295 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 Thursday, June 15, 2000, 25 commencing at 0903 26 27 HEARING 28 VOLUME 3 Les Services StenoTran Services Inc. 613-521-0703 296 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 297 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 298 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 11 DWAYNE QUINN/ City of Kitchener Utilities 12 ALICK RYDER 13 14 DAVID POCH Green Energy Coalition (GEC) 15 16 MICHAEL M. PETERSON Nova Chemicals 17 18 RANDY AIKEN London Property Management 19 Association 20 21 VALERIE YOUNG Ontario Association of Physical 22 Plant Administrators 23 24 MARY ANNE ALDRED HYDRO ONE NETWORKS 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 299 1 Toronto, Ontario 2 --- Upon resuming on Thursday, June 15, 2000 at 0903 3 THE PRESIDING MEMBER: Good morning. 4 PREVIOUSLY SWORN: RICK BIRMINGHAM 5 PREVIOUSLY SWORN: PAT ELLIOTT 6 THE PRESIDING MEMBER: Are there any 7 preliminary matters? 8 PRELIMINARY MATTERS 9 MR. PENNY: Mr. Chairman, just to advise you 10 that there are a number of filings for this morning, 11 June 15th. 12 There are answers to transcript 13 interrogatories from yesterday, G2.2, 2.3, 2.4 and then 14 in addition there are some additional evidence updates. 15 The first are extracts from the Christensen evidence 16 that simply reflect the changes that Ms Elliott spoke to 17 on the first day and then there is an evidence update 18 from Mr. Packer on pricing flexibility which became 19 available. So we are making it available in advance, of 20 course, of his testimony so parties can read it. 21 And I should also advise the Board that these 22 -- all of these materials are issuing out of head office 23 as well to all intervenors of record so we are not just 24 filing it here, but making sure it is available to 25 everyone. 26 The evidence updates are just being put out 27 now. 28 THE PRESIDING MEMBER: Thank you. Les Services StenoTran Services Inc. 613-521-0703 300 Preliminary Matters 1 MR. PENNY: And I believe Ms Elliott has an 2 answer to G1.4, which she proposes simply to read into 3 the record once we start proceedings today. 4 THE PRESIDING MEMBER: Thank you, Mr. Penny. 5 --- Pause 6 THE PRESIDING MEMBER: Mr. Penny, it was 2.2 7 and 2.4 and 2.3? 8 MR. PENNY: Yes, 2.2, 2.3 and 2.4. 9 THE PRESIDING MEMBER: Mr. Wightman, could we 10 get 2.3, please. 11 --- Pause 12 THE PRESIDING MEMBER: Are there any other 13 preliminary matters? Ms Lea. 14 MS LEA: Board staff has prepared an exhibit 15 list to this proceeding and it is available on the 16 windowsill if you have not already got one. Thanks. 17 THE PRESIDING MEMBER: Thank you, Ms Lea. 18 So we are ready to proceed. I believe it is 19 Mr. Janigan. 20 MR. WARREN: Mr. Chairman, just before 21 Mr. Janigan begins, I read the transcript last night and 22 Mr. Thompson in his characteristically deferential way 23 punted the ball to me to deal with the question of my 24 response, if any, to the adequacy of the filing 25 yesterday. And I just wonder when, in your view, would 26 be an appropriate time to hear from me on that question? 27 THE PRESIDING MEMBER: Mr. Warren, it would 28 probably be best if you are prepared to go now before Les Services StenoTran Services Inc. 613-521-0703 301 Preliminary Matters 1 Mr. Janigan starts so we don't interrupt his cross- 2 examination. 3 MR. WARREN: Thank you, Mr. Chairman. 4 I wonder if I could begin, my position, 5 Mr. Chairman and Dr. Jackson, is that the material that 6 was filed yesterday was not responsive to the question I 7 asked or to, in my submission, the Panel's direction. 8 I wonder if I could begin with page 143 of the 9 transcript with the question which I asked. It begins 10 at line 10. Page 143, line 10. 11 "Does the company prepare as part of its 12 ongoing of its business, a budget for 13 2000 or has it prepared such a budget?" 14 Answer from Ms Elliott: 15 "Yes, we do. We prepare operating 16 budgets on a fairly regular basis." 17 I underscore the words "operating budgets" 18 there. 19 Then in the next question and answer sequence, 20 I asked Ms Elliott to refer to Exhibit B, Tab, Appendix 21 H, Schedule 4, which is a breakout of the operating and 22 maintenance expense by administrator for the calendar 23 year ending December 31, 1999 and then I asked the 24 question: 25 "... would the budget for 2000 contain an 26 estimate of costs, a budget for costs in 27 each of those categories at that level of 28 detail?" Les Services StenoTran Services Inc. 613-521-0703 302 Preliminary Matters 1 Answer: 2 "Those categories are no longer the 3 categories which the organization -- and 4 you will, I guess, in looking at the 5 summary page that we have provided in the 6 organization chart, the organization, the 7 organization has been restructured to 8 reduce the number of areas. But if you 9 are asking me is an O&M budget prepared 10 for each of the various levels of the -- 11 or areas of the organization under which 12 executives -- over which executives have 13 responsibility, the answer is yes." 14 Question: 15 "And that budget has been prepared?" 16 Answer: 17 "Yes." 18 Question: 19 "Can that budget be produced?" 20 The issue then or the material that I asked 21 for with a production of a 2000 budget as something 22 which approximated the level of detail of the 1999 23 actuals which were set out in Exhibit B, Tab 2, Appendix 24 H, Schedule 4, and the answer from Ms Elliott as I 25 understood the answer and there didn't seem to be any 26 ambiguity about it was that subject to the restructuring 27 into different organizational headings that such a 28 budget existed. Les Services StenoTran Services Inc. 613-521-0703 303 Preliminary Matters 1 Now, the question, Members of the Panel, then 2 I think it would be useful to review is why this 3 information, which was asked for, is relevant. There 4 are two broad reasons why in my submission it is 5 relevant. 6 First is to assess the base for purposes of 7 the PBR regime. Union's proposal initially was that the 8 base be, and indeed it's proposal as of today, is that 9 the Board-approved rates arising from E.B.R.O. 499 be 10 the base. In part in order to allow the intervenors and 11 presumably the Board to test that to see if there should 12 be a different base more accurately reflecting the 13 states of Union at the beginning of the PBR regime, the 14 Board arising from the submissions on issues day ordered 15 the delivery of the 1999 actuals. 16 Union delivered the actuals, which showed a 17 different picture than the Board-approved numbers in 18 E.B.R.O. 499. The numbers were delivered with what 19 amounted to an argument that they were not sustainable. 20 Union did, in delivering the numbers, concede that there 21 were savings as a result of the organization -- 22 reorganization. But they conflated those savings with 23 arguments about warmer -- sorry -- with numbers 24 reflecting what they said was warmer weather in a way 25 which made it difficult, indeed if not impossible, for 26 the intervenors and the Board to determine the meaning 27 and therefore the significance of those 1999 actuals. 28 So with the delivery of the numbers at the Les Services StenoTran Services Inc. 613-521-0703 304 Preliminary Matters 1 Board's direction following the issues day submissions, 2 Union made or tried to make, I submit, the numbers 3 virtually impenetrable. 4 Now, when the interrogatories were asked as 5 they were permitted to be asked on that supplemental 6 evidence, the answers were coded -- sorry -- were 7 clouded with the same arguments. And if the Board turns 8 up, and it isn't necessary for purposes of my 9 submissions to actually turn it up, Board Staff 10 Interrogatory 196, the Board will see is that we have a 11 running together of arguments about warmer weather in 12 reorganization in a way which makes them in my 13 respectful submission impossible to separate. 14 Now, on Tuesday when I attempted to get 15 Ms Elliott to sort out the O&M numbers in a way which 16 distinguished the argument warmer weather from 17 reorganization in order to get at their argument about 18 sustainability, she said at transcript 154, beginning in 19 question and answer sequence at line 6: 20 "Not at this level, no. I can't tell you 21 at all how much of each reduction was due 22 to that factor. When we look at the 2000 23 expenses, we can provide a high level 24 indication of what savings we anticipate 25 to carry forward into 2000, but not at 26 the specific level you are asking for. 27 Sorry ..." 28 This is the question: Les Services StenoTran Services Inc. 613-521-0703 305 Preliminary Matters 1 "Sorry. When we look at the 2000 2 expenses, that is in the budget document, 3 is that right -- that I asked for?" 4 Answer: 5 "To the extent that that information is 6 provided, that would be --" 7 And then it trails off. 8 In my respectful submission, the burden of 9 Ms Elliott's answer to that question was that the 10 sustainability argument could be tested on the basis of 11 the budget information that was to be produced in 12 response to my question. 13 Now, in my respectful submission, the 14 information which was produced yesterday which is not at 15 the level of detail that I asked for and that Ms Elliott 16 said existed does not allow me to do what Ms Elliott 17 said I could do at page 151, which is to break out the 18 warmer weather from the reorganization in order to test 19 the sustainability argument and to get at the adequacy 20 of the base. 21 I think that if we turn back to the Board's 22 earlier ruling which begins at page 84 of the 23 transcript, the Board held, Mr. Dominy said: 24 "In breaking the three types of 25 information that I had asked for 26 1) information in order for the Board to 27 assess the reasonableness of the 1999 28 rates as a starting point for Union's Les Services StenoTran Services Inc. 613-521-0703 306 Preliminary Matters 1 proposed PBR plan; 2 2) current information with respect to 3 2000, including current plans which may 4 assist the Board, for example, in 5 assessing the appropriateness of the 6 productivity factor and concern the 7 appropriateness of using the 1999 rates 8 as the basis for the PBR plan." (As read) 9 The Board then said, beginning at line 7: 10 "The Board believes that the information 11 in the first two categories --" 12 That is those that I have just read. 13 "-- would be of assistance to the Board 14 in deciding the application before it." 15 (As read) 16 In my respectful submission, the information 17 which Ms Elliott said existed and which would assist me 18 falls squarely into both of those categories. It allows 19 us to test the reasonableness of the base and to provide 20 a reasonable basis for the Board to decide 2000 rates. 21 It would be, in my respectful submission, a 22 dangerous result if the applicant, who indeed has all 23 the information, were allowed to, in effect, disguise 24 the information by bearing it in arguments, this 25 conflating of warmer weather with reorganization, in a 26 way that neither the Board nor the intervenors can test. 27 They have the information. It can be provided and it 28 would allow us to test this base for the PBR regime. Les Services StenoTran Services Inc. 613-521-0703 307 Preliminary Matters 1 Now, the second ground, the second reason for 2 pursuing this information is to test and examine Union's 3 assertion that the PBR regime should be imposed 4 retroactively to January 1, 2000. There is expert 5 evidence from Dr. Bauer that this is inappropriate and 6 is inconsistent with regulatory practice. 7 The Board itself may determine that the 8 retroactive imposition of PBR is inappropriate. Indeed, 9 the Board might decide that PBR regime at the present 10 time is premature. 11 The question, then, is what should the rates 12 be for 2000? If there is a PBR regime beginning on 13 January 1, what is the justification for? If there 14 isn't a PBR regime beginning January 1, 2000, how do we 15 set rates? 16 Both of those issues are alive in this case, 17 and as much as Union would not like them to be alive, 18 they are alive and legitimate issues that have to be 19 pursued. In order to do that appropriately, we need the 20 2000 budget, in my respectful submission, at the level 21 of detail that existed -- sorry, that Ms Elliott said 22 existed. So for those two reasons, in my respectful 23 submission, the information should be produced. 24 The Board, when I asked this question toward 25 the close of business on Tuesday, the Board, Mr. Dominy, 26 gave, if not a ruling, what amounts to a direction to 27 Union as to the information which the Board would find 28 useful. Les Services StenoTran Services Inc. 613-521-0703 308 Preliminary Matters 1 Beginning at the bottom of transcript page 2 146, Mr. Dominy said as follows: 3 "The reason I ask this question is 4 because the reason we have put this in is 5 that we are asked to make findings about 6 the PBR plan. We are asked to make 7 findings, I assume, about the base on 8 which that plan is to be developed. We 9 are asked to make findings about the 10 reasonableness of any productivity 11 assumptions that will be incorporated 12 into the plan as we go forward. 13 And the reason we made that decision 14 of creating that category of information 15 was that we needed some information with 16 regard to what the 2000 situation was as 17 compared to 1999, as compared to the 1998 18 situation so that we could make those 19 judgements. And that was the basis of 20 our category called current information 21 with respect to 2000, including current 22 plans. 23 Because 2000 is not yet complete, 24 there can be no actuals in practice 25 unless one gets six and six before 2000. 26 So I request the company to provide the 27 information which would provide that type 28 of -- I use the word "information" again Les Services StenoTran Services Inc. 613-521-0703 309 Preliminary Matters 1 which would assist the Board and would 2 assist the parties." 3 That amounts, in my respectful submission, to 4 a direction from the Board perfectly consistent with 5 your ruling earlier in the day, perfectly consistent 6 with the information Ms Elliott said would exist and 7 perfectly in keeping with the information Ms Elliott 8 said would help me in testing their argument about 9 sustainability. 10 Now, what Union has chosen to do is to say -- 11 If you look at Mr. Penny's response beginning 12 at 148, he says: 13 "Mr. Chairman, I understand you to be 14 saying that you would like the company to 15 consider what it can provide." 16 There is no issue here about what it can 17 provide. We were told by Ms Elliott what they can 18 provide. They have operating budgets, they have to let 19 the level of detail which approximates what was filed in 20 1999 but for the reorganization. So it isn't a question 21 of can't, it's a question of what they will provide. 22 The company is saying to the Board, in effect, 23 we are not going to give you this information, 24 notwithstanding your ruling and notwithstanding your 25 direction. That, I say, with great respect to Mr. Penny 26 and his client, is inappropriate. This information is 27 essential for the two points that I have raised. It's 28 essential for the Board to be able to carry out its Les Services StenoTran Services Inc. 613-521-0703 310 Preliminary Matters 1 function of determining just and reasonable rates. It's 2 essential for the Board to determine what the 3 appropriate base is for PBR going forward. 4 The information we were given yesterday is not 5 at the level of detail Ms Elliott said existed. It's 6 not at the level of detail that we require, and I ask, 7 with respect, that the Board order further and better 8 production of the 2000 operating budget at the level of 9 detail Ms Elliott said existed. 10 Those are my submissions. Thank you. 11 THE PRESIDING MEMBER: Thank you, Mr. Warren. 12 MEMBER JACKSON: Just to clarify, Mr. Warren, 13 are you essentially asking for a schedule that might 14 have the same roads in it as Exhibit B, Tab 2, 15 Appendix H, Schedule 4? 16 MR. WARREN: I am, Dr. Jackson, subject to the 17 reorganizational changes that Ms Elliott referred to. 18 She said there might not be the same headings as a 19 result of the reorganization. I accept that. But 20 whatever approximates that under the reorganized scheme 21 is what I'm looking for. 22 MEMBER JACKSON: Right, so that any road map 23 with respect to reconciling the two schedules, the one 24 that is produced under the new format and the old one, 25 would be helpful too, then, would it? 26 MR. WARREN: That's right, Dr. Jackson. 27 MEMBER JACKSON: I just noticed on that 28 schedule, I don't know why it didn't rise as a question Les Services StenoTran Services Inc. 613-521-0703 311 Preliminary Matters 1 in my mind before, but it's operating and maintaining 2 expense by administrator. What do we mean by "by 3 administrator"? Maybe Mr. Penny could help me on 4 that one. 5 MR. PENNY: I think Ms Elliott is probably the 6 best person to respond to that. 7 MS ELLIOTT: The schedule would really be by 8 executive areas, so in the new organization, that's five 9 areas. It's down considerably from the listing that 10 appears on Exhibit B, Tab 2, Appendix H, Schedule 4. 11 MEMBER JACKSON: And so, basically, do I 12 understand the company's evidence that there was no 13 budget for 2000 prepared on this basis? It has only 14 been prepared on the basis of the five new areas? 15 MS ELLIOTT: That's correct, yes. 16 MEMBER JACKSON: So that if you got that, 17 Mr. Warren, with some sort of a road map to connect 18 those five new areas and the umpteen old areas, you 19 would be satisfied? 20 MR. WARREN: That's what I'm looking for, 21 Dr. Jackson. 22 MEMBER JACKSON: Thank you very much. 23 THE PRESIDING MEMBER: Thank you, Dr. Jackson. 24 Are there any other comments before I ask Mr. Penny to 25 speak? Mr. Janigan. 26 MR. JANIGAN: Thank you very much. I would 27 also adopt the comments expressed by Mr. Warren with 28 respect for the necessity to produce the appropriate Les Services StenoTran Services Inc. 613-521-0703 312 Preliminary Matters 1 documents associated with the existing budget for the 2 year 2000. 3 And as well any documents that may assist in 4 the explanation, particularly of the restructuring and 5 process that has taken place and to attempt to separate 6 that from has been articulated as warm weather 7 adjustments or other non-sustainable adjustments. 8 This material is necessary, as Mr. Warren has 9 indicated, both to explain the 1999 restructuring and as 10 well the warm weather adjustments or any other matters, 11 but also to capture those efficiencies which would 12 ordinarily accrue to ratepayers under the cost of 13 service regulation. 14 We must also determine in the course of the 15 proceeding the timeliness of the PBR plan and the date 16 of implementation and as well such information will 17 assist in the understanding of what productivity levels 18 in a general sense may be achievable, both looking at 19 the estimate of the stretch factor and as well in terms 20 of increasing the efficiencies that may be brought to 21 bear. 22 In a general sense -- and I would like to 23 address this matter in a general way as it pertains to 24 the company's general opposition in releasing 25 information about what currently is going on -- PBR is a 26 forward-looking exercise that allows the company a 27 period to plan and execute programs and operational 28 changes to increase efficiency and reduce what is called Les Services StenoTran Services Inc. 613-521-0703 313 Preliminary Matters 1 gold-plating incentives and increased flexibility of 2 response. 3 The benefits are designed to be shared between 4 the shareholders and the ratepayers. We must stress 5 that PBR is not some kind of regulatory pyxie dust by 6 which the invocation of the those letters automatically 7 shields all from regulatory scrutiny, despite the fact 8 that those operations may have been carried on under 9 preexisting cost of service regulation. 10 Whatever has been done to date has been done 11 under the shelter of cost of service regulation. I 12 would note that the ADR Agreement arrived at in the 13 previous proceeding specifically noted the fact that the 14 intervenors reserve their right to test the 15 appropriateness of the 1999 base on a going-forward 16 basis to act as the PBR base envelope. 17 No one has told the company to have a PBR plan 18 in place for January 1, 2000. We have been faced 19 essentially with an argument that it would be an 20 effrontery to demand information on operations and cost 21 levels of the company that exists now at this time where 22 the Board is to determine whether to put a PBR plan in 23 place or not. 24 It comes as a surprise to us that all of the 25 cost savings and efficiencies over the period of 1999 26 and 2000 have been driven simply by the desire to put 27 PBR in place and not arising as a result of the ordinary 28 prudent management of the company of which we were Les Services StenoTran Services Inc. 613-521-0703 314 Preliminary Matters 1 assured under previous cost of service regulation. 2 The most important question: How is the 3 public interest served by an exercise that cloaks this 4 material under the rubric of privilege or plans that are 5 under way from which the company will profit? The 6 company has indicated that if we learn what productivity 7 levels the company may be able to achieve by looking at 8 the 2000 items the company won't be able to profit so 9 much as a result of our knowledge. 10 In our respectful submission, this is a 11 corruption of the original intention of PBR. It reduces 12 PBR to the level of a game where the emphasis is on 13 whatever efficiencies were previously induced which have 14 been bought and paid for by ratepayers under cost of 15 services hidden under the assumption. It was hidden 16 until PBR is imposed and the shareholders may have a 17 benefit on it. 18 In our respectful submission, Mr. Chair, this 19 is the kind of gamesmanship that is fatal to the purpose 20 of the PBR. It had caused the reevaluation of PBR in 21 many jurisdictions and in our respectful submission it 22 is most subversive to the whole intent of the exercise. 23 We would strongly urge the Board at this 24 juncture to stop the information striptease that we have 25 been subject to over the past several days and provide 26 the relevant documents so that the Board and the 27 intervenors may be able to assess with some degree of 28 accuracy what is currently in place with respect to the Les Services StenoTran Services Inc. 613-521-0703 315 Preliminary Matters 1 2000 budget and as well any explanatory documents that 2 may be available so that we can understand 3 restructuring. 4 We all haven't come here just to eat our 5 lunch. There is a purpose for the hearing process to 6 both receive the evidence and have it tested. The 7 current way in which we are receiving the evidence, and 8 the inability that we have to assimilate it and to 9 organize it in a way that would be effective to help the 10 Board understand what may be achievable in terms of -- 11 or what may be appropriate in terms of a base for 12 applying PBR, any submissions that we have with respect 13 to the timeliness of PBR, or for that matter with 14 respect to productivity levels, can't be done if 15 information is released in this fashion. 16 So I would strongly submit that the Board 17 should, at this juncture, order the company to produce 18 the corporate budget or the material in a fashion which 19 is able to be dealt with in an appropriate fashion by 20 the Board, as well any explanatory documents that may be 21 available that will assist the Board in terms of 22 understanding what has been done to date in both the 23 1999 and 2000 years so that we may more effectively 24 address the points in issue in this proceeding. 25 Thank you. 26 THE PRESIDING MEMBER: Thank you, Mr. Janigan. 27 Are there any parties who wish to make 28 submissions before Mr. Penny speaks? Les Services StenoTran Services Inc. 613-521-0703 316 Preliminary Matters 1 Mr. Mattson. 2 MR. MATTSON: Mr. Chairman, just briefly on an 3 additional matter. I raised it earlier in support of 4 Mr. Warren's earlier motion and that is again that there 5 are two decisions that the Board needs to make. 6 First of all, with respect to the approval of 7 the PBR plan and whether or not there are benefits in 8 the public interest that exceed the cost of service 9 regulation. And secondly, what sort of PBR plan you are 10 going to put in place. 11 Many of the intervenors have brought evidence 12 and they will be leading evidence to try and critique 13 and bring forward a better PBR plan maybe than the 14 company. But I think we need to go back to the original 15 concept here that Union -- the burden is on Union to 16 show and to demonstrate to this Board that the PBR plan 17 is in fact beneficial and has benefits over the current 18 cost of service regulations. 19 Certainly if this was a cost of service 20 hearing, we would get all the information that 21 Mr. Warren is asking for, no question. This information 22 could not -- Mr. Penny and Union would not be able to 23 hide behind the arguments that they are making here that 24 somehow this will prejudice them in PBR, somehow that 25 this information will hurt their new restructuring and 26 shouldn't be allowed. It would be accessible. 27 Mr. Penny has indicated that the new Act 28 allows for PBR. I agree with that, but the burden isn't Les Services StenoTran Services Inc. 613-521-0703 317 Preliminary Matters 1 any different. The onus is still on the applicant to 2 show that PBR is in the public interest. 3 So if what they are saying to Mr. Warren's 4 request or to your decision on the motion the other day, 5 is, "We are not going to provide this information", I 6 would urge the Board to warn the company that without 7 this information there isn't a evidentiary basis upon 8 which this Board can approve this application. And it 9 may be that the Board may have difficulty ordering the 10 company to produce things it doesn't want to produce. 11 If that's the case, however, and if Mr. Penny 12 insists that they will not produce the information, then 13 I would suggest that the Board should indicate to the 14 company that there is a concern here that they are not 15 meeting the onus that is necessary to demonstrate to the 16 Board and to the intervenors, and in fact to the public, 17 that their proposal is in some way better than what the 18 public had before under cost of service regulation. 19 Thank you. 20 THE PRESIDING MEMBER: Thank you, Mr. Mattson. 21 Any other parties? Ms Symes. 22 MS SYMES: Union is asking the Board for a PBR 23 regime of setting rates for 2000 to 2004 and in terms of 24 this new process of setting rates there are two issues. 25 First of all, where to start and how to go forward. It 26 is our submission that in that new exercise the process 27 must be both open and transparent and that the Board 28 must receive the best possible information in order to Les Services StenoTran Services Inc. 613-521-0703 318 Preliminary Matters 1 make those decisions. 2 The Alliance supports Mr. Warren, that the 3 best possible information to enable an open and 4 transparent decision-making process is the information 5 that Union has with respect to its 2000 operating 6 budget. To use anything else is to violate those 7 essential principles which are there to protect the 8 public and especially important as we begin a new 9 exercise, a new venture in regulating rates in Ontario 10 for natural gas. 11 THE PRESIDING MEMBER: Thank you, Ms Symes. 12 Any other parties? 13 --- Pause 14 THE PRESIDING MEMBER: Mr. Penny, would you 15 care to respond? 16 MR. PENNY: Thank you, Mr. Chairman. 17 I will be quite brief. I am not proposing to 18 respond to the tendentious arguments that you have heard 19 or the jury addresses. I am not going to respond to the 20 rhetoric. I am going to try and just deal with the 21 issue at hand. 22 In my submission, there is nothing 23 impenetrable about the 1999 actual information that was 24 provided. Mr. Warren was quite right, there was some 25 qualification on that information when it was provided. 26 That was simply based on past regulatory practice, which 27 is that this Board does not set rates based on an 28 historic test year. This Board, for 20 years and more, Les Services StenoTran Services Inc. 613-521-0703 319 Preliminary Matters 1 has set rates on the basis of a forecast test year. 2 The cautions that were attributed to the 1990 3 actual information were exclusively related to that fact 4 and that is that it is not an appropriate basis for 5 setting rates to look at historic information. If this 6 were a cost of service hearing, you would have historic 7 information. It obviously would be relevant, but it is 8 not the basis upon which you set rates. There is a new 9 forecast for the test year and that information is taken 10 into account. 11 With respect to the questions that Mr. Warren 12 focused on, with great respect to Mr. Warren, I think he 13 mischaracterizes what Ms Elliott said the information 14 would do. Ms Elliott has never said that you would be 15 able to separate out the particular weather impact on 16 what the company did to manage its costs as opposed to 17 the impact of managing the ADR process from last time or 18 the restructuring or any of the other -- or the 19 separation of ancillary business, which was also a 20 relatively recent initiative. 21 That is, I think, where the real crux of the 22 issue arises, that it is unfortunately not possible for 23 the company to just say and put in neat little pigeon 24 holes, "Well, this is the cost that we managed because 25 our revenues were down because the weather was warmer 26 than it was supposed to be and this is the cost that we 27 managed because we agreed to an O&M budget in 499 that 28 was $6 million less than what we had asked for." Life Les Services StenoTran Services Inc. 613-521-0703 320 Preliminary Matters 1 isn't that simple and the way you carry on business 2 isn't that simple. 3 The information that we provided is the 4 information that forms the basis of the 2000 operating 5 budget, that is G -- F2.1, excuse me. 6 We understood the ruling from page 147 -- 7 well, first of all, I don't believe it was a ruling -- 8 we understood the direction from the Chairman and Dr. 9 Jackson to be focused on information. Mr. Chairman, you 10 said at page 147: 11 "Because 2000 is not yet complete, there 12 can be no actuals in practice unless one 13 gets six and six before 2000." 14 So I request the company to provide 15 information which would provide that type of -- I use 16 the word "information" again, which would assist the 17 Board and would assist the parties. I took that to mean 18 not that you were telling Union to produce the physical 19 2000 operating budget, but to produce the information 20 that the parties wanted having regard to the two issues, 21 which were the reasonableness of the 499 as the base and 22 the extent to which it may inform any productivity 23 assumptions or productivity determinations that should 24 be made with respect to the commencement of PBR. 25 That, in my respectful submission, is 26 information that is contained within F2.1. Ms Elliott 27 was examined on it yesterday and indicated that the 28 productivity earnings management issues were $10 million Les Services StenoTran Services Inc. 613-521-0703 321 Preliminary Matters 1 in Note 3 of page 4 of that exhibit. 2 With respect to the additional information 3 that Mr. Warren is talking about in response to 4 questions from Dr. Jackson, I understand it is possible 5 for the company to break out the O&M by the new 6 executive categories, which, if memory serves, is five. 7 I'm not sure whether it is possible to unscramble the 8 egg in the sense that it is possible to say that this is 9 what it would have looked like under the old 10 pre-restructuring categories by administrator. Indeed, 11 I suspect it is not. But we can provide the breakout of 12 the 269 O&M piece, for example, by the new categories, 13 if that would be of assistance. 14 The starting point of this debate, 15 Mr. Chairman, yesterday -- and I suppose with its 16 origins on the first day -- really surrounded not so 17 much the information as the production of the budget. 18 The sensitivity around the budget, just to reiterate, is 19 that it contains assumptions about what the company 20 might or might not receive from the Board in respect of 21 the PBR plan. 22 Those, I think, we dealt -- I thought we dealt 23 with on the basis that those are on the revenue side and 24 that that was less significant. What we were focusing 25 on was the cost side. We believe that that information 26 that we have provided does focus on the cost side. 27 I had understood that the Board had some 28 sympathy with the company's position that it ought not Les Services StenoTran Services Inc. 613-521-0703 322 Preliminary Matters 1 to be required to produce documents that contain 2 assumptions about what the company might or might not 3 receive from the Board by way of an order and a decision 4 in this application, given that those are, by 5 definition, assumptions and also contain perhaps 6 compromised positions that would prejudice the company's 7 position. 8 So Union is well aware -- Mr. Mattson does not 9 need to keep reminding me -- Union is well aware of the 10 fact that it has the burden of the proof. 11 The suggestion that management budgets would 12 be produced under cost of service regulation is simply 13 wrong. That is historically not the case. Under cost 14 of service regulation there are forecasts prepared and 15 that information is provided. This is not a cost of 16 service application. 17 So, in my submission, the company ought not to 18 be required to produce its budget. If it would be of 19 assistance, we can provide the breakout under the new 20 administrative categories. Parties may want to -- would 21 be at liberty to ask about the connectability of those 22 categories to the old categories. And it may be parties 23 will want to ask about why certain elements -- or 24 whether certain elements derived from weather management 25 versus ADR management versus separation management 26 versus management of other business impacts in 27 situations that the company is facing. 28 Although, as I have said, I think we have Les Services StenoTran Services Inc. 613-521-0703 323 Preliminary Matters 1 heard several times from Ms Elliott in her evidence 2 yesterday that that isn't how companies operate. You 3 can't just say "We saved this dollar because we had to 4 face the fact that we had $100 less revenue than we 5 thought due to warm weather". The saving of that dollar 6 was in response to a number of issues the company was 7 facing. 8 To say more, Mr. Chairman, I think would be 9 repeating the submissions you have heard. 10 THE PRESIDING MEMBER: Thank you, Mr. Penny. 11 --- Pause 12 THE PRESIDING MEMBER: Mr. Warren. 13 MR. WARREN: Thank you. I will be brief. 14 I am stunned at the suggestion that I violated 15 one of my life's rules, which is never to be contentious 16 or excessively rhetorical before ten o'clock in the 17 morning, but I guess I have failed. 18 The short answer is that the information 19 exists. The information that I have asked for exists 20 and I would ask that it be produced. 21 The problems that there may be in sorting it 22 out both with respect to the new organizational format 23 and with respect to causality, mainly whether it is 24 driven by warm weather or ADR settlements or Board 25 decisions or restructuring or matters that we are going 26 to have to wrestle with, they would be easier to wrestle 27 with if we had a guide book from the utility. Given 28 that it exists, given that Ms Elliott has suggested to Les Services StenoTran Services Inc. 613-521-0703 324 Preliminary Matters 1 me it would be helpful, I ask that it be produced. 2 The larger question is the issue of the 3 budget. And in my respectful submission, the budget 4 numbers are squarely within the budget and it is 5 entirety is squarely within both your ruling on Tuesday 6 and your direction, as Mr. Penny and I have agreed to 7 call it, at page 146 and 147 of the transcript. So I 8 would ask that both items of information be produced but 9 at a minimum we get the document that I was describing 10 in my exchange with Dr. Jackson with the road map that 11 would allow us to connect the existing appendix with the 12 new data. 13 Those are my submissions in response. 14 THE PRESIDING MEMBER: Thank you, Mr. Warren. 15 MEMBER JACKSON: Mr. Penny, we may take some 16 time to discuss this and get back to you. But just 17 while we are discussing it, can I just ask for 18 clarification and again perhaps Ms Elliott could 19 help us. 20 On the information that was filed as F2.1, 21 page 3, the column headed up "2000 Forecast", does that 22 not bear some relationship, and assuming that it does, 23 could you just indicate what the relationship is just to 24 clarify? To the budget is the relationship that I am 25 looking for, the most recent budget for the corporation. 26 MS ELLIOTT: The column headed up "2000 27 Forecast" is the current outlook. It is three months of 28 actuals, nine months of forecast. It excludes, however, Les Services StenoTran Services Inc. 613-521-0703 325 Preliminary Matters 1 any assumptions as to the outcome of this proceeding. 2 MEMBER JACKSON: And Mr. Penny has reminded us 3 though that that would just affect the revenue lines. 4 Is that correct? 5 MS ELLIOTT: Yes. 6 MEMBER JACKSON: Okay. Thank you. 7 --- Pause 8 MEMBER JACKSON: When you say the "current 9 outlook", that is something that is produced internally 10 as well. You do this sort of an outlook with three 11 months actual and forecast the rest of the year, do you? 12 This is the closest we can get to your most current 13 budget, is it, without looking at the revenue items? 14 MS ELLIOTT: That is right. The column A is 15 really the original budget. So that is twelve months of 16 forecast. It has no actuals in it. So the impact of 17 weather has been taken out. And the impact of managing 18 that weather you can see the difference in line 9 on the 19 operating and maintenance expenses were originally five 20 million higher. 21 MEMBER JACKSON: Yes. 22 So when you talk about managing the weather 23 effect, just remind me how that effects O&M or does that 24 just effect the vigour with which you manage the O&M 25 costs because you realize earnings are going to be down 26 because of the effect of the weather and you can be a 27 little tougher or you can -- maybe you can defer some 28 programs or elements of programs that you otherwise Les Services StenoTran Services Inc. 613-521-0703 326 Preliminary Matters 1 would have done in 2000, defer them to 2001. What are 2 we looking at when you say that? 3 MS ELLIOTT: As we go through the year and our 4 revenues are not on track because of warmer than normal 5 weather or a decline in use per customer, we do 6 certainly take a look at our O&M and capital spending 7 and look to defer costs and manage our discretionary 8 spending as much as possible. So what you see between 9 columns A and B is a reduction of $24 million worth of 10 revenues, and in response to that we have reduced our 11 O&M by $5 million and made some determinations in terms 12 of capital spending. 13 MEMBER JACKSON: Well, thanks for that 14 clarification. It will help us when we are reflecting 15 on the decisions we make with respect to the motion. 16 Thank you. 17 --- Pause 18 MEMBER JACKSON: Mr. Warren. No, that is 19 fine. I didn't want to interrupt you either because I 20 think that when we go away, we want to have all the 21 information to make a good finding or decision. 22 We are just wondering what it is you would 23 think you would get then in addition by getting the 24 actual budget document? Do I hear you are asking for 25 the actual budget document? 26 MR. WARREN: Well, as I understand, Doctor, 27 and let me try and respond to it by saying that as I 28 understand Ms Elliott's exchange with you, the actual Les Services StenoTran Services Inc. 613-521-0703 327 Preliminary Matters 1 budget would be something like column B but with an 2 adjustment to the revenue figures that would somehow 3 factor in the results of this, of your deliberations. 4 Now, if that is the only difference between 5 the actual budget and this, then the actual budget isn't 6 going to help me very much. What is going to help me, 7 however, is a drilling down through the O&M numbers to 8 get what it is they are anticipating for in various 9 categories in O&M. That is -- so in answer to your 10 question, if the only difference between column B and 11 the actual budget is as she has described it, I am not 12 sure it is not going to help me all that much. 13 MEMBER JACKSON: All right. Thank you, 14 Mr. Warren. 15 And my understanding is the same as 16 Mr. Warren's so correct me if there is any 17 misunderstanding left, Mr. Penny or Ms Elliott. The 18 only difference is in the revenue items. Correct? 19 MS ELLIOTT: That is right. Column B is our 20 current operating budget. The only difference is we 21 have excluded the revenue assumptions for this hearing. 22 MEMBER JACKSON: Okay. Thank you. Then I 23 think we are fine. 24 Then it seems to me that Mr. Penny has offered 25 then to provide that background detail. Is that 26 correct? So maybe there is no longer a dispute. We 27 have resolved it with respect to the O&M expenses. 28 MR. PENNY: We can give, as I understand it, a Les Services StenoTran Services Inc. 613-521-0703 328 Preliminary Matters 1 breakout by current -- under the current organizational 2 structure. I think the confusion arises because there 3 is no road map. The way that it was done in 499 and the 4 way that it is done now and I do not -- it is my 5 information that there isn't a way that we can just 6 neatly reconnect all of those lines so you can see where 7 everything is. But I think what we can do is breakout 8 this number by the new organizational structure. 9 MEMBER JACKSON: Okay, fair enough if that is 10 the case. So you are saying it can only be reconciled 11 up to the 269 figure? There is no subsidiary 12 reconciliation that can be done to the rows in Schedule 13 4 of Appendix H? 14 MR. PENNY: This is really a matter of 15 evidence as opposed to argument. 16 MEMBER JACKSON: Yes. 17 MR. PENNY: So maybe Ms Elliott should -- 18 MEMBER JACKSON: It is a question of how far 19 we go in our ruling or whether we have got a settlement 20 right now. And if we have got a settlement of the 21 issue, then I guess we are content just to move on. 22 Otherwise, if you would like us to direct that you file 23 something, we will compose our thoughts and direct it. 24 MR. PENNY: Well, we can do this on-line or 25 off-line. We can either, at the break, confirm with 26 Mr. Warren and Ms Elliott can explain to him what there 27 might or might not be available and we can see. Or we 28 can do it now. Frankly, as this emerges, I think we Les Services StenoTran Services Inc. 613-521-0703 329 Preliminary Matters 1 might be better off talking off-the-record with 2 Mr. Warren and just advising you. 3 MEMBER JACKSON: Let me just say, then, for 4 your assistance, I think that if there can be a 5 reconciliation of any of the numbers in the new 6 categories to numbers in the old categories below the 7 number 269, we would like to see it. If there cannot, 8 then there cannot. But you can explain that. Thank you 9 very much. 10 MR. PENNY: All right, thank you. We will 11 speak about it at the break with Mr. Warren. 12 THE PRESIDING MEMBER: Mr. Warren, did you 13 want to say something, then? I wasn't sure. I saw some 14 movement. 15 MR. WARREN: I'm always happy to chat with 16 Mr. Penny. 17 THE PRESIDING MEMBER: Well, in which case, I 18 think what we will do is we will leave it to the break 19 and if we have to make a specific direction, then we 20 will have better information after the break, when you 21 have had a chance to discuss it. 22 I think we will move on, then, with 23 Mr. Janigan's cross-examination of this panel. 24 I do make a comment. If, as a result of 25 information that is filed there are additional questions 26 required, then we will have to work out -- or I ask that 27 the parties work out amongst themselves the best process 28 for doing that, whether it is to offer an opportunity Les Services StenoTran Services Inc. 613-521-0703 330 Preliminary Matters 1 for people who have already been cross-examined to ask 2 further questions or to add them to the list, which are 3 the same people in the next panel. Thank you. 4 Mr. Janigan. 5 MR. JANIGAN: Thank you, Mr. Chairman. For 6 this panel, I have some clean-up questions. 7 CROSS-EXAMINATION 8 MR. JANIGAN: First of all, with respect to 9 this document, I'm afraid I don't know what Exhibits or 10 Undertaking this refers to or whether or not it's been 11 introduced in evidence. 12 MS ELLIOTT: It was Undertaking G1.1. 13 MR. JANIGAN: Is it possible to receive the 14 numbers of staff that are associated with each 15 individual area? 16 MS ELLIOTT: You are looking for a breakdown 17 that would total the 2,499 by area? 18 MR. JANIGAN: That's correct. 19 MS ELLIOTT: Yes, I think we can do that. 20 THE PRESIDING MEMBER: Undertaking G3.1. 21 UNDERTAKING NO. G3.1: Ms Elliott to 22 provide numbers of staff that are 23 associated with each individual area 24 MR. JANIGAN: Secondly, just to follow up to 25 the Undertaking that was given to Mr. Brett, G1.6, I 26 believe the Undertaking asked for the level of vacancies 27 to date. I know we have a figure to the end of 1999. 28 Do we have a figure of the total number of vacancies up Les Services StenoTran Services Inc. 613-521-0703 331 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 until this point in time? 2 MR. PENNY: That was addressed yesterday by 3 Mr. Thompson, and I believe there is an Undertaking 4 given in respect to that. 5 MR. JANIGAN: No, actually, the Undertaking 6 relates to the number of vacancies of the 1999 figure 7 that's been filled. It doesn't relate to the number of 8 vacancies up to this point in time. 9 THE PRESIDING MEMBER: I think the Undertaking 10 yesterday was to give the number of vacancies then and 11 the number of vacancies now. 12 MS ELLIOTT: The Undertaking G2.5 is the 13 number that have been filled and the current level of 14 vacancies. 15 MR. JANIGAN: That's an absolute number? 16 MS ELLIOTT: Yes. 17 MR. JANIGAN: I'm going to ask some questions 18 with respect to your proposed adjustment for pension 19 benefits to the base. 20 First of all, I wonder if I could just clarify 21 something. You have, on Exhibit B.1, Tab 2, page 1, the 22 supplemental evidence. It's noted that you propose to 23 treat changes in GAAP as non-routine adjustments, and as 24 well, to establish a deferral account to capture the 25 impact of non-routine adjustments. 26 I don't understand the fit between those two 27 sentences and the idea that we will make an adjustment 28 to the base on a going forward basis for pension Les Services StenoTran Services Inc. 613-521-0703 332 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 benefits. Can you clarify that for me? 2 MS ELLIOTT: The proposed treatment of non- 3 routine adjustments, I guess non-routine adjustments, by 4 their nature, are items that are not forecastable. So 5 when they do materialize -- and it's likely the 6 circumstance will be between rate change dates -- we 7 will establish a deferral account for that amount and 8 deal with the disposition of the account and the 9 adjustments to rates in the subsequent customer review 10 process. 11 Where we are right now, is we do know there is 12 a change in accounting policy with respect to the 13 pension and post-retirement benefits, and rather than 14 establishing a deferral account and seeking recovery at 15 the next date, we are in the process of changing the 16 rates for 2001 and we have brought the adjustment 17 forward as an adjustment to base rates. 18 Had this change happened during the term, it 19 would have been set up in a deferral account and dealt 20 with in the customer review process. 21 MR. JANIGAN: Now, I note, in your examination 22 by Mr. Warren and Mr. Brett, that in fact, previously, 23 under GAAP, there was some flexibility in the way in 24 which these matters were treated. Is that correct? 25 MS ELLIOTT: There is a provision in the 26 general accepted accounting principles for accounting 27 for rate regulated enterprises. That provision deals 28 with deferred taxes, it deals with plant. There is no Les Services StenoTran Services Inc. 613-521-0703 333 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 provision in the current handbook to deal with the 2 accounting for post-retirement and pension benefits. 3 MR. JANIGAN: And in order to continue the 4 current treatment, I understand that it would be 5 necessary to have the fact that the treatment of pension 6 benefits by the company is being carried on non- 7 compliance with GAAP principles. Is that correct? 8 There would have to be a note appear in the audit 9 statement to that effect. 10 MS ELLIOTT: If we did not adhere to general 11 accepted accounting principles, there would be a note in 12 our financial statements indicating that. 13 MR. JANIGAN: Now, this change came about in 14 1999 as I understand, the change in GAAP accounting 15 principles for pension benefits? 16 MS ELLIOTT: The handbook section was released 17 in 1999, effective January 1, 2000. 18 MR. JANIGAN: And do you know of any regulated 19 companies that have chosen to treat, to continue the 20 previous practice that is associated with pension and 21 retirement benefits and to note the same on their 22 audited statements? 23 MS ELLIOTT: I'm not aware of any company who 24 has taken that route, no. 25 MR. JANIGAN: I wonder if you could undertake 26 to check whether or not Pacific Northern Gas Limited has 27 elected to take this route as a result of an ADR 28 Settlement that was arrived at following the GAAP Les Services StenoTran Services Inc. 613-521-0703 334 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 adjustments. 2 MR. PENNY: I'm sorry, Mr. Chairman. May I 3 interject? The question is, do we know of any utilities 4 that have chosen not to follow general accepted 5 accounting principles. Is that what Mr. Janigan wants 6 to know? 7 MR. JANIGAN: No, the question is whether or 8 not there are any regulated companies. The first 9 question was whether or not there are any regulated 10 companies who have chosen to take the route to have 11 recorded on their audited statements that, in fact, the 12 practice of accounting for pension and retirement 13 benefits has been done not in accordance with GAAP 14 principles. 15 And not to be too cute about this, but as I 16 understand it, there are Pacific Northern Gas, which I 17 believe is a Westcoast company as a result of an ADR 18 settlement arrived at last year, as well as BC Gas as a 19 result of an ADR settlement arrived at last year, have 20 elected to record the pension and retirement benefits 21 item in the same basis that they previously did and to 22 have the note appended to their financial statements to 23 the effect that this accounting -- this particular item 24 has been accounted for in that fashion. 25 MR. PENNY: And so, Mr. Chairman, as I 26 understand, Mr. Janigan wants to know if we can find out 27 if Pacific Northern Gas has done that as a result of an 28 ADR settlement? Has agreed to do that. Les Services StenoTran Services Inc. 613-521-0703 335 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 MR. JANIGAN: Well, I mean it is fine. We can 2 put this matter in on our own case if you wish, but the 3 testimony of the witness panel is that they are not 4 aware of any regulated companies that have done so and 5 we are content to have that put in on our own case if 6 that is satisfactory with Mr. Penny. 7 MR. PENNY: Mr. Chairman, I am just trying to 8 clarify what it is that Mr. Janigan's wants to know so 9 that I can assess whether it seems to be relevant or not 10 and whether it is something the company should do. I am 11 not suggesting he do anything at this stage, Mr. 12 Chairman. I am just trying to clarify what it is he 13 wants. 14 THE PRESIDING MEMBER: As I understand it, the 15 initial request that Mr. Janigan had asked was whether 16 Ms Elliott could check whether in fact this was the 17 case, whether she could find that out. That is what I 18 understood the original question. 19 Subsequent to that, I hear Mr. Janigan say 20 that he has the information and they will provide it 21 themselves. And therefore the question was, was 22 Ms Elliott aware of this. This is my understanding of 23 what I have heard. I think I am correct. 24 MR. JANIGAN: That is correct, Mr. Dominy. 25 MEMBER JACKSON: Mr. Janigan, when you file 26 that with your part of the case, could you see if you 27 could copy the relevant page or two from the CICA 28 Handbook as well just so that we see what they are Les Services StenoTran Services Inc. 613-521-0703 336 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 operating under. And if that turns out to be many 2 pages, maybe you would advise us because I am not asking 3 for a lot of copying. 4 MR. JANIGAN: We will do that, Dr. Jackson. 5 MEMBER JACKSON: Thank you. 6 THE PRESIDING MEMBER: So are we at that 7 question then, Mr. Janigan? Is Ms Elliott aware of 8 this. Is that the question we are at now? 9 MR. JANIGAN: Is he prepared to undertake to 10 confirm that information? 11 MR. PENNY: Mr. Chairman, we will look at that 12 now that I understand what it is Mr. Janigan wants. And 13 we will certainly make inquiries and if we have 14 information, we will provide it. 15 THE PRESIDING MEMBER: Thank you. 16 MR. WIGHTMAN: G3.2. 17 UNDERTAKING NO. G3.2: Mr. Penny to 18 provide information as to whether or not 19 there are any regulated companies who 20 have chosen to take the route to have 21 recorded on their audited statements that 22 the practice of accounting for pension 23 and retirement benefits has been done in 24 accordance with GAAP principles 25 MR. JANIGAN: Just in terms of some clean-up 26 questions, on Exhibit F2.1, which is the 2000 financial 27 information that you have given to us, I wonder if you 28 could just clarify for me what, under the Note 3, the Les Services StenoTran Services Inc. 613-521-0703 337 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 reversal of 1999 earnings management refers to? 2 MS ELLIOTT: And note 3 is a continuity 3 between the 1999 actuals and the current 2000 forecasts. 4 And recognizing that the 1999 actuals were -- had been 5 reduced by nine and a half million dollars. 6 Just to identify what can be or has been 7 carried forward, I added back the reduction in 1999 8 actuals and the bottom line shows the reduction for 2000 9 productivity earnings management. They net each other 10 off, but it shows that at least part of 1999 savings has 11 been carried forward through productivity in 2000. And 12 if you look at the original budget, you will see it was 13 five million higher than our current forecast. So in 14 addition to the five million of productivity, we have 15 about five million of ongoing earnings management to 16 deal with this year's weather. 17 MR. JANIGAN: So that the productivity, as I 18 understand it, the productivity enhancements that you 19 introduced in 1999, 10 million of that is coming 20 forward. But there is another item that you have added 21 to reflect essentially warm weather adjustments that 22 were not sustainable. Have I got that correct? 23 MS ELLIOTT: Starting with the 1999 actuals 24 and going through to the 2000 forecast, what you don't 25 see is the impact of the restructuring. If you just 26 look at the pension adjustment, the compressor fuel 27 price adjustment, the volume inflation and growth, the 28 reason you don't see it is because the productivity Les Services StenoTran Services Inc. 613-521-0703 338 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 going forward really captures the savings that were 2 realized through 1999 earnings management. 3 So it deals with the question of 4 sustainability. While there was nine and a half million 5 dollars worth of cost reduction in 1999, those exact 6 savings weren't carried forward to 2000, but the 7 restructuring efforts generated in that productivity of 8 $5 million and then there is continued earnings 9 management of an additional $5 million for a total of 10 ten. 11 MR. JANIGAN: That will be perhaps clearer 12 when we have received the additional information. 13 I wonder if you could turn up Interrogatory 14 Number or Exhibit No. C1.88 for me please. Exhibit 15 C1.88. 16 MS ELLIOTT: Is that 188 or 88? 17 MR. JANIGAN: No, 88. 18 --- Pause 19 MR. JANIGAN: Now, the question from Board 20 staff was to quantify the yearly saving in meter reading 21 costs, direct and indirect, that Union expects to enjoy 22 from going from monthly to bi-monthly readings in the 23 southern area and indicate whether the initial PBR base 24 reflects these cost savings. 25 Now, I understand your answer to be that the 26 savings reflected in the 1999 actual O&M was 0.750 27 million and those are contained in the 1999 actuals as I 28 understand. Is that correct? Les Services StenoTran Services Inc. 613-521-0703 339 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 MS ELLIOTT: Yes, that is correct. 2 MR. JANIGAN: But we don't have a comparable 3 figure for what those savings will induce then in fiscal 4 year 2000, but I would assume that it is some full year 5 basis of the pro-rated number of 0.750 million. Is that 6 correct? 7 MS ELLIOTT: Recognizing that we started bi- 8 monthly meter reading in May and realized a reduction in 9 O&M costs directly related to that of three-quarters of 10 a million dollars, I would expect a full year's cost to 11 be greater than that, yes. 12 MR. JANIGAN: Now, as I understand your answer 13 to this interrogatory is that notwithstanding that this 14 efficiency was introduced in 1999, I presume it was 15 planned -- been in the planning for some months before. 16 Am I correct? 17 MS ELLIOTT: I don't know. 18 MR. JANIGAN: Well, notwithstanding the fact 19 that this was introduced in May of 1999 under cost of 20 service that the benefits of this efficiency that was 21 generated and put in place in May of 1999 will not be 22 reflected according to the company in the PBR rate base. 23 It won't adjust the rate base to acknowledge 24 this efficiency? 25 MS ELLIOTT: Are you referring to rate base as 26 an investment in plant or base rate as in the starting 27 point for PBR? 28 MR. JANIGAN: Base rates. Les Services StenoTran Services Inc. 613-521-0703 340 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 MS ELLIOTT: Base rates are in our position 2 based on 1999 approved. So no, the base rates would not 3 reflect this reduction. 4 The price cap formula would however capture 5 these efficiency gains. 6 MR. JANIGAN: And the way it would capture 7 that is in the productivity factor estimates? 8 MS ELLIOTT: Yes. 9 MR. JANIGAN: And as I understand the netting 10 out of those two, both the productivity and the stretch 11 factor, is the negative number. 12 MS ELLIOTT: That's correct, yes. 13 MR. JANIGAN: How would then this efficiency 14 be captured on the productivity side? 15 MS ELLIOTT: The struck productivity being a 16 negative number really reflects the decline in use per 17 customer that Union is seeing, so the reductions in 18 revenue on an ongoing basis will be managed not through 19 price increases, but through productivity gains on the 20 system. 21 So there is a reduction in the impact that the 22 decline in use per customer will have on customers. 23 MR. JANIGAN: Has your productivity factor 24 been arrived at with reference to the 1999 actual? 25 MS ELLIOTT: Are you asking if our stretch 26 factor was based on the 1999 actual? 27 MR. JANIGAN: Either your productivity or your 28 stretch factor. Les Services StenoTran Services Inc. 613-521-0703 341 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 First your productivity. The historical 2 productivity, as I understand, was not calculated with 3 reference to your 1999 figures. 4 MS ELLIOTT: That's right. 5 MR. JANIGAN: Stretch factor? 6 MS ELLIOTT: Not directly, no. 7 MR. JANIGAN: It seems to me difficult that we 8 are going to capture this efficiency in any useful 9 fashion with respect to the PBR plan. 10 MR. PENNY: But we are surely in the realm of 11 the argument here and what Mr. Janigan seems to find 12 difficult or not is surely something that he can submit 13 in his argument. 14 MR. JANIGAN: Now, let me just phrase this 15 question in this fashion. If the reason that this 16 efficiency, for example, that was (off microphone) under 17 cost of service regulation included in the base rates, 18 as you have chosen to incorporate the 1999 approved 19 rates as your base rates. Is that the sole reason? 20 MR. BIRMINGHAM: We are using the Board- 21 approved rates from PBR-04-99 and we aren't applying any 22 sort of retroactive ratemaking with respect to the 1999 23 actual results. 24 MR. JANIGAN: Notwithstanding that we know and 25 can quantify this particular efficiency that arose in 26 1999, you will not incorporate it -- or the company will 27 not incorporate it -- into base rates because you have 28 chosen to use the 1999-approved rates as the base rate. Les Services StenoTran Services Inc. 613-521-0703 342 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 Have I got that right? 2 MR. BIRMINGHAM: We have not incorporated it 3 in the base rates nor have we incorporated any other 4 aspect of our actual 1999 performance in the base rates. 5 We have, however, included a stretch factor in 6 the pricing formula that will capture this and other 7 types of efficiencies going forward. 8 MR. JANIGAN: And just finally, you have 9 obviously studied or have been aware of the changes in 10 the regulatory operations of the various companies in 11 Canada that have gone to PBR or a price gap regime for a 12 substantial amount of their ratemaking process. Am I 13 correct in that? 14 MR. BIRMINGHAM: We have looked at the 15 Canadian companies that are under some form of incentive 16 ratemaking. That includes those that are under price 17 factor. 18 MR. JANIGAN: I wonder why your adjustment to 19 regulatory costs does not incorporate more of that 20 experience and I am particularly thinking of the full 21 scale reductions in staff that occurred post-price gap 22 in the telecommunications field and in TCPL following 23 the implementation of a price gap. 24 MR. BIRMINGHAM: One of the things that we 25 learned when we looked at the precedents, Mr. Janigan, 26 is that you really have to look at the specific 27 circumstances of each company that is subject to the new 28 regulatory framework. Les Services StenoTran Services Inc. 613-521-0703 343 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 We have removed the regulatory costs that are 2 associated with all of our direct costs as well as the 3 direct costs of the intervenors, up to 60 per cent of 4 those costs which are amortized into rates over a two- 5 year period and we have left some in to be able to deal 6 with the customer view process and the funding for 7 certain groups who wouldn't otherwise be able to 8 participate in that proceeding. 9 So we have taken out everything that we think 10 should be avoidable in the context of this particular 11 PBR application in our circumstances before the Board. 12 MR. JANIGAN: But the reductions that you have 13 made to regulatory staff, for example (off microphone) 14 telecommunications industry or in TCPL? 15 MR. BIRMINGHAM: I don't know, sir. 16 What I can tell you is that have we reduced a 17 number of staff and costs that are related to the rate 18 case administration pursuant to our proposal and the 19 customer view process that is part of the first cap 20 proposal that we have before the Board. 21 MR. JANIGAN: Thank you, panel. 22 Those are all my questions. 23 THE PRESIDING MEMBER: Thank you, Mr. Janigan. 24 Next counsel I have on the list is 25 Mr. Klippenstein. 26 MR. KLIPPENSTEIN: No questions at this time. 27 THE PRESIDING MEMBER: Mr. Mondrow? 28 Ms Symes? Les Services StenoTran Services Inc. 613-521-0703 344 1 CROSS-EXAMINATION 2 MS SYMES: Panel, I am going to ask you 3 questions with respect to the overall issue of PBR. 4 In the last five years, and even in the last 5 three years, would you agree with me that Union Gas has 6 been required and in fact has in some cases initiated a 7 number of changes in its business and the way it does 8 its business as a regulated utility? 9 MR. BIRMINGHAM: I think there are two things 10 there, Ms Symes. 11 The first one is the scope of the business 12 activities, as I understand the question, and I would 13 certainly agree that there have been some changes in the 14 last couple of years with respect to the scope of those 15 activities, the most significant of which was the 16 separation of the our ancillary retail businesses and 17 the transfer of those businesses to Union Energy. 18 With respect to the way that we do those 19 businesses, we have tried to improve the processes by 20 which we undertake the scope of those activities and 21 part of that has been obviously in response to the types 22 of changes that we have seen in the marketplace. So to 23 the extent that there are more customers going in 24 direct purchase, some marketers wanted to move customers 25 from contract to contract, we have accommodated that 26 type of change through our business processes. 27 MS SYMES: Mr. Birmingham, let's just get some 28 time frames. In terms of the ancillary business, you Les Services StenoTran Services Inc. 613-521-0703 345 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 achieved or agreed to new undertakings with the 2 Lieutenant Governor in Council with respect to core 3 utility activity. That was in December of -- is that 4 1998? 5 MR. BIRMINGHAM: Yes, the new undertakings are 6 dated December 7, 1998. 7 MS SYMES: Okay. And so -- 8 THE PRESIDING MEMBER: Would you like to break 9 for a moment and come back? 10 Let's take our morning break now then. 11 Thank you. 12 --- Upon recessing at 1023 13 --- Upon resuming at 1050 14 THE PRESIDING MEMBER: Please be seated. 15 Ms Symes, I apologize for breaking you in 16 midstream, but please commence when you are ready. 17 MS SYMES: No, I apologize. 18 THE PRESIDING MEMBER: I'm sorry, Mr. Warren? 19 MR. WARREN: Yes, I was just going to say, 20 Mr. Chairman and Dr. Jackson, I think that Mr. Penny and 21 I have arrived at an agreement on what can be provided 22 and let me try to express it. 23 As I understand it, from our exchange over the 24 break, there is a 2000 O&M budget which exists. It 25 takes the 269 number and it breaks it down, not just 26 according to the seven new organizational heads, but 27 there's a drilling down below that to the department 28 levels or manager levels or whatever it happens to be. Les Services StenoTran Services Inc. 613-521-0703 346 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 So, as I understand it, Union has agreed to 2 provide that drilled down detailed O&M budget. Number 3 one. 4 Number two, Ms Elliott is going to make an 5 attempt to connect the dots between that document and 6 the Appendix H, page 4 document. 7 She has said, in fairness, that it will be 8 difficult to do it. I have said that from our 9 perspective we appreciate the difficulty and we would 10 appreciate if she can do the best job she can without 11 spending the rest of the year on it. 12 So that is the agreement we have come to, if I 13 have fairly articulated it, I think that obviates, from 14 our point of view, the need for a directive on that. It 15 is simply an undertaking to provide the information. 16 THE PRESIDING MEMBER: Thank you, Mr. Warren. 17 Mr. Penny, any comment? 18 MR. PENNY: I think Mr. Warren has captured 19 the essence of it. I would only emphasize the latter 20 part, that is that Ms Elliott is quite unsure of the 21 extent to which any meaningful comparisons can be made 22 to the old. But she has said that she will think about 23 it and see what she can do. 24 THE PRESIDING MEMBER: So when the document is 25 filed, then Ms Elliott will give her oral support to the 26 document. Is that the intention? 27 MR. PENNY: Well, it may be or it may be if 28 something can be done in writing it may be part of the Les Services StenoTran Services Inc. 613-521-0703 347 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 answer. But we will see how that unfolds. 2 THE PRESIDING MEMBER: Thank you. 3 MR. PENNY: So I think we can give that an 4 undertaking number. 5 THE PRESIDING MEMBER: Thank you. 6 MS LEA: G3.3. 7 UNDERTAKING NO. G3.3: Ms Elliott 8 undertakes to provide a reconciliation of 9 any numbers in the new categories to 10 numbers in the old categories below the 11 number 269 12 THE PRESIDING MEMBER: Thank you, Mr. Warren. 13 Thank you, Mr. Penny. 14 MR. WARREN: The only other matter, just a 15 personal one, I think at the beginning of the hearing we 16 had made some attempt among intervenor counsel to try to 17 rationalize the efforts and with respect to the next 18 panel, which are the details of the formula, Mr. Janigan 19 and Mr. Thompson are going to handle that as opposed 20 to me. 21 So, with your permission, if I might be 22 excused and I will return for the issue after that. 23 THE PRESIDING MEMBER: We will miss you, 24 Mr. Warren, but certainly. 25 MR. WARREN: Thank you very much. 26 I'm sure Mr. Penny feels exactly the same way! 27 --- Laughter 28 THE PRESIDING MEMBER: Ms Symes, I think we Les Services StenoTran Services Inc. 613-521-0703 348 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 can get back to you now. 2 MS SYMES: Mr. Birmingham, we are dealing, 3 then, with the undertaking to the Lieutenant Governor of 4 December 7, 1998 in separating out the ancillary 5 business. I think that's where we were just before we 6 broke. 7 Is it fair to say, then, that Union has done 8 that separation? 9 MR. PENNY: Just to interject, I don't think 10 we have gotten anywhere on the relationship between that 11 undertaking and Union's application to separate the 12 ancillary business. You seem to be making an 13 assumption. I don't think there is anything on the 14 record about it. 15 Mr. Birmingham testified that the company did 16 go through an exercise of an application before the 17 Board in which the Board approved the separation of 18 Union's ancillary business. 19 MS SYMES: Right. 20 MR. PENNY: That's where we got to. 21 MS SYMES: Okay, fine. 22 Union received approval from the Board to 23 separate out its ancillary business? 24 MR. BIRMINGHAM: That's correct, in 1998. 25 MS SYMES: And on December 7, 1998, it entered 26 into new undertakings with the Lieutenant Governor with 27 respect to the core activities of the utility. 28 MR. BIRMINGHAM: Just a couple of points on Les Services StenoTran Services Inc. 613-521-0703 349 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 that, Ms Symes. 2 The undertakings themselves are dated 3 December 7, 1998 with respect to our signatures on them. 4 The Order in Council is December 9, 1998 and the 5 covering letter from Minister Jim Wilson indicates that 6 the government has approved the undertakings to 7 eliminate the overlap with the new legislation and to 8 allow Ontario gas utilities to participate in business 9 opportunities with a similar degree of flexibility as is 10 available to electricity utilities. 11 MS SYMES: By Christmas, then, everyone knew 12 that the approvals were in place for the separation of 13 the ancillary businesses. 14 MR. BIRMINGHAM: At Christmas of 1998, that's 15 right. 16 MS SYMES: Yes, 1998. And Union then began to 17 move those out upon approval. 18 MR. BIRMINGHAM: I'm sorry, Ms Symes. We had 19 the Board's approval and decision to separate our 20 ancillary businesses and we separated them at the 21 beginning of 1999. 22 MS SYMES: Yes. 23 MR. BIRMINGHAM: Then the undertakings 24 followed that. 25 MS SYMES: No, the undertakings are 26 December 7, 1998, and you began to effect these 27 approvals in 1999. 28 MR. PENNY: I think the problem here is that Les Services StenoTran Services Inc. 613-521-0703 350 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 Ms Symes seems to be making the assumption that the 1998 2 undertakings had something to do with the separation of 3 the ancillary businesses. They had nothing to do with 4 the separation of the ancillary businesses. The 5 application that was brought before the Energy Board for 6 that separation was brought under the former 7 undertakings which had been in place since, I think, 8 around 1992 or something like that. 9 So that approval had already been given before 10 the new undertakings were entered into in the latter 11 part of 1998. 12 The only reason that the separation actually 13 started was because that was the plan from the 14 beginning, that the separation would be in effect as of 15 January 1, 1999. It had nothing to do with the 16 subsequent undertaking. 17 MR. BIRMINGHAM: What may be helpful, 18 Ms Symes, is the effective date of the new undertakings 19 was March 31, 1999, so that would have been some 90 days 20 after we had effected the separation of our ancillary 21 programs. 22 MS SYMES: You began to separate, to carry out 23 essentially, the approval that you got from the Board on 24 January 1, 1999? 25 MR. BIRMINGHAM: That is when we separated our 26 ancillary businesses from Union Gas, right. 27 MS SYMES: And as result of that, would you 28 agree with me that there were changes in the structure Les Services StenoTran Services Inc. 613-521-0703 351 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 of Union Gas? 2 MR. BIRMINGHAM: There were changes with 3 respect to both the scope of the activities and the 4 responsibilities of certain individuals within the 5 company, yes. 6 MS SYMES: Specifically, employees left, were 7 transferred to the other business? 8 MR. BIRMINGHAM: There were a number of 9 employees who went with the ancillary businesses and 10 became employees of Union Energy, that's right. 11 MS SYMES: Right. 12 That process, then, continued throughout 1999? 13 The changes in the structure, the changes in how Union 14 does its business, or did its business as a result of 15 the ancillary business, continued throughout 1999? 16 MR. BIRMINGHAM: We were still in the process 17 of amending some of our business processes as a result 18 of the transfer of that business, yes. 19 MS SYMES: And in the year 2000, are you still 20 in the process? 21 MR. BIRMINGHAM: We are in the process of 22 amending our business processes as it relates to our 23 business restructuring. I wouldn't say that I am able 24 to say that we are still accommodating the transfer of 25 the ancillary businesses. It's more with respect to the 26 ongoing business restructuring that began with the early 27 retirement program and the appointment of employees into 28 different roles. Les Services StenoTran Services Inc. 613-521-0703 352 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 MS SYMES: Okay. I am going to go through the 2 different things that you -- or decisions that you have 3 made with respect with business. 4 There is also the separation of the merchant 5 function and would you agree with me that as that rolls 6 out, that will also affect the structure of Union. 7 MR. BIRMINGHAM: I would say no, Ms Symes. 8 The structure of Union will stay the same as it has over 9 the last number of years since direct purchase began. 10 I would agree that at some point if we had no 11 customers who were purchasing gas from Union then some 12 of our structure would change because we wouldn't need 13 some of the facilities and some of the capabilities that 14 are currently used to serve those System customers. 15 MS SYMES: But as you deal increasingly with 16 marketers and persons, or companies electing to buy 17 direct, would you agree with me that it changes how you 18 carry out your business? 19 MR. BIRMINGHAM: I agree that it -- with 20 respect to more marketers coming in and taking more 21 customers from System gas to direct purchase that it 22 will increase the volume of the types of transactions 23 that we have with the marketers. 24 MS SYMES: You have made an application in 25 this hearing to unbundle the upstream transportation. 26 If that is granted, will that also change or impact on 27 the structure of Union and how it carries on its 28 business? Les Services StenoTran Services Inc. 613-521-0703 353 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 MR. BIRMINGHAM: The application is for both 2 the unbundling of upstream transportation and for 3 storage? 4 MS SYMES: Right. 5 MR. BIRMINGHAM: And there are additional 6 business processes that we need to put in place to be 7 able to allow customers to use those unbundled services. 8 MS SYMES: And would you agree with me that if 9 that approval is granted you will commence this upon the 10 Board's order -- or the Board's decision -- and that it 11 may well take not only the balance of 2000, but part of 12 the 2001 to complete? 13 MR. BIRMINGHAM: That's correct. We have 14 actually proposed that the use of the unbundled services 15 for the large industrial customers commence this fall, 16 and the use of those same unbundled services will be 17 used by marketers roughly April 1 of next year. So we 18 would have to be putting our business process in place 19 to be able to accommodate that and we have requested a 20 deferral account from the Board to be able to capture 21 the cost of putting those business processes in place. 22 MS SYMES: And Mr. Birmingham, as you look 23 forward in terms of the natural gas business and Union's 24 activities in particular, would you agree with me that 25 we can expect additional changes, for example, the 26 unbundling of retail billing? 27 MR. BIRMINGHAM: I would agree that to the 28 extent that the industry is going to continue to evolve Les Services StenoTran Services Inc. 613-521-0703 354 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 to a more competitive one, that there will be some 2 further changes and some further corresponding changes 3 to our business processes, yes. 4 MS SYMES: And I would like to then refer you 5 to Dr. Bauer's evidence which is Exhibit D3.1, page 8. 6 And towards the end of that paragraph he says: 7 "Lastly, PBR works much better under 8 relatively stable, steady state industry 9 conditions. It is much less appropriate 10 during times of rapid structural changes 11 when the definition of meaningful planned 12 parameters is difficult if not 13 impossible. Under these conditions there 14 exists an increased risk that the plan 15 does not properly reflect the underlying 16 economic structure of the industry. 17 Whenever regulators have influence on the 18 timing of reforms, major structural 19 adjustments should be completed prior to 20 the introduction of PBR". (As read) 21 Now, does Union disagree with Dr. Bauer that 22 PBR works much better under relatively stable steady 23 state industry conditions? 24 MR. BIRMINGHAM: I think at a high level, 25 Ms Symes, my understanding of what Dr. Bauer is saying 26 is that to the extent that an industry is going through 27 rapid and significant change, that determining the 28 parameters of the PBR mechanism may be more difficult Les Services StenoTran Services Inc. 613-521-0703 355 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 than otherwise. But that is not the case in our view 2 for the natural gas industry. 3 We have separated our ancillary programs. 4 There will be some further changes just as there have 5 been over the last number of years that will deal with 6 potentially things like retail billing, or may deal with 7 other aspects of the utilities operation. But they are 8 not rapid and they are not necessarily significant 9 structural changes, in our view. 10 Further than that, we have established a 11 process by which those things can be brought forward and 12 dealt with and I don't think that any of the changes 13 need to be put in place prior to a new regulatory 14 framework being considered by the Board. 15 MS SYMES: Mr. Birmingham, in looking at your 16 experts' evidence, Exhibit B, Tab 3, Christensen and 17 Associates, I couldn't find anywhere that they dealt 18 with this issue in their evidence -- the issue of 19 whether or not PBR works better, much better under 20 relative stable steady state industry conditions. 21 MR. BIRMINGHAM: I don't know, Ms Symes. We 22 will have to look a look at it. 23 MS SYMES: Perhaps take it under advisement in 24 terms that the question -- 25 MR. BIRMINGHAM: Why don't we leave the 26 response as I don't believe that they do, but to the 27 extent that they do I will come back to you and let you 28 know. Les Services StenoTran Services Inc. 613-521-0703 356 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 MS SYMES: The question to you is: Did you 2 ask them in giving their expert opinion to address this 3 issue? 4 --- Pause 5 MS SYMES: Not to use up valuable time, would 6 it be helpful if you were to give me an undertaking 7 to -- 8 MR. BIRMINGHAM: I was just looking for the 9 interrogatory response where we provided the terms of 10 reference for the engagement with Christensen 11 Associates. My recollection of that interrogatory 12 response, Ms Symes -- and I will give you the reference 13 after we break, perhaps after the lunch period -- is 14 that we did not ask them to examine that explicitly, but 15 what we did do is discuss the conditions under which 16 Union is operating, the circumstances in Ontario and it 17 was in that context that they gave their comments on our 18 PBR proposal. 19 MS SYMES: Thank you, panel. Those are my 20 questions. 21 THE PRESIDING MEMBER: Thank you, Ms Symes. 22 Mr. Mattson, I believe you are up to bat. 23 MR. MATTSON: Thank you, Mr. Chairman. 24 CROSS-EXAMINATION 25 MR. MATTSON: Panel, I am going to take a 26 fairly high level review of some of the evidence you 27 have put in your overview and rationale evidence. 28 I would like to begin by seeing if I can get Les Services StenoTran Services Inc. 613-521-0703 357 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 some agreement that performance-based regulation and 2 price cap regulation is not in and of itself an 3 objective. Is that fair? It isn't an objective itself. 4 It has to serve some purpose. 5 MR. BIRMINGHAM: I agree that performance- 6 based regulation is a means to an end, not an end 7 itself. That is right. 8 MR. MATTSON: And that same question is the 9 same as it goes with cost of service regulation. It is 10 not an objective itself. It is a means to an end. Is 11 that fair? 12 MR. BIRMINGHAM: Given the new legislation 13 that is in place, Mr. Mattson, I would agree with that. 14 Prior to that though, I would say that cost of service 15 regulation was the only means to the end. But at this 16 point that is true. 17 MR. MATTSON: Right. And now we have a number 18 of options before us and performance-based regulation is 19 an option that this Board can choose to regulate the 20 utility. Right? 21 MR. BIRMINGHAM: That is correct. 22 MR. MATTSON: And the utility -- what we are 23 talking about here are still core utility services, 24 right? These are monopoly services? 25 MR. BIRMINGHAM: It is for the regulated 26 services and the associated prices for storage, 27 transmission and distribution. That is right. 28 MR. MATTSON: Right. And those are monopoly Les Services StenoTran Services Inc. 613-521-0703 358 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 services, right? 2 MR. BIRMINGHAM: Yes, they are. 3 MR. MATTSON: And you are a private company, 4 right? 5 MR. BIRMINGHAM: We are a company that is 6 wholly owned by Westcoast Energy and Westcoast Energy is 7 a publicly traded company. 8 MR. MATTSON: Right. And what we are being 9 asked to do, what the Board is being asked to do in this 10 hearing is replace the cost of service regulation with 11 performance-based regulation. Correct? 12 MR. BIRMINGHAM: With respect to the services 13 which are storage, transmission and distribution, that 14 is right. 15 MR. MATTSON: And would you agree with me that 16 the Board wouldn't accept that -- the Board in 17 determining whether to accept that application will look 18 at issues as to whether or not your proposal offers the 19 same level of public oversight of these monopoly 20 functions? 21 MR. BIRMINGHAM: I assume that the Board will 22 consider our proposal in the context of their public 23 interest mandate. 24 MR. MATTSON: And -- well, would you agree 25 with me that there can be good and bad performance-based 26 regulation proposals? There could be good ones. There 27 can be ones. Correct? 28 MR. BIRMINGHAM: I think the performance-based Les Services StenoTran Services Inc. 613-521-0703 359 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 regulation proposals to the extent that you are looking 2 at the broad spectrum of all of the different parameters 3 and types that could be included could result in some 4 unacceptable outcomes from a regulatory and public 5 interest standpoint. So yes, you could design both PBR 6 and cost of service regulation in a way that gave 7 unacceptable outcomes. 8 MR. MATTSON: Okay. And it is also again, it 9 would be fair to say the same about cost of service 10 regulation. I mean some cost of service regulation 11 serves its function well and some might argue that other 12 cost of service regulation doesn't do as good a job. Is 13 that fair? 14 MR. BIRMINGHAM: I assume there may be parties 15 that take that view, yes. 16 MR. MATTSON: And in terms of evaluating your 17 proposal, I would expect that we would need to evaluate 18 how well cost of service regulation serves the public 19 interest in regulating your monopoly services, versus 20 how well your new proposal, with respect to performance- 21 based regulation, will regulate and serve the public 22 purpose with respect to rates. Is that fair? 23 MR. BIRMINGHAM: I think from a public 24 interest standpoint, Mr. Mattson, the Board would want 25 to have some assurance that Union's price cap proposal 26 would in fact serve all of its objectives at least as 27 well and perhaps better than cost of service regulation. 28 MR. MATTSON: That is right. And so we Les Services StenoTran Services Inc. 613-521-0703 360 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 wouldn't want to replace the current cost of service 2 process with a performance-based regulation process that 3 serves the public interest less. Is that fair? 4 MR. BIRMINGHAM: I believe the Board would not 5 want to replace cost of service regulation with 6 performance-based regulation if it gave outcomes that 7 were unacceptable from the Board's standpoint. 8 MR. MATTSON: Okay. Now, I also take it that 9 you are a publicly traded company, you have a privileged 10 position with respect to delivering monopoly services. 11 I would -- would you agree with me that the purpose of 12 public regulation here really isn't so much focused on 13 trying to protect the ratepayer from abuses. Is that 14 fair? 15 MR. PENNY: I think the question misstated the 16 evidence, Mr. Chairman. The evidence was that Union is 17 not a publicly traded company. 18 MR. MATTSON: Its parent is. Is that fair? 19 MR. BIRMINGHAM: Our parent is publicly 20 traded, yes. 21 MR. MATTSON: The point being that what we are 22 looking at here from a performance-based regulation 23 proposal is how is it going to serve the ratepayers? 24 How does this benefit the ratepayers? And I have gone 25 through your evidence and is it fair to say that one 26 benefit that you have clearly identified is that it will 27 reduce regulatory costs. Is that fair? 28 MR. BIRMINGHAM: Yes. Les Services StenoTran Services Inc. 613-521-0703 361 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 MR. MATTSON: And after yesterday's evidence, 2 what is the extent of that reduction? I know that there 3 were costs with respect to intervenors, with respect to 4 the Board costs, in respect to your own regulatory 5 department. What in fact are we saving in terms of 6 regulatory costs? 7 MR. BIRMINGHAM: On an annual basis, the 8 regulatory costs that are associated with the direct 9 costs of intervenors participating in rates case 10 proceedings and the direct costs associated with Union's 11 legal counsel, consultants and employees participating 12 in those same regulatory proceedings is roughly $800,000 13 a year. 14 MR. MATTSON: So the ratepayer is looking at 15 savings for moving to performance-based regulation from 16 cost of service regulation in terms of regulatory costs 17 of 800,000 a year. 18 Now, what other hard dollar numbers savings 19 are you -- will this, if the Board accepts your 20 proposal, will the ratepayer see other than that 21 $800,000? What other savings have you identified? 22 MR. BIRMINGHAM: There are two other general 23 categories of benefits, Mr. Mattson. The first general 24 category are the exposures that Union will manage under 25 the price cap proposal that would otherwise be 26 attributed to ratepayers under cost of service 27 regulation and we have attempted to quantify those and 28 we have summarized them in Appendix G to the evidence. Les Services StenoTran Services Inc. 613-521-0703 362 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 That is Exhibit B, Tab 2, Appendix G. 2 The second category of benefit is that they 3 receive an upfront commitment to a higher productivity 4 than has otherwise been achieved under cost of service 5 regulation, that is referred to as the stretch factor in 6 the pricing formula. And that is the 0.4 per cent. And 7 0.4 per cent on the base that we have roughly is just 8 over $3 million annually. 9 MR. MATTSON: And so although they are not 10 commitments to dollars, what you are saying is that 11 these exposures will be managed under the price cap and 12 you will have higher productivity rates than otherwise 13 would be achievable under cost of service regulation. 14 Is that what you are saying? 15 MR. BIRMINGHAM: The productivity commitment 16 that Union is making is greater than what has been 17 achieved under cost of service regulation. Yes. 18 MR. MATTSON: Would be greater than what would 19 be achieved under cost of service regulation is what I 20 am asking. Like right now you are saying that these 21 risks that the customer no longer needs to bear, I take 22 it in the past the way that that was dealt with was that 23 we had cost of service review. So it was the Board that 24 ultimately found just and reasonable rates. So you are 25 going to better what you think the Board could do. Is 26 that fair? From a customer's point of view. 27 MR. BIRMINGHAM: From a customer's point of 28 view, we are going to manage exposures that they would Les Services StenoTran Services Inc. 613-521-0703 363 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 otherwise have to assume under cost of service 2 regulation. 3 MR. MATTSON: But those risks were being 4 managed before through cost of service regulation, 5 right? That was the protection the public sought from 6 those monopoly, you know, from abuse of monopoly 7 practices. We had a public review, looked over your 8 costs and -- 9 MR. BIRMINGHAM: No, I disagree with that, 10 Mr. Mattson, and it is the way that you have 11 characterized. Where I am having difficulty is that the 12 exposures to the extent that they manifest themselves 13 into real dollars end up being put into Union's cost of 14 service. So to that extent they aren't managed under 15 cost of service regulation. They are simply included in 16 Union's cost of service and then included in the rates 17 that customers pay. 18 MR. MATTSON: Only if they are just and 19 reasonable, isn't that fair, Mr. Birmingham? They would 20 have to be determined to be just and reasonable. 21 MR. BIRMINGHAM: The rates would have to be 22 determined to be just and reasonable just as they would 23 under our proposal, that is right. 24 MR. MATTSON: So it is only those rates that 25 -- it is only those costs that would not be determined 26 to be just and reasonable that the customer under PBR 27 would be getting protection from. Fair? 28 MR. BIRMINGHAM: It is only those costs that Les Services StenoTran Services Inc. 613-521-0703 364 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 would be included in Union's cost of service for the 2 purpose of establishing the just and reasonable rates. 3 That is right. 4 MR. MATTSON: Now, this performance-based 5 regulation plan, however, I believe you will acknowledge 6 provides the shareholder in your company with many 7 benefits, does it not? And you have listed those in 8 your purpose for the PBR plan. Correct? 9 MR. BIRMINGHAM: The price cap plan provides 10 the company with certain benefits. One of those 11 benefits as an example is that it gives us the ability 12 to negotiate rates and different terms and conditions 13 for services for customers so that we can keep them on 14 our system and keep them using natural gas, that is 15 flexibility that we don't have right now. 16 MR. MATTSON: That is one, yes. There are 17 also others. For example, I think we heard in evidence 18 yesterday that if your price cap regulation proposal is 19 accepted that there will be -- let me see -- there will 20 be no sharing with ratepayers of transactional services, 21 for example? 22 MR. BIRMINGHAM: The transactional services 23 that are currently in rates amounts to five and a half 24 million dollars. That will be maintained. To the 25 extent that any other storage and transportation 26 transactional revenues are generated during the PBR 27 period, the company will be using that revenue stream 28 along with the revenue stream that is from the price cap Les Services StenoTran Services Inc. 613-521-0703 365 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 to manage all of its costs and exposures. 2 MR. MATTSON: So that part of the proposal 3 isn't intended to lower costs for the customer or 4 strength public oversight. Its sole purpose there is to 5 provide the company with opportunities to achieve 6 greater profits. Fair? 7 MR. BIRMINGHAM: No, it is intended to have 8 the company manage its costs and the exposures that it 9 is taking on under the price cap regulation. 10 MR. MATTSON: Mr. Birmingham, would you agree 11 that an acceptable or a PBR plan would produce lower 12 rates per customer in the long term if all service 13 quality indicators were -- if the service quality 14 indicators were acceptable or were held to a constant 15 level? Would you agree that your plan should be 16 producing lower customer rates? Lower than what is 17 currently achievable under cost of service regulation. 18 MR. BIRMINGHAM: It's a question of balancing 19 all of the parameters within the price cap proposal, 20 Mr. Mattson. It's Union's view that with respect to the 21 ongoing existence of cost of service regulation, based 22 on the evidence that we have provided at Appendix G and 23 some of the other supporting evidence around the 24 calculation of those items, that in fact our price cap 25 proposal will produce lower rates for customers than 26 would otherwise be achievable under cost of service 27 regulation. 28 MR. MATTSON: Okay. I fail to find where that Les Services StenoTran Services Inc. 613-521-0703 366 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 discussion or where that evidence is in your filings. 2 You identified an $800,000 reduction in 3 regulatory benefits -- regulation costs, and some of 4 these risks that you are eliminating exposure to. Where 5 is the discussion that this is producing lower rates 6 than cost of service would produce? 7 MR. BIRMINGHAM: That discussion, Mr. Mattson, 8 is on pages 64 to 79 of our prefiled evidence and is 9 summarized in Appendix G of Exhibit B, Tab 2. 10 MR. MATTSON: Sixty-four to -- 11 MR. BIRMINGHAM: Seventy-nine. That's at 12 Exhibit B, Tab 2, pages 64 to 79. 13 MR. MATTSON: Exhibit B, Tab 2 -- I'm sorry. 14 --- Pause 15 MR. MATTSON: Yes, but this is what I'm 16 saying. This sets out risk. What you are doing is you 17 are offering sort of an insurance policy here. You are 18 saying that the Board was not able to manage this risk 19 under cost of service as well as your performance based 20 regulation plan will. That's what your evidence 21 suggests. 22 MR. BIRMINGHAM: No, it doesn't. What it is 23 saying is that under cost of service regulation the 24 exposures that we have listed here -- and there is a 25 further explanation of these items at Exhibit C1.155. 26 But then under cost of service regulation 27 these exposures would result in rate increases under 28 cost of service regulation, and those cost of service Les Services StenoTran Services Inc. 613-521-0703 367 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 regulation increases will not appear to the same extent 2 as our under our price cap proposal. 3 MR. MATTSON: All right. So again what you 4 are saying is that you are providing -- the performance 5 base regulation provides greater protection against the 6 risk of -- I guess you would have to say just and 7 reasonable increases, fair, because they would have to 8 be determined to be just and reasonable under the cost 9 of service regulation. 10 MR. BIRMINGHAM: No. What we are saying is 11 the price cap proposal provides protection for end use 12 consumers against the risks that we have listed there. 13 MR. MATTSON: Would you look back over -- have 14 you given any thought to looking back over the last 15 three or four years of cost of service regulation to 16 determine what increases your company was able to 17 justify before this Board versus what increases you are 18 asking this Board to justify over the next five years in 19 this proceeding? 20 Have you done any analysis of that sort, 21 looking at how customers and ratepayers fared under cost 22 of service versus how they are going to fare under this 23 performance based regulation plan? Have you done that 24 analysis? 25 MR. BIRMINGHAM: We have looked at two things, 26 Mr. Mattson. The first one is we have looked at the 27 risks as they have manifested themselves over time with 28 respect to the items listed at Appendix G. We tried to Les Services StenoTran Services Inc. 613-521-0703 368 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 quantify those on a going-forward basis. 2 The other thing that we have looked at is the 3 historical achievement of productivity under cost of 4 service regulation and we have added a stretch factor to 5 that to recognize that our price cap proposal will 6 provide a greater incentive for productivity from the 7 utility and that the customer should receive some of 8 that productivity incentive directly. 9 MR. MATTSON: Your evidence, Mr. Birmingham, 10 if I could just move a little bit here. I think I have 11 a pretty clear idea of where we are going on the other 12 issue. 13 The evidence of your company has been that you 14 were able to achieve substantial cost savings in 1999, 15 driven in some way -- we haven't determined to what 16 extent yet -- but by warm weather. Is that fair? 17 MR. BIRMINGHAM: There were a number of 18 changes to our business and to the costs of running that 19 business as a result of the circumstances that arose 20 during 1999, one of those which was extremely warm 21 weather. That is the information that is quantified in 22 Exhibit B, Tab 2, Appendix H. 23 MR. MATTSON: Right. But you would think that 24 your short-run costs would be more or less fixed 25 irrespective of your volume throughput, would you not? 26 How were you able to make these savings as a result of 27 warm weather? 28 MR. BIRMINGHAM: As an example, Mr. Mattson -- Les Services StenoTran Services Inc. 613-521-0703 369 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 there are a number of them and we have had a fair bit of 2 testimony already -- but one example is when a role 3 becomes vacant because somebody finds another role and 4 decides that they are going to leave Union Gas, one of 5 the things that we would look at is, is there a way that 6 we can manage, because of the warm weather, to leave 7 that role vacant for a certain period of time -- that 8 may be within the year. To the extent if somebody left, 9 for instance, in March of 1999 and we filled the role in 10 October -- we can at least try to manage our costs in 11 the short term to accommodate the lower level of revenue 12 that we are collecting. 13 MR. MATTSON: Okay, so that is one way you 14 could do it, anybody who is retiring or leaving the 15 company, you didn't fill their job in 1999. 16 And the other way? 17 MR. BIRMINGHAM: To the extent that we were 18 planning certain studies or the use of consultants to 19 support certain business initiatives to improve our 20 business processes is another example. We may again 21 decide to defer that, simply because we don't have the 22 revenue stream that would support that level of 23 expenditure. 24 MR. MATTSON: And to what extent did you do 25 that, Mr. Birmingham? Is there any evidence that you 26 were able to defer programs, experts? 27 MS ELLIOTT: The evidence at Appendix H shows 28 a reduction in O&M expenses of $9.5 million for the Les Services StenoTran Services Inc. 613-521-0703 370 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 year, and that is a reduction that managed a number of 2 things. 3 The evidence at Schedule 1, if you look at our 4 weather adjustments, to normalize these earnings we 5 added back $25 million worth of revenue less the cost of 6 gas that we did not earn in 1999. 7 So our revenues were down $25 million. 8 MR. MATTSON: Yes. 9 MS ELLIOTT: Our costs were only down 9.5. 10 As you indicated earlier, we don't have full 11 capacity to manage our costs to the extent that we will 12 lose revenue, but we were able to manage our O&M 13 expenses during the year by looking at our discretionary 14 spending, employee expenses, training, travel, salaries 15 and wages and produce about $9.5 million worth of cost 16 reductions. 17 MR. MATTSON: Okay. Now, these programs that 18 were deferred, though, I take it that most of those 19 programs that were looking at were meant to be cost 20 minimizing in the first place, were they not? They were 21 all intended to reduce costs. These programs that were 22 deferred, to what extent would they be implemented later 23 at higher cost to the company because of your deferral? 24 --- Pause 25 MS ELLIOTT: Can you repeat the question, 26 please? 27 MR. MATTSON: Yes. I take it that the 28 programs that were deferred that you were looking at Les Services StenoTran Services Inc. 613-521-0703 371 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 were meant in the first place to reduce costs. Is that 2 not fair? 3 MS ELLIOTT: I'm not sure what specific 4 programs you are referring to. But when our earnings or 5 revenues are falling, our management is looking for ways 6 that they can reduce their costs, and that is through 7 the things that are available to them like leaving roles 8 vacant. 9 MR. MATTSON: We have gone through that one 10 and now we have these programs that you were going to 11 put in place and that you deferred. 12 --- Pause 13 MS ELLIOTT: Mr. Mattson, I guess the savings 14 through 1999, a portion of those savings were 15 subsequently captured through the restructuring. Some 16 of those costs will in fact be back in our 2000 forecast 17 to be spent. I can't think of a specific example where 18 a deferred program has returned at a higher cost. 19 MR. BIRMINGHAM: The only general comment I 20 would make, Mr. Mattson, is that there are some, as an 21 example, with respect to our business restructuring 22 where we may look to take processes which are currently 23 part manual and part computerized and try to computerize 24 them all. That would be an example where you would have 25 to incur cost to improve the process, but that we 26 wouldn't be in a position of doing it in a year where 27 our revenues were significantly lower. 28 MR. MATTSON: But there is no evidence in Les Services StenoTran Services Inc. 613-521-0703 372 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 terms of underpinning that additional -- I think it was 2 9 point something million and 5 million was as a result 3 of unfilled roles. Those programs, that $4 million of 4 programs or so that were saved on, we don't have any 5 evidence of what that $4 million is. Other than the 6 unfilled roles, we don't know what programs were 7 deferred. Is that fair? 8 MR. BIRMINGHAM: And we aren't able to parcel 9 it out, Mr. Mattson, no. 10 MR. MATTSON: How can that be? I mean, one 11 million dollars in programs, you would think you would 12 have some sort of a description of what those programs 13 were going to be for 1999. 14 Maybe I should get into this with another 15 panel. 16 MS ELLIOTT: I don't know where you are 17 getting your 4 million dollars' worth of program costs 18 that were deferred. 19 MR. MATTSON: Let me put it this way: 20 anything above and beyond the money that was saved 21 through not filling the roles at the company because of 22 the warm weather. Can you tell us what those deferral 23 programs were? 24 MS ELLIOTT: Well, Schedule 4 at Appendix H, 25 and Exhibit C1.196. 26 MR. MATTSON: Yes. 27 MS ELLIOTT: Those two are a description of 28 what the $9.5 million of cost reductions is made up of. Les Services StenoTran Services Inc. 613-521-0703 373 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 There are salaries and wages of $3.4 million. 2 MR. MATTSON: Yes. 3 MS ELLIOTT: Employee expenses of $2.7. 4 Reductions in consulting and other general expenses of 5 $5.4 and other general reductions of $.9. 6 MR. MATTSON: So we are looking at about -- 7 that 5.4, the consulting, and the other reductions. We 8 don't have any further details as to what those programs 9 were that were deferred that would have cost you that 10 amount of money. 11 MS ELLIOTT: What consultants were not hired? 12 No, I don't have any detail. 13 MR. MATTSON: What programs they were going to 14 be hired to work on? 15 MS ELLIOTT: I don't have the specifics of 16 that, no. In Exhibit C1.196, we identified the 17 reductions by administrator, but again it refers to the 18 savings as consulting and general expenses and I don't 19 have the details of what the consulting dollars would 20 have been spent on, no. 21 MR. MATTSON: Can I ask for an undertaking, 22 Mr. Chairman, for Ms Elliott to give us her best efforts 23 to try and determine with a greater level of detail what 24 that money was to be spent on in 1999? 25 THE PRESIDING MEMBER: Specifically related to 26 the consulting expenses? 27 MR. MATTSON: The $5.4 million and the $.9 28 million, yes. Some $6.1 million. Les Services StenoTran Services Inc. 613-521-0703 374 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 THE PRESIDING MEMBER: Ms Elliott, is it 2 possible to use your best efforts to provide information 3 that would help clarify that? 4 MS ELLIOTT: The difficulty I am having is to 5 get that information I would have to go back in the 6 organization that existed before our restructuring to 7 determine who was planning to do what and get the 8 information from them, and I am not sure that it is 9 possible to do that kind of a breakdown. 10 THE PRESIDING MEMBER: Can we leave the 11 undertaking to use your best efforts because you may not 12 be able to give a precise estimate, but you might be 13 able to indicate the areas of study, that is what 14 Mr. Mattson is after, or the areas of consulting in 15 which the savings were achieved. Would that satisfy 16 you, Mr. Mattson? 17 MR. MATTSON: Yes, Mr. Chairman. Thank you. 18 MS LEA: D3.4. 19 UNDERTAKING NO. G3.4: Ms Elliott 20 undertakes to provide information on 21 the amounts of money specifically 22 related to the consulting expenses 23 in 1999, ie. the $5.4 million and 24 the $.9 million 25 MR. MATTSON: Now, again on the overview, 26 Mr. Birmingham. Is it true that by rebasing of the 27 utilities costs through your PBR plan to January 1, 2000 28 all the benefits of the savings achieved from your PBR Les Services StenoTran Services Inc. 613-521-0703 375 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 behaviour would flow to the shareholders, at least in 2 that time period, if we rebase it back to January 1, 3 2000? 4 MR. BIRMINGHAM: No, Mr. Mattson. Our PBR 5 proposal uses Board-approved for 499 and proposed that 6 PBR then be put in place effective January 1, 2000. 7 So Union would be operating under a PBR 8 framework effective January 1, 2000? 9 MR. MATTSON: That would be retroactive, is 10 that fair? It could be potentially nine months -- the 11 approval for a PBR plan in place for January 1, 2000. 12 MR. BIRMINGHAM: No. There is the application 13 that was made to the Board early in 1999 and the Board 14 set our current rates in the interim pending the outcome 15 of this application. 16 I think there is a bit of a misunderstanding 17 about retroactivity, Mr. Mattson. The retroactivity 18 that I refer to is that the Board has not retroactively 19 set rates, that is it doesn't use historical information 20 as the basis for setting its rates. That is what I call 21 retroactive ratemaking. There is another type of 22 retroactivity that is dealt with typically in the 23 regulatory form and particularly before this Board, and 24 that is the retroactive implementation of the Board's 25 order and that can happen when the order takes place 26 during the year to which it relates. 27 And there the Board has to make a 28 determination as to whether it wants a one-time charge Les Services StenoTran Services Inc. 613-521-0703 376 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 for the period which is already passed, which is the 2 retroactive part of the implementation or whether it 3 would deal with those financial impacts of a 4 prospective basis and put them in the rates going 5 forward. 6 MR. MATTSON: Thank you. 7 May I have your indulgence, Mr. Chairman, for 8 a moment? 9 --- Pause 10 Thank you. Those are all my questions, 11 Mr. Chairman. 12 Thank you, panel. 13 THE PRESIDING MEMBER: Thank you, Mr. Mattson. 14 Dr. Jackson has a question. 15 MEMBER JACKSON: I am just wondering how many 16 definitions of retroactivity we are going to get in this 17 proceeding? Feel free to assist me now or later, but I 18 thought retroactive meant active for the past. So if we 19 are talking about rates, if we use the fact that rates 20 are interim, as of January 1, 2000, and we make final 21 rates for the period before the date of our rate order, 22 then those rates are indeed retroactive and in that 23 limited sense of making them retroactive in the interim 24 period, that seems to be a good working approach to our 25 form of regulation, we do it. 26 What we resist doing is going back and making 27 rates retroactive to a period in time before the rates 28 were made interim. Les Services StenoTran Services Inc. 613-521-0703 377 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 Now there are lots of things we do, I think, 2 that are retrospective in nature. We take a look back 3 and see how hard you have been done by perhaps on 4 unaccounted for gas and we agree to build that into 5 ratemaking perhaps. That is one of the things you are 6 asking us to think about. And so the ratemaking for the 7 future will be retrospective to that extent, but it 8 won't be retroactive if we don't make rates for the 9 past, will it? 10 MR. BIRMINGHAM: No, that's a helpful 11 distinction, Dr. Jackson. You are right. What I was 12 referring to is that the Board, as you say, has 13 typically resisted using historical information as the 14 basis for setting rates. 15 MEMBER JACKSON: And yet you are asking us to 16 do that in this proceeding. You are asking us to use 17 the historical information with respect to unaccounted 18 for gas in order to make rates for the future. 19 MR. BIRMINGHAM: No, I think that is the 20 retrospective that you are describing and it is a 21 function of the past regulatory treatment of those. 22 Actually, I think that's a helpful distinction. 23 MEMBER JACKSON: Thank you. 24 THE PRESIDING MEMBER: Thank you, Dr. Jackson. 25 I believe the next person up is Mr. Ryder. 26 MR. RYDER: Yes. My friend George -- 27 Mr. Vegh -- I need a pill. 28 --- Laughter Les Services StenoTran Services Inc. 613-521-0703 378 ELLIOTT/BIRMINGHAM, cr-ex (Mattson) 1 MR. RYDER: That is why the asterisk is on 2 mine so that Mr. Vegh can precede me today so that 3 Mr. Quinn can be here when I start, if that can be 4 accommodated. 5 THE PRESIDING MEMBER: So Mr. Vegh is going to 6 go ahead of you then? 7 MR. RYDER: Please. 8 THE PRESIDING MEMBER: Mr. Vegh, please. 9 MR. VEGH: Thank you for that introduction, 10 Mr. Ryder. 11 CROSS-EXAMINATION 12 MR. VEGH: Panel, I will be referring to a few 13 documents that you may want to have handy in this cross- 14 examination. I will be referring to Volume 2 of your 15 prefiled evidence. I will be referring to CEED's 16 prefiled evidence which is Exhibit D5.1. 17 And I have also prepared a book of materials 18 which I have identified as references for CEED's cross- 19 examination of Union Gas. I provided copies of those 20 books to your counsel on Tuesday and yesterday I advised 21 your counsel of the specific references I was going to 22 make to these documents. Panel, I asked Board's staff 23 to provide you each with a set of these as well, so you 24 should have them. 25 MS LEA: I wonder if we could, for 26 identification, give this an Exhibit No. F3.1. F3.1. 27 MR. VEGH: Thank you. 28 EXHIBIT NO. F3.1: Book of materials Les Services StenoTran Services Inc. 613-521-0703 379 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. VEGH: Thank you. 2 Panel, just by way of introduction and to set 3 some context for the questions I was going to ask you -- 4 I am here representing CEED and CEED is a collection of 5 wholesale and retail marketers who provide gas supplies 6 on a competitive basis -- members of CEED and other 7 suppliers will be customers of your unbundled services. 8 Panel, the primary concern of CEED in these 9 proceedings is with unbundling and I think you are aware 10 that CEED's position has been that bundling is a 11 necessary element of facilitating competition, but CEED 12 also has concerns with respect to PBR to the extent that 13 PBR has an impact on facilitating competition. 14 Yesterday, Mr. Birmingham, in response to 15 Mr. Thompson's question, I believe you agreed that PBR 16 may be an improvement over cost of service to the extent 17 that it provides stronger incentives for achieving 18 desirable objectives. 19 Do you remember that exchange? 20 MR. BIRMINGHAM: I believe that was in 21 reference to Dr. Bauer's evidence where Dr. Bauer made 22 the statement that it was intended -- hang on a second, 23 Mr. Vegh. 24 --- Pause 25 MR. BIRMINGHAM: Yes, this is at Section 2 of 26 Dr. Bauer's evidence where Mr. Thompson was asking me 27 that: 28 "Performance-based regulation is Les Services StenoTran Services Inc. 613-521-0703 380 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 generally understood as a summary term 2 for regulatory methods that aim at 3 providing stronger incentives than cost 4 of service regulation for the achievement 5 of desirable objectives." 6 And I agreed with that. 7 MR. VEGH: Okay, thank you. 8 That is what I was really focusing on was the 9 reference to achievement of desirable objectives. 10 And in terms of desirable objectives, I take 11 it you are aware that facilitating competition in the 12 sale of gas is one of the objectives of this Board under 13 the Energy Board Act? Are you aware of that? 14 --- Pause 15 MR. VEGH: I'm sorry, I didn't think I would 16 have to take you to it. It is Section 1 of the Energy 17 Board Act. 18 MR. BIRMINGHAM: Yes, sir, I have it. I am 19 aware of that. 20 MR. VEGH: Oh, sorry, Section 2. 21 Facilitating competition on the sale of gas to 22 users is one of the objectives of the Board under this 23 Act. Are aware of that? 24 MR. BIRMINGHAM: Yes, sir. 25 MR. VEGH: And my client's evidence in these 26 proceedings -- I will give you the reference, I don't 27 think you will have to look at it. The reference is at 28 paragraph 19 to 20. Les Services StenoTran Services Inc. 613-521-0703 381 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 My client's evidence is that in their position 2 PBR should not be proceeded with it at this time and 3 that their position is that unbundling should be 4 completed and some experience should be gained with 5 unbundled services before determining whether to move to 6 previous -- to PBR. You are aware of my client's 7 position in this regard? 8 MR. BIRMINGHAM: Yes. 9 MR. VEGH: So with that there are two specific 10 areas I would like to address with you in 11 cross-examination. 12 One is the future unbundling of distribution 13 services under PBR. 14 The second is the way in which your PBR 15 proposal impacts on the current offering of unbundled 16 storage and transportation. 17 So in terms of this first area, which is the 18 future unbundling of services, I would like you to turn, 19 if you would, to your prefiled evidence, Tab 2, page 14. 20 --- Pause 21 MR. VEGH: On page 14 -- this is in your 22 introductory section -- there is a drawing there that 23 demonstrates an overlap between PBR and unbundling. Do 24 you see that? 25 MR. BIRMINGHAM: Yes, sir. 26 MR. VEGH: Turning the page to page 15 where 27 you are discussing the overlaps between PBR and 28 unbundling, the last bullet point at line 4 says that: Les Services StenoTran Services Inc. 613-521-0703 382 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 "Part of the overlap issue is that PBR 2 establishes process for further 3 unbundling under lighter handed 4 regulation." (As read) 5 Do you see that? 6 MR. BIRMINGHAM: Yes, that is our evidence. 7 MR. VEGH: And that is the theme I would like 8 to address from your evidence. 9 I would like to address some principles of 10 unbundling with you, if I could, and how these 11 principles are being addressed over the years by the 12 Board and then how these principles are addressed in 13 your PBR proposal. 14 Now, if you could, please turn up your book of 15 materials which has been mark as Exhibit F3.1. And the 16 first document there at Tab 1 is the report of the 17 ten-year market review of natural gas deregulation. I 18 am taking you way back here, Mr. Birmingham. This one 19 is dated September 27, 1996. Close to four years ago. 20 And can you turn to page 9 of that report, please. 21 MR. BIRMINGHAM: I have page 9. 22 MR. VEGH: Under the heading "Necessary Market 23 Conditions" the report reads: 24 "As part of the workshop discussion, some 25 participants identified the following 26 requirements in addition to the required 27 legislative changes that are necessary 28 conditions to allow the development of a Les Services StenoTran Services Inc. 613-521-0703 383 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 fully competitive market for natural gas 2 in Ontario..." (As read) 3 And then there is a list. And I will take you 4 through that list, but just before I do, you will notice 5 following that list that the Board accepts these 6 conditions. So this is not just a position of, you 7 know, various market participants like my clients, these 8 are positions that have been accepted by the Board. 9 MR. BIRMINGHAM: I think the way that it 10 reads, Mr. Vegh, is that the Board accepts these as 11 general requirements in an ideal competitive market and 12 agrees that the industry should move towards such a 13 market. However, without resolution of the customer 14 protection and public interest issues the Board is not 15 prepared at this point to determine how fast and to what 16 extent this market transition should occur. So that is 17 in that same section? 18 MR. VEGH: That is fair. That is fair and it 19 has been four years ago so we haven't rushed into 20 anything, have we, Mr. Birmingham? 21 --- Pause 22 MR. VEGH: Now, if you go through this list of 23 bullet points there are a couple that I would like to 24 address with you. 25 Well, actually, the one I would like to 26 address with you is bullet point number 6, that: 27 "unbundled services, fair allocation of 28 costs, and ability to rebundle." Les Services StenoTran Services Inc. 613-521-0703 384 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 (As read) 2 Do you see that? 3 So the Board approved -- or the Board 4 identified as a necessary condition to competition: 5 unbundled services, fair allocation of costs, and 6 ability to rebundle. 7 Now, if you could turn from that document to 8 Tab 2 -- which is a little more recent as we are now in 9 December 1997 -- this is the advisory report to the 10 Minister of Energy, Science and Technology from the 11 Board. 12 Please turn to page 11. There is a reference 13 to the "Working Group Report". 14 Union was a member of that working group, 15 wasn't it? 16 MR. BIRMINGHAM: Yes. 17 MR. VEGH: And at paragraph 3.1.2, the Board 18 refers to the working group using as its planning 19 objective: 20 "A hypothetical competitive market end 21 state with the following features..." 22 (As read) 23 And it goes down. Again, if you go down to 24 bullet point number 6, there is a reference to: 25 "Bundled and unbundled delivery 26 arrangements are available between the 27 LDC and all customers, including large 28 and small volume end-use customers." Les Services StenoTran Services Inc. 613-521-0703 385 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 (As read) 2 And you were a member of the working group 3 that identified this as a feature of a hypothetical 4 competitive market end state. Do you still agree with 5 that position? 6 MR. BIRMINGHAM: That one of the features of a 7 hypothetical competitive market end state is that the 8 bundled and unbundled delivery arrangements are 9 available between the LDC and all customers? 10 Is that the question, Mr. Vegh? 11 MR. VEGH: That is the question, yes. 12 MR. BIRMINGHAM: Yes, I agree. 13 MR. VEGH: You agree with that. And turning 14 over to page 12, the next bullet point is another one of 15 these features is the assignment of storage and upstream 16 transportation and I take it you agree with that because 17 you have brought forward a proposal to address the 18 assignment of storage and upstream transportation? 19 MR. BIRMINGHAM: That is right. 20 MR. VEGH: And when you go down to the bottom 21 of that page at paragraph 3.1.6. The Board identifies 22 there that it attempts to establish a market designed 23 task force consisting of stakeholders, et cetera, which 24 would propose appropriate market structures for full and 25 effective retail commodity competition and which would 26 ensure the safe, reliable and secure provision of 27 natural gas to Ontario consumers. 28 Union participated on that task force, didn't Les Services StenoTran Services Inc. 613-521-0703 386 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 it, market design task force? 2 MR. BIRMINGHAM: Yes. 3 MR. VEGH: And that task force, I believe, 4 provided a couple of reports. The first was in June 5 1998, so that was two years ago and then the second was 6 in February 1999. So that was about a year and a half 7 ago. 8 So can you please turn to the June 1998, 9 report and that is at Tab 3. And I would like to take 10 you to page 21 because up until this time we have seen 11 references to unbundling in various bullet points but 12 there hasn't been a lot of discussion about what 13 unbundling actually means. In paragraph 21 or page 21 14 provides a definition of unbundling and I would like to 15 take you to that definition and tell me if you agree 16 with it. 17 Under the heading "Long run benefits of a 18 fully unbundled market", the report reads: 19 "As outlined above, unbundling entails a 20 separate pricing and offering of the 21 discrete elements of LDC services, 22 example, gas supply, load balancing, 23 storage, transportation, billing and 24 after meter services and the further 25 opening of these previously monopolized 26 elements of sales service to alternative 27 suppliers of those services. Unbundling 28 reflects broad-based efforts to identify Les Services StenoTran Services Inc. 613-521-0703 387 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 those elements of LDC service that can be 2 provided by competitive suppliers and 3 develop and implement regulatory and 4 operating terms and conditions that would 5 permit alternative salaries to function 6 in a competitive manner to all end users. 7 Retail unbundling is an opportunity for 8 competitive forces to operate in 9 previously precluded areas of the gas 10 market." (As read) 11 Do you agree with that discussion of what 12 unbundling entails? 13 MR. BIRMINGHAM: Our evidence with respect to 14 the unbundled storage and upstream transportation 15 services in fact includes a definition that is somewhat 16 similar to this one, that is it is the separate pricing 17 and offering of discrete elements of the previously 18 bundled service. 19 MR. VEGH: Your position hasn't -- well, let's 20 do it this way. 21 This 1998 report was written by a task force 22 of which you were a member, yes? 23 MR. BIRMINGHAM: That is right. 24 MR. VEGH: And it came up with this 25 description of unbundling that you and I just -- or that 26 I just read to you. Right? 27 MR. BIRMINGHAM: That is correct. 28 MR. VEGH: And you agreed with that definition Les Services StenoTran Services Inc. 613-521-0703 388 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 in 1998 and I don't hear you saying that you disagree 2 with that definition in your current application? 3 MR. BIRMINGHAM: With respect to the 4 definition of unbundling, no, we agree with it. 5 MR. VEGH: And further down the page on page 6 21 in the last full paragraph, starting -- actually 7 let's go to the second last paragraph. There is a 8 discussion here on the benefits of unbundling and I 9 would like to know whether you still agree with this 10 description of the benefits of unbundling. So if there 11 was general agreement within the task force that: 12 "The continued development of a fully 13 unbundled market structure will create 14 net benefits for Ontario Gas users 15 provided the resulting market functions 16 in a workably competitive manner. The 17 consumer benefits of creating a fully 18 competitive market in Ontario in a forum 19 generally consistent with the fully 20 unbundled model described above, would 21 arise from competition amongst marketers 22 and the ability of marketers and end 23 users to contract for and manage upstream 24 transportation, storage and supply in the 25 most cost effective ways possible." 26 (As read) 27 And I have gone over to page 22, then dropping 28 down to the second last full paragraph on page 22 -- but Les Services StenoTran Services Inc. 613-521-0703 389 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 maybe before I do that, do you still agree with what is 2 -- with the position set out in the task force report 3 that I have just read to you? 4 MR. BIRMINGHAM: Subject to the other 5 conditions within a fully competitive market that is the 6 appropriate consumer protection and public interest 7 issues being dealt with, yes, I would agree, Mr. Vegh. 8 MR. VEGH: Okay. Thank you. 9 Now, page 22, second last paragraph: 10 "The task force believes that unbundling 11 downstream services, for example, billing 12 and after meter services from utility 13 rates will be important to the continued 14 evolution of competition and energy 15 technology and should create value to 16 consumers by providing the market with 17 incentives to create innovative product. 18 It will enable marketers to interface 19 directly with retail customers and 20 thereby create and maintain a market 21 presence. These and other efficiencies 22 should encourage market entry competition 23 and a greater range of customer choice." 24 (As read) 25 Do you still agree with that position? 26 MR. BIRMINGHAM: In the context of a properly 27 designed and functioning competitive market, yes, I 28 agree. Les Services StenoTran Services Inc. 613-521-0703 390 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. VEGH: When you go to Tab -- would you 2 turn to Tab 4, please, and that is the final report of 3 the market design task force. And I would like you to 4 go to page 52 because what we see now is some statements 5 on unbundling being important to develop competition. 6 We have seen a further definition of unbundling and we 7 have seen a description of some of the benefits of 8 unbundling. 9 But at page 52 of the report in February of 10 1999, this was the final report, we start to see some of 11 the more contentious issues around unbundling. And at 12 page 52, the MDTF starts to refer to the pricing of 13 unbundled components. And under that heading it notes: 14 "The pricing issue from unbundled 15 components will lead to striking an 16 appropriate balance in order to avoid 17 stranded costs, i.e., removing costs in 18 excess of avoidable costs under fully 19 allocated cost of service approach or a 20 subsidy." (As read) 21 And then it goes in the next full paragraph to 22 further elaborate this point: 23 "To the extent that certain costs of 24 providing services are avoidable, i.e., 25 lying somewhere between marginal and 26 fully allocated costs, the LDCs are 27 willing to unbundle and price them 28 accordingly. These include direct and Les Services StenoTran Services Inc. 613-521-0703 391 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 out-of-pocket costs that can be shed 2 promptly. They exclude related 3 infrastructure costs which cannot be shed 4 as quickly." (As read) 5 And it refers to the difficulties of 6 determining avoidable costs in the context of billing. 7 Mr. Birmingham, it seems to me that once we 8 get to these sorts of issues, that is how do we price 9 these unbundled components, that is where we get into 10 much more of the contentious realm of issues, isn't it, 11 than the high principles of unbundling? The question of 12 how do you bill for these unbundled components. 13 MR. BIRMINGHAM: Well, I think the details of 14 any proposal are always more difficult than the high 15 level concept. 16 MR. VEGH: All right. And one of the major 17 details in an unbundling proposal is how do you properly 18 account for the -- or how do you price the services for 19 bundled rates and for unbundled rates? 20 MR. BIRMINGHAM: I think that may be an issue 21 for some parties, Mr. Vegh. I take a look at the 22 language that is on page 52 at the end of that first 23 paragraph where it says: 24 "Subject to the resolution of market 25 versus cost-based pricing for storage and 26 perhaps reconciling the different 27 methodologies currently in place and 28 Enbridge and Union with respect to Les Services StenoTran Services Inc. 613-521-0703 392 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 upstream transportation, it was agreed 2 that existing methodologies for 3 allocating costs should be useable when 4 services are unbundled." (As read) 5 And certainly that approach is consistent with 6 the approach that we have taken on unbundling our 7 upstream transportation and storage. 8 MR. VEGH: Yes. I am not disagreeing with you 9 on the approach that you have taken on the upstream 10 transportation and storage or at least how you have 11 described that. I am just asking you to agree that 12 where the rubber really hits the road in these 13 unbundling issues is how do you account for the pricing 14 of bundled and unbundled services? To give you a simple 15 example, a customer who takes on an unbundled service 16 doesn't want to contribute towards the cost of providing 17 a bundled service, right? 18 MR. BIRMINGHAM: To the extent that that cost 19 is only attributed to the provision of the bundled 20 service, yes. 21 MR. VEGH: Okay. But let's address this 22 debate then a little closer to the ground and in the 23 context of your particular application. There is a 24 discussion in this report on some of the cost issues for 25 billing. 26 MR. BIRMINGHAM: Are we still under Tab 4, 27 Mr. Vegh. 28 MR. VEGH: I haven't moved from Tab 4 yet. Les Services StenoTran Services Inc. 613-521-0703 393 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 That is right. 2 MR. BIRMINGHAM: Okay. 3 MR. VEGH: But in terms of your -- let's talk 4 now about your particular application. The one that you 5 have commenced. 6 Your application proposes that PBR be approved 7 prior to addressing the issue of unbundling of billing, 8 doesn't it? 9 MR. BIRMINGHAM: That is right. 10 MR. VEGH: And in your initial application, I 11 understand that you have revised your evidence on this 12 but your initial evidence proposed that after this case 13 Union would be proposing a wholesale delivery rate. Is 14 that right? 15 MR. BIRMINGHAM: Our initial evidence 16 indicated that we were intending to apply for a delivery 17 rate which would allow wholesale delivery services to be 18 provided from the utility. That is right. But that is 19 no longer the case. We have amended that evidence to 20 suggest that the next application will deal with the 21 unbundling of billings so that marketers can bill their 22 end users directly for the services that they provide. 23 MR. VEGH: Right. And the difference between 24 these two proposals is that your original proposal would 25 have allowed the marketer to bill for distribution 26 services as well and Union would not have billed for 27 these services. Right? That is wholesale market rate 28 or in electricity I believe it is called retailed Les Services StenoTran Services Inc. 613-521-0703 394 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 consolidated billing. 2 MR. BIRMINGHAM: The initial concept was that 3 the marketer would be able to bill for Union's delivery 4 services. That is right. 5 MR. VEGH: That is right. And I understand 6 that you have changed your position on this, but you 7 also understand, don't you, that marketers are still 8 seeking the ability to bill for delivery services? 9 MR. BIRMINGHAM: I understand that there may 10 be marketers who are looking to bill their end users for 11 Union services, yes. I am not aware that any of them 12 actually have the capability of doing so yet but I am 13 aware that some of them may be interested in having that 14 service, yes. 15 MR. VEGH: Fair enough. And you are also 16 aware that the Board ordered electric utilities to allow 17 market -- electricity marketers to provide this service? 18 MR. BIRMINGHAM: I am aware that the Board has 19 directed a number of different options. That is right. 20 MR. VEGH: Well, and one of the options 21 included what is called this retail consolidated billing 22 option? 23 MR. BIRMINGHAM: That is my understanding. 24 MR. VEGH: And this option was also proposed 25 by Enbridge Consumers Gas, wasn't it? If you would turn 26 to Tab 5, please. At Tab 5, Tab 5 includes some 27 correspondence on Enbridge's original unbundling 28 proposal and you will see in the documents that is at Les Services StenoTran Services Inc. 613-521-0703 395 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 the end of Tab 5 entitled "Unbundling of 2 Services/Scoping of Issues", if you turn to page 2 under 3 the heading "Customer Care", number 11 refers to -- I'm 4 sorry. Do you have that? 5 MR. BIRMINGHAM: I do. 6 MR. VEGH: Under "Customer Care", number 11, 7 refers to the proposal, that is Enbridge's proposal, for 8 three bill options. And one of the issues is whether 9 that proposal was appropriate. And these options are 10 one bill from the marketer. That is what we were just 11 talking about. The second was two bills. I believe 12 that is called split billing. And the third bill was 13 one bill from the utility. So Enbridge initially 14 offered this proposal as well, the retail consolidated 15 billing proposal. 16 MR. BIRMINGHAM: As I read the statement it 17 says -- there is a question. Number 11 says: 18 "Is the proposal for three bill options 19 appropriate? The options are ..." 20 (As read) 21 MR. VEGH: Yes. I didn't bring the entire 22 case, Mr. Penny, but that is Enbridge's proposal. 23 Enbridge was a proponent in that case. 24 THE PRESIDING MEMBER: Mr. Vegh, am I correct 25 that this has not yet been heard? 26 MR. VEGH: That's right. This has been 27 deferred. 28 MR. PENNY: Is there a question? Les Services StenoTran Services Inc. 613-521-0703 396 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. VEGH: I guess the question comes down to 2 this, Mr. Birmingham: I know that Union has changed 3 their proposal, but in light of the Board's direction 4 for electricity, in light of the industry consensus over 5 the years on this issue, you would agree that it's not 6 outside the realm of possibility that the Board will at 7 least want to review a retail consolidated billing 8 option for Union as well. 9 MR. BIRMINGHAM: Well, we don't have any sort 10 of proposal before the board yet, Mr. Vegh, nor do we 11 have even an application before them. But it would not 12 come as a surprise to me that other parties will want to 13 pursue some sort of consolidated billing option on 14 behalf of retail suppliers of the commodity. 15 MR. VEGH: Okay. As part of that there are 16 likely to be different positions on the cost -- again, 17 the cost treatment of retail consolidated billing. 18 Would you agree? 19 MR. BIRMINGHAM: Which cost are you referring 20 to, Mr. Vegh? 21 MR. VEGH: Well, let me give you an example. 22 If you still have the Enbridge proposal in front of you, 23 if you go down to number 12, this is one of the issues 24 in that case: 25 "Should the billing credit be based on 26 avoided cost? If the credit is based on 27 more than avoided cost who bears the 28 remaining cost of billing utility Les Services StenoTran Services Inc. 613-521-0703 397 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 customers?" (As read) 2 That's the same sort of debate that you and I 3 were just talking about, that is: How do you cost out 4 these services? 5 MR. BIRMINGHAM: So this is the issue of: Is 6 it direct or marginal? Is it fully allocated? Is it 7 something in between? And parties may take different 8 views of those different options. 9 MR. VEGH: That's right. So that would be an 10 issue in a case in front of the Board that addressed the 11 possibility of retail consolidated billing. 12 MR. BIRMINGHAM: I suspect that it would be. 13 MR. VEGH: In fact, under your original 14 proposal, CEED and Union I believe already started to 15 engage in this issue. 16 If you turn at CEED's prefiled evidence, and 17 turn, please, to paragraph 107. 18 I appreciate, Mr. Birmingham, that this 19 evidence was filed before Union changed its position on 20 the wholesale billing rate. So this is when we were 21 still moving along with the idea that there would be a 22 retail consolidated billing. 23 Paragraph 107 describes how Union proposed 24 dealing with the costing of this issue. It says: 25 "Union proposes that when a customer 26 moves to an REM, Union will provide a 27 credit to marketers for the costs Union 28 was able to avoid by virtue of no longer Les Services StenoTran Services Inc. 613-521-0703 398 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 issuing the retail bill to end use 2 customers." (As read) 3 Of course, CEED, in paragraph 108, takes the 4 opposite view, that there should be, in a sense, a -- 5 What it says is that: 6 "REM should be charging amounts that 7 reflects Union's distribution rate and 8 the incremental cost of providing 9 information necessary to bill the 10 customer. REM customers should not have 11 to contribute any amount toward the 12 billing and customer care services which 13 Union provides to its unbundled 14 customers." (As read) 15 So this is the same sort of issue that we saw 16 arising in the Enbridge case, isn't it? 17 MR. BIRMINGHAM: It appears that it is, 18 Mr. Vegh, and that it looks like there are different 19 views about how a particular service should be -- or 20 what costs should be attributed to a particular service, 21 and therefore the implication on the rate under which 22 that service would be provided or under which those 23 costs would be removed. 24 MR. VEGH: Right. 25 So that will be an issue between us. 26 Now, if the Board does rule in favour of what 27 we have called this retail consolidated billing option, 28 then the distribution service that you provide to your Les Services StenoTran Services Inc. 613-521-0703 399 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 bundled customers will be different than the 2 distribution service that is contemplated in this 3 application, isn't? I'm sorry, I didn't mean to confuse 4 you there. I confused myself. 5 The distribution service you provided to 6 unbundled customers will be different than the 7 distribution service that you propose providing to 8 unbundled customers in this application. Because right 9 now your distribution service includes billing. 10 MR. BIRMINGHAM: That's right, Mr. Vegh. 11 But I won't agree that we would provide 12 different distribution services. 13 One of the issues that gets tied up in the 14 issue of billing is return to system capability for 15 customers. To the extent that the utility has to 16 maintain the customer care and billing capability for 17 customers who can be returned to system gas service, 18 then there remains the issue, I think, of who should 19 properly pay for those costs. 20 MR. VEGH: That will definitely be an issue. 21 The Board, in resolving that issue, would have 22 to look, wouldn't it, at what is the service that you 23 are providing to unbundled customers and how different 24 is it in fact than the service that you are providing to 25 bundled customers. 26 You will take the position that services are 27 really quite the same; marketers will take the position 28 that they are really quite different. Isn't that right? Les Services StenoTran Services Inc. 613-521-0703 400 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. PENNY: Mr. Chairman, I'm happy to have 2 Mr. Birmingham answer the question. However, I would 3 simply note that Mr. Vegh has cross-examining on Issue 6 4 for some time. I have no problem with that, as long as 5 we don't hear from him again on the subject. 6 But the questions he is now into have nothing 7 to do with the timing and process of unbundling and 8 billing, they do not have anything to do with the PBR 9 application, they are foursquare into the issues on the 10 merit of what may be before the Board in an application 11 that has yet to be brought that will deal in the future 12 with the issue of the unbundling of billing and how -- 13 if, how and at what cost it should be done. 14 So, in my submission, we are far outside the 15 realm of even Issue 6. 16 I am obviously in your hands and if you want 17 Mr. Birmingham to answer the question I'm happy that he 18 do so, but I wanted to note for the record that we seem 19 to be outside of the issues in this case. 20 MR. VEGH: Mr. Penny, I was addressing with 21 Mr. Birmingham unbundling under the PBR proposal. 22 But maybe I could just ask you directly, 23 Mr. Birmingham, how we would deal with this debate of 24 the different costs for the different elements of 25 service under your PBR proposal. 26 Let me do it this way: Your PBR proposal 27 delinks the cost of service from the rates charged for 28 that service. Right? Les Services StenoTran Services Inc. 613-521-0703 401 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. BIRMINGHAM: During the term of the PBR, 2 rates are not set with respect to cost, that's right. 3 MR. VEGH: Right. So it does not contain a 4 means by which the Board may direct that billing costs, 5 for example, which were once allocated to distribution 6 be removed from distribution, does it? 7 MR. BIRMINGHAM: It deals with how to adjust 8 the prices for the individual services. I don't think 9 that there is anything that would preclude the Board 10 from making a finding on an application that deals with 11 billing and examining the different costs or the 12 different approaches to pricing the billing services and 13 what that might mean for Union's rates. 14 MR. VEGH: Well, we wouldn't be able to say to 15 the Board, "Here are the costs that Union incurs for 16 billing its distribution customers and here are the 17 costs that we should be able to" -- that "we" being 18 marketers -- should be able to avoid by billing our own 19 customers." 20 MR. BIRMINGHAM: I think it would, Mr. Vegh, 21 because it would be done in reference to the existing 22 methodologies and the existing approvals under 23 E.B.R.O. 499. 24 MR. VEGH: So you are saying that in order to 25 determine what the costs would be of billing that should 26 be removed, we will have to back to the 1999 forecasted 27 costs? 28 MR. BIRMINGHAM: We would use the existing Les Services StenoTran Services Inc. 613-521-0703 402 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 Board approved methodologies and the information at that 2 time, yes. 3 MR. VEGH: Well, if we were to bring an 4 application in 2002 to remove billing from the utility, 5 the debate that we would have on what the cost 6 allocation issue should be will be based on 1999 7 forecasted costs of billing? 8 MR. BIRMINGHAM: We would use that approved 9 methodology, Mr. Vegh, but, frankly, without the details 10 of the proposal developed at this point I can't really 11 comment on the details of what the approach might mean. 12 MR. VEGH: And how about other services? What 13 if we were to move to unbundled metering from the 14 utility? How would we go about doing that? 15 MR. BIRMINGHAM: We would establish a process, 16 either through the customer review process or through an 17 application to the Board and deal with the specifics at 18 that time. 19 MR. VEGH: And how would we remove the costs 20 of metering from the unbundled distribution service? 21 MR. BIRMINGHAM: At this point, Mr. Vegh, I 22 can't speculate on that, but the information would be 23 available for the Board to consider how Union's prices 24 should change as a result of offering further unbundled 25 services. 26 MR. VEGH: But that information on prices 27 wouldn't relate to the costs of those services at 28 that time. Les Services StenoTran Services Inc. 613-521-0703 403 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. BIRMINGHAM: I don't know, Mr. Vegh. I 2 haven't turned my mind to it. 3 MR. VEGH: But would you agree, though, that 4 if we were to remove metering from the distribution 5 function or activity, or if we were to remove billing 6 and collection from the distribution activity, the Board 7 would somehow have to reflect that in the rates that you 8 charge for the distribution activity. 9 MR. BIRMINGHAM: Absolutely. 10 MR. VEGH: Because you couldn't charge the 11 same rate for a distribution activity which doesn't 12 include metering and billing that you would charge for a 13 distribution service that does include metering and 14 billing. 15 MR. BIRMINGHAM: That's right. To the extent 16 that there was a bundled rate that included those 17 services and now they were going to be unbundled and 18 offered as discrete services, no, those two distribution 19 rates or delivery rates would change. 20 MR. VEGH: And your proposal contains no means 21 by which the cost of these services may be removed from 22 distribution rates? 23 MR. BIRMINGHAM: We have set up a process, 24 either through the customer review process or for 25 specific application to the Board that would deal with 26 that, Mr. Vegh. 27 MR. VEGH: Removing the cost of these 28 services? Les Services StenoTran Services Inc. 613-521-0703 404 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. BIRMINGHAM: Yes. 2 MR. VEGH: And by "cost" you mean the 3 forecasted 1999 cost? 4 MR. BIRMINGHAM: At this point that would be 5 my suggestion but, as I say, I haven't turned my mind to 6 the specifics of what might happen under those 7 hypothetical applications. 8 MR. VEGH: No, I guess you haven't. 9 There are some more unbundling issues which 10 relate, however, to GAAP costs. So I will come back to 11 that, how we can remove all GAAP costs from distribution 12 rates, but I will address that in the GAAP costs 13 section. 14 I would like to turn to the secondary of my 15 cross-examination, which is the impact of your PBR 16 proposal on unbundling. 17 We could start at Exhibit -- going back to 18 your evidence now -- Exhibit B, Tab 2, starting at 19 page 9. 20 Again I'm looking at the interaction between 21 PBR and unbundling, but now I'm not looking at future 22 unbundling of distribution rates, I'm looking at Union's 23 current proposal of unbundling transportation and 24 storage and how that and the PBR proposal interact. 25 In particular, I would like to refer to what 26 you -- or what the evidence identified as key 27 implications for Union, starting at line 17. 28 The implication number one, you refer to an Les Services StenoTran Services Inc. 613-521-0703 405 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 increased risk -- and I don't have to read it to you. 2 Maybe you could take a minute to read it to yourself and 3 let me know when I can ask you some questions on that. 4 MR. BIRMINGHAM: You can ask them, Mr. Vegh. 5 MR. VEGH: Okay, then. 6 If I understand the concern that is being 7 addressed here, it is that if a customer moved to 8 unbundled services, then the management of the storage 9 and transportation assets moved to that customer. Is 10 that right? 11 MR. BIRMINGHAM: That's right. They have the 12 full use of that asset capability. 13 MR. VEGH: And this may cause commercial 14 detriment to Union because Union would otherwise have 15 used those assets to offer transactional services? 16 MR. BIRMINGHAM: To the extent that those 17 assets were not needed to provide the bundled services 18 to customers and there was unused capability, then Union 19 would then use that asset capability to generate storage 20 and transportation transactional revenue, yes. 21 MR. VEGH: That's right. I wasn't meaning to 22 suggest that you would deprive customers of the use of 23 those assets, just that is someone takes up an unbundled 24 service Union faces a potential financial harm because 25 the assets relating to those customers are no longer 26 available to be managed by Union for its own purposes? 27 MR. BIRMINGHAM: To the extent that Union has 28 committed to keeping the $5.5 million of transactional Les Services StenoTran Services Inc. 613-521-0703 406 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 revenue that is currently in rates there for the benefit 2 of customers and those customers are using that asset 3 capability themselves there is a risk to the utility 4 because of that commitment, yes. 5 MR. VEGH: I'm not sure if we are disagreeing. 6 All I am referring to is in the third sentence: 7 "This..." 8 being the transfer of those assets to the unbundled 9 customer: 10 "...reduces Union's opportunity to 11 generate transactional business using its 12 storage and transmission assets." 13 (As read) 14 MR. BIRMINGHAM: I'm agreeing with you, 15 Mr. Vegh. 16 MR. VEGH: Okay. 17 Union faces a potential loss of revenue from 18 these services if a customer takes up the unbundled 19 option? 20 MR. BIRMINGHAM: That's correct. 21 MR. VEGH: So Union would be better off, 22 wouldn't it, if its customers didn't take up the 23 unbundled option? 24 MR. BIRMINGHAM: No, I disagree with that, 25 Mr. Vegh. 26 I do agree that Union has a risk to manage, 27 that is we have committed to the $5.5 million of 28 transactional revenue, and to the extent that in the Les Services StenoTran Services Inc. 613-521-0703 407 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 extreme all customers took up the unbundled service we 2 would be left without the asset capability to provide 3 that revenue. So there is a risk. 4 But, in our view, the benefit of offering 5 unbundled services so that customers can better manage 6 their energy costs, continue to use gas and continue to 7 use Union's system outweighs that risk. 8 MR. VEGH: What do you mean "continue to use 9 Union's system"? Where are they going to go? 10 MR. BIRMINGHAM: A number of customers, 11 Mr. Vegh, have alternate fuel capabilities. Indeed, 12 some bundled services will provide the opportunity for 13 customers to use natural gas and manage their energy 14 costs in a way that will hopefully prevent them from 15 using those alternate fuel capabilities. 16 MR. VEGH: So is that the risk you are talking 17 about then? Is that the harm you face ,if customers 18 don't take up unbundled service the threat of bypassing 19 Union? 20 MR. BIRMINGHAM: That's one of the risks, but 21 one of the things that unbundled services helps to 22 manage. But the one that is being specifically 23 identified here is our commitment to the $5.5 million of 24 transactional revenue. 25 MR. VEGH: Well, what you are specifically 26 referring to here is the harm that is caused to Union 27 when customers take up unbundled services. I'm 28 suggesting to you that that provides Union with an Les Services StenoTran Services Inc. 613-521-0703 408 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 incentive to make these unbundled services so 2 unattractive that customers won't take them up. 3 MR. PENNY: Well, Mr. Chairman, this question 4 has been asked and answered at least once. 5 THE PRESIDING MEMBER: Can we move on, 6 Mr. Vegh? 7 MR. VEGH: Your evidence on this point goes on 8 to state that: 9 "No specific adjustment has been made to 10 your PBR proposal to account for this 11 risk. Union recognizes that a large 12 portion of the $5 million of 13 transactional revenue currently reflected 14 in rates will be at risk." 15 We have gone through the transactional 16 services issue and the closing of the deferral accounts 17 that are associated with that and I just want a 18 clarification on this point in light of that evidence. 19 It is not entirely accurate to say that no 20 specific adjustments have been made to your proposal to 21 account for this risk, is it? 22 MR. BIRMINGHAM: It is one of the risks that 23 Union will manage within the PBR price cap parameters. 24 And one of those parameters is the closing of the 25 existing deferral account. 26 MR. VEGH: Right. And the closing of the 27 account is an adjustment made to your proposal to 28 account fully this risk. Les Services StenoTran Services Inc. 613-521-0703 409 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. BIRMINGHAM: In part, that's right. 2 MR. VEGH: And your proposal then limits your 3 contribution to customers for transactional services to 4 the existing $5 million. Is that right? 5 MR. BIRMINGHAM: To the $5.5 million that is 6 currently -- 7 MR. VEGH: Right, $5.5 million. So you have 8 quantified your down side risk here to $5.5 million. 9 MR. BIRMINGHAM: With respect to those S&T 10 transactional services, yes. 11 MR. VEGH: Now the upside opportunity is 12 unlimited, I guess. It leads to regulatory purposes. 13 MR. BIRMINGHAM: What do you mean by upside 14 opportunity, Mr. Vegh? 15 MR. VEGH: You quantified your down side to 16 $5.5 million, but the revenues you can earn in excess of 17 that are entirely to the shareholders. So to that 18 extent, for regulatory purposes, the upside has not been 19 capped for Union. 20 MR. BIRMINGHAM: To the extent that we can 21 generate additional storage and transportation 22 transactional revenues, net of cost, over and above the 23 $5.5 million, those would accrue to the company during 24 the PBR term, that's right. That is at the same time 25 that customers can be electing the unbundled service and 26 using that asset capability themselves. 27 MR. VEGH: Right. So the upside opportunity 28 is limited more by the market than by the regulator. Les Services StenoTran Services Inc. 613-521-0703 410 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. BIRMINGHAM: The total revenue would be 2 limited by other customers who are using those assets, 3 that's right. The pricing of the services is dealt with 4 to the extent that they are regulated services by the 5 Board and within the parameters of the price cap. 6 MR. VEGH: The S&T services that we are 7 talking about here are not within the parameters of the 8 price cap, are they? 9 MR. BIRMINGHAM: The S&T transactional 10 services, Mr. Vegh, are a combination of regulated and 11 unregulated services. To the extent that they are 12 regulated services, they are captured within the price 13 cap parameters. 14 MR. VEGH: Let's address this. In No. 2 -- to 15 be clear on what kind of services we are talking 16 about -- there is a reference to unbundled service 17 offerings in the third sentence: 18 "Unbundled service offerings also provide 19 the utility and others to provide new 20 discreet services such as load balancing, 21 demand and supply nominations, load 22 profiling and informational services". 23 (As read) 24 The revenues for those services are not 25 captured in the rate cap, are they? 26 MR. BIRMINGHAM: To the extent that they are 27 not regulated services, that is they aren't storage 28 transmission or distribution services then they would be Les Services StenoTran Services Inc. 613-521-0703 411 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 outside of the various cap parameters, that's right. 2 MR. VEGH: Well, tell me. These are services 3 that you have identified as new discreet services. Are 4 they inside or outside? 5 MR. BIRMINGHAM: Are you looking at the 6 examples that we have listed on page 10, Mr. Vegh? 7 MR. VEGH: Yes. 8 MR. BIRMINGHAM: Of the four that are there, I 9 would suggest that both load balancing and demand and 10 supply nomination -- load balancing is definitely 11 regulated service. It's currently within the utility's 12 distribution service. Beyond that, demand and supply 13 nomination, load profiling and informational services, I 14 would suggest, are unregulated. 15 MR. VEGH: So the only load balancing that is 16 referred to in this paragraph is load balancing for your 17 distribution customers, or are you talking about 18 providing load balancing to other customers as well? 19 MR. BIRMINGHAM: No, that's a reference to 20 customers who would have left the unbundled service and 21 were looking for somebody to manage the unbundled 22 services for them. 23 MR. VEGH: Now in this management of the 24 unbundled services, are we still talking about regulated 25 delivery services or are we talking about unregulated 26 services at market rates? 27 MR. BIRMINGHAM: For which service, Mr. Vegh? 28 Sorry. Les Services StenoTran Services Inc. 613-521-0703 412 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. VEGH: The services that you are referring 2 to in paragraph 2 here. 3 MR. BIRMINGHAM: Okay. So let's take 4 informational -- let's take load profiling then just 5 because it's a simple one. That is an unregulated 6 service. Other parties can provide it. It would be at 7 whatever market rate could be charged. 8 MEMBER JACKSON: Did I mishear, Mr. Vegh? Did 9 you not ask about the load balancing whether that could 10 be offered on an unregulated basis -- and I didn't hear 11 the answer, I am sorry, that you gave us. 12 MR. BIRMINGHAM: Sorry, Mr. Jackson. I assume 13 that mode balancing would be a regulated service and so 14 that we would -- 15 MEMBER JACKSON: In its entirety. 16 MR. BIRMINGHAM: That's right. So we would 17 actually have to apply to the Board for a regulated rate 18 to be able to provide that. 19 MEMBER JACKSON: Thank you. 20 MR. VEGH: Okay. Thank you, Mr. Birmingham. 21 Go to No. 3, please. You talk about increased 22 competition in the wholesale market and much more 23 competitive pricing in the wholesale market and 24 increasingly smaller margins for those wholesale 25 services. 26 Now, in that market those services will be -- 27 the offerings in that market will be provided both by 28 the utility and by marketers? Les Services StenoTran Services Inc. 613-521-0703 413 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. BIRMINGHAM: There will be services that 2 both the utility and marketers may provide. An example 3 of that would be the utility offering bundled services 4 to customers and the marketer choosing the unbundled 5 service from Union and providing those services directly 6 to their end users. 7 MR. VEGH: So Union would then be competing 8 with the marketers to provide these services to 9 customers? 10 MR. BIRMINGHAM: That's entirely possible, 11 yes. 12 MR. VEGH: And marketers will be in a position 13 to provide these services because of unbundling of 14 transportation and storage? 15 MR. BIRMINGHAM: That's right. 16 MR. VEGH: So again, if customers do not take 17 up unbundled services, wouldn't Union be better off 18 because you face less competition? 19 MR. BIRMINGHAM: There is some element of 20 truth, I think, Mr. Vegh. But the other aspect of it is 21 to the extent that the utility is unable to provide in 22 this case a regulated service that provides the same 23 type of value that a marketer could use in the unbundled 24 services and providing that to the end user. Then the 25 end user should rightfully take the marketer service. 26 THE PRESIDING MEMBER: Mr. Vegh -- have you 27 finished your answer, Mr. Birmingham? Have you finished 28 your answer? Les Services StenoTran Services Inc. 613-521-0703 414 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. BIRMINGHAM: Yes, I have. Thank you, 2 Mr. Chairman. 3 THE PRESIDING MEMBER: Mr. Vegh, can we break 4 now please? We have a request for a break. 5 MR. VEGH: Of course. 6 THE PRESIDING MEMBER: And we could take our 7 lunch break now. I apologize for interrupting your 8 examination, but could we break now and we will come 9 back at two o'clock. No, that would make it a quarter 10 to two -- 1:45. 11 Thank you. 12 --- Upon recessing at 1230 13 --- Upon resuming at 1348 14 THE PRESIDING MEMBER: Any procedural matters 15 before we start? 16 MR. PENNY: Mr. Chairman, it was pointed out 17 -- there are two procedural matters. First of all, it 18 was pointed out to me that I had told you this morning 19 that Ms Elliott was going to address one undertaking 20 orally when we started the evidence. And then when we 21 started the evidence, I forgot about it. So she did not 22 have the opportunity to do that. So perhaps we could 23 deal with that and just get it out of the way. 24 MS ELLIOTT: Undertaking G1.4 asks for the 25 costs associated with the early retirement programs and 26 we have $1.3 million ongoing costs for each of the next 27 15 years as a result of the early retirement programs. 28 MR. PENNY: Thank you. Les Services StenoTran Services Inc. 613-521-0703 415 ELLIOTT/BIRMINGHAM 1 And, Mr. Chairman, the second procedural issue 2 has to do with the order of cross-examination in 3 accommodating Mr. Janigan who can't be here tomorrow. 4 Mr. Janigan had approached us at lunch and asked whether 5 he might be fit in with his initial cross-examination on 6 the second group of issues. And we are -- to 7 accommodate him, we are prepared to do that. 8 My suggestion is, however, that we have done a 9 straw poll of the parties in the room and the amount of 10 time that they have for cross-examination on the first 11 bundle of issues, and Mr. Vegh I think thinks he will be 12 about another 20 minutes, Mr. Ryder thought an hour and 13 then there are several other parties with relatively 14 short periods, five, ten, fifteen minutes. 15 And my suggestion would be this, that Mr. Vegh 16 finish, that the other parties other than Mr. Ryder, if 17 this is acceptable to Mr. Ryder who have relatively 18 short cross-examinations on the first bundle of issues 19 finish. That Mr. Janigan -- to ensure Mr. Janigan can 20 get his piece in on the second bundle, that Mr. Janigan 21 then go. And he doesn't think he will be more than half 22 an hour, 45 minutes. But just to be on the safe side we 23 would allow him to go ahead with Mr. Ryder and then with 24 any luck we would finish today on all of the first 25 bundle of issues with Mr. Ryder's cross-examination. 26 THE PRESIDING MEMBER: I obviously have to ask 27 Mr. Ryder what his position on this is. 28 MR. RYDER: That is fine with me, sir. Les Services StenoTran Services Inc. 613-521-0703 416 ELLIOTT/BIRMINGHAM 1 THE PRESIDING MEMBER: Thank you, Mr. Ryder. 2 Well, in which case, we will proceed that way. So it is 3 Mr. Vegh, then any other parties, then Mr. Janigan and 4 then Mr. Ryder. 5 MR. PENNY: Yes. Thank you, sir. 6 MR. JANIGAN: Thank you, Mr. Chairman. 7 Thank you, Mr. Penny and Mr. Ryder. 8 THE PRESIDING MEMBER: Mr. Vegh, I apologize 9 for the sudden interruption, almost in mid-question. I 10 apologize and please carry on. 11 MR. VEGH: Thank you. 12 Mr. Birmingham, just a bit of a clean-up issue 13 first. We were on page 10 of Tab 2 and in the middle of 14 page 10, Tab 2 and we were looking at numbered 15 paragraph 2, and the reference to the increased 16 requirement for new services to be developed and then we 17 talked about some of these services and got into a 18 discussion by way of clarification of what these 19 services are. 20 We got into a discussion of how they are being 21 treated under the price basket and what I am going to do 22 is not pursue that issue further here. Just to make the 23 point that that is an issue to be addressed in this 24 case, that is what are new services and which services 25 are in and which services are out. But that is 26 addressed in issue 2.3 and 2.3.4 in particular so I will 27 address that at that time and just move on. 28 Now, in point number 3 on this page there is a Les Services StenoTran Services Inc. 613-521-0703 417 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 statement in the third sentence that I would like some 2 clarification on. It says: 3 "Marketers will look to the utility or 4 other marketers for the best priced 5 services which they may not want to 6 manage themselves." (As read) 7 Now, without getting into the issue of what is 8 in or out of the basket, I am not clear on what sort of 9 services we are talking about here. Are these largely 10 asset management kind of services? 11 MR. BIRMINGHAM: Yes. 12 MR. VEGH: So they are the kind of services 13 which would allow a customer to manage their gas supply 14 more efficiently? 15 MR. BIRMINGHAM: They may be, yes. 16 MR. VEGH: So the demand for these sorts of 17 services increase to the extent that there are 18 additional efficiencies to be gained in managing gas 19 supplies? 20 MR. BIRMINGHAM: Sorry. Say that again, 21 Mr. Vegh? 22 MR. VEGH: I say that the demand for these 23 services increase to the extent that there are 24 efficiencies to be gained in the management of gas 25 supply? 26 MR. BIRMINGHAM: To the extent that there are 27 additional customers looking for those additional 28 efficiencies, yes. Les Services StenoTran Services Inc. 613-521-0703 418 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. VEGH: And additional customers or the 2 extent of efficiencies that can be gained? 3 MR. BIRMINGHAM: Right. 4 MR. VEGH: And the customers for these 5 services they would include large volume customers? 6 MR. BIRMINGHAM: Yes. 7 MR. VEGH: And they would also -- the 8 customers for these services would also include REMs who 9 take up unbundled services? 10 MR. BIRMINGHAM: That would be my expectation, 11 yes. 12 MR. VEGH: So the greater the efficiencies 13 that may be realized by REMs in taking up their 14 unbundled services, the greater is the demand for these 15 types of services you are talking about in paragraph 3 16 here? 17 MR. BIRMINGHAM: Or the greater the demand for 18 the unbundled services initially I think and then 19 further to that there may be a corresponding demand for 20 supplementary services that would be partnered with the 21 unbundled services, yes. 22 MR. VEGH: So then -- and Union would be one 23 of the parties providing this service? 24 MR. BIRMINGHAM: These are the what I might 25 call some services that supplement the current bundled 26 or unbundled services, Mr. Vegh? 27 MR. VEGH: Yes. 28 MR. BIRMINGHAM: We may be if customers are Les Services StenoTran Services Inc. 613-521-0703 419 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 asking for it, yes. So to my previous example about 2 load profiling, to the extent that a customer was using 3 the unbundled services and wanted some scenarios run 4 around different load profiles, what the implications 5 might be for their unbundled services, then Union could 6 be one of the parties that could provide that service. 7 MR. VEGH: Right. So Union will provide sort 8 of the basic unbundled service as is proposed in this 9 proceeding but there may also be supplementary services 10 that Union can provide for more efficient asset 11 management for marketers? 12 MR. BIRMINGHAM: It would either result in the 13 more efficient management of the assets or could be 14 information that would allow them or others to manage it 15 more effectively, yes. 16 MR. VEGH: Yes. So to the extent that the 17 initial offering of unbundled services creates a demand 18 for these supplementary services, then Union would be 19 better off, wouldn't it? 20 MR. BIRMINGHAM: I hope that there will be an 21 opportunity for Union to provide some new types of 22 services, yes. 23 MR. VEGH: Right. And to the extent that 24 there is a greater demand for this service, then Union 25 benefits from that greater demand. 26 MR. BIRMINGHAM: To the extent that that 27 demand is from -- is for the utility to provide it, yes, 28 Union would benefit. Les Services StenoTran Services Inc. 613-521-0703 420 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 MR. VEGH: Now, point 3 or just following 2 point 3, there is a sentence that says: 3 "These implications indicate greater gas 4 on gas competition in the wholesaler 5 market." (As read) 6 And I am a little confused about the term "gas on gas 7 competition". Union Gas does not now provide a 8 competitive gas commodity service, right? 9 MR. BIRMINGHAM: We provide a service to 10 customers which we sell under the Board-approved pricing 11 methodology which is our weighted average cost of gas. 12 That is a choice for customers whether they take that 13 offering from the utility or they choose to take their 14 gas supply from a marketer. 15 MR. VEGH: Oh, I see. So you are correcting 16 me that when I say "competitive", I may have misstated 17 it. What I should have said was you don't provide a 18 market-based commodity service. You provide a Board 19 regulated -- a Board rate regulated commodity service? 20 MR. BIRMINGHAM: It's a cost-based gas 21 service, that is right. 22 MR. VEGH: And Union last proposed to provide 23 an unregulated commodity service in 499. That was a 24 supplemental gas supplied service. Do you remember 25 that? 26 MR. BIRMINGHAM: I recall there was a proposal 27 for a wholesale gas service, yes. 28 MR. VEGH: Now, is Union proposing something Les Services StenoTran Services Inc. 613-521-0703 421 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 like a supplemental gas supply service in this case? 2 MR. BIRMINGHAM: No, we are not. 3 MR. VEGH: So you don't plan to go in to the 4 supply business in that sense? 5 MR. BIRMINGHAM: No, and to the extent that we 6 did, Mr. Vegh, we would require the Board's approval in 7 any event because that would be a regulated service. 8 But there is no proposal that we are contemplating at 9 this time to do that. 10 MR. VEGH: Okay. Now, will you be providing 11 competitive services using your storage and 12 transportation assets? 13 MR. BIRMINGHAM: Maybe you can help me out 14 with the definition of competitive services in the way 15 that you are using it, Mr. Vegh. 16 To the extent that we are using some of the 17 storage and transportation asset capability to provide 18 transactional services and others could provide those 19 services, if that is the definition, then, yes, we are. 20 MR. VEGH: To that definition, I would add 21 that the services -- the transactional services that you 22 propose providing, would the rates for those services be 23 set by the Board? 24 MR. BIRMINGHAM: It depends on the service, 25 Mr. Vegh. Some of those services are regulated services 26 and they would be set by the Board and they would be 27 subject to the price cap parameters. Others are not 28 regulated services. They are not storage, transmission Les Services StenoTran Services Inc. 613-521-0703 422 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 or distribution and, therefore, the prices for those 2 services are not determined by the Board. 3 MR. VEGH: Okay. Well, if we just consider 4 your existing S&T services and not get into new 5 services, existing S&T services, you will continue to 6 provide them. Is that right? 7 MR. BIRMINGHAM: To the extent that we have 8 the capability to, yes. 9 MR. VEGH: Right. And will the rates for 10 those services, existing S&T services, be set by the 11 Board? 12 MR. BIRMINGHAM: For some of them. It depends 13 on what the service is. 14 As an example, to the extent that we are using 15 something like off-peak storage services under our C1 16 rate schedule, that price is set by the Board and will 17 be subject to the price cap parameters. 18 To the extent that, for instance, we have very 19 warm weather, we have more gas in inventory than we 20 would otherwise have planned and we loan that gas to a 21 party, that is for receipt back to Union later on, then 22 that service is an unregulated service and the Board 23 would not be setting the price for that. 24 MR. VEGH: Okay. So let's just consider the 25 gas loan services you have described. That will be an 26 unregulated service in the sense that the rates for that 27 service will not be set by the Board? 28 MR. BIRMINGHAM: It is an unregulated service. Les Services StenoTran Services Inc. 613-521-0703 423 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 It's something that we do now, that's right. 2 MR. VEGH: From a customer's perspective, a 3 gas loan service is an alternative to a gas commodity 4 service, isn't it? They can either borrow the gas from 5 Union or buy the gas in the market. 6 MR. BIRMINGHAM: To the extent that that 7 customer was an end user and actually burned gas, that 8 may be the case. But the gas loans are typically made 9 to marketers. 10 MR. VEGH: Even in that case, though, 11 marketers could buy gas from each other or borrow gas 12 from Union. They are alternatives, aren't they? 13 MR. BIRMINGHAM: Yes. 14 MR. VEGH: So even if Union will not directly 15 provide a gas commodity service on a competitive basis, 16 as we have discussed, it will be competing with 17 commodity service offerings of gas suppliers, won't it? 18 MR. BIRMINGHAM: Gas loans are not a sale, 19 Mr. Vegh, so I don't see them that way. 20 This is a short term loan of gas where the 21 marketer has to return the gas within a certain period 22 of time. So even to the extent that they used it to 23 replace some of their supplies, they are still in the 24 position, when they have to return the gas, to go out 25 and get that supply. 26 So I would agree that there may be a timing 27 issue about when somebody would have to go out and seek 28 their supply, but it doesn't replace the need for that Les Services StenoTran Services Inc. 613-521-0703 424 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 supply ultimately. 2 MR. VEGH: It's a competitive alternative to a 3 marketer that needs supply at the time. They could buy 4 supply at Dawn, they could buy it from another marketer, 5 they could borrow gas from Union. 6 MR. BIRMINGHAM: That's possible, yes. 7 MR. VEGH: Now, Union as a -- I will use the 8 term "system operator" -- will have knowledge of the 9 usage of patterns of all the customers on its system, 10 won't it? 11 MR. BIRMINGHAM: That's true, in particular 12 for those customers who are under contract. 13 MR. VEGH: But it is true for all customers? 14 MR. BIRMINGHAM: Generally, yes. 15 MR. VEGH: Now, Union Gas has a competitive 16 affiliate in the gas supply business? 17 MR. PENNY: Mr. Chairman, again, I'm happy to 18 have Mr. Birmingham answer the question, but I must say 19 that I am again at sea. Maybe it's just me, but I am at 20 sea as to where we are in relation to performance based 21 regulation and the first bundle of issues for 22 cross-examination in this portion of the case. 23 THE PRESIDING MEMBER: Perhaps Mr. Vegh will 24 make clear the relationship he is going to with the 25 question he is asking. 26 MR. VEGH: The point I am addressing is the 27 point proposed by Union, which is to have a PBR system 28 in place with certain incentives at the same time as an Les Services StenoTran Services Inc. 613-521-0703 425 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 unbundling proposal is to go forward. What I'm 2 exploring is how those two systems are supposed to 3 operate together. 4 And so my question, Mr. Birmingham, was about 5 the information that you have respecting customers that 6 you acquire as a system operator and I asked you whether 7 Union has an affiliate that is operating in the supply 8 business. 9 MR. BIRMINGHAM: Well, we have two affiliates 10 that deal with the commodity, one which is Engage Energy 11 in which Westcoast is a 50 per cent partner, at least at 12 this time, and Union Energy who is a retail energy 13 marketer and also supplies other ancillary services. We 14 don't actually have a gas supplier, but we have those 15 two entities. 16 MR. VEGH: All right. And the Board has 17 issued a Code of Conduct that governs your relationship 18 with those affiliates. Is that right? 19 MR. BIRMINGHAM: That's right. 20 MR. VEGH: And that Code of Conduct prevents 21 you from providing any customer information that you 22 would acquire as a system operator to your affiliates on 23 a preferential basis, doesn't it? 24 MR. BIRMINGHAM: That's right. The Code 25 requires us to deal with marketers on a non-preferential 26 basis, and that just makes good business sense from our 27 standpoint as well. 28 MR. VEGH: Right. So you wouldn't provide Les Services StenoTran Services Inc. 613-521-0703 426 ELLIOTT/BIRMINGHAM, cr-ex (Vegh) 1 your affiliate with the usage information you have of 2 customers that you acquire as a system operator? 3 MR. BIRMINGHAM: No, not without the 4 customer's express approval. 5 MR. VEGH: That's right. 6 Now, what protections do you have in place to 7 ensure that Union Gas does not use this information in 8 competing with marketers in the wholesale market? 9 MR. BIRMINGHAM: To the extent that we know 10 that under the bundled service arrangement that there 11 may be excess storage or short-term transmission 12 capacity available, we do use that information to be 13 able to provide the types of S&T transactional services 14 that we have historically provided. 15 MR. VEGH: And do you share that information 16 with other marketers or do you just keep it to yourself? 17 MR. BIRMINGHAM: We do not share with anyone, 18 other than ourselves, unless we have the customer's 19 express approval for their particular situation. 20 MR. VEGH: Thank you, sir. 21 Those are my questions. 22 Thank you. 23 THE PRESIDING MEMBER: Thank you, Mr. Vegh. 24 MEMBER JACKSON: But the prices for those 25 services which you do offer competitively, then, are not 26 regulated by the Board. Is that the point? 27 Could you first confirm that, because that is 28 the message I'm getting. Les Services StenoTran Services Inc. 613-521-0703 427 ELLIOTT/BIRMINGHAM 1 MR. VEGH: If I could be of assistance 2 Mr. Birmingham, I could direct you to page 54 where you 3 talk about which services will be subject to the price 4 cap parameters and which will not be. 5 MR. PENNY: Dr. Jackson has asked 6 Mr. Birmingham a question and perhaps, Mr. Vegh, you 7 could permit Mr. Birmingham to answer it. 8 MR. VEGH: Just trying to be of assistance. 9 MR. BIRMINGHAM: The section that Mr. Vegh is 10 referring to is a new services section on page 54 of the 11 evidence. 12 Dr. Jackson, what I was speaking was the 13 existing storage and transportation services, the 14 transactional services that are listed at Exhibit C3.14. 15 And most of those are regulated services. They include 16 interruptible transportation, short-term transportation, 17 hot peak storage, rates that are set by the Board and 18 are subject to an existing rate schedule and Board- 19 approved terms and conditions. 20 There are some unregulated services as they 21 say, such as gas loans or name changes that have an 22 administration fee attached to them and aren't regulated 23 by the Board. I just struggle with the concept of 24 whether they are competitive or not only because, for 25 instance, with respect to peak storage or off-peak 26 storage, other parties do provide those types of 27 services. But clearly those -- a lot of those services 28 that we are providing within the transactional services Les Services StenoTran Services Inc. 613-521-0703 428 ELLIOTT/BIRMINGHAM 1 basket clearly are regulated -- are currently regulated 2 by the Board. 3 MEMBER JACKSON: Right. But you would have 4 the flexibility or the ability to generate some extra 5 revenue off gas which you have in storage. Is that what 6 I understand by this concept of loaning? And that 7 revenue is not traditionally forecast as part of the 8 revenue under the cost of service methodology like would 9 it have been in the last case forecast? 10 MR. BIRMINGHAM: The gas loans is a good 11 example. Typically the reason that we have extra gas in 12 inventory is because we are in the situation where the 13 weather has been warmer than normal. Parties have 14 continued to deliver their firm obligations, but the 15 demand, of course, is in meeting those obligations. So 16 we are in a situation where we are trying to mitigate 17 the level of inventory that we have. 18 And with respect to the gas loans, it is 19 typically a short-term period. We might loan it, for 20 instance, in December when we see that the demand isn't 21 what we expect it to be and require it to be redelivered 22 in March. So it would exist for three or four months 23 and there would be an administration fee that goes along 24 with that. 25 MEMBER JACKSON: Is this something which would 26 generally come under the heading of load balancing for a 27 customer too? When he borrows your gas and pays a fee, 28 does that balance his load for him? It may not be the Les Services StenoTran Services Inc. 613-521-0703 429 ELLIOTT/BIRMINGHAM 1 exact same thing as you have under the so-called load 2 balancing in your rate schedule, but it is another 3 method of his balancing the load that he wants to take 4 out of your system against the load which he is putting 5 in. Is that correct? 6 MR. BIRMINGHAM: That is typically not the 7 case, Dr. Jackson. The load balancing requires -- 8 particularly of direct purchase customers right now, 9 require them to balance annually within a plus or minus 10 4 per cent tolerance. The gas loans are typically made 11 to marketers who use that -- those molecules outside of 12 our franchise. Typically if there isn't a demand from 13 customers within the franchise, that is the reason. Why 14 it is in inventory so there usually isn't an incremental 15 demand infranchise for those volumes. 16 With respect to the ability to forecast which 17 is the question that you asked me before, if you would 18 go back to the history of these deferral accounts, in 19 fact, that was the very reason that they were put in 20 place, that the ability to forecast these types of 21 services in an annual rate case became contentious to 22 the point where deferral accounts were put in place so 23 it would help relieve some of that. 24 MEMBER JACKSON: Thank you. That has helped 25 me understand the nature of the transaction a little bit 26 better. Thank you. 27 THE PRESIDING MEMBER: Now we go to other 28 parties who may have questions. Les Services StenoTran Services Inc. 613-521-0703 430 ELLIOTT/BIRMINGHAM 1 MR. VEGH: Pardon me, sir. But if I may just 2 to clarify. My understanding now of where this is left, 3 if I could just have your indulgence for two minutes to 4 ask some subsequent questions arising from that? 5 THE PRESIDING MEMBER: If it is a question of 6 clarification on this subject matter, yes, not a new 7 area I hope. 8 MR. VEGH: Well, I won't push it, sir. I will 9 address this later. Thank you. 10 THE PRESIDING MEMBER: Thank you. 11 I have various people on the list. Mr. Waqu‚, 12 Mr. Rutwind, one of Mr. King, Mr. Keizer or Mr. Budd. 13 MR. KING: Yes. It is Mr. King here on behalf 14 of MECAP and the Wholesale Group. 15 THE PRESIDING MEMBER: Thank you, Mr. King. 16 CROSS-EXAMINATION 17 MR. KING: I would like to start with a few 18 questions on some of your introductory material and 19 looking specifically at pages 4 and 5 and what is titled 20 there, "Union's Objectives for the PBR Framework". You 21 list here nine objectives of your PBR plan. Are these 22 all of equal importance or can they be ranked or grouped 23 in any way? 24 MR. BIRMINGHAM: We hadn't attempted to rank 25 them at all, Mr. King. We had laid these out saying 26 that what we really tried to do is set up a framework 27 that would satisfy all of these objectives to the 28 greatest extent possible. Les Services StenoTran Services Inc. 613-521-0703 431 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 MR. KING: Looking at the first objective, you 2 refer to improving productivity. By those words I take 3 it you are referring to the stretch factor of 0.4? 4 MR. BIRMINGHAM: Well, what I was referring to 5 there is simply improving productivity, which we define 6 as growth, innovation and cost efficiency. And simply 7 that if we were going to move to a different regulatory 8 framework that improving that productivity should be one 9 of the benefits that comes out of the framework and that 10 there should be a sharing between the company and the 11 ratepayers with respect to that higher productivity 12 level. 13 MR. KING: Okay. Turning the page over, down 14 to line 16 on page 5, you refer to price and service 15 quality as the two items of most importance to 16 consumers. I have a couple of questions here. Sorry, 17 customers. 18 By customers I am assuming you mean all 19 infranchise customers? 20 MR. BIRMINGHAM: No, all of the customers who 21 purchase services from us. So that could be both 22 infranchise and exfranchise. It can be end users as 23 well as marketers. 24 MR. KING: Do you have any information or 25 background to support ranking price and service quality 26 as the two items most important, whether that be market 27 survey or something like that? 28 MR. BIRMINGHAM: No, sir, only our anecdotal Les Services StenoTran Services Inc. 613-521-0703 432 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 evidence and experience with customers when price 2 changes have gone through or where they have 3 difficulties with obtaining service or where they have 4 been calling to commend the utility about the service 5 quality that they receive. 6 And what we -- that comment was really 7 directed at are simply some observations from the 8 competitive market. When customers are shopping for 9 services, what they are focusing on primarily are the 10 price of the product or the service that they are 11 receiving and the quality of that product including any 12 service that goes along with that. So it was really 13 just trying to come up with a framework and focusing on 14 generally what customers place a lot of emphasis on when 15 they are making their buying decisions in the 16 competitive market. 17 MR. KING: Okay. I would like to move just to 18 one of the base rate adjustment items and that is 19 regulatory cost savings. If you could go to page 22 and 20 the table that we have been referring to, that is 21 Table 2. 22 MR. BIRMINGHAM: We have it. 23 MR. KING: The table shows that your 24 regulatory costs, that is for Union and intervenors, for 25 E.B.R.O. 499 total just over $3 million. Correct? 26 MS ELLIOTT: That is right. 27 MR. KING: And in the paragraph following that 28 you talk about one-half of this amount being recoverable Les Services StenoTran Services Inc. 613-521-0703 433 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 in Board-approved rates. 2 MS ELLIOTT: The practice is that the annual 3 rate hearing costs are amortized over a two-year period. 4 So one-half would be recovered in the year of the 5 application and the subsequent year. 6 MR. KING: So for 1999, you would have 7 recovered half of that, which would have been just 8 slightly over $1.5 million? 9 MS ELLIOTT: Yes. 10 MR. KING: If I go down to line -- down 11 further on the page you talk about a reduction of 12 approximately 60 per cent as being your estimate of the 13 regulatory cost savings you expect. 14 MS ELLIOTT: Yes. 15 MR. KING: Focusing on the $800,000 figure 16 that you have been tossing around, is it not more 17 accurate that that number should be $900,000 based on 18 the 1999 numbers, that being 60 per cent of the 19 $1.5 million? 20 MS ELLIOTT: In arriving at the 60 per cent, 21 we have really averaged the costs for the last three 22 proceedings to determine the $1.4 million per year as 23 opposed to the $1.5 million, which would be the 1999 24 costs. 25 MR. KING: So you have gone beyond just 26 looking at 1999 and E.B.R.O. 499, in this case anyways. 27 MS ELLIOTT: Yes. 28 MR. KING: I would like to talk a little bit Les Services StenoTran Services Inc. 613-521-0703 434 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 about depreciation expenses. I am going to be referring 2 to Exhibit B, Tab 2, Appendix H, Schedule 2. 3 You might also just want to get out 4 Exhibit C24.73. This is an interrogatory of MECAP. 5 MS ELLIOTT: That was C24 -- 6 MR. KING: Seventy-three. 7 MS ELLIOTT: Seventy-three. 8 --- Pause 9 MS ELLIOTT: Yes. 10 MR. KING: I'm looking at line 9 of 11 Schedule 2. 12 Your actual depreciation expense for 1999 was 13 almost $2.7 million less than the Board-approved figure. 14 MS ELLIOTT: That's correct. 15 MR. KING: And the interrogatory, in your 16 response to it you state that the decrease was due 17 primarily to lower expenditures and distribution of new 18 business. Correct? 19 MS ELLIOTT: Yes. 20 MR. KING: Now, on a going-forward basis under 21 your PBR plan, it is my understanding that any capital 22 expenditures related to new distribution business will 23 generate additional revenues and you will manage that 24 under PBR. Is that not right? 25 MS ELLIOTT: That's correct, yes. 26 MR. KING: Is it also true that any new 27 capital expenditures that take place in the future will 28 generate an associated depreciation expense which you Les Services StenoTran Services Inc. 613-521-0703 435 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 will also manage under your PBR framework? 2 MS ELLIOTT: Yes. 3 MR. KING: At the same appendix, could you go 4 to Schedule 6? 5 --- Pause 6 MS ELLIOTT: I have that. 7 MR. KING: At line 17, you have used the 8 provincial rate of 15.5 per cent for 1999. Is that 9 right? 10 MS ELLIOTT: Yes, that's correct. 11 MR. KING: Effective May 1st of this year the 12 provincial tax rate was decreased to 14.5 per cent. I 13 assume you know that. 14 MS ELLIOTT: Yes. 15 MR. KING: Will you take it, subject to check, 16 that the effective provincial tax rate for this year 17 will be 14.83 per cent? I have just used 15.5 prior to 18 May 1 and 14.5 afterwards. 19 MS ELLIOTT: That was 14.8 per cent? 20 MR. KING: Eight-three. 21 MS ELLIOTT: I will take that, subject to 22 check. 23 MR. KING: So if we were to update line 17 the 24 total tax rate then, I think, becomes 42.83 per cent 25 rather than 43.5? 26 MS ELLIOTT: Yes. 27 MR. KING: So to calculate your income taxes 28 using this new number, we would take line 11, your Les Services StenoTran Services Inc. 613-521-0703 436 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 taxable income, and multiply it by the 42.83 per cent, 2 correct? 3 MS ELLIOTT: That's correct. 4 MR. KING: Subject to check, then, I guess, I 5 calculate the income taxes in column B, the 6 Board-approved figures, to be reduced by $918,000 down 7 to $58 million 699. Will you take that subject to 8 check? 9 MS ELLIOTT: Yes. 10 MR. KING: If this Board were to conclude that 11 the appropriate starting point were the E.B.R.O. 499 12 approved rates, would you agree that the $918,000 13 reduction is appropriate to reflect the lower income 14 taxes? 15 MS ELLIOTT: Not for 1999, no. That is a tax 16 effect that took place in 2000. 17 --- Pause 18 MR. KING: How would account for the 2000 19 reduction then? 20 MS ELLIOTT: By definition, a tax change would 21 be a non-routine adjustment that would be dealt with in 22 the customer review process on an annual -- annually as 23 we went through to set rates for the following year as a 24 result of a legislation change in income tax rates. 25 MR. KING: All right. But it's now June and 26 the tax rate was changed May 1st. I would assume the 27 upcoming customer review process at the end of this 28 year, if there is one, would deal with the further Les Services StenoTran Services Inc. 613-521-0703 437 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 changes that are going to happen effective Jan. 1, 2001, 2 and then I will see the rates go down to 14 per cent 3 provincially and 27 per cent federally -- yes -- 4 which -- 5 MS ELLIOTT: To the extent that there are 6 significant cost reductions resulting from income tax 7 legislation, those will be dealt with in the customer 8 review process on an annual basis. So this income tax 9 change going forward would be dealt with in the 10 proceeding for 2001. 11 MR. KING: Could we now move to Exhibit B, 12 Tab 2, Schedule 6? Not this appendix, just Schedule 6. 13 MS ELLIOTT: I have that. 14 MR. KING: I'm looking at line 16. There is a 15 gross-up for tax year of $2,479,000. Am I correct in 16 assuming that this gross-up is based on a tax rate of 17 43.5 per cent? 18 MS ELLIOTT: Yes, I think that's the case. 19 MR. KING: Given that the return on equity 20 passthrough as proposed in your evidence is dependent on 21 the tax rate, will you be adjusting this passthrough on 22 an annual basis to reflect the change in tax rates over 23 the term of the PBR agreement? 24 MS ELLIOTT: Yes. We would be using the tax 25 rate in effect for the year that we were making the 26 change. 27 MR. KING: Thank you. 28 Those are my questions. Les Services StenoTran Services Inc. 613-521-0703 438 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 THE PRESIDING MEMBER: Thank you, Mr. King. 2 I don't see Mr. Scully, Mr. Rook, Mr. Poch, 3 Mr. Peterson, Mr. Aiken. 4 No questions? Ms Young and Ms Aldred? 5 So I think we have come to Mr. Janigan and 6 then we come back to Mr. Ryder. 7 Mr. Janigan. 8 MR. JANIGAN: Thank you, Mr. Chair. 9 FURTHER CROSS-EXAMINATION 10 MR. JANIGAN: I would like to start first with 11 the non-routine adjustments that have been proposed by 12 Union as part of the price cap framework and on page 34 13 of Exhibit B, Tab 2, you set out a definition of non- 14 routine adjustments, on line 12: 15 "Adjustments to prices over and above the 16 application of the price cap index that 17 will be made as a result of circumstances 18 currently unforseen and therefore not 19 contemplated within the proposed price 20 cap". (As read) 21 I want to go to some of the proposed Z-factors 22 that are listed on pages 36 and 37, and in particular I 23 would like to start with the adjustment that is 24 associated with the costs associated with providing 25 additional flexibility for customers respecting an 26 amount of volume subject to the 22-day call at Parkway. 27 That is under Item 5 on page 37. 28 Could you confirm that that cost is related to Les Services StenoTran Services Inc. 613-521-0703 439 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 the cost associated with providing a system-wide 2 solution that is noted on page 15 of the ADR Agreement? 3 MR. BIRMINGHAM: It was originally put in, 4 Mr. Janigan, to deal with the fact that we were working 5 out a number of different options to see if we could 6 provide some additional flexibility for customers and 7 the original reference was to the fact that we might 8 need to build additional Dawn-Trafalgar facilities to 9 provide that flexibility. 10 But should the Board accept our agreement with 11 respect to the unbundled services, then the cost to 12 provide additional flexibility for customers can be 13 removed as a non-routine adjustment because there is 14 going to be the system-wide piece for the initial 20 per 15 cent and then anything beyond that individual customers 16 will then contract for and pay for that additional 17 flexibility. 18 MR. JANIGAN: Now in terms of how that is 19 going to work, I take it through Appendix C, which is 20 attached to the PBR -- sorry, ADR Agreement. There will 21 be an amount allocated to rate classes based on fixed 22 1999 volume. Is that correct? 23 --- Pause 24 MS ELLIOTT: Could you repeat the question, 25 please? 26 MR. JANIGAN: As I understand the way 27 Appendix C works is that the way in which the 20 per 28 cent flexibility costs are going to be collected from Les Services StenoTran Services Inc. 613-521-0703 440 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 customers, is that there will be an amount allocated to 2 different rate classes based on 1999 volumes. 3 MS ELLIOTT: As I read this schedule, the 4 allocation of the costs is based on the design day 5 demand -- at least the majority of the costs. Column D 6 has $5,051,000 worth of costs and note two indicates 7 that it is allocated using Column B which is the design 8 day demand from E.B.R.O. 499. 9 MR. JANIGAN: And as volumes increase, will 10 the company collect more from different requests? 11 MS ELLIOTT: As this is built into our prices 12 and if it's recovered in a volumetric charge, the more 13 volume we move, we will increase our revenues. 14 Similarly, if we move less volume than forecasted, 15 revenues will be below this cost level. 16 MR. JANIGAN: Wouldn't the preferred method of 17 recovery of this cost item be by way of a deferral 18 account? 19 MS ELLIOTT: This is a cost that will be 20 incurred for at least the next three years. We are 21 proposing here to build into prices. What you are 22 suggesting is to dispose of it in each of the next three 23 years through a surcharge on rates or through a 24 disposition of a deferral account. This is a 25 prospective recovery from customers to recover those 26 costs. 27 MR. JANIGAN: But I would assume that the 28 intent is to match cost to rates. It's not intended to Les Services StenoTran Services Inc. 613-521-0703 441 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 be a money-earning or a money-losing exercise. 2 MS ELLIOTT: The intent is to recover the 3 costs. The easiest way to do that is to build it into 4 rates over the next three years. Union is at risk for 5 recovering less than its costs and it does have the 6 opportunity to recover more than its costs. 7 MR. JANIGAN: Now, back to Exhibit B, Tab 2, 8 on page 37. 9 I wonder if you would confirm that the Parkway 10 to Dawn delivery point flexibility issue is not related 11 to either unbundling or PBR. 12 MS ELLIOTT: Are you looking at Point 4? 13 MR. JANIGAN: That's correct. 14 MS ELLIOTT: Well, it is in fact related to 15 unbundling to the extent that customers choose unbundled 16 services and subsequently alter the supply arrangements 17 and are no longer delivery gas to the east end of our 18 system. 19 For those customers who are returned, who 20 could potentially be returned to us to supply them 21 without the east end's deliveries, we will have to incur 22 costs to acquire that capacity. So it is related to the 23 unbundling agreement. 24 MR. JANIGAN: I believe your evidence notes 25 that the reduced Parkway commitment involves both 26 bundled and unbundled customers. Is that correct? 27 MS ELLIOTT: You are back to the system-wide 28 solution for east end deliveries? Les Services StenoTran Services Inc. 613-521-0703 442 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 MR. JANIGAN: Yes. 2 MS ELLIOTT: As it applies to both unbundled 3 and bundled customers. 4 MR. JANIGAN: Would it not be more appropriate 5 for the utility to only cover the cost of that 6 flexibility and not to crate a situation where there is 7 an issue of managing risk in terms of a non-routine 8 adjustment? 9 MS ELLIOTT: I am sorry? 10 MR. JANIGAN: We are dealing with this issue 11 in the category of non-routine adjustments. 12 Essentially, this is something that is related to the 13 definition. These are matters which are unforeseen and 14 essentially not in the province of management to 15 control. 16 We have chosen to deal with this by way of a 17 non-routine adjustment on PBR. But in fact it involves 18 circumstances where there is an issue of managing risk 19 on the part of Union. And in addition in terms of the 20 recovery of cost that is not necessarily a one-to-one 21 transference of cost to rates. Would it not be better 22 that the utility recovered only the cost of this 23 flexibility? 24 MS ELLIOTT: Are you speaking about point 5? 25 MR. JANIGAN: No, I am speaking about point 4. 26 MS ELLIOTT: The intent here is to deal with 27 the issue of customers being returned to system which is 28 outside of our control. The customer chooses a direct Les Services StenoTran Services Inc. 613-521-0703 443 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 purchase option. Through the course and the passage of 2 time, that customer or their supplier changes the 3 upstream supply arrangements and they are at liberty to 4 do that within the parameters of our service. And then 5 the customer is returned to us to provide service to 6 them. 7 In the absence of having the upstream capacity 8 returned to us, we will have costs associated with that. 9 The non-routine adjustment is to deal with the costs 10 better incurred when they are incurred and the subject 11 of who will pay for them and how they will be recovered 12 would be dealt with during the customer review process 13 as well as what the costs are. 14 MR. JANIGAN: That was my next question and 15 you answered it. 16 In Exhibit B, Tab 2, page 35, line 4, you 17 indicate: 18 "It is therefore in the best interest of 19 all parties to minimize the number and 20 frequency of non-routine adjustments, and 21 to make such adjustments only when a 22 material impact occurs." 23 I wonder if you could give us some guidance on 24 what will constitute a material impact, particularly 25 with respect to a dollar amount? 26 MR. BIRMINGHAM: It is our view, Mr. Janigan, 27 that the significance or the materiality threshold that 28 we would consider would really be two different ones. Les Services StenoTran Services Inc. 613-521-0703 444 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 One would be where an individual items exceeds one and a 2 half million dollars on a pre-tax basis. And that would 3 be a charge or a reduction. So the non-routine 4 adjustments cut both ways. Or a cumulative change which 5 exceeds plus or minus three million dollars and that is 6 in the situation where no individual item would exceed a 7 million dollars but you could have an accumulation of a 8 couple of these items, which would then accumulate to 9 $3 million on a pre-tax basis. 10 And there is no particular science behind 11 those numbers. They are a matter of judgment. One item 12 we did look at was the recommendation by the Consumers 13 Association of Canada in RP-1999-01 where they are 14 recommending a materiality threshold in this same area 15 for Enbridge Consumers Gas of half a million dollars on 16 O&M. And O&M is roughly a third of the cost of service. 17 So extrapolating that over the comprehensive price cap 18 plan, we would come to something in the order of 1.5 19 million for an individual item, 3 million as a 20 cumulative change were no individual item were to meet 21 the $1.5 million threshold. 22 MR. JANIGAN: I wonder if I could skip ahead 23 to -- well, staying in non-routine adjustments, the 24 adjustment proposed for successful lawsuits against the 25 utility. 26 Can you indicate what is the basis for this 27 concern? 28 MR. BIRMINGHAM: The cost impacts caused by Les Services StenoTran Services Inc. 613-521-0703 445 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 successful lawsuits are limited and they are limited to 2 the two instances which are found at the top of page 37. 3 Let's deal with the second one first which is the cost 4 of Y2K litigation. 5 And at the time that this was prepared, of 6 course, we were still going through the whole Y2K 7 rollover, the mitigation of our systems to be able to 8 accommodate the change to the year 2000. And there was 9 some expectation at that time that should things not 10 turn out the way everybody hoped that there would be 11 some form of litigation almost regardless of how 12 prudently individuals had managed their affairs, and in 13 particular how companies had managed their affairs. 14 At this point, it is our view that the cost of 15 any Y2K litigation is so small that I think we could 16 remove that as a non-routine adjustment. We haven't had 17 any indication at this point that there would be 18 anything forthcoming. 19 Now, on the first issue, this is the issue 20 around the past assessment and the collection of delayed 21 payment revenue. And that was put in only because the 22 delayed payment revenue, while it has not been a charge 23 that has been regulated by the Board, has been included 24 in our cost of service for the purpose of setting rates. 25 And to the extent that there was a successful judgment 26 against Union with respect to the level and the 27 assessment of that delayed payment revenue, then there 28 presumably would have to be some sort of corresponding Les Services StenoTran Services Inc. 613-521-0703 446 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 remediation that went along with that. 2 I suspect it would be a fairly complicated 3 case to resolve if there was that kind of judgment. 4 Because on the one hand you have the delayed payment 5 revenue being collected from one group of customers that 6 now would presumably have to be redistributed in some 7 fashion. That would obviously be the subject of some 8 form of court order and ultimately, I think, the Board 9 would end up approving it. So we are making a 10 combination for that possibility even though at this 11 point we don't think that there is a strong likelihood 12 of it coming forward. 13 MR. JANIGAN: Thank you. I would like to 14 proceed to the passthrough items and in particular I 15 would like to start with the ROE proposed passthrough. 16 And I would like to refer you to the evidence of 17 Dr. Bauer on page 28. 18 MR. BIRMINGHAM: Mr. Janigan, just to make 19 sure that we get the right reference. We had some 20 pagination difficulties when we were referring to 21 Dr. Bauer's evidence yesterday. And just to make sure 22 that we are in the right section, my page 28 starts with 23 the escalation formula and I take it that is not where 24 you want us to go. 25 MR. JANIGAN: No. 26 MR. BIRMINGHAM: Which subsection is it that 27 you want us to go? 28 MR. JANIGAN: 5.2.2, Determination of the Les Services StenoTran Services Inc. 613-521-0703 447 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 Input Price Inflation. 2 MR. BIRMINGHAM: We have it now. Thank you. 3 MR. JANIGAN: What I am referring to as the 4 final sentence -- two sentences of that particular 5 Section 5.2.2 where Dr. Bauer indicates: 6 "If the input price inflation measure 7 were to be adjusted on an annual basis, 8 no such ROE adjustment would be required 9 as the overall inflation also reflects 10 the cost of capital in an economy. Only 11 in this latter approach would Union work 12 under a comprehensive incentive 13 mechanism." (As read) 14 I wonder if you could respond to that and whether or not 15 you agree with him that in the event that we decided 16 upon an inflation measure that would be adjusted on an 17 annual basis that it would be unnecessary to take ROE 18 out of the PBR formula? 19 MR. BIRMINGHAM: We don't agree obviously that 20 if the inflation measure was to be adjusted on an annual 21 basis that the return on equity passthrough should be 22 eliminated. 23 To the extent that the inflation measure was 24 adjusted annually, then that presumably would capture 25 some level of change with respect to the cost of 26 capital. But with respect to the impact on Union, 27 because of the heavy weighting of capital that we have 28 in the utility compared to the overall economy, we don't Les Services StenoTran Services Inc. 613-521-0703 448 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 believe that it captures the effect appropriately. And 2 you can see that different weighting that Union has with 3 respect to its capital weighting in the input price 4 index compared to the Canadian economy in Union's 5 response to Exhibit C1.90. 6 So really what Union is doing is using the 7 return on equity passthrough for the existing rate base 8 only as that goes up and down, and the GDPPI forecast as 9 a way to start to take a small measure towards creating 10 what will ultimately be, we hope, an industry specific 11 index which we have committed to developing for the 12 second generation of parameters. 13 The one comment I would make, Mr. Janigan, is 14 that to the extent that the inflation factor was 15 adjusted annually, I do think that there is an impact on 16 the non-routine adjustments, and that is: Right now 17 Union is proposing a fixed cap which, because it is 18 fixed, we are suggesting that the economy-wide 19 legislative and regulatory-type changes then be 20 incorporated in our non-routine adjustments. 21 But to the extent that we went to an annual 22 inflation adjustment, then I think what would happen is 23 that you would then go to more of an industry-specific 24 non-routine adjustment for those items, because 25 presumably the economy-wide impact would, at least to 26 some extent, be captured in the annual inflation factor, 27 but we don't agree that it has that same effect to the 28 return on equity. Les Services StenoTran Services Inc. 613-521-0703 449 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 MR. JANIGAN: I guess I'm curious why on a 2 forward-looking basis you were content to use an 3 economy-wide measure such as the GDPPI to give your 4 inflation measure -- well, to estimate historical 5 productivity, but you are not content, on a year-to-year 6 basis, to use that same index or something like it to 7 adjust for changes in the capital market. 8 MR. BIRMINGHAM: And the reason for that is 9 that we don't believe that the annual inflation factor 10 captures the impact of changes in interest rates as they 11 affect Union. One of the significant reasons for that 12 is the significant weighting of capital that Union has 13 compared to the economy in its input prices. 14 MR. JANIGAN: But that same criticism might be 15 made of the use of GDPPI to measure inflation and 16 historic productivity, would it not? The inputs that 17 Union has of 65 per cent of its costs are 18 capital-weighted. If you are attempting to use the same 19 measures to look at historical productivity, for 20 example, you are bound to be off because of the same 21 reasons that you have indicated for not using the 22 economy-wide measure to adjust ROE. 23 Do you understand what I mean? 24 MR. BIRMINGHAM: I don't think so, but let me 25 take one shot at it. 26 --- Laughter 27 MR. BIRMINGHAM: When we determined our 28 historical productivity we in fact used the weightings Les Services StenoTran Services Inc. 613-521-0703 450 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 that are contained in Exhibit C1.90 and in the evidence 2 of Christensen and Associates. 3 With respect to setting the next generation of 4 price cap parameters, we have indicated that we want to 5 work with parties to try to develop an industry-specific 6 input price index. 7 What we have in this proceeding, in my view, 8 is a step toward that industry-specific price index by 9 using GDPPI and having the return on equity passthrough, 10 because then the GDPPI, in combination with the return 11 on equity passthrough, starts to give that higher 12 weighting of capital to the utility that isn't contained 13 in the economy-wide measure. 14 MR. JANIGAN: If I could deal with your 15 opposition to earning sharing. 16 I believe you have indicated, in your answers 17 to interrogatories in particular, that the Board need 18 not impose an earning sharing as part of an ongoing PBR 19 scheme because of the historical experience that it has 20 had in reviewing Union's cost of service. Therefore, 21 unlike the situation with electricity in Ontario, we can 22 have more confidence that we have gotten the parameters 23 initially correct. 24 Am I correct in that summation? 25 MR. BIRMINGHAM: I think that captures part of 26 the rationale, Mr. Janigan. Certainly, it's our view 27 that with the long history of regulation before the 28 Board, that is one of the considerations that the Board Les Services StenoTran Services Inc. 613-521-0703 451 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 can use in determining whether the price cap parameters 2 are properly specified or not. 3 But the other ones that we have stated in the 4 evidence is that we are using just and reasonable rates 5 as a starting point for our PBR. We do use a 6 well-accepted inflation factor, that is GDPPI, as the 7 escalator. We valuate our productivity using the most 8 widely accepted analytical framework underneath TFP. We 9 have a stretch factor that has been included in there. 10 We have regulatory costs which we are explicitly 11 reducing. We have narrowly defined both the passthrough 12 items and the non-routine adjustments. 13 So I guess from out standpoint, when you look 14 at all of that and you say the cost to the typical M2 15 customer might be something in the order of 90 cents a 16 month, we think that there is good reason why the Board 17 doesn't need to be concerned about setting the 18 parameters. 19 Now, with respect to your question about the 20 earnings band or earning sharing in particular, it is 21 our view that earning bands or earning sharings are only 22 put in place as a protective measure against some type 23 of unfavourable outcome. So to the extent that you knew 24 which price cap parameter of your plant was creating 25 that unfavourable outcome, you would change the 26 parameter and eliminate any sort of earnings sharing. 27 So it really only has to be -- or from Union's 28 standpoint the determination is not whether there should Les Services StenoTran Services Inc. 613-521-0703 452 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 be some sort of earnings sharing mechanism, but rather 2 whether the way that the price cap parameters specified 3 under some scenarios could give some range of 4 unacceptable outcomes -- and it should only be used in 5 respect of the protection against that range of 6 unacceptable outcomes. 7 So, from our standpoint, the incentive under 8 PBR is really determined through the pricing formula and 9 it is in combination with the term of the agreement and 10 the criteria for resetting really gives the incentive 11 for the higher productivity. It's only when you look at 12 the parameters and if there are some unacceptable 13 outcomes from the Board's standpoint that they think 14 could be generated from those price cap parameters, then 15 I think the earnings sharing might be appropriate. 16 But it's our view that because of the way they 17 were set then we don't need one. 18 MR. JANIGAN: Do you believe that -- well, let 19 me rephrase that. 20 The PBR plan is being put in place at the same 21 time as the first major unbundling of activities of a 22 gas distribution utility is taking place, is it not? 23 MR. BIRMINGHAM: We are introducing our price 24 cap proposal at the same time that we are offering the 25 option of more unbundled services, but from our 26 standpoint, Mr. Janigan, I think this isn't the first 27 type of unbundling that has happened. As you know, the 28 commodity started way back when. We have been moving Les Services StenoTran Services Inc. 613-521-0703 453 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 toward further unbundled services with the introduction 2 of things like T-service. And so we describe that 3 process in our response to Exhibit C1.63 that talks 4 about why PBR and unbundling are being introduced, and 5 we really see this as just another step in that 6 longer-term process. 7 MR. JANIGAN: But as of this current time I 8 believe your evidence indicates that the overall cost 9 impact of unbundling cannot be known. You are willing 10 to manage it, but you don't know the specifics of that 11 at the moment. 12 MR. BIRMINGHAM: What the overall impact on 13 Union would be from offering the unbundled services? 14 No, I think we tried to quantify individual 15 items with respect to that, that is the impact on -- or 16 the potential impact on the storage and transportation 17 transactional revenues, and we have asked for a deferral 18 account with respect to the costs that we need to 19 implement the systems to offer the services. 20 But to the extent that -- what all the impacts 21 might be on Union from the unbundled services, I think 22 it's fair to say that we don't know all of them yet, no. 23 MR. JANIGAN: And you are unable to quantify 24 what revenues may be available from new services or, in 25 fact, what changes in the industry that are occurring 26 now or that are contemplated might have on costs and 27 revenues at present. 28 MR. BIRMINGHAM: Well, we have been able to Les Services StenoTran Services Inc. 613-521-0703 454 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 quantify, I think, most of the exposures as we see them. 2 Beyond that, to the extent that things start to change 3 more, for instance through the Distribution Access Rules 4 or through some other mechanism, then we do have a 5 process in place to deal with that. But we can't look 6 into the future and know exactly what is going to 7 happen, that's right. 8 In fact, it's one of the -- from my 9 standpoint, one of the benefits of the price cap 10 regulation is that it gives you the ability to respond 11 more quickly to some of those changes. 12 MR. JANIGAN: But all of these are new 13 uncertainties that to some extent undermine the 14 confidence that we might have in the cost of service -- 15 historic cost of service regulation -- that the Board 16 has had over Union in terms of composing price cap 17 parameters or imposing an earning sharing as a kind of 18 incentive measure against failure of the plan. 19 MR. BIRMINGHAM: I don't think so, 20 Mr. Janigan. It's one of the reasons why when we looked 21 at our historical productivity we chose a relatively 22 long period so we could capture some of those types of 23 changes. 24 MR. JANIGAN: But the situation where 25 historical productivity was measured is not the 26 situation that we are going to be working on though, is 27 it? 28 MR. BIRMINGHAM: In what respect, sir? Les Services StenoTran Services Inc. 613-521-0703 455 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 MR. JANIGAN: Well, because of the changes to 2 the industry with respect of unbundling services, 3 competition, et cetera, et cetera. 4 MR. BIRMINGHAM: No. There will different 5 changes, but there are a number of changes over that 6 ten-year period as well. 7 MR. JANIGAN: Now, in dealing with historical 8 productivity -- I don't want to get into the mechanics 9 of the calculation of the formula which I intend to 10 raise with your expert panel. But very briefly, on the 11 transcript in day one, in your opening remarks, 12 Mr. Birmingham, on page 20. 13 MR. BIRMINGHAM: Page 20 of the transcript? 14 MR. JANIGAN: Volume 1, where you were dealing 15 with the reasons for the negative TFP, you indicated 16 that: 17 "This is not surprising given that use 18 per customer has been declining, that 19 cost inflation and legislative changes 20 such as pay equity have increased the 21 input costs. There have been increases 22 in other costs such as regulatory 23 expenses and demand-side management with 24 output which is not measured by the TFP, 25 and that there has been no significant 26 technology advancement in the natural gas 27 industry. It's not like the telecom 28 industry". Les Services StenoTran Services Inc. 613-521-0703 456 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 But I note on Exhibit C1.111, Board Staff 2 Interrogatory, you set out some additional reasons 3 therein and in particular -- sorry, I guess it's 4 Ms Elliott's interrogatory -- that: 5 "One primary reason for the volatility is 6 that increases in capital will not move 7 in lock step with changes in output". 8 And you noted that: 9 "Other potential causes of negative 10 productivity performance for Union 11 include the use of a portfolio approach 12 to system expansion which allows 13 expansion with profitability index of 14 less than one to proceed". (As read) 15 Now, given the capital-intensive nature of 16 Union's business, is it not more likely that these two 17 factors which I have outlined are the major driving 18 causes behind the negative productivity number? 19 MS ELLIOTT: I think if you look at the 20 productivity calculation, we did it two ways. The first 21 way through we measured output based on the number of 22 customers. You will find that the input price and the 23 output price are keeping pace with each other for a zero 24 productivity in the latest -- the revision at say .1 per 25 cent productivity. When we, however, measure output 26 based on volume throughput, which is how our revenues 27 are actually delivered in the general service market, 28 that is where we find the productivity falling into the Les Services StenoTran Services Inc. 613-521-0703 457 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 negative range. 2 So I would say the negative productivity is 3 generally the result of the more efficient use, the 4 declining use per customers, the efficient appliances. 5 We have managed the capital input costs to keep pace 6 with the output, if output is measured by customers. If 7 output is measured by volume, however, we do see the 8 productivity go negative. 9 MR. JANIGAN: So you would alter this 10 interrogatory to eliminate the idea that the primary 11 reason is that increases in capital will not move unless 12 there is change in output. 13 MS ELLIOTT: Well, clearly if you look at the 14 year over year volatility on the productivity factor you 15 will see the years where there has been a major capital 16 expenditure that raises the input price. 17 MR. JANIGAN: So the primary driver, in your 18 view, for negative productivity numbers is increased use 19 of efficiency appliances by customers? 20 MS ELLIOTT: On average, as you go through 21 calculating the average productivity over the ten-year 22 period of time, the negative productivity factor arises 23 when you measure output using volume. 24 MR. JANIGAN: Finally with respect to the term 25 of the plan, I believe your evidence and answers to 26 interrogatory indicates that you require a five-year 27 plan to capture the efficiencies that have been started 28 during the plan. Is that an appropriate reflection of Les Services StenoTran Services Inc. 613-521-0703 458 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 your position? 2 MR. BIRMINGHAM: I think one of the reasons 3 that we had suggested this term, Mr. Janigan, is really 4 to ensure that if there is going to be an incentive for 5 higher productivity, that those productivity increases 6 are going to come at some cost, and to the extent that 7 the utility has to make those investments, it should 8 have an opportunity to recover those costs and to then 9 start to achieve a higher of productivity subsequent to 10 that. 11 In addition, because a lot of those 12 productivity gains we expect are going to come from 13 changes to our business processes and learning to 14 operate in a more competitive environment, there is 15 going to be some impacts on our employees with respect 16 to new skills training and getting them up to speed to 17 be able to operate in a different environment and that 18 is going to take some time as well. 19 I think our concern generally is that the 20 shorter the term, the lower the incentive you really 21 have to invest any sort of significant amounts in your 22 employees or in your systems to be able to achieve the 23 higher productivity gains because you then run the risk 24 of incurring the costs but not having those costs 25 returned through the productivity gains to which they 26 are associated. 27 MR. JANIGAN: Now as I understand that 28 evidence that we have been debating over the last few Les Services StenoTran Services Inc. 613-521-0703 459 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 days, there seems to be efficiencies that the company 2 has already started upon that it wishes to recapture in 3 the context of the PBR plan. 4 MR. BIRMINGHAM: We have started our business 5 restructuring and that is done in part with respect of 6 knowing, or at least anticipating that we will be under 7 a performance-based regulation framework, but that is 8 only part of it and that is one of the ways that we can 9 commit to and meet the higher productivity level that we 10 expect will be in the pricing formula and also to try to 11 prepare our employees to be able to operate in that 12 environment as well. 13 I think the other thing with respect to the 14 term, Mr. Janigan, is that you need a sufficient period 15 when you are operating under a different framework to be 16 able to really see how things are working out and that 17 would include things like, for instance, the negotiated 18 rates and what, in fact if any, there is from that type 19 of parameter included in the plan. So part of it is 20 being able to see how the plan works and being able to 21 measure and assess the results of the plan. 22 MR. JANIGAN: As I understand your response, 23 Mr. Birmingham, a lesser term may be doable, but a five- 24 year term is preferable. Would that be? 25 MR. BIRMINGHAM: Pardon me? 26 MR. JANIGAN: Although a lesser term than five 27 years may be doable, but five years is preferable. 28 MR. BIRMINGHAM: Certainly five years is Les Services StenoTran Services Inc. 613-521-0703 460 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 preferable. My view is that a shorter term means that 2 you have to change the other parameters within the price 3 cap plan because you can no longer have as big a stretch 4 factor if you are going to have a shorter term. 5 MR. JANIGAN: Thank you. I just have one 6 final question on the previous section. 7 I noted that in the transcript comment that I 8 referred to on page 20 that you indicated that it is not 9 like the telecom industry. I take it from that that you 10 would view that comparisons between productivity levels 11 of telecom and gas is not a useful exercise. 12 MR. BIRMINGHAM: I think that is fair and it 13 is primarily around the significant technological change 14 that that industry is going through where we don't have 15 a corresponding type of initiative in the natural gas 16 industry. 17 MR. JANIGAN: So that it would probably be 18 incorrect to transplant measurements of the different 19 components of the PBR regime, for example, in the 20 Canadian telecom sector to the Ontario gas industry. 21 MR. BIRMINGHAM: I think that is generally 22 true, Mr. Janigan, even with respect to existing PBR 23 mechanisms for natural gas utilities. I think you do 24 have to carefully look at the context in which they are 25 set to determine whether it is appropriate to use a 26 particular parameter or not. 27 MR. JANIGAN: Thank you, Mr. Chair. 28 Those are all my questions. Les Services StenoTran Services Inc. 613-521-0703 461 ELLIOTT/BIRMINGHAM, cr-ex (Janigan) 1 Thanks to Mr. Ryder and to the Union panel for 2 accommodating me. 3 THE PRESIDING MEMBER: Thank you, Mr. Janigan. 4 Mr. Ryder, I thought we would take our break 5 and then you can have a straight run through your cross- 6 examination. It's 3:15 now. If we came back at say 7 3:35 then you will be clear sailing as opposed to an 8 interruption. People are getting very restless. 9 MR. RYDER: Thank you. 10 THE PRESIDING MEMBER: So if we break now and 11 come back at 3:35, at which point, Mr. Ryder can take 12 over. 13 --- Upon recessing at 1515 14 --- Upon resuming at 1535 15 THE PRESIDING MEMBER: Mr. Ryder. 16 MR. RYDER: Thank you, sir. 17 MR. BIRMINGHAM: Mr. Chairman, before we get 18 going -- sorry for interrupting, but as I left the stand 19 a number of my colleagues gang-tackled me and thumped me 20 resoundingly. 21 When I was explaining the non-routine 22 adjustment for the delayed payment revenue to 23 Mr. Janigan, I believe I might have indicated that the 24 Board did not regulate the delayed payment charge and 25 that's clearly wrong. I misspoke myself. The Board has 26 regulated that charge for a number of years. 27 Thank you. 28 THE PRESIDING MEMBER: Mr. Lyle, do you have Les Services StenoTran Services Inc. 613-521-0703 462 ELLIOTT/BIRMINGHAM 1 any comments you need to -- 2 MR. LYLE: No, not at this point. 3 THE PRESIDING MEMBER: Fine, thank you. 4 --- Pause 5 THE PRESIDING MEMBER: Mr. Ryder, would you 6 like to proceed? 7 MR. RYDER: Yes, thank you, sir. 8 CROSS-EXAMINATION 9 MR. RYDER: In Exhibit B, Tab 2, at page 4, 10 you have set out your objectives for the PBR plan. 11 MR. BIRMINGHAM: That's right. 12 MR. RYDER: I note that non-specifically 13 referred to the achievement of just and reasonable 14 rates. I take it that it's not an oversight, but it's 15 your view that just and reasonable rates are implicit in 16 each of those objectives. 17 MR. BIRMINGHAM: They are implicit as an 18 objective of and an outcome of the PBR framework. 19 MR. RYDER: And just and reasonable rates 20 continues to be the legislative standard for rate 21 setting under the new Act. 22 MR. BIRMINGHAM: That's right. 23 MR. RYDER: Now, do you agree that just and 24 reasonable rates includes a just and reasonable rate 25 design -- and by design, I mean the relationship between 26 the rates. 27 --- Pause 28 MR. BIRMINGHAM: Yes, I would agree with that, Les Services StenoTran Services Inc. 613-521-0703 463 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 Mr. Ryder. 2 MR. RYDER: And in each cost of service rate 3 hearing over the years, the rate design portion of the 4 Board's hearing deals with a number of documents that 5 show the relationship between the rates as part of your 6 cost allocation filing. 7 MR. BIRMINGHAM: There is both cost allocation 8 and rate design evidence, and they would show the 9 relationship between the rates as proposed in that 10 particular application, yes. 11 MR. RYDER: And just to list the cost --sorry, 12 the rate design documents -- that are regularly filed, 13 one is the over and under contribution of each class 14 before and after revenue recovery. Do you recall that? 15 MR. BIRMINGHAM: Yes, these are the revenue to 16 cost ratios. 17 MR. RYDER: No, this is the over and under 18 contribution of each class before and after revenue 19 recovery. That's one of the documents as filed. 20 MR. BIRMINGHAM: I believe that's right. 21 MR. RYDER: And then the other one is the 22 ratio of revenue to costs, before and after revenue 23 recovery? 24 MR. BIRMINGHAM: That's right. 25 MR. RYDER: And both of these documents show 26 the results over an extended period of time -- four or 27 five years of history? 28 MS ELLIOTT: There have in the past been Les Services StenoTran Services Inc. 613-521-0703 464 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 schedules that produce the over and under contribution 2 before and after and the revenue to cost ratios over 3 time. I can't speak for the last proceeding, but prior 4 to that, yes, those schedules were prepared. 5 MR. RYDER: And another document shows the 6 return on allocated rate base and the return on rate 7 base? 8 MS ELLIOTT: Yes, that document has been 9 prepared in the past. 10 MR. RYDER: Well, there are two documents. 11 One is the return on rate base and the other is the 12 return on rate base allocated to each class. 13 MS ELLIOTT: The return on rate base in total 14 for the company, and then the return on rate base 15 allocated to each class, yes. 16 MR. RYDER: And in Interrogatory C7, question 17 39, you told us that the ongoing cost of preparing a 18 cost allocation study is $246,000 annually for each 19 study. 20 MS ELLIOTT: Those are the direct costs 21 associated with preparing the study, yes. 22 MR. RYDER: And the study that you would give 23 us for $246,000 includes the four documents we have just 24 discussed? 25 MS ELLIOTT: Among other things, yes. 26 MR. RYDER: Now, Ms Elliott, do you agree that 27 these documents show us that after each rate case the 28 revenue to cost ratio and the over and under Les Services StenoTran Services Inc. 613-521-0703 465 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 contribution is set by the Board, and then by the time 2 they get to the next rate case, the relationship set by 3 the Board has altered so that the subsequent rate case 4 moves the relationship back into an acceptable ratio? 5 MS ELLIOTT: I can't say that I agree that the 6 Board sets the ratio of revenue to cost or the amount of 7 the over and under contribution. The Board approves the 8 rates, or alters the rates, as proposed by Union. One 9 of the factors that is considered in designing rates is 10 the relationship to cost. But I can't agree that that's 11 what the Board targets in setting those rates. 12 But I do agree that there is a relationship to 13 cost, and as costs change, rates will change, but not 14 necessarily in sync at all times. 15 MR. RYDER: That's not quite my point. My 16 point is that the Board uses these relationship document 17 as a guide to ratemaking. Would you agree with that? 18 MS ELLIOTT: The cost allocation study has 19 been under cost of service one of the components used to 20 determine the reasonableness of the rates, yes. 21 MR. RYDER: So it's a guide to ratemaking. 22 MS ELLIOTT: Yes. 23 MR. RYDER: Thank you. 24 And the relationship that results from a rate 25 order changes during the course of the test year that 26 the rate order applies. 27 MS ELLIOTT: I'm sorry. Could you repeat 28 that? Les Services StenoTran Services Inc. 613-521-0703 466 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 MR. RYDER: The relationship that reflects the 2 Board's rate order, in any case at the beginning of a 3 test year, changes as you proceed through a test year. 4 MS ELLIOTT: Which relationship are you 5 referring to? 6 MR. RYDER: The relationship between classes, 7 revenues and its costs. 8 MS ELLIOTT: As we go through the year, actual 9 revenues and actual costs may produce a different 10 relationship than that which was set at the start of the 11 year, yes. 12 MR. RYDER: Yes. And the further you go out 13 in time, the more the relationship between revenues and 14 costs that was reflected at the beginning of the -- as 15 soon as the Board made its order, that relationship 16 breaks down over time? 17 MS ELLIOTT: I can't say that I have ever 18 studied the relationship between revenues and costs 19 outside of the forecast cost allocation study and the 20 proposed rates. 21 MR. RYDER: Well, let me give you a precise 22 example. In a rate case say of 493, the Board would 23 determine just and reasonable rates and it would have a 24 revenue to cost ratio that reflects those rates. Right? 25 MS ELLIOTT: Yes. 26 MR. RYDER: And that would be the 27 revenue-to-cost ratio at the beginning of the test year. 28 And then as you proceed through the test year and you Les Services StenoTran Services Inc. 613-521-0703 467 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 get to the next case which is 499 you have another 2 revenue to cost ratio before recovery and it would be 3 quite a different revenue to cost ratio for each rate 4 class. 5 MS ELLIOTT: I am not sure that I can agree 6 that it would be different as you move through the year. 7 It is possible that there is a difference between the 8 revenue and the cost ratio in a subsequent period, yes. 9 But I don't know for a fact whether they have been 10 different and by how much. 11 MR. RYDER: Well, would you produce for me 12 then the revenue to cost ratios resulting from the rate 13 fixed by the Board in -- sorry -- the revenue-to-cost 14 ratios before and after revenue recovery filed by the 15 Board in the last three rate cases and so we can 16 demonstrate this point without further argument? 17 MS ELLIOTT: You are looking for the schedules 18 that would have been produced in evidence in 499? 19 MR. RYDER: Yes, 499 and then the one before 20 that was 493, 494 and the one before that just to give a 21 complete picture. 22 MS ELLIOTT: I can do that. 23 MR. LYLE: We will make that Undertaking G3.5. 24 UNDERTAKING NO. G3.5: Ms Elliott to 25 provide the revenue to cost ratios before 26 and after revenue recovery filed by the 27 Board in the last three rate cases 28 MR. RYDER: And that is the revenue to cost Les Services StenoTran Services Inc. 613-521-0703 468 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 ratios before and after revenue recovery. 2 Now, just so you know where I am going with 3 this, it is my submission that those documents will show 4 that the relationship to cost breaks down over time. 5 The relationship established by the rate order to cost 6 breaks down the further you get away from that rate 7 order. All right. 8 Now, in your PBR plan we have a five-year 9 term. All right. 10 MS ELLIOTT: Yes. 11 MR. RYDER: And in addition to the changes 12 imposed by the price cap there will be changes -- and by 13 the PBR plan, there will be changes imposed by the 14 flexibility component of the plan? 15 MS ELLIOTT: Changes to rates during the term 16 of the plan will be guided by the plan parameters which 17 will include the price flexibility parameters, yes. 18 MR. RYDER: And the flexibility will operate 19 to further change the relationship between costs and 20 revenues that existed in 499? 21 MS ELLIOTT: Since we are not doing cost of 22 service or cost allocation studies under a price cap 23 plan, I am not sure I can speak to how the relationship 24 will -- what the relationship between prices and costs 25 will be during the term. 26 MR. RYDER: Well, the customers that are 27 subject to the flexibility provision will be pushed 28 further away from costs than the customers that are not Les Services StenoTran Services Inc. 613-521-0703 469 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 subject to the flexibility provision? 2 MS ELLIOTT: I don't know that, no. 3 MR. RYDER: So you don't know the impact of 4 the flexibility component of your plan on the 5 relationship between the rates? 6 MS ELLIOTT: On the relationship between 7 revenues and costs. I will know the impact of the 8 flexibility on the relationship between rates. The 9 flexibility will in fact be used to maintain a 10 relationship between rates. 11 MR. RYDER: Well, we will come to that in a 12 second. 13 In your plan you say that the link between 14 costs and rates has been broken? 15 MS ELLIOTT: Yes, that is one of the 16 fundamentals of a price cap plan. It is the price that 17 is changed on an annual basis based on outside factors 18 included in the price cap parameters. 19 MR. RYDER: So what is the standard to assess 20 the reasonableness of your rate design if we do not have 21 costs to assess the rate levels against? What is our 22 new bench mark that replaces our relationship to costs? 23 MS ELLIOTT: The standard of reasonableness is 24 in the determination and the setting of the plan 25 parameters. So the starting point, the base rates, the 26 price cap formula and the adjustments to that formula 27 that we are here in this proceeding to establish. 28 MR. RYDER: But the plan parameters don't Les Services StenoTran Services Inc. 613-521-0703 470 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 maintain a relationship to costs at all, do they? 2 MS ELLIOTT: No, they don't. 3 MR. RYDER: No. And so we knew a number that 4 we could compare our rate level with in order to assess 5 the reasonableness of our rate level. We knew, we had a 6 cost number. What is the best mark equivalent to that 7 in terms of certainty? 8 MS ELLIOTT: On a going forward basis the 9 bench mark will be that the rates proposed on an annual 10 basis adhere to the conditions established in the plan. 11 So they comply with the parameters laid out that will be 12 defined as a result of this proceeding. 13 MR. RYDER: But the parameters are different 14 for the basket 1A and basket 1B? 15 MS ELLIOTT: But they are all predefined 16 parameters in advance of going forward into the plan. 17 MR. RYDER: And is it possible to have a true- 18 up at the end of the price cap term, PBR term of the 19 allocated cost to bring the rates back into conformity 20 with some acceptable relationships to costs? 21 MR. BIRMINGHAM: It is certainly possible, 22 Mr. Ryder, but I don't think -- certainly Union would 23 not recommend it. One of the problems with doing that 24 resetting based on cost is the fact that it really does 25 blunt the productivity incentive that the price cap was 26 originally designed to achieve. That is everybody knows 27 that you are returning to cost of service, then 28 presumably all that is going to happen in the PBR term Les Services StenoTran Services Inc. 613-521-0703 471 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 is whatever productivity gain, net of cost that you can 2 achieve within that limited time period. And then your 3 returning to cost of service therefore will take away 4 any sort of longer term incentive that might be 5 available. 6 In addition, to the extent that through the 7 PBR term that the revenues and cost for a particular 8 class in fact do diverge from where they are now, I 9 don't know what you would do with that when you have 10 some difference that parties want to rectify. 11 MR. RYDER: Well, without knowing the costs 12 for each reclass periodically, how can we tell that the 13 relationship between the rate is a fair one? 14 MS ELLIOTT: Well, you are asking about the 15 relationship between rates and the rates will be 16 presented on an annual basis and their relationship 17 between each other will be reviewed at each customer 18 review process. 19 So to the extent that one rate, for example 20 the general service rate, is increased and that rate has 21 an impact on the small contract customers' rate, it is 22 not advisable for us to increase one set of rates and 23 not maintain the relationship between the next set or we 24 will have customers moving between rate classes causing 25 an unstable revenue situation. 26 MR. RYDER: But what is the standard that you 27 assess what is a proper relationship between rate if it 28 is not costs? What are the factors which determine what Les Services StenoTran Services Inc. 613-521-0703 472 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 is a proper relationship, apart from market expediency? 2 MS ELLIOTT: Well, the relationship between 3 prices is reviewed on an ongoing basis. Between the 4 different rate classes and the classes of service, in 5 order to establish the new prices the relativity of 6 those services amongst themselves and between rate 7 classes is one of the considerations for setting new 8 prices. 9 MR. RYDER: Well, say all the prices aren't 10 fair, then I guess you can say the relationship is fair, 11 but how do we know that the rates are fair? 12 MS ELLIOTT: Well, we are starting with a 13 Board-approved set of rates that have viewed to be fair, 14 just and reasonable and escalating it based on planned 15 parameters with the conditions of flexibility that are 16 established. The outcome should be fair, just and 17 reasonable rates. 18 MR. RYDER: So the result is that the 19 benchmark continues to be costs -- the allocated 20 costs -- but the costs allocated in 1999. Right? 21 That is the last time the Board assessed the 22 reasonableness of the cost-to-revenue ratios. 23 MS ELLIOTT: I am not suggesting that we would 24 benchmark rates in 2003 based on 1999 costs. We are 25 starting with the 1999 rates which have been approved by 26 the Board. We will be applying the formula in the 27 planned parameters each and every year during the term 28 of the agreement. Those parameters have been approved Les Services StenoTran Services Inc. 613-521-0703 473 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 and will produce just and reasonable rates. The 2 relationship between rate classes is something that can 3 be reviewed during the customer review process. If it 4 is determined that one service has been priced by 5 increasing it 2 per cent then a comparable service in 6 another rate class has to be priced the same way. We 7 can't diverge prices between rate classes. 8 MR. RYDER: Well, except that the prices are 9 going to be altered without reference to cost. So I am 10 simply saying we are in the middle of a vacuum in space 11 without any grounding as to benchmark the prices, but I 12 am not going to pursue that with you. 13 When we come to the second generation under 14 your proposal we are still going to be in the same boat 15 because we won't be able to ground our rates on costs -- 16 on allocated costs. We have lost that grounding forever 17 under your proposal. 18 MR. PENNY: Are you asking a question, 19 Mr. Ryder, or are you making an argument? 20 MR. RYDER: All right. I am making an 21 argument. 22 I want to ask you some questions about Exhibit 23 F2.2, which is the IGUA PBR guide. It shows adjustments 24 to base revenues for the year 2000, right? 25 MS ELLIOTT: It shows in Part A the same 26 information that is in Union's evidence at Schedule 1 of 27 Exhibit B, Tab 2, starting with the revenue resulting 28 from Union's delivery rates in E.B.R.O. 499. Les Services StenoTran Services Inc. 613-521-0703 474 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 There have been a number of adjustments to get 2 to the revenue resulting from delivery rates that would 3 be subject to the price cap. 4 MR. RYDER: I have a simple question. These 5 adjustments that are shown in Exhibit B, Tab 2, 6 Schedule 1, Inventory Carrying Costs and Compressor 7 Fuel, they will change -- they won't be the same in 8 year 2, in year 3, in year 4, and year 5 of the PBR 9 plan. They will change during the course of the plan, 10 right? 11 MS ELLIOTT: Which adjustments are you 12 referring to that will change? 13 MR. RYDER: Well, you tell me which 14 adjustments will change. I think you should do that 15 rather than me tell you. 16 --- Pause 17 MS ELLIOTT: Are you looking at note 4 on 18 Schedule 1? 19 MR. RYDER: Tell me this: Will the inventory 20 carrying costs change over the course of the plan? 21 MS ELLIOTT: Union's inventory carrying costs? 22 MR. RYDER: Yes. 23 MS ELLIOTT: Union's inventory carrying costs 24 will change during the course of the plan. The 25 passthrough item that is identified on -- 26 MR. RYDER: Can we do this question by 27 question? So the inventory carrying costs will change, 28 they will be different in year 2 than it is in year 1? Les Services StenoTran Services Inc. 613-521-0703 475 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 MS ELLIOTT: It is dependent upon the amount 2 of inventory Union is carrying so it will change as the 3 inventory varies. It will also change as the cost of 4 gas varies. 5 MR. RYDER: Do you have a forecast for a 6 change in year 2 for that? 7 MS ELLIOTT: The change related to the cost of 8 gas that would be a passthrough item in year 2, I don't 9 because I don't have a forecasted cost of gas for 10 year 2. 11 MR. BIRMINGHAM: Mr. Ryder, just to be clear, 12 you are talking about line 12 on Exhibit B, Tab 2, 13 Schedule 1. Is that right? 14 MR. RYDER: Well, let's look at your Exhibit 15 B, Tab 2, Schedule 1, lines 11, 12, and 13. Will these 16 be the same in lines 1, 2, and 3? Will these be the 17 same in every year of the plan or will they vary? 18 MS ELLIOTT: Once the adjustments have been 19 made to the 1999 base rates -- so the adjustments in 20 lines 1, 2, and 3 -- they will be in the rates. There 21 will be no need for a further adjustment. There are, 22 however, two adjustments in this proceeding that have 23 been identified that will impact rates. In 2001, we are 24 proposing to remove the Y2K costs and in 2002, we are 25 proposing to remove the regulatory cost savings. But 26 beyond that, there will be no further adjustments in the 27 category titled Adjustments to 1999 Base Rates. 28 MR. RYDER: Well, when you reproduce Exhibit Les Services StenoTran Services Inc. 613-521-0703 476 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 F2.2, would you be good enough to do it for each year of 2 the PBR plan so that we have a guide as to the impact of 3 this plan on customers throughout the course of the 4 five-year term? 5 MS ELLIOTT: I can do that with respect to the 6 price cap because I am determining the price cap in 7 advance and I know what it will be for each of the five 8 years. There will be no further adjustments to the base 9 rates than I have indicated, but for the passthrough 10 items I will not know the amount of the passthrough 11 until I know what the cost of gas is for the upcoming 12 year or the interest rates with respect to the return on 13 equity. 14 So I don't have a forecast of those items. 15 They will be the subject of the customer review process 16 in the year preceding the rate change. 17 MR. RYDER: For the purposes of giving an 18 indication as to the impact of the plan in future years, 19 would you just repeat the same values for the past two 20 items in subsequent years so we have an idea as to how 21 this plan will impact on us? 22 MS ELLIOTT: I don't think that is a 23 reasonable view of how this plan will work for the next 24 five years. That would suggest my cost of gas will 25 increase by the same amount next year as it did this 26 year. It may decrease. 27 MR. RYDER: Well, I am entitled to some 28 certainty as to how the plan will impact on me for five Les Services StenoTran Services Inc. 613-521-0703 477 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 years. And at the moment, you have provided a schedule 2 or a chart which shows the calculations for the first 3 year, but we don't have that for subsequent years. 4 MR. BIRMINGHAM: You do have it for the 5 subsequent years with respect to the 1999 base rate, as 6 Ms Elliott has described it to you, Mr. Ryder, and you 7 have it for the price cap formula. 8 What we can't give you are the passthrough 9 items because we don't know them. For instance, 10 lines 11, 12 and 13 are all dependent on what the cost 11 of gas is going to be. We don't know what that is going 12 to be. We will determine it once we get into the 13 individual year and we will bring that forward to the 14 customer review process. So we can't put anything in 15 there now because we don't know what it is. 16 The same thing goes for the return on equity. 17 We will be using the September forecast of interest 18 rates to determine what that return would be and it will 19 go up and down depending on what happens, and the same 20 with the unaccounted for gas volume change. 21 So I can't give you any more certainty than 22 that because I just don't know what those items are 23 going to be. That is why they are passthrough items. 24 MR. RYDER: All right. Well, then I will 25 withdraw my request for passthrough items for years 26 2001, 2002, 2003, 2004. But I would like a chart 27 showing how the revenue requirement from each year is 28 developed starting with 2000 going down to the --working Les Services StenoTran Services Inc. 613-521-0703 478 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 it through the price cap plan and creating revenue 2 requirements for 2001 and then working it through the 3 price cap plan so that I can get some idea as to the 4 bottom line impact on customers because otherwise you 5 are asking the Board to make an approval for five years 6 without knowing what the impact is going to be on 7 customers for the duration of the plan. 8 MS ELLIOTT: The difficulty I am having is the 9 impact is the price cap. It is 1.9 per cent per year 10 for each year of the plan. 11 MR. RYDER: Yes. 12 MR. THOMPSON: I think what Mr. Ryder wants 13 is -- 14 MR. PENNY: You are now the designated 15 lifeguard, Mr. Thompson. 16 MR. THOMPSON: That's right. Well, in terms 17 of guide, if you look at guide .2.2 where at line 5 we 18 have the revenue -- what do you call it -- applicable 19 revenue, and then we have the passthrough components 20 that we have identified in line 6 to 10. And then over 21 in Section E, we have the additional passthroughs in 22 2000. I think what he is asking to do is to carry 23 forward the beginning passthroughs, the added 24 passthroughs into the next year, along with the 25 applicable revenue that you say would be the beginning 26 the next year to illustrate how it moves forward from 27 year to year. 28 MS ELLIOTT: Using the format of the PBR Les Services StenoTran Services Inc. 613-521-0703 479 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 guide? 2 MR. THOMPSON: Yes, or whatever other format 3 you think would be more desirable. But I think that is 4 what he is after. 5 MR. RYDER: That's the first chart that I am 6 at. 7 The second chart is that when you apply the 8 price cap to your calculations, I would ask you to put 9 the maximum cap applicable to Kitchener as a single 10 customer in the M9 class. I am not quite sure what that 11 is after the revised evidence this morning, but I want 12 to know the extent of the vulnerability of my client to 13 your client over five years. 14 THE PRESIDING MEMBER: Mr. Ryder, do I 15 understand what you are asking for is a projection of 16 the rate that would be charged to Kitchener for the 17 services it takes? 18 MR. RYDER: Yes, that was -- 19 THE PRESIDING MEMBER: It was the case. So 20 1.9 per cent increase in each year. 21 MR. RYDER: I would like two documents. One 22 based on the 1.9 factor, and the other the worse case 23 scenario for my client under the flexibility component. 24 THE PRESIDING MEMBER: In other words, I have 25 difficulty working out exactly what you mean, but I 26 think there is something about a 1.5 per cent 27 flexibility within a group which could then be as much 28 as 4 per cent if it was carried forward. Is that sort Les Services StenoTran Services Inc. 613-521-0703 480 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 of a calculation? Is that possible to do? 2 MR. PENNY: Just so I am clear. I think in 3 the discussion -- and the witnesses can respond to 4 this -- but in the discussion that have come so far, I 5 think we have made it clear that this would not reflect 6 any of the passthrough items, so anything that changes 7 like the cost of gas, interest rates, determining return 8 on equity, and so on. 9 THE PRESIDING MEMBER: I understand that. I 10 thought Mr. Ryder was asking -- assuming everything else 11 stays constant, you have the price cap format, you also 12 have the flexibility of format. What would it mean to 13 Kitchener if they were at the worst end of the 14 flexibility calculation? 15 Does that make sense? Mr. Birmingham, you are 16 looking at me and nodding your head. 17 MR. BIRMINGHAM: Yes, I think it does, 18 Mr. Chairman. Thank you. 19 Mr. Ryder, just to be clear now, I think -- 20 MR. RYDER: You understood all along. I know 21 you did. 22 --- Laughter 23 MR. BIRMINGHAM: I think what you want, as I 24 hear you, is you wanted now three things. You wanted 25 Mr. Thompson's PBR tour guide expanded for the five-year 26 PBR period just showing the PBR cap applied to the 27 revenue stream for each year. That was the first 28 request. Les Services StenoTran Services Inc. 613-521-0703 481 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 The second one is you wanted a five-year 2 projection for Kitchener's rate using the 1.9 per cent 3 price cap. 4 And then the third thing was, you wanted 5 projection of Kitchener's rate using the maximum pricing 6 flexibility for the five-year period. 7 MR. RYDER: Yes. Thank you. 8 MR. PENNY: That will be G3.6. 9 UNDERTAKING NO. G3.6: Mr. Birmingham 10 undertakes to provide information on 11 Mr. Thompson's PBR tour guide expanded 12 for the five-year PBR period just showing 13 the PBR cap applied to the revenue stream 14 for each year. A five-year projection 15 for Kitchener's rate using the 1.9 per 16 cent price cap, and projection of 17 Kitchener's rate using the maximum 18 pricing flexibility for the five-year 19 period.on the amounts of money 20 specifically related to the consulting 21 expenses in 1999, ie. the $5.4 million 22 and the $.9 million 23 MR. RYDER: Now turning to your pension 24 adjustment, can we have a number for that? 25 MR. PENNY: It was just given one, it was 26 G3.6. 27 MR. RYDER: The pension adjustment which is 28 addressed in your supplementary evidence in Exhibit B, Les Services StenoTran Services Inc. 613-521-0703 482 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 Tab 2, at page 1, I think -- 1 or 2. 2 I just want to sort of establish the basic 3 facts to set the table for my questions. The cost of 4 this item of $6.3 million was included in Union's 5 proposal for 499 rates -- in its O&M proposal for 499 6 rates. Right? 7 MS ELLIOTT: Yes, that is correct. 8 MR. RYDER: And the proposal for your O&M was 9 reduced to the ADR process by $4.9 million. 10 MS ELLIOTT: That was the amount of the ADR 11 adjustments. There was also an increase in the non- 12 utility allocation and another separation adjustment. 13 But in the ADR process, we agreed to reduce our O&M. 14 MR. RYDER: By $4.9 million. 15 MS ELLIOTT: By $4.9 million. 16 MR. RYDER: And that is shown in Appendix H, 17 right? 18 MS ELLIOTT: Yes. 19 MR. RYDER: Schedule 4. And that was a 20 blanket reduction that did not earmark any particular 21 cost item. 22 MS ELLIOTT: That's correct. 23 MR. RYDER: And the pension costs in 499 24 approved were then treated by you as a prorated 25 reduction of the $6.3. 26 MS ELLIOTT: No. In fact we didn't take the 27 reductions agreed to in the ADR and prorate them. We 28 had the ADR reduction and the separation impact in the Les Services StenoTran Services Inc. 613-521-0703 483 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 non-utility allocations to manage. When we looked at 2 the difference that we had to manage, one of the ways 3 that we did that was to go and reduce the pension 4 expense that was included in the O&M. 5 MR. RYDER: And you managed the $6.3 cost down 6 to $1.1 million. 7 MS ELLIOTT: Yes. 8 MR. RYDER: And so in effect what you are 9 doing now is assuming that the approved O&M of $2.58 10 million contains pension costs of $1.1. 11 MS ELLIOTT: Yes, that is correct. 12 MR. RYDER: And am I correct then in saying 13 that the combination of reducing the pension costs to 14 $1.1 in 1999 and then increasing the pension costs in 15 2000 to $7.9 million allows you to completely recapture 16 the $4.9 million reduction achieved by the ADR process 17 in 1999? 18 MS ELLIOTT: No, I don't think so. We have 19 approved O&M of $258 million which we have managed. The 20 change in the accounting standards have increased those 21 costs by $6.8 million. The result is then to increase 22 Union's O&M. But I don't do it as a recapture of the 23 previously committed to reductions. 24 MR. RYDER: Was the 6.3 proposal for pension 25 costs in your proposal for 499, was that based on actual 26 cost levels historically? 27 MS ELLIOTT: It was a forecast of the pension 28 expense using the parameters that existed at the time Les Services StenoTran Services Inc. 613-521-0703 484 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 the expense was forecast so it was based on the 2 employees and discount rate assumptions and the 3 assumption on return on assets and salary increases. 4 The new handbook section determines what the discount 5 rate and the return on assets assumption should be. 6 MR. RYDER: What was the level -- I mean is 7 the level of 6.8 that you proposed for 1999, was that 8 based on actual cost experience in the past? 9 MS ELLIOTT: It was based on an actuarial 10 estimate. 11 MR. RYDER: And so I take it the 6.8 was in 12 line with the prior years? 13 MS ELLIOTT: Yes, it was. 14 MR. RYDER: And then in 1999 it dropped down 15 to 1.1 as in actual cost and then in 2000 it jumps up 16 again to 7.9. These are wildly fluctuating amounts. 17 MS ELLIOTT: The increase in 2000 is the 18 result of the change in the handbook which says the 19 company must, and it is largely due to the change in 20 recording non-pension benefits. In the past, post- 21 retirement benefits were recorded on a cash basis. So 22 we expensed what we paid during the year. The change is 23 now those must be reflected on an accrual basis. So we 24 have to set up the cost for the post-retirement benefits 25 for the employees that are currently with us. 26 MR. RYDER: I take it there was not a -- your 27 pension is it run by an administrator? You have a 28 number of plans, right? Les Services StenoTran Services Inc. 613-521-0703 485 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 MS ELLIOTT: Yes. 2 MR. RYDER: And are these run by an outside 3 administrator or are they internally financed? 4 MS ELLIOTT: It is an outside administrator. 5 MR. RYDER: All right. And does the outside 6 administrator sends you bills to pay so that you can 7 maintain the plan to the standard that the administrator 8 requires? 9 MS ELLIOTT: I assume the funds that we put 10 into the pension plan go into the plan through the 11 administrator. 12 MR. RYDER: And so the funds that you deliver 13 to the administrator dropped by 5.2 million in 1999? 14 MS ELLIOTT: For the pension plan, yes. 15 MR. RYDER: And is that a decision that the 16 administrator made or that the company made? 17 MS ELLIOTT: It was a decision that the 18 company made. 19 MR. RYDER: And you control the contribution 20 to the plan, not the administrator? 21 MS ELLIOTT: Well, the actuaries determine 22 what the plan -- what contributions need to be made to 23 the plan on an ongoing basis. Now, the accounting rules 24 determine what expense needs to be recorded on the 25 financial statements for that plan. 26 MR. RYDER: How do you account for the wild 27 fluctuations of 6.8, 1.1 and 7.9? I understand that 28 GAAP requires 7.9 but are there -- I can't imagine what Les Services StenoTran Services Inc. 613-521-0703 486 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 permits a drop down to 1.1. Is that a bookkeeping 2 adjustment or is it a real adjustment? 3 MS ELLIOTT: The adjustment in the pension 4 plans is largely the result of the economic assumptions 5 that go into the contribution for the plan; the discount 6 rates, the return on the pension fund assets and the 7 projection of the company's salary increases over the 8 year. The increase is related to the change in 9 accounting rules that require an accrual for the post- 10 retirement benefits. 11 MR. RYDER: But the drop in 1999 to 1.1 that 12 is a drop of over 600 per cent. Now, surely 13 assumptions, a change in assumptions wouldn't be that 14 dramatic, have that dramatic an effect? 15 MS ELLIOTT: The change in assumptions as to 16 what the discount rate was with the return on the assets 17 was and what the salary expenses for the employees, does 18 in fact reduce the expense from 5.1 to a negative point 19 1. Part of the reason for the change in the accounting 20 was to remove the flexibility that existed that 21 companies had to be able to record their pension 22 expenses. Those are now determined by the accounting 23 procedures. 24 MR. RYDER: How did you manage the ADR 25 reduction of 4.9 by just a pro rata attack on all of 26 your costs? If you had done that, then you wouldn't be 27 trying to recapture that amount today? 28 MS ELLIOTT: If the ADR reduction had been Les Services StenoTran Services Inc. 613-521-0703 487 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 assigned to each of the various administrators in 2 proportion to their expenses, undoubtedly reduction to 3 the pension expense would be something different than it 4 was. That is not how we managed the reductions and the 5 O&M expenses. 6 MR. RYDER: I take it that 1.1 is not a 7 sustainable -- was not sustainable? 8 MS ELLIOTT: That is right. 9 MR. RYDER: Right. So it doesn't reflect sort 10 of an ongoing cost picture? 11 MS ELLIOTT: That is right. 12 MR. RYDER: No. And 6.8 is more reflective of 13 an ongoing cost picture? 14 MR. RYDER: The 7.9. According to the new 15 standards, yes. 16 MR. RYDER: All right. But if you had taken a 17 pro rate cap on all your costs, then I take it the 18 adjustment today would not be 6.8. It would 1.6. 19 Something like that? It would be based anyway on the 20 6.3 pro rata number -- reduced by a pro rata -- 21 MS ELLIOTT: That is right. 22 MR. RYDER: Now, the UFG catch up of four 23 million over five years, under your system, under your 24 proposal, this item is subject to the inflator, to the 25 cap? 26 MS ELLIOTT: Yes, once the adjustment is made 27 in the rates the rates will be subject to the price cap. 28 MR. RYDER: But it is not a cost item which Les Services StenoTran Services Inc. 613-521-0703 488 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 Union is managing in any sense. It is a catch up to 2 overcome a flaw in the method you propose to the Board 3 for UFG? 4 MS ELLIOTT: It is an adjustment that will 5 recover previously incurred costs that were not 6 recovered at the time they were incurred due to the 7 formula that has been used to include UFG end rates. 8 MR. RYDER: Why should that item be inflated? 9 MS ELLIOTT: We are not inflating the costs. 10 We are inflating the prices that are being charged to 11 customers for the delivery service. 12 MR. RYDER: But this is not a cost item which 13 are you managing in any sense? 14 MS ELLIOTT: As I said, this is cost -- this 15 is a previously incurred cost. The current formula does 16 provide for recovery of that cost. It is recovery over 17 a three-year period. The proposal here is to recovery 18 those costs and to change the methodology for recovering 19 costs on an ongoing basis to better match the recovery 20 period -- the recovery with the period in which the 21 costs are incurred. 22 MR. RYDER: Would you agree with me that the 23 existing recovery method provides an incentive to 24 improve your unaccounted for gas experience? 25 MS ELLIOTT: The existing method provides an 26 incentive for the company to manage costs and that 27 incentive doesn't go away with Union's proposal. 28 MR. RYDER: Well, in particular it provides an Les Services StenoTran Services Inc. 613-521-0703 489 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 incentive to have managed your unaccounted for gas 2 costs. Is it seen to reduce? 3 MS ELLIOTT: We have that incentive now and we 4 have that incentive under this proposal. 5 MR. RYDER: Well, you would have a greater 6 incentive if you have to catch it up by improving your 7 performance as opposed to asking the ratepayers to do it 8 for you. 9 MS ELLIOTT: These are costs that have 10 previously been incurred and as a result of that there 11 is nothing I can do about a cost experience that 12 occurred in 1996. I do have the incentive, however, to 13 manage those costs as they are being incurred in the 14 year 2000 and going forward. 15 MR. RYDER: The sources of unaccounted for 16 gas, what are they? What are you doing about them? 17 MR. PENNY: Mr. Chairman, we have been over 18 this several times. 19 MR. RYDER: Well, I want to show that this is 20 an area where the incentive should remain. 21 Let me put it -- I understand that some gas is 22 lost because of metering differences? 23 MS ELLIOTT: The majority of unaccounted for 24 gas is measurement differences, yes. 25 MR. RYDER: All right. And measurement 26 differences in two places. One, between Union's system 27 and pipelines and the second between -- at your customer 28 meters. Les Services StenoTran Services Inc. 613-521-0703 490 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 MS ELLIOTT: Yes. There will be differences 2 between the purchase meters and the sales meters. 3 MR. RYDER: And you own the meters at the 4 customers' locations? 5 MS ELLIOTT: Yes. And we generally own a 6 meter at the purchase location as well. 7 MR. RYDER: And there is no incentive to 8 upgrade these meters if you -- if this item is 9 considered as a passthrough? 10 MS ELLIOTT: The company is exposed to the 11 cost impact of unaccounted for gas that is incurred in 12 the year to the extent that is incurred in the year. To 13 the extent that that happens, there is an incentive to 14 manage that. You can see on the schedule that we have 15 filed for the 1999 results that in 1999 the company 16 expensed $11.7 million worth of unaccounted for gas 17 which is the gas measurement normalization adjustments. 18 Those were costs in excess of the revenue. 19 We have the incentive to manage those costs. 20 Reducing them will in fact reduce an unfavourable impact 21 on Union's earnings. 22 MR. RYDER: I have one other question on this. 23 Do accounting disputes with your large customers relate 24 to this item, unaccounted for gas? When the customer -- 25 when you say that the customer has taken "X" amount and 26 the customer says, "No, I have only used 'X' minus 'Y'." 27 And it is not a measuring problem. It is really a paper 28 accounting issue. Les Services StenoTran Services Inc. 613-521-0703 491 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 MS ELLIOTT: There are circumstances where 2 there is an accounting cause for the unaccounted for 3 gas, yes. 4 MR. RYDER: So it would be appropriate to have 5 an incentive in place to avoid those and minimize those? 6 Keep your accounting staff on its toes. 7 MS ELLIOTT: Well, I think the incentive 8 exists. I mean we don't go out -- I mean we have the 9 incentive to manage our customer relations. It is, you 10 know, providing timely and accurate bills is something 11 that we strive to do. There will be cases where 12 mistakes are made that we work to manage. 13 MEMBER JACKSON: Are you just talking about an 14 inter-period difference? Like are you talking about the 15 fact that they say, "Well, we didn't use it all up to 16 that date," and you catch them in the next bill then for 17 it? 18 MS ELLIOTT: If it is an accounting 19 adjustment, normally that would be an inter-period. 20 Measurement differences will be in unaccounted for gas. 21 There is no reversal of those unless we can go back and 22 remeasure and re-bill customers. Generally there is a 23 tolerance in the measurement that says that within one 24 half of a one per cent there is that flexibility. So 25 that we don't have the option to re-bill. But 26 accounting changes or errors normally are timing 27 differences. 28 MEMBER JACKSON: Are they ever related to the Les Services StenoTran Services Inc. 613-521-0703 492 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 heat content of the gas or because of the way you do 2 your ratemaking they are tied strictly to cubic metres 3 or do you have accounting -- I guess a repeating of my 4 question. But do you have accounting differences that 5 relate to heat content? 6 MS ELLIOTT: Yes, we measure unaccounted for 7 gas in volume but it will be a combination of volume and 8 energy. 9 MEMBER JACKSON: So does that lead to some of 10 these billing disputes as well? 11 MS ELLIOTT: I am not aware of any specific 12 cases where the energy content has led to a dispute, but 13 it is possible. 14 MEMBER JACKSON: I wasn't sure how it would 15 either. I just wanted to confirm that. Thank you. 16 MR. RYDER: Turning to a new topic, the 17 adjustment to effect the 1999 actual results, I just 18 want to ask you sort of a theoretical question if I can. 19 Insofar as any of these reductions in costs 20 are sustainable, if you don't deduct them, does it mean 21 that the cap will inflate a cost or a revenue 22 requirement that doesn't exist and that is the 23 significance of the failure to deduct. 24 MS ELLIOTT: As I said earlier, we are not 25 inflating costs. We are inflating prices. Those prices 26 to start with are based on approved costs. To the 27 extent that the cost does not exist and we move all of 28 the revenue that we are forecast to move, that will Les Services StenoTran Services Inc. 613-521-0703 493 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 generate a -- that is basically the productivity or the 2 efficiency gains that we are looking for and that will 3 generate a favourable impact on the company's bottom 4 line. 5 MR. RYDER: But in the first year we are 6 establishing a revenue requirement for the company that 7 is based on costs. And I am saying that insofar as you 8 don't deduct a sustainable cost saving then are you 9 inflating a revenue requirement which doesn't exist? 10 MS ELLIOTT: We are not establishing a revenue 11 requirement that is based on cost in this proceeding. 12 We are using an already existing revenue stream that was 13 based on cost. 14 MR. RYDER: All right. And are you, 15 therefore, inflating a revenue requirement which doesn't 16 exist? A revenue requirement based on a cost that no 17 longer exists, to use your terms. 18 MR. PENNY: I think Ms Elliott has said now 19 three times that what the -- what the formula applied to 20 are the rates, not the costs. 21 THE PRESIDING MEMBER: As I understand what I 22 think Mr. Ryder is saying, is if you don't remove what 23 he regards as sustainable costs, is the rates from which 24 you move forward too high. 25 MS ELLIOTT: The current rates are based on 26 the current approved cost levels and assumptions are an 27 approved level of volume and revenues. All other things 28 being equal, if the costs were reduced, moving forward Les Services StenoTran Services Inc. 613-521-0703 494 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 with those prices will generate a favourable variance, 2 will generate earnings to the bottom line. 3 MR. RYDER: All right. I think the answer is 4 yes. 5 Would it also mean that Union will get the 6 benefit of a productivity gain that was achieved before 7 PBR began? 8 MS ELLIOTT: Sorry. Could you repeat that, 9 Mr. Ryder? 10 MR. RYDER: If you don't deduct a cost that 11 has been removed, a sustainable cost that has been 12 removed in 1999, does it not mean that your plan will 13 provide the company a hundred per cent of the benefit of 14 a productivity gain that occurred prior to the start of 15 the plan? 16 MS ELLIOTT: Well, in fact, our plan does 17 include a productivity gain that will go to the customer 18 through the stretch factor and the price cap. 19 MR. RYDER: Well, does it not mean that the 20 productivity gain that is resulting -- that is churned 21 out through the plan will in fact have occurred before 22 it started? In other words, it's a productivity gain 23 that didn't apply -- didn't result from the stretch 24 factor. It is a productivity that resulted before the 25 stretch factor came into play. 26 MS ELLIOTT: I am not sure which productivity 27 gain you are referring to. So I am -- 28 MR. RYDER: I am talking about reductions in Les Services StenoTran Services Inc. 613-521-0703 495 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 1999 costs that are sustainable at the moment you are 2 not including, you are not deducting for them. 3 MS ELLIOTT: Reductions in 1999 costs that are 4 sustainable are managing a number of things. But one of 5 those things would be our ability to deliver a stretch 6 factor in the price cap. 7 MR. RYDER: All right. I will turn to another 8 topic. I would like to canvass the benefits to 9 Kitchener. 10 We are a customer of the M9 class, right? 11 MR. BIRMINGHAM: I believe you have a T3 12 contract, Mr. Ryder. 13 MR. RYDER: But it is still part of the M9 14 group for purposes of price cap? 15 MR. BIRMINGHAM: That is correct. 16 MR. RYDER: And we are in basket 1A? 17 MR. BIRMINGHAM: You are. 18 MR. RYDER: And notwithstanding, Kitchener's 19 volumes exceed five million? 20 MR. BIRMINGHAM: That is right, Mr. Ryder. I 21 did have a question for you though and that is if these 22 questions are going to go to the pricing flexibility, it 23 is probably better that we wait for that panel and Mr. 24 Packer is here with them. 25 MR. RYDER: One final question. 26 Your competitive profile, I take it with 27 respect to Kitchener in terms of your delivery services 28 for Kitchener, there is no competition there? You would Les Services StenoTran Services Inc. 613-521-0703 496 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 agree that you are in the same position now as you were 2 before PBR? You are the only delivery service available 3 to us. 4 MR. BIRMINGHAM: Yes, that is right. 5 MR. RYDER: So there has been no competitive 6 change in that -- for the delivery of that service has 7 there? 8 MR. BIRMINGHAM: The storage, transmission and 9 distribution services that the City of Kitchener would 10 purchase from Union Gas are regulated services and they 11 are provided by a monopoly. 12 MR. RYDER: One final question. It is really 13 a clarification of the gas loan question pursued by 14 Mr. Vegh and Dr. Jackson. 15 If Union deems that a customer is out of 16 balance in his contract and requires additional gas to 17 be brought in, can the customer opt to contract for a 18 gas loan from Union to provide itself time to purchase 19 an alternate supply? 20 MR. BIRMINGHAM: I think conceptually that is 21 probably right, Mr. Ryder, but we have never had a 22 situation where that has happened. Gas loans, as I say, 23 tend to be in situations where markers take the 24 molecules exfranchise for a very short period of time. 25 Typically if customers are out of balance then they want 26 a permanent resolution to that out of balance situation 27 and they arrange for incremental supplies if that is the 28 requirement to remedy their imbalance situation. Les Services StenoTran Services Inc. 613-521-0703 497 ELLIOTT/BIRMINGHAM, cr-ex (Ryder) 1 MR. RYDER: So there is no impediment in that 2 option? 3 MR. BIRMINGHAM: There is no impediment 4 recognizing though that it isn't a sale and there is a 5 requirement that it be returned within a certain period 6 of time. 7 MR. RYDER: Thank you. Thank you. 8 THE PRESIDING MEMBER: Thank you, Mr. Ryder. 9 MEMBER JACKSON: Could I just seek 10 clarification on one thing. I am trying to get -- just 11 to swat my knowledge on the Union system again, if I 12 ever had this particular piece of knowledge. 13 In any event, my question goes to the question 14 of storage. You said that I think that you could be the 15 only supplier of storage to Kitchener, did you, in your 16 answer to Mr. Ryder's question? Or could his client 17 purchase storage from anyone else perhaps? 18 MR. BIRMINGHAM: Well, certainly they can 19 purchase storage from anyone else. But in terms of the 20 bundled service that we have provided to Kitchener up 21 until this time, the storage has been included in that 22 rate. But to the extent that they wanted incremental 23 storage, they could purchase it from parties other than 24 Union. That is right. 25 MEMBER JACKSON: And if they wanted less, 26 would they on a year's notice be able to get out of 27 their existing contract and contract for storage 28 separately from transportation? Or what sort of a Les Services StenoTran Services Inc. 613-521-0703 498 ELLIOTT/BIRMINGHAM 1 contract do they have with you? Are they locked in a 2 for long period of time? 3 MR. BIRMINGHAM: The T3 contract is a five- 4 year term. 5 MEMBER JACKSON: Okay. Thank you. I didn't 6 know that. Thank you. 7 THE PRESIDING MEMBER: We are now at ten to 8 five. Are there any other parties before I ask Board 9 staff if they have any questions who have not had their 10 chance to ask questions of this panel? No. 11 Mr. Lyle, do you want to proceed tonight or do 12 you want to start first thing tomorrow morning since it 13 is ten to five? 14 MR. LYLE: I am in your hands, Mr. Chair, but 15 I should be only a matter of five minutes or so. 16 THE PRESIDING MEMBER: Mr. Lyle, would you 17 proceed then. 18 MR. LYLE: Thank you, Mr. Chair. 19 Panel, Union is much more than a gas 20 distributor, isn't it? It has got a very extensive 21 business in transmission and storage. 22 MR. BIRMINGHAM: That is right. We operate an 23 integrated storage, transmission and distribution 24 system. 25 MR. LYLE: And given that you have got these 26 three very distinct lines of business, did you give any 27 consideration to developing three different price cap 28 formulas? Les Services StenoTran Services Inc. 613-521-0703 499 ELLIOTT/BIRMINGHAM, ex (Lyle) 1 MR. BIRMINGHAM: No, we didn't and there is a 2 couple of reasons for that. 3 One is our bundled rates include storage, 4 transmission and distribution and so we were looking for 5 a price cap formula that would apply to that service. 6 Further we are now introducing the option of unbundled 7 services for both storage and upstream transportation. 8 And to that extent those -- the price cap parameters 9 will apply to those services. 10 Any further unbundling with respect to Union's 11 system and the services that we provide will be dealt 12 with in the customer review process and before the 13 Board. And to the extent that those are offered 14 discretely, the price cap parameters would also apply to 15 them. 16 MR. LYLE: Wouldn't you agree with me though 17 that to the extent, let's imagine that there are greater 18 potential productivity gains in transmission over 19 distribution or storage, that those potential greater 20 productivity gains should be going to the benefit of the 21 transmission customers as opposed to distribution or 22 storage customers? 23 MR. BIRMINGHAM: I guess there is a couple of 24 comments to that, Mr. Lyle. One is that transmission is 25 not an unbundled service. So all customers are paying 26 their share of the cost of the transmission system. 27 But more than that is the productivity gains 28 are done in a pricing formula. So again this isn't cost Les Services StenoTran Services Inc. 613-521-0703 500 ELLIOTT/BIRMINGHAM, ex (Lyle) 1 of service regulation where we look at which costs are 2 allocated and where the productivity gains go and 3 allocate those on the basis of costs and then figure out 4 where they should go to the rate classes. It is really 5 in the pricing formula and all customers receive the 6 benefit of the productivity gains. So it isn't again a 7 cost allocation type of framework. It is a pricing 8 framework. 9 MR. LYLE: But even as you move to PBR don't 10 you want to be sending efficient price signals and 11 ensuring that costs are properly -- that the proper 12 price signals go out. And so that if in fact costs are 13 going down more significantly in one area of your 14 business, that should be reflected. 15 MR. BIRMINGHAM: We will be sending 16 appropriate pricing signals both through using a Board- 17 approved base for the price cap proposal and through 18 using a widely accepted framework which is the GDPPI 19 less the total factor productivity determination with 20 the stretch factor added on. 21 MR. LYLE: Thank you. Those are my questions. 22 MEMBER JACKSON: Yes. I was wondering about 23 two areas, panel. 24 One is what information the Board and 25 ratepayers will have sort of on an annual basis going 26 forward into this five year PBR? 27 And it may be in your evidence, but if it is, 28 just remind me where. For these customer adjustment Les Services StenoTran Services Inc. 613-521-0703 501 ELLIOTT/BIRMINGHAM 1 sessions that you will be having, and I forget the 2 terminology, but will those customers be able to look at 3 an actual and say a weather normalized cost experience 4 for that annual period when they talk to you? 5 I think we saw on your evidence that they will 6 not be able to see the cost by rate classes, but will 7 they be able to see sort of an annual statement of the 8 total costs of the utility on a normalized and an actual 9 basis going forward? 10 MR. BIRMINGHAM: I think you said a couple of 11 things, Dr. Jackson. We have described the content of 12 the packages that we would provide in the customer 13 review process both in Exhibit B, Tab 2 -- it starts at 14 page 81 -- and we developed some further detail in 15 response to a Board's Staff Interrogatory C1.160. That 16 is just for your reference. 17 MEMBER JACKSON: Yes. Thank you. 18 MR. BIRMINGHAM: It was our intention to 19 provide financial information that would be publicly 20 available. So to the extent that we were, for instance 21 in the fall, in a customer review process, we would have 22 typically around that time either our six month results 23 or our nine month results, depending on when they are, 24 and we would be able to provide that information. That 25 would compare to the actuals for the prior year. But it 26 wasn't our intention to provide what I will call a 27 typical cost-of-service type of revenue or cost 28 information. Les Services StenoTran Services Inc. 613-521-0703 502 ELLIOTT/BIRMINGHAM 1 MEMBER JACKSON: My concern here is the issue 2 of how the Board can look at how this PBR plan is 3 working over the five-year period. It seems to me that 4 everyone should be entitled to look at that, not just 5 the Board. 6 We are all entering into some sort of an 7 experiment and it seemed to me that that was something 8 perhaps to work out in terms of implementing this kind 9 of a plan, see how it is working. We can come back to 10 that, but I just thought I should let you know that that 11 is one of the questions in my mind. 12 The other question I had -- and again it may 13 be in the material, so if it is just point me to it -- 14 but in terms of debt issues coming due that are perhaps 15 above market rates, as I understand it, under the PBR 16 plan that will be to the benefit of the shareholder, if 17 there is a benefit there, that they will be able to 18 refund those at a lower cost of debt -- is that 19 correct -- during the five-year period? And do we have 20 a measure of that kind of experience or that kind of 21 potential benefit for the utility over the five-year 22 period? 23 MS ELLIOTT: You are right about the comment: 24 The cost of debt is one of the costs that the utility is 25 managing during the term. So to the extent that we have 26 debt that comes due for redemption at a higher interest 27 rate and we can replace it with debt at a lower interest 28 rate, that will be an efficiency gain, if you will, as Les Services StenoTran Services Inc. 613-521-0703 503 ELLIOTT/BIRMINGHAM 1 will the cost of any new debt that comes along will have 2 to be managed through incremental revenue. 3 MEMBER JACKSON: Yes. 4 MS ELLIOTT: In this evidence, there isn't a 5 debt redemption schedule. 6 MEMBER JACKSON: I had a look at your Annual 7 Report for 1999, the one for the Union Gas Limited, and 8 I was just trying to identify what debt issues might be 9 involved. I was doing that while I was trying to listen 10 to cross-examination, so I didn't get very far with it. 11 I noticed, for example, there is at least one 12 sinking fund debenture and perhaps one or two -- I am 13 not sure -- other long-term debt instruments that are 14 coming due. 15 I wonder if you could just, in addition to the 16 number of items that Mr. Thompson has asked you to look 17 at numbers for the other day, if you could separately 18 for me, outline what sorts of interest cost savings you 19 would see from those reasonably certain events? 20 MR. BIRMINGHAM: So, Dr. Jackson, just to be 21 clear, this is in reference to Note 9 of the Annual 22 Report on page 33 -- 23 MEMBER JACKSON: Yes. 24 MR. BIRMINGHAM: -- for Union Gas. 25 And with respect to the replacement of any of 26 those debentures during the term of the PBR, is there a 27 particular interest rate assumption that you would want 28 us to make? Just should we assume the current rate Les Services StenoTran Services Inc. 613-521-0703 504 ELLIOTT/BIRMINGHAM 1 levels? 2 MEMBER JACKSON: Yes, I thought that would be 3 appropriate. 4 Perhaps you would make a comment about the 5 term of the debt you might use for replacement. I know 6 this is just a ballpark assumption, but a current debt 7 rate for refunding that instrument. You might use -- I 8 don't know, maybe a five-year instrument, maybe a 10. 9 You pick it. 10 MS ELLIOTT: We can do that. 11 MEMBER JACKSON: Thank you very much. 12 THE PRESIDING MEMBER: Undertaking number, 13 please. 14 MR. LYLE: Make that G3.7. 15 UNDERTAKING NO. G3.7: Ms Elliott 16 undertakes to respond to request 17 described by Member Jackson on the 18 previous pages 19 MEMBER JACKSON: And that way if there is 20 anything negative occurring, I am sure you will tell us 21 as well. 22 Thank you. 23 THE PRESIDING MEMBER: I just had a general 24 question in relation to -- I believe you filed some time 25 ago a sort of package of different PBR plans that Union 26 had reviewed in designing their own proposal and I was 27 wondering to what extent the design of your plan is 28 similar to that of other plans that have been Les Services StenoTran Services Inc. 613-521-0703 505 ELLIOTT/BIRMINGHAM 1 implemented and what experience these other plans may 2 have. If you could identify ones which are close to the 3 same plans as yours which have been in existence for 4 some time, if there are any. 5 MR. LYLE: We will make that Undertaking G3.7 6 -- 3.8, my apologies. 7 UNDERTAKING NO. G3.8: Ms Elliott 8 undertakes to provide a "package" of 9 different PBR plans that Union had 10 reviewed in designing their own proposal 11 and detail the extent the design of 12 these plans were similar to that of 13 other plans that had been implemented and 14 what experience these other plans may 15 had, and identify ones which were close 16 to the same plans as Union's which have 17 been in existence for some time, if there 18 are any 19 THE PRESIDING MEMBER: And some of the factors 20 about your particular plan -- I mean basically you are 21 using a historic approved base from which to start for a 22 year that is one-year old. Let's put it at that, 1999 23 as opposed to 2000. You are going forward with a fixed 24 ceiling as opposed to one which varies as you go 25 forward. Some of the plans have -- they change the 26 escalator with inflation that is experienced. It is a 27 five-year term, others are five-year terms, some of them 28 are less. Les Services StenoTran Services Inc. 613-521-0703 506 ELLIOTT/BIRMINGHAM 1 So if you can give us some indication of a 2 plan that has similar characteristics and the 3 experiences you have had with it, I would find that 4 helpful. 5 Thank you. 6 With that, Mr. Penny, I am not sure what you 7 want to do about re-direct. 8 MR. PENNY: Well, I think it probably makes 9 sense to do re-examination in terms of as we do the 10 issues, but I can advise the Board that I have no 11 re-examination with respect to this first bundle of 12 issues. 13 THE PRESIDING MEMBER: Thank you. 14 So tomorrow we will start with the second set 15 of issues that this panel is subject to, if I might put 16 it that way, and we will start at nine o'clock tomorrow 17 morning. 18 Now, Dr. Wightman, would you discuss with 19 parties how late they want to sit, seeing as it is 20 Friday, and then advise the reporters and us to whether 21 we are closing at 3:00, 4:00, 5:00 tomorrow. 22 Thank you. 23 MR. WIGHTMAN: Yes, I will. 24 THE PRESIDING MEMBER: Okay, thanks. And let 25 us know. 26 Thank you. 27 --- Whereupon the hearing adjourned at 1702, to resume 28 on Friday, June 16, 2000 at 0900 Les Services StenoTran Services Inc. 613-521-0703 507 1 INDEX OF PROCEEDING 2 PAGE 3 Upon resuming at 0910 299 4 Preliminary Matters 299 5 PREVIOUSLY SWORN: RICK BIRMINGHAM 299 6 PREVIOUSLY SWORN: PAT ELLIOTT 299 7 Cross-Examination by Mr. Janigan 330 8 Cross-Examination by Ms Symes 344 9 Cross-Examination by Mr. Mattson 356 10 Cross-Examination by Mr. Vegh 378 11 Upon recessing at 1023 345 12 Upon resuming at 1050 345 13 Upon recessing at 1230 414 14 Upon resuming at 1348 414 15 Cross-Examination by Mr. King 430 16 Further Cross-Examination by Mr. Janigan 438 17 Upon recessing at 1515 461 18 Upon resuming at 1535 461 19 Cross-Examination by Mr. Ryder 462 20 Examination by Board Counsel 498 21 Upon adjourning at 1702 506 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 508 1 EXHIBITS 2 NO. DESCRIPTION PAGE 3 F3.1 Book of materials 378 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 509 1 UNDERTAKINGS 2 PAGE 3 G3.1 Ms Elliott to provide numbers of 330 4 staff that are associated with each 5 individual area 6 7 G3.2 Mr. Penny to provide information 336 8 as to whether or not there are any 9 regulated companies who have chosen 10 to take the route to have recorded 11 on their audited statements that the 12 practice of accounting for pension and 13 retirement benefits has been done in 14 accordance with GAAP principles 15 16 G3.3 Ms Elliott undertakes to provide 347 17 a reconciliation of any numbers 18 in the new categories to numbers 19 in the old categories below the 20 number 269 21 22 G3.4 Ms Elliott undertakes to provide 374 23 information on the amounts of money 24 specifically related to the consulting 25 expenses in 1999, ie. the $5.4 million 26 and the $.9 million 27 28 Les Services StenoTran Services Inc. 613-521-0703 510 1 UNDERTAKINGS (Cont'd) 2 PAGE 3 G3.5 Ms Elliott to provide the revenue 467 4 to cost ratios before and after 5 revenue recovery filed by the Board 6 in the last three rate cases 7 8 G3.6 Mr. Birmingham undertakes to provide 481 9 information on Mr. Thompson's PBR tour 10 guide expanded for the five-year PBR 11 period just showing the PBR cap applied 12 to the revenue stream for each year, 13 a five-year projection for Kitchener's 14 rate using the 1.9 per cent price cap, 15 and projection of Kitchener's rate 16 using the maximum pricing flexibility 17 for the five-year period.on the amounts 18 of money specifically related to the 19 consulting expenses in 1999, ie. the 20 $5.4 million and the $.9 million 21 22 G3.7 Ms Elliott undertakes to respond to 504 23 request described by Member Jackson 24 on the previous pages 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 511 1 UNDERTAKINGS (Cont'd) 2 PAGE 3 G3.8 Ms Elliott undertakes to provide a 505 4 "package" of different PBR plans 5 that Union had reviewed in designing 6 their own proposal and detail the 7 extent the design of these plans were 8 similar to that of other plans that 9 had been implemented and what experience 10 these other plans may had, and identify 11 ones which were close to the same plans 12 as Union's which have been in existence 13 for some time, if there are any 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703