185 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 Wednesday, June 14, 2000, 25 commencing at 0910 26 27 HEARING 28 VOLUME 2 Les Services StenoTran Services Inc. 613-521-0703 186 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 187 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 188 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 189 1 Toronto, Ontario 2 --- Upon resuming on Wednesday, June 14, 2000 at 0910 3 THE PRESIDING MEMBER: Good morning. Please 4 be seated. 5 Good morning. Before we start, are there any 6 preliminaries. 7 PRELIMINARY MATTERS 8 MR. PENNY: Yes, Mr. Chairman, first of all, 9 thank you for your indulgence this morning. We wanted 10 to take a few -- we needed a few extra minutes to finish 11 photocopying some material which we have just made 12 available. 13 The first preliminary matter I wanted to raise 14 was to ask you, sir, in the context of the unbundling 15 settlement where for reasons of both scheduling 16 witnesses and as a result of interest of the parties to 17 get under way with some of the Parkway flexibility 18 assignments and the contracting that is required to do 19 that, there is some interest on the part of the parties 20 and Union in knowing when we might expect to have either 21 questions that you may have resulting from the agreement 22 that for clarification or your assistance or/and 23 alternatively the ruling on whether the agreement is 24 acceptable. 25 --- Pause 26 THE PRESIDING MEMBER: Mr. Penny, just like 27 yourselves, I think you will find we have a very loaded 28 agenda. We will aim to do it as early in next weekend Les Services StenoTran Services Inc. 613-521-0703 190 Preliminary Matters 1 as I can. 2 MR. PENNY: Right. Thank you, sir. 3 THE PRESIDING MEMBER: Thank you. 4 Can you hear? 5 --- Pause 6 THE PRESIDING MEMBER: Can you hear now? 7 Okay. 8 Are there any other procedural matters or 9 administrative matters? 10 MR. VEGH: Just one over here, sir. 11 THE PRESIDING MEMBER: Mr. Vegh. 12 MR. VEGH: As part of the direction with 13 respect to the Board's consideration of the ADR, it 14 would be helpful if you could let us know whether you 15 plan to, upon addressing the ADR Agreement, interrupt 16 the PBR portion of the hearing and go to 17 cross-examination on further unbundling issues or 18 whether those unbundling issues will be addressed later 19 in the hearing. 20 THE PRESIDING MEMBER: I thought that Union 21 had proposed a sequence and they were going to finish 22 with these panels and I thought they then had unbundling 23 overview and rational following these panels and that is 24 what we had intended that was probably their sequence in 25 which it would be addressed. And that if we make our 26 findings or seek clarification on unbundling and it 27 happens before that time, we won't get directly into the 28 unbundling evidence unless they happen to coincide. At Les Services StenoTran Services Inc. 613-521-0703 191 Preliminary Matters 1 least that was my understanding by looking at this 2 proposed schedule. 3 Mr. Penny, am I correct? 4 MR. PENNY: This proposed schedule in effect 5 assumes that the unbundling settlement is approved. But 6 if it is not, as I said at the outset, the whole 7 approach to the unbundling issue will have to change and 8 the matter in which the witness panels are assembled and 9 everything else will be quite different. 10 THE PRESIDING MEMBER: Well, in that case 11 then, obviously one of the outcomes of whatever our 12 position is will be a discussion then of what the 13 schedule should be in light of our finding. 14 MR. VEGH: Thank you. 15 MR. LYLE: Mr. Chair, I have just one 16 procedural item. My name is Mike Lyle. I am appearing 17 for Board staff this morning. 18 It has been pointed out to me that there is a 19 small error in the transcript from yesterday. It is at 20 page 162. 21 THE PRESIDING MEMBER: Yes. 22 MR. LYLE: It is towards the top of the page 23 under Mr. Brett's name on the third line, there is a 24 reference to 31.5, and I am told that should be a 25 reference to G1.5. 26 MR. BRETT: I noticed G1.5 was missing. Thank 27 you. 28 THE PRESIDING MEMBER: Any other matters? Les Services StenoTran Services Inc. 613-521-0703 192 Preliminary Matters 1 PREVIOUSLY SWORN: RICK BIRMINGHAM 2 PREVIOUSLY SWORN: PAT ELLIOTT 3 THE PRESIDING MEMBER: Then I have in front of 4 me a sequence of cross-examination or proposed sequence 5 of cross-examination and I believe that Mr. Janigan is 6 next up. Is that correct? Sorry. Mr. Thompson. I 7 have forgotten Mr. Thompson. I remember we stood -- 8 MR. PENNY: Mr. Chairman, Mr. Thompson begins 9 there is one other matter, not procedural but 10 substantive, arising out of the questions of yesterday 11 on 2000 financial information and the helpful comments 12 of the Board with respect to that issue. And it is a 13 four-page document which contains some description on 14 the front page. The Union Gas first quarter financial 15 results press release of May 11, 2000 and then a page 16 containing 2000 normalized, 2000 forecast, 1999 actual 17 and variance columns, the fourth page being some notes 18 to that document. 19 With your permission, Mr. Chairman, I was 20 going to propose before we continue with 21 cross-examination to enable Ms Elliott to outline what 22 this document is and what the basis for it is. 23 MR. LYLE: Perhaps we could mark the document 24 as Exhibit F2.1. 25 EXHIBIT NO. F2.1: Four-page document 26 containing Union Gas' first quarter 27 financial results press release of 28 May 11, 2000, a page containing 2000 Les Services StenoTran Services Inc. 613-521-0703 193 Preliminary Matters 1 normalized, 2000 forecast, 1999 actual 2 and variance columns, the fourth page 3 being some notes to that document. 4 THE PRESIDING MEMBER: Thank you. 5 Mr. Penny, then please proceed. 6 MS ELLIOTT: This document includes on the 7 second page Union's press release for its first quarter 8 results and you will note in the first paragraph the 9 earnings to common were 69 million this year compared to 10 $74 million last year. If you take a look at the second 11 paragraph, it speaks to the primary reasons for that 12 variance being the weather, which was warmer than normal 13 and also warmer than last year. The variance from last 14 year is $6 million. If you take the 69 and the 6, you 15 would get $75 million of earnings this year compared to 16 74 million for a year ago. 17 So essentially for the year 2000 we are on 18 track with last year's earnings. 19 The third page is a presentation that compares 20 for the year ended December 31st of 2000 on a normalized 21 basis; that is it adds back the lost revenues due to the 22 warmer than normal weather. 23 Both columns A and column B for 2000 exclude 24 any revenue assumptions or any outcome expected from 25 this PBR hearing. Absent that revenue on a normalized 26 basis for 2000 we are looking at $94 million for the 27 whole year. On an actual basis our current outlook 28 brings that down to $84 million. Les Services StenoTran Services Inc. 613-521-0703 194 Preliminary Matters 1 These are also corporate statements, not 2 utility statements. So you will note that the 1999 3 earnings reported on an actual basis were $90 million. 4 The variance column is a variance between our current 5 forecast and our 1999 actual results. And to be of 6 assistance I have summarized the majority of those 7 variances on page 4. So explaining the change in gas 8 distribution margin, transportation and storage revenue 9 and the O&M expenses for the year. 10 THE PRESIDING MEMBER: Thank you, Ms Elliott. 11 Anything else? 12 MS ELLIOTT: No, that is it. 13 THE PRESIDING MEMBER: Mr. Penny. 14 MR. PENNY: Thank you, Mr. Chairman. 15 MEMBER JACKSON: Ms Elliott, perhaps it would 16 be helpful if you just indicated to us the ways in which 17 the corporate statements would differ from utility. You 18 can pick the level of detail. I don't need it in too 19 much detail but just the main items that would differ. 20 MS ELLIOTT: The major difference between the 21 corporate and utility statements are the earnings from 22 Union Energy and the pref shares held by Union from 23 Union Energy. 24 The other difference would be the treatment of 25 unaccounted for gas on a corporate basis. It would be 26 expensed as incurred or through the gas measurement 27 normalization adjustment. You can see some of the types 28 of adjustments when you look at the 1999 actuals at Les Services StenoTran Services Inc. 613-521-0703 195 Preliminary Matters 1 Exhibit B, Tab 2, Appendix H on Schedule 1, but the 2 majority of the earnings from UEI pref shares are from 3 Manitoba. 4 MEMBER JACKSON: Where do they appear, under 5 other revenue? 6 MS ELLIOTT: Yes. 7 MEMBER JACKSON: Would you be able to ball 8 park a dollar number difference in the results from the 9 difference in treatment of unaccounted for gas? You 10 would capitalize more on your utility statements, or 11 perhaps the net effect would not be as much as that 12 capitalization because the amount you take through the 13 income statement would be different as well. 14 MS ELLIOTT: And a corporate statement would 15 take more expense through the income statement. The 16 utility number will depend upon the outcome of this 17 proceeding. 18 MEMBER JACKSON: Based on the methodology in 19 the previous proceeding can you give me an idea of what 20 the difference would be between the corporate treatment 21 on a balance sheet and the utility treatment on a 22 balance sheet and, I guess, correspondingly the 23 difference between the corporate treatment on the income 24 statement and the utility treatment on the income 25 statement? 26 MS ELLIOTT: I can do that assuming no change 27 in rates. 28 MEMBER JACKSON: Yes. Les Services StenoTran Services Inc. 613-521-0703 196 Preliminary Matters 1 MS ELLIOTT: If there is a change in notes the 2 treatment should be identical. If our proposal is 3 accepted we should be --- 4 MEMBER JACKSON: Yes. 5 MS ELLIOTT: --- recovering on an utility 6 basis what we are expensing for corporate purposes. 7 MEMBER JACKSON: Right. 8 MS ELLIOTT: I can calculate that. 9 MEMBER JACKSON: Right. So that on the basis 10 of the existing systems, though there is a difference, 11 is what you are telling me? 12 MS ELLIOTT: Yes, there is. 13 MEMBER JACKSON: Yes. I just wasn't sure 14 whether this was a large number or relatively small. 15 MS ELLIOTT: I would like to get back to you 16 on that number. 17 MEMBER JACKSON: Fine, thank you. 18 Perhaps if you are going to get back to us 19 could you just tell us what the Union Energy earnings 20 are that would be in other revenue on the corporate 21 statement? 22 MS ELLIOTT: I can confirm them, but for 1999 23 they were $7.89 million. I have no reason to believe 24 they are different. 25 MEMBER JACKSON: That's fine, thank you. 26 On page 3, I guess it is, the normalized 27 column is normalized only for weather. Is that correct? 28 MS ELLIOTT: In this case on an outlook basis Les Services StenoTran Services Inc. 613-521-0703 197 Preliminary Matters 1 it is normalized for weather and you will notice the O&M 2 expenses under the normalized column are higher. So 3 these efforts to manage the impact of the weather have 4 reduced the O&M and the transport costs. 5 MEMBER JACKSON: Yes, okay. 6 The gas sales revenue item is revenue from 7 existing rates, I take it? 8 MS ELLIOTT: Yes. 9 MEMBER JACKSON: That's again what volumes as 10 we go across line 1? Under the normalized column have 11 you normalized back to a set of volumes, perhaps from 12 the Board's decision, or are you using actuals? 13 MS ELLIOTT: For 2000 we are using forecast 14 volumes. 15 MEMBER JACKSON: Your best forecast, Union's 16 forecast? 17 MS ELLIOTT: Union's forecast for 2000. 18 MEMBER JACKSON: Thank you, good. 19 MS ELLIOTT: Yes. 20 MEMBER JACKSON: Thank you very much. 21 THE PRESIDING MEMBER: Could we make an 22 undertaking G2.1 for the additional information that 23 Ms Elliott has offered to provide Dr. Jackson? Thank 24 you. 25 UNDERTAKING NO. G2.1: Ms Elliott 26 undertakes to provide Member Jackson with 27 additional information based on the 28 methodology in the previous proceeding Les Services StenoTran Services Inc. 613-521-0703 198 Preliminary Matters 1 and giving an idea of what the difference 2 would be between the corporate treatment 3 on a balance sheet and the utility 4 treatment on a balance sheet, and 5 correspondingly the difference between 6 the corporate treatment on the income 7 statement and the utility treatment on 8 the income statement, as well as 9 information indicating what Union Energy 10 earnings are that would be in other 11 revenue on the corporate statement 12 THE PRESIDING MEMBER: Any other matters 13 before we start with Mr. Thompson? 14 Mr. Thompson, I believe it's your call. 15 CROSS-EXAMINATION 16 MR. THOMPSON: Yes, thank you, Mr. Chairman. 17 Just on this exhibit, Ms Elliott, the volumes 18 normalized forecast for 2000 were what? 19 MS ELLIOTT: I don't have that information 20 with me right now. 21 MR. THOMPSON: Would you take $14,802 22 10(6)m(3), subject to check? 23 MS ELLIOTT: I will. 24 MR. THOMPSON: And the updated forecast, would 25 you take $14,560 10(6)m(3), subject to check? 26 MS ELLIOTT: I will have to check those 27 numbers, yes. 28 MR. THOMPSON: Again, just on this document, Les Services StenoTran Services Inc. 613-521-0703 199 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Mr. Warren isn't here, but is this being produced in 2 response to the undertaking you gave to him? Because my 3 understanding was his question was focused on the 4 detailed operating and maintenance budget and the 5 documents pertaining to that. My recollection is you 6 had indicated that the production of those documents 7 would enable us to discern which items of savings 8 occurring in 1999 were sustainable. Are there more 9 documents to come? 10 MS ELLIOTT: No, the variance on Note 4 goes 11 through a continuity from the 1999 O&M to the 2000 12 forecast at the total level. Going through line by line 13 for each area and determining which of the savings 14 resulted from what activity and were sustainable is not 15 an exercise that we can do given the business 16 restructuring. What this note does, however, tell you 17 is productivity and earnings management for the year 18 2000 will generate $10 million worth of reduced O&M. 19 MR. THOMPSON: All right. But just in terms 20 of the documents that exist there are -- am I correct 21 that there are documents showing the detail of the 22 operating and maintenance corporate budget normalized at 23 274 million and then forecast at 269 million? There are 24 papers behind these numbers. Is that correct? 25 MS ELLIOTT: Yes. 26 MR. THOMPSON: Perhaps I will just have to 27 reserve Mr. Warren's rights to determine what he 28 understood the undertaking was to be. I won't pursue it Les Services StenoTran Services Inc. 613-521-0703 200 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 any further now, but your position is what, you will not 2 be producing those documents unless directed by the 3 Board? 4 MR. PENNY: Mr. Chairman, if I could just ask 5 through you for clarification? I don't recall what 6 undertaking Mr. Thompson is referring to. 7 I do recall a discussion about the 2000 budget 8 and Mr. Warren and I had some interchange about that. 9 We received a request on the part of the Board to review 10 what we thought we could provide with respect to that 11 issue with both Mr. Chairman and Dr. Jackson making 12 comments about that. I think we have responded to that 13 by producing what has been produced this morning. 14 If there is another specific undertaking that 15 dealt specifically with certain line items, I don't 16 recall what that was. 17 THE PRESIDING MEMBER: I believe, Mr. Penny, 18 you are right in the sense that the request for an 19 undertaking was deferred, that you were going to see 20 what you would produce and then the opportunity would 21 exist for Mr. Warren if he wasn't satisfied to pursue 22 that undertaking --- 23 MR. PENNY: Quite so, quite so. 24 MR. THOMPSON: Perhaps we should just, 25 Mr. Chairman -- we could reserve until Mr. Warren and 26 perhaps others have studied this document in more detail 27 to ascertain if they need more documents. 28 THE PRESIDING MEMBER: I think that's probably Les Services StenoTran Services Inc. 613-521-0703 201 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 the wisest move at the present time. 2 MR. THOMPSON: Panel, in terms of the topic on 3 the schedule which is "Overview and Rationale for PBR 4 Including Implementation" my plan is to cross-examine in 5 essentially four areas. 6 First, I wanted to just start -- in terms of 7 overview, I wanted to start with an overview of the 8 financial parameters of the PBR relief that you seek and 9 try and put those claims in the sequence of calculations 10 that you make. 11 Having done that, I then want to come back to 12 that sequence to identify the areas in the sequence of 13 calculations where the company and intervenors have 14 differences in terms of the amounts to be included and 15 perhaps their calculations. 16 The third area was to then turn to the 17 rationale for PBR and draw your attention to some of the 18 evidence of others that have been filed on that issue, 19 and then I want to come back to some more detail with 20 respect to 1999 actuals and 2000 budget and forecasts 21 in order to get a better handle on this issue of the 22 headroom that is available to Union going forward under 23 the auspices of the 1999 revenue requirement, Board 24 approved unadjusted. 25 So with that introduction, let me turn to my 26 first topic, which is the financial parameters of the 27 relief that you seek, the company seeks. 28 I believe the most helpful document there is Les Services StenoTran Services Inc. 613-521-0703 202 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Exhibit B, Tab 2, Schedule 1, revised. Could you turn 2 that up, please? 3 THE PRESIDING MEMBER: We have it, 4 Mr. Thompson. 5 MR. THOMPSON: Just to get the sequence of 6 moving from the Board approved 1999 revenue requirement 7 forward into your price cap methodology and adjustments, 8 am I correct that the starting line is line 9, 9 Applicable Revenue, $783,832,000? That would be your 10 calculation of the 1999 revenue requirement base for the 11 derivation -- as the number to which to apply the price 12 cap. 13 MS ELLIOTT: Yes, although yesterday, I 14 indicated that that should be reduced by $7.6 million 15 for the Y2K recovery. 16 MR. THOMPSON: You have modified, then, your 17 original proposal. You are taking the Y2K out? 18 MS ELLIOTT: Yes. 19 MR. THOMPSON: So that number now is what? 20 MS ELLIOTT: $776,232,000. 21 MR. THOMPSON: Well, the Y2K issue was 22 discussed in your evidence as an adjustment to the 1999 23 base rate. 24 Let me come at it this way: The starting 25 revenue requirement -- maybe this is the way to go at 26 it. The starting point derived from E.B.R.O. 499 is 27 down there in footnote 4: $787,205,000. Is that 28 correct? Les Services StenoTran Services Inc. 613-521-0703 203 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Yes, that's correct. 2 MR. THOMPSON: Could you just tell the Board 3 what that number is? It's not all the E.B.R.O. 499 4 revenue requirement, it's part of it. Is that right? 5 MS ELLIOTT: That's the revenue from the 6 delivery rates, so the demands charge, the delivery 7 commodities and the customer related charges would 8 recover the $787 million. 9 MR. THOMPSON: So it excludes the commodity 10 portion of your Board approved E.B.R.O. 499 revenue 11 requirement? 12 MS ELLIOTT: It excludes the commodity cost of 13 gas, it excludes the upstream cost of transportation, 14 and in the north and the east, it also excludes the 15 revenues or the cost of storage, which is why the second 16 item is added into that. Those costs are recovered in 17 the gas supply transportation charge in the north and 18 the east. 19 MR. THOMPSON: Would it be possible for you 20 to -- 21 Well, let's just finish this footnote first. 22 You then have an add-on of delivery, re-delivery, 23 storage and revenue, north and east. Could you explain 24 why that is added on? 25 MS ELLIOTT: Those are the costs of storage 26 and transportation services in the northern and eastern 27 operations area. Basically, the TransCanada STS 28 charges, what used to be Union's M12 rate and the cost Les Services StenoTran Services Inc. 613-521-0703 204 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 of the Centra storage operation, those costs are 2 recovered in the gas supply transportation charges in 3 the north and the east. 4 The same costs are recovered in the delivery 5 revenue in the southern operations area. The price cap 6 proposal includes all of the costs at the point where 7 the gas is received onto Union's system. 8 It may be helpful just to turn up Exhibit B, 9 Tab 2, Appendix C. It really identifies which cost 10 components are under the price cap. We have drawn the 11 line at the point where the gas is received onto the 12 system so that commodity, the upstream transportation 13 and any gas supply balancing costs are outside of the 14 cap. The delivery, re-delivery, storage and 15 transportation and distribution services are inside of 16 the cap, and it's that dark shaded area that is the $776 17 million worth of costs. 18 MR. THOMPSON: All right. The gas supply 19 commodity, upstream transportation, gas supply balancing 20 are pass-through items, are they, under cost of service? 21 MS ELLIOTT: Yes, the gas supply commodity is 22 currently passed through using the quarterly rate 23 adjustment mechanisms. The proposal here is to continue 24 that mechanism for recovering those costs. 25 In addition, we will be passing through the 26 upstream transportation and balancing costs through an 27 annual adjustment. 28 MR. THOMPSON: So those components of the Les Services StenoTran Services Inc. 613-521-0703 205 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 revenue requirement will remain in a cost of service 2 mode, is that fair? 3 MS ELLIOTT: Yes. 4 MR. THOMPSON: Again, coming back to your 5 footnote, short-term gas supply is exclusion from the 6 delivery revenue starting point. Could you just explain 7 why? 8 MS ELLIOTT: Currently, in the delivery rates, 9 there is a charge for gas supply load balancing related 10 costs. So that is being removed because it's not part 11 of the price cap plan. It is currently one of the 12 pass-through items. 13 MR. THOMPSON: So that's removed because it's 14 a pass-through item. 15 MS ELLIOTT: Included in our cost of gas, yes. 16 MR. THOMPSON: And the DCC is removed because 17 you are proposing to eliminate it? 18 MS ELLIOTT: Yes, that's correct. 19 MR. THOMPSON: In order just to have the 20 complete picture here, then, as to how we get to the 21 $783,832,000, could you put together a document that 22 takes us from the E.B.R.O. 499 Decision, including 23 everything, the revenue requirement, total, and then 24 show the gas supply commodity, upstream transportation 25 and other costs you backed out to get to $787,205,000, 26 some sort of trail to follow these numbers? Is that 27 possible? 28 MS ELLIOTT: Yes, I think we can do that. Les Services StenoTran Services Inc. 613-521-0703 206 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: Could I have an undertaking 2 number, please? 3 THE PRESIDING MEMBER: G2.2. 4 UNDERTAKING NO. G2.2: Ms Elliott 5 undertakes to put together a document 6 that takes us from the E.B.R.O. 499 7 Decision, including everything, the 8 revenue requirement, total, and then show 9 the gas supply commodity, upstream 10 transportation and other costs you backed 11 out to get to $787,205,000, some sort of 12 trail to follow these numbers 13 MR. THOMPSON: I didn't get the number. 14 THE PRESIDING MEMBER: G2.2 15 MR. THOMPSON: And then, you have removed the 16 $7.6 million for Y2K costs to bring that down to 17 $776,232,000. And it's to that number, then, that you 18 apply your 1.9 per cent price cap and we see the 19 components of that at lines five through to eight of 20 Exhibit B, Tab 2, Schedule 1. 21 MS ELLIOTT: Yes. 22 MR. THOMPSON: And the price cap component of 23 the revenue requirement that you're seeking for 2000 is 24 the product of the price cap times the number at line 25 nine, which you have now revised, so it's no longer 26 $14,893,000. What is it? 27 MS. ELLIOTT: $14,748,000. 28 MR. THOMPSON: And then, sequentially, in Les Services StenoTran Services Inc. 613-521-0703 207 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 terms of your process, we have the applicable revenue, 2 then we have the price cap derivation and then, having 3 done that, you make adjustments to 1999. I say "revenue 4 requirement", but it's really in 2000. These 5 adjustments that you show up in lines one to four are 6 done after you have applied the cap rather than before. 7 Is that right? 8 MS ELLIOTT: Yes, that's right. 9 MR. THOMPSON: Could you just explain why? 10 MS ELLIOTT: Really, the sequence of the 11 adjustments would be the price cap formula applied to 12 the rates that are existing and, then, the adjustments 13 are made to those rates, creating new base rates. So 14 for 2001, the base rates to be escalated would include 15 any adjustments made to the 1999 base. 16 MR. THOMPSON: Right. But I'm just curious. 17 You could have, in effect, carried on with adjustments 18 to what is your 776,232 by making these adjustments that 19 you have at lines 1 to 3 inclusive, i.e. before applying 20 the price cap. 21 MS ELLIOTT: All of these adjustments are 22 effective January 1, 2000, so the price cap would be in 23 effect January 1, 2000, so would the base rate 24 adjustments. 25 The reconciliation below is really dealing 26 with existing rates to arrive at a base that is existing 27 and then on Schedule I we identified the adjustments to 28 that base. At the same time we are escalating that Les Services StenoTran Services Inc. 613-521-0703 208 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 base. They are done -- it's not a consecutive 2 calculation. The base isn't adjusted and then 3 escalated. It's escalated and adjusted. 4 MR. THOMPSON: I understand that. So would it 5 be fair to describe what appears at lines 1 to 4 as 6 adjustments to the 1999 base rates in 2000? 7 MS ELLIOTT: Yes. 8 MR. THOMPSON: And under your price cap 9 methodology, my understanding is that in order to 10 qualify for adjustment in the year in which the method 11 applies they must be non-routine. Do I understand your 12 method correctly? 13 MS ELLIOTT: There are really three categories 14 of adjustments: the adjustments to the base rates, the 15 non-routine adjustments and the pass-through items. The 16 adjustments to the 1999 base rates -- 17 MR. THOMPSON: In 2000. 18 MS ELLIOTT: -- in 2000 are really separate 19 than from the non -- well, the accounting for pension 20 and other post-retirement benefits is effectively a 21 non-routine adjustment. The deferred tax amortization 22 is a previous commitment that had been made to rates 23 that would have been made under a cost-of-service 24 regulation. So the existing formula, if you will, in 25 rates provided for this adjustment to be made on an 26 ongoing basis and the recovery of the accumulated 27 unaccounted for gas is really a proposal that's made in 28 this case. Les Services StenoTran Services Inc. 613-521-0703 209 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: All right. 2 Will you agree with me that to qualify for 3 adjustment, an adjustment to 1999 base rates or revenue 4 requirement in 2000, the accumulated UFG variance and 5 the change in accounting for pension and other 6 post-retirement benefits must be non-routine? 7 MS ELLIOTT: The change in accounting for 8 pension and other post retirement benefits does meet the 9 definition of a non-routine adjustment. As we have 10 proposed it would be a change in generally accepted 11 accounting principles. 12 The accumulated unaccounted for gas variance 13 is a proposal made in this proceeding for recovery to 14 catch up the unaccounted for gas variances in addition 15 to the proposal made under the pass-through, which will 16 change the formula. 17 MR. THOMPSON: Is it, in your view, a 18 non-routine adjustment? Does it meet the definition 19 that you advocate? 20 MR. THOMPSON: The definition that we are 21 proposing for non-routine adjustments are those 22 adjustments that are outside of management's control and 23 cannot be predicted going forward -- 24 MR. THOMPSON: I don't think this qualifies 25 under -- 26 MS ELLIOTT: Specifically this is not under 27 our definition of non-routine adjustment. This is a 28 proposal to adjust the base rates going into this Les Services StenoTran Services Inc. 613-521-0703 210 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 proceeding, so it is a separate category to reset the 2 starting point for the PBR. 3 MR. THOMPSON: If the Board finds that to 4 qualify for adjustment in 2000 the adjustment proposed 5 must meet the non-routine characterization, then this 6 adjustment would fall by the wayside? 7 MS ELLIOTT: Yes. 8 MR. THOMPSON: Now, the next step in the 9 determination of your increment to revenue requirement 10 claims in 2000 is to do the pass-through items. We see 11 those at lines 11 through to 16. 12 MS ELLIOTT: Yes. 13 MR. THOMPSON: I will come back to these in a 14 little more detail later, but there has been some 15 discussion of them. The gas costs for unaccounted for 16 gas WACOG change of $5.6 million approximately, that 17 assumes that the method for calculating UFG in 2000 18 changes. Is that right? 19 MS ELLIOTT: Yes. That's the change in WACOG 20 applied to the proposed volume for 2000. 21 MR. THOMPSON: We just want to make a note 22 here on your document of what that number would be if 23 the current method for calculating unaccounted for gas 24 continued. We will find that I believe in 25 Exhibit C21.111 at page 2. The number, I believe, is 26 $5,148,000. Is that correct? 27 MS ELLIOTT: Yes. That's the WACOG change 28 applied to the volume that would be generated by the Les Services StenoTran Services Inc. 613-521-0703 211 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 existing methodology. 2 MR. THOMPSON: It would be about a half a 3 million dollars. Well, between four and $500,000 less 4 than under the proposed methodology. 5 MS ELLIOTT: Yes. 6 MR. THOMPSON: Thank you. 7 Just for clarification, the WACOG change that 8 this exhibit speaks to is what WACOG change? 9 MS ELLIOTT: To bring our forecast up to the 10 weighted average cost of gas effective December 1st, 11 1999 which was $169 and 60.9 cents. 12 MR. THOMPSON: There has been another WACOG 13 change approved, has there not? 14 MS ELLIOTT: Yes. As of June 1 our WACOG 15 increased -- and I can't quote the price to three 16 decimals, but it's around the $181 mark. 17 MR. THOMPSON: Would you undertake to give us 18 these pass-through items on the basis of the current 19 WACOG? 20 MR. LYLE: We will mark that as Undertaking 21 G2.3. 22 UNDERTAKING NO. G2.3: Ms Elliott 23 undertakes to provide the pass-through 24 items on a current WACOG basis 25 MR. THOMPSON: I have the UFG pass-through 26 items under current WACOG shown in both the current and 27 proposed methodology modes. 28 MS ELLIOTT: Yes. Les Services StenoTran Services Inc. 613-521-0703 212 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: The inventory carrying costs, 2 that is again based on a December 1, 1999 WACOG? 3 MS ELLIOTT: Yes, it is. 4 MR. THOMPSON: That will need to be updated. 5 And the same with the compressor fuel at line 13. 6 MS ELLIOTT: Yes. 7 MR. THOMPSON: Now, the return on equity, 8 line 8, would you just explain briefly how that has been 9 derived? 10 MS ELLIOTT: The calculation of the return on 11 equity pass-through is found at Exhibit B, Tab 2, 12 Schedule VI. Using the Board-approved formula to 13 calculate the return on equity and the November 1999 14 consensus forecast. The proposed return on equity has 15 been applied to the 1999 approved rate base using a 35 16 per cent common equity component, arrives at the 17 proposed adjustment of $5,699,000. 18 MR. THOMPSON: Just to put this in context, 19 what is the equity return that is currently included in 20 the applicable revenue of $776,232,000? 21 MS ELLIOTT: The existing approved return on 22 equity from 499 is 9.61 per cent. 23 MR. THOMPSON: Yes, but is the dollar -- what 24 is the dollar amount in the 776,232? 25 MS ELLIOTT: It would be $91 million. 26 MR. THOMPSON: Ninety-one million. Then there 27 are taxes over and above that. Correct? 28 MS ELLIOTT: Yes. Les Services StenoTran Services Inc. 613-521-0703 213 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: What is the tax component on 2 equity? 3 MS ELLIOTT: The tax component is $71 million. 4 MR. THOMPSON: Seventy-one million. So the 5 total is $162 million? 6 MS ELLIOTT: Yes. 7 MR. THOMPSON: And your flow-through 8 adjustment is a pre-tax number? 9 MS ELLIOTT: Yes, it is. 10 MR. THOMPSON: All right. So you are adding 11 to the $162 million about $5.7 million of equity return, 12 including taxes? 13 MS ELLIOTT: Yes. 14 MR. THOMPSON: All right. 15 You pointed out, Mr. Birmingham, in your 16 examination-in-chief that this flow-through item under 17 your proposal only pertains to the equity component of 18 rate base approved in E.B.R.O. 499? 19 MR. BIRMINGHAM: That's right. 20 MR. THOMPSON: All right. 21 As I understand it, then, to the extent you 22 add $100 of rate base, the equity cost of that added 23 $100 rate base you will manage under the price cap? 24 MR. BIRMINGHAM: That's true, as well as the 25 cost of debt that is associated with new investment. 26 MR. THOMPSON: Right. Well, your managing 27 costs of debt under everything. There is no 28 flow-through of any cost of debt -- Les Services StenoTran Services Inc. 613-521-0703 214 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. BIRMINGHAM: That's right. 2 MR. THOMPSON: -- but you are flowing through 3 an equity return on the equity component of Board 4 approved E.B.R.O. 499 rate base? 5 MR. BIRMINGHAM: That's correct. 6 MR. THOMPSON: The unaccounted for gas item at 7 line 15 again reflects this methodology change from a 8 great volume allowance to a ratio calculation. I will 9 come back to that in a little more detail later, but 10 that reflects the new way of doing things, or the 11 proposed way of doing things? 12 MS ELLIOTT: Yes, that is correct. 13 MR. THOMPSON: Again, just to put the number 14 there that would apply under the old way of doing 15 things -- I'm sorry, the current way of doing things and 16 the way of doing things as long as you can remember -- 17 again, this is from C21.111 -- it is $3,697,000? 18 MR. PENNY: That reference again, 19 Mr. Thompson, was? 20 MR. THOMPSON: Yes, Exhibit C21.111, page 2. 21 MS ELLIOTT: Yes. 22 MR. THOMPSON: But due to volume it is 3,607 23 versus the 5,555? 24 MS ELLIOTT: Yes, that's correct. 25 MR. THOMPSON: All right. Those numbers will 26 not change with a WACOG, or will they? 27 MS ELLIOTT: No. The change has been divided 28 into two parts. The change at line 15 is volume only at Les Services StenoTran Services Inc. 613-521-0703 215 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 the WACOG in the current rates. The change to the new 2 WACOG is captured in line 11. 3 MR. THOMPSON: Just stopping there for a 4 moment and coming back to the question that Dr. Jackson 5 asked you about the difference between what is recorded 6 in your corporate financials for unaccounted for and 7 what would be recorded under utility amounts, is it not 8 the difference between $5.6 and $3.7 million? 9 MS ELLIOTT: That would be one of the 10 differences, yes. 11 MR. THOMPSON: What are the other? 12 MS ELLIOTT: Well, the $5.6 million is still a 13 weighted average methodology. 14 MR. THOMPSON: You are saying there is even 15 more than $5.6 million recorded in the corporate 16 statement? 17 MS ELLIOTT: Yes. The actual unaccounted for 18 gas volume cost for the year are recorded in the 19 corporate financials. 20 MR. THOMPSON: Can you tell us how much more 21 that would be than $5.6 million, approximately, or how 22 we can -- 23 MS ELLIOTT: If I look at Appendix H, 24 Schedule 1, the amount recorded in 1999 for the gas 25 measurement normalization adjustment, which is the 26 corporate accounting for unaccounted for gas, it was 27 $11,661,000. Those are costs above what are recovered 28 in rates. Les Services StenoTran Services Inc. 613-521-0703 216 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: All right. So that order of 2 magnitude would be expected in the corporate 3 calculation? 4 MS ELLIOTT: Yes. 5 MR. THOMPSON: So it's another $5 million 6 anyway. 7 MS ELLIOTT: Yes. 8 MR. THOMPSON: That is in the corporate 9 statements that you have prepared. In the corporate 10 normalized budget you have another $5 million over and 11 above the $5.6 million in there for UFG expense. 12 MS ELLIOTT: I indicated to Dr. Jackson 13 earlier that I would undertake to determine what was in 14 the 2000 corporate versus what would be in the utility 15 without any change in rates. 16 MR. THOMPSON: Yes, I appreciate you did, but 17 I'm just, for the purposes of going forward, trying to 18 get an order of magnitude. Am I in the ballpark? 19 MS ELLIOTT: I think so. I do have to check 20 those numbers. 21 MR. THOMPSON: Thank you. 22 Then the total of the changes to rates that 23 you are seeking we find at line 17, which again will now 24 be changed. And it is what? 25 MS ELLIOTT: It will be $35,384,000. 26 MR. THOMPSON: Those are the rate changes that 27 you are seeking and that is not the end of the story. 28 You are also seeking to take the complete share that is Les Services StenoTran Services Inc. 613-521-0703 217 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 currently allocated to ratepayers of transactional 2 services deferral account revenues and market price 3 storage premium revenue. Correct? 4 MS ELLIOTT: Yes. Under this proposal we are 5 proposing to eliminate the current deferral accounts for 6 S&T revenues. 7 MR. THOMPSON: Could we just find out what 8 those amounts are expected to be in 2000, the 9 transactional services deferral account? I appreciate 10 this account operates above a forecast that is embedded 11 in the 1999 rates. 12 --- Pause 13 MS ELLIOTT: There is a schedule filed at 14 Exhibit B, Tab 5, and it is Schedule 2. This schedule 15 lists, at the far right-hand side of the page, the 16 balances in the deferral account. 17 MR. THOMPSON: Excuse me, B, Tab 5? 18 MS ELLIOTT: B, Tab 5, Schedule 2. Actually 19 there is probably an easier schedule to read which is at 20 B, Tab 5, Appendix C. 21 On page 2 of Appendix C the first six lines 22 list the storage and transportation related deferral 23 accounts and they are balances as at the end of 1999. 24 MR. THOMPSON: Right. And the total of those 25 is what? 26 MS ELLIOTT: Five million six hundred and 27 eighty-two thousand dollars ($5,682,000). 28 MR. THOMPSON: Right. And where do I find the Les Services StenoTran Services Inc. 613-521-0703 218 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 storage premium account? 2 MS ELLIOTT: I think that is account 179-72 at 3 line 4. 4 MR. THOMPSON: Why is that showing a debit? 5 I was trying to get for 2000 some idea of what 6 you were forecasting for what we call the transactional 7 services deferral account and then the market premium. 8 And I had understood that in 2000 there should be 9 increases in that because some M12 shippers have gone to 10 market price storage. The number I have in my mind 11 subject to check for two of the accounts in total is 12 $7 million. I am happy if you take an undertaking, but 13 am I in the ballpark subject to check? 14 MS ELLIOTT: Yes, you are. The long-term 15 storage premium for 1999 was refunded to customers at 16 the beginning of the year. So the refund was 17 processed -- 18 MR. THOMPSON: In advance. 19 MS ELLIOTT: -- in advance. And it was, I 20 believe, in the $2 million range. 21 MR. THOMPSON: So for 2000 is it reasonable 22 for the purposes of this cross-examination to assume 23 that the ratepayer share of those revenues if it 24 continues in 2000 would be about $7 million? 25 MS ELLIOTT: Yes. 26 MR. THOMPSON: And so what the company is 27 proposing is that it now realize that $7 million and 28 that is in addition to the $35.4 million that you are Les Services StenoTran Services Inc. 613-521-0703 219 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 claiming by way of rate changes? 2 MS ELLIOTT: Yes. 3 MR. THOMPSON: So the total rate changes that 4 you are seeking is about 42 under your proposal in 2000 5 and without having any change in here for current WACOG 6 is about $42.4 million? 7 MS ELLIOTT: No, the rates changes would be 8 about $35 million. The S&T revenue does not impact the 9 customers' rates. 10 MR. THOMPSON: I understand that. But it -- I 11 want to bring these numbers forward to your corporate 12 statement. So we have to add them in terms of the 13 impact on the shareholder, we add them? 14 MS ELLIOTT: It is a revenue change, yes. 15 MR. THOMPSON: Okay. And in terms of their 16 impact on the shareholder as shown in this corporate 17 statement, filed F.2.1, you would be adding revenues 18 pre-tax of about 42.4 million? 19 MS ELLIOTT: Yes. 20 MR. THOMPSON: And after tax that would be 21 what? 22 MS ELLIOTT: Twenty-four million dollars ($24 23 million). 24 MR. THOMPSON: And so the earnings applicable 25 to common shares would increase by $24 million? 26 MS ELLIOTT: Yes. 27 MR. THOMPSON: Because you have already 28 recorded expenses for UFG in this statement, formalized Les Services StenoTran Services Inc. 613-521-0703 220 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 or forecast on the basis of actuals? 2 MS ELLIOTT: Yes. 3 MR. THOMPSON: And $24 million means what in 4 terms of basis points on the equity return, a component 5 of rate base? 6 MS ELLIOTT: It's 107 basis points. 7 MR. THOMPSON: One hundred and seven (107)? 8 MS ELLIOTT: One hundred and seven (107). 9 MEMBER JACKSON: Mr. Thompson, just so that we 10 can follow, could I interject a question? 11 MR. THOMPSON: Yes, by all means. 12 MEMBER JACKSON: That is an answer sort of 13 based on all other things being equal then. It doesn't 14 take into account any changes in debt costs, for 15 example, that would occur in the year 2000? 16 MS ELLIOTT: That is all other things being as 17 forecast, yes, for the year 2000. 18 MEMBER JACKSON: You say "as forecast", are 19 you forecasting for these purposes a cost of debt which 20 is different from that which was used in last rate 21 proceeding? 22 MS ELLIOTT: Yes. Yes, the 2000 forecast will 23 reflect our current outlook, current debt levels, 24 current interest rates. 25 MEMBER JACKSON: Thank you. 26 MR. THOMPSON: Yes. Could you just tell me 27 how you arrived at 107 basis points? 28 MS ELLIOTT: I would like to check it again Les Services StenoTran Services Inc. 613-521-0703 221 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 here. 2 MR. THOMPSON: My suspicion is it is a little 3 low but -- I thought Mr. Birmingham told us 14 million 4 was about a hundred, and so I was just ballparking 24 5 has got to be more like a hundred and something. 6 --- Pause 7 MS ELLIOTT: Yes. Sorry. My calculation 8 wasn't correct. 9 The rate base and the 2000 normalized forecast 10 is 2,900,000,000; 35 per cent of that is 1,015,000,000. 11 Twenty-four (24) million dollars on that equity 12 component would be about 240 basis points. 13 MR. THOMPSON: Thank you. 14 Now, could I ask you to insert in -- well, 15 it's another schedule -- using page 3 of 4 of 16 Exhibit F2.1, adding two columns, one after normalized, 17 to show the impact of what you are claiming for the 18 additional revenues from the deferral accounts as well 19 as by rate increase and taxes and the rate of return 20 calculations at the bottom, and the same thing after 21 your 2000 forecast so we could see the impact of the 22 claim in the context of this corporate forecast? 23 MS ELLIOTT: I can do that. 24 MR. LYLE: Marked as Undertaking G2.4. 25 UNDERTAKING NO. G2.4: Ms Elliott 26 undertakes to provide Mr. Thompson 27 additional information by using page 3 of 28 4 of Exhibit F2.1, adding two columns, Les Services StenoTran Services Inc. 613-521-0703 222 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 one after normalized, to show the impact 2 of Union's claim for the additional 3 revenues from the deferral accounts, as 4 well as the rate increase and taxes and 5 the rate of return calculations at the 6 bottom, and to provide additional 7 information using the 2000 forecast to 8 indicate the impact of the claim in the 9 context of Union's corporate forecast 10 MR. THOMPSON: Having done that now, I would 11 just like to run through with you -- and this is to help 12 the Board and perhaps others -- where the company and 13 intervenors differ on the calculation, the PBR financial 14 parameters as I call them. I have provided you this 15 morning on about 24 seconds notice, not 24 hours -- and 16 I placed on the Board's dais some output from the IGUA 17 1941 IBM desktop. 18 MR. JANIGAN: This is the satellite version 19 called PBR Guide? 20 MR. THOMPSON: That's right. 21 MR. JANIGAN: Where did you get that font? 22 MR. THOMPSON: Well, you can blame my mother 23 for that. But this was produced at about five a.m. this 24 morning. 25 I'm hoping that at the end of it perhaps the 26 company might convert it to something that is more 27 legible and make adjustments to it if you think I have 28 misstated anything here. What I am trying to do here is Les Services StenoTran Services Inc. 613-521-0703 223 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 to put your claim and then the position of others in 2 context so that when we talk about adjustments we can 3 focus on where they appear in the chain of calculation. 4 MR. LYLE: We will make the document 5 Exhibit F2.2. 6 EXHIBIT NO. F2.2: Document Produced by 7 Mr. Thompson entitled "PBR Guide" 8 MR. THOMPSON: Category A here -- I have 9 called this PBR Guide -- Category A is the 1999 revenue 10 requirement base. I did this when I thought Y2K was an 11 adjustment that comes under B. So perhaps you could 12 just stick with me on these numbers and we will fill 13 this in quickly. 14 But the items, lines 1 to 5, would you take, 15 subject to check, are the items that appear in the 16 footnote in Exhibit B, Tab 2, Schedule 1? 17 MS ELLIOTT: Yes. 18 MR. THOMPSON: Then the line 6 and following 19 are what I have entitled the "Pass-Through Components" 20 in line 5. The pass-through components we have from 21 your Exhibit B, Tab 2, Schedule 1 include unaccounted 22 for gas, inventory carrying charges, compressor fuel, 23 equity return and taxes. 24 So I just wanted to identify in the 783,832 25 those components. These numbers would come from the 26 E.B.R.O. 499 Board-approved revenue requirement. Would 27 you take, subject to check, that the compressor fuel 28 component is 16.5 million? Les Services StenoTran Services Inc. 613-521-0703 224 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Yes. 2 MR. THOMPSON: And that the inventory carrying 3 costs are $12.3 million? 4 MS ELLIOTT: Yes. 5 MR. THOMPSON: And that the UFG component is 6 $17.6 million? 7 MS ELLIOTT: Yes. 8 MR. THOMPSON: The equity return component you 9 gave me earlier is $91 million? 10 MS ELLIOTT: Yes. 11 MR. THOMPSON: The taxes on the equity return 12 are $71 million? 13 MS ELLIOTT: Yes, for a total of $162 million. 14 MR. THOMPSON: Okay. So the sub-total of 15 pass-through components -- I haven't done the 16 calculation, but it would be lines 6 to 10. We can all 17 do that number -- those are the pass-through components 18 in that number and are similar to the, I would suggest, 19 the gas commodity upstream transportation and the gas 20 balancing costs that you have excluded from the cap? 21 MS ELLIOTT: No, they are not similar to. 22 There is a difference between those components and the 23 components that have been excluded from the cap. 24 We are not passing through any volume changes 25 on the compressor fuel inventory. We are not passing 26 through any growth or changes in equity. We are only 27 passing through the returned component on existing 28 equity. We are only passing through in compressor fuel Les Services StenoTran Services Inc. 613-521-0703 225 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 the price component on the inventory as well on the 2 existing levels. There is no adjustment for increases 3 to those levels. 4 In terms of our cost of service increase 5 moving forward, those items as we go forward under PBR 6 will be subject to the price cap. So there will have to 7 be -- increases in volume will have to be managed under 8 the price cap. 9 MR. THOMPSON: Well, this is an area, perhaps, 10 of the dispute between the company and intervenors. But 11 just to understand what you are saying in terms of 12 compressor fuel, the extent compressor fuel costs 13 increase in the year 2000, what are you telling us? You 14 will pass through the unit cost of that increase based 15 on the volumes that have flowed in -- sorry -- the 16 volumes, the Board-approved volumes in 499, don't you 17 think? 18 MS ELLIOTT: Yes, the only pass through is the 19 change in the weighted average cost of gas. The 20 pass-through items are really those items that are not 21 within management's control. So the volume is subject 22 to changes -- we increase our load or decrease our 23 load -- is potentially manageable by the company. 24 The price at which we must pay for our 25 compressor fuel, however, is not manageable. As a 26 supplier of gas we are subject to incurring those costs 27 at the weighted average cost of gas. We don't have the 28 ability to go out and contract for a source of Les Services StenoTran Services Inc. 613-521-0703 226 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 compressor fuel at a price of gas other than the 2 weighted average cost of gas. So that component is the 3 pass through. It is that which is not subject to 4 management control. 5 MR. THOMPSON: I just want to understand. 6 Let's assume that your compressor -- you had 100 units 7 of compressor fuel approved in 499. Let's assume that 8 the 499 cost is $100. 9 MS ELLIOTT: We can actually look at the 10 calculation at Exhibit B, Tab 2, Schedule 5. I'm 11 looking at a schedule that is corrected, dated 12 December 22nd, 1999. 13 MR. THOMPSON: Right. 14 MS ELLIOTT: At lines 13 and 15, you see the 15 volume of compressor fuel. Those are the 1999 approved 16 volumes. And all we are doing in the pass-through is 17 updating those volumes to the new WACOG. 18 MR. THOMPSON: I understand that. I just want 19 to understand what the implications are. 20 Let's assume we have 100 units of compressor 21 fuel and the cost is $100, so that the E.B.R.O. 499 cost 22 is a dollar per unit. 23 MS ELLIOTT: Okay. 24 MR. THOMPSON: And let's assume that in 2000, 25 the costs of compressor fuel go up $10. We would now 26 have $110 -- 27 MS ELLIOTT: Okay. 28 MR. THOMPSON: Compressor fuel costs. Well, Les Services StenoTran Services Inc. 613-521-0703 227 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 we have an additional $10 of compressor fuel costs, 2 right? 3 MS ELLIOTT: Yes. 4 MR. THOMPSON: And you're going to 5 pass-through, then, 10 cents per unit. 6 MS ELLIOTT: Yes. 7 MR. THOMPSON: All right. And if you have, in 8 2000, 200 units flow in, you will get $20 recovery, but 9 you have only had $10 of increased costs. So you are 10 not doing us any favours here. 11 MS ELLIOTT: Well, if I had 100 units in the 12 base rate and it goes up by $10 and I'm going to 13 pass-through the increase in the cost, if I actually 14 move twice as much volume, I will have twice as much 15 compressor fuel. 16 MR. THOMPSON: Meaning what? That there will 17 always be a match? 18 MS ELLIOTT: Yes. 19 MR. THOMPSON: So, then, why do you have a 20 problem -- 21 If it's going to be pass-through, why would 22 you have a problem in treating it as a pass-through 23 using the costs of -- 24 Treat it like you do gas costs. How do you 25 treat gas costs? 26 MS ELLIOTT: Gas costs are going to be 27 treated, under this proposal, the same way they're 28 treated today. So the price and volume and mix will be Les Services StenoTran Services Inc. 613-521-0703 228 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 forecast and recovered through new rates on an annual 2 basis. 3 Compressor fuel, to the extent that I use the 4 same amount of fuel on average into the future as I have 5 in approved rates, then there is no volume variance, if 6 you will. But if my compressor fuel increases at a 7 greater rate or decreases, those are variances that will 8 be managed under the price cap. The variance that is 9 not being managed under the price cap is simply the 10 price variance. 11 MR. THOMPSON: The pass-through items are 12 really part of the second panel. I'm going to have to 13 come back to this volume issue because I am not 14 satisfied that what you are suggesting is reasonable. 15 But just to come back to our road map here, 16 intervenors take the position that the price cap should 17 be applied to a 1999 revenue requirement base, less 18 pass-through items, and the company has a different 19 position on that issue. 20 MR. BIRMINGHAM: That's right. 21 MR. THOMPSON: And, then, moving forward to 22 the second step in the process that we discussed 23 earlier, adjustments to the 1999 base, before applying 24 the price cap or determining what I call the price cap 25 component of 2000 rates -- that's what those 26 hieroglyphics at the right mean -- first of all, there's 27 a position of intervenors that we need to reduce the 28 1999 base for 1999 actuals. Would you agree that is Les Services StenoTran Services Inc. 613-521-0703 229 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 their position? 2 MR. BIRMINGHAM: I would agree that that is 3 the position that some intervenors seem to be putting 4 forward in their evidence, yes. 5 MR. THOMPSON: Again, I will come back to this 6 in a little more detail. 7 If there is to be a reduction for actuals, 8 what do you say the number should be? Should it be, in 9 your view, the $8,242,000 pre-tax revenue sufficiency 10 shown in the H Exhibits? 11 MR. BIRMINGHAM: We say there shouldn't be an 12 adjustment, Mr. Thompson. 13 MR. THOMPSON: Yes, I understand that. But 14 there's a debate over what the number ought to be. I'm 15 just giving you your chance. If there's going to be 16 one, is that the number, in your view? 17 MR. BIRMINGHAM: The numbers, as they have 18 been calculated, for the 1999 actuals would show, on the 19 basis of simply normalizing the revenue for weather, a 20 revenue sufficiency of some $8.2 million. But as I 21 said, it's Union's position that that is not an 22 appropriate base for the Board to use with respect to 23 the PBR. 24 MR. THOMPSON: And that number comes from 25 the H -- 26 Perhaps you could just, for the record, tell 27 us where that number is. 28 MR. BIRMINGHAM: That is Exhibit B, Tab 2, Les Services StenoTran Services Inc. 613-521-0703 230 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Appendix H, Schedule 8, line 7, column C. That's a 2 pre-tax number of $8.242 million. 3 MR. THOMPSON: The other item that I have 4 shown on my road map here, at line 15, is the 5 elimination of the Y2K of $7.6 million and you have done 6 that now in your calculations, correct? 7 MS ELLIOTT: Yes. 8 MR. THOMPSON: At line 16, in terms of the 9 further adjustments before applying the price cap, your 10 position there should be no adjustments -- well, subject 11 to the change on seven point six and the intervenors' 12 position, those adjustments at 14 are necessary. 13 And then, moving forward to the price cap 14 formula and application, you gave us your claim in-chief 15 of 1.9 per cent and its components, as I understand it, 16 are inflation of 1.6 per cent fuel factor productivity 17 of -.07 per cent and a stretch factor of 0.4 per cent. 18 MR. BIRMINGHAM: That's right. 19 MR. THOMPSON: And that factor in your 20 proposal applies for five years, commencing January 1, 21 2000? 22 MR. BIRMINGHAM: That's correct. 23 MR. THOMPSON: The intervenors' position on 24 these components and, if you will, the net between 25 inflation and productivity varies and the numbers could 26 be zero or less, on their evidence. Is that fair? 27 MR. BIRMINGHAM: On the basis of the 28 intervenors who have filed evidence, Mr. Thompson, and Les Services StenoTran Services Inc. 613-521-0703 231 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 I'm not really sure because some of the evidence, for 2 instance, the evidence of Mr. Johnson really deals with 3 a cost of service type of approach. So what his 4 corresponding price cap would be on the same basis, I'm 5 not sure. 6 But I do take your point that the intervenors 7 who have filed evidence have a significantly different 8 approach and position than we do. 9 MR. THOMPSON: Then I have said in this 10 document that Union applies the price cap to line 5 -- 11 and actually it's now line 5 minus line 15 -- whereas 12 intervenors apply the price cap to line 16, which is 13 revenue requirement base less pass-through items, less 14 adjustments. 15 That's the difference between the parties at a 16 high level. Is that fair? 17 MR. BIRMINGHAM: I will take that if that's 18 the position of the intervenors, Mr. Thompson. 19 As I understand it, they are taking the 20 delivery revenue requirement, they are eliminating some 21 costs, which is lines 6 through 10, and as well line 15 22 to apply the price cap to. Is that right? 23 MR. THOMPSON: Eliminating what they regard as 24 the pass-through components in line 5. 25 MR. BIRMINGHAM: I understand that. 26 MR. THOMPSON: Then the next step, as we 27 discussed, was with respect to adjustments in 2000. 28 I have characterized them as non-routine. You Les Services StenoTran Services Inc. 613-521-0703 232 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 have made it clear that as far as you are concerned you 2 may not have to meet that criterion in 2000 but the 3 items claimed, we have discussed recovery of the 4 accumulated UFG of $4 million, the accounting change per 5 pension of $6.8 million, and then there is the 6 accumulated deferred tax drawdown which is a credit of 7 $10.3 million. Those are numbers that appear in your 8 Exhibit B, Tab 2, Schedule I. 9 MR. BIRMINGHAM: That's right. 10 MR. THOMPSON: Then there is this regulatory 11 cost savings issue which is again an adjustment but it 12 only, on your evidence, becomes effective January 1, 13 2002, so it's not an adjustment in year 2000. 14 MR. BIRMINGHAM: That's right. Although we 15 are asking the Board for the rate reduction effective 16 January 1, 2002 of $800,000. 17 MR. THOMPSON: Right. The amount of that 18 adjustment is a matter that is in dispute between the 19 parties. There is evidence which I will come to in a 20 moment focusing on that particular item? 21 MR. BIRMINGHAM: Right. 22 MR. THOMPSON: All right. 23 We then have a total for what I call 24 non-routine adjustments and to which we then add the 25 pass-through items. 26 What I have tried to do here, and again it's 27 not very legible, but this is focusing on what was in 28 your Exhibit B, Tab 2, Schedule I, under "Pass-through Les Services StenoTran Services Inc. 613-521-0703 233 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 items". I have, under "Gas costs WACOG" -- and that 2 first column reads, "Changed methodology for UFG." What 3 the second one reads is, "Existing methodology for UFG." 4 What I have simply reproduced at lines 26 to 30 of this 5 schedule are the numbers that -- I probably didn't add 6 them up right -- 7 MR. BIRMINGHAM: But the numbers that you have 8 in the changed methodology are the numbers that come 9 from Exhibit B, Tab 2, Schedule I, and then the 10 corresponding numbers under the column that you have 11 titled "Existing methodology" are the numbers from 12 C21.111. 13 MR. THOMPSON: Right. Correct. 14 And in lines 31 and 32 I have stated what I 15 understand Union's position to be and the intervenors' 16 position. Some of them take the position, again as I 17 understand it, that the equity pass-through adjustment 18 should be out, but equity should not be excluded as a 19 pass-through item up in line 9. In other words, equity 20 return should come under the cap. 21 MS ELLIOTT: I understand that proposal or 22 position is linked to the position that inflation should 23 vary in the formula. 24 MR. THOMPSON: Yes. That's correct. 25 Just on that point your position is that the 26 cap should be determined for five years on a fixed 27 basis. That's your position? 28 MR. BIRMINGHAM: That the net price cap of Les Services StenoTran Services Inc. 613-521-0703 234 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 1.9 per cent be fixed for the five-year period. That's 2 right. 3 MR. THOMPSON: In F what I have tried to do is 4 capture what items drive the rate changes for 2000 if 5 the price cap component in section C, the what I call 6 non-routine adjustments in section D, and pass-through 7 items in section E. That's correct, is it not, that 8 those components produce the rate change? 9 MS ELLIOTT: That's correct, yes. 10 MR. THOMPSON: And that the revenue at the new 11 rates becomes line 5 plus the rate changes in F, and 12 there is a slight variant on that now because you have 13 eliminated what I have at line 15 when deriving what I 14 show at line 5. But subject to that, the revenue that 15 we are talking about is line 5 plus rate changes. 16 MS ELLIOTT: In 2000 the revenue would also 17 include the $7.6 million of Y2K recovery. 18 In terms of a reduction to prices, that 19 wouldn't be passed through until 2001. It's really a 20 rider on the existing rates to recover the deferral 21 account balance, recognizing that we are not increasing 22 it -- we are not escalating it using the price cap, but 23 it's still recovered from the customers in 2000. 24 MR. THOMPSON: Okay. I think I follow that. 25 MS ELLIOTT: Taking it out of rates in 2000 26 would eliminate those credits into the deferral account 27 leaving a debit balance which we would then have to 28 recover from the customers in the disposition of the -- Les Services StenoTran Services Inc. 613-521-0703 235 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: Yes. You are going to clear 2 the Y2K costs. They will be recorded as a debit of a 3 deferral account and be cleared to ratepayers. 4 MS ELLIOTT: Yes. 5 MR. THOMPSON: I understand. 6 Then, revenue sharing 2000. What I have tried 7 to capture here are the deferral accounts that we have 8 discussed. There is the S&T revenues and the storage 9 premium. The current sharing of the S&T revenue in the 10 deferral account which is accumulated above a forecast 11 is 75/25 in favour of ratepayers. Is that correct? 12 MR. BIRMINGHAM: For any amounts over and 13 above what is already in rates. 14 MR. THOMPSON: That's right. Then the storage 15 premium is 100 per cent in favour of ratepayers at the 16 moment? 17 MR. BIRMINGHAM: That's right. 18 MR. THOMPSON: And the total of those amounts 19 we estimated for 2000 would be about $7 million? 20 MR. BIRMINGHAM: Correct. 21 MR. THOMPSON: And Union's position, as I have 22 stated there, you get it all; and the intervenors' 23 position, the sharing remains as is. 24 The other topics that I have included in this 25 road map are the corporate earnings sharing. This is 26 separate from revenue deferral accounts. 27 Union's position is that there should be none 28 and the intervenors' position is there should be some Les Services StenoTran Services Inc. 613-521-0703 236 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 sharing but the suggested methods vary from intervenor 2 to intervenor. Is that fair? 3 MR. BIRMINGHAM: That's right. 4 When you use the word "intervenors" here, Mr. 5 Thompson, for instance, on the S&T revenue sharing, when 6 you say the intervenors' position is that the sharings 7 remain, is that the intervenors who have filed evidence 8 or is that some other group that we are talking about 9 here? 10 MR. THOMPSON: I'm relating it to evidence. 11 MR. BIRMINGHAM: All right. Thanks. 12 MR. THOMPSON: I'm trying to relate it to 13 evidence. 14 And then the price cap going forward is the 15 revenue requirement for 2000 -- 16 THE PRESIDING MEMBER: Mr. Thompson, could I 17 just -- 18 MR. THOMPSON: -- and then if the Board agrees 19 with the position of the intervenors' pass-through 20 items, lines 6 to 10, and 26 to 30 would -- 21 --- Laughter 22 THE PRESIDING MEMBER: Mr. Thompson, I was 23 just wondering whether I could pause a moment. 24 When you went on to corporate earnings 25 sharing, I just wanted to understand what you meant by 26 "corporate earnings sharing". Is this earnings above a 27 certain level or what? 28 MR. THOMPSON: Yes. I was trying to Les Services StenoTran Services Inc. 613-521-0703 237 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 distinguish from the revenue, deferral account revenue 2 sharing, as opposed to corporate -- and it would be, 3 yes, earnings above ROE. 4 THE PRESIDING MEMBER: Okay. I just wanted to 5 understand that. Sorry. Sorry for interjecting. 6 MR. THOMPSON: Yes. No, I understand. 7 THE PRESIDING MEMBER: Please resume on J. 8 I'm sorry. 9 MR. THOMPSON: We will give them their allowed 10 rate of return, Mr. Chairman. 11 And then on the revenue -- sorry -- the price 12 cap going forward in terms of the base, all I have tried 13 to capture in this item J is to the extent we have this 14 pass-through item deduction from the line 5 in my 15 presentation here, to the extent those items come out 16 and are treated as pass-through items, going forward you 17 would deduct from the revenue requirement for 2000 the 18 lines -- the items that are -- the pass-through items 19 embedded in the 499 rates plus the added component that 20 would appear in the pass-through section of your 21 calculations. And Union's position is that there is no 22 deductions for pass-through items and in fact no carry 23 forward of the pass-through items. 24 Have I captured the essence of that difference 25 between the parties fairly? 26 MS ELLIOTT: Although I wouldn't categorize 27 the number you are referring to as a revenue 28 requirement, once it goes through the price cap model, Les Services StenoTran Services Inc. 613-521-0703 238 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 it is the revenue recovered at the current rates. But 2 it is not related to the costs. 3 We start out with a cost-based model and we 4 move into the price cap model it becomes the revenue at 5 existing rates, not the revenue requirement by 6 definition which is the cost of service. 7 MR. THOMPSON: Well, you feel that word phrase 8 is that cost of service connotation which you would like 9 to avoid? 10 MS ELLIOTT: Yes, I do. 11 MR. THOMPSON: All right. And so if I just 12 said revenue for 2000, would that be better? 13 MR. BIRMINGHAM: Yes. 14 MR. THOMPSON: Well, would -- Mr. Chairman, I 15 don't know if that was of help to the Board. If it is, 16 I would suggest the company perhaps transcribe this in 17 some legible fashion and we could file it as an 18 attachment. Would that be satisfactory? 19 THE PRESIDING MEMBER: I think it has been 20 filed but I am sure somehow we can get it put into a 21 typed form if the company is willing, Mr. Penny? 22 MR. PENNY: I think we are willing to do that, 23 Mr. Chairman. 24 MR. BIRMINGHAM: Mr. Thompson, maybe I could 25 just ask a question of clarification. 26 Is it your intention that this exhibit be 27 filed for the purpose of using it during further 28 cross-examination or is this intended to be a template Les Services StenoTran Services Inc. 613-521-0703 239 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 that parties would follow with respect to their 2 arguments? 3 MR. THOMPSON: Probably both. It just helps, 4 I believe, people to focus on the line items where there 5 are disputes. And that is what I want to do when we 6 come back after the break is just return to a couple of 7 these line items that fall within the adjustment 8 category. But it is intended as an aide and a guide but 9 nothing more than that if that is what you are concerned 10 about. 11 THE PRESIDING MEMBER: So is that all right, 12 Mr. Birmingham. Is that a clear response? 13 MR. BIRMINGHAM: Yes, thank you very much. 14 THE PRESIDING MEMBER: Well, I think this is a 15 good time to break. It is now five to eleven. I think 16 20 minutes would be a good thing. We have had a long 17 session. 18 Is that long enough for you, Mr. Court 19 Reporter? 20 THE COURT REPORTER: Yes. Thank you. 21 THE PRESIDING MEMBER: All right. Come back 22 at quarter past eleven. 23 --- Upon recessing at 1050 24 --- Upon resuming at 1116 25 THE PRESIDING MEMBER: Please be seated. 26 Before you start, Dr. Wightman -- 27 Mr. Thompson, Dr. Wightman has asked me to remind people 28 that the Board can't sit this afternoon because we have Les Services StenoTran Services Inc. 613-521-0703 240 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 a Board meeting. And that is why we had said earlier in 2 the day that it was only a morning session today. 3 So what I would suggest is some time between 4 twelve and one, one is the latest, if you come to a 5 convenient place, whoever is cross-examining, that would 6 be an appropriate place to break, would you please 7 suggest it. Thank you. 8 MR. PENNY: Mr. Chairman, can I just say for 9 the record that we have received written answers to 10 G1.2, G1.3 and G1.5 and those have been made available 11 to the parties. 12 THE PRESIDING MEMBER: Thank you. 13 MR. PENNY: And I think we have one further 14 answer which we will just do on the transcript and 15 Ms Elliott has that information. 16 MS ELLIOTT: Undertaking G1.6 asked for the 17 number of vacancies. That would be 210 vacancies at the 18 end of the year. That is the end of 1999. 19 THE PRESIDING MEMBER: Mr. Thompson, when you 20 are ready. 21 MR. THOMPSON: Panel, I would like to turn now 22 to a little more detailed discussion on some of these 23 items you have discussed with others. And to assist you 24 I am looking in terms of my road map I am looking at 25 lines -- page 2, lines 21, 22, 23 and 24. These are the 26 adjustments after the price cap component has been 27 applied to the revenue -- what do you call it? -- 28 applicable revenue. Les Services StenoTran Services Inc. 613-521-0703 241 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 And the first one is recovery of the 2 accumulated UFG. To expedite this discussion you really 3 should have in front of you Mr. Johnson's testimony 4 which is Tab 3 of the binder of IGUA prefiled evidence. 5 I am afraid I don't have an exhibit number for this. 6 MS ELLIOTT: Do you have a page reference? 7 MR. THOMPSON: Yes. I wanted to start with 8 UFG, which he discusses at question 9, which is page 6. 9 And in the first 16 lines of this response he 10 is describing your proposal to recover the $4 million a 11 year over five years on account of the accumulated 12 unaccounted for gas deficiency. Do you see that? 13 MS ELLIOTT: Yes. 14 MR. THOMPSON: And he says at line 12 the 15 issue is one of timing. Do you agree with that? 16 MS ELLIOTT: The issue is one of timing. If 17 you assume that the actuals vary around an average, so 18 that at some point in time, our actual unaccounted for 19 will be less than the average built-into rate, that 20 recovery of additional unaccounted-for will reduce the 21 accumulated deficiency. 22 MR. THOMPSON: I guess the point I'm trying to 23 make is the claim for this aspect of rate increase 24 really is not a methodology change. It's really, in my 25 parlance, you're tired of waiting. 26 MS ELLIOTT: This isn't the methodology 27 change. This is a recovery of the historic accumulation 28 based on the existing methodology. In addition to this Les Services StenoTran Services Inc. 613-521-0703 242 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 proposal, there is a proposal to change the existing 2 methodology to more accurately match the recovery with 3 the period in which the unaccounted for gas is incurred 4 to avoid further accumulation of these variances. 5 MR. THOMPSON: But the Board's options are 6 that it can refuse to allow you to recover this, the 7 accumulated deficiency amortized over five years, but 8 approve the change of methodology, in which case the 9 deficiency will continue to be recorded on the books, 10 right? 11 MS ELLIOTT: Yes, the two proposals are not 12 connected such that you have to accept them both. 13 MR. THOMPSON: So the point is that -- 14 And we discussed earlier that this is not 15 something that falls within the non-routine adjustment 16 classification. 17 But in terms of its derivation, it's simply 18 taking the $22.6 million of UFG recorded on your balance 19 sheet and, what, dividing it by five? 20 MS ELLIOTT: Yes. The result -- 21 If you take the $22.6 million and divide it by 22 five, the proposal should have been for a higher amount. 23 But in going through the customer review process, we had 24 previously tabled $4 million as the amount, and in 25 finalizing the evidence, we did not increase the amount 26 of the proposed recovery. 27 MR. THOMPSON: Now, there's no evidence that I 28 have seen and that the company has provided conducting Les Services StenoTran Services Inc. 613-521-0703 243 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 an analysis of the causes of its increasing UFG, no 2 fresh evidence. Is that correct? 3 MS ELLIOTT: The evidence is from the last 4 rate case in terms of the reasonableness of the UFG and 5 the comparison between our experience and the experience 6 of similar companies. That was filed in this proceeding 7 under Appendix A of Exhibit B, Tab 2. 8 MR. THOMPSON: Yes, right. But at some point, 9 I thought I heard you say something to the effect 10 that -- 11 Well, let me ask this. Was there anything in 12 the Board's Decision in 499 that directed you to study 13 this issue and come forward with some evidence 14 explaining why it just keeps increasing? I thought you 15 gave an answer yesterday to the effect we are responding 16 to the Board's direction, or words to that effect, in 17 coming forward with this claim. There's nothing that I 18 could find that addresses that. 19 MS ELLIOTT: No, this proposal is not in 20 response to the Board's direction. It's in response to 21 our own review, in reviewing the risks under performance 22 based regulation, looking at the unaccounted for gas, 23 making no changes to the existing methodology would 24 continue to accumulate variances, such that the issue of 25 timing is that at some point we would build an 26 accumulated variance that we had no expectation of 27 actually being able to recover within a reasonable 28 period of time. Les Services StenoTran Services Inc. 613-521-0703 244 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 So this proposal was in response to our own 2 review, moving forward to performance based regulation, 3 making the proposal to catch up the current methodology 4 and change it, going forward to better match the timing 5 recovery and where the costs were incurred. 6 MR. THOMPSON: There's no supporting opinion 7 that I am aware of from independent experts saying you 8 have no reasonable prospect of recovering this $22 9 million as time passes. Whoever gives that opinion. I 10 don't know if it's an auditor or some third-party 11 professional. We don't have that in this case. 12 MS ELLIOTT: There is no expert evidence in 13 this case. 14 MR. THOMPSON: And this number is still being 15 recorded on the books so the company regards it, as we 16 sit here today, as collectible, whether the methodology 17 changes or not. Is that fair? 18 MS ELLIOTT: It is being recorded on the 19 books, but for corporate financial statement purposes we 20 are making a provision against it. We are writing it 21 off as we go forward to keep the financial statements 22 reflecting the current cost of unaccounted for gas. But 23 from a utility perspective, we do have a variance 24 between what we recover and what we actually record on 25 the corporate statements. 26 MR. THOMPSON: So do you agree with the 27 statement that Mr. Johnson makes, the issue is one of 28 timing, period? Les Services StenoTran Services Inc. 613-521-0703 245 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: It's a timing issue, it's an 2 accounting issue and it's a regulatory recovery issue. 3 The current method of recovering unaccounted for gas 4 doesn't keep pace with the current experience. 5 MR. THOMPSON: And in terms of its impact of 6 recovery during the period of PBR, the reality is it 7 goes right to the bottom line in terms of your earnings 8 to shareholder based on the corporate budget. 9 MS ELLIOTT: No, it will continue to be 10 deferred on the balance sheet and the variances will 11 accumulate. It doesn't go to the bottom line. 12 MR. THOMPSON: The four million goes to the 13 bottom line. That's part of the $35 million you are 14 claiming and, as we went through earlier, that goes 15 right to the bottom line of your corporate budget for 16 2000 to enhance shareholders' earnings. 17 MS ELLIOTT: It will actually go back to the 18 balance sheet account to record -- 19 Currently, there's a balance sheet account 20 that has a receivable from customers. The amount of 21 recovery will go against that account. It won't go to 22 the bottom line. 23 MR. THOMPSON: Maybe we are quibbling, but 24 whatever cost you're incurring with respect to 25 unaccounted for actual are in your corporate budget. We 26 went through this earlier, correct? 27 MS ELLIOTT: Yes, we are making provisions in 28 the corporate statements against that balance sheet Les Services StenoTran Services Inc. 613-521-0703 246 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 account to the extent that we recover some of those 2 previously recorded expenses. That will go to the 3 bottom line, yes. 4 MR. THOMPSON: A bump up of $4 million in a 5 year PBR has this impact on -- 6 It's part of the $43 million before taxes and 7 $24 million after taxes that flows to the shareholder in 8 2000, if you get this $4 million. 9 MS ELLIOTT: Yes. 10 MR. THOMPSON: Okay. 11 Now, the other aspect of UFG that you have 12 discussed with others is the change in method of 13 calculating it. 14 I wonder if you could just walk us through -- 15 and maybe there's an Exhibit that does it -- the 16 existing method. As I understand it, the existing 17 method comes up with a volume allowance for a particular 18 test period. 19 MS ELLIOTT: If you turn up Exhibit B, Tab 2, 20 Schedule 7, the first section on that schedule. 21 --- Pause 22 MR. THOMPSON: Where am I at? I will be all 23 right. 24 There we go. Okay, I'm with you. 25 MS ELLIOTT: Okay. The first four lines is 26 really the existing methodology, taking the actual 27 unaccounted for gas for the most recent three years. So 28 in this case, given the timing of the filing we don't Les Services StenoTran Services Inc. 613-521-0703 247 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 have 1999 -- or didn't have 1999. So 1998, 1997 and 2 1996 are weighted three, two, one, with the most recent 3 year getting the greatest weight. 4 So the existing methodology would arrive at an 5 unaccounted for gas volume of 156,050, and that is 6 thousand cubic metres. That amount would be then 7 recovered over the throughput volumes, if you go to the 8 line 10 for the 1999 throughput. 9 MR. THOMPSON: All right. Is it converted to 10 a dollar amount first? 11 MS ELLIOTT: In fact, in the existing 12 methodology it is converted to a dollar amount and then 13 recovered from customers in rates that way. That 14 156,000 cubic metres would be -- I'm sorry, 156 million 15 cubic metres would be multiplied by the WACOG in the 16 forecast period and then was recovered in rates. 17 MR. THOMPSON: But we would do that for -- 18 under your proposal, if we continue with the current 19 methodology, would we be using 1999, 1998 and 1997 20 volumes for 2000? 21 MS ELLIOTT: The current methodology would 22 actually use 1998, 1997 and 1996. 23 MR. THOMPSON: These numbers are the ones that 24 would be used? 25 MS ELLIOTT: Yes. 26 MR. THOMPSON: And we would use an updated 27 WACOG and then we would -- if we stuck with the current 28 methodology on a pass-through basis, would we then Les Services StenoTran Services Inc. 613-521-0703 248 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 divide the dollars produced by that volume by the 2 throughput for 2000? 3 MS ELLIOTT: The rate proposals are 4 actually -- actually continue to use the 1999 approved 5 volumes, so it would be divided by approved volumes to 6 come up with the rate impact. 7 MR. THOMPSON: All right. Well, I will follow 8 up on the volume point later. 9 Okay. If I understand how the dollars are 10 derived, and that is sort of a fixed volume estimate for 11 2000 in the current methodology, now you are proposing 12 to change that to a ratio, if I understand it. Could 13 you just tell us how that is derived? 14 MS ELLIOTT: The next calculation in the 15 proposed methodology is really to look at the actual 16 throughput for the years in relationship to the actual 17 unaccounted for gas volumes. What you see is the same 18 weighting applied to the throughput and a calculation of 19 a ratio at line 9, which is line 4 divided by line 8. 20 That ratio is applied to the approved volumes to come 21 up -- 22 MR. THOMPSON: Just tell us what the number -- 23 let's take 1998 at line 5 here, 27,000 10(6)m(3). So 24 these are substantially larger units than what appears 25 at lines 1, 2 and 3? 26 MS ELLIOTT: Yes. They are -- 27 MR. THOMPSON: That is total throughput for 28 the system? Les Services StenoTran Services Inc. 613-521-0703 249 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Total throughput for the system 2 on an actual basis for 1998, and that is measured in 3 million cubic metres or 10(6)m(3). 4 MR. THOMPSON: We then weight total throughput 5 for the system the same way as we did the previous 6 weighting. 7 MS ELLIOTT: Yes. 8 MR. THOMPSON: We get a weighted throughput 9 for the system over the past three years of 28,236. Is 10 that right? 11 MS ELLIOTT: Yes. 12 MR. THOMPSON: Then we are dividing the volume 13 under the existing methodology into that throughput to 14 come up with a ratio. 15 MS ELLIOTT: That's right. 16 MR. THOMPSON: We then apply that ratio to 17 what? 18 MS ELLIOTT: To the approved throughput volume 19 in 1999. 20 MR. THOMPSON: Is that for 2000? 21 MS ELLIOTT: Yes. 22 MR. THOMPSON: What do we do in 2001, the same 23 number? 24 MS ELLIOTT: It continues to be applied to the 25 1999 approved. 26 MR. THOMPSON: So that the UFG volume for the 27 five years will be the same? 28 MS ELLIOTT: No. This change will pick up a Les Services StenoTran Services Inc. 613-521-0703 250 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 change in the ratio, so -- what we see here is the 2 weight average ratio for the three years 1998 through 3 1996 is -- 4 MR. THOMPSON: The ratio will change. 5 MS ELLIOTT: The ratio will change. So the 6 only number that -- the numbers that are new in this 7 formula for 2001, you would delete 1996 and -- 8 MR. THOMPSON: I understand. 9 MS ELLIOTT: -- and add 1999. 10 MR. THOMPSON: You roll forward and you get a 11 new ratio at line 9 for 2001, 2002, and so on, and you 12 apply that to the throughput number at line 10. That 13 number remains constant under your proposal. 14 MS ELLIOTT: The number remains constant, yes. 15 MR. THOMPSON: That produces a volume which 16 you then cost at the prevailing WACOG. 17 MS ELLIOTT: Yes. 18 MR. THOMPSON: Okay, I understand the 19 methodology. 20 THE PRESIDING MEMBER: Could I ask a question 21 for understanding. I would just like to clarify what 22 the throughput actually measures. 23 MS ELLIOTT: It is the total volume on the 24 system moved for storage, transportation and 25 distribution customers. 26 THE PRESIDING MEMBER: That includes 27 infranchise and exfranchise customers. 28 MS ELLIOTT: Infranchise and exfranchise. Les Services StenoTran Services Inc. 613-521-0703 251 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 THE PRESIDING MEMBER: And includes into and 2 out of storage or just out of storage? 3 MS ELLIOTT: This number is just out of 4 storage. I think when we get to the rate design it is 5 recovered on into and out of so it becomes a smaller 6 ratio in the rates, but it is applied to more volume. 7 THE PRESIDING MEMBER: Thank you. 8 I'm sorry, Mr. Thompson. 9 MR. THOMPSON: What are the chances that this 10 volume is going to exceed actual? It's better, I 11 suppose, than the other method. Is that as far as we 12 can go? 13 MS ELLIOTT: "This volume" being the new -- 14 MR. THOMPSON: The new method of deriving the 15 volume. It produces a higher volume, obviously. 16 MS ELLIOTT: And the intent is that that 17 volume should be closer to the actuals to the extent 18 that our actual experience for 1999 falls -- or 2000 19 falls, that will be rolled into the average and the 20 average will then drop. So it is self-correcting in 21 that the actuals are always used going forward. 22 MR. THOMPSON: Again in terms of the impact of 23 this in PBR in 2000, we know the dollar impact, it 24 increases the UFG by about -- well, we discussed that 25 earlier -- about some 3.7 million to 5.6. 26 MS ELLIOTT: Yes. 27 MR. THOMPSON: So that is about 2.9, I guess. 28 MS ELLIOTT: One-point-nine. Les Services StenoTran Services Inc. 613-521-0703 252 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: One-point-nine. Two million 2 dollars, okay, roughly. 3 MS ELLIOTT: Yes. 4 MR. THOMPSON: In terms of its impact in 2000, 5 that is part of the 43.5 million net 24 that goes to 6 corporate earnings in your corporate budget? 7 MS ELLIOTT: Yes. 8 MR. THOMPSON: We have discussed with others 9 the coincidence of this coming forward in conjunction 10 with PBR after the issue lying dormant for so many 11 years. It that just a coincidence? 12 MS ELLIOTT: I think it's a result of our 13 review in looking at the risks we are managing under 14 PBR. Identifying that unaccounted for gas is one of 15 those risks, and trying to manage it under a price cap 16 model, we looked at the alternatives, one being to put 17 forward a proposal for a base rate adjustment which 18 would allow us to change the existing methodology to 19 manage unaccounted for gas during the term. 20 When that proposal was presented to customers 21 it was rejected. We came back with this as a 22 pass-through item to take care of the actual experience 23 as opposed to trying to determine what the variabilities 24 in that unaccounted for gas would be. 25 MR. THOMPSON: Is it the company's position? 26 Although, as presented to customers it was rejected. We 27 came back with this as a pass-through item to take care 28 of the actual experience, as opposed to trying to Les Services StenoTran Services Inc. 613-521-0703 253 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 determine what the variability of the unaccounted for 2 gas would be. 3 MR. THOMPSON: Is it the company's position 4 that you should attain 100 per cent recovery of your 5 UFG, or should you be at risk for some portion of it? 6 MS ELLIOTT: Unaccounted for gas is a cost of 7 operations. The current methodology allows us to 8 recover the costs that we experienced and there is a 9 review of what those costs are in sense of their 10 reasonableness and those costs should be recovered, and 11 since that there should be another methodology for 12 recovering unaccounted for gas in rates. 13 But that other methodology would be our 14 judgment as to what the forecast amount would be. 15 Previously, I presume that approach has been rejected 16 since you can't easily forecast unaccounted for gas. It 17 has become the subject of a formula. 18 MR. THOMPSON: I just want to draw your 19 attention to some of Mr. Johnson's evidence on this 20 point so you can evaluate or comment on it. 21 At page 15 of his testimony he talks about 22 Union has some control and should be at risk for some 23 portion of the UFG and have an incentive to reduce the 24 ratio. So he talks about that issue at length, 1 to 15. 25 Then, in his interrogatory responses -- and 26 again, I don't have an exhibit number for this book but 27 it is IGUA's interrogatory responses. At Tab 3 we have 28 Mr. Johnson's responses -- in question 10 you asked him Les Services StenoTran Services Inc. 613-521-0703 254 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 a question, "Please provide all evidence and studies 2 relied on to support the claim that Union has some 3 control over UFG and should therefore be at risk for a 4 portion of UFG." He was cited some TransCanada 5 decisions, the NEB TransCanada decisions with respect to 6 UFG. 7 Does the company accept that it has some 8 responsibility in this area of managing UFG? 9 MS ELLIOTT: I think, as I indicated 10 yesterday, as we go forward we are subject to review of 11 the most recent years' experience and prior to 12 incorporating those amounts into the formula there will 13 be a review for reasonableness. So yes, the company has 14 some responsibility to manage its unaccounted for gas to 15 a reasonable level. 16 Our experience, however, has been in the 17 currently on average 5/10 of a per cent or 6/10 of a 18 per cent. I think the evidence shows that given the 19 range of unaccounted for in other companies, that is 20 well within the range of reasonableness. 21 MR. THOMPSON: All right. So you are telling 22 me, I think, that in the customer review process if your 23 unaccounted for went off the map, either negative or 24 positive, we would have a chance to bring that forward 25 to the Board or that there is some unusual variance in 26 this as we go forward? This is not an iron-clad ratio 27 calculation. 28 MS ELLIOTT: The calculation and the formula Les Services StenoTran Services Inc. 613-521-0703 255 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 is the formula, but substituting 1996's volume for 1999 2 is not an automatic adjustment. There would be a review 3 of the 1999 number prior to it being included in the 4 formula. It's not an automatic recovery of whatever 5 last year's experience would be. There is a review of 6 that experience and a determination that it is 7 acceptable and would be put in the formula. 8 MR. THOMPSON: If 1999 comes in as -- you have 9 gained gas, you didn't lose, we would have an 10 opportunity to say, "Well, you should have gained more?" 11 MR. BIRMINGHAM: There would be a review of 12 those volumes, regardless of what the volume is, 13 Mr. Thompson, if that's your question. It will be dealt 14 with in the customer review process when we go to update 15 this. 16 MR. THOMPSON: Apart from that, the proposal 17 is if the Board approves your proposal the ratio stays 18 and it is just a question of what is the new number to 19 plug in? 20 MR. BIRMINGHAM: That's right. 21 MR. THOMPSON: Okay. 22 Let's move on to the accounting change for 23 pension. The evidence here from Mr. Johnson at question 24 12, I believe -- I will let you read it through 25 entirely. 26 Just to give you my understanding of what 27 Mr. Johnson is getting at here is that you said in your 28 response to CAC Interrogatory 26 is that the E.B.R.O. Les Services StenoTran Services Inc. 613-521-0703 256 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 499 forecast amount for pension was $5.1 million. The 2 actual pension was 102,000. 3 What Mr. Johnson is saying is that you have 4 derived your adjustment of initially 7 and 6.8 as an 5 increment to actual in 1999. What he is saying is if 6 you are going to use 499 revenue requirements unadjusted 7 for actuals, then the adjustment for pension should only 8 be, in his view, about 1.6 million rather than your 6.8. 9 But he agrees that if we use 1999 actuals the pension 10 add on should be 6.8. 11 I hope I have paraphrased that fairly. 12 Assuming that I have, can I get your reaction to that? 13 MS ELLIOTT: Yes, as I indicated yesterday, 14 the difficulty we have is the Board-approved, or the 15 agreement in 499, for total O&M was much less than the 16 submission. So while we know what we submitted and we 17 know what the actual expense was, we don't know what the 18 approved level was. What we are doing in this case is 19 deeming the actual to be approved in that we managed the 20 ADR agreement reductions using the flexibility that we 21 had in the pension accounting. 22 MR. THOMPSON: Yes, well, that is fairly 23 generous to yourselves or to your shareholders. 24 --- Laughter 25 MR. THOMPSON: The fact is, though, that in 26 the budget that the company presented to the Board for 27 approval in E.B.R.O. 499 the pension amount was $5.1 28 million. That's correct? Les Services StenoTran Services Inc. 613-521-0703 257 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Yes, that's correct. 2 MR. THOMPSON: So there is no issue, I guess, 3 if we use actuals, the 6.8 as an add on? If the Board 4 doesn't use actuals, then, are you still sticking with 5 your 6.8 add on, or is there any give there from the 6 company's perspective? 7 MS ELLIOTT: Our position is that it is a $6.8 8 million increase to the Board-approved O&M budget. 9 MR. THOMPSON: Okay. 10 The deferred tax adjustment we agree with. 11 Let's just turn to the regulatory cost 12 savings. Again, this isn't anything that has an impact 13 in 2000. This starts January 1, 2002. 14 Could you just explain quickly why you say 15 these savings won't start until January 1, 2002? 16 MR. PENNY: Mr. Chairman, Mr. Thompson is the 17 third person to cross-examine on this subject. This is 18 the third time that this question has been put. 19 Mr. Warren examined on it, Mr. Brett examined on it --- 20 MR. BRETT: No, I didn't, actually. 21 MR. PENNY: --- if there is going to be any 22 discipline in this process we surely have to have some 23 constraint on just going over the same things over 24 again. These questions were put, if not by Mr. Brett, 25 certainly by Mr. Warren, and these explanations are on 26 the record from yesterday's transcript. 27 MR. THOMPSON: Well, I'm sorry, I missed it 28 anyway. If it offends you, Mr. Penny, strike the Les Services StenoTran Services Inc. 613-521-0703 258 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 question. 2 Let's just go to Mr. Johnson's evidence, if 3 you wouldn't mind. It is question 11. 4 After introducing the topic and making 5 reference to CAC Exhibit C32 he suggests all 6 regulatory -- this is at line 25 -- all regulatory cost 7 savings should be taken out of base rates if actuals are 8 not to be used. Based on the $800,000 of intervenor 9 costs, Union's internal costs, which have been about 8.9 10 per cent higher than intervenor costs, would appear to 11 be about $850,000. Then he adds these two together to 12 come up with an estimate of regulatory cost savings of 13 $1.65 million in 2002. 14 Would you comment on that evidence, please? 15 MR. THOMPSON: Again, the point is you are not 16 taking out enough and I guess others have been trying to 17 make this point as well. 18 MS ELLIOTT: I guess I don't agree with 19 Mr. Johnson's logic in that the $800,000 is not just 20 external intervenor costs, it is direct costs related to 21 the regulatory process. It includes Union's direct 22 hearing costs, external costs in that they are external 23 consultants, legal costs, out-of-pocket costs for Union 24 as well as the intervenor costs. We are taking out 25 60 per cent of those costs that are currently in rates. 26 MR. THOMPSON: Let me, while I'm on this 27 point, then, just direct your attention to Dr. Bauer's 28 testimony on this issue. I would just like to get your Les Services StenoTran Services Inc. 613-521-0703 259 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 reaction to it. I would like to get the numbers as 2 well. His testimony is at page 23. The middle 3 paragraph. He says: 4 "Lastly, the Company anticipates annual 5 regulatory cost savings of $800,000. 6 These are only..." 7 MS ELLIOTT: You will have to give us a 8 minute. 9 MR. BIRMINGHAM: Sorry, Mr. Thompson. Our 10 pagination is somewhat different than yours. 11 MR. THOMPSON: Oh, yes. Okay. You took it 12 off the net, like me. It's under the heading "Base 13 Rates". 14 MR. BIRMINGHAM: Right. That's section 5.1 of 15 his evidence. 16 MR. THOMPSON: That's right. 17 MR. BIRMINGHAM: Okay. 18 MR. THOMPSON: I think it's six or seven 19 paragraphs in. The first sentence reads, "Lastly, the 20 Company anticipates". 21 MR. BIRMINGHAM: Okay. We have it now. Thank 22 you. 23 MR. THOMPSON: Take a moment to read it and 24 then -- 25 --- Pause 26 MS ELLIOTT: We have read it. 27 MR. THOMPSON: Okay. His point, as I 28 understand it is -- well, he says that: Les Services StenoTran Services Inc. 613-521-0703 260 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 "...the anticipated reduced cost should 2 be seen as a reduction of transaction 3 costs that will benefit ratepayers (who 4 were ultimately responsible for the 5 payment of regulatory costs). It is a 6 recurring observation that regulatory 7 costs under PBR decline less than 8 anticipated. Therefore, it is 9 recommended that the full costs, 10 (incremental plus internal) of eliminated 11 regulatory tasks be eliminated from the 12 base rates entirely and that actual 13 future regulatory costs be treated as a 14 non-routine adjustment." 15 I assume you don't agree with that proposal or 16 recommendation? 17 MR. BIRMINGHAM: That's right. 18 MR. THOMPSON: Could you explain why? 19 MS ELLIOTT: Our proposal is to recognize an 20 estimated reduction in direct regulatory costs by moving 21 to a PBR. We are obviously taking some risk in 22 identifying that amount. If this evidence is correct 23 and we will not see a decline, that's a cost that will 24 be managed under our price cap. 25 With respect to the internal costs and those 26 that are indirectly related to the regulatory process, 27 they are general productivity improvements that we will 28 recognize or are recognizing in our productivity factor Les Services StenoTran Services Inc. 613-521-0703 261 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 in the price cap formula. Again, to the extent that we 2 cannot realize those savings, that is a risk that we are 3 managing under the price cap formula. 4 MR. THOMPSON: Could you tell me, if 5 Dr. Bauer's recommendation were to be accepted, the 6 effect that the full costs, incremental plus internal, 7 be removed and that future regulatory costs be treated 8 as a non-routine adjustment, how much full costs, 9 incremental plus internal, would come out? Is that 10 shown in any of these interrogatory responses, G1 and 11 G2, or is it another number? I'm sorry, undertaking 12 responses G1 and G2. 13 Sorry, G1.2, G1.3. 14 --- Pause 15 MS ELLIOTT: The incremental rate hearing 16 costs are identified on G1.2. 17 MR. THOMPSON: What about -- 18 MS ELLIOTT: The remaining costs are our 19 internal costs of our regulatory department. 20 MR. THOMPSON: Are they identified on either 21 one of these undertaking responses? If not, could you 22 just give me the full costs, incremental plus internal 23 by way of a further undertaking? 24 MR. BIRMINGHAM: The costs of the rate case 25 administration staff within the regulatory department is 26 found at Exhibit G1.2. You can see that there are six 27 staff members who are associated with the rate-setting 28 process out of a total of 31. So in terms of their Les Services StenoTran Services Inc. 613-521-0703 262 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 wages and salaries, you would be taking that proportion 2 of the $1.9 million that is all of the staff, so it 3 would be about $370,000. 4 MR. THOMPSON: But that is incremental. 5 MR. BIRMINGHAM: No. No, that amount, 6 Mr. Thompson -- maybe I can just take you through some 7 of those numbers that are in there. 8 Line 1 in G1.2 is the total regulatory costs, 9 and that was a number that was tracked from the 10 Board-approved numbers. You can see the reference in 11 the footnote. 12 MR. THOMPSON: Yes. 13 MR. BIRMINGHAM: Then we removed the rate 14 hearing costs. That is again the Board-approved number 15 from E.B.R.O. 499, and that would include all of the 16 incremental costs, so that would be the legal costs, 17 consulting costs, travel costs, which would leave the 18 costs for the staff itself within the regulatory group 19 and a number of other staff-related costs. That's the 20 total of $2.684 million. 21 Then we have divided the $2.684 million into 22 two components: one with the wages and salaries 23 associated with the 31 people that are in that group; 24 and then line 5, which are others costs, and you can see 25 that's education, it includes some floor space leases, 26 some travel costs that are not associated with the 27 rate-setting process many related to our upstream 28 regulation group who participates in the TCPL Les Services StenoTran Services Inc. 613-521-0703 263 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 toll-setting process and again some legal costs again 2 not related to the OEB rate-setting process but rather 3 more with the upstream regulation. So those are the two 4 components. 5 All I would suggest to you is that within the 6 regulatory group what you would see is the costs that 7 are embedded within the regulatory department O&M that 8 would be associated with the rate case administration 9 process would be the proportion of the six people over 10 the total staff of 31 multiplied by $1.9 million of 11 wages and salaries or about $370,000. 12 MR. THOMPSON: Yes. But this doesn't include, 13 I gather, an estimate of staff and resources that are 14 used to support the process beyond those in the 15 regulatory department? 16 MR. BIRMINGHAM: That's right. 17 MR. THOMPSON: So, presumably, that's another 18 internal cost. 19 I am just trying to get a handle on 20 Dr. Bauer's recommendation. If the Board subscribed to 21 it, that the full costs, incremental plus internal, of 22 eliminated regulatory tasks be removed from the base, do 23 I understand you to be saying it is $300,000 from G1.2 24 and then would we remove all of what is showing on G1.3? 25 And if it is easier for you to answer this 26 question by way of further undertaking, I'm happy to 27 have you do it that way. 28 MR. BIRMINGHAM: No, sir, it wouldn't be. Les Services StenoTran Services Inc. 613-521-0703 264 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 With respect to the proceeding staff, the six 2 people there -- this is the cross-examination from 3 yesterday -- the six people there do more than just the 4 rate setting process. They also manage the cost of gas 5 proceedings, as an example, they participate in generic 6 hearings and other proceedings before the Board. 7 And in addition, they would be supporting any 8 other sort of working group that came out of an Ontario 9 Energy Board sponsor process, like the Distribution 10 Access Rules Task Force. So that, it wouldn't even be 11 the full amount of that. 12 Beyond that, in terms of our internal costs, 13 we don't track those, we don't have any sense or what 14 those might be. They are additional responsibilities 15 that are added to the roles of people. But in our view, 16 even though the rate setting process would be 17 significantly amended, there would not be any reduction 18 in those staff members or their costs -- other than the 19 ones that are directly attributed and already accounted 20 for. 21 MR. THOMPSON: Okay. I guess so that if the 22 Board wishes to follow Dr. Bauer's recommendation, it's 23 just going to have to use its own devices to estimate 24 these incremental plus internal? 25 MR. BIRMINGHAM: No, it can use the evidence 26 that is currently on the record, which is at Exhibit B, 27 Tab 2, page 22, and the response that we have given to 28 Undertaking G1.2. Les Services StenoTran Services Inc. 613-521-0703 265 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: Okay, thank you. 2 I would now like to come to the 1999 actuals 3 issue, and that, in this PBR guide, is at line 14. 4 --- Pause 5 MR. THOMPSON: Let me put the issue as I see 6 it. It's really this: How much headroom is there in 7 the 1999 revenue requirement with respect to human 8 resources costs that are, in effect, not being used to 9 pay for anybody, which is wrapped up in this normalized 10 over-earnings figure of $8.242 million which we 11 discussed earlier? So that is where I'm coming from. 12 And just in terms of that over-earnings, 13 normalized over-earnings figure of $8.242 million -- 14 would you turn up Exhibit C21.97, IGUA 97? 15 --- Pause 16 THE PRESIDING MEMBER: We have it, 17 Mr. Thompson. 18 MR. THOMPSON: You say here: 19 "The Board approved information reflects 20 NGV and ABC programs on a fully allocated 21 basis. Union has not calculated the 22 fully allocated costs associated with the 23 NGV and ABC programs in its calculation 24 of the 1999 actual information." 25 (As read) 26 If you had, does that mean that the normalized 27 over-earnings would be greater than $8.242 million? 28 Would you take out more costs? Les Services StenoTran Services Inc. 613-521-0703 266 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 --- Pause 2 MS ELLIOTT: The costs of those programs are 3 included in the utility's actuals, so that the impact 4 would not be changed from the $8.2 million. The actual 5 costs are included in those numbers. We just haven't 6 specifically identified what those costs are relative to 7 what the approved fully allocated costs would be, to the 8 extent that there is a variance. That variance is part 9 of the $8.2 million. 10 MR. THOMPSON: We have a normalized gross 11 revenue requirement -- excess on your calculations of 12 the actuals of $8.242 million, taking into account ABC 13 and NGV. It's not higher, it's not lower. That's the 14 number. 15 MS ELLIOTT: The $8.2 million is our 16 calculation of the revenue sufficiency on a weather 17 normalized basis. The only adjustments we have made is 18 to increase revenues for what we would have expected in 19 a normal year. 20 MR. THOMPSON: And a major component of the 21 combination of savings that contributed to this 22 situation is the savings that were made with respect to 23 human resources expenses. Is that fair? I am 24 looking -- I want to direct your attention to C3.93 25 again, which you had discussed with others. 26 --- Pause 27 MS ELLIOTT: The information that you are 28 referring to in Exhibit C3.93 is the annualized impact Les Services StenoTran Services Inc. 613-521-0703 267 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 of the restructuring that happened at the end of the 2 year. The $7.9 million would be the impact for a full 3 year. What this also shows is, during 1999, however, 4 some of those reductions were managed through vacancies, 5 and that vacancy amount or that cost saving was $3.4 6 million in 1999. 7 --- Pause 8 MR. THOMPSON: So these numbers on C3.93, you 9 say, are annualized or are they actual? 10 MS. ELLIOTT: It's the full year impact of the 11 restructuring. The restructuring happened at the end of 12 1999. 13 MR. THOMPSON: Right. 14 I thought -- well, let me come at this in a 15 couple of ways. IGUA C21.103. 16 --- Pause 17 MR. THOMPSON: We asked you to normalize O&M 18 and annualize them to reflect the year-end level of 19 employees and you essentially refused to provide that 20 information. 21 What I'm trying to come at is this: That the 22 $8.242 million revenue excess for '99 has not been 23 annualized. Am I -- 24 MS ELLIOTT: No. It's -- the revenue 25 sufficiency that has been calculated for 1999 is the 26 impact of all of our earnings management activities that 27 took place in 1999. The normalization really only deals 28 with the revenue component that is attributed to the Les Services StenoTran Services Inc. 613-521-0703 268 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 warmer than normal weather -- 2 MR. THOMPSON: Right. 3 MS ELLIOTT: -- we add in the revenue as if 4 the weather was normal, but we continue to reflect the 5 O&M expenses on an actual basis. 6 So you get the impact of the favourable 7 variances in O&M that were used to manage our actual 8 unfavourable variances in revenue, but those revenue 9 variances are normalized out in this calculation, which 10 is one of the problems with using the 1999 actual 11 normalized results. 12 MR. THOMPSON: I'm just talking about -- at 13 the moment, you're recovering in E.B.R.O. 499 rates, a 14 certain amount of dollars for human resources. And you 15 have told us that you have restructured at the end of 16 '99 -- and we had a lot of vacancies at the end of 1999. 17 The number you gave us was 210. And you tell us the 18 annualized effect of the restructuring, as I understand 19 it, is $7.9 million? 20 MS ELLIOTT: Yes. 21 MR. THOMPSON: All right. 22 Then, the annualized effect of the vacancies 23 is what? 24 MS ELLIOTT: Well, the vacancies aren't an 25 annual number. We restructured at the end of 1999. As 26 we testified yesterday, that restructuring effort was 27 assisted by early retirement of about 350. The number 28 of roles that were eliminated through the restructuring Les Services StenoTran Services Inc. 613-521-0703 269 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 was the 177. What ends up happening is we created a 2 number of vacancies through the early retirement process 3 that will need to be filled, and we are in the process 4 of filling the vacancies. The actual role reductions 5 are 177. Those positions will not be filled. That 6 savings does carry forward into 2000. 7 MR. THOMPSON: That was sustainable you told 8 Mr. Warren and that produced, I thought you said, $7.9 9 million of sustainable savings? 10 MS ELLIOTT: Those savings went -- actual 11 savings in 1999? The actual savings were $3.4 million. 12 MR. THOMPSON: Well, let me come at it this 13 way then. 14 So what -- the number that is in the 15 derivation of the 8,242,000 over earnings is $3.4 16 million? 17 MS ELLIOTT: That is right. 18 MR. THOMPSON: All right. And if we 19 annualized that number we would take it up to what -- 20 7.9? 21 MS ELLIOTT: Yes. 22 MR. THOMPSON: All right. And then -- so that 23 is the restructuring. And then we have in addition to 24 this, and maybe they overlap to some degree, vacancies. 25 In other words, you have human resources dollars being 26 recovered in rates in 1999 that are not being used for 27 that purpose because you have got vacancies. 28 MS ELLIOTT: That is the $3.4 million. The Les Services StenoTran Services Inc. 613-521-0703 270 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 vacancies in 1999, the savings is the $3.4 million. 2 MR. THOMPSON: They are vacant because you 3 restructured. 4 MS ELLIOTT: They were vacant because we were 5 restructuring, because we were managing warmer than 6 normal weather, managing decline in youth, we were 7 managing revenue -- unfavourable variances in revenue 8 and the expectation that we would be reducing roles 9 through the restructuring. 10 MR. THOMPSON: All right. So does the vacancy 11 number of 210 include the 177 role elimination? Is that 12 what you are telling us? 13 MS ELLIOTT: No. The 210 -- I guess really 14 the math is more along the lines of if you look at the 15 number of early retirements that we had in the 16 restructuring effort it was 356 I think. We only 17 eliminated 177 positions. The difference there is the 18 number of vacancies, positions where people left roles 19 but the roles were not eliminated. There is some 20 rounding or juggling and maybe some role additions in 21 that calculation. 22 But the 210 vacancies at the end of the year 23 are really the result of people who were either through 24 early retirement or through a severance package left 25 their roles who will be replaced. The roles that will 26 not be filled are the 177. 27 MR. THOMPSON: I think I am getting it now. 28 The big picture, 330 left by retirement. Les Services StenoTran Services Inc. 613-521-0703 271 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Three hundred and -- there were 2 about 356. 3 MR. THOMPSON: Okay. Sorry, 350. I got that 4 number wrong. And concurrently 177 roles were 5 eliminated through restructuring. Have I got that 6 right? 7 MS ELLIOTT: Yes. 8 MR. THOMPSON: And then the difference between 9 the two amount to 210 you say are -- the difference 10 between the two and then a few other positions accounts 11 for the 210 vacancies? 12 MS ELLIOTT: Yes. 13 MR. THOMPSON: So that at year end we have 356 14 positions not filled, either the positions reflected in 15 the 1999 revenue requirement not filled either because 16 of restructuring or vacancies? 17 MS ELLIOTT: Yes. 18 MR. THOMPSON: And so I am trying to find out 19 the annualized dollar value of the 356 unfilled 20 positions. And you did provide -- and if that amount 21 were factored into the 1999 actuals annualized, we would 22 have a very significantly different number than 8.2 23 million? 24 MS ELLIOTT: The roles were vacant at the end 25 of the year. Restructuring happened at the end of the 26 year and will be filled this year. Two hundred and ten 27 (210) of those roles will be filled this year. So there 28 isn't an annual impact of those vacancies in that they Les Services StenoTran Services Inc. 613-521-0703 272 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 were not vacant during 1999 and they will not be vacant 2 during 2000. 3 MR. THOMPSON: All right. But as we roll into 4 2000 then we have 356 gaps; 177 of them have been 5 eliminated. 6 MS ELLIOTT: Yes. 7 MR. THOMPSON: So we have got the difference 8 of that to be filled as you say. 9 MS ELLIOTT: Yes. 10 MR. THOMPSON: Now, as we sit here today, how 11 many of those positions have been filled or are we still 12 sitting -- you mentioned earlier we are still sitting 13 with vacancies because you are managing warmer than 14 normal weather. 15 MS ELLIOTT: Yes. Our plans are to fill the 16 vacancies but it is a question of timing as to when 17 those vacancies will be filled. Getting the candidates 18 to fill the roles and in addition to that we are 19 continuing to manage warmer than normal weather. 20 MR. THOMPSON: Well, as we sit here today, 21 which is halfway through almost 2000, how many of the 22 vacancies of 210 have been filled? None? 23 MS ELLIOTT: I don't know that. 24 MR. THOMPSON: Could you undertake to find 25 out? Would it be very few, sort of big picture? 26 MS ELLIOTT: I don't know because I don't know 27 which roles were vacant in the 210. 28 MR. THOMPSON: Could you undertake to tell us Les Services StenoTran Services Inc. 613-521-0703 273 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 how many of the vacancies of 210 year end have been 2 filled as of June 2000? 3 MR. LYLE: We will make that Undertaking G2.5. 4 MR. PENNY: Before we assign it a number, 5 let's find out whether it can be done. I don't think 6 the witness has answered the question. 7 MS ELLIOTT: I can find out whether it can be 8 done. 9 MR. THOMPSON: Why couldn't it be done? 10 Surely you have track -- you know what positions are 11 vacant and you don't have to be a Rhodes scholar to find 12 out if they have been filled. 13 MS ELLIOTT: I can give you the best 14 information that we have available today as to whether 15 those positions have been already filled. What I can't 16 tell you is what are in the process of being filled and 17 what the timing is on filling the rest of them. Filling 18 vacancies is a question of getting the available 19 candidates. 20 MR. THOMPSON: I understand. I am just trying 21 to get current information here. And as time passes, as 22 you have indicated you may not -- you may decide not to 23 fill them and you may decide to increase -- well, to 24 reduce staff further. I think you have told that to 25 others. Your plans are uncertain in this area. That is 26 the message I have obtained. 27 MR. BIRMINGHAM: That is right, Mr. Thompson. 28 It is our expectation that as we continue the Les Services StenoTran Services Inc. 613-521-0703 274 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 restructuring with respect to our business processes 2 that that will have some remaining impact on the roles 3 that we have in the company. 4 MR. THOMPSON: And I guess what I would like 5 to know is what is the total of vacancies now, today? 6 Will that come out of the undertaking? 7 MR. BIRMINGHAM: It should. 8 MS ELLIOTT: Yes. If I had 210 at the end of 9 the year and I can tell you how many have been filled to 10 date, the remaining will be vacancies today. 11 MR. THOMPSON: Yes, but there may be some new 12 vacancies in between. I would like you to add those on. 13 MS ELLIOTT: Okay. 14 THE PRESIDING MEMBER: Mr. Thompson, can I 15 understand. Basically you would be satisfied with a 16 statement of not which of the 210 have been filled but 17 what is the level of vacancies at the end of the year 18 and what is the level of vacancies today. Is that what 19 you want? 20 MR. THOMPSON: Yes, please. 21 THE PRESIDING MEMBER: Thank you. 22 MR. LYLE: So we will make that G2.5. 23 UNDERTAKING NO. G2.5: Ms Elliott to 24 provide what is the level of vacancies at 25 the end of the year and what is the level 26 of vacancies today as well as a full year 27 impact of the current level of vacancies 28 MR. THOMPSON: What I would like you to do is Les Services StenoTran Services Inc. 613-521-0703 275 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 to ascribe a full year impact -- well, to give me the 2 amount of the full year impact of the current level of 3 vacancies. That will have a dollar amount that is 4 presumably derived from the average cost per person. Is 5 that right? 6 MS ELLIOTT: You mean that we don't fill those 7 vacancies for a full year? 8 MR. THOMPSON: That's right. Assuming they 9 remain vacant. 10 MS ELLIOTT: Okay. 11 MR. THOMPSON: Let's say for the sake of 12 argument that -- well, somewhere in the evidence you 13 give the average salaries and benefits for various 14 levels of staff. They were, I thought, around $60,000 15 or something. I think it's the CAC interrogatory. Do 16 you recall the one I'm -- the one that actually shows 17 salaries. 18 MS ELLIOTT: We actually report in C3.93 the 19 reductions at the management, analyst and clerical level 20 and the associated salaries at those levels. 21 MR. THOMPSON: So if the average of -- if it's 22 200 vacancies as we sit here today and the average is 23 $50,000, then we are talking $10 million, right, as the 24 annual impact of vacancies? 25 MS ELLIOTT: If the average salary is $50,000 26 for 210 it would be $10.5 million. Yes. 27 MR. THOMPSON: All right. 28 I guess what I'm trying to get at is that's Les Services StenoTran Services Inc. 613-521-0703 276 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 the kind of head room that appears to be available as 2 you rolled into 2000 operating under the auspices of 3 1999 rates. 4 MS ELLIOTT: You are assuming that I don't 5 fill those vacancies and I don't agree with that 6 assumption, but those are positions that will be filled 7 during the year, so that the -- 8 MR. THOMPSON: Promises, promises, promises. 9 MS ELLIOTT: -- full year impact will not be 10 realized. 11 MR. THOMPSON: Okay. I'm just trying to get 12 the -- tell you where I'm coming from and your 13 information will be current and we will use it for what 14 it demonstrates. 15 But assuming the current level is 200 and 16 assuming the average is $50,000, we are talking about 17 the company, having operated from January 1, 2000 18 through to mid June, recovering, if you will, $5 million 19 on account of positions that have not been filled. 20 MS ELLIOTT: At the same time, we have lost 21 millions of dollars worth of revenue as a result of 22 warmer than normal weather, so we aren't recovering the 23 full cost of service in 2000 because we aren't 24 recovering the revenues that we had expected to recover 25 under normal weather. 26 MR. THOMPSON: I'm not suggesting you are. 27 Rates are stuck on a normalized basis. Okay? 28 MS ELLIOTT: They are also struck on a volume Les Services StenoTran Services Inc. 613-521-0703 277 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 that is normalized and we are not moving the volume that 2 the rates were struck on either, so to suggest that we 3 are recovering costs would assume that I'm recovering 4 the full volume in the forecast and I'm not. 5 MR. THOMPSON: I think I'm getting into the 6 realm of argument here. 7 Just in terms of documents with respect to 8 this business of retirements and vacancies and 9 restructuring, there are a number of questions that the 10 CAC asked you on this issue. I think there are around 11 25 and so on about announcements to staff and this kind 12 of thing. 13 On the basis of the -- I will be asking this 14 on behalf of Mr. Warren -- on the basis of the Board's 15 ruling that current information will be made available 16 or is to be made available, will the documents that are 17 described be made available to Mr. Warren? I'm just 18 trying to find an example of what I'm talking about. 19 MR. PENNY: It's not clear to me why staff 20 announcements would be relevant, Mr. Thompson, in any 21 event. Can you enlighten us as to why that will assist 22 the Board in deciding this PBR application when 23 announcements were made to the staff in 1999? 24 MR. THOMPSON: Well, maybe I will just leave 25 this for him. But an example of the documents that he 26 wished to obtain is in C3.29: 27 "Please provide copies of correspondence 28 to employees regarding the restructuring Les Services StenoTran Services Inc. 613-521-0703 278 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 and..." 2 MR. BIRMINGHAM: With respect to that one, 3 Mr. Thompson, it is not our intention to provide it. I 4 think what the Board had directed us to do was to 5 provide some year 2000 information that would help them 6 assess, as I understand it, the reasonableness of using 7 the 1999 rates going forward as the base for PBR and 8 potentially as some context for the productivity factor 9 that is to be included in the pricing formula and the 10 correspondence to our employees with respect to the 11 reorganization doesn't affect either one of those 12 things. 13 MR. THOMPSON: Okay. Well, I will let him 14 fight his own battles. 15 Let me come quickly to -- I want to try and 16 wrap up, if I can, before 1:00. I want to come back to 17 the corporate budget you provided this morning. 18 --- Pause 19 MS ELLIOTT: I have that. 20 MR. BIRMINGHAM: This is Exhibit F2.1? 21 MR. THOMPSON: Yes. Yes, it is. 22 I just want to confirm how these numbers were 23 derived in terms of what would come out if we had a 24 utility separation. 25 First of all, "Gas sales". You indicated to 26 Dr. Jackson that is revenue from the existing 499 27 Board-approved rates. 28 MS ELLIOTT: Yes. Les Services StenoTran Services Inc. 613-521-0703 279 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: And the "Cost of gas" is at 2 what WACOG? 3 --- Pause 4 MS ELLIOTT: The same WACOG as the revenue. 5 --- Laughter 6 MS ELLIOTT: We would need to check the 7 effective date of the rates that were used. Given the 8 number of rate changes I would expect that this forecast 9 was prepared prior to the December 1st change, so it 10 would be the rates that were in effect last summer or in 11 the fall. 12 MR. THOMPSON: Is that number carried forward 13 into the forecast column as well? 14 MS ELLIOTT: Well, the forecast would be based 15 on Board-approved rates on the revenue side and the cost 16 of gas side. I would need to confirm the actual rate 17 order that was used for that forecast. It would be one 18 of the 499 series of rate orders. I just can't tell you 19 specifically which cost of gas. 20 MR. THOMPSON: But is the same rate order used 21 in Column A and Column B. 22 MS ELLIOTT: Yes. 23 MR. THOMPSON: We should have an undertaking 24 number, then, just to confirm which WACOG is applying. 25 MR. LYLE: We will make that Undertaking G2.6. 26 UNDERTAKING NO. G2.6: Ms Elliott 27 undertakes to confirm which WACOG applies 28 in Exhibit F2.1 Les Services StenoTran Services Inc. 613-521-0703 280 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: Now, lines 1 and 2 would appear 2 as is in a utility presentation? 3 MS ELLIOTT: This is the undertaking I gave to 4 Dr. Jackson to determine in the "Cost of gas" whether 5 there is a difference between the corporate cost of gas 6 and the utility cost of gas. 7 MR. THOMPSON: So the UFG is up there in that 8 line. 9 MS ELLIOTT: The UFG is in the "Cost of gas" 10 line. 11 MR. THOMPSON: But in terms of line 1, that 12 would be the same in a utility presentation? 13 MS ELLIOTT: Yes. 14 MR. THOMPSON: And "Transportation service", 15 line 4, that would be the same as in a utility 16 presentation? 17 MS ELLIOTT: Yes. 18 MR. THOMPSON: And expenses now, line 9, 19 operating maintenance, is that the same as would be in a 20 utility presentation? 21 MS ELLIOTT: With the exception of the removal 22 of charitable donations for utility purposes. I think 23 that is about $400,000. 24 MR. THOMPSON: Depreciation and amortization 25 is the same as in the utility presentation? 26 MS ELLIOTT: Yes. 27 MR. THOMPSON: Property and capital taxes? 28 MS ELLIOTT: Yes, they would be the same. Les Services StenoTran Services Inc. 613-521-0703 281 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: Interest expense? 2 MS ELLIOTT: No, the interest expense in the 3 utility presentation is calculated on a capital 4 structure. 5 MR. THOMPSON: Would it be less or --- 6 MS ELLIOTT: This is not the approved -- this 7 is not the approved interest expense. This isn't the 8 approved level of interest expense for 1999. 9 MR. THOMPSON: Could you give us the --- 10 MS ELLIOTT: The approved level would be less. 11 MR. THOMPSON: Less. Could you give us the 12 interest expense calculation that would be in a utility 13 presentation? 14 MS ELLIOTT: I can do that. 15 MR. LYLE: That is G2.7. 16 UNDERTAKING NO. G2.7: Ms Elliott 17 undertakes to provide to Mr. Thompson the 18 interest expense calculation that would 19 be in a utility presentation 20 MR. THOMPSON: Sixteen are the income taxes 21 calculated as they would be in a utility presentation? 22 MS ELLIOTT: No, the utility would be 23 calculated based on the approved capital structure in 24 the approved ROE. 25 MR. THOMPSON: Can you give us the number that 26 would be there if it were a utility presentation? 27 MS ELLIOTT: Yes. 28 MR. LYLE: Make that G2.8. Les Services StenoTran Services Inc. 613-521-0703 282 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 UNDERTAKING NO. G2.8: Ms Elliott 2 undertakes to provide Mr. Thompson with 3 the calculation of income taxes in a 4 utility presentation 5 MR. THOMPSON: Now, the pref shares dividends, 6 line 18, would that appear in a utility presentation? 7 MS ELLIOTT: Yes, I think it does. 8 MR. THOMPSON: The rate base, that would be in 9 a utility presentation, line 20? 10 MS ELLIOTT: Yes. 11 MR. THOMPSON: Thank you. 12 Now, does this budget reflect -- let me back 13 up -- in your evidence you are talking about offering 14 other services in the unbundling text. "New services", 15 I think, is the language that is used. Does this budget 16 contain any estimate for new services? 17 MS ELLIOTT: This budget doesn't include any 18 new services or any of the existing S&T transactional 19 revenue that is captured in the deferral account. I 20 indicated earlier this budget excludes any assumptions 21 with respect to the impact of this PBR hearing. 22 So there is no additional revenues resulting 23 from those services which under this proposal would flow 24 to the shareholder. 25 MR. THOMPSON: All right. Well, under the S&T 26 transactional services account you are entitled to 25 27 per cent of that? 28 MS ELLIOTT: Yes, and that is included in this Les Services StenoTran Services Inc. 613-521-0703 283 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 forecast. 2 MR. THOMPSON: That is included in this 3 budget? 4 MS ELLIOTT: Yes. 5 MR. THOMPSON: But there is nothing in here 6 for the portion that you are claiming under PBR to 7 divert it from shareholders -- from ratepayers to 8 shareholders? 9 MS ELLIOTT: There is not, but in response to 10 a previous undertaking that calculation will be 11 provided. 12 MR. THOMPSON: Yes, and then you told me that 13 is part of the 7 -- that is in the 7 million that is 14 added to the rate increases of 35.5? 15 MS ELLIOTT: Yes. 16 MR. THOMPSON: Right. 17 Now, the volumes -- I just want to come back 18 to one point about this volume business -- the 19 distribution volume forecast normalized, at the outset 20 you took to be $14,802 million, subject to check, and 21 then 14.6 10(6)m(3) in the forecast, which is three 22 months actual and nine months normalized, as I 23 understand it -- just stopping there -- the forecast is 24 three and nine, three actual, nine normalized? 25 MS ELLIOTT: Yes, it is. 26 MR. THOMPSON: The volumes, the throughput in 27 the 1999 Board approved, is in that Appendix H, I think. 28 MS ELLIOTT: It is, although Appendix H is on Les Services StenoTran Services Inc. 613-521-0703 284 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 a weather-normalized basis. So there is more throughput 2 showing on the actuals than we experienced in our actual 3 financial results. There has been an increase in the 4 volume in Appendix H to reflect normal weather. 5 MR. THOMPSON: Okay. I was more interested in 6 the Board-approved volume. 7 MS ELLIOTT: Yes, the Board approved -- the 8 schedule of reference is Exhibit B, Tab 2, Appendix H, 9 Schedule 3. 10 MR. THOMPSON: The Board --- 11 MS ELLIOTT: The Board-approved volumes. 12 MR. THOMPSON: 14.6 10(6)m(3) roughly? 13 MS ELLIOTT: Yes. 14 MR. THOMPSON: All right. Just to take an 15 example of what I am trying to drive at here is, we take 16 your equity pass-through claim, which we discussed 17 earlier of $5.7 million. 18 MS ELLIOTT: Yes. 19 MR. THOMPSON: Right. The plan is to divide 20 that by 14.6 10(6)m(3) in terms of passing it through in 21 the year 2000. So the unit --- 22 MS ELLIOTT: The full amount of the adjustment 23 would be allocated to both the ex-franchised and the 24 enfranchised. The 14.6 is enfranchised only. But I 25 think your point is their allocation of that will be 26 divided by the Board-approved volumes. 27 MR. THOMPSON: We know that looking again at 28 normalized, just to illustrate the point, if your Les Services StenoTran Services Inc. 613-521-0703 285 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 volumes are 14.8 in 2000 versus 14.6 in the 1999 year, 2 you will recover from enfranchised more than their share 3 of the $5.7 million. In other words, there will be a 4 bit of an add on there? 5 MS ELLIOTT: That calculation is right, 6 although in 2000 to get that additional volume we will 7 have incurred additional investments in capital and 8 expenses. So it is not revenue without costs associated 9 with it. 10 MR. THOMPSON: That may be so. I'm not 11 quarrelling with that. All I am asking: Is that 12 revenue in the 2000 normalized -- is that kind of 13 volume-based add on in the 2000 normalized corporate 14 budget? 15 MS ELLIOTT: No. 16 MR. THOMPSON: I would like to conclude then 17 with just a few questions about the rationale for PBR. 18 Again, there is evidence from others on this 19 topic. Perhaps it might be best to start with 20 Dr. Bauer's evidence just to get your reaction to it. 21 --- Pause 22 MR. THOMPSON: Perhaps the first place to 23 start is page 5. This is the heading "Role and Limits 24 of Performance Based Regulation". 25 MR. BIRMINGHAM: We have it, Mr. Thompson. 26 MR. THOMPSON: And he says in the first part: 27 "Performance-based regulation is 28 generally understood as a summary term Les Services StenoTran Services Inc. 613-521-0703 286 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 for regulatory methods that aim at 2 providing stronger incentives than cost 3 of service regulation for achievement of 4 desirable objectives." (As read) 5 Do you accept that as a description of a 6 rationale for performance-based regulations? 7 MR. BIRMINGHAM: I think that is right given 8 that he is speaking to a broad range of 9 performance-based regulation on the overall topic. 10 MR. THOMPSON: And then in terms of his 11 critique of your approach that probably starts at page 12 16 where he describe, again this is under the heading 13 "The overall rationale and design of Union's unbundling 14 and price cap proposals". 15 And he starts there with discussing the eight 16 objectives that you listed in your testimony and goes 17 through analysing all of this added protection that you 18 say you are providing to ratepayers and which you 19 addressed in-chief. And then at the end of the piece he 20 concludes: 21 "Union's assertion that the specific 22 design of the price cap plan can be seen 23 as a compensation for the unique risks of 24 an unbundled environment are weak." 25 (As read) 26 And I don't want to take you through each and every one 27 of those criticisms, but would you agree that there is a 28 difference of view as to whether your plan is driving Les Services StenoTran Services Inc. 613-521-0703 287 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 appropriate incentives? 2 MR. BIRMINGHAM: There may be a difference of 3 view, Mr. Thompson. When I read Dr. Bauer's evidence, I 4 didn't take it that he had any issue with respect to the 5 fact that it may be driving the appropriate incentives. 6 I thought what he may be taking issue with was a quantum 7 of those incentives and how strong they were. 8 MR. THOMPSON: Now let's come to -- and you 9 don't need to turn this up -- it's in IGUA's policy 10 paper. It is in paragraphs 63 and 65. IGUA takes the 11 view that the rationale for PBR is that it should 12 enhance performance from an existing situation and drive 13 some real benefits for ratepayers. 14 Would you take that subject to check? 15 MR. BIRMINGHAM: In fact, I would agree with 16 the assertion that it should drive benefits for 17 customers and in fact Union's proposal does that, both 18 with respect to a stretch factor that goes into the 19 pricing formula on the higher productivity and with 20 respect to the additional risk that ratepayers would 21 normally absorb under cost of service regulation but 22 will now be the utilities to manage under the price cap 23 framework. 24 MR. THOMPSON: So you would agree that a PBR 25 plan that simply diverts money from ratepayers to 26 shareholders because PBR is fashionable is not an 27 appropriate PBR plan? 28 MR. BIRMINGHAM: No, I would disagree with Les Services StenoTran Services Inc. 613-521-0703 288 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 that, Mr. Thompson. What we are talking about is, is 2 the revenue stream appropriate for the utility to manage 3 its costs and the exposures that it takes on under that. 4 And to the extent that there is a higher incentive for 5 productivity from the utility, is there an appropriate 6 sharing of the benefits of that? You can't in my view 7 on an absolute basis simply say that in your words 8 "diverting a revenue stream" that might be attributed to 9 the ratepayers under cost of service is something that 10 is inappropriate. 11 MR. THOMPSON: What has Union Gas done in its 12 performance in the year 2000 to date to justify an 13 increase in the pre-tax revenue flowing to shareholders 14 of $43.5 million? I would suggest zero. 15 MR. BIRMINGHAM: It has increased the 16 exposures that it is managing underneath the regulatory 17 framework and it has provided an upfront commitment to 18 customers for higher productivity within the pricing 19 formula. 20 MR. THOMPSON: Thank you. Those are my 21 questions, Mr. Chairman. 22 THE PRESIDING MEMBER: Thank you, 23 Mr. Thompson. 24 I think we will close now and start again 25 tomorrow at nine o'clock as we have to attend a meeting 26 of the Board. 27 Before we close, anything, Mr. Penny or 28 Mr. Lyle, that needs to be -- Les Services StenoTran Services Inc. 613-521-0703 289 1 MR. PENNY: There was discussion about an 2 order of cross-examination. Has that been reduced to a 3 document? 4 THE PRESIDING MEMBER: I leave that with the 5 legal people to sort out. Thank you. 6 --- Whereupon the hearing adjourned at 1251, to resume 7 on Thursday, June 15, 2000 at 0900 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 290 1 INDEX OF PROCEEDING 2 PAGE 3 Upon resuming at 0910 189 4 Preliminary Matters 189 5 PREVIOUSLY SWORN: RICK BIRMINGHAM 192 6 PREVIOUSLY SWORN: PAT ELLIOTT 192 7 Cross-Examination by Mr. Thompson 198 8 Upon recessing at 1050 239 9 Upon resuming at 1116 239 10 Upon adjourning at 1251 289 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 291 1 EXHIBITS 2 NO. DESCRIPTION PAGE 3 F2.1 Four-page document containing 192 4 Union Gas' first quarter financial 5 results press release of May 11, 6 2000, a page containing 2000 7 normalized, 2000 forecast, 1999 8 actual and variance columns, the 9 fourth page being some notes to 10 that document 11 12 F2.2 Document Produced by Mr. Thompson 223 13 entitled "PBR Guide" 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 292 1 UNDERTAKINGS (Cont'd) 2 G2.1 Ms Elliott undertakes to provide 197 3 Member Jackson with additional 4 information based on the methodology 5 in the previous proceeding and 6 giving an idea of what the difference 7 would be between the corporate 8 treatment on a balance sheet and 9 the utility treatment on a balance 10 sheet, and correspondingly the 11 difference between the corporate 12 treatment on the income statement 13 and the utility treatment on the 14 income statement, as well as 15 information indicating what Union 16 Energy earnings are that would be 17 in other revenue on the corporate 18 statement 19 G2.2 Ms Elliott undertakes to put 206 20 together a document that takes 21 us from the E.B.R.O. 499 Decision, 22 including everything, the revenue 23 requirement, total, and then show 24 the gas supply commodity, upstream 25 transportation and other costs you 26 backed out to get to $787,205,000, 27 some sort of trail to follow these 28 numbers Les Services StenoTran Services Inc. 613-521-0703 293 1 UNDERTAKINGS (Cont'd) 2 3 G2.3 Ms Elliott undertakes to provide 211 4 the pass-through items on a current 5 WACOG basis 6 7 G2.4 Ms Elliott undertakes to provide 221 8 Mr. Thompson additional information 9 by using page 3 of 4 of Exhibit F2.1, 10 adding two columns, one after 11 normalized, to show the impact of 12 Union's claim for the additional 13 revenues from the deferral accounts, 14 as well as the rate increase and taxes 15 and the rate of return calculations at 16 the bottom, and to provide additional 17 information using the 2000 forecast 18 to indicate the impact of the claim 19 in the context of Union's corporate 20 forecast 21 22 G2.5 Ms Elliott to provide what is the 274 23 level of vacancies at the end of 24 the year and what is the level of 25 vacancies today as well as a full 26 year impact of the current level of 27 vacancies 28 Les Services StenoTran Services Inc. 613-521-0703 294 1 UNDERTAKINGS (Cont'd) 2 3 G2.6 Ms Elliott undertakes to confirm 279 4 which WACOG applies in Exhibit F2.1 5 6 G2.7 Ms Elliott undertakes to provide 281 7 to Mr. Thompson the interest 8 expense calculation that would 9 be in a utility presentation 10 11 G2.8 Ms Elliott undertakes to provide 282 12 Mr. Thompson with the calculation 13 of income taxes in a utility 14 presentation