectful submission, having that 14 information doesn't prejudice Union, but what it does do 15 is it allows us to leave this. If the Board approves a 16 PBR regime, it allows us to leave this process with a 17 sense that we have the best available information and 18 that all parties are going to be treated fairly in the 19 PBR. 20 And in my respectful submission, information 21 of the kind I am asking for, which is information about 22 what is the projection made to senior management, what 23 does senior management approve, what does Union forecast 24 over the next few years will give all of the parties, 25 and in particular will give the Board, a better sense, a 26 clearer sense, a fairer sense of how this PBR regime is 27 going to operate over a long period of time. What is 28 proposed as five years. Les Services StenoTran Services Inc. 613-521-0703 50 ELLIOTT/BIRMINGHAM 1 Those are my submissions on the second and 2 broader point. Thank you. 3 THE PRESIDING MEMBER: Thank you, Mr. Warren. 4 Mr. Brett. 5 MR. BRETT: Mr. Chairman, Dr. Jackson, I just 6 would add in support of Mr. Warren the fact that one of 7 the issues in this case as you know is when the PBR 8 program should start. And Mr. Birmingham spoke a moment 9 ago about retroactive rate making using the actual 10 numbers for 1999 as a base. 11 Here we are halfway through 2000, we will be 12 more than halfway through 2000 before the Board has 13 completed this case and gets its decision out. It may 14 well be that you decide that PBR should start on, if it 15 is going to start, January the 1st of 2001. If you 16 decide that, then the issue of what is the appropriate 17 and fair base to use becomes important. And in that 18 context, the year 2000 numbers become very important as 19 a possible and fair baseline. 20 So that one of the things that would then 21 become of interest -- or what are the follow-on effects, 22 for example, of these large changes that have taken 23 place in manpower and organization in the company in the 24 fall of 1999. There are effects going forward in year 25 2000 flowing from that and that information would be 26 helpful to assessing the appropriateness of 2000 numbers 27 or some alternative set of numbers to use as a base for 28 a PBR plan that starts in January 1 of 2001. Les Services StenoTran Services Inc. 613-521-0703 51 ELLIOTT/BIRMINGHAM 1 Thanks very much. 2 THE PRESIDING MEMBER: Thank you, Mr. Brett. 3 Ms Lea. 4 MS LEA: Thank you. 5 Board Staff has an interest in ensuring that 6 the Board has a complete record of relevant information 7 upon which to make its decision. So that I think the 8 Board panel here would need to determine whether the 9 information sought by the intervenors here is relevant. 10 Submissions suggest that it is likely that it is. And 11 secondly, is there any harm to be -- that would happen 12 if it was provided. 13 As far as I can understand it, and my friend, 14 Mr. Penny, may want to speak to this, further 15 information should not prejudice Union's case and may 16 well assist the Board in this matter. There is the 17 possibility that it would slightly lengthen this hearing 18 process. But we do have before us a five-year proposal 19 for an initial PBR regime and in those circumstances it 20 may be that it is worthwhile to err on the side of 21 inclusion and time taken in order to get this right from 22 the start. 23 Thank you that is all I have to say. 24 THE PRESIDING MEMBER: Ms Lea, I think there 25 are some others. 26 MS LEA: Oh, I beg your pardon. I wasn't 27 sure. 28 THE PRESIDING MEMBER: Mr. Brett had spoken. Les Services StenoTran Services Inc. 613-521-0703 52 ELLIOTT/BIRMINGHAM 1 Are there other parties who would like to speak to this 2 motion. Well, it is not a motion but a question. 3 Mr. Thompson. 4 MR. THOMPSON: Yes, thanks, Mr. Chairman. I 5 would just like to add a couple of points. 6 Whether it is a full cost of service 7 presentation or something less, my submission is some 8 current year information is necessary for you to 9 consider either granting or rejecting the PBR. For 10 example, what impact does what the company asks for have 11 on its forecasts of normalized earning for 2000. That 12 in my submission would be relevant to consideration of 13 whether the base that they are proposing in 1999 is or 14 is not appropriate. 15 The other factor I urge you to consider in the 16 context of year 2000 information, is that year 2000 is 17 clearly a transition year. And even if you were to 18 agree that a 1999 adjusted base was appropriate for PBR, 19 in my submission we still have to look at 2000 as a 20 transition year and the appropriate rate treatment for 21 2000 may differ from the other rate treatment that you 22 adopt for the year commencing January 1, 2001. 23 So those are factors that are germane to a 24 consideration of even granting the PBR request. If the 25 decision is to reject the PBR, my submission is you need 26 some 2000 information to determine whether it is 27 appropriate to leave the 1999 rates operative. I don't 28 agree with Mr. Penny that this is a decision for the Les Services StenoTran Services Inc. 613-521-0703 53 ELLIOTT/BIRMINGHAM 1 ERO. It is a decision for this panel and if the 2 decision is to reject PBR, this panel should, in my 3 submission, make a direction that the company either 4 come in with a cost of service presentation or a finding 5 that 1999 rates are okay for 2000. 6 Those are my submissions. 7 THE PRESIDING MEMBER: Thank you, 8 Mr. Thompson. 9 Are there any other parties? 10 MR. RYDER: Just one observation, 11 Mr. Chairman. 12 I agree with Ms Lea that the single test for 13 you as an adjudicator for admissibility is one of 14 relevance. And if you are satisfied that the evidence 15 is relevant to the issues raised by the intervenors in 16 response to the application, then I submit you are 17 obliged to admit it. 18 On my part, I fully endorse the compelling 19 arguments to the intervenors as to the relevance of this 20 information to the issues they want to assert for you to 21 decide. 22 Thank you. 23 THE PRESIDING MEMBER: Thank you, Mr. Ryder. 24 Mr. Janigan. 25 MR. JANIGAN: Thank you, Mr. Chair. 26 Two small points. Firstly, to the extent that 27 the company has incurred expenses as a lead up to PBR, 28 both in terms of planning or any other operational Les Services StenoTran Services Inc. 613-521-0703 54 ELLIOTT/BIRMINGHAM 1 changes that have been put in place, these have been 2 delivered under the existing cost of service regime, 3 unless PBR of course starts on January 1st, but up until 4 this point in time we are operating under a cost of 5 service regime, and customers are entitled to have the 6 benefit of that either in one of two ways, either in 7 adjustments to the rate base or to have those 8 efficiencies reflected in the productivity number that 9 the Board arrives at at the end of the day. 10 With respect to the productivity number, as 11 the evidence will disclose in the course of this 12 hearing, I predict that in fact it is an inexact science 13 to some extent, and it's fraught with input from the 14 judgment of experts and other important sources. Woven 15 throughout the company's submissions are facts that are 16 pleaded in relation to the operations of the company in 17 the past to be used as a kind of check against the 18 numbers that have been derived from various different 19 sources. So I think it's important that the most 20 relevant and up-to-date information is available to the 21 Board in order to be able to compare with some of the 22 statistical derivations that will be attested to later 23 in this proceeding and to test the company's assumptions 24 with respect to what kind of productivity can be 25 generated over the course of the PBR plan. 26 So we would submit that it's highly relevant 27 for the Board to receive this information and to compare 28 it with the submissions of the company with respect to Les Services StenoTran Services Inc. 613-521-0703 55 ELLIOTT/BIRMINGHAM 1 the productivity that is possible during the PBR period. 2 THE PRESIDING MEMBER: Any other parties who 3 wish to -- Mr. Mattson. 4 MR. MATTSON: Thank you, Mr. Chairman. 5 Again, I won't go over what I said, but in 6 light of Dr. Jackson's questions, and comments from 7 Mr. Penny, I don't understand how the company can meet 8 their onus in this hearing to show that PBR is in the 9 interest of customers without having or being prepared 10 to give any information to this Board on cost-of-service 11 information beyond 1999. 12 In the statute there is statutory power given 13 to both the Board and the government if they wish to 14 make that decision that PBR is in the interests of 15 customers, it's in the public interest, and therefore 16 they can say that we're going ahead with PBR. 17 That decision has not been met. We're still 18 under gas regulations under the Ontario Energy Act where 19 the onus is squarely upon Union to demonstrate that 20 their PBR proposals is in the public interest and the 21 Board has not issued any order, the government hasn't 22 issued any order. They have to prove their case. 23 I'm very concerned now that even in 24 cross-examination they are not able to provide any 25 cost-of-service information beyond 1999. How can they 26 meet that onus? How can they? Under 36(6), the burden 27 of proof is squarely on the applicant to justify rates 28 for the sale, transmission, distribution and storage of Les Services StenoTran Services Inc. 613-521-0703 56 ELLIOTT/BIRMINGHAM 1 gas. How can they justify it by just throwing forward a 2 PBR application which fixes rates at a 1.9 per cent 3 price cap over a five-year period? How can any of us be 4 convinced that this is in the public interest without 5 any information, cost-of-service information, beyond 6 1999? 7 Union knows my client's position, that we are 8 in opposition to this plan. We don't see the benefits. 9 We have been on the record, so it's not a surprise. I 10 don't see how they intend to meet the burden of proof 11 without any of that information in this case. 12 Thank you. 13 THE PRESIDING MEMBER: Thank you, Mr. Mattson. 14 Are there any other comments before I pass it 15 over to Mr. Penny? Then I believe Mr. Warren has a 16 response at the end of that. Is that correct? 17 Mr. Penny. 18 MR. PENNY: Yes. Thank you, Mr. Chairman. 19 If Mr. Warren puts it that what we're talking 20 about is information given to senior management, then 21 it's my submission that this information is neither 22 relevant nor admissible. The information, to the extent 23 there is any, in my submission, by definition has been 24 prepared in contemplation of litigation or prepared in 25 contemplation of these proceedings. The information, in 26 my submission, is confidential, prepared for internal 27 budgets, and internal information for the assistance of 28 senior management is confidential. Les Services StenoTran Services Inc. 613-521-0703 57 ELLIOTT/BIRMINGHAM 1 And I will come back to each of these, 2 Mr. Chairman. 3 In my submission, it is not the kind of -- 4 confidential information is not the kind of information 5 which, if required to be produced, would enable a 6 company to carry on its business and the Board has 7 recognized in the past that internal management 8 information ought not to have to be produced, even if it 9 is relevant, in circumstances where it was prepared for 10 internal purposes to enable the company to conduct its 11 business. 12 Dealing first with the issue of privilege, 13 what the company has thought about doing in relation to 14 its conduct under a performance-based regulation plan 15 that is the subject of an application before this Board 16 is, in my submission, a conduct and material that was 17 prepared in contemplation of litigation and that, in my 18 submission, would give rise to a legal privilege which 19 would insulate it from production. 20 The company has this application pending 21 before the Board. It doesn't know whether the 22 application will be successful or not. It makes 23 assumptions about what it might get, for example, out of 24 the ADR process, may well contain information about its 25 positions that it may wish to take in ADR, about 26 outcomes which it may hope come out of ADR, outcomes 27 which it may hope come out of this hearing if it was 28 required, and a decision of the Board. Les Services StenoTran Services Inc. 613-521-0703 58 ELLIOTT/BIRMINGHAM 1 That information is all prepared with a view 2 to a pending application before the Board and, with 3 great respect to my friends, it would be highly 4 prejudicial for the company to be required to produce 5 any information that contemplates the potential outcomes 6 of this process, whether it's through a settlement or 7 through a hearing. It seems to me, by definition, the 8 kind of information given to senior management, by 9 definition, must contain that kind of thing because of 10 the way in which and the timing during which it was 11 prepared, i.e., at a time when the company doesn't know 12 whether it has a PBR mechanism in place or not and is 13 making plans for what might or might not happen if it's 14 successful, partially or in whole, with this 15 application. 16 Secondly, in my submission, whether or not 17 there is a technical legal privilege associated with it, 18 the underlying concept that the legal privilege is 19 intended to protect still applies, and that is the 20 protection of information prepared in confidence. As I 21 have said earlier to Dr. Jackson, information has not 22 been prepared on a cost-of-service basis because this 23 application is not seeking a 1999 rate based on a 24 cost-of-service analysis. 25 The classic test for confidentiality, 26 Mr. Chairman, involves four things: the information 27 originates in confidence, that it will not be disclosed; 28 the elements of the confidentiality must be essential to Les Services StenoTran Services Inc. 613-521-0703 59 ELLIOTT/BIRMINGHAM 1 the conduct of the business; the third is that the 2 relationship that gives rise to the confidentiality, in 3 this case the internal management of union, that 4 confidentiality is a situation where it ought to be 5 fostered or recognized in the public interest. 6 In other words, there is a reason for 7 preserving that confidentiality beyond the particular 8 case at hand. 9 Thirdly, that there is a balance between the 10 harm that may be derived from the disclosure of the 11 communications versus the benefits that may be gained by 12 requiring the disclosure. 13 In my submission, in the context of pending 14 litigation before this Board, information given to 15 senior management about possible outcomes of PBR is 16 clearly information that was generated in confidence. 17 It is generated for internal management purposes. 18 The second part of the test, that the 19 confidentiality must be essential to the full and 20 satisfactory relationship and maintenance of the 21 relationship, in this case, this is the company 22 conducting its business. 23 In my submission, it has been well recognized 24 on many occasions in the past by this Board that if 25 every time management thinks about something or any 26 piece of paper that they generate about issues, if that 27 were all required to be produced in a public forum, the 28 company wouldn't be able to really carry on business Les Services StenoTran Services Inc. 613-521-0703 60 ELLIOTT/BIRMINGHAM 1 because the consequence of that, of course, would be 2 they would stop generating that kind of information or 3 prepare it knowing that it may be subject to scrutiny 4 and, therefore, it would not contain the kind of rigour 5 and candour that the company would require to carry on 6 its internal processes. 7 The third part of the test, the relationship 8 or the information -- the protection of the 9 confidentiality of the information sedulously fostered, 10 in my submission, it is really the same analysis, that 11 of course it is in the Board's interest, it is in the 12 interest of ratepayers that the company be able to 13 conduct its business with the full benefit of frank 14 views expressed by management, realistic assessments of 15 what it will do, and so on, without fear that all of 16 this will have to be pumped out into public. 17 Finally, in respect of the balance, in my 18 submission, there is no evident harm because the 19 information is, by definition, speculative and there is 20 prejudice because it will require the company to reveal 21 positions, expectations and anticipations that it may 22 have about the potential outcome of these proceedings. 23 So in my submission, whether or not you 24 recognize -- or it could be said that there is a 25 technical legal privilege associated with the 26 information, it is confidential and should be recognized 27 as confidential and there is a public interest in 28 enabling the company to preserve that confidentiality. Les Services StenoTran Services Inc. 613-521-0703 61 ELLIOTT/BIRMINGHAM 1 In addition to my generic comment that I 2 believe that the Board has recognized frequently in the 3 past in particular cases that confidential information 4 is necessary to the conduct of the company's business, 5 there was a specific application of this in a related 6 context in the 497-01 Decision involving Consumers Gas. 7 That was a situation in which parties expressed concern 8 that the base year information to be used for financial 9 2000 was out of date because it has been originally 10 obtained in Consumers original filing for 1999. 11 The Board was urged to either require a full 12 presentation of O&M for 2000, which would here be the 13 equivalent of asking Union to do a full cost of service 14 presentation for 2000. Others wanted the company to 15 prepare some kind of true-up based on actuals for 2000, 16 and that here would be the kind of thing that Mr. Warren 17 is asking for, that we provide -- or I guess it was 18 Mr. Thompson who said, "Well, leaving aside the forward 19 looking information what about actuals to date that are 20 known about, et cetera." 21 The Board in the Consumers case rejected both 22 of those submissions, did not require a full filing for 23 the 2000 O&M budget, indeed did not even require a 24 true-up for the 2000 budget. It recognized that 25 Consumers had come in with the 1999 base, that had been 26 approved, and they were going to proceed on the 1999 27 base as originally contemplated. 28 So we have, in my respectful submission, both Les Services StenoTran Services Inc. 613-521-0703 62 ELLIOTT/BIRMINGHAM 1 in general a willingness on the part of the Board in 2 past circumstances of a traditional nature to recognize 3 that a certain amount of confidentiality is required in 4 order for the company to carry on its business, and in a 5 similar context, with Consumers' specific instance in 6 which the Board did not require either updated or 7 truing-up information. 8 The second to last point I wanted to make in 9 response, Mr. Chairman, is that under PBR the whole idea 10 is to create incentives. Mr. Warren says, "Well, the 11 Board, it won't be used to necessarily alter the 12 parameters" or "It won't be used to necessarily try to 13 squeeze the company with tighter parameters based on 14 some expectations they have". 15 Well, with great respect, I don't know what 16 else it could be used for or why else Mr. Warren would 17 want the information. 18 It is clear that the reason the parties want 19 any speculations or judgments that the company has made 20 about what it might be able to achieve or might not be 21 able to achieve under PBR is to say, "Well, if they 22 think they can do `X' and they are only asking for `Y', 23 let's make them do `X' or whatever". 24 That is the prejudice to the underlying 25 premise of the operation. If the company is being asked 26 to produce all of its plans and intentions about what it 27 thinks it can do to improve productivity, then all of 28 the incentives -- and if those are then used to Les Services StenoTran Services Inc. 613-521-0703 63 ELLIOTT/BIRMINGHAM 1 establish a new baseline or new parameters for the 2 proposal, then all the benefits that one expects to get 3 out of PBR will be gone because they will all be -- all 4 of the benefits will be built into some threshold and 5 the bar will be raised and so the incentives to actually 6 generate the benefits of PBR will be frustrated. 7 Finally, with respect to Mr. Mattson's point, 8 the onus is clearly on Union. We take no issue with 9 that. 10 But what Mr. Mattson misses in his submission 11 is that the Board is no longer constrained by the old 12 Act and having to do cost of service regulation. That 13 is the whole point of this application. This is not a 14 cost of service application. We have not come forward 15 with a full cost of service analysis for 2000 and asking 16 to set rates on that basis. 17 The legislation now provides that the Board 18 can set rates on any manner that it deems just and 19 reasonable. It was frankly for this very purpose that 20 that legislation was amended and Union has acted on that 21 amendment and brought forward this proposal. 22 So in my respectful submission, Mr. Mattson's 23 submissions are off the mark. 24 Thank you, Mr. Chairman. Those are my 25 submissions. 26 THE PRESIDING MEMBER: Thank you, Mr. Penny. 27 Mr. Warren. 28 MR. THOMPSON: Mr. Chairman, just before Les Services StenoTran Services Inc. 613-521-0703 64 ELLIOTT/BIRMINGHAM 1 Mr. Warren speaks, could I, by way of clarification, 2 through you, ask a question of Mr. Penny as to just what 3 documents he is saying are privileged. 4 He seems to be saying company opinions on the 5 possible results of PBR be regarded as privileged. But 6 is he saying, for example, that the corporate budget for 7 2000 is privileged? Is he saying that what the company 8 claims and its impact on that corporate budget is 9 privileged? 10 I would like to have some clarification of 11 what is inside the privilege and outside the privilege, 12 if I could. 13 THE PRESIDING MEMBER: Mr. Penny. 14 MR. PENNY: Well, we are handicapped, of 15 course, and perhaps the argument is, to some extent, 16 premature. I am handicapped, at least, in not knowing 17 exactly what it is that people want. 18 These submissions were premised on -- my 19 submissions at least, were premised on Mr. Warren's 20 submissions that what he wanted was information given to 21 senior management. I took that to be an 22 all-encompassing request that any information relating 23 to the potential effects of PBR in 2000 and beyond were 24 on the table. 25 So I'm not in a position -- without knowing 26 precisely what parties want, I'm not in a position to 27 really respond to Mr. Thompson because I frankly don't 28 know in fact the scope of what material is out there, Les Services StenoTran Services Inc. 613-521-0703 65 ELLIOTT/BIRMINGHAM 1 nor do I know for a fact what it is precisely that Mr. 2 Warren and Mr. Thompson are looking for. 3 THE PRESIDING MEMBER: Dr. Jackson. 4 MEMBER JACKSON: Mr. Penny, could you perhaps 5 go just a little bit farther and address the one 6 illustration which Mr. Thompson raised? 7 MR. PENNY: The 2000 budget, sir? 8 MEMBER JACKSON: Yes. 9 MR. PENNY: Yes, I can. 10 It is my understanding that to the extent that 11 there is a 2000 budget that it was not prepared -- it is 12 not a cost of service budget, because the company wasn't 13 coming forward with a cost of service application, but 14 it was a budget prepared for internal management 15 purposes, not for public consumption, and that it is a 16 budget which makes assumptions about what the company 17 might get out of the litigation process, either by way 18 of settlement or through the hearing and a decision of 19 the Board. 20 So, in my submission, that would be subject 21 either to some form of privilege, either legally or on a 22 public-interest basis, and an entitlement to the 23 protection from disclosure by this Board on the basis 24 that it would contain compromised positions that would 25 be prejudicial to the company. 26 MEMBER JACKSON: The second question I have 27 goes to your submissions about technical privilege. I 28 just need a little bit of help there. Les Services StenoTran Services Inc. 613-521-0703 66 ELLIOTT/BIRMINGHAM 1 The matters to which privilege might apply 2 would be matters, would they, which counsel then for the 3 corporation would always be aware of, or not 4 necessarily so? 5 I take it they get their privilege because 6 they are arguably prepared for the purpose of what you 7 have referred to here as litigation, in other words, the 8 application before the Board. 9 MR. PENNY: That's correct. I perhaps should 10 have been more clear and I apologize, Dr. Jackson. I 11 shouldn't have dove so quickly into those legal waters. 12 There are two -- 13 MEMBER JACKSON: It's all right. You raised 14 my interest. 15 MR. PENNY: There are two grounds of privilege 16 in law. One arises from communications between a 17 solicitor and his or her client for the purposes of 18 getting legal advice or receiving legal advice, and the 19 second ground of privilege is information that is 20 prepared in contemplation of litigation or dispute 21 resolution. 22 MEMBER JACKSON: Whether or not it is 23 communicated to counsel. 24 MR. PENNY: Whether or not it is 25 communications to counsel, exactly. 26 MEMBER JACKSON: Thank you. 27 MR. PENNY: Again, I'm not sure for a fact 28 what information is out there, some of which may have Les Services StenoTran Services Inc. 613-521-0703 67 ELLIOTT/BIRMINGHAM 1 been prepared for the obtaining of legal advice, either 2 from in-house counsel or from external counsel, but the 3 real -- without knowing that for sure in a given case, 4 my submission is really founded on the second ground, 5 which is that the company has a pending application 6 before the Board, it is either -- we are in a position 7 earlier on where it is either going to be the subject of 8 a settlement agreement or it is going to be the subject 9 of a contested application before the Board, mitigation, 10 and because it is prepared for that purpose, or at least 11 with that in mind I should say, that it is subject to 12 that privilege. 13 Then my second submission is, whether or not 14 it is subject to that privilege as a legal matter, 15 certainly as a matter of substance, that it does contain 16 assumptions, et cetera, et cetera, about the outcome of 17 these proceedings which would be prejudicial and, 18 therefore, should be protected just as a matter of 19 public interest. 20 In other words, there is a reason for 21 preserving that confidentiality beyond the particular 22 case at hand. 23 Thirdly, that there is a balance between the 24 harm that may be derived from the disclosure of the 25 communications versus the benefits that may be gained by 26 requiring the disclosure. 27 In my submission, in the context of pending 28 litigation before this Board, information given to Les Services StenoTran Services Inc. 613-521-0703 68 ELLIOTT/BIRMINGHAM 1 senior management about possible outcomes of PBR is 2 clearly information that was generated in confidence. 3 It is generated for internal management purposes. 4 The second part of the test, that the 5 confidentiality must be essential to the full and 6 satisfactory relationship and maintenance of the 7 relationship, in this case, this is the company 8 conducting its business. 9 In my submission, it has been well recognized 10 on many occasions in the past by this Board that if 11 every time management thinks about something or any 12 piece of paper that they generate about issues, if that 13 were all required to be produced in a public forum, the 14 company wouldn't be able to really carry on business 15 because the consequence of that, of course, would be 16 they would stop generating that kind of information or 17 prepare it knowing that it may be subject to scrutiny 18 and, therefore, it would not contain the kind of rigour 19 and candour that the company would require to carry on 20 its internal processes. 21 The third part of the test, the relationship 22 or the information -- the protection of the 23 confidentiality of the information sedulously fostered, 24 in my submission, it is really the same analysis, that 25 of course it is in the Board's interest, it is in the 26 interest of ratepayers that the company be able to 27 conduct its business with the full benefit of frank 28 views expressed by management, realistic assessments of Les Services StenoTran Services Inc. 613-521-0703 69 ELLIOTT/BIRMINGHAM 1 what it will do, and so on, without fear that all of 2 this will have to be pumped out into public. 3 Finally, in respect of the balance, in my 4 submission, there is no evident harm because the 5 information is, by definition, speculative and there is 6 prejudice because it will require the company to reveal 7 positions, expectations and anticipations that it may 8 have about the potential outcome of these proceedings. 9 So in my submission, whether or not you 10 recognize -- or it could be said that there is a 11 technical legal privilege associated with the 12 information, it is confidential and should be recognized 13 as confidential and there is a public interest in 14 enabling the company to preserve that confidentiality. 15 In addition to my generic comment that I 16 believe that the Board has recognized frequently in the 17 past in particular cases that confidential information 18 is necessary to the conduct of the company's business, 19 there was a specific application of this in a related 20 context in the 497-01 Decision involving Consumers Gas. 21 That was a situation in which parties expressed concern 22 that the base year information to be used for financial 23 2000 was out of date because it has been originally 24 obtained in Consumers original filing for 1999. 25 The Board was urged to either require a full 26 presentation of O&M for 2000, which would here be the 27 equivalent of asking Union to do a full cost of service 28 presentation for 2000. Others wanted the company to Les Services StenoTran Services Inc. 613-521-0703 70 ELLIOTT/BIRMINGHAM 1 prepare some kind of true-up based on actuals for 2000, 2 and that here would be the kind of thing that Mr. Warren 3 is asking for, that we provide -- or I guess it was 4 Mr. Thompson who said, "Well, leaving aside the forward 5 looking information what about actuals to date that are 6 known about, et cetera." 7 The Board in the Consumers case rejected both 8 of those submissions, did not require a full filing for 9 the 2000 O&M budget, indeed did not even require a 10 true-up for the 2000 budget. It recognized that 11 Consumers had come in with the 1999 base, that had been 12 approved, and they were going to proceed on the 1999 13 base as originally contemplated. 14 So we have, in my respectful submission, both 15 in general a willingness on the part of the Board in 16 past circumstances of a traditional nature to recognize 17 that a certain amount of confidentiality is required in 18 order for the company to carry on its business, and in a 19 similar context, with Consumers' specific instance in 20 which the Board did not require either updated or 21 truing-up information. 22 The second to last point I wanted to make in 23 response, Mr. Chairman, is that under PBR the whole idea 24 is to create incentives. Mr. Warren says, "Well, the 25 Board, it won't be used to necessarily alter the 26 parameters" or "It won't be used to necessarily try to 27 squeeze the company with tighter parameters based on 28 some expectations they have". Les Services StenoTran Services Inc. 613-521-0703 71 ELLIOTT/BIRMINGHAM 1 Well, with great respect, I don't know what 2 else it could be used for or why else Mr. Warren would 3 want the information. 4 It is clear that the reason the parties want 5 any speculations or judgments that the company has made 6 about what it might be able to achieve or might not be 7 able to achieve under PBR is to say, "Well, if they 8 think they can do `X' and they are only asking for `Y', 9 let's make them do `X' or whatever". 10 That is the prejudice to the underlying 11 premise of the operation. If the company is being asked 12 to produce all of its plans and intentions about what it 13 thinks it can do to improve productivity, then all of 14 the incentives -- and if those are then used to 15 establish a new baseline or new parameters for the 16 proposal, then all the benefits that one expects to get 17 out of PBR will be gone because they will all be -- all 18 of the benefits will be built into some threshold and 19 the bar will be raised and so the incentives to actually 20 generate the benefits of PBR will be frustrated. 21 Finally, with respect to Mr. Mattson's point, 22 the onus is clearly on Union. We take no issue with 23 that. 24 But what Mr. Mattson misses in his submission 25 is that the Board is no longer constrained by the old 26 Act and having to do cost of service regulation. That 27 is the whole point of this application. This is not a 28 cost of service application. We have not come forward Les Services StenoTran Services Inc. 613-521-0703 72 ELLIOTT/BIRMINGHAM 1 with a full cost of service analysis for 2000 and asking 2 to set rates on that basis. 3 The legislation now provides that the Board 4 can set rates on any manner that it deems just and 5 reasonable. It was frankly for this very purpose that 6 that legislation was amended and Union has acted on that 7 amendment and brought forward this proposal. 8 So in my respectful submission, Mr. Mattson's 9 submissions are off the mark. 10 Thank you, Mr. Chairman. Those are my 11 submissions. 12 THE PRESIDING MEMBER: Thank you, Mr. Penny. 13 Mr. Warren. 14 MR. THOMPSON: Mr. Chairman, just before 15 Mr. Warren speaks, could I, by way of clarification, 16 through you, ask a question of Mr. Penny as to just what 17 documents he is saying are privileged. 18 He seems to be saying company opinions on the 19 possible results of PBR be regarded as privileged. But 20 is he saying, for example, that the corporate budget for 21 2000 is privileged? Is he saying that what the company 22 claims and its impact on that corporate budget is 23 privileged? 24 I would like to have some clarification of 25 what is inside the privilege and outside the privilege, 26 if I could. 27 THE PRESIDING MEMBER: Mr. Penny. 28 MR. PENNY: Well, we are handicapped, of Les Services StenoTran Services Inc. 613-521-0703 73 ELLIOTT/BIRMINGHAM 1 course, and perhaps the argument is, to some extent, 2 premature. I am handicapped, at least, in not knowing 3 exactly what it is that people want. 4 These submissions were premised on -- my 5 submissions at least, were premised on Mr. Warren's 6 submissions that what he wanted was information given to 7 senior management. I took that to be an 8 all-encompassing request that any information relating 9 to the potential effects of PBR in 2000 and beyond were 10 on the table. 11 So I'm not in a position -- without knowing 12 precisely what parties want, I'm not in a position to 13 really respond to Mr. Thompson because I frankly don't 14 know in fact the scope of what material is out there, 15 nor do I know for a fact what it is precisely that Mr. 16 Warren and Mr. Thompson are looking for. 17 THE PRESIDING MEMBER: Dr. Jackson. 18 MEMBER JACKSON: Mr. Penny, could you perhaps 19 go just a little bit farther and address the one 20 illustration which Mr. Thompson raised? 21 MR. PENNY: The 2000 budget, sir? 22 MEMBER JACKSON: Yes. 23 MR. PENNY: Yes, I can. 24 It is my understanding that to the extent that 25 there is a 2000 budget that it was not prepared -- it is 26 not a cost of service budget, because the company wasn't 27 coming forward with a cost of service application, but 28 it was a budget prepared for internal management Les Services StenoTran Services Inc. 613-521-0703 74 ELLIOTT/BIRMINGHAM 1 purposes, not for public consumption, and that it is a 2 budget which makes assumptions about what the company 3 might get out of the litigation process, either by way 4 of settlement or through the hearing and a decision of 5 the Board. 6 So, in my submission, that would be subject 7 either to some form of privilege, either legally or on a 8 public-interest basis, and an entitlement to the 9 protection from disclosure by this Board on the basis 10 that it would contain compromised positions that would 11 be prejudicial to the company. 12 MEMBER JACKSON: The second question I have 13 goes to your submissions about technical privilege. I 14 just need a little bit of help there. 15 The matters to which privilege might apply 16 would be matters, would they, which counsel then for the 17 corporation would always be aware of, or not 18 necessarily so? 19 I take it they get their privilege because 20 they are arguably prepared for the purpose of what you 21 have referred to here as litigation, in other words, the 22 application before the Board. 23 MR. PENNY: That's correct. I perhaps should 24 have been more clear and I apologize, Dr. Jackson. I 25 shouldn't have dove so quickly into those legal waters. 26 There are two -- 27 MEMBER JACKSON: It's all right. You raised 28 my interest. Les Services StenoTran Services Inc. 613-521-0703 75 ELLIOTT/BIRMINGHAM 1 MR. PENNY: There are two grounds of privilege 2 in law. One arises from communications between a 3 solicitor and his or her client for the purposes of 4 getting legal advice or receiving legal advice, and the 5 second ground of privilege is information that is 6 prepared in contemplation of litigation or dispute 7 resolution. 8 MEMBER JACKSON: Whether or not it is 9 communicated to counsel. 10 MR. PENNY: Whether or not it is 11 communications to counsel, exactly. 12 MEMBER JACKSON: Thank you. 13 MR. PENNY: Again, I'm not sure for a fact 14 what information is out there, some of which may have 15 been prepared for the obtaining of legal advice, either 16 from in-house counsel or from external counsel, but the 17 real -- without knowing that for sure in a given case, 18 my submission is really founded on the second ground, 19 which is that the company has a pending application 20 before the Board, it is either -- we are in a position 21 earlier on where it is either going to be the subject of 22 a settlement agreement or it is going to be the subject 23 of a contested application before the Board, mitigation, 24 and because it is prepared for that purpose, or at least 25 with that in mind I should say, that it is subject to 26 that privilege. 27 Then my second submission is, whether or not 28 it is subject to that privilege as a legal matter, Les Services StenoTran Services Inc. 613-521-0703 76 ELLIOTT/BIRMINGHAM 1 certainly as a matter of substance, that it does contain 2 assumptions, et cetera, et cetera, about the outcome of 3 these proceedings which would be prejudicial and, 4 therefore, should be protected just as a matter of 5 public interest. 6 MEMBER JACKSON: Mr. Penny, I have just one 7 more question which has occurred to me during your 8 answer and you might wish to ask Mr. Birmingham for 9 assistance on this. But I am curious to know whether 10 under cost of service methodology the budget would have 11 reflected the assumptions that would have been in the 12 then current rate application or whether it would have 13 been different from the data in the rate application? 14 Like is there a consistency of this existing 15 set of differences or potential differences or are we 16 moving into a new area where cost data which is asked 17 for in a proceeding like this, if it is given, may very 18 well be different from the budget? 19 MR. PENNY: I think perhaps that is an issue 20 that the witnesses should address rather than me. 21 MS ELLIOTT: Generally under a cost of service 22 regulation our budget would start with the information 23 that is the basis of the submission. We do, however, 24 layer on some judgement as to what the potential outcome 25 of that submission might be in finalizing the budget. 26 So there would be differences between the submission and 27 the budget that would reflect our judgement as to the 28 potential outcome. Les Services StenoTran Services Inc. 613-521-0703 77 ELLIOTT/BIRMINGHAM 1 MEMBER JACKSON: And they might very well be 2 differences which have been introduced, would they, 3 during the hearing or towards the end of the proceeding. 4 But are you saying that the starting point would have 5 been the same at the beginning of the hearing? 6 MS ELLIOTT: The starting point would be the 7 same at the beginning. And depending on the timing of 8 the proceeding and the timing of our budget, we would 9 move forward recognizing some of the issues and the 10 concerns raised by parties and reflect that in our 11 budget. 12 MEMBER JACKSON: Thank you. 13 THE PRESIDING MEMBER: Thank you, Dr. Jackson. 14 Mr. Warren. 15 MR. WARREN: Thank you, Mr. Chairman. 16 Let me begin with this observation that 17 Mr. Penny by making submissions with respect to 18 privilege has presented the Board with an issue which 19 may have very dramatic effects if the Board makes a 20 decision upholding this claim for privilege. And one of 21 the submissions I would make is that it seems to me that 22 before the Board makes a decision it should receive from 23 all of the intervenors a kind of laundry list of what 24 information is being asked for, less the Board make a 25 decision inadvertently, that privilege attaches to 26 information and that sweep into the basket, information 27 that should under no circumstance be subject to a claim 28 for privilege. Les Services StenoTran Services Inc. 613-521-0703 78 ELLIOTT/BIRMINGHAM 1 So I would ask that the Board perhaps take a 2 break at some point to receive as much of the list as 3 they can from the intervenors. But with that in mind, 4 it seems to me that there are really, broadly speaking, 5 three categories of information which are being asked 6 for. The first is information about which, if you wish, 7 explains and updates the 1999 actuals. 8 Now, the 1999 actuals are before the Board in 9 evidence, in the supplementary evidence. And Union is 10 making certain claims in respect of that information, 11 the principal one of which is that reductions in cost 12 are not sustainable. 13 In order to be able to test that information 14 and for other reasons, the intervenors should be 15 entitled to get more information about 1999 including 16 information about whether or not those reductions 17 reflect organizational changes and efficiencies. 18 Now, as I understand, and I don't want to be 19 unfair to Mr. Penny, but the potential reach of his 20 privilege argument is that all of that planning was in 21 anticipation not just of PBR, but of some lis inter 22 partes, some contest before the Board and so should be 23 protected by privilege. 24 A second category of information is 2000 25 information, including a budget for 2000. Now, various 26 of my friends on this side of the debate have said and I 27 will simply summarize that the claim by Union is that it 28 wants its PBR regime to have retroactive effect. Les Services StenoTran Services Inc. 613-521-0703 79 ELLIOTT/BIRMINGHAM 1 Intervenors may claim that is not appropriate because 2 there isn't sufficient information about 2000 to justify 3 that retroactive effect. And secondly, if the Board 4 rejects the retroactive effect or says we don't like PBR 5 at all, there has to be sufficient information before 6 the Board to test the rate. 7 Mr. Penny would say, as I understand him, that 8 all of that information is prepared in anticipation of 9 this proceeding litigation and therefore is caught by 10 privilege. 11 The third category of information or what I 12 might call "planning documents", which are placed before 13 management which would include some of the 1999 14 information, some of the 2000 information and some 15 forward looking information. Broadly speaking, it seems 16 to me those are the three categories of information. 17 Now, I disagree, with respect, with my friend, 18 Mr. Penny, that any privilege attaches in law to these 19 documents at all. This is not conventional litigation. 20 As much as we have converted this process over 21 the years into what appears to be an adversarial fight 22 between the applicant on the one hand and the 23 intervenors on the other, at the end of the day what 24 this is, is an inquiry by the Board in carrying out its 25 statutory obligation to make a determination of just and 26 reasonable rates. And the Board in order to do that 27 requires and is entitled to have as much information as 28 it wants. And the fact that other people may disagree Les Services StenoTran Services Inc. 613-521-0703 80 ELLIOTT/BIRMINGHAM 1 with it and take a different position doesn't transform 2 the fundamental nature of the proceeding. 3 This is not litigation, notwithstanding its 4 trappings. It's a regulatory proceeding in which the 5 Board is carrying out a statutory obligation, if you 6 wish, broadly speaking, a public interest obligation. 7 Carrying out a public interest function. 8 Now, in those circumstances, the traditional 9 rules of privilege simply don't apply. Because if they 10 did apply, the net result would be this Board would not 11 be able to carry out its statutory functions as it is 12 obligated to do. So the notion of a legal privilege 13 attaching to this is simply in my respectful submission 14 not well grounded. 15 There then is the question of whether or not 16 there should be some policy consideration which would 17 attach some form of privilege, the exact parameters of 18 which haven't been defined. And in determining that 19 policy the test is what does the Board need to make a 20 decision in the public interest. That is the test. 21 Now, the information we have asked for, again, 22 to be detailed with respect to 1999 certainly is 23 necessary de minimis to be able to test the assertions 24 that Union is making about the appropriate base. It is 25 necessary for the Board to make a grounded -- properly 26 grounded decision on the base for the PBR plan. The 27 2000 information is necessary for the Board to make a 28 decision if it decides that PBR shouldn't be retroactive Les Services StenoTran Services Inc. 613-521-0703 81 ELLIOTT/BIRMINGHAM 1 to January 1 or if it wants a justification in that 2 retroactive application or if it decides that PBR 3 shouldn't be moved at all. 4 The planning documents it seems to me, and in 5 my respectful submission this is an insidious 6 possibility, is if all documents in which a company 7 decides what is the appropriate PBR plan or whatever, 8 are now closed with this, I say with great respect, 9 bogus claim of privilege because they come before what 10 appears to be an adversarial proceeding, then the Board 11 really can't get any information. The intervenors can't 12 get any information. 13 What we need to be able to do in a sense is to 14 go beyond the appearance of an adversarial proceeding to 15 get the best available information, which is what does 16 the company think it can achieve out of PBR. 17 I am not asking for information about its 18 planning document for the ADR process. To have that 19 information really would defeat the ADR process and I am 20 prepared to accept that there is a legitimate policy 21 consideration in upholding that ADR process. But at the 22 beginning of this, what the company felt it could 23 achieve gives the Board a realistic sense, a realistic 24 understanding of what is achievable and not the 25 information which may be entirely in good faith, 26 artificial because of the constraints of the Fed Reserve 27 proceeding. 28 In my respectful submission there is no Les Services StenoTran Services Inc. 613-521-0703 82 ELLIOTT/BIRMINGHAM 1 privilege, the information with respect to 1999 actuals 2 is essential, the information with respect to 2000 is 3 essential and the information with respect to the 4 planning documents would be useful in assisting the 5 Board. 6 Thank you, Mr. Chairman and Dr. Jackson. 7 THE PRESIDING MEMBER: Thank you, Mr. Warren. 8 --- Pause 9 THE PRESIDING MEMBER: Mr. Warren, I did have 10 one question. You used the word "achieved." 11 MR. WARREN: I beg your pardon, but 12 Mr. Dominy, I didn't hear the word. 13 THE PRESIDING MEMBER: Fine, Mr. Warren. You 14 used the word "achieve", what the company might achieve. 15 I wasn't sure what you meant by that. 16 Did you mean by that with regards to the 17 various parameters as to what that measure might be, or 18 did you mean by that --- 19 MR. WARREN: Well, with respect to --- 20 THE PRESIDING MEMBER: --- what incentives 21 they would have? 22 MR. WARREN: --- with respect to what it might 23 achieve by way of efficiencies, efficiencies in 24 particular. 25 So that we have -- rather than debating in 26 largely academic terms what the appropriate productivity 27 factor would be, if looking at that we would have a more 28 grounded sense of what the appropriate factor is. So Les Services StenoTran Services Inc. 613-521-0703 83 ELLIOTT/BIRMINGHAM 1 that everyone would leave this process confident that we 2 have got the right productivity factor, that there were 3 genuine incentives left to Union and that there was a 4 fair return for the ratepayers. 5 THE PRESIDING MEMBER: I think it is now 6 nearly eleven o'clock. I think we should have a break 7 so that at least Dr. Jackson and I can talk it over. 8 So we will break now and come back at half 9 past eleven. Thank you. 10 --- Upon recessing at 1058 11 --- Upon resuming at 1130 12 THE PRESIDING MEMBER: Mr. Warren, I am going 13 to go back to the start of the discussion and ask 14 whether you were concerned that your original request 15 for information related to the changes in the staffing 16 between 1998 and 1999 in Union and the request for 17 organization charts showing this. Is this correct? 18 MR. WARREN: That is what I had asked for. 19 THE PRESIDING MEMBER: Thank you. 20 The Board has considered the discussion that 21 we listened to before we broke. The Board has been 22 assisted by the comments of the parties. The Board 23 notes that there are three types of information that the 24 parties are interested in pursuing. 25 One, information in order for the Board to 26 assess the reasonableness of 1999 rates as the starting 27 base for Union's proposed PBR plan. 28 Two, current information with respect to 2000, Les Services StenoTran Services Inc. 613-521-0703 84 ELLIOTT/BIRMINGHAM 1 including current plans which may assist the Board, for 2 example, in assessing the appropriateness of the 3 productivity factor and concerning the appropriateness 4 of using the 1999 rates as the basis for the PBR plan. 5 And three, future plans which are speculative 6 in nature and are under discussions within the company. 7 The Board believes that the information in the 8 first two categories would be of assistance to the Board 9 in deciding the application before it. 10 With respect to the third category, the Board 11 recognizes the need for management to be able to discuss 12 these plans without concern that their discussion will 13 become part of the public record. The Board will 14 exercise due caution in acquiring the production of 15 information of this nature. 16 The Board finds the specific information 17 requested by Mr. Warren falls within the first two 18 categories. Therefore, the Board requires Union to 19 provide the requested information. 20 The Board believes the parties should operate 21 within the above guidelines and the Board should deal 22 with specific requests for further information as they 23 arise. 24 MR. PENNY: Thank you, Mr. Dominy. 25 If I could just ask for clarification then, 26 the specific information is the question that you just 27 confirmed Mr. Warren ask, which was the organizational 28 chart showing the change from 1998 to 1999? Les Services StenoTran Services Inc. 613-521-0703 85 ELLIOTT/BIRMINGHAM 1 THE PRESIDING MEMBER: That's right. 2 MR. PENNY: Thank you, sir. 3 THE PRESIDING MEMBER: Are there any questions 4 or comments necessary? 5 --- Pause 6 THE PRESIDING MEMBER: Now, Mr. Warren and 7 Mr. Penny, the Board has a bit of a difficulty. We 8 have -- well, I might as well state it right up front. 9 One of our colleagues will be leaving the Board very 10 shortly -- I think you know him, Dr. Higgin -- and we 11 have an event to mark his passage at this lunch time. 12 So we would be assisted if you would -- if we could just 13 stay for half an hour now and then come back at half 14 past one, if that's all right with the parties? 15 MR. WARREN: That's fine. 16 May I, through you, Mr. Dominy, ask Mr. Penny 17 about the organizational charts that I had asked for 18 which are really -- would be the starting point for a 19 line of cross-examination on changes in the company and 20 so on and so forth? When might that be available? 21 Because if it is available reasonably soon, I will 22 simply defer cross-examination on that topic and move 23 onto something else. 24 THE PRESIDING MEMBER: Mr. Penny. 25 MR. PENNY: Mr. Dominy, I am advised that, and 26 it is my recollection that, most of the information that 27 Mr. Warren was talking about, short of the org. chart, 28 is in the evidence already in Appendix H and the Les Services StenoTran Services Inc. 613-521-0703 86 ELLIOTT/BIRMINGHAM 1 supplemental evidence which gave the 1999 actual 2 information. 3 I am not sure if the org -- if there is in 4 existence today an organizational chart. We will have 5 to check and see, but I don't imagine that in any event 6 it will take too long to actually generate that. But 7 I'm not in a position to say precisely when, whether it 8 would be over the lunch break or not until tomorrow. We 9 will just have to regroup a bit and decide that. 10 THE PRESIDING MEMBER: Mr. Warren, is that 11 helpful? 12 MR. WARREN: What I will do, Mr. Chairman, and 13 Dr. Jackson, I will move on to another area of 14 cross-examination. I will see what is produced, 15 available after noon and then I will play it by ear as I 16 go along. 17 THE PRESIDING MEMBER: The alternative, 18 Mr. Penny, is if it can be done at our lunch break we 19 could break now if Mr. Warren prepared that and then 20 come back at quarter past one instead of half past one. 21 I see a number of nodding heads. 22 MR. PENNY: I'm just not sure that we can do 23 it that quickly, Mr. Dominy. 24 THE PRESIDING MEMBER: Well, shall we leave 25 and come back at quarter past one and --- 26 MR. PENNY: That's fine in any event as far as 27 we are concerned, yes. 28 MS LEA: There is just one administrative Les Services StenoTran Services Inc. 613-521-0703 87 ELLIOTT/BIRMINGHAM 1 matter, then. Could we assign an undertaking number to 2 that undertaking then? G1.1 will be the organizational 3 chart for -- and what were the years, Mr. Warren? 4 MR. WARREN: 1998 to 1999. 5 MS LEA: 1998 to 1999, thank you very much, 6 G1.1. 7 UNDERTAKING NO. G1.1: Mr. Warren to 8 provide organizational chart for the 9 years 1998 and 1999 10 THE PRESIDING MEMBER: So we will be coming 11 back at quarter past one. 12 Thank you. 13 --- Upon recessing at 1315 14 --- Upon resuming at 1423 15 THE PRESIDING MEMBER: Mr. Warren. 16 FURTHER CROSS-EXAMINATION 17 MR. WARREN: Thank you, Mr. Chairman. 18 I gather from Mr. Penny that an organizational 19 chart may be available at the break this afternoon, and 20 so with your permission I will defer questions on that 21 line of questioning until that is available. 22 Panel, I would like to move to issue 2.2.1, 23 which is the PBR base and adjustments thereto. And I 24 would like to start with just a pure informational 25 question if I could, and that is this. 26 The proposal is that the base for PBR be the 27 Board-approved rates in E.B.R.O. 499 subject to, I 28 think, five categories of adjustments. Correct? Les Services StenoTran Services Inc. 613-521-0703 88 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MS ELLIOTT: That is correct, yes. 2 MR. WARREN: And, Ms Elliott or Mr. 3 Birmingham, could you, first of all, just either tell me 4 or point me to where I can find them in the evidence 5 what the actual figures are that you are asking the 6 Board to approve as the base for the rates. For 7 example, the figure for the revenue requirement, the 8 figure for O&M, the assumptions about volumes. I 9 just -- I don't remember where it is in the evidence. 10 If it is there, could you point me to it? If it is not, 11 could you perhaps -- 12 MS ELLIOTT: The summary of the proposed 13 changes is at Schedule 1 of Exhibit "B", Tab 2, and that 14 is the schedule that I amended this morning, copies of 15 which are available now. But that goes through and 16 identifies the value of each of the adjustments that we 17 are proposing. 18 The adjustment that is not on this list is the 19 proposed reduction for regulatory cost savings which is 20 proposed to be effective January 2002. So these are the 21 changes for the year 2000. 22 MR. WARREN: What you have pointed me to is 23 Exhibit "B", Tab 2, Schedule 1 with the correction, and 24 that is the summary of the proposed changes to the 25 rates. Is that right? 26 MS ELLIOTT: Yes. 27 MR. WARREN: What I was looking for was the 28 numbers to which these revenue changes. The actual -- Les Services StenoTran Services Inc. 613-521-0703 89 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 the actual base to which these changes would be applied. 2 Is that somewhere in the evidence and I have missed it, 3 or -- and if it isn't, could you provide it to me, 4 please? 5 MS ELLIOTT: In total the revenue that these 6 changes will be applied to is on line 9 of that 7 schedule. But if you are looking -- so that that 8 revenue is the $783 million. It is the total revenue 9 under existing rates and that is -- the derivation of 10 that is at the bottom of that schedule under Note 4. 11 So the total delivery revenue using rates from 12 499 is 781 million. There are some adjustments to that 13 total delivery revenue to reclassify revenues, the 14 delivery, re-delivery and storage revenue is a transfer 15 from the gas supply charge to the delivery revenue. 16 Those are charges that are under the price cap but are 17 recovered in our gas supply charges or gas supply 18 transportation charges in the north and the east. 19 And then there is a reduction for short-term 20 gas supply which is an amount for gas supply covered in 21 the delivery rates for load balancing. And then there 22 is a reduction for the current delivery commitment 23 credit that is also recovered in the delivery rates, 24 which is not under the price cap and in fact to be 25 eliminated in this proposal. And that is the $27 26 million reduction. 27 So the rates will apply to the $783.8 million. 28 MR. BRETT: Excuse me. Could I just -- did I Les Services StenoTran Services Inc. 613-521-0703 90 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 hear you say 787 million as the starting point or 781. 2 I thought I heard you say 781 but I see written here 3 787. 4 MS ELLIOTT: It is 787. 5 MR. BRETT: Thanks. 6 MR. WARREN: And do you know, Ms Elliott, or 7 can you find out for me in that figure what is the 8 number for O&M? 9 MS ELLIOTT: To tie that number back to our 10 Board-approved revenue requirement for 1999, I would go 11 to the schedule provided in Exhibit "B2" or sorry, "B", 12 Tab 2, Appendix "H", Schedule 2. 13 MR. WARREN: Is that the supplemental 14 evidence? 15 MS ELLIOTT: Yes, it was filed as supplemental 16 evidence. 17 MR. WARREN: Just give me a moment to turn 18 that up. So "B", Tab 2. 19 MS ELLIOTT: Appendix "H". 20 MR. WARREN: Yes. 21 MS ELLIOTT: Schedule 2 at line 8 under column 22 B, the Board approved O&M was $258 million, and that is 23 recovered in our delivery revenues. So it is included 24 in the $787 million. 25 MR. WARREN: Now, you are proposing a number 26 of adjustments to those first -- I'm sorry. 27 Historically, those Board approved numbers, if we just 28 get the chronology correctly, they would have been based Les Services StenoTran Services Inc. 613-521-0703 91 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 on forecasts that would have been developed when, Ms 2 Elliott? 3 MS ELLIOTT: To be effective January 1, 1999, 4 the filing would have been prepared and filed in early 5 1998. So starting in the fall, late in 1997 but updated 6 in around March or April of 1998, those numbers would 7 have been prepared and filed. There was probably an 8 update to those numbers in the June/July time frame of 9 1998. So they are at this point coming up to about two 10 years old. 11 MR. WARREN: And because my middle-aged memory 12 doesn't go back that far, we are talking about -- the 13 mix of numbers that we would have had in let's say as 14 late as June of 1998 would have been a mix of forecast 15 and actuals at that point. Is that right? 16 MS ELLIOTT: For 1999, that would have been 17 all forecast information. 18 MR. WARREN: All forecast information. And 19 the proposal is that those -- the proposal is that those 20 two year old numbers would form the base for a PBR 21 scheme that is to last until the end of 2004. Is that 22 right? 23 MS ELLIOTT: The proposal is that the current 24 approved rates, which are based on the 1999 forecast 25 would form the base for the rates going forward and then 26 subject to the price cap methodology, those rates would 27 be increased -- 28 MR. WARREN: Right. Les Services StenoTran Services Inc. 613-521-0703 92 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MS ELLIOTT: -- during the term. 2 MR. WARREN: But have I connected the dots 3 correctly that the proposal is that the Board-approved 4 499 rates, which as of this date are, you said, about 5 two years old, would form the basis for a PBR regime 6 that would extend to the end of 2004. Correct? 7 MS ELLIOTT: Yes. They are the base rates for 8 the proposal. 9 MR. WARREN: Okay. Now, I want to deal first 10 with the proposed adjustments to the base rates, the 11 ones that you are proposing and the first one is 12 unaccounted for gas. And do I understand the proposal 13 correctly that you are proposing to recover an 14 accumulated deficiency of costs associated with 15 unaccounted for gas? 16 MS ELLIOTT: Under the existing methodology, 17 the unaccounted for gas in each rate case is forecast 18 based on the most recent three years worth of actual 19 information. That forms the basis for the next year. 20 Under the existing methodology that 21 accumulation would be recovered, but it would be, for 22 example, the 1998 unaccounted for gas would be recovered 23 in 2000, 2001 and 2002. What I am proposing here is 24 that recovery be changed so that it is recovered over 25 the next five years on a levelized basis. In addition 26 to that there is a proposal to change the way the 27 unaccounted for gas is passed through in existing rates, 28 which will attempt to catch up and project more Les Services StenoTran Services Inc. 613-521-0703 93 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 accurately the unaccounted for gas going forward into 2 the next year. 3 MR. WARREN: My understanding of the evidence, 4 and I am sure you will correct me if I am wrong, is that 5 the formula which had been used for the last several 6 years resulted in your not capturing every year all of 7 the unaccounted for gas. Is that a fair summary of it? 8 MS ELLIOTT: The formula that is being used 9 really lags the recovery several years, yes. 10 MR. WARREN: And that what you are proposing 11 is to go back three years and recover the deficiency 12 created by the operation of that formula. Is that fair? 13 MS ELLIOTT: Yes, although the existing 14 methodology would recover that amount over time and by 15 the end of 2002, 1998 unaccounted for gas would be fully 16 recovered. But what we wouldn't have recovered is 17 1999s, 2000 and 2001 or 2002 at that point. 18 MR. WARREN: The deficiency in dollar amounts 19 that you propose to recover is some $22 million. Is 20 that right? 21 MS ELLIOTT: That is right. 22 MR. WARREN: And the method by which you 23 propose to recover that is what? An adjustment to the 24 base rates of what amount? 25 MS ELLIOTT: Four million dollars. 26 MR. WARREN: And during the -- how long has 27 Union been aware that the formula as it was then 28 operating was creating this deficiency? Les Services StenoTran Services Inc. 613-521-0703 94 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MS ELLIOTT: I'm not sure because I have only 2 recently taken on the responsibility for looking at 3 that. 4 MR. WARREN: Certainly, if memory serves me 5 correctly, this would be the first time that you have 6 raised a concern, this would be the first case in which 7 you have raised a concern about the problem with the 8 operation of the formula. Is that right? 9 MS ELLIOTT: That is right, yes. 10 MR. WARREN: And would I be mischaracterizing 11 the problem if I said that this was an issue of an 12 incorrect forecast of unforecasted gas -- sorry -- of 13 unaccounted for gas by Union? 14 MS ELLIOTT: We don't actually forecast 15 unaccounted for gas. The approved approach to 16 recovering unaccounted for gas is to use the prior 17 year's actuals on a weighted average basis. Because 18 unaccounted for gas tends to vary around an average, 19 the formula really reflects the actual experience, sets 20 that up as a proxy for what the unaccounted for gas may 21 be experienced in the year. It is not, as we have come 22 to determine, a very reasonable proxy for the 23 unaccounted for gas in the period. 24 MR. WARREN: You say it is not a reasonable 25 proxy? 26 MS ELLIOTT: It is leaving us with a shortfall 27 each and every year, which is accumulating, yes. 28 MR. WARREN: And you can't answer -- can you Les Services StenoTran Services Inc. 613-521-0703 95 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 undertake to determine for me when -- how long it is you 2 have known that this was not an adequate proxy? Is this 3 a recent discovery on your part or -- 4 MS ELLIOTT: This is something that I have 5 recently looked at, yes, and determined that it isn't a 6 reasonable proxy. If you are asking whether my 7 predecessor knew -- 8 MR. WARREN: Right. 9 MS ELLIOTT: -- whether it was not a 10 reasonable proxy, I can't tell you that. I don't know. 11 MR. WARREN: Will you undertake to find that 12 out frankly? 13 MS ELLIOTT: He is actually no longer with the 14 company. 15 MR. WARREN: Then I take it we can't find the 16 information. Is that right? There is no one within 17 Union who would know how long Union -- Union's 18 collective memory of how long this would have been a 19 problem? 20 MS ELLIOTT: I'm not aware of anyone who has 21 put forward a proposal in the past to have this 22 reviewed. This is a result of a review that we 23 undertook in 1998-99 to determine what was in fact 24 happening with our unaccounted for gas. The proposal 25 here is a response to that. 26 MR. WARREN: Now, under the PBR regime the 27 proposal is that a risk of any kind is a miscalculating 28 of unaccounted for gas. It would be a management Les Services StenoTran Services Inc. 613-521-0703 96 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 responsibility. You are going to manage that risk, is 2 that right? 3 MS ELLIOTT: Under the PBR regime we have 4 actually proposed to maintain the existing formula, but 5 we have modified it slightly in our proposal so that it 6 more accurately reflects the current experience with 7 unaccounted for gas. 8 So we are going to -- we are proposing to 9 maintain the current formula which uses the previous 10 three years actuals on a weighted average basis. But 11 instead of using them on an absolute basis it looks at 12 the ratio of unaccounted for gas, the throughput volume, 13 and projects that number into the next year. 14 MR. WARREN: You believe that you got a better 15 proxy, right? 16 MS ELLIOTT: Yes. 17 MR. WARREN: Using the ratio method. But if 18 you are wrong that it isn't a better proxy and you have 19 this, a deficiency in unaccounted for gas, do I have it 20 incorrectly that this is a problem that you will manage, 21 a risk you will manage under the PBR regime? 22 MS ELLIOTT: We will continue to use the 23 existing methodology. So I guess, to the extent that if 24 my projection for 2000, which is the weighted average of 25 1998, 1997 and 1996, miscalculates the actual experience 26 for 2000, my actual experience for 2000 will get built 27 into rates in 2002 through 2004. 28 MR. WARREN: What is the mechanism by which Les Services StenoTran Services Inc. 613-521-0703 97 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 you will get built into rates? 2 MS ELLIOTT: As part of the pass-through 3 adjustments. It would be reviewed in the customer 4 review process for reasonableness on an annual basis and 5 then the formula would be updated to include the most 6 recent year's actuals and they would be recovered that 7 way. 8 So management is at risk subject to the 9 customer review process determining that it wasn't a 10 reasonable amount of unaccounted for gas during the 11 year. If we have a dispute over that and the Board 12 hears a case and determines that it wasn't a reasonable 13 amount, then management is at risk for variances that 14 are viewed to be unreasonable. 15 MR. WARREN: Now, my last question in this 16 area of the unaccounted for gas is, I suppose, a generic 17 question with respect to this. Arising out of this 18 category is that you are proposing to recover, with 19 respect to this item, for an item where you have under 20 recovered in rates. Is that right? 21 MS ELLIOTT: That's right, yes. 22 MR. WARREN: Now, you are proposing an 23 adjustment for that. Would it not be reasonable for you 24 to propose an adjustment for all categories whether you 25 had under recorded or over recorded -- sorry -- 26 recovered? 27 MS ELLIOTT: The under recovery in this case 28 is not a result of poor forecasting or poor management. Les Services StenoTran Services Inc. 613-521-0703 98 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 It is a result of the formula that is used to place the 2 unaccounted for gas value in rates. So we have, in 3 looking at that formula, revised it and indicated that 4 it has created a shortfall in the past. 5 The proposal here is to spread that shortfall 6 now over a longer period of time so that I don't 7 actually recover that unaccounted for gas which I have 8 already recorded until 2004, or at least not completely 9 recovered, and then catch up with the formula in the 10 current year's rates and next year's rates by making the 11 amendment to include the throughput into the calculation 12 and do it on a ratio basis. 13 MR. WARREN: Let me see if I understand the 14 answer. 15 Are you telling me that the reason that you 16 wouldn't have an adjustment for the categories, or the 17 reason that you haven't an adjustment in this case, is 18 that it is the operation of a formula without any 19 measure of management judgment in it? Is that why it 20 forms a separate category as opposed to other categories 21 where you might, for example, over recover it? 22 MS ELLIOTT: That's correct, yes. In this 23 case there is no management judgment involved in 24 determining how much is recovered. It is a 25 pre-determined formula. 26 MR. WARREN: Let me move to the second 27 category then, "Changes in Accounting for Pension and 28 Other Post Employment Benefits." That is the category Les Services StenoTran Services Inc. 613-521-0703 99 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 where you gave us a revised figure of $6.8 million which 2 is to be added to the base. Is that right? 3 MS ELLIOTT: That's right, yes. 4 MR. WARREN: And this is a proposal to adjust 5 base rates to recover for the impact of change in 6 generally accepted accounting principles of vocation and 7 other post-employment benefits. Is that right? 8 MS ELLIOTT: That's right. 9 MR. WARREN: Is Union bound to follow changes 10 in GAP? Is there some requirement that they do so? 11 MS ELLIOTT: Yes, as part of the financial 12 reporting requirements we are in fact bound to report 13 our financial results according to generally accepted 14 accounting principles. 15 MR. WARREN: All right. I want to get to how 16 the numbers are derived, and in that context, could you 17 turn up the supplemental evidence, Exhibit B, Tab 2 at 18 page 2? 19 MS ELLIOTT: I have that. 20 MR. WARREN: The sentence right at the top of 21 the page says: 22 "The following table shows the updated 23 expenses for pension and post-employment 24 benefits as calculated by the company's 25 external actuaries, based on the current 26 levels of employment." 27 Can you tell me what were the current levels 28 of employment that went into those calculations? Les Services StenoTran Services Inc. 613-521-0703 100 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MS ELLIOTT: Those are the roles following the 2 re-organization. So I think the number is 2,499 roles. 3 MR. WARREN: Sorry, 2,449 roles. 4 MS ELLIOTT: I think it is 99. 5 MR. WARREN: 2,499 roles and that post 6 re-organization? 7 MS ELLIOTT: Yes, that's correct. 8 MR. WARREN: Is that number, 2,499, somewhere 9 in the evidence? 10 MS ELLIOTT: Yes, it is, in response to 11 interrogatory -- it is Exhibit C3.25. 12 MR. WARREN: That is a CAC Interrogatory 13 No. 25? 14 MS ELLIOTT: Yes. It also, I think, was in 15 C3.93. 16 MR. WARREN: Okay. I'm just -- sorry -- if 17 you could just bear with me a moment, Panel, until I 18 turn up my own interrogatory response. As is always it 19 has gone missing -- sorry -- C3.25. 20 MS ELLIOTT: C3.25 is a schedule by the 21 administrator of the roles in 1997. It shows a 22 reduction in that total number of roles for 1998's 23 activities and then it shows the reduction in roles 24 through 1999 and totals the roles at the end of 1999. 25 MR. WARREN: Now, can you tell me, Ms Elliott, 26 whether or not as we sit here today in mid-June whether 27 or not 2,499 would reflect the current number of 28 employees in Union? Les Services StenoTran Services Inc. 613-521-0703 101 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MS ELLIOTT: Yes, it does. 2 MR. WARREN: Is there a projection that will 3 be a continuing number of employees or is there a plan 4 to reduce that number of employees? 5 MS ELLIOTT: I have not seen a projection that 6 shows that number of employees changing. 7 MR. WARREN: I want to be fair so I need to be 8 precise in my question. You haven't seen a projection. 9 Is the company plan to reduce that number of employees 10 and if so, by how many? 11 MS ELLIOTT: That 2,499 is the current number 12 of employees. That is the current number of positions 13 that we are working with. Whether it is projected into 14 the future with respect to roles and dollars is the 15 subject of and part of our business review, but this is 16 the number at this point and during 2000. Those are the 17 current number of roles. 18 MR. WARREN: The question that I want to get 19 to is whether or not this number, that 6,800, whether or 20 not there will be an adjustment to that number as the 21 number of -- if the number of employees drops? 22 MS ELLIOTT: No, our proposal would be that 23 this is the adjustment that is effective as a result of 24 the change in generally accepted accounting principals 25 to the extent that the number of employees increases or 26 decreases during the term, there will be no further 27 adjustment. That is within -- with the control of 28 management. It is the initial change, the subject of Les Services StenoTran Services Inc. 613-521-0703 102 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 the change in accounting principals that is outside 2 management's control. The new definitions that require 3 us now to report as an expense, largely the non-pension 4 benefits is what is driving this adjustment. 5 MR. WARREN: I understand that and I am trying 6 to look as we go forward and see if I have got it 7 correctly. 8 We are, as a result of the change in gap, 9 Union is proposing to increase the base going in by 10 $6.8 million. That $6.8 million is based on the number 11 of employees, calculated on the number of employees as 12 of December 31st 1999. Under the operation of the PBR 13 formula, the $6.8 million together with all other items 14 will be increased annually by 1.9 per cent. Correct? 15 MS ELLIOTT: Under the PBR formula the rates 16 that we will be recovering from customers would be 17 increased by 1.9 per cent. That doesn't specifically 18 address what the costs are doing. And to the extent 19 that this cost becomes part of what Union is incurring 20 to manage its business, it will vary as the number of 21 employees varies, just like salary and wages. 22 MR. WARREN: But at a simplistic level, if the 23 $6.8 million is calculated on 2,499 employees, would 24 there not be going forward a lower number that would 25 reflect declining numbers of employees, assuming they 26 decline? 27 MS ELLIOTT: That would be how Union manages 28 its business going forward. If the number of employees Les Services StenoTran Services Inc. 613-521-0703 103 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 decline and the costs, salary and wages, associated 2 expenses with those employees decline, those savings 3 will be going to offset some of the risks that Union is 4 managing during the term. 5 MR. WARREN: I understand your answer. 6 Finally, just in this area, could you turn up Exhibit 7 "B2" -- sorry -- B, Tab 2, Schedule 3. That is the 8 original evidence. 9 Now, this schedule indicates that the numbers, 10 the estimates are currently being reviewed by Towers 11 Perrin. Is that ongoing? 12 MS ELLIOTT: This was the original evidence. 13 The review from Towers Perrin produced the supplemental 14 evidence. 15 MR. WARREN: There is nothing yet more to come 16 from Towers Perrin? 17 MS ELLIOTT: No. 18 MR. WARREN: Okay. The deferred tax 19 amortization, you are proposing a reduction in the base 20 rates of approximately $10.6 million; is that correct? 21 MS ELLIOTT: It is $10.3 million. 22 MR. WARREN: For $10.3 million, yes. 23 Now, if -- can you tell me if you know, 24 Ms Elliott, what that figure would be if 1999 actuals 25 were used? It would be different? 26 MS ELLIOTT: In 1999 -- 27 MR. WARREN: Sorry. If the base were going 28 into PBR. Les Services StenoTran Services Inc. 613-521-0703 104 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MS ELLIOTT: Sorry. If we updated our rates 2 to the 1999 actuals? 3 MR. WARREN: Do I understand that the $10.3 4 does that reflect the Board-approved numbers in some 5 way? 6 MS ELLIOTT: It is the levelization of the 7 sort of commitments given in, I guess, 499. Each year 8 at that time when we changed the flow-through taxes, we 9 indicated this time series over which our current 10 accumulated deferred tax balance would be drawn down 11 absent a levelization each and every year that amount 12 would be adjusted. And rather than passing that through 13 each year, we proposed to take the next five years and 14 average it so that it was the same amount for each year. 15 It has no connection to the 1999 actuals. The 16 actual draw down for 1999 was the amount that was 17 included in the revenue requirement in the approved 18 rates. 19 MR. WARREN: Okay. With apologies, I have to 20 go back to the previous topic which was the pension and 21 post-employment benefits and the impact of the gap 22 change. And in that context, could you turn up 23 Exhibit "B", Tab 2, Page 2 again. 24 MS ELLIOTT: I have that. 25 MR. WARREN: For purposes of calculating the 26 6.8 you are proposing to use a 1999 actual number? 27 MR. PENNY: Mr. Warren, you are back in the 28 supplemental evidence, am I correct? Les Services StenoTran Services Inc. 613-521-0703 105 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MR. WARREN: I apologize. Yes, I am. I'm 2 sorry. Exhibit "B", 2, supplemental page 2. Sorry 3 about that. 4 MS ELLIOTT: The difficulty we have with 5 determining what the specific components of the 1999 6 Board-approved O&M is if you look at Exhibit "B", Tab 2, 7 Appendix H, Schedule 4. 8 MR. WARREN: This is the supplemental 9 evidence? 10 MS ELLIOTT: This is the supplemental evidence 11 on the 1999 actuals. Schedule 4 is a detailed listing 12 of the Board-approved O&Ms. 13 MR. WARREN: You are ahead of me. Okay. 14 MS ELLIOTT: In arriving at the Board-approved 15 O&M of $258 million there was an agreement that reduced 16 the level of costs submitted by $4.9 million and there 17 were further adjustments for EBO 177-17. In managing 18 those adjustments one of the ways that we did that was 19 use the flexibility that we had in the existing pension 20 accounting. 21 The fact that the assumptions that went into 22 it and the interest rates that went into it were not 23 determined by generally accepted accounting principals 24 really allowed us to modify those assumptions to reduce 25 the pension expense in the 1999 O&M. Between the 26 submission and the actual that is what is reflected 27 there and we are proposing to use the actual as the base 28 as a proxy for what the approved number was. Les Services StenoTran Services Inc. 613-521-0703 106 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MR. WARREN: I am sorry. I don't understand 2 why you wouldn't use the Board-approved number? 3 MS ELLIOTT: There isn't a Board-approved 4 number for the pension expense. There is a 5 Board-approved number for the total O&M. I don't know 6 specifically what the components are. 7 MR. WARREN: Y2K costs, the fourth category of 8 adjustment and those costs are at $7.6 million. Have I 9 got that correctly? 10 MS ELLIOTT: That is the approved recovery. 11 So in rates approved in 1999 was recovery of $7.6 12 million. That amount is going to offset the costs that 13 are being recorded in the deferral accounts. So to the 14 extent that we incur more costs the deferral account 15 will have a debit balance in it to be recovered from the 16 customers. 17 Exhibit "C1", 179 shows the costs for the Y2K 18 remediation and matches those costs up against the 19 recovery and the recovery is really in three parts. 20 There is an approved recovery in 1998, which is $3.2 21 million. The approved recovery in 1999, which was 7.6. 22 Leaving existing rates in place through 2000 would 23 recover another 7.6. 24 MR. WARREN: The proposal here though is to 25 add that $7.6 million to the base. 26 MS ELLIOTT: Yes. In fact, that is something 27 that I probably should have indicated earlier as an 28 adjustment to the base. It wasn't intended to be Les Services StenoTran Services Inc. 613-521-0703 107 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 inflated. The recovery of the $7.6 million is really 2 much like a rider on the rates, not part of the base 3 rates. That should have been an adjustment on 4 Schedule 1. 5 MR. WARREN: So can you just take me back to 6 the schedule. I am -- 7 MS ELLIOTT: Yes. If we go back to Schedule 8 1, which is Exhibit B, Tab 2, Schedule 1, in Note 4 9 there should be a further reduction for $7.6 million 10 that is recovered in the delivery revenue. It shouldn't 11 be in the base. 12 MR. WARREN: So if the base going forward is 13 now some 7.6 -- is that right, or 7.9? 14 MS ELLIOTT: 7.6 or $7.6 million less than. 15 It is shown on the schedule. 16 MR. WARREN: Now, the final item of your 17 proposed adjustments is in a category of regulatory 18 costs. Perhaps in this context if you turn up your 19 original pre-filed evidence, Exhibit B, Tab 2, pages 21 20 and following? 21 MS ELLIOTT: I have that. 22 MR. WARREN: I just want to work through the 23 elements of this and how we get to the proposal which is 24 to reduce the base by $800,000 effective January 1 of 25 2002. Is that right? 26 MS ELLIOTT: That's right. 27 MR. WARREN: Now, the reason for the lag, that 28 is not adjusting the base today but doing it in effect Les Services StenoTran Services Inc. 613-521-0703 108 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 in the third year of the PBR, is what? 2 MS ELLIOTT: It is really to give recognition 3 to the costs of this proceeding to the extent that the 4 current rates in place today will recover the cost of 5 the 1999 rate hearings in 1999 and 2000. The cost of 6 this proceeding would be recovered in 2000 and 2001 and 7 then the costs could be removed from rates in 2002. 8 MR. WARREN: Now, the way you have got to the 9 $800,000 is set out, as I understand it, on page 22 of 10 Exhibit B, Tab 2. Is that right? 11 MS ELLIOTT: That's right. 12 MR. WARREN: Now, for purposes of your 13 analysis, there are three components to the regulatory 14 costs. There are union costs, the intervenor costs and 15 the Board costs. Is that right? 16 MS ELLIOTT: Yes. 17 MR. WARREN: In coming to the $800,000 you are 18 treating the Board costs as a constant. Is that right? 19 MS ELLIOTT: Yes. We are assuming that we 20 will continue to pay the Board's costs under PBR. 21 MR. WARREN: Is the assumption that you were 22 paying the Board costs in an amount which is reflected 23 in the third column? Are those costs likely to decline? 24 MS ELLIOTT: No, but the assumption is that 25 the current rates don't need to be adjusted for that, or 26 won't be adjusted for any forecast increase or decrease 27 in those costs. They will be costs that once again we 28 will manage under the term of the agreement. Les Services StenoTran Services Inc. 613-521-0703 109 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MR. WARREN: Now, the Union component of the 2 costs consists or is comprised how? How do you get to 3 those costs? 4 MS ELLIOTT: Those are the direct costs 5 associated with the rate hearings. 6 MR. WARREN: Does it include the costs of the 7 employees in the regulatory department at Union? 8 MS ELLIOTT: It doesn't include the salaries 9 and wages of the regulatory department. It includes 10 out-of-pocket expenses and legal costs, travel expenses 11 incurred. 12 MR. WARREN: The costs of these high end 13 hotels that you stay in come under costs? That is just 14 a joke. There is some people laughing. 15 MS ELLIOTT: The costs of living in Toronto 16 while we are at the hearing. 17 MR. WARREN: There are how many employees in 18 the regulatory department at Union? 19 Birmingham, that's your old bailiwick. Do you 20 know? 21 --- Pause 22 MR. BIRMINGHAM: If we look back to that 23 misplaced Interrogatory Response C3.25, Mr. Warren, on 24 page 2 we had 31 employees in the regulatory group, but 25 that includes staff that intervened in upstream 26 transportation hearings such as TransCanada toll 27 hearings. It includes employees that conduct the 28 hearings with respect to our facilities, at least to Les Services StenoTran Services Inc. 613-521-0703 110 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 construct applications. 2 So it would be within that group, that is the 3 rates proceedings group, and they take care of the rates 4 proceedings, the gas cost proceedings, any generic 5 hearings. I don't know the specific number within that. 6 That would be just the rates group. 7 MR. WARREN: Can I find in here, 8 Mr. Birmingham -- Ms Elliott, I am sure you can find it 9 if it exists, find it faster than I can -- what the 10 salaries and benefits would be for the total regulatory 11 group, for 31? 12 Would it be in that Appendix H? 13 --- Pause 14 MR. WARREN: I'm looking at Exhibit B, Tab 2. 15 This is the supplemental of Appendix H, Schedule 4. I 16 see under regulatory the Board-approved number for 1999 17 is approximately $7.5 million. Is that right? 18 MS ELLIOTT: That's right. 19 MR. WARREN: Is that the 31 folks? 20 MS ELLIOTT: That's the 31 who staff the OEB's 21 costs, the intervenor costs and basically the 22 amortization for the rate hearing. 23 MR. WARREN: So if I were to ask the question, 24 "What do the 31 folks cost", do you know that number or 25 can you get it for me? 26 MS ELLIOTT: I don't know it off hand. It can 27 be obtained. 28 MR. WARREN: Okay. Can I get an undertaking Les Services StenoTran Services Inc. 613-521-0703 111 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 to obtain that number? 2 MR. BIRMINGHAM: Just to be clear, Mr. Warren, 3 because I want to be responsive here, that, as they say, 4 includes the staff for the upstream regulation staff, 5 for the facilities leave to construct staff. I presume 6 what you are looking for is the salaries cost for the 7 rates staff. Is that right? 8 MR. WARREN: I am going to get that, 9 Mr. Birmingham. I want the total costs first and then I 10 was going to get to the costs of the rate staff, the 11 costs associated with rate applications to this Board as 12 a separate item. 13 So could I get an undertaking for both of 14 those? 15 THE PRESIDING MEMBER: It is number 2, isn't 16 it? 17 MR. WIGHTMAN: Yes, G1.2. 18 UNDERTAKING NO. G1.2: Mr. Birmingham to 19 provide two undertakings, one indicating 20 the total costs for the rates staff, the 21 second indicating Costs Associated with 22 Rate Applications to the Board 23 MR. WARREN: Now, I'm assuming in this 24 discussion, panel, that the current consists of the 25 regulatory department is still 31. Is that right? 26 --- Pause 27 MS ELLIOTT: The 31 people that were 28 previously in the regulatory department reporting to Les Services StenoTran Services Inc. 613-521-0703 112 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 Mr. Birmingham have -- a number of them have been 2 transferred or reassigned. Within the re-organization 3 there was movement of those people. 4 The upstream regulation staff would now be in 5 the group responsible for the gas supply purchases and 6 the upstream costs. So those people have been 7 transferred into other areas of the organization under 8 the re-organization. 9 MR. WARREN: They are still carrying out the 10 same function, though? 11 MS ELLIOTT: They are still carrying out the 12 same function. 13 MR. WARREN: Now, let's focus, if we can, on 14 the number of people who are responsible for these rate 15 applications. Can you tell me approximately how many 16 that would be, Mr. Birmingham? 17 --- Pause 18 MR. BIRMINGHAM: You will be able to see those 19 a little more clearly when we provide the organization 20 charts, Mr. Warren, but roughly I think it is about six 21 people. 22 MR. WARREN: Six people? 23 MR. BIRMINGHAM: Six people. 24 MR. WARREN: Now, would I be unreasonable in 25 assuming that if the Board were to approve a PBR, the 26 PBR proposal which is before it, that the number of 27 staff required for these rate hearings are fewer? 28 Is that one of the savings we are all going to Les Services StenoTran Services Inc. 613-521-0703 113 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 achieve as a result of PBR, Ms Elliott? 2 MS ELLIOTT: I mean, clearly, our expectation 3 is that one of the savings we will achieve through PBR 4 is fewer regulatory costs. 5 The difficulty I am having, I guess, is in Mr. 6 Birmingham's response of six people, if some of those 7 same people are involved in the facilities application. 8 I am not sure they will, in fact -- those rules will be 9 reduced. 10 And in conjunction with the customer review 11 process, if it operates under a streamlined review 12 process, then there will not be as much regulatory 13 involvement as there is in a rate case. But a lot of 14 that is yet to be determined, in terms of how well the 15 customer review process will operate as to how efficient 16 the regulatory department and how streamlined they can 17 become. 18 MR. WARREN: Is it not fair, when we are 19 calculating the savings, the adjustment to the base, the 20 $800 thousand, should we not factor in -- include in it 21 the savings from fewer bodies that will be required to 22 drive this kind of process; is that not reasonable, 23 Ms Elliott? 24 MS ELLIOTT: Well, as Mr. Birmingham indicated 25 earlier, there are two places where the adjustments for 26 the efficient -- the increased efficiency in the 27 regulatory process can take place. 28 One of them is in the productivity factor Les Services StenoTran Services Inc. 613-521-0703 114 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 within the formula, and the other is a specific 2 recognition through the rate reduction. We, in fact, I 3 guess, have both. 4 We have specific reduction to recognize that 5 certainly the direct expenses associated with the rate 6 cases, we would expect to see declines. So the hotel 7 costs, travel costs, intervenor costs, we will expect to 8 see those decline. 9 The direct salaries and wages of the 10 regulatory department, really form the basis of ongoing 11 costs within the organization and will be managed under 12 the general productivity offset. 13 MR. WARREN: Now, another category of costs -- 14 correct me if I am wrong on the assumption -- would be 15 the costs associated with folks like yourself and Mr. 16 Birmingham having to come up to hearings and listen to 17 boring people like me. They have psychic costs of that, 18 but let us just deal with the financial costs of having 19 to -- in other words, am I incorrect in assuming that 20 you have got the direct costs of the 31 employees or the 21 subset of six employees who are responsible for this 22 hearing process, the rate application process, plus you 23 have got indirect costs in the form of the expenses for 24 coming to Toronto, but you also have other employees 25 within the company who are generating information, data, 26 exhibits, so on and so forth for these rate proceedings, 27 is that not fair? 28 MS ELLIOTT: Certainly part of my role as the Les Services StenoTran Services Inc. 613-521-0703 115 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 comptroller involves being involved in the regulatory 2 proceeding. 3 Absent that work, there are a number of other 4 things that my role is also involved in; so I am not 5 sure that I would see my costs specifically being 6 reduced as a result of the PBR process, nor would I see 7 any of my staff costs being reduced. The management 8 information requirements and the reporting requirements 9 for management continue to have to be met with those 10 staff. 11 MR. WARREN: But it is not the same 12 information kept in the same way, or at the same level 13 of detail; is that not fair? 14 MS ELLIOTT: There is certainly a difference 15 between the information that is provided and prepared 16 for the regulatory proceeding, and that which we do on 17 an ongoing basis for management. 18 And, again, to the extent of not having 19 regular rate cases generates efficiencies and 20 streamlines the operation and results in reduction in 21 staff, that will be part of the general productivity, 22 and the productivity the union would expect to get to 23 manage the risks that it is also managing. 24 MR. WARREN: Dr. Bauer -- and I don't think 25 you need to turn up his evidence on this point -- I will 26 see if I can summarize it briefly. 27 Dr. Bauer's position is that this is not a 28 productivity saving, but this is an up-front saving that Les Services StenoTran Services Inc. 613-521-0703 116 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 derives from the adoption of a new regulatory model; I 2 take it you disagree with that? 3 MS ELLIOTT: With respect to the indirect 4 salaries and wages of existing employees, yes. We 5 recognize there is a direct savings associated with the 6 direct costs of the regulatory proceedings. 7 MR. WARREN: Now, with respect to intervenor 8 costs, your calculation is, as I understand it, that 9 there will be 60 per cent of the -- I have the glass 10 half full or the glass half empty on this number, Ms 11 Elliott, I am sorry. You have taken the intervenor 12 costs and you are saying there will be a saving, a 13 reduction of about 60 per cent of those intervenor 14 costs, is that right? 15 MS ELLIOTT: Yes. The $800 thousand is 60 per 16 cent of the 1.4 million that is currently recovered. 17 MR. WARREN: Now, those intervenor costs are 18 principally, if not entirely, a result of these rate 19 hearings, is that not right? 20 MS ELLIOTT: Under the existing cost of 21 service approach, yes. But we expect that during the 22 PBR term we will be conducting the customer review 23 process and continue to fund the intervenors through 24 that process. 25 MR. WARREN: I have one final question in this 26 area and that is with respect to the Board's costs. I 27 preface this question by saying that I am operating at 28 an intuitive level only. Les Services StenoTran Services Inc. 613-521-0703 117 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 I am sure Mr. Penny would say that is where I 2 am most comfortable most of the time. But we will leave 3 that aside. 4 Is it not fair to assume that the Board's 5 costs will be spread out more broadly now that there is 6 a regulatory regime in place for the two hydro 7 derivative companies and all of those varying sized 8 municipal electric utilities? 9 In other words, is it not fair to assume that 10 the OEB portion of the costs, the proportion that you 11 pay will be reduced? Do you have an estimate? 12 MR. PENNY: Which question do you want an 13 answer to? 14 MR. WARREN: Mr. Penny is quite right, I asked 15 two questions? Naughty me. 16 The first question is: is it not fair to 17 assume that your proportion of the OEB costs will 18 decline? 19 MS ELLIOTT: You are, I guess, in suggesting 20 that, assuming that the OEB costs remain fixed and are 21 spread over a broader base. I don't know that is the 22 case. I don't have any estimate of what the Board's 23 fixed costs might be in the future and I don't know over 24 who they are going to spread those costs. 25 All we have right now is our current levels. 26 MR. WARREN: Thank you, panel. 27 Could I then turn to the 1999 actuals. 28 Perhaps, Mr. Chairman, I could ask at this point -- and Les Services StenoTran Services Inc. 613-521-0703 118 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 this would be a useful point -- beginning on the 1999 2 actuals to have that organization chart and the 3 questions that derive from it. 4 I am wondering -- though it is a little early 5 in the process -- if I could ask that we might see if it 6 is available and perhaps take a break to take a look at 7 it. 8 THE PRESIDING MEMBER: If people are happy to 9 have their afternoon break early, I am agreeable to 10 that. We can come back at twenty five to three. 11 Mr. Penny -- I suppose I should ask if he is 12 ready? 13 Dr. Jackson suggests I should ask him. 14 MR. PENNY: I mean, we will do what the Board 15 wishes. 16 We have been going less than an hour, is my 17 only -- 18 THE PRESIDING MEMBER: Is the organization 19 chart ready? 20 MR. PENNY: It has not been brought in. 21 Mr. Reghelini can go and find out. 22 THE PRESIDING MEMBER: You find out, 23 Mr. Reghelini. 24 Mr. Warren, is there something we can continue 25 with or do we have to await the chart? 26 MR. PENNY: Mr. Chairman, Mr. Reghelini quite 27 correctly points out to me we will want to take a final 28 review of it to make sure it is right before we pass it Les Services StenoTran Services Inc. 613-521-0703 119 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 out. 2 So I think it is appropriate to do that at the 3 break rather than just bring it in. We can either 4 continue until the regular time for the break and then 5 check, or we can take the break now. I am in your 6 hands. 7 THE PRESIDING MEMBER: Mr. Warren? 8 MR. WARREN: Let me try and see if I can make 9 some progress, Mr. Chairman. 10 We apologize in advance, because there is 11 bound to be more than usual amounts of stumbling around 12 on my part as we get that information and try and 13 integrate it. 14 Now, the proposal, as I understand it, panel, 15 as it has been articulated, is that the PBR plan, which 16 you have before the Board, would take effect as of 17 January 1, 2000; is that right? 18 MS ELLIOTT: That is right. 19 MR. WARREN: And perhaps you can help me, 20 panel, if you could just explain what the rationale is 21 for the retroactive application of the PBR scheme? 22 MS ELLIOTT: At the time we made the 23 application and were proceeding with this it was not 24 retroactive and the application was made in 1999 and the 25 discussions were ongoing in 1998 and 1999 with the 26 parties. The difficulty came when it turned into a 27 regulatory proceeding, at which point we filed the 28 evidence in 1999 and we are here now in June. Les Services StenoTran Services Inc. 613-521-0703 120 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MR. WARREN: The principle which you 2 articulated this morning, Mr. Birmingham articulated in 3 the context of not using 1999 actuals is a principle 4 that the Board has historically tried to follow is that 5 there shouldn't be a retroactive imposition of rates. 6 Now, if that principle applies with 1999 7 actuals, does it not apply with equal force to the 8 retroactive application of PBR? 9 MR. BIRMINGHAM: I think we are using two 10 different definitions of retroactive rates, Mr. Warren. 11 My reference was with respect to the Board setting rates 12 for 1999 and then using 1999 actuals as a way to true it 13 up. The Board does not do that. They set rates on a 14 perspective basis and that was my context for 15 retroactive rates. 16 To the extent that the Board uses perspective 17 information to determine rates and puts them in place in 18 a time frame that is after the beginning of the fiscal 19 year to which they relate, then that is a practice that 20 the Board in fact has followed and in fact followed as 21 recently as E.B.R.O. 499 where we didn't have the rate 22 order until some time into the year. So that is a 23 different approach or a different definition of 24 retroactive rate making. That wasn't the one that I was 25 using with respect to the 1999 base. 26 MR. WARREN: In order for the Board, as I 27 understand the mechanism as set out in the evidence, Mr. 28 Birmingham, what the Board if it accepts your proposal Les Services StenoTran Services Inc. 613-521-0703 121 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 will do, will take the 1999 actuals and apply the PBR 2 escalator of 1.9 per cent to it effective January 1 of 3 2000. Is that right? 4 MR. BIRMINGHAM: No, our proposal is that it 5 would use the 499 approved rates and then make those -- 6 then make the five one time adjustments to the extent 7 that they impact the year 2000 and then apply the price 8 cap. That is right. 9 MR. WARREN: A Freudian slip on my part. The 10 499 approved rates subject to the adjustments to which 11 the 1.9 per cent escalator would apply. That is right? 12 MR. BIRMINGHAM: That is correct. 13 MR. WARREN: Okay. Now, would it not be 14 fair -- is it fair for me to assume that for the Board 15 to determine that it would have to be satisfied that the 16 company had achieved some measure of efficiencies in 17 2000 to this point to justify that retroactive use of 18 that format? 19 MR. BIRMINGHAM: No, it is not the retroactive 20 use of the formula. They are applying it to the year 21 2000 and the rates are set using a formula that deals 22 strictly with prices and they are increased by the 23 inflation factor as an offset for productivity and a 24 stretch factor. And there isn't a determination of the 25 costs as they behave in that period and then try to 26 reflect those in rates. That is not the way that the 27 price cap regulation works. 28 MR. WARREN: I understand that. But what does Les Services StenoTran Services Inc. 613-521-0703 122 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 the -- at the end of the day when the Board sits down 2 and says, well, assuming a decision is issued in August 3 let's say, the Board says, "Well, we are going to say to 4 customers, rate payers that they are going to pay rates 5 for the last eight or nine months reflecting a PBR 6 scheme." Isn't the implied assumption in that, that the 7 Board is satisfied that the customers would have 8 received the benefits of a PBR regime during that 9 interim period? 10 MR. BIRMINGHAM: Rate payers will have 11 received a benefit from PBR by applying the PBR formula, 12 the pricing formula to prices for the year 2000. 13 MR. WARREN: Now, as I understand it -- I have 14 your answer. Thank you. 15 As I understand it, the answer that was given 16 by Mr. Penny to a question by Dr. Jackson this morning 17 is if the Board decides, for example, that it is not 18 going to accept PBR applied retroactively, it would 19 determine rates for 2000 on the basis -- is your 20 position the Board would not have to make a 21 determination of 2000 rates, you would simply continue 22 the 1999 rates? 23 MR. BIRMINGHAM: I think what Mr. Penny 24 expressed, Mr. Warren, is that there would be a number 25 of options at that point. Our position is that applying 26 the pricing formula to year 2000 is not retroactive rate 27 making. But with respect to the options, if the Board 28 was to reject PBR, then I think there are a number of Les Services StenoTran Services Inc. 613-521-0703 123 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 options. 2 One option that could be followed is that the 3 1999 approved rates would simply continue through 2000. 4 Another one I think that Mr. Penny described is the fact 5 that and you may indeed apply for 2000 rates under cost 6 of service regulation. But there would have to be some 7 other determination with respect to 2000 if the price 8 cap framework was not to be used for that period. 9 MR. WARREN: Could you turn up please a 10 response to the Board Staff Interrogatory C1.196. 11 MR. BIRMINGHAM: I have it, Mr. Warren. 12 MR. WARREN: Board Staff asked you the 13 question to identify in each of the categories of O&M 14 for the 1999 actuals where there had been -- what the 15 actual expenditures were in relation to Board-approved, 16 what the difference was and the reason for the 17 difference. 18 Now, as I do a quick count, there are some 25 19 different areas and there were reductions below 20 Board-approved in 20 of the 25. Is that right? Take 21 that subject to check? 22 MS ELLIOTT: Yes, I will. 23 MR. WARREN: Now, if I have understood your 24 supplementary evidence -- supplemental, I am sorry, 25 evidence, Exhibit "B", Tab 2, page 1 of 9 and you might 26 just turn that up. Correct me if I am wrong about this. 27 When you filed the supplemental evidence which contained 28 the actuals and you had, at least in the O&M category, Les Services StenoTran Services Inc. 613-521-0703 124 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 O&M if I turn up Exhibit "B", Tab 2, Appendix H, 2 Schedule 2, O&M expenditures were some $9.5 million 3 lower than Board-approved. Correct? 4 MS ELLIOTT: That is correct, yes. 5 MR. WARREN: Now, if I turn back to Exhibit 6 "B", Tab 2 at page 4, this is the supplemental evidence, 7 if I understood your answer correctly that the savings, 8 some $9 million, are in your view not sustainable? 9 MS ELLIOTT: During 1999, we were managing a 10 number of conditions, one of which was continued warmer 11 than normal weather. And if you look at Exhibit "B", 12 Tab 2, Appendix H, Schedule 1, when we present this 13 material we make a number of weather normalization 14 adjustments. In fact, however, all we do is adjust the 15 revenue to what it would have been if weather had been 16 normal. 17 If you look at lines 1, 2 and 7, I mean we 18 increased the revenue net of cost of gas by some $25 19 million. That was $25 million of revenues or margin 20 that we did not get in 1999. In order to manage that we 21 needed to look at our O&M, our other costs and manage 22 our costs to be able to respond to that. 23 The other thing we were managing in 1999 was 24 the impact of business transformation. So leaving roles 25 vacant to avoid the situations that in the 26 reorganization or -- the reorganization that they became 27 redundant positions or that they resulted in 28 redundancies was something that we managed. Les Services StenoTran Services Inc. 613-521-0703 125 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 The net result was that our O&Ms for 1999 was 2 nine and a half million dollars below our total 3 Board-approved. There is a response to an interrogatory 4 that will tell that in fact our business 5 reorganization -- and we have identified 177 rules that 6 were eliminated from the organization and that will 7 reduce our costs by about $7 or $8 million. 8 There is a response to an interrogatory that 9 will tell that in fact our business reorganization -- 10 and we have identified 177 roles that were eliminated 11 from the organization and that will reduce our costs by 12 about $7 or $8 million. 13 So although the savings that we realized in 14 1999 may not specifically be sustainable, the business 15 transformation does, in fact, capture some of them on an 16 ongoing basis. 17 Again, we are in a position that we have to 18 manage the impact of continued warmer than normal 19 weather, and that is a fairly significant impact on our 20 earnings and we need to respond to that. In fact, we 21 need to take a situation where we are proactive to 22 manage that, as well as managing the impacts of PBR and 23 the productivity gains that are expected under a PBR 24 framework. 25 MR. WARREN: Ms Elliott, that is a long answer 26 and I want to see if I can break it up into bits that I 27 can chew on. 28 Now, the question that I asked you was whether Les Services StenoTran Services Inc. 613-521-0703 126 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 or not the $9.5 million -- whether your position was 2 that that was not sustainable. The answer I got -- and 3 please correct me if I'm wrong -- is that some component 4 of the $9.5 million were adjustments that were made 5 because of warmer than normal weather and those are not 6 sustainable. Is that correct? 7 MS ELLIOTT: The $9.5 million is an assortment 8 of things, some of which are sustainable in that we have 9 gone through a business reorganization and captured them 10 on a more permanent basis. Other cost reductions in 11 1999 will not be repeated in 2000. 12 MR. WARREN: So I can get a focus on this, 13 could you turn up Exhibit C1.196, page 7 of 10. 14 MS ELLIOTT: I have that. 15 MR. WARREN: I'm sorry, I apologize. 16 Before I get to that, you referred to the 17 177 positions eliminated and that you said was in an 18 interrogatory response. 19 MS ELLIOTT: I think it's C3.93. 20 MR. WARREN: Do I understand that those 21 177 positions are the result of the reorganization 22 program that we were talking about at the beginning of 23 the show today. Is that right? 24 MS ELLIOTT: Yes. 25 MR. WARREN: Those represent a total amount, I 26 think you said -- correct me if I'm wrong -- of 27 something like $7 million in savings? 28 MS ELLIOTT: The calculation in the Les Services StenoTran Services Inc. 613-521-0703 127 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 interrogatory response is $7,927,000. 2 MR. WARREN: Do I understand that that is, in 3 your view, a sustainable reduction in costs? Those 4 positions have been eliminated in anticipation of PBR? 5 MS ELLIOTT: Those positions have been 6 eliminated. 7 MR. WARREN: Just for a simple person trying 8 to connect the dots, why would the base not be adjusted 9 downwards by $7.9 million to reflect the elimination of 10 those 177 positions? 11 MS ELLIOTT: Well, you are choosing to reflect 12 one component of a change that happened through 1999. 13 If you look at the rest of our income statement, there 14 are other components that created unfavourable 15 variances, there are components that created favourable 16 variances, and we are not proposing that we make 17 adjustments to reflect the 1999 actuals, nor are we 18 proposing that we make selective adjustments to reflect 19 changes in the approved rates for those items that the 20 current forecast would suggest are lower or higher, 21 except for those things that are based on a formula, not 22 based on management's forecast. 23 MR. WARREN: Mr. Penny and I can argue at the 24 end of the day who is being selective and who is not 25 being selective, but what I want to do just for the 26 moment is stay with this composition which is advanced 27 in the supplemental evidence, that is the $9.5 million 28 savings in O&M is not sustainable. Les Services StenoTran Services Inc. 613-521-0703 128 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 If I understood the evidence correctly, the 2 use of the term "not sustainable" was in aid of the 3 proposition, perhaps by implication, that there should 4 not be an adjustment to the PBR base to reflect those 5 savings because they are not likely -- they are not 6 going to continue, they are not sustainable. 7 Now, if I have understood that correctly, we 8 have a category of savings, some $7.7 million reflecting 9 new positions -- or eliminated positions, which are 10 sustainable. I have understood that correctly. 11 MS ELLIOTT: And are required to manage the 12 impact of warmer than normal weather, the impact of the 13 decline in use per customer and the other risks that we 14 are managing under PBR. 15 MR. WARREN: But the $7.7 million, none of 16 that savings has anything to do with warmer than normal 17 weather. Those are 177 positions that have been 18 eliminated, as I understand it, in anticipation of PBR. 19 MS ELLIOTT: We have had three years of warmer 20 than normal weather. To manage the earnings impact we 21 have had to take actions. One of those actions has been 22 to look at the cost. We continue to experience declines 23 in use beyond what is built into the current rates. As 24 a management group we have to take actions against that 25 and one of the responses has been to look at our 26 restructuring. 27 MR. WARREN: Can you turn up, please, 28 Exhibit C19.22, which is an interrogatory response to Les Services StenoTran Services Inc. 613-521-0703 129 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 The Wholesale Gas Service Purchasers Group. 2 THE PRESIDING MEMBER: Mr. Warren, I didn't 3 hear the reference, I'm sorry. 4 MR. WARREN: It's Exhibit C19.22. 5 THE PRESIDING MEMBER: Thank you. 6 MR. WARREN: Do you have it? 7 MS ELLIOTT: I have that, yes. 8 MR. WARREN: Just wait until the Board turns 9 it up. 10 --- Pause 11 MR. WARREN: One of the questions, 12 Question (B) was: 13 "How many employees took an early 14 retirement package in 1999?" 15 The answer was: 16 "356 employees took an early retirement 17 package..." 18 Now, was there a specific reason why -- with 19 the 356 employees taking an early retirement package, 20 was this an ongoing program to promote early retirement 21 at Union Gas or was it part of a targeted attempt to 22 reduce the number of employees through early retirement? 23 MS ELLIOTT: The yearly retirement program was 24 part of the restructuring activities. In order to -- in 25 looking at our restructuring and the reductions in our 26 staff we choose to offer an early retirement program, 27 but that offer had to go out to all companies within 28 the -- all employees within the company who qualified Les Services StenoTran Services Inc. 613-521-0703 130 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 for the program. 2 What is the relationship between the 3 177 employees, positions eliminated in C3.93 and these 4 356 employees taking early retirement? 5 MS ELLIOTT: I guess beyond experiencing sort 6 of an acceptance rate of 356 employees accepting their 7 early retirement, that allowed us to manage the 8 reductions in roles that we put forward through the 9 restructuring. 10 If you are asking if the retired employees 11 were the roles that were reduced, the answer is probably 12 not in most cases. There was not a one-for-one 13 relationship between the employee who retired and the 14 role that was eliminated. 15 MR. WARREN: That is fair enough, Ms Elliott. 16 What I want to do is, I want to get to the 17 total number of positions that have been eliminated as 18 part of the reorganization in anticipation of PBR. 19 Is it 356 or is it 177 or is it some other 20 number? 21 MS ELLIOTT: It is 177. 22 MR. WARREN: So of the 356 employees taking 23 early retirement in 1999 are a number of those going to 24 be replaced? 25 MS ELLIOTT: To the extent that their role was 26 not eliminated in the restructuring they will be 27 replaced, yes. 28 MR. WARREN: Now, the cost implications of 356 Les Services StenoTran Services Inc. 613-521-0703 131 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 employees taking early retirement are what? 2 MS ELLIOTT: Are you asking us what the early 3 retirement program costs? 4 MR. WARREN: Yes, and where would I find it 5 in -- can I find it in the 1999 actuals? 6 MS ELLIOTT: Yes. I don't actually have a 7 breakdown, but the total cost of the restructuring is on 8 Exhibit C, Tab 2, Appendix H, Schedule 1. It shows up 9 in line -- sorry - in Note 4, as $15.8 million. We have 10 removed those costs from the O&M expense when we reflect 11 the utility statement for we have normalized those costs 12 out of the utility earnings. 13 --- Pause 14 MR. WARREN: Now, they are described in that 15 note as a "restructuring cost." I understood the answer 16 it was the cost of the 356 employees taking early 17 retirement. 18 MS ELLIOTT: It's both costs and any severance 19 costs, so the location costs that we incurred through 20 the restructuring process, not just the early retirement 21 costs. 22 MR. WARREN: I have bobbed and weaved and 23 tacked together about as much as I really can without 24 the organization chart. I wonder if it would be 25 possible now to take a break to get that organization 26 chart? 27 THE PRESIDING MEMBER: I think now we have 28 reached a time when it would be reasonable to have a Les Services StenoTran Services Inc. 613-521-0703 132 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 break. We will break until five after three. 2 MS LEA: I'm sorry, I don't hear. 3 THE PRESIDING MEMBER: Five after three. 4 MS LEA: Thank you. 5 --- Upon recessing at 1445 6 --- Upon resuming at 1506 7 MR. PENNY: Mr. Chairman, then, there are two 8 things that have been passed out and there is some other 9 material that is being photocopied as we speak. It will 10 brought in here as soon as the copying is done. 11 The first package does not relate specifically 12 to Mr. Warren's questions, but it is simply the evidence 13 update that Miss Elliott referred to earlier. It 14 contains updated pages that should be put in as 15 replacement pages to the evidence which simply reflects 16 the calculation error that Ms Elliott alluded to and the 17 change to the 1.9 per cent cap. 18 Then the second page, which is responsive to 19 Ms -- which is responsive to Mr. Warren's question 20 regarding the organizational chart is labelled 21 Undertaking G1.1. This is an overview. 22 What is being copied now are the actual 23 organizational charts which underpin that. As I said, 24 those will be brought here as soon as that copying is 25 done. 26 THE PRESIDING MEMBER: Thank you, Mr. Penny. 27 Mr. Warren, are you ready to proceed? 28 MR. WARREN: I have just now been handed this, Les Services StenoTran Services Inc. 613-521-0703 133 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 Mr. Chairman, and I will do my best to sort of fumble my 2 way through it. 3 THE PRESIDING MEMBER: Do you want a few 4 moments then? 5 MR. WARREN: I beg your pardon? 6 THE PRESIDING MEMBER: We could take the 7 opportunity of a break to make our decision on the 8 motion, which may be one way. 9 MR. WARREN: You won't be insulted if I don't 10 listen to your decision on the motion, Mr. Chairman. 11 THE PRESIDING MEMBER: So I would ask 12 Dr. Jackson to read in the Board's decision on the 13 Motion Agreement that includes the evidence of Energy 14 Probe. 15 DECISION 16 MEMBER JACKSON: On June 12, 2000 the Ontario 17 Energy Board heard a motion of Union Gas Limited to 18 strike out or otherwise declare as irrelevant to the 19 issues in RP-1999-0017 the pre-filed evidence of 20 Mr. Thomas Adams on behalf of Energy Probe, dated April 21 3, 2000 and subtitled, "The Case for a Gas Independent 22 System Operator for the Dawn-Trafalgar Pipeline System." 23 Counsel for Union has submitted that the Board 24 does not have jurisdiction to create, establish or 25 implement such a gas independent system operator as 26 described in the pre-filed evidence of Mr. Adams. Union 27 submits that the proposal is, in Energy Probe's own 28 words, "...illustrative and is not developed to the Les Services StenoTran Services Inc. 613-521-0703 134 Decision 1 level of detail that will permit its implementation 2 without further input." 3 Further, Union notes that the alternative 4 proposal is not on the Issues List and expresses its 5 concern that introduction of this proposal will create 6 unnecessary effort and delay and will divert parties 7 from expeditiously dealing with issues on the Issues 8 List. 9 Union also notes that Energy Probe has raised 10 this proposal in other discussion forums and has not 11 succeeded in having its proposal adopted or brought 12 forward as a recommendation flowing from those forums. 13 Union advances this as another reason why the Board 14 should not hear it. 15 Union submits that Energy Probe should bring 16 this proposal to the Minister and not present it as 17 evidence before this Board. 18 Counsel for Energy Probe, on the other hand, 19 says that Energy Probe wishes to be able to argue for 20 conditions to be imposed on a Board decision with 21 respect to unbundling, specifically as such could relate 22 to the time horizon for acceptance of unbundling 23 practices, to findings with respect to an appropriate 24 end state market structure for natural gas, and perhaps, 25 to a direction from the Board to file a more 26 comprehensive unbundling proposal. 27 Counsel for Energy Probe submits that it 28 should be permitted to introduce this evidence since it Les Services StenoTran Services Inc. 613-521-0703 135 Decision 1 will be used to support such arguments and will assist 2 the Board in reviewing Union's proposal. 3 Counsel for CEED, supported by counsel for 4 HVAC Coalition and by counsel for Vulnerable Energy 5 Consumers Association, asserted that the process of this 6 proceeding "will be diminished if this evidence is 7 struck." CEED asserts that Energy Probe's views on why 8 independence is important for a system operator should 9 be heard. CEED also urges the Board not to exclude 10 evidence on what may be an ideal or an end state which 11 may be currently beyond the power of the Board to 12 implement. It holds out the idea that it may be 13 valuable to know what are the objectives or the end 14 state towards which parties understand the process 15 should be leading. 16 Counsel for IGUA submitted that striking out 17 the material as evidence would be too severe, but that 18 one option would be to decline to receive the paper as 19 evidence, without prejudice to its being referred to in 20 argument. Counsel for IGUA offered the view, however, 21 that the material would carry less weight if it were not 22 received as evidence and submitted to the rigours of 23 cross-examination. 24 The Board in this proceeding is not being 25 asked to decide whether or not to implement a gas 26 independent system operator. Hence, it need not make a 27 finding on whether it would have the jurisdiction to do 28 so. The Board finds that this evidence may be relevant Les Services StenoTran Services Inc. 613-521-0703 136 Decision 1 and may assist the Board in its review of Union's 2 proposal. Once heard, the evidence can be given the 3 weight which is due to it. 4 The Board is not persuaded that the proposal 5 has not been fully developed -- that because the 6 proposal has not been fully developed for implementation 7 it can contribute nothing to the Board's understanding 8 of an issue. Nor should the evidence be rejected from 9 this proceeding simply because it failed to be 10 persuasive in another forum. 11 In the Board's view, the evidence may be 12 relevant in support of Energy Probe's arguments on 13 issues properly within this proceeding. It remains to 14 be seen the extent to which this evidence is relevant to 15 the unsettled issues of unbundling and whether indeed it 16 will be helpful to the Board. 17 The Board shares the concerns of the parties 18 about proceeding expeditiously with all matters in this 19 proceeding and will endeavour to ensure that examination 20 and cross-examination are conducted efficiently. The 21 Board will, of course, expect cooperation from all 22 parties to achieve this objective. 23 The Board has considered Union's request and 24 finds that Energy Probe's pre-filed evidence, and the 25 testimony of Mr. Thomas Adams, should be admitted as 26 evidence in this proceeding. The Union motion is 27 denied. 28 THE PRESIDING MEMBER: Thank you, Dr. Jackson. Les Services StenoTran Services Inc. 613-521-0703 137 Decision 1 Mr. Warren, are you ready to proceed? 2 MR. WARREN: Thank you, Mr. Chairman. 3 One of the advantages or disadvantages, 4 depending on your point of view, of having a break is 5 that you are told -- I'm told -- how many points I have 6 missed. With apologies, I want to go over just a couple 7 of points in areas that we have already covered. It 8 won't take very long. 9 FURTHER CROSS-EXAMINATION 10 MR. WARREN: Could I ask you to turn up in 11 your original filing Exhibit B, Tab 2, page 22, and at 12 the same time Exhibit C19.21 -- C19.21, which is an 13 Undertaking Response to a question from the Wholesale 14 Gas Service Purchasers Group? 15 In the pre-filed evidence we talked earlier 16 about the regulatory costs and that component of it 17 represented by the Board costs. The figure we have for 18 E.B.R.O. 499 is $4.493 million. What we have in the 19 answer given in C19.21 is the following: 20 "Union was assessed $1.7 million of the 21 Board's fixed costs for its fiscal year 22 ending March 31, 2000." 23 Perhaps we are comparing apples and oranges, 24 but I wonder if you could help me in reconciling the 25 $1.7 million, the Board's fixed costs, with the figures 26 that appear on Exhibit B, Tab 2, page 22? 27 MS ELLIOTT: The rest of the response in 28 Exhibit 19.21 indicates that the Board's fixed costs of Les Services StenoTran Services Inc. 613-521-0703 138 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 $4.493 million represents two years of fixed costs. So 2 the annual costs of the Board would be $2.2 million 3 incorporated into current rates. The balance of the 4 answer at C19.21 is our assessment for the year ending 5 March 31, 2000. It was $1.7 million. 6 The comparable numbers are the 2.2 for a full 7 year and 1.7 for the most recent year. 8 MR. WARREN: Okay. 9 Now, would logic not then dictate that there 10 should be a greater amount in the annual portion of the 11 regulatory savings than $0.8 million since your Board 12 regulatory costs appear to be lower than what you had 13 estimated? 14 MS ELLIOTT: I think we have identified a 15 difference between the forecast that was built into 16 rates and the most recent year's assessment from the 17 Board. The adjustments that we are proposing don't 18 reflect the Board's costs, but are related to the direct 19 hearing costs to Union and the intervenors. I don't 20 have a similar comparison between that forecast and the 21 actual costs. 22 MR. WARREN: Okay. Now, with respect to 23 regulatory costs, generally I wonder if I could get an 24 undertaking from you to provide for, I guess, fiscal 25 1999, all direct and indirect costs of supporting 26 this -- not the specific hearing process but the Board's 27 rate approval process? 28 MS ELLIOTT: Are you asking for the costs that Les Services StenoTran Services Inc. 613-521-0703 139 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 we have incurred to date for the PBR proceeding? 2 MR. WARREN: No. No, fiscal 1999 for -- what 3 I'm trying to get is an estimate of the costs, direct 4 and indirect, which are associated with the ordinary 5 rate approval process under the cost-of-service regime. 6 MS ELLIOTT: I think the direct costs are 7 possible to obtain. I'm not sure how I would go about 8 determining what the indirect costs to support the 9 process would be, short of going through an entire 10 allocation process of our existing costs to attempt to 11 determine how much of people's time was associated with 12 the rate process. That's not something that we have 13 available. 14 MR. WARREN: Okay. Can you get me the direct 15 costs simply, Ms Elliott? 16 MS ELLIOTT: I can. 17 THE PRESIDING MEMBER: That will be 18 Undertaking G1.3. That is for what time period? 19 MR. WARREN: Fiscal 1999. 20 THE PRESIDING MEMBER: Can I just get a 21 clarification of what exactly the request is? 22 MR. WARREN: It is the direct costs within 23 Union of supporting the costs-of-service rate 24 application process. 25 THE PRESIDING MEMBER: Thank you, G1.3. 26 UNDERTAKING NO. G1.3: Ms Elliott to 27 Provide Actuals of the Direct Costs 28 within Union of Supporting the Les Services StenoTran Services Inc. 613-521-0703 140 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 Costs-of-Service Rate Application Process 2 MS ELLIOTT: You are looking for actuals, not 3 the forecast? 4 MR. WARREN: Actuals. 5 Now, I had one other follow-up question to the 6 exchanges we had over the application of the PBR 7 formula, beginning in January 1 of 2000. I asked a 8 number of questions and I have your answers on the 9 question of what would happen if the Board said that -- 10 what would happen to 2000 rates if the Board said that 11 PBR was not to begin until January 1 of next year. What 12 I neglected to ask you was: If the Board were to 13 determine that the PBR regime was not to begin until 14 January 1 of 2001, what would you propose to be the base 15 for that PBR regime? 16 MR. BIRMINGHAM: We haven't turned our minds 17 to that, Mr. Warren. We have the application from the 18 Board for the year 2000 with respect to 19 performance-based regulation and what would happen in 20 the event that it was applied to some different period 21 or was not put in place at all. We haven't tried to 22 think out what those scenarios might be. 23 MR. WARREN: My final -- with apologies -- 24 catch-up question is just a brief one with respect to 25 the changes in accounting roles for pension and other 26 post-employment benefits. 27 I asked you if you were required to follow GAP 28 and your answer, Ms Elliott, was that you were and I Les Services StenoTran Services Inc. 613-521-0703 141 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 just wanted for you to identify for me where it is or 2 from where that obligation arises. 3 MS ELLIOTT: To the extent that we don't 4 follow that, that would be disclosed in our annual 5 financial statements as part of the comments of the 6 auditors as a qualification to the Audit Report. To get 7 an unqualified audit opinion we would follow generally 8 accepted accounting principles. 9 MR. WARREN: Can I then go back to our 10 discussion just before the break of the effects of a 11 restructuring? Now, as I understand your evidence given 12 to me before the break there are 177 roles that have 13 been eliminated as a result of the restructuring 14 exercise. Is that correct? 15 MS ELLIOTT: That is correct. Yes. 16 MR. WARREN: And those roles were eliminated 17 as of December 31, 1999? 18 MS ELLIOTT: Technically they were probably 19 eliminated in the late November time frame. 20 MR. WARREN: Is it the intention of the 21 company that those roles will remain eliminated or will 22 they be filled? 23 MS ELLIOTT: No, those are the roles that are 24 eliminated and will not be filled. 25 MR. WARREN: And is there any intention to 26 eliminate any further roles as part of an ongoing 27 restructuring? 28 MS ELLIOTT: As part of continuous process Les Services StenoTran Services Inc. 613-521-0703 142 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 improvement, there will be a continuous review of the 2 roles that we have in place. And the productivity and 3 efficiencies and the roles that we have in place today 4 will continuously be under review to determine areas 5 where further reductions can be made. 6 Do I have a specific plan right now? No. 7 MR. WARREN: Now, in connection with the 1999 8 actuals, just before we get back into a body count and 9 the implications of the body count, you have produced 10 the 1999 actuals. Does the company prepare as part of 11 its ongoing management of its business, a budget for 12 2000 or has it prepared such a budget? 13 MS ELLIOTT: Yes, we do. We prepare operating 14 budgets on a fairly regular basis. 15 MR. WARREN: Now, if I were to look at, for 16 example, a supplemental evidence, would there be a 17 budget, for example, if I look at the supplemental 18 evidence, Exhibit "B", Tab 2, Appendix H, Schedule 4, 19 which is a breakout of the operating and maintenance 20 expense by administrator for the calendar year ending 21 December 31, 1999, would the budget for 2000 contain an 22 estimate of costs, a budget for costs in each of those 23 categories at that level of detail? 24 MS ELLIOTT: Those categories are no longer 25 the categories which the organization -- and you will, I 26 guess, in looking at the summary page that we have 27 provided in the organization chart, the organization has 28 been restructured to reduce the number of areas. But if Les Services StenoTran Services Inc. 613-521-0703 143 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 you are asking me is an O&M budget prepared for each of 2 the various levels of the -- or areas of the 3 organization under which executives -- over which 4 executives have responsibility, the answer is yes. 5 MR. WARREN: And that budget has been 6 prepared? 7 MS ELLIOTT: Yes. 8 MR. WARREN: Can that budget be produced? 9 MS ELLIOTT: Well, as I think we indicated 10 earlier, the budgets and forecasts of 2000 information 11 are not part of this process. 12 --- Pause 13 MR. WARREN: Mr. Chairman, the exchange that I 14 just had with the witness panel was with respect to a 15 number of preliminary questions about the budget that 16 had been prepared for 2000. The answer was that a 17 budget had been prepared and I have asked the witness to 18 produce it and the witness -- I think her answer can 19 fairly be taken to be a "no". 20 In my respectful submission, the production of 21 the 2000 budget falls within the second of the 22 categories that were reviewed and therefore is 23 encompassed in your earlier ruling. I would ask that 24 the witness panel be directed to produce that budget. 25 MR. PENNY: With great respect to Mr. Warren, 26 Mr. Chairman, he is putting the cart before the horse. 27 There is no evidentiary basis upon which he can make the 28 claim that he just made that it falls into the second Les Services StenoTran Services Inc. 613-521-0703 144 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 category that you outlined earlier. 2 As I recall what you had said was that actual 3 2000 and actual plans but not anything that contained 4 assumptions or speculation about the future. And we 5 don't know at this point in time whether the 2000 budget 6 makes assumptions about what the company might get out 7 of PBR or not. And it would be, in my respectful 8 submission, it would clearly fall within the third 9 category if this budget did contain that information. 10 So in my submission the issue that 11 Mr. Birmingham and Ms Elliott should outline is what the 12 basis of that 2000 budget is. 13 MR. WARREN: I would ask, Mr. Chairman, if it 14 were an operating budget, the budget by which the 15 company conducts its business every day. I am sorry if 16 I was naive in assuming that that wasn't going to be 17 speculative. It wasn't going to be chancy. It was 18 going to be how the business is run every day. And if 19 that is the way the business is running today, there is 20 nothing of the third category in it. But if my friend 21 is suggesting that there may be something speculative in 22 it, which I would find astonishing, then I suppose we 23 should know that. 24 MR. PENNY: Well, Mr. Chairman, the issue 25 isn't a matter of being speculative. The issue is a 26 matter of whether assumptions are made by the company 27 about the outcome of this process as I understood your 28 ruling. Les Services StenoTran Services Inc. 613-521-0703 145 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 And you had indicated that the Board was 2 sensitive to the needs of the company to have 3 confidentiality around its internal operating systems. 4 And it is one thing to say, "Do you have a plan to have 5 further staff reductions in 2000," and Ms Elliott 6 indicated that she did not. And it is another thing in 7 my submission to say, "Do you have forecasts about what 8 you think you may achieve in 2000 if you get certain 9 combinations and permutations under the PBR plan," which 10 in my submission falls squarely into the area of 11 concern. 12 It would be prejudicial to the company to have 13 to reveal those kinds of assumptions and may well be 14 inappropriate having regard to the company's disclosure 15 obligations as to its debt holders and so on. 16 THE PRESIDING MEMBER: I must admit I find it 17 difficult to understand the question of achieving as 18 opposed to the question of information of operating 19 budget because I would have thought that was covered by 20 current plan as opposed to assumptions of expectations. 21 I believe that the company should consider what 22 information it can provide that would provide some 23 indication that would be helpful to the Board and to 24 parties with regard to the level of what the current 25 plan is for 2000. 26 The reason that I ask this question is because 27 the reason we have put this in is that we are asked to 28 make findings about the PBR plan. We are asked to make Les Services StenoTran Services Inc. 613-521-0703 146 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 findings, I assume, about the base on which that plan is 2 to be developed. We are asked to make findings about 3 the reasonableness of any productivity assumptions that 4 will be incorporated into the plan as we go forward. 5 And the reason we made that decision of 6 creating that category of information was that we needed 7 some information with regard to what the 2000 situation 8 was as compared to 1999, as compared to the 1998 9 situation so that we can make those judgements. And 10 that was the basis of our category called current 11 information with respect to 2000, including current 12 plans. 13 Because 2000 is not yet complete, there can be 14 no actuals in practice unless one gets six and six 15 before 2000. So I request the company to provide 16 information which would provide that type of -- I use 17 the word "information" again which would assist the 18 Board and would assist the parties. 19 MEMBER JACKSON: May I just say that in 20 providing that information you might want to comment at 21 the front end, in other words, right now on a couple of 22 questions that are in my mind or perhaps file it with 23 the information you have filed. 24 But are we saying essentially or do I hear you 25 saying that certain cost reductions which you could 26 implement, you might not implement if we didn't give you 27 a PBR? Or alternatively, are you saying that possibly 28 this operating budget shows a revenue line that assumes Les Services StenoTran Services Inc. 613-521-0703 147 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 that you were given a chance to increase your rates 1.9 2 per cent? 3 I could take that as an operating assumption 4 which wouldn't insult me in terms of a decision maker 5 that you had prejudged what I was going to do. I 6 wouldn't have any difficulty with receiving something 7 like that. 8 But on the other hand, I think it might 9 satisfy Mr. Warren's purposes if you didn't forecast the 10 revenues, you just told us what your budget was with 11 respect to costs. 12 But it does beg the first question I asked as 13 well, which I think you should address. 14 THE PRESIDING MEMBER: Just a moment. 15 MR. PENNY: Mr. Chairman, I understand you to 16 be saying that you would like the company to consider 17 what it can provide. We will do that. 18 We have the additional guidance from 19 Dr. Jackson as to what kind of information it might 20 contain which might speak to the concerns I have 21 articulated. 22 May we leave it at this: we will take that 23 suggestion and consider it over the evening and speak to 24 the issue tomorrow? 25 THE PRESIDING MEMBER: We will wait until 26 tomorrow to hear that. So I will not ask for an 27 undertaking now. But I may well ask for an undertaking 28 tomorrow. Les Services StenoTran Services Inc. 613-521-0703 148 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MR. PENNY: I understand, sir. 2 THE PRESIDING MEMBER: Give an undertaking... 3 MR. WARREN: I did not hear what you said 4 there? 5 THE PRESIDING MEMBER: Mr. Warren, is that -- 6 MR. WARREN: Mr. Chairman, could I ask you to 7 turn up the undertaking response G1.1. 8 Perhaps, panel, you could tell me what it is 9 that this document is telling me? 10 MS ELLIOTT: This is a summary. Hopefully 11 shortly we will have two packages. One reflects the 12 1998 organizational structure. That package is what was 13 filed in E.B.R.O 499 at Exhibit A, Tab 8. So the 14 organization structure that existed -- it is actually 15 dated 1998, but that would be prior to the 16 reorganization. 17 The other package will be the 1999 18 organization structure as it existed at the end of the 19 year. So subsequent to the reorganization. 20 What you see on the summary is really a number 21 of things. The groupings of the organization have 22 changed and have gone from -- in 1998 to president, 23 vice-president regulatory affairs, regulatory affairs 24 comptroller and on down the list. 25 Nine areas to seven areas. There have been 26 some consolidation of the various areas. 27 It is very difficult to compare area by area, 28 before and after. What you will see is the existing Les Services StenoTran Services Inc. 613-521-0703 149 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 organization structure which goes down three and 2 sometimes four layers into the organization, which is 3 the management group. 4 In the 1999 organization structure, what the 5 package includes is three layers: the president, the 6 vice-presidents and the direct reports of the 7 vice-presidents, and subject to getting it myself, I can 8 confirm whether it contains the fourth layer, but I 9 think it does. So the only level of the organization 10 that is not included in the org. chart is sort of the 11 front line and that is where the bulk of the people are. 12 While it looks like there is an increase 13 between the 157 roles in management in 1998 and the 303 14 in 1999, that is really a flattening of the 15 organization. 16 The organization now only contains five levels 17 within it, whereas previously there was as much as nine 18 levels within the organization. The org. charts that 19 had been provided in the past were the first three or 20 sometimes four levels. 21 We have tried to line them up so that you can 22 see the president, and CEO, previously had about 23 23 people either reporting to him directly or reporting to 24 one of his direct reports. That has changed now. There 25 are only eight people reporting to him directly. Each 26 of those eight people have an area of responsibility and 27 you will get their organization charts and their direct 28 reports. Les Services StenoTran Services Inc. 613-521-0703 150 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 There has been some reclassification. In the 2 old organization, engineering and gas supply operations 3 were together. They are actually split into two 4 different areas of the organization. 5 Engineering is in two assets; management and 6 gas supply operations is in two asset operations. 7 So it is difficult to compare the two sets of 8 org. charts. But what it does show is a streamlining of 9 the organization and a grouping within that organization 10 of functional responsibilities. 11 MR. WARREN: I am sorry. Were you done? 12 MS ELLIOTT: Yes. 13 MR. WARREN: In looking at this, can I 14 determine whether at the senior level of management 15 there have been any reduction in roles as a result of 16 the restructuring? 17 MS ELLIOTT: Probably not without some help in 18 terms of comparing charts and that the most clear would 19 be the president's, the chart before and the chart after 20 to determine whether the role was transferred or 21 eliminated entirely. 22 MR. WARREN: Those are the charts that are to 23 come, is that correct? 24 MS ELLIOTT: Yes. 25 MR. WARREN: Can I ask you to go back, panel, 26 to C1.196, which was a Board staff Interrogatory, in 27 which you broke out into 25 categories, the 1999 actual 28 versus 1999 Board approved O&M expense showing increases Les Services StenoTran Services Inc. 613-521-0703 151 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 and decreases and the reasons for it, and try to achieve 2 some efficiencies in this cross-examination so it 3 doesn't do "snarkelepsy" all around. 4 What I like to do in each of these categories, 5 panel, is assess them according to a couple of criteria. 6 The first is whether these efficiencies are a 7 function of restructuring. I am already wincing, 8 Ms Elliott. I am trying to be efficient in your 9 wincing. It is not a good time. 10 The second consideration is your criterion, in 11 your evidence of sustainability. 12 Now, against that background, I want to look 13 first at the -- going through the categories as quickly 14 as we can -- major industrial market. You have spent 15 less in that category by some 1.1 million in 1999. The 16 principal differences, as I read these, or about half 17 the differences, to be fair, was in salaries, wages, 18 employee expenses. 19 What is the reason for the decline? You know, 20 I see the categories where you saved the money, but why 21 did you spend less money in this category? 22 MS ELLIOTT: I think generally with respect to 23 salaries and wages we were in fact leaving those vacant, 24 one in anticipation of the restructuring in response to 25 warmer than normal weather and that holds true for 26 employee expenses and consulting as well -- the warmer 27 than normal weather, the decline in use per customer. 28 We were also managing at this level the Les Services StenoTran Services Inc. 613-521-0703 152 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 shortfall in the utility -- sorry, non-utility revenues. 2 We were managing the ADR agreement and we were managing 3 the impact of separation. 4 So although we had submissions in ADR-0499 5 that started with a cost level, the reality is we 6 accepted a reduction of non-utility revenues that was 7 higher than we had commitments for non-utility or 8 affiliates to provide us and we had to manage that 9 shortfall through cost reductions. We had agreed to ADR 10 reductions. We had to manage those reductions. We had 11 to manage the impact of separation. We were also 12 managing the weather and restructuring. 13 It will be very difficult for me to go through 14 this list and to tell you whether it was due to 15 restructuring or whether it was due to the management of 16 weather. As we went through the year, we responded to 17 the conditions that were present that we had to react 18 to, in addition to responding to the Board-approved O&M 19 numbers. 20 So I can't really tell you at the level you 21 asking what the savings was the result of. The 22 direction that was provided from the executive to 23 management was to manage the cost and manage those 24 reductions as each executive could within their own 25 area. 26 MR. WARREN: I take it then that what you are 27 telling me is that on my criterion, that you simply 28 can't give me an answer for each of these categories on Les Services StenoTran Services Inc. 613-521-0703 153 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 each of the two questions of: One, how much are the 2 expenses of the decline in each in case that was driven 3 by a restructuring and how much of it is sustainable? 4 You simply can't answer those questions for these 5 categories? 6 MS ELLIOTT: Not at this level, no. I can't 7 tell you at all how much of each reduction was due to 8 that factor. When we look at the 2000 expenses, we can 9 provide a high level indication of what savings we 10 anticipate to carry forward into 2000, but not at the 11 specific level that you are asking for. 12 MR. WARREN: Sorry. When we look at the 2000 13 expenses, that is in the budget document, is that 14 right -- that I asked for? 15 MS ELLIOTT: To the extent that that 16 information is provided, that would be -- 17 MR. WARREN: We actually can leave it then 18 until I have -- until we have a result tomorrow, I don't 19 want to presume anything. 20 Now I have just one, mercifully for you, just 21 one final area I want to cover off and that is just to 22 go back to see if I have an understanding of the 23 relationship in expenses for the 356, early retirement. 24 That I think you said the expense of that was 25 $15 million. I am looking at Exhibit B, Tab 2, 26 Appendix H, Schedule 1, supplementary evidence. Exhibit 27 B, Tab 2, Appendix H, Schedule 1. 28 MS ELLIOTT: Yes. I said the restructuring Les Services StenoTran Services Inc. 613-521-0703 154 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 costs totalled $15.8 million. That included the early 2 retirement. It also included any severances and any 3 relocation that we incurred as a result of the 4 restructuring. 5 MR. WARREN: And the number I have for -- the 6 number you have given me for the 177 reduced, eliminated 7 roles, is the 7.7 -- I think it is in C2.393. Is that 8 right? 9 MS ELLIOTT: I think it was C3.93. 10 MR. WARREN: C3.93, sorry. 11 MS ELLIOTT: And that's 7.9. 12 MR. WARREN: That's $7.9 million. Okay. 13 Now the final question is just a clarification 14 on a CAC interrogatory C3.25. There are a total of 15 2,499 roles as at December 31, 1999 and I don't 16 recollect your answer -- I am sure you gave it to 17 me --that the present context of the company is that 18 there are no plans that you know of to reduce that 19 number further. Is that right? 20 MS ELLIOTT: Those are the roles in the 21 current organization and I am not aware of any plans 22 that specify what, if any, the future changes will be, 23 but I did acknowledge that there will likely be changes 24 in the future as we go forward. 25 MR. WARREN: Those are my questions. I 26 regrettably because of a conflicting obligation can't be 27 here tomorrow so I will leave it to my elders and my 28 betters to patch the holes in terms of the org. charts Les Services StenoTran Services Inc. 613-521-0703 155 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 and the undertaking that I have asked for today. There 2 are others who can pick up on that, Mr. Chairman, but I 3 can't be here. 4 THE PRESIDING MEMBER: Then Mr. Warren you are 5 saying you don't want to raise any other questions based 6 on what the results of tomorrow -- and you will leave it 7 to the other parties. 8 MR. WARREN: I will leave it to the other 9 parties. I think it would be silly for me to reserve a 10 right to come back given so many other competent people 11 in the room. So those are my questions to this panel 12 under these issues. 13 THE PRESIDING MEMBER: One thing we haven't 14 got there is the sequence of cross-examination. We are 15 hopeful the parties would identify themselves as they 16 come up. Is it Mr. Brett next? 17 CROSS-EXAMINATION 18 MR. BRETT: Thank you, Mr. Chairman. 19 Dr. Jackson. 20 I have questions for your panel in three 21 areas. The first is unaccounted for gas. The second is 22 Y2K costs and the third is the general adjustments to 23 the base, the sort of catch all last adjustment issue. 24 I have two preliminary questions really just 25 before moving into that, before I forget them. The 26 first is you had asked -- this is just following up on 27 an answer, Ms Elliott, that you gave to Mr. Warren a 28 couple of moments ago with respect to the restructuring Les Services StenoTran Services Inc. 613-521-0703 156 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 cost item that is found on the $15.8 million item that 2 is found at Exhibit B, Tab 2, Appendix H, Schedule 1. 3 Did I hear correctly to say that number 4 contains the restructuring costs associated with the 5 elimination of 177 roles, people associated therewith. 6 That is the severance payments. Is that what that is? 7 MS ELLIOTT: Yes. It actually includes the 8 early retirement program costs. 9 MR. BRETT: Okay. 10 MS ELLIOTT: And any severances and 11 relocations associated with the restructuring. 12 MR. BRETT: Okay. So that is basically done 13 in 1999. 14 MS ELLIOTT: With the exception of some 15 ongoing pension and benefit costs, it's done. But we 16 have a continued obligation to maintain some pension and 17 benefit costs for those people. 18 MR. BRETT: Right. And those obligations are 19 picked up in your pension costs or in your numbers here? 20 MS ELLIOTT: Not the ones that apply to 21 employees that were retired as part of the 22 restructuring, no. 23 MR. BRETT: What is that amount of money? 24 MS ELLIOTT: I don't have that with me. 25 MR. BRETT: Okay. Could I get that please, by 26 way of an undertaking? 27 THE PRESIDING MEMBER: Is it possible to get 28 it, Ms Elliott? Les Services StenoTran Services Inc. 613-521-0703 157 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MS ELLIOTT: Yes. 2 THE PRESIDING MEMBER: That will be 3 undertaking G1.4, I believe. 4 UNDERTAKING NO. G1.4: Ms Elliott 5 undertakes to provide the amounts of 6 money that apply to employees that were 7 retired as part of the restructuring 8 MR. BRETT: And the second preliminary 9 question is just -- and I don't think this is in the 10 evidence, it might be, but can you just confirm for me 11 that you have made in moving into -- the PBR proposal 12 for 2000 contains no change in the capitalization ratios 13 for O&M costs? 14 MS ELLIOTT: There isn't any change as a part 15 of this proposal to the capitalization, no. 16 MR. BRETT: With respect to the unaccounted 17 for gas, the last unaccounted for gas, I am really going 18 to approach this under three headings, Ms Elliott. Bear 19 with me for a moment here. I basically see three 20 separate but related issues here. 21 One is what I will call, for want of a better 22 label, the catch-up issue. The second issue is your 23 proposal to change the formula by which you estimate 24 UFG. And the third issue, although it may not be as 25 much of an issue, is the adjustment to the amount of UFG 26 to the price, to the dollar valuation of UFG because of 27 the changes in WACOG historically. 28 And I want to start initially with the issue Les Services StenoTran Services Inc. 613-521-0703 158 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 of the catch-up proposal and I think the best place to 2 look to get us started on this is Exhibit B, Tab 2, 3 Schedule 2. If you could turn that up? 4 MS ELLIOTT: I have that. 5 MR. BRETT: And as I understand it, what this 6 shows, what this schedule shows is the -- this shows the 7 composition of the $22.5 million that you were speaking 8 to Mr. Warren about earlier, how it has built up over 9 the years 1996, 1997, 1998. 10 I guess my first question is here, how long 11 have you been forecasting UFG? How long does this go 12 back? Does this go back right 10, 15, 20 years or 13 estimating UFG, let's say? 14 MS ELLIOTT: I don't know for certain how far 15 back it goes. I do not know of any other methodology or 16 of any point that we changed the methodology for 17 including UFG in rates, but my history only goes back to 18 just after the 1987 rate case. 19 MR. BRETT: That's far enough. That gives us 20 a picture. It has been a fairly -- essentially this is 21 gas. UFG is gas that you -- to vastly oversimplify it, 22 which is mostly for purposes. This is gas that you 23 purchased but that you haven't recovered, you haven't 24 sold pursuant to a rate. You haven't been paid for it 25 essentially. 26 MS ELLIOTT: This is largely the difference 27 between the gas that we receive into the system and the 28 measurement of that gas and the gas that we measure out Les Services StenoTran Services Inc. 613-521-0703 159 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 of the system. It comes about largely as a difference, 2 the variation between the measurement in and measurement 3 out. 4 MR. BRETT: And you have estimated it -- this 5 method of estimating that you have used for a long time 6 is based on a weighted average, as you explained to Mr. 7 Warren, of the previous -- not the immediately previous 8 three years but the next to immediate previous three 9 years, so that while the weighting of going backwards of 10 three, two and one as I understand it. 11 You used that then as the basis for your 12 estimate for the year in question. 13 Your experience -- as this table shows, your 14 experience recently, 1996, 1997, 1998 has been that you 15 have consistently underestimated UFG and you have these 16 cost volume metric and, therefore, cost differences that 17 arise as a result, correct, of seven million in 1996, 18 seven and a half million in 1996, 5.7 million in 1997 19 and 9.2 million in 1998. 20 MS ELLIOTT: That's correct. That's the 21 difference between what the formula produces to be 22 recovered in rates and the actual experience for the 23 year. 24 MR. BRETT: That's what you estimated would be 25 based on a formula would be recovered and what you 26 actually got. 27 Now, I take it if you went back, if you took 28 this table back ten years, you may have some years in Les Services StenoTran Services Inc. 613-521-0703 160 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 which you actually recovered -- the UFG was less than 2 you had estimated. Is that so? I think your comment 3 earlier on in describing this was that it varies around 4 an average. I took you to be saying it could go one way 5 or the other. 6 MS ELLIOTT: Certainly the theory in the 7 formula that is being used is that it varies around the 8 average. Our actual experience is that it hasn't varied 9 around the average. It has generally been greater 10 than -- 11 MR. BRETT: Do you have a reference there for 12 that? 13 MS ELLIOTT: There's an interrogatory, 14 Exhibit C3.19. It shows some history. 15 MR. BRETT: That's back in 1994, I believe. 16 MS ELLIOTT: 1993. 17 MR. BRETT: 1993. Yes. I have seen that. 18 That's the one that shows the -- back to 1993 and shows 19 the increasing ratio coming up from 20.21 to .55, 20 something like that. 21 MS. ELLIOTT: Yes. 22 MR. BRETT: Okay. But if you went back 23 another five years or ten years, would it show the same 24 thing or would it show -- in certain cases would you 25 have over-forecast it, or do you know? 26 MS ELLIOTT: It's my recollection that there 27 has actually only been one year where we have recovered 28 more in rates than we have actually experienced. If you Les Services StenoTran Services Inc. 613-521-0703 161 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 go back ten years, I think in 1992, but I would have to 2 confirm that. 3 MR. BRETT: Perhaps you could do that. Would 4 you mind doing that, just what the experience has been 5 going back 31.5. 6 Now, if I may ask, under the cost of service 7 regime, when you have a situation like you have had here 8 in 1996, 1997, 1998, what happens effectively? You are 9 paying out more than you have recovered in rates. What 10 is happening there in a financial sense? Can you help 11 me with that a bit? Are those dollars that are -- where 12 are those dollars coming from, if I can put it that way? 13 MS ELLIOTT: The unaccounted for gas actually 14 becomes a demand on our system which under normal 15 circumstances I guess would be an expense. What we do, 16 rather than expensing the full amount of the variance in 17 the years, we do recognize that the current methodology 18 will recover that cost over a three year period. 19 The amount of the variance is recorded on the 20 balance sheet and then is expensed over the next three 21 years against our revenues. When you see in Exhibit B, 22 Tab 2, Appendix H, Schedule 1, an adjustment to 23 corporate earnings -- 24 MR. BRETT: Sorry. B, Tab 2, Schedule -- 25 MS ELLIOTT: Schedule 1. It's Appendix H. 26 MR. BRETT: Appendix H, Schedule 1. Yes. 27 MS ELLIOTT: If we adjust the corporate 28 financials to the utility financials. Les Services StenoTran Services Inc. 613-521-0703 162 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: Right. 2 MS ELLIOTT: There is an adjustment for what 3 we refer to as gas measurement normalization. 4 MR. BRETT: I see. That's line 3, the 5 footnote. 6 MS ELLIOTT: Footnote 3. 7 MR. BRETT: All right. 8 MS ELLIOTT: In 1999 we expensed $11.7 million 9 out of the balance sheet account to write off part of 10 that, which is really just a recognition that as the 11 balance sheet accumulates, we have to make provisions 12 for those costs against the current year's financials. 13 MR. BRETT: At the risk of -- all right. So 14 it's carried as an asset on the balance sheet. 15 MS ELLIOTT: Carried as an asset on the 16 balance sheet, but for corporate -- 17 MR. BRETT: The corporate balance sheet. 18 MS ELLIOTT: For corporate reporting purposes, 19 we do in fact recognize it as an expense. 20 MR. BRETT: Well, bearing in mind that you are 21 speaking -- that I am a lawyer rather than an 22 accountant, this is -- I understand that. The next 23 question is it is on the balance sheet. It's not in the 24 rate base, or is it? 25 MS ELLIOTT: It is not in the rate base. No. 26 MR. BRETT: And you charge interest, accrue 27 interest on it? 28 MS ELLIOTT: No, we don't. Nor do we write up Les Services StenoTran Services Inc. 613-521-0703 163 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 the losses to the current WACOG. It's on the balance 2 sheet at the level of cost that was incurred in the year 3 that the unaccounted for gas variance was reported. 4 MR. BIRMINGHAM: But the point about the 5 answer to your first question, Mr. Brett, whatever is 6 recovered in rates is what we get from customers. Any 7 difference between what we recover in rates that are 8 actual unaccounted for is funded by the company. 9 MR. BRETT: That's funded by the company. 10 Effectively you are financing it, so you have got a 11 chunk of expenditure that you are financing and not 12 recovering interest in rates for, is what you are 13 saying? 14 MR. BIRMINGHAM: That's right. 15 MR. BRETT: All right. But as I say, 16 conversely, if you had a situation where your recovery 17 was less than you forecasted, you would be being 18 financed by the ratepayers. 19 MS ELLIOTT: Yes. If we were covering more 20 than we were actually incurring, that would go to reduce 21 the amount that we are carrying. 22 MR. BRETT: What your catch-up proposal is, as 23 I understand it, is to take the $22.5 million and to put 24 $4 million of it, as you spell out here in Exhibit D, 25 Tab 2, Schedule 2, adjust the base rates for 2000 to 26 2004 by $4 million in each year. 27 Now, just a clarification here. When you say 28 adjust the base rates, I thought I heard earlier today Les Services StenoTran Services Inc. 613-521-0703 164 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 some conversation where you said in reality it's a pass 2 through or the way in which it's put into rates, it's 3 put in as a pass-through item. 4 I'm sorry, the question really I want to -- 5 just before going any further -- clarify in my own mind 6 here is: Are you going to be calculating the 7 1.9 per cent or the 2 per cent on the $4 million in each 8 year or not? I'm not clear on that. You explained to 9 Mr. Warren this morning exactly how this amount would 10 flow into the pool, as it were, each year, but I'm not 11 all together sure exactly how that works, and 12 particularly how does it impact -- is it compounded by 13 the price cap amount? 14 MS ELLIOTT: Once the adjustment has been made 15 to the base rate. So going into 2000 base rates would 16 be increased by $4 million. That would form the base 17 for the 2001 rates, so it would then be escalated by 1.9 18 per cent, yes. 19 MR. BRETT: Okay. When you say base rates 20 would be escalated, do you mean that the pool of dollars 21 to which the 1.9 is being applied to? 22 MS ELLIOTT: That's right. We are starting 23 with the 1999 base and then we are making a number of 24 adjustments to that base. 25 MR. BRETT: Right. 26 MS ELLIOTT: And escalating that for 2000 27 rates. 28 MR. BRETT: Okay. Les Services StenoTran Services Inc. 613-521-0703 165 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MS ELLIOTT: Moving forward to 2001 we would 2 take the 2000, the rates out of 2000 and escalate those 3 into 2001. So any base adjustments made to rates now 4 would be escalated in 2001 and the adjustments made in 5 2001 would be escalated in 2002. 6 MR. BRETT: Okay. So in that sense it is 7 different than a -- it is fundamentally different than a 8 gas cost pass through, for example, which is simply an 9 amount that is added on after this process is completed. 10 MS ELLIOTT: Once the gas cost pass through is 11 in rates, once that adjustment has been made in the 12 subsequent year, that forms the new base so the new base 13 would be escalated. 14 MR. BRETT: Which gas cost pass through did 15 you think I was talking about? 16 MS ELLIOTT: Well, it would be the 17 pass-through items that were identified in this 18 proceeding, so the compressor fuel, inventory carrying 19 costs and unaccounted for gas. 20 MR. BRETT: Okay. 21 I mean it is the $24 question -- in my mind, 22 at least -- is what does this catch-up proposal got to 23 do with performance-based ratemaking? I mean, I don't 24 see, speaking for myself, any link particularly. This 25 is an accumulated balance that you have that may very 26 well right itself over time, particularly if you are 27 successful in getting the Board to approve your change 28 in formula and indeed, in any event, because there is Les Services StenoTran Services Inc. 613-521-0703 166 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 nothing to say that UFG would -- there is nothing to say 2 that you would systematically underestimate UFG 3 recoveries indefinitely into the future. 4 Why wouldn't this just -- I guess two 5 questions. This could be self correcting. Whether it 6 can or it can't, what is the linkage between this and 7 PBR? I see no connection between the two. 8 MS ELLIOTT: The linkage comes in making the 9 rates as we go into PBR efficient to manage the risks 10 that we are taking on under PBR. Without this change we 11 would continue to use the Board's methodology to capture 12 unaccounted for gas building. There would be an 13 accumulation of the unaccounted for gas variance on into 14 the future. At some point we would have to correct that 15 build up. This is the point in time when we have made 16 that correction or made that proposal. 17 MR. BRETT: All right. So you have picked 18 this time to make the change, but you have also proposed 19 as a complementary measure here that you are going to 20 change the formula by which you calculate, by which you 21 estimate UFG. 22 I think to get a sense of what you are doing 23 here we should look at Schedule 7, Exhibit B, Tab 2, 24 Schedule 7. There is also an IGUA interrogatory which 25 is very helpful in this regard, which is C21.111. If 26 you put those -- at least, if I put those two documents 27 together I am starting to get a feel for what you are 28 proposing to do here. Les Services StenoTran Services Inc. 613-521-0703 167 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 I'm going to just summarize what I think you 2 are doing, the way I think you are proposing to change 3 your formula. 4 Your old method was you simply took the three 5 times -- you took the three years, the next-to-previous 6 three years, multiplied them going backwards by three, 7 two and one, respectively, and then used that as your 8 estimate for UFG going forward. 9 What you are proposing to do here is to 10 calculate a new ratio each year. You take the ratio -- 11 in other words if I -- and I am basing this basically on 12 C21.111 (c), paragraph c) on that page. 13 But let me summarize. You are proposing to 14 calculate a new ratio each year based on the 15 relationship between the previous three years, 16 next-to-previous three years' actual throughput and the 17 three years actual experience -- next-to-three years 18 actual experience UFG. You then get that ratio and you 19 apply that ratio to the 1999 volume, approved volume, 20 for E.B.R.O. 499. And as I understand it, you continue 21 to use that approved volume in 499 in each year. You 22 don't change that part of it, but the ratio changes. Is 23 that basically the change? Have I got that right, or if 24 not could you just -- I think I have that right. 25 MS ELLIOTT: You have the application of the 26 formula right, yes. 27 The change is to use the ratio against the 28 volume. Previously, we took the weighted average volume Les Services StenoTran Services Inc. 613-521-0703 168 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 and divided by the new throughput forecast. So 2 immediately, we set ourselves up to under recover even 3 if our actual experience for the year was the same as it 4 had been on an average basis. If the volume throughput 5 was higher the ratio would fall. 6 MR. BRETT: In your new proposal what you are 7 going to do is use the 1999 approved volume for each of 8 the annual calculations, or are you going to use the new 9 volume that arises from year to year? 10 MS ELLIOTT: No, all the rates are being 11 assessed based on the 1999 approved volumes. 12 MR. BRETT: Right, that's what I thought. You 13 are using the 1999 actual volume or you are using the 14 approved volume? 15 MS ELLIOTT: We are using the approved volume. 16 MR. BRETT: Approved, which is a normalized 17 volume? 18 MS ELLIOTT: Yes. 19 MR. BRETT: Now, my understanding of the 20 effect of that is that as you go forward if you -- let 21 me put this to you in this way -- if your UFG experience 22 deteriorates, continues to deteriorate, it moves up from 23 .55 to .6 to .7 -- this is a hypothetical question, of 24 course -- as I understand the method that you are using 25 here, you would nonetheless take that new ratio and you 26 would apply it to the 1999 volume so that it would in 27 turn then create a higher amount of UFG, if I can put 28 that properly. Les Services StenoTran Services Inc. 613-521-0703 169 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 In other words, what you have is a system in 2 which you are taking three years -- to get the ratio 3 each year you are taking three years actual UFG 4 experience and three years throughput. You are 5 calculating the ratio and then you are applying that 6 ratio to the 1999 approved volume. So if you postulate 7 a rising UFG amount, in other words a rising ratio, then 8 you have a system here which in turn creates for you a 9 larger amount of UFG, does it not? 10 MS ELLIOTT: Except that the ratio or actual 11 experience is generating a higher ratio. What this 12 methodology does is increase the recovery of UFG to 13 match off against those higher costs so that there is an 14 increase in the recovery. 15 MR. BRETT: And that recovery of UFG which is 16 something that is added into rates in the subsequent 17 years? 18 MS ELLIOTT: Yes, the proposal is this 19 methodology, this formula that we currently use today, 20 would be with this modification be used in the future to 21 pass through unaccounted for gas. The alternative is to 22 come up with an adjustment to base rates that is 23 sufficient to allow us to manage the unaccounted for gas 24 amounts going into the PBR term. 25 MR. BRETT: So this number, this is the 5.555 26 on Schedule 7? 27 MS ELLIOTT: That's the current weighted 28 average ratio of our experience from 1998, 1997 and Les Services StenoTran Services Inc. 613-521-0703 170 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 1996. 2 MR. BRETT: The amount that is added in the 3 rates as a result of the reformulation of your approach, 4 that is added in over and above the $4 million. 5 Correct? 6 MS ELLIOTT: Yes, it is. 7 MR. BRETT: Okay. 8 Now, this system as you have designed it, as I 9 understand it, does not -- is it fair to say that 10 whatever else it does it is not much of an incentive for 11 Union to manage its UFG costs? 12 MS ELLIOTT: To the extent that Union will 13 have to bring forward its actual experience in order to 14 get it built into the formula. To establish the 15 reasonableness of that amount for the formula there 16 continues to be an incentive to manage that, to avoid 17 large increases if it all possible, but it is a variable 18 amount. It is generally related to measurement 19 variations and the amount of throughput, but each year 20 we will have to support the next year's actual 21 experience before it is built into the formula. 22 MR. BRETT: It is part of the customer review 23 process? 24 MS ELLIOTT: It is part of the customer review 25 process. 26 MR. BRETT: But that aside, apart from 27 bringing it forward and justifying the amount, the 28 mechanics of the system, of the new method don't in Les Services StenoTran Services Inc. 613-521-0703 171 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 themselves give you an incentive to manage UFG. 2 MS ELLIOTT: The pass-through amount is by its 3 nature defined to be a very mechanical process. It is a 4 question of putting the new actuals into the formula and 5 creating the result. There is no judgement involved in 6 determined what the pass-through amount is. 7 MR. BRETT: But there may be some judgement 8 involved or some skill involved in some fashion in 9 trying to manage UFG? 10 MS ELLIOTT: And that will have -- 11 MR. BRETT: Alternative metering technologies 12 and the like. 13 MS ELLIOTT: That would have to be applied to 14 manage the actual experience in the prior years in the 15 year that is going to be added to the formula. 16 MR. BRETT: Thank you. 17 I would like to touch briefly on Y2K costs. 18 Now, most of this is laid out I believe in C1.179 and 19 you have spoken to Mr. Warren about that. So I won't 20 get into that in great detail. But I just want to be 21 clear that in my own mind that you -- that is C1.179, 22 pages 1 and 2. 23 You have an open deferral account on this 24 item. Correct? 25 MS ELLIOTT: That is correct. Yes. 26 MR. BRETT: But you are also recovering -- you 27 have recovered according to this interrogatory the 7.6 28 million in 1999 rates, which was authorized I believe by Les Services StenoTran Services Inc. 613-521-0703 172 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 the E.B.R.O. 499 Settlement Conference. Right? 2 MS ELLIOTT: Yes. 3 MR. BRETT: But then you also are recovering a 4 further 7.6 million in 2000 rates. Correct? 5 MS ELLIOTT: By virtue of the fact that the 6 existing approved rates are still in effect. So those 7 rates that were approved by 499 are still in effect and 8 still recovering the Y2K costs. So -- 9 MR. BRETT: But you don't have, as I 10 understand it, any approval at the moment from the Board 11 to recover Y2K costs, no explicit approval to recover 12 Y2K costs over and above the 7.6 million that were 13 agreed upon in the Settlement Conference in E.B.R.O. 14 499. I mean there is -- am I right in that? There has 15 never been an explicit consideration of that and 16 approval? 17 MS ELLIOTT: To the extent that their rates 18 were approved and those rates included that recovery -- 19 MR. BRETT: Well, they included a report for 20 1999. 21 MR. PENNY: Perhaps, Mr. Brett, it would help 22 if you would allow the witness to finish the answer 23 before you continue with your question. 24 MR. BRETT: Yes, Mr. Penny, I agree. Sorry. 25 Go ahead. 26 MS ELLIOTT: If I'm not aware of a specific 27 order that took that or takes that amount out of the 28 rates at the end of 1999. So to the extent that the Les Services StenoTran Services Inc. 613-521-0703 173 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 amount is in rates, it continues to be recovered. What 2 we are doing with the revenue is recording it in the 3 deferral account against the costs. But to the extent 4 that we recover more revenues than we incur the expenses 5 to offset, that will be refunded to the customers as the 6 deferral account is disposed of. 7 MR. BRETT: That would be at the end of 2000? 8 MS ELLIOTT: At the end of 2000. 9 MR. BRETT: That is your proposal. So there 10 would be a credit or a rider on rates at that point? 11 MS ELLIOTT: What our proposal is that the 7.6 12 would actually come out of rates at the end of 2000. So 13 effective January 1, 2001, rates would go down by 7.6. 14 At the same time we would be refunding to customers 2.8 15 million dollars which is the recovery in excess of the 16 charges that were actually incurred for Y2K remediation. 17 MR. BRETT: And how would we see that 18 reduction in rates? That would be an explicit 19 adjustment to the -- 20 MS ELLIOTT: The reduction in rates would be 21 an explicit adjustment in the 2001 proposal. So much 22 like we had base rate adjustments between 1999 and 2000, 23 we will have an adjustment between 2000 and 2001 to 24 remove the Y2K costs with subsequent adjustment in 2002 25 to remove the regulatory cost savings. 26 MR. BRETT: You mention that you are still 27 incurring costs in year 2000 but that you may have 28 revenues accruing in 2000 from the sale of equipment. Les Services StenoTran Services Inc. 613-521-0703 174 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 Do you have an estimate of that? 2 MS ELLIOTT: The response to this 3 interrogatory does in fact reflect the most recent costs 4 and we don't currently have any offers for the equipment 5 that we are looking to salvage that I am aware of. So I 6 have no estimate of any reduction in those charges for 7 2000. 8 MR. BRETT: So in terms of -- just getting 9 back to the magnitude of the Y2K cost issue for a 10 moment, are you basically -- are you looking here at 11 this point for the Board to -- I mean you have a 12 deferral account and you have been plugging these costs 13 into the deferral account as you go along. But are 14 you -- we all agreed that E.B.R.O. 499 approved a 15 certain level of Y2K costs. Are you at this time, as 16 part of this proposal, asking the Board -- you are 17 asking the Board, I take it, to approve the balance of 18 the Y2K spending as appropriate spending? 19 MS ELLIOTT: Actually our proposal is to carry 20 that account through to the end of 2000 so that we in 21 fact do capture any further, or in this case it would be 22 credits from the salvage of any equipment so that we 23 would dispose of this balance at the end of -- 24 MR. BRETT: The next case. 25 MS ELLIOTT: In the next -- 26 MR. BRETT: So you would anticipate the 27 discussion about the appropriateness of the level of Y2K 28 expenditures to take place at the next case? Les Services StenoTran Services Inc. 613-521-0703 175 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MS ELLIOTT: Part of the customer review 2 process going into the 20001 changes, yes. 3 MR. BRETT: You do agree with me, though, that 4 we haven't really crossed that bridge yet? 5 MS. ELLIOTT: That is right. We have not. 6 MR. BRETT: Okay. I would like to move now to 7 the 1999 base issue and just a preliminary question on 8 that. It is a general question. It is the question 9 of -- you discussed this somewhat with Mr. Warren. It 10 is a question of roles versus people. You have a -- you 11 have given us some information about the reduction in 12 roles of 177, I believe, roles in 1999. And then you 13 have gone on and talked about positions being held 14 vacant as a means of mitigating costs. 15 Now, I take it that the positions that are 16 being held vacant are not the same -- are not 17 necessarily the same as the 177 roles that were 18 eliminated. You can have a -- in fact I guess to put 19 it, maybe to help my understanding of it along, if the 20 role is being eliminated, then you don't get to the 21 issue of holding a position vacant. 22 These are items that you sum together. You 23 look to see how many roles you eliminated and then you, 24 in addition to that, you can have a situation where you 25 keep roles but you simply don't -- you don't hire people 26 or is it not like that? Could you just explain how the 27 two relate? 28 MS ELLIOTT: Well, as we went through 1999, we Les Services StenoTran Services Inc. 613-521-0703 176 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 would have had the roles defined. 2 MR. BRETT: Sorry? 3 MS ELLIOTT: We would have had the role in 4 1999. But in response to all of the various situations 5 and circumstances that we were managing, the decisions, 6 agreements in the ADR, the affiliate transaction 7 revenue. 8 MR. BIRMINGHAM: The weather. 9 MS ELLIOTT: The weather, the declining use 10 per customer. All of those things would suggest that we 11 needed to respond by looking at our costs. 12 So to the extent that our role was vacant was 13 looked at as to whether it could be held vacant, if the 14 work could be done by the existing staff or if the 15 filling of the role could be delayed somewhat to be able 16 to manage the unfavourable variances and to manage the 17 cost reductions that we needed to achieve in response to 18 the weather and the earnings. 19 Some roles might have been held vacant for the 20 entire year. Those may be roles that were eventually 21 eliminated. I can't for certain say whether the role 22 was eliminated. With the restructuring and the transfer 23 of positions to other departments, the role may have 24 become something else. 25 MR. BRETT: How many roles were held vacant 26 for 1999? 27 MS ELLIOTT: I'm not sure exact roles, but 28 really what the response to that is in Exhibit C3.93 Les Services StenoTran Services Inc. 613-521-0703 177 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 says that there was salary and wage reductions managed 2 through vacancies of $3.4 million during 1999. 3 MR. BRETT: What that means is then that there 4 were roles held vacant through 1999 that had salaries 5 annualized -- not annualized, but salaries, actual 6 salary and wage dollars associated with them of 3.4 7 million that may or may not have been roles that were 8 subsequently eliminated. Right? 9 MS ELLIOTT: That is right. 10 MR. BRETT: And that 3.4 doesn't include 11 benefits, I take it. You would have to gross that up by 12 about 16 per cent as you would the 7.9 million in the 13 same interrogatory response. You would just call those 14 wages and salaries. I am assuming you would apply a 15 mark-up to both of those. 16 MS ELLIOTT: I think this response deals only 17 with the salary. 18 MR. BRETT: Okay. If it were to be -- if it 19 had been reworded to deal with the total compensation, 20 it would be the wages and salaries plus another 16 per 21 cent or so? I have that number in my mind somewhere 22 from a previous case. Maybe I'm -- 23 MS ELLIOTT: There is a response, Exhibit 24 C21.147 that shows the Board-approved salaries and the 25 benefits. The relationship between benefits and 26 salaries is 14 per cent. 27 MR. BRETT: Okay. Thank you. 28 Now, were those roles filled by the end of the Les Services StenoTran Services Inc. 613-521-0703 178 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 year or held vacant? Were they filled by the end of 2 1999 most of them? 3 MS ELLIOTT: There were still vacancies at the 4 end of 1999. I don't know whether they were the same 5 roles that were vacant at the beginning, but at the 6 present time we are not fully staffed so there are still 7 vacancies. 8 MR. BRETT: How many vacancies would you have 9 now, approximately? 10 MS ELLIOTT: I don't know. 11 MR. BRETT: Could you check that, please, or 12 give us an undertaking on that? 13 THE PRESIDING MEMBER: Is that obtainable, 14 Ms Elliott? 15 MS ELLIOTT: It should be, yes. 16 THE PRESIDING MEMBER: I think it is 17 Undertaking G1.6 then. 18 UNDERTAKING NO. G1.6: Ms Elliot 19 undertakes to inform Mr. Brett how many 20 vacancies there are presently 21 --- Pause 22 MR. BRETT: If I could turn for a moment to 23 the exhibit everyone has been looking at here, B2, 24 Appendix H -- that is the supplementary material that 25 you filed, if I can find it -- I just have a couple of 26 questions. 27 I guess if we turn to B2, Appendix H, 28 Schedule 4, which is the O&M page that you were Les Services StenoTran Services Inc. 613-521-0703 179 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 discussing earlier with Mr. Warren, in your note at the 2 bottom, when you explain what accounts for the 3 reductions in services -- I'm sorry, the cost 4 reductions, you say at the last sentence of your "Note": 5 "These costs were managed..." 6 This is the overall reduction in O&M here from 7 258, Board approved, to 248 and your comment is: 8 "These costs were managed through a 9 reduction in pension costs..." 10 Which we talked about: 11 "...reductions in wages salaries and 12 benefits ... reductions in employee 13 expenses ($2.7 million) ... consulting 14 and general ($5.4 million)..." 15 The "employee expenses" item, $2.7 million, 16 could you say what that is, please? That is different, 17 I take it, than wages, salaries and benefits? 18 MS ELLIOTT: Those are essentially travel 19 costs, training costs, meals, transportation, hotel 20 accommodations, education, training programs. 21 MR. BRETT: Just as an aside -- and I meant to 22 ask you this as a preliminary matter -- am I right in 23 thinking that the principles and practices of accounting 24 convention principles and practices, do give the 25 regulated utility some flexibility in the way it deals 26 with certain issues that may not be available to the 27 non-regulated company? 28 MS ELLIOTT: There are generally accepted Les Services StenoTran Services Inc. 613-521-0703 180 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 accounting principles that apply to regulated 2 enterprises. 3 MR. BRETT: Right. 4 MS ELLIOTT: Yes. 5 MR. BRETT: And they give you some leeway with 6 respect to -- deferred taxes is the one that comes to 7 mind, or at least used to give some leeway with respect 8 to deferred tax. 9 MS ELLIOTT: Yes, deferred taxes is the 10 primary one. 11 MR. BRETT: The reduction in "consulting and 12 general" expenses, can you elaborate on that at all? 13 MS ELLIOTT: Consulting and general is really 14 two categories, one being the hiring of outside 15 consultants and contractors to provide support for 16 business initiatives or studies that are ongoing. 17 General expenses would be material supplies, 18 paper, pencils and those kinds of costs. 19 --- Pause 20 MR. BRETT: Thank you very much, Mr. Chairman 21 and panel. Those are my questions. 22 Thank you, panel. 23 THE PRESIDING MEMBER: Thank you, Mr. Brett. 24 It is now 25 to 5:00. I was wondering whether 25 should close for today, but before we did I would like 26 to have some indication of the sequence of 27 cross-examination, if there is one planned. 28 MR. THOMPSON: I think I am next, Les Services StenoTran Services Inc. 613-521-0703 181 1 Mr. Chairman. 2 THE PRESIDING MEMBER: Mr. Thompson, would you 3 be prepared to go for 20 minutes more or would you 4 prefer to start tomorrow morning? 5 MR. THOMPSON: I'm in your hands. I would 6 prefer a fresh start, quite frankly. 7 THE PRESIDING MEMBER: So would we. I think 8 what we will do is we will assemble again tomorrow at 9 nine o'clock. 10 Mr. Thompson and Dr. Wightman, can you find 11 out what the cross-examination sequence is? I don't 12 want to miss anyone. 13 MR. WIGHTMAN: Yes. Yes, I will do that. 14 THE PRESIDING MEMBER: Thank you. 15 So we will close tonight now and meet again 16 tomorrow at 9:00 a.m. 17 MR. PENNY: Mr. Chairman, just before we rise, 18 may I just advise the parties that we can provide copies 19 to the Board of the organization chart which arrived 20 about 20 minutes ago. 21 THE PRESIDING MEMBER: Thank you. I think 22 that would be helpful. 23 So we will see you tomorrow morning at nine 24 o'clock. 25 Thank you. 26 --- Whereupon the hearing adjourned at 1638, 27 to resume on Wednesday, June 14, 2000 at 0900 28 Les Services StenoTran Services Inc. 613-521-0703 182 1 INDEX OF PROCEEDING 2 PAGE 3 Upon commencing at 0931 5 4 Preliminary Matters 5 5 RICK BIRMINGHAM 9 6 PAT ELLIOTT 9 7 Examination-in-Chief by Mr. Penny 9 8 Cross-Examination by Mr. Warren 30 9 Cross-Examination by Mr. Mattson 42 10 Cross-Examination by Mr. Janigan 43 11 Re-Examination by Mr. Penny 44 12 Upon recessing at 1058 83 13 Upon resuming at 1130 83 14 Upon recessing at 1315 87 15 Upon resuming at 1423 87 16 Further Cross-Examination by Mr. Warren 87 17 Upon recessing at 1445 132 18 Upon resuming at 1506 132 19 Decision 135 20 Further Cross-Examination by Mr. Warren 137 21 Cross-Examination by Mr. Brett 155 22 Upon adjourning at 1638 181 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 183 1 EXHIBITS 2 NO. DESCRIPTION PAGE 3 A-8 Bundle of Affidavits 6 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 184 1 UNDERTAKINGS 2 G1.1 Mr. Warren to provide organizational 87 3 chart for the years 1998 and 1999 4 5 G1.2 Mr. Birmingham to provide two 111 6 undertakings, one indicating the 7 total costs for the rates staff, 8 the second indicating Costs 9 Associated with Rate Applications 10 to the Board 11 12 G1.3 Ms Elliott to Provide Actuals 139 13 of the Direct Costs within Union 14 of Supporting the Costs-of-Service 15 Rate Application Process 16 17 G1.4 Ms Elliott undertakes to provide 157 18 the amounts of money that apply to 19 employees that were retired as part 20 of the restructuring 21 22 G1.5 Not used 23 24 G1.6 Ms Elliot undertakes to inform 178 25 Mr. Brett how many vacancies they 26 presently have